SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - - - - - - - - - - - -
FORM 8-K
CURRENT REPORT
- - - - - - - - - - - -
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (July 1, 1998):
Commission file number 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1024020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1271 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip Code)
(212) 399-8000
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
As more fully discussed in Note 16 of the supplemental consolidated
financial statements of The Interpublic Group of Companies, Inc. (the
"Company"), in April 1998, the Company acquired three companies in stock for
stock transactions, which were accounted for as poolings of interests. This
report on Form 8-K includes the Company's supplemental consolidated
financial statements and other financial information restated to reflect the
aggregate effect of the April 1998 pooled companies and all prior poolings
as of the earliest period presented. These combined results will become the
historical results of the Company upon publication of financial results for
periods inclusive of the date of consummation of the April 1998
transactions. This report may be incorporated by reference into other
reports or registration statements filed with the Securities and Exchange
Commission.
ITEM 7. SUPPLEMENTAL FINANCIAL STATEMENTS AND EXHIBITS
Financial Highlights
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Supplemental Consolidated Financial Statements
Report of Independent Accountants - Price Waterhouse LLP
Report of Independent Accountants - Ernst & Young LLP
Supplemental Consolidated Balance Sheet
December 31, 1997 and 1996
Supplemental Consolidated Statement of Income for the Years Ended
December 31, 1997, 1996 and 1995
Supplemental Consolidated Statement of Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995
Supplemental Consolidated Statement of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995
Supplemental Consolidated Statement of Stockholders' Equity
Three Years Ended December 31, 1997
Notes to Supplemental Consolidated Financial Statements
Selected Financial Data For Five Years
Supplemental Financial Statement Schedule
Schedule VIII: Valuation and Qualifying Accounts
Supplemental Financial Statements
Supplemental Consolidated Balance Sheet
March 31, 1998 (unaudited) and
December 31, 1997
Supplemental Consolidated Statement of Income for the
Three Months Ended March 31, 1998 and 1997 (unaudited)
Supplemental Consolidated Statement of Comprehensive Income for
the Three Months Ended March 31, 1998 and 1997 (unaudited)
Supplemental Consolidated Statement of Cash Flows
Three Months Ended March 31, 1998 and 1997 (unaudited)
Notes to Supplemental Consolidated Financial Statements
(unaudited)
Management's Discussion and Analysis of
Financial Condition and Results of Operations (unaudited)
SIGNATURES
Exhibit 11 COMPUTATION OF EARNINGS PER SHARE
For the Years Ended December 31, 1993, 1994, 1995, 1996 and 1997
For the Three Months Ended March 31, 1997 and 1998
Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Ernst & Young LLP
Exhibit 27 RESTATED FINANCIAL DATA SCHEDULE
For the Year Ended December 31, 1997
For the Years Ended December 31, 1996 and 1995
For the Three Months Ended March 31, 1998 and 1997
THE INTERPUBLIC GROUP OF COMPANIES, INC.
The Interpublic Group of Companies, Inc. is one of the largest organizations
of advertising agencies and marketing communications companies in the world.
It includes the parent company, The Interpublic Group of Companies, Inc.,
McCann-Erickson WorldGroup, Ammirati Puris Lintas, The Lowe Group, Western
International Media, DraftWorldwide, The Allied Communications Group,
Octagon, and other related companies. Interpublic employs more than 28,000
people and maintains offices in over 120 countries.
FINANCIAL HIGHLIGHTS <F1>
(Dollars in thousands except per share data)
______________________________________________________________________
December 31
Percent
1997 1996 Increase
______________________________________________________________________
Operating Data
Gross income $ 3,264,120 $ 2,786,655 17.1%
Net Income $ 205,033 $ 211,113 (2.9)%
Per Share Data:
Basic EPS $ 1.61 $ 1.66 (3.0)%
Diluted EPS 1.55 1.60 (3.1)%
Cash dividends (Interpublic) .50 .44 13.6%
Share price at December 31 $ 49 13/16 $ 31 5/8 57.5%
Weighted-average shares:
Basic 127,457,013 127,504,436 -
Diluted 136,016,598 135,795,875 .2%
Financial Position
Working capital $ 245,757 $ 143,859 70.8%
Total assets 5,877,605 5,017,419 17.1%
Book value per share $ 8.05 $ 6.73<F3> 19.6%
Return on average stockholders'
equity 20.8% 25.8%<F3>(19.4)%
Gross Income
1997 $3,264,120
1996 $2,786,655
1995 $2,429,341
Basic Earnings Per Share:
1997 $ 1.84/1.61<F2>
1996 $ 1.66<F3>/1.60
1995 $ 1.43/1.12<F4>
Cash Dividends Per Share (Interpublic)
1997 $ .50
1996 $ .44
1995 $ .40
Return On Average Stockholders' Equity
1997 24.2%/20.8%<F2>
1996 25.8%<F3>/24.8%
1995 25.3%/19.8%<F4>
________________________________________________________________________
<F1> Restated to reflect the aggregate effect of pooling of interests
transactions. See Note 16.
<F2> Includes after-tax charge of $29.7 million or $.23 per share (basic)
for special compensation charges.
<F3> Includes an after-tax gain of approximately $8.1 million or $.06 per
share (basic) resulting from the sale of a portion of the Company's
shares in CKS Group, Inc.
<F4> Includes an after-tax charge of $38.2 million or $.31 per share
(basic) for the write-down of goodwill and related assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As more fully discussed in Note 16 of the supplemental consolidated
financial statements, the Company acquired three companies in April 1998
which were accounted for as poolings of interests. The Company's financial
statements, including the related notes, have been restated as of the
earliest period presented to include the results of operations, financial
position and cash flows of the April 1998 pooled entities in addition to
all prior pooled entities. A noteworthy item is that one of the April 1998
pooled companies recorded after-tax special compensation charges in the
fourth quarter of 1997 totaling $29.7 million or $.23 per share (basic) as
further explained in Note 6. The following discussion relates to the
combined results of the Company after giving effect to all pooled
companies.
Liquidity and Capital Resources
The Company's financial position continued to be strong during 1997.
Working capital increased $101.9 million over 1996 to $245.8 million. This
increase in working capital was a result of growing operations and the
payment of short-term borrowings with some of the proceeds from the 1.80%
Convertible Subordinated Notes due 2004 issued during the latter part of
1997. Working capital increased $15.2 million and $53.5 million in 1996
and 1995, respectively. The increase in working capital in 1995 related to
the refinancing of short-term debt with long-term debt.
The current ratio was approximately 1.1 to 1 for the past three years,
which is another indication of the Company's strong liquidity. The Company
utilized its strong financial position to obtain short-term and long-term
financing on competitive terms.
The Company and its subsidiaries maintained credit facilities in the
United States and in countries where it conducts business to manage its
future liquidity requirements.
Summary of
Short-term credit facilities at December 31,
(Dollars in millions)
Domestic International
Available Utilized Available Utilized
1997 $307.0 $ 2.1 $210.8 $86.1
1996 $217.6 $17.4 $215.7 $86.7
1995 $215.1 $39.2 $229.1 $73.5
Approximately 46%, 51% and 53% of the Company's assets at December 31,
1997, 1996 and 1995, respectively, were outside the United States. The
Company actively hedges to minimize the impact of foreign exchange
exposure. However, the notional value and fair value of all outstanding
forwards and options contracts at the end of the year were not
significant.
The Company is not aware of any significant occurrences that could
negatively impact its liquidity. However, should such a trend develop, the
Company believes that there are sufficient funds available under its
existing lines of credit and from internal cash-generating capabilities to
meet future needs.
The principal use of the Company's working capital is to provide for the
operating needs of its subsidiaries, which includes payments for space or
time purchased from various media on behalf of clients. The Company's
practice is to bill and collect from its clients in sufficient time to pay
the amounts due media on a timely basis. Other uses of working capital
include the repurchase of the Company's common stock, payment of cash
dividends, capital expenditures and acquisitions.
During 1997, the Company, excluding pooled companies, purchased
approximately 3.5 million shares of its common stock for an average price
of $41.57 per share. During 1996 and 1995, the Company, excluding pooled
companies, acquired approximately 2.9 million shares each year for $86.9
million and $69.7 million, respectively. The Company repurchases its stock
to meet its obligations under various compensation plans.
The Company, excluding pooled entities, paid $61.2 million ($.50 per
share) in dividends to stockholders in 1997, an 18% increase over 1996
dividends of $51.8 million ($.44 per share). During 1995, the Company,
excluding pooled entities, paid $46.1 million in dividends or $.40 per
share.
The Company's capital expenditures in 1997 were $102.5 million. The
primary purpose of expenditures was to modernize the offices and upgrade
the computer and communications systems to better serve clients. During
1996, the Company spent $88.4 million for capital improvements, an
increase of 17.2% from 1995. The increase in capital expenditures year
over year resulted from the continuing growth of operations.
During 1997, the Company paid approximately $302 million in cash and stock
to acquire a number of marketing communications companies to complement
its existing agency systems and to optimally position itself in the ever-
broadening communications marketplace.
In the fourth quarter of 1997, the Company called for redemption its 3
3/4% Convertible Subordinated Debentures due 2002. Substantially all of
the outstanding debentures were converted into approximately 4.3 million
shares of the Company's common stock.
Return on average stockholders' equity was 20.8% in 1997, 25.8% in 1996
and 19.8% in 1995. The return on average stockholders' equity in 1997 was
24.2% excluding the special compensation charges. The return on average
stockholders' equity in 1995, excluding the effect of the write-down of
goodwill and other related assets was 25.3%.
RESULTS OF OPERATIONS
Worldwide income from commissions and fees increased 17.1% in 1997, 14.3%
in 1996 and 10.7% in 1995. The continued growth in revenue was mainly due
to the expansion of the business and new business gains.
International revenue, which represented 51.2% of worldwide revenue in
1997, increased $141.0 million or 9.6% over 1996. This was after an
unfavorable currency impact of 4.5%. During 1996 and 1995, revenue from
international operations increased $94.4 million and $146.0 million,
respectively. During 1997, commissions and fees from domestic operations
increased 26.0% primarily due to the effect of new business gains.
Commissions and fees from domestic operations increased 24.7% in 1996 and
8.9% in 1995.
Other income increased 18.4% in 1997, 25.2% in 1996 and 26.0% in 1995. The
increases were primarily due to the proceeds from the sale of investments,
primarily All American Communications, Inc. in 1997, CKS Group, Inc. and
Spotlink in 1996 and Fremantle International, Inc. in 1995.
Total operating expenses worldwide increased 16.8% in 1997, 14.1% in 1996,
and 10.4% in 1995. Cost increases for both domestic and international are
in line with revenue increases. Operating expenses outside the United
States increased 8.2% in 1997, 6.7% in 1996 and 11.1% in 1995. Domestic
operating expenses increased 27.7% in 1997, 24.7% in 1996 and 8.7% in
1995. The 1997 increase in domestic operating expenses resulted from a
greater proportion of the Company's earnings being generated domestically.
Significant portions of the Company's expenses relate to employee
compensation and various employee incentive and benefit programs which are
based primarily upon operating results. In 1997, as part of its continuing
cost containment efforts, the Company announced that it was curtailing its
domestic pension plan effective April 1, 1998 and recorded pre-tax charges
of approximately $16.7 million. The Company will realize a pre-tax savings
of approximately $9 million per year. The Company continues to sponsor a
domestic defined contribution plan. In 1997, one of the 1998 pooled
companies recorded one-time after-tax charges of $29.7 million primarily
related to compensation.
Interest expense increased 17.5% in 1997 after increasing 5.2% and 20.0%
in 1996 and 1995, respectively. The increase in 1997 was primarily
attributable to the issuance of the 1.80% Convertible Subordinated Notes
due 2004 and additional financing of acquisitions.
Equity in net income of unconsolidated affiliates decreased in 1997, after
increasing in 1996 and 1995. The decrease in equity income in 1997
primarily resulted from the consolidation of a company previously
accounted for on the equity basis. The 1996 and 1995 increases were
primarily due to the Company's investment in Campbell Mithun Esty.
Income applicable to minority interests increased in 1997, 1996 and 1995
primarily due to the strong performance of companies which were not wholly
owned as well as the consolidation of a company with a significant
minority interest in 1997, which was previously accounted for on the
equity basis.
In 1995, the Company wrote down goodwill and other related assets of $38.2
million or $.31 per share (basic). The reason for the write-down was that
the carrying value of the assets exceeded management's estimate of the
fair value of these operations which was based primarily on discounted
projected cash flows.
The Company's effective income tax rate was 45.3% in 1997, 42.0% in 1996
and 47.2% in 1995. The higher rate in 1997 was attributable to the pooled
companies. The higher rate in 1995 was primarily attributable to the
impact of the write-down of goodwill and other related assets of $38.2
million.
The Company's management continuously evaluates and manages its exposure
to exchange, economic, and political risks. The 1997 exchange crisis in
Asia had a minimal impact on the Company partly due to the agency systems'
contingency plans that included active hedging, repatriation of cash, cost-
cutting, and capital improvement freezes.
The Company is engaged in a global effort to assess the required
modification or replacement of its internal software to become Year 2000
compliant. Additionally, the Company is working with its major software
providers to ensure that they are Year 2000 compliant. Management believes
that the required software changes will be completed without causing
operational issues. The costs of addressing the Year 2000 issues are not
expected to have a material adverse impact on the Company's financial
condition or results of operations. If the Company's Year 2000 remediation
efforts are not successful, it will implement contingency plans to ensure
that operations are not disrupted.
Report of Independent Accountants
To the Board of Directors and Stockholders of
The Interpublic Group of Companies, Inc.
In our opinion, based upon our audits and the report of other auditors,
the accompanying supplemental consolidated balance sheet and the related
supplemental consolidated statements of income, of comprehensive income,
of stockholders' equity, and of cash flows present fairly, in all material
respects, the financial position of The Interpublic Group of Companies,
Inc. and its subsidiaries (the "Company") at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 Hill, Holliday, Connors,
Cosmopulos, Inc. ("Hill Holliday"), a wholly-owned subsidiary, which
statements reflect total net loss constituting approximately 16% of the
related 1997 supplemental consolidated financial statement total. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates
to the amounts included for Hill Holliday, is based solely on the report
of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that
we plan and perform the audit 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits and the report of other auditors provide a reasonable basis for
the opinion expressed above.
As discussed in Note 4 to the supplemental consolidated financial
statements, during 1995, the Company changed its method of accounting for
long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121.
As more fully described in Note 16 to the supplemental consolidated
financial statements, the Company merged with three entities in April 1998
in transactions accounted for as poolings of interests. The accompanying
supplemental consolidated financial statements give retroactive effect to
the mergers of the Company with those pooled entities as well as all
entities pooled during 1995 through 1997.
/s/ By: PRICE WATERHOUSE LLP
Price Waterhouse LLP
New York, New York
February 20, 1998, except for
Note 16 which is as of April 16, 1998
Report of Independent Auditors
Board of Directors
Hill, Holliday, Connors, Cosmopulos, Inc.
We have audited the consolidated balance sheet of Hill, Holliday, Connors,
Cosmopulos, Inc. and Subsidiaries (the Company) as of December 31, 1997,
and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the twelve-month period then ended,
not separately presented herein. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Hill, Holliday, Connors, Cosmopulos, Inc. and Subsidiaries at
December 31, 1997, and the consolidated results of its operations and its
cash flows for the twelve-month period then ended, in conformity with
generally accepted accounting principles.
BY /s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 13, 1998
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
DECEMBER 31
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (includes
certificates of deposit: 1997-$256,934;
1996-$84,543) $ 735,440 $ 507,394
Marketable securities 31,944 36,940
Receivables (net of allowance for doubtful
accounts: 1997-$39,896; 1996-$34,953) 3,050,917 2,747,323
Expenditures billable to clients 240,000 190,595
Prepaid expenses and other current assets 105,504 78,637
Total current assets 4,163,805 3,560,889
OTHER ASSETS:
Investment in unconsolidated affiliates 46,665 102,808
Deferred taxes on income 59,424 84,336
Other investments and miscellaneous
assets 219,839 188,202
Total other assets 325,928 375,346
FIXED ASSETS, at cost:
Land and buildings 83,621 83,764
Furniture and equipment 503,823 452,324
587,444 536,088
Less: accumulated depreciation 330,593 302,681
256,851 233,407
Unamortized leasehold improvements 103,494 92,280
Total fixed assets 360,345 325,687
INTANGIBLE ASSETS (net of accumulated
amortization: 1997-$227,401;
1996-$187,638) 1,027,527 755,497
TOTAL ASSETS $5,877,605 $5,017,419
</TABLE>
FINANCIAL STATEMENTS
INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
DECEMBER 31
(Dollars in thousands except per share data)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Payable to banks $ 162,807 $ 129,994
Accounts payable 3,156,049 2,807,042
Accrued expenses 448,054 345,056
Accrued income taxes 151,138 134,938
Total current liabilities 3,918,048 3,417,030
NONCURRENT LIABILITIES:
Long-term debt 253,910 239,411
Convertible subordinated debentures
and notes 201,768 115,192
Deferred compensation and reserve
for termination allowances 263,463 228,518
Accrued postretirement benefits 47,404 46,726
Other noncurrent liabilities 70,791 69,167
Minority interests in consolidated
subsidiaries 31,917 23,687
Total noncurrent liabilities 869,253 722,701
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value
shares authorized: 20,000,000
shares issued: none
Common Stock, $.10 par value
shares authorized: 225,000,000
shares issued:
1997 - 143,567,843;
1996 - 136,410,542 14,357 13,641
Additional paid-in capital 552,282 284,756
Retained earnings 995,702 860,988
Adjustment for minimum pension liability (13,207) (12,979)
Net unrealized gain on equity securities 12,405 -
Cumulative translation adjustment (154,093) (82,486)
1,407,446 1,063,920
Less:
Treasury stock, at cost:
1997 - 8,063,983 shares;
1996 - 5,967,554 shares 253,088 131,082
Unearned ESOP compensation 7,420 7,800
Unamortized expense of restricted
stock grants 56,634 47,350
Total stockholders' equity 1,090,304 877,688
COMMITMENTS AND CONTINGENCIES (SEE NOTE 15) ___________ __________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,877,605 $5,017,419
All periods have been restated to reflect the aggregate effect of the
acquisitions accounted for as poolings of interests. See Note 16.
The accompanying notes are an integral part of these financial statements.
</TABLE>
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
(Dollars in thousands except per share data)
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Commissions and fees $3,134,512 $2,677,173 $2,341,901
Other income 129,608 109,482 87,440
Gross income 3,264,120 2,786,655 2,429,341
Salaries and related expenses 1,781,410 1,504,772 1,308,027
Office and general expenses 993,401 870,794 774,170
Interest expense 50,574 43,041 40,924
Write-down of goodwill and other
related assets - - 38,177
Special compensation
charges 32,229 - -
Total costs and expenses 2,857,614 2,418,607 2,161,298
Income before provision for
income taxes 406,506 368,048 268,043
Provision for income taxes 184,227 154,507 126,619
Income of consolidated
companies 222,279 213,541 141,424
Income applicable to minority
interests (23,754) (14,872) (7,922)
Equity in net income of
unconsolidated affiliates 6,508 12,444 6,086
Net Income $ 205,033 $ 211,113 $ 139,588
Per Share Data:
Basic EPS $1.61 $1.66 $1.12
Diluted EPS $1.55 $1.60 $1.09
The accompanying notes are an integral part of these financial statements.
All periods have been restated to reflect the aggregate effect of the
acquisitions accounted for as poolings of interests. See Note 16.
</TABLE>
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
(Dollars in Thousands)
1997 1996 1995
Net Income $205,033 $211,113 $139,588
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments (71,607) 11,036 4,025
Net Unrealized Gains on Securities 12,405 - -
Minimum Pension Liability Adjustments (228) (3,891) (2,666)
Other Comprehensive Income (59,430) 7,145 1,359
Comprehensive Income $145,603 $218,258 $140,947
The accompanying notes are an integral part of these financial statements.
All periods have been restated to reflect the aggregate effect of the
acquisitions accounted for as poolings of interests. See Note 16.
<TABLE> FINANCIAL STATEMENTS
(Dollars in thousands) THE INTERPUBLIC GROUP OF COMPANIES, INC. AND
ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<S> YEAR ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES: <C>1997 <C>1996 <C>1995
Net Income $205,033 $211,113
$139,588
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 78,258 65,297
53,870
Amortization of intangible assets 39,763 29,317
27,995
Amortization of restricted stock awards 16,222 14,451
13,558
Stock bonus plans/ESOP 1,389 4,067
769
Provision for deferred income taxes 9,530 3,986
12,071
Noncash pension plan charges 16,700
- - -
Equity in net income of unconsolidated affiliates (6,508)
(12,444) (6,086)
Income applicable to minority interests 23,754 14,872
7,922
Translation losses 1,321 3,484
4,071
Write-down of goodwill and other related assets - -
38,177
Special compensation charges 31,553 -
- -
Sale of investments (44,598)
(35,043) -
Other (11,963)
4,446 (2,430)
Change in assets and liabilities, net of acquisitions:
Receivables (335,344)
(285,884) (236,266)
Expenditures billable to clients (45,972)
(25,347) (10,998)
Prepaid expenses and other assets (13,289)
(39,073) (30,925)
Accounts payable and accrued expenses 292,624 298,203
160,391
Accrued income taxes 2,622 25,756
23,470
Deferred compensation and reserve for termination allowances 18,397 (13,503)
2,517
Net cash provided by operating activities 279,492 263,698
197,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net (89,910) (51,848)
(66,387)
Capital expenditures (102,521)
(88,362) (75,413)
Proceeds from sales of assets 113,374 39,474
1,722
Net proceeds from(net purchase of) marketable securities 324 476
(9,203)
Investment in unconsolidated affiliates (8,371) 17,210
(14,044)
Net cash used in investing activities (87,104)
(83,050) (163,325)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease)in short-term borrowings 22,418 (23,176)
19,263
Proceeds from long-term debt 256,337 84,060
72,744
Payments of long-term debt (24,577) (63,663)
(27,968)
Treasury stock acquired (144,470) (86,949)
(72,249)
Issuance of common stock 36,862 19,588
31,206
Cash dividends - Interpublic (61,242) (51,786)
(46,124)
Cash dividends - pooled companies (7,416)
(3,979) (6,733)
Net cash provided by (used in) financing activities 77,912 (125,905)
(29,861)
Effect of exchange rates on cash and cash equivalents (42,254) (2,234)
10,048
Increase in cash and cash equivalents 228,046 52,509
14,556
Cash and cash equivalents at beginning of year 507,394 454,885
440,329
Cash and cash equivalents at end of year $735,440 $507,394
$454,885
The accompanying notes are an integral part of these financial statements.
All periods have been restated to reflect the aggregate effect of the
acquisitions for as poolings of interests. See Note 16.
</TABLE>
<TABLE> FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands) FOR THE THREE-YEAR PERIOD ENDED DECEMBER
31, 1997
Net
Unrealized
Unamortized
Additional Minimum Gain on
Cumulative Expense Unearned
Common Paid-In Retained Pension Equity
Translation Treasury of Restricted ESOP
Stock Capital Earnings Liability
Securities Adjustment Stock Stock Grants Plan
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
BALANCES, DECEMBER 31, 1996 $13,641 $284,756 $860,988 $(12,979) $ -
$(82,486) $131,082 $ 47,350 $ 7,800
Net income 205,033
Cash dividends - IPG (61,242)
Cash dividends - pooled cos. ( 7,416)
Retained Earnings - pooled cos. ( 1,661)
Foreign currency translation
adjustment
(71,607)
Awards of common stock under
Company plans:
Management incentive
compensation 534
Achievement stock awards 253 (175)
Restricted stock 53 27,821
27,873
Employee stock purchases 23 9,684
Exercise of stock options 138 27,905
Purchase of Company's own stock 144,094
Tax benefit relating to
exercise of stock options 12,950
Restricted Stock: Forfeitures 3,664
(2,367)
Amortization
(16,222)
Issuance of shares
for acquisitions 47,574 (25,577)
Conversion of convertible
debentures 443 118,357
Adjustment for minimum pension
liability (228)
Par value of shares issued
for three-for-two stock split 59
Change in market value of
securities available-for-sale 12,405
Payments from ESOP
(380)
Special compensation
charges 27,324
Deferred stock bonus charges (4,876)
________________________________________________________________________________
____________________________________________
BALANCES, DECEMBER 31, 1997 $14,357 $552,282 $995,702 $(13,207) $ 12,405
$(154,093) $253,088 $ 56,634 $ 7,420
</TABLE>
<TABLE> FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(Dollars in
thousands)
Net
Unrealized
Unamortized
Additional Minimum Gain on
Cumulative Expense Unearned
Common Paid-In Retained Pension
Equity Translation Treasury of Restricted ESOP
Stock Capital Earnings Liability Securities
Adjustment Stock Stock Grants Plan
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
BALANCES, DECEMBER 31, 1995 $8,963 $232,504 $711,236 $( 9,088) $ -
$(93,522) $ 41,126 $ 39,664 $ 9,900
Net income 211,113
Cash dividends - IPG (51,786)
Cash dividends - pooled cos. ( 3,979)
Retained Earnings - pooled cos. ( 1,049)
Foreign currency translation
adjustment
11,036
Awards of common stock under
Company plans:
Management incentive
compensation 172
Achievement stock awards 159 (103)
Restricted stock 50 22,831
23,247
Employee stock purchases 19 7,273
Exercise of stock options 61 12,738
Purchase of Company's own stock 86,949
Tax benefit relating to
exercise of stock options 4,381
Restricted Stock: Forfeitures (1) 1,244
(1,110)
Amortization
(14,451)
Issuance of shares for
acquisitions 3,775 1,866
Conversion of convertible
debentures 2 923
Adjustment for minimum pension
liability ( 3,891)
Par value of shares issued
for three-for-two stock split 4,547 (4,547)
Payments from ESOP
(2,100)
________________________________________________________________________________
_____________________________________________
BALANCES, DECEMBER 31, 1996 $13,641 $284,756 $860,988 $(12,979) $ -
$(82,486) $131,082 $ 47,350 $ 7,800
</TABLE>
<TABLE> FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(Dollars in thousands) Net
Unrealized
Unamortized
Additional Minimum Gain on
Cumulative Expense Unearned
Common Paid-In Retained Pension Equity
Translation Treasury of Restricted ESOP
Stock Capital Earnings Liability Securities
Adjustment Stock Stock Grants Plan
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $8,771 $174,882 $626,925 $(6,422) $ -
$ (97,547) $ 11,644 $ 35,942 $ 11,123
Net income 139,588
Cash dividends - IPG (46,124)
Cash dividends - pooled cos. ( 6,733)
Retained Earnings - pooled cos. ( 2,420)
Foreign currency translation
adjustment
4,025
Awards of common stock under
Company plans:
Achievement stock awards 167 (98)
Restricted stock 50 18,256
18,306
Employee stock purchases 15 5,073
Exercise of stock options 127 28,849
Purchase of Company's own stock 75,229
Tax benefit relating to
exercise of stock options 5,809
Restricted Stock: Forfeitures 1,608
(1,026)
Amortization
(13,558)
Issuance of shares
for acquisitions (532) (47,257)
Adjustment for minimum pension
liability (2,666)
Payment from ESOP
(1,223)
________________________________________________________________________________
____________________________________________
BALANCES, DECEMBER 31, 1995 $8,963 $232,504 $711,236 $(9,088) $ -
$(93,522) $ 41,126 $ 39,664 $ 9,900
The accompanying notes are an integral part of these financial statements.
All periods have been restated to reflect the aggregate effect of the
acquisitions accounted for as poolings of interests. See Note 16.
</TABLE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: The Company is a worldwide provider of advertising
agency and related services. The Company conducts business through the
following subsidiaries: McCann-Erickson WorldGroup, Ammirati Puris Lintas,
The Lowe Group, Western International Media, DraftWorldwide, Allied
Communications Group, Octagon and other related companies. Interpublic also
has arrangements through association with local agencies in various parts of
the world. Other "marketing communications" activities conducted by the
Company are market research, sales promotion, product development, direct
marketing, telemarketing and other related services.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, most of which are wholly
owned. The Company also has certain investments in unconsolidated affiliates
that are carried on the equity basis. All periods have been restated to
reflect the aggregate effect of the acquisitions accounted for as poolings
of interests.
Short-term and Long-term Investments: The Company's investments in
marketable and equity securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards No.
115, (SFAS 115),"Accounting for Certain Investments in Debt and Equity
Securities". Unrealized holding gains and losses are reflected as a net
amount in a separate component of stockholders' equity until realized. The
cost of securities sold is based on the average cost of securities when
computing realized gains and losses.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Translation of Foreign Currencies: Balance sheet accounts are translated
principally at rates of exchange prevailing at the end of the year except
for fixed assets and related depreciation in countries with highly
inflationary economies which are translated at rates in effect on dates of
acquisition. Revenue and expense accounts are translated at average rates of
exchange in effect during each year. Translation adjustments are included as
a separate component of stockholders' equity except for countries with
highly inflationary economies, which are included in current operations.
Commissions, Fees and Costs: Commissions and fees are generally recognized
when media placements appear and production costs are incurred. Salaries and
other agency costs are generally expensed as incurred.
Depreciation and Amortization: Depreciation is computed principally using
the straight-line method over estimated useful lives of the related assets,
ranging generally from 3 to 20 years for furniture and equipment and from 10
to 45 years for various component parts of buildings.
Leasehold improvements and rights are amortized over the terms of related
leases. Company policy provides for the capitalization of all major
expenditures for renewal and improvements and for current charges to income
for repairs and maintenance.
Long-lived Assets: The excess of purchase price over the fair value of net
tangible assets acquired is amortized on a straight-line basis over periods
not exceeding 40 years.
The Company evaluates the recoverability of the carrying value of long-lived
assets whenever events or changes in circumstances indicate that the net
book value of an operation may not be recoverable. If the sum of projected
future undiscounted cash flows of an operation is less than its carrying
value, an impairment loss is recognized. The impairment loss is measured by
the excess of the carrying value over fair value based on estimated
discounted future cash flows or other valuation measures.
Income Taxes: Deferred income taxes reflect the impact of temporary
differences between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for income tax
purposes.
Earnings per Common and Common Equivalent Share: As further discussed in
Note 3, the Company adopted Statement of Financial Accounting Standards No.
128, (SFAS 128), "Earnings Per Share", in the fourth quarter of 1997. Basic
earnings per share is based on the weighted-average number of common shares
outstanding during each year. Diluted earnings per share also includes
common equivalent shares applicable to grants under the stock incentive and
stock option plans and the assumed conversion of convertible subordinated
debentures and notes, if they are determined to be dilutive.
Treasury Stock: Treasury stock is acquired at market value and is recorded
at cost. Issuances are accounted for on a first in, first out basis.
Concentrations of Credit Risk: The Company's clients are in various
businesses, located primarily in North America, Latin America, Europe and
the Pacific Region. The Company performs ongoing credit evaluations of its
clients. Reserves for credit losses are maintained at levels considered
adequate by management. The Company invests its excess cash in deposits
with major banks and in money market securities. These securities typically
mature within 90 days and bear minimal risk.
NOTE 2: STOCKHOLDERS' EQUITY
On May 19, 1997, the stockholders approved an increase in the number of
authorized common shares from 150,000,000 shares to 225,000,000 shares. The
stockholders also approved a three-for-two stock split, effected in the form
of a 50% stock dividend paid on July 15, 1997 to stockholders of record as
of June 27, 1997. The number of shares reserved for issuance pursuant to
various plans under which stock is issued was increased by 50%. The three-
for-two stock split has been reflected retroactively in the consolidated
financial statements and all per share data, shares, and market prices of
the Company's common stock included in the consolidated financial statements
and notes thereto have been adjusted to give effect to the stock split.
The Company has a Preferred Share Rights Plan designed to deter coercive
takeover tactics. Pursuant to this plan, common stockholders are entitled
to purchase 1/100 of a share of preferred stock at an exercise price of $100
if a person or group acquires or commences a tender offer for 15% or more of
Interpublic's common stock. Rights holders (other than the 15% stockholder)
will also be entitled to buy, for the $100 exercise price, shares of
Interpublic's common stock with a market value of $200 in the event a person
or group actually acquires 15% or more of Interpublic's common stock.
Rights may be redeemed at $.01 per right under certain circumstances.NOTE 3:
EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, (SFAS 128), "Earnings Per Share", which specifies
the method of computation, presentation and disclosure for earnings per
share(EPS). SFAS 128 replaces the presentation of primary EPS with basic EPS and
requires dual presentation of basic and diluted EPS. All prior period EPS data
has been restated to comply with SFAS 128 and to reflect the three-for-two stock
split effected July 1997.
In accordance with SFAS 128, the following is a reconciliation of the components
of the basic and diluted EPS computations for income available to common
stockholders:
<TABLE>
FOR THE YEAR
ENDED DECEMBER 31,
(Dollars in thousands)
1997 1996
1995
PER
PER PER
SHARE
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES
AMOUNT INCOME SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
BASIC EPS
Income available
to common stockholders $205,033 127,457,013 $1.61 $211,113 127,504,436
$1.66 $139,588 125,009,700 $1.12
EFFECT OF DILUTIVE SECURITIES
Options 2,910,648 2,219,373
1,921,923
Restricted stock 447 1,638,646 384 1,605,564
461 2,080,067
3 3/4% Convertible
Subordinated Debentures 5,929 4,010,291 6,410 4,466,502
DILUTED EPS $211,409 136,016,598 $1.55 $217,907 135,795,875
$1.60 $140,049 129,011,690 $1.09
The computation of diluted EPS for 1995 and 1997 excludes the assumed conversion
of the 3 3/4% Convertible Subordinated Debentures and the 1.80% Convertible
Subordinated Notes, respectively, because they were antidilutive.
</TABLE>
NOTE 4: ACQUISITIONS AND RELATED COSTS
The Company acquired a number of advertising and communications companies
during the three year period ended December 31, 1997. The aggregate purchase
price, including cash and stock payments, was $302 million, $173 million and
$142 million in 1997, 1996 and 1995, respectively.
In 1997, 4,059,255 shares of the Company's common stock were issued for
acquisitions accounted for as poolings of interests. Some of the companies
pooled and the respective shares of the Company's common stock issued were
Complete Medical Group- 708,789 shares, Integrated Communications
Corporation - 585,054 shares, Advantage International- 579,206 shares and
Ludgate- 539,459 shares. Additional companies accounted for as poolings of
interests include Adler Boschetto Peebles, Barnett Fletcher, Davies Baron,
Diefenbach Elkins, D.L. Blair, Rubin Barney & Birger, Inc. and Technology
Solutions Inc.
In 1997, the Company also paid $81 million in cash and issued 1,200,059
shares of its common stock for acquisitions accounted for as purchases and
equity investments. Such acquisitions included Marketing Corporation of
America, Medialog, The Sponsorship Group, Kaleidoscope and Addis Wechsler
(51% interest). The Company also increased its interest in Campbell Mithun
Esty by 25%. The Company also recorded acquisition related deferred payments
of $38 million.
In 1996, the Company issued 3,519,847 shares of its stock for acquisitions
accounted for as poolings of interests. Pooled companies included
DraftDirect- 2,736,914 shares, The Weber Group- 495,996 shares and Torre
Renta Lazur- 286,937 shares.
During 1996, the Company paid $57 million in cash and issued 190,653 shares
of its common stock for acquisitions accounted for as purchases and equity
investments. Such acquisitions included Angotti Thomas Hedge, Jay
Advertising, Media Inc., McAdams Healthcare, GGK (49% interest) and Goldberg
Moser O'Neill (49% interest).
In 1995, the Company acquired Anderson & Lembke and Addison Whitney for
881,763 and 391,134 shares of its common stock, respectively. These
acquisitions were accounted for as poolings of interests. The Company also
issued 1,364,039 shares of its common stock and paid $47 million in cash for
companies accounted for as purchases and equity investments. Such
acquisitions included Newspaper Services of America, Kevin Morley Marketing,
Bosch & Butz (80% interest), Mark Goodson Productions (50% interest),
Campbell Mithun Esty (50% interest) and CKS Group, Inc. (28% interest).
As more fully discussed in Note 16, the Company acquired three companies in
April 1998 which were accounted for as poolings of interests. The Company's
supplemental consolidated financial statements, including the related notes,
have been restated as of the earliest period presented to include the
results of operations, financial position and cash flows of the April 1998
pooled entities in addition to all prior pooled entities. Gross income and
net income for the combining entities included in the supplemental
consolidated statement of income for the years ending December 31, 1997,
1996 and 1995 are summarized below.
Gross Income Net Income/(Loss)
For the year ended December 31, 1997:
As Reported $3,125,846 $ 239,146
Pooled Companies 138,274 (34,113)
As Restated $3,264,120 $ 205,033
For the year ended December 31, 1996:
As Reported $2,537,516 $ 205,205
Pooled Companies 249,139 5,908
As Restated $2,786,655 $ 211,113
For the year ended December 31, 1995:
As Reported $2,179,739 $ 129,812
Pooled Companies 249,602 9,776
As Restated $2,429,341 $ 139,588
Deferred payments of both cash and shares of the Company's common stock for
prior years' acquisitions were $43 million, $16 million, and $27 million in
1997, 1996 and 1995, respectively.
During 1997, the Company sold its investment in All American Communications,
Inc. for approximately $77 million. During 1996, the Company sold its 50%
investment in Mark Goodson Productions for approximately $29 million, a
portion of its investment in CKS Group, Inc. for $37.6 million and its
investment in Spotlink for $11.7 million in shares of the purchaser's common
stock.
In the fourth quarter of 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121
established accounting standards for the recognition and the measurement of
impairment of long-lived assets and certain identifiable intangibles
including goodwill. As a result of the adoption of SFAS 121, the Company
recorded a noncash charge of $38.2 million, comprised of a write-down of
$25.8 million for goodwill and $12.4 million for investments and advances.
The write-down related to sixteen separate operating units, primarily
advertising and promotion agencies. All but two of these units are located
in Europe or North America and were acquired between 1978 and 1994. The
reason for the write-down was that the carrying value of the assets exceeded
management's estimate of the fair value of these operations which was based
primarily on discounted projected cash flows. The fair values estimated by
management took into consideration the following: the profitability and
trend in profitability of each of the operations, the effects of economic
recessions in the various markets, changes in client relationships, trends
in clients' spending patterns, the strength of the U.S. dollar relative to
foreign currencies and additional political, economic and legal factors
where applicable. In some instances, strategies had been implemented to
improve operating results which did not prove successful and in some
instances management reached a decision in 1995 to sell, merge, or
discontinue the operations.
NOTE 5: PROVISION FOR INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, (SFAS 109), "Accounting for Income Taxes".
SFAS 109 applies an asset and liability approach that requires the
recognition of deferred tax assets and liabilities with respect to the
expected future tax consequences of events that have been recognized in the
consolidated financial statements and tax returns.
The components of income before provision for income taxes are as follows:
(Dollars in thousands) 1997 1996 1995
Domestic $179,815 $176,998 $118,209
Foreign 226,691 191,050 149,834
Total $406,506 $368,048 $268,043
The provision for income taxes consisted of:
(Dollars in thousands) 1997 1996 1995
Federal income taxes (including foreign
withholding taxes):
Current $ 67,476 $ 59,260 $ 39,454
Deferred 5,601 181 3,297
73,077 59,441 42,751
State and local income taxes:
Current 21,900 20,358 12,451
Deferred 1,447 2,803 552
23,347 23,161 13,003
Foreign income taxes:
Current 85,321 70,903 62,643
Deferred 2,482 1,002 8,222
87,803 71,905 70,865
Total $184,227 $154,507 $126,619
At December 31, 1997 and 1996 the deferred tax assets/(liabilities)
consisted of the following items:
(Dollars in thousands) 1997 1996
Postretirement/postemployment benefits $ 40,760 $ 40,030
Deferred compensation 25,427 12,450
Pension costs 11,873 6,785
Depreciation (9,269) (8,132)
Rent (3,546) 10,846
Interest 2,056 6,051
Accrued reserves 4,361 4,551
Investments in equity securities (8,956) -
Tax loss/tax credit carryforwards 22,172 22,510
Other (4,139) 3,867
Total deferred tax assets 80,739 98,958
Deferred tax valuation allowance 21,315 14,622
Net deferred tax assets $ 59,424 $ 84,336
The valuation allowance of $21,315,000 and $14,622,000 at December 31, 1997
and 1996, respectively, represents a provision for uncertainty as to the
realization of certain deferred tax assets, including U.S. tax credit and
net operating loss carryforwards in certain jurisdictions. The change
during 1997 in the deferred tax valuation allowance primarily relates to net
operating loss carryforwards and the utilization of the tax credit. At
December 31, 1997 there were $7,052,000 of tax credit carryforwards with
expiration periods through 2002 and net operating loss carryforwards with a
tax effect of $15,120,000 with various expiration periods. The Company has
concluded that based upon expected future results, it is more likely than
not that the net deferred tax asset balance will be realized.
A reconciliation of the effective income tax rate as shown in the
consolidated statement of income to the federal statutory rate is as
follows:
1997 1996 1995
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefit 3.5 2.9 3.2
Impact of foreign operations, including
withholding taxes 1.0 1.1 3.8
Goodwill and intangible assets 2.5 2.5 7.3
Effect of pooled companies 3.4 0.0 (1.1)
Other (0.1) 0.5 (1.0)
Effective tax rate 45.3% 42.0% 47.2%
The total amount of undistributed earnings of foreign subsidiaries for
income tax purposes was approximately $415.4 million at December 31, 1997.
No provision has been made for foreign withholding taxes or United States
income taxes which may become payable if undistributed earnings of foreign
subsidiaries were paid as dividends to the Company, since a major portion of
these earnings has been reinvested in working capital and other business
needs. The additional taxes on that portion of undistributed earnings which
is available for dividends are not practicably determinable.
NOTE 6: INCENTIVE PLANS
The 1997 Performance Incentive Plan, ("1997 PIP Plan"), approved by the
Company's stockholders in May 1997, replaced the Company's Management
Incentive Compensation Plan, Long-Term Performance Incentive Plan, 1996
Stock Incentive Plan and the 1986 Stock Incentive Plan ("Predecessor
Plans"). Awards made under the Predecessor Plans remain subject to their
terms and conditions. The 1997 PIP Plan includes the following types of
awards: (1) stock options, (2) stock appreciation rights, (3) restricted
stock, (4) phantom shares, (5) performance units and (6) management
incentive compensation performance awards.
The maximum number of shares of the Company's common stock which may be
granted in any year under the 1997 PIP Plan, excluding management incentive
compensation performance awards, is equal to a base amount (1.85% of the
total number of shares of the Company's common stock outstanding on the
first day of the year) supplemented by additional shares as defined in the
1997 PIP Plan document. The 1997 PIP Plan also limits the number of shares
available with respect to stock option and stock appreciation rights awards
made each year to any one participant as well as the number of shares
available under certain types of awards.
The following discussion relates to transactions under the 1997 PIP Plan,
the Predecessor Plans as well as other incentive plans. Except as otherwise
noted, awards under the 1997 PIP Plan have terms similar to awards made
under the respective Predecessor Plans. All prior years' EPS and share data
has been restated to reflect a three-for-two stock split effected July 1997.
Stock Options
The 1997 PIP Plan provides for the granting of either incentive stock
options (ISO's) or nonstatutory options to purchase shares at the fair value
of the Company's common stock on the date of grant. The Compensation
Committee of the Board of Directors, ( the "Committee"), is responsible for
determining the vesting terms and the exercise period of each grant within
the limitations set forth in the 1997 PIP Plan document.
Outstanding options are generally granted at the fair market value of the
Company's common stock on the date of grant and are exercisable based on a
schedule determined by the Committee. Generally, options become exercisable
between two and five years after the date of grant and expire ten years from
the date of grant.
Under the 1988 Stock Option Plan, the Company can grant, through 1998,
options to purchase 900,000 shares of the Company's common stock to key
employees who are employed outside the United States. As permitted under
this Plan, certain options were granted at prices less than the market value
of the Company's common stock.
The Company also maintains a stock plan for outside directors. Under this
plan, 300,000 shares of common stock of the Company are reserved for
issuance. Stock options under this plan are awarded at the fair market
value of the Company's common stock on the date the option is granted.
Options generally become exercisable three years after the date of grant and
expire ten years from the date of grant.
Following is a summary of stock option transactions during the three-year
period ended December 31, 1997:
Number of Weighted-
Shares Average
Under Option Exercise Price
________________________________________________________________
Balance, December 31, 1994 9,135,213 $16
Exercisable, December 31, 1994 2,345,247 10
________________________________________________________________
New Awards 3,115,196 22
Exercised (1,903,550) 14
Cancelled (409,707) 20
Balance, December 31, 1995 9,937,152 22
Exercisable, December 31, 1995 4,538,483 11
_________________________________________________________________
New Awards 3,503,580 31
Exercised (907,866) 14
Cancelled (466,923) 22
Balance, December 31, 1996 12,065,943 22
Exercisable, December 31, 1996 3,846,002 14
_________________________________________________________________
New Awards 2,210,980 38
Exercised (1,733,559) 16
Cancelled (521,160) 24
Balance, December 31, 1997 12,022,204 26
Exercisable, December 31, 1997 4,201,219 17
_________________________________________________________________
The following table summarizes information about stock options outstanding
at December 31, 1997:
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
$4.91 to $14.99 2,255,982 3.50 $14 2,252,156 $14
15.00 to 21.99 3,751,339 6.19 21 1,812,194 20
22.00 to 31.99 3,772,182 8.19 30 136,869 25
32.00 to 49.09 2,242,701 9.34 39 - -
Stock Appreciation Rights
The 1997 PIP Plan permits the Company to grant stock appreciation rights. A
stock appreciation right entitles the holder to receive an amount equal to
the fair market value of a share of common stock of the Company on the date
of exercise over a base price. No such awards have been made to date.
Restricted Stock
Various incentive plans incorporate the issuance of restricted stock subject
to certain restrictions and vesting requirements determined by the
Committee.
Restricted stock awards are subject to certain restrictions and vesting
requirements, generally five to seven years. No monetary consideration is
paid by a recipient for a restricted stock award. The cost of these shares
is amortized over the restriction periods. The Committee is authorized to
direct that discretionary tax assistance payments may be made to recipients
when the restrictions lapse. Such payments are expensed as awarded. At
December 31, 1997, there were a total of 3,589,605 shares of restricted
stock outstanding. During 1997, 1996 and 1995, the Company awarded 699,257
shares, 720,903 shares and 745,842 shares of restricted stock with a
weighted-average grant date fair value of $38.96, $31.14 and $24.55,
respectively.
Restricted shares under the Outside Directors' Plan are subject to certain
restrictions and vesting requirements, generally five years. At December 31,
1997, there were 18,000 shares of restricted stock outstanding. During 1997,
the Company awarded 6,000 shares under this Plan with a weighted-average
grant date fair value of $40.
Phantom Shares
The 1997 PIP Plan permits the Company to grant phantom shares. A phantom
share represents the right of the holder to receive an amount determined by
the Committee based on the achievement of performance goals. No such grants
have been made under the 1997 PIP Plan.
Performance Units
The 1997 PIP Plan and its predecessor, the Long-Term Performance Incentive
Plan, permit the Company to grant performance units. Performance units
represent the contractual right of the holder to receive a payment that
becomes vested upon the attainment of performance objectives determined by
the Committee.
Grants consisting of performance units have been awarded to certain key
employees of the Company and its subsidiaries. The ultimate value of these
performance units is contingent upon the annual growth of profit (as
defined) of the Company, its operating components or both, over the 1995-
1998 and 1997-2000 performance periods. The awards are generally paid in
cash. The projected value of these units is accrued by the Company and
charged to expense over the four-year performance period.
The Company expensed $19.9 million in 1997, $13.6 million in 1996 and $9.6
million in 1995 relating to performance units. As of December 31, 1997, the
Company's liability for the 1995-1998 and 1997-2000 performance periods was
$31.7 million, which represents a proportionate part of the total estimated
amounts payable for the two performance periods. The Company's payout to
participants for the 1993-1996 performance period was $20.2 million, of
which $7.9 million was paid in December 1996, and the remaining $12.3
million was paid in the first quarter of 1997.
Management Incentive Compensation Plan
Under the management incentive compensation component of the 1997 PIP Plan
the Committee is authorized to make management incentive compensation awards
to employees of the Company and its subsidiaries and affiliates, subject to
the limitation that no individual may receive in excess of $2 million and
certain limitations of common shares issued.
Miscellaneous Incentive Arrangements
Under the Employee Stock Purchase Plan (ESPP), employees may purchase common
stock of the Company through payroll deductions not exceeding 10% of their
compensation. The price an employee pays for a share of stock is 85% of the
market price on the last business day of the month. The Company issued
281,852 shares, 279,879 shares and 237,821 shares during 1997, 1996 and
1995, respectively, under the ESPP. An additional 8,305,378 shares were
reserved for issuance at December 31, 1997.
Under the Company's Achievement Stock Award Plan, awards may be made up to
an aggregate of 1,872,000 shares of common stock together with cash awards
to cover any applicable withholding taxes. The Company issued 10,130 shares,
8,505 shares and 10,778 shares during 1997, 1996 and 1995, respectively,
under this plan. The weighted-average fair value on the dates of grant in
1997, 1996 and 1995 was $42.25, $30.86 and $24.73, respectively.
SFAS 123 Disclosures
The Company adopted Statement of Financial Accounting Standards No. 123,
(SFAS 123), "Accounting for Stock-Based Compensation" in the fourth quarter
of 1996. As permitted by the provisions of SFAS 123, the Company applies
APB Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock-based employee compensation
plans. Accordingly, no compensation cost has been recognized for the
Company's stock options or for purchases under the ESPP. The cost recorded
for restricted stock and achievement stock awards in 1997, 1996 and 1995 was
$16,684,652, $14,527,086 and $13,738,872, respectively. If compensation cost
for the Company's stock option plans and its ESPP had been determined based
on the fair value at the grant dates as defined by SFAS 123, the Company's
pro forma net income and earnings per share would have been as follows:
1997 1996 1995
(Dollars in thousands except per share data)
Net Income As reported $205,033 $211,113 $139,588
Pro forma $195,198 $204,127 $135,412
Earnings per share
Basic As reported $1.61 $1.66 $1.12
Pro forma $1.53 $1.60 $1.08
Diluted As reported $1.55 $1.60 $1.09
Pro forma $1.48 $1.55 $1.05
For purposes of this pro forma information, the fair value of shares issued
under the ESPP was based on the 15% discount received by the employees. The
weighted-average fair value on the date of purchase for stock purchased
under this Plan was $5.36, $4.60 and $3.72 in 1997, 1996 and 1995,
respectively.
For purposes of this pro forma information, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for
grants in 1997, 1996 and 1995, respectively: dividend yield of 1.3%, 1.41%
and 1.72%; expected volatility of 19.17%, 20.71% and 22.08%; risk-free
interest rate of 6.51%, 6.43% and 7.66%; and expected life of six years for
each of the three years.
The weighted-average fair value on the dates of grant for options granted in
1997, 1996 and 1995 was $11.83, $9.63 and $7.26, respectively. As required
by SFAS 123, this pro forma information is based on stock awards beginning
in 1995 and accordingly is not likely to be representative of the pro forma
effects in future years because options vest over several years and
additional awards generally are made each year.
Hill, Holliday, Connors, Cosmopulos, Inc. Compensation Plans
Hill, Holliday, Connors, Cosmopulos, Inc.,("Hill Holliday"), had an Equity
Participation Plan (the "EPP") for various members of management and certain
agreements (the "Awards") with three key members of their management, which
provide for participants to receive a portion of the proceeds in the event
of the sale or merger of Hill Holliday. As a result of the merger
discussions initiated in November 1997 and the subsequent agreement entered
into on February 19, 1998, Hill Holliday recognized $25,951,000 of
compensation expense based on management's assessment that as of December
31, 1997, it was probable that the obligations under the EPP and the Awards
would become payable. Also included in the special compensation charge was
$869,000 related to the value of certain compensatory stock options and
$504,000 related to other stock grants. The remaining balance of the special
charge consisted of $4,228,000 of payments on a consulting and supplemental
retirement agreement under which no future services are expected, $1,017,000
payable under an employment agreement in the event of the sale of Hill
Holliday and $1,033,000 of other expenses.
Carmichael Lynch, Inc. Compensation Plans
Carmichael Lynch maintained an Employee Stock Ownership Program ("ESOP")
which was funded by a loan in the original amount of $10,457,694 and
contributions from Carmichael Lynch which were approximately $749,000 in
1997, $2,350,000 in 1996 and $1,623,000 in 1995. In accordance with SOP 93-6
the ESOP loan is carried as "Unearned ESOP Compensation" in the supplemental
consolidated balance sheet. At December 31, 1997, the loan had a balance of
$7,420,000 which will be repaid from proceeds from sale of Company stock
received in the merger and the Plan will be terminated. Carmichael Lynch
also had a deferred stock equivalent plan payable in cash or stock. In 1997,
it was determined that the units would be paid in cash and accordingly the
balance of $4,876,399 was reclassified from "Additional Paid in Capital" to
"Deferred Compensation". At December 31, 1997, the outstanding units were
valued at $3,819,000.
NOTE 7: RETIREMENT PLANS
Domestic Retirement Plan
The Company and certain of its domestic subsidiaries have a defined benefit
plan ("Domestic Plan") and a defined contribution plan ("Savings Plan")
which covers substantially all regular employees.
The Company announced that it was freezing benefit accruals under the
Domestic Plan effective April 1, 1998. Participants with five or less years
of service will become fully vested in the plan effective April 1, 1998.
Participants with five or more years of service as of March 31, 1998 will
retain their vested balances and participate in a new compensation plan.
Under the new plan, each participant's account will be credited with an
annual allocation, equal to the projected discounted pension benefit accrual
plus interest, while they continue to work for the Company. Participants
will be eligible to receive up to ten years of allocations coinciding with
the number of years of service with the Company after March 31, 1998. As a
result of the change in the Domestic Plan, the Company recorded charges of
approximately $16.7 million in the fourth quarter of 1997.
The Company's policy was to fund pension costs as permitted by applicable
tax regulations. Pension costs were determined by the projected unit credit
method based upon career average pay. Funding requirements for the Domestic
Plan were determined using the accrued benefit unit credit method. Under
the "cash balance" formula, the participant's account balance was credited
each year with an amount equal to the percentage of the year's annual
compensation, plus interest credits. Participants in the Domestic Plan on
December 31, 1991 who continued to work for the Company after that date had
their normal retirement benefits under the plan as of that date converted on
an actuarial basis into an opening account balance as of January 1, 1992.
Prior to the 1998 change in the Domestic Plan, the Company was required to
record an intangible asset to the extent of unrecognized prior service cost
and net transition obligation. In 1996 and 1995, the Company recorded an
intangible asset of $10.4 million and $10.5 million, respectively. In
addition, the Company recorded a reduction to stockholders' equity of $13.2
million, $13.0 million and $9.1 million, in 1997, 1996 and 1995,
respectively.
Net pension costs for the Domestic Plan for 1997, 1996 and 1995 included the
following components:
(Dollars in thousands) 1997 1996 1995
Service cost $ 4,179 $ 4,057 $ 3,322
Interest cost 10,567 10,248 10,398
Actual return on plan assets (14,346) (10,983) (20,622)
Amortization of unrecognized
transition obligation 1,887 1,887 1,887
Amortization of unrecognized
prior service cost (1,276) (1,769) (1,769)
Amortization of unrecognized
losses 943 1,005 309
Curtailment charge 9,727 - -
Deferred investment gain 3,335 129 10,874
Net periodic pension cost $15,016 $ 4,574 $ 4,399
The following table sets forth the funded status and amounts recognized for
the Domestic Plan in the Company's consolidated balance sheet at December
31, 1997 and 1996:
(Dollars in thousands) 1997 1996
Actuarial present value of accumulated
benefit obligation (including vested
benefits of $130,707 in 1997 and
$128,649 in 1996) $130,707 $132,110
Actuarial present value of projected benefit
obligation 134,348 139,142
Plan assets at fair value 115,944 112,284
Projected benefit obligation in excess of
plan assets (18,404) (26,858)
Unrecognized net losses 13,207 20,010
Unrecognized prior service cost - 902
Unrecognized net transition obligation - 9,437
Additional minimum liability (13,207) (23,317)
Accrued pension liability $(18,404) $(19,826)
At December 31, 1997, Domestic Plan assets were primarily invested in fixed
income and equity securities. Prior service costs were being amortized over
the estimated average remaining service period of active employees. The
initial net transition obligation was being amortized over 15 years.
A discount rate of 7.25% in 1997, 7.5% in 1996 and 7.25% in 1995 and a
salary increase assumption of 6% in 1997, 1996 and 1995 were used in
determining the actuarial present value of the projected benefit obligation.
The expected return on assets was 10% in 1997, 1996 and 1995.
In addition to the defined benefit plan described above, the Company also
sponsors a Savings Plan that covers substantially all domestic employees of
the Company and participating subsidiaries who have completed one year of
service. The Savings Plan permits participants to make contributions on a
pre-tax and/or after-tax basis. The Savings Plan allows participants to
designate in which fund(s) they want their contributions invested. The
Company matches a portion of participants' contributions based upon the
number of years of service. The Company contributed $6,320,738, $5,389,464
and $4,866,881 to the Savings Plan in 1997, 1996 and 1995, respectively.
Foreign Retirement Plans
The Company has several foreign pension plans in which benefits are based
primarily on years of service and employee compensation. It is the
Company's policy to fund these plans in accordance with local laws and
income tax regulations.
Net pension costs for foreign pension plans for 1997, 1996 and 1995 included
the following components:
(Dollars in thousands) 1997 1996 1995
Service cost $ 5,266 $ 4,900 $ 5,276
Interest cost 10,589 10,084 11,054
Net return on plan assets (10,506) (9,077) (8,738)
Net amortization and deferral 1,159 1,251 1,372
Unrecognized net gain (1,745) (2,026) (1,367)
Other - (50) -
Net pension costs $ 4,763 $ 5,082 $ 7,597
<TABLE>
The following table sets forth the funded status and amounts recognized for the
foreign pension plans in the Company's consolidated balance sheet at December
31, 1997 and 1996:
(Dollars in thousands) 1997 1996
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit obligation
(including vested benefits of:
1997 - $95,139 and $60,888;
1996 - $76,092 and $66,113) $ 95,265 $ 64,650 $ 76,293 $ 71,779
Actuarial present value of
projected benefit obligation 105,051 72,119 84,404 79,290
Plan assets at fair value 141,215 4,195 129,488 6,336
Projected benefit obligation
less than (in excess of)
plan assets 36,164 (67,924) 45,084 (72,954)
Unrecognized net (gain)/loss (14,373) 1,490 (27,517) (1,884)
Unrecognized prior service
cost 3,524 - 4,519 -
Unrecognized net (asset)
obligation (1,043) 4,384 (1,492) 5,777
Prepaid (accrued) pension cost at
December 31, 1997 and 1996 $ 24,272 $(62,050) $ 20,594
$(69,061)
</TABLE>
Foreign plans utilized discount rates ranging from 3.5% to 14.0% in 1997 and
from 5.5% to 12.0% in both 1996 and 1995 and salary increase assumptions
ranging from 2.0% to 10.0% in 1997, 1996 and 1995, to determine the
actuarial present value of the projected benefit obligation. The expected
rates of return on assets of foreign plans ranged from 3.5% to 14.0% in 1997
and 4.0% to 12.0% in both 1996 and 1995.
The Company also has special deferred benefit arrangements with certain key
employees. Vesting is based upon the age of the employee and the terms of
the employee's contract. Life insurance contracts have been purchased in
amounts which may be used to fund these arrangements.
NOTE 8: POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefit Plans
The Company and its subsidiaries provide certain postretirement health care
benefits for employees who were in the employ of the Company as of January
1, 1988, and life insurance benefits for employees who were in the employ of
the Company as of December 1, 1961. The plans cover certain employees in the
United States and certain key employees in foreign countries. Effective
January 1, 1993, the Company's plan covering postretirement medical benefits
was amended to place a cap on annual benefits payable to retirees. Such
coverage is self-insured, but is administered by an insurance company.
The Company accrues the expected cost of postretirement benefits other than
pensions over the period in which the active employees become eligible for
such postretirement benefits.
The components of periodic expense for these postretirement benefits for
1997, 1996 and 1995 were as follows:
(Dollars in thousands) 1997 1996
1995
Service cost $ 612 $ 610 $ 583
Interest cost 2,958 2,824 3,047
Amortization of prior service cost (934) (934) (934)
Total periodic expense $2,636 $2,500 $2,696
The following table sets forth the funded status and amounts recognized for
the Company's postretirement benefit plans in the consolidated balance sheet
at December 31, 1997 and 1996:
(Dollars in thousands)
1997 1996
Accumulated postretirement benefit
obligation:
Retirees $ 22,619 $ 21,227
Fully eligible active plan participants 5,484 5,110
Other active plan participants 13,534 12,420
Total accumulated postretirement
benefit obligation 41,637 38,757
Plan assets at fair value - -
Accumulated postretirement benefit
obligation in excess of plan assets (41,637) (38,757)
Unrecognized net loss (2,004) (3,272)
Unrecognized prior service cost (3,763) (4,697)
Accrued postretirement benefit liability $(47,404) $(46,726)
A discount rate of 7.25% in 1997, 7.50% in 1996 and 7.25% in 1995 and a
salary increase assumption of 6.0% in 1997, 1996 and 1995 were used in
determining the accumulated postretirement benefit obligation. A 9.0% and a
10.0% increase in the cost of covered health care benefits was assumed for
1997 and 1996, respectively. This rate is assumed to decrease incrementally
to 5.5% in the year 2002 and remain at that level thereafter. The health
care cost trend rate assumption does not have a significant effect on the
amounts reported. For example, a 1% increase in the health care cost trend
rate would increase the accumulated postretirement benefit obligation at
December 31, 1997 by approximately $1.9 million, and the net periodic cost
for 1997 by approximately $0.2 million.
Postemployment Benefits
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, (SFAS 112), "Employers' Accounting for
Postemployment Benefits", and recognized a one-time after-tax charge of
$29.6 million. This Statement requires the Company to accrue the costs of
certain benefits which include severance, worker's compensation and health
care coverage over an employee's service life.
The Company's liability for postemployment benefits totaled $46.7 million
and $40.8 million at December 31, 1997 and 1996, respectively, and is
included in deferred compensation and reserve for termination allowances.
The net periodic expense recognized in 1997, 1996 and 1995 was $28.9
million, $21.2 million and $9.6 million, respectively.
NOTE 9: SHORT-TERM BORROWINGS
The Company and its domestic subsidiaries have lines of credit with various
banks. These credit lines permit borrowings at fluctuating interest rates
determined by the banks. Short-term borrowings by subsidiaries outside the
United States principally consist of drawings against bank overdraft
facilities and lines of credit. These borrowings bear interest at the
prevailing local rates. Where required, the Company has guaranteed the
repayment of the borrowings. Unused lines of credit by the Company and its
subsidiaries at December 31, 1997 and 1996 aggregated $430 million and $329
million, respectively. The weighted-average interest rate on outstanding
balances at December 31, 1997 was approximately 6.61%. Current maturities of
long-term debt are included in the payable to banks balance.
NOTE 10: LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
1997 1996
(Dollars in thousands)
Convertible Subordinated Notes - 1.80% $201,768 $ -
Convertible Subordinated Debentures - 3 3/4% - 115,192
Term loans- 6.45% to 14.0% 236,833 206,914
Mortgage notes payable and other
long-term loans- 4.0% to 16.0% 39,838 50,791
478,439 372,897
Less: current portion 22,761 18,294
Long-term debt $455,678 $354,603
On September 16, 1997, the Company issued $250 million face amount of
Convertible Subordinated Notes due 2004 ("2004 Notes") with a coupon rate of
1.80%. The 2004 Notes were issued at an original price of 80% of the face
amount, generating proceeds of approximately $200 million. The notes are
convertible into 3.3 million shares of the Company's common stock at a
conversion rate of 13.386 shares per $1,000 face amount. These shares have
been reserved for the conversion of the notes. The fair value of the 2004
Notes as of December 31, 1997 was approximately $208 million and was
determined by obtaining quotes from brokers.
In the fourth quarter of 1997, the Company called for redemption its 3 3/4%
Convertible Subordinated Debentures due 2002. Substantially all of the
outstanding debentures were converted into approximately 4.3 million shares
of the Company's common stock.
The increase in term loans during 1997 was primarily due to an additional
$50 million private placement with Prudential. Term loans at December 31,
1997 consisted of $146.7 million of private placements with Prudential,
$25.0 million in term loans with First Chicago NBD, $40.0 million in term
loans with SunTrust Bank, $20.0 million in term loans with Wachovia Bank,
$3.5 million in loans with Norwest and a $1.6 million private placement loan
with Massachusetts Mutual.
Mortgage notes payable and other long-term loans at December 31, 1997
primarily related to a $31.6 million mortgage which was used to finance
the purchase of a building and land by one of the Company's subsidiaries
during 1993.
Under various loan agreements, the Company must maintain specified levels of
net worth and meet certain cash flow requirements, and is limited in the
level of indebtedness. The Company has complied with the limitations under
the terms of these loan agreements.
Long-term debt maturing over the next five years is as follows: 1998-$22.8
million; 1999-$27.5 million; 2000-$6.1 million; 2001-$14.3 million; 2002-
$45.6 million, and thereafter $362.1 million.
All material long-term debt is carried in the consolidated balance sheet at
amounts which approximate fair values based upon current borrowing rates
available to the Company unless otherwise disclosed.
NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with a maturity of three months or
less to be cash equivalents.
Income Tax and Interest Payments
Cash paid for income taxes was approximately $124.8 million, $105.8 million
and $84.0 million in 1997, 1996 and 1995, respectively. Interest payments
were approximately $24.2 million in 1997, $28.1 million in 1996 and $26.4
million in 1995.
Noncash Financing Activity
As more fully described in Note 10, the Company called for redemption all
outstanding issues under the 3 3/4% Convertible Subordinated Debentures due
2002. The debentures were converted into approximately 4.3 million shares of
the Company's common stock.
Acquisitions
As more fully described in Note 4 and in connection with acquisitions, the
Company issued 5,259,314 shares, 3,710,500 shares, and 2,636,936 shares of
the Company's common stock during 1997, 1996 and 1995, respectively.
Details of businesses acquired in transactions accounted for as purchases
were as follows:
1997 1996 1995
(Dollars in thousands)
Fair value of assets acquired $262,925 $182,572 $ 75,305
Liabilities assumed 89,686 106,289 11,170
Net assets acquired 173,239 76,283 64,135
Less: noncash consideration 76,794 7,568 9,637
Less: cash acquired 6,535 16,867 5,481
Net cash paid for acquisitions $ 89,910 $ 51,848 $ 49,017
The amounts shown above exclude acquisition related deferred payments due in
subsequent years, but include cash deferred payments of $30 million, $14
million and $27 million made during 1997, 1996 and 1995, respectively.
<TABLE>
NOTE 12: RESULTS BY QUARTER (UNAUDITED)
________________________________________________________________________________
________________________________________
(Dollars in thousands 1st Quarter 2nd Quarter
3rd Quarter 4th Quarter
except per share data) 1997 1996 1997 1996
1997 1996 1997 1996
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Gross income $679,297 $583,133 $825,358 $719,577
$732,959 $621,702 $1,026,506 $862,243
Operating expenses 614,874 534,105 649,291 558,461
660,465 557,084 850,181 725,916
Special compensation charges
32,229
Interest expense 10,698 10,280 11,306 10,097
14,343 10,753 14,227 11,911
Income before provision
for taxes 53,725 38,748 164,761 151,019
58,151 53,865 129,869 124,416
Provision for income taxes 21,590 15,023 66,428 61,481
26,124 20,742 70,085 57,261
Net equity interests (2,704) 441 (5,113) 61
(942) (555) (8,487) (2,375)
Net income 29,431 24,166 93,220 89,599
31,085 32,568 51,297 64,780
Per share data:
Basic EPS .23 .19 .73 .70
.24 .26 .40 .51
Diluted EPS .23 .18 .70 .67
.24 .25 .38 .49
Cash dividends per share (IPG) $.113 $.103 $.130
$.113 $.130 $.113 $.130 $.113
Weighted-average shares:
Basic 126,734,506 127,756,770 127,161,514 127,730,182
127,078,261 127,561,172 128,853,772 126,969,620
Diluted 130,669,256 131,671,984 136,044,790 136,034,532
132,181,681 131,327,207 133,592,508 135,162,648
Stock Price:
High $36 5/8 $31 1/2 $41 3/8 $33 1/8
$51 3/8 $32 3/8 $52 1/2 $33 3/8 Low $32 1/4
$26 5/8 $35 $30 3/8 $41 1/2 $27 7/8 $45 1/4
$29 5/8
________________________________________________________________________________
_________________________________________________
All periods have been restated to reflect the aggregate effect of the
acquisitions accounted for as poolings of interests. See Note 16.
</TABLE>
NOTE 13: GEOGRAPHIC AREAS
Total assets, income from commissions and fees and income before provision
for income taxes are presented below by major geographic area:
(Dollars in thousands) 1997 1996 1995
Total Assets:
United States $3,179,103 $2,458,270 $2,117,696
International
Europe 1,735,068 1,653,242 1,569,650
Asia Pacific 571,153 545,350 515,505
Latin America 257,730 224,683 193,592
Other 134,551 135,874 135,243
Total International 2,698,502 2,559,149 2,413,990
Total Consolidated $5,877,605 $5,017,419 $4,531,686
Income From Commissions and Fees:
United States $1,531,152 $1,214,785 $ 973,943
International
Europe 996,823 907,373 860,502
Asia Pacific 323,626 311,576 282,200
Latin America 204,894 170,024 152,503
Other 78,017 73,415 72,753
Total International 1,603,360 1,462,388 1,367,958
Total Consolidated $3,134,512 $2,677,173 $2,341,901
Income Before Provision for Income Taxes:
Operating income:
United States $ 215,167 $ 206,898 $ 144,681
International
Europe 129,757 99,778 77,798
Asia Pacific 53,485 57,831 48,290
Latin America 48,067 35,578 31,626
Other 10,604 11,004 6,572
Total International 241,913 204,191 164,286
Items not allocated to operations,
principally interest expense:
United States (35,352) (29,900) (26,472)
International (15,222) (13,141) (14,452)
Total Consolidated $ 406,506 $ 368,048 $ 268,043
The largest client of the Company contributed approximately 11% in 1997,
1996 and 1995 to income from commissions and fees. The Company's second
largest client contributed approximately 8% in 1997, 1996 and 1995 to income
from commissions and fees.
Dividends received from foreign subsidiaries were approximately $40.8
million in 1997, $35.2 million in 1996 and $31.8 million in 1995. Net
assets of foreign subsidiaries were approximately $645 million, $679 million
and $586 million at December 31, 1997, 1996 and 1995, respectively.
Consolidated net income includes losses from exchange and translation of
foreign currencies of $5.6 million, $4.1 million and $4.7 million in 1997,
1996 and 1995, respectively.
NOTE 14: FINANCIAL INSTRUMENTS
Financial assets, which include cash and cash equivalents, marketable
securities and receivables, have carrying values, which approximate fair
value. Long-term equity securities, included in other investments and
miscellaneous assets in the Consolidated Balance Sheet, are deemed to be
available-for-sale as defined by SFAS 115 and accordingly are reported at
fair value with net unrealized gains and losses reported within
stockholders' equity. At December 31, 1997, long-term equity securities had
a cost basis of $20 million with a market value of $42 million.
Financial liabilities with carrying values approximating fair value include
accounts payable and accrued expenses, as well as payable to banks and long-
term debt. As of December 31, 1997, the 1.80% Convertible Subordinated Notes
due 2004 had a cost basis of $202 million with a market value of $208
million. The fair value was determined by obtaining quotes from
brokers(refer to Note 10 for additional information on long-term debt).
The Company occasionally uses forwards and options to hedge a portion of its
net investment in foreign subsidiaries and certain intercompany transactions
in order to mitigate the impact of changes in foreign exchange rates on
working capital. The notional value and fair value of all outstanding
forwards and options contracts at the end of the year as well as the net
cost of all settled contracts during the year were not significant.
NOTE 15: COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company's subsidiaries operating outside the
United States were contingently liable for discounted notes receivable of
approximately $11.5 million.
The Company and its subsidiaries lease certain facilities and equipment.
Gross rental expense amounted to approximately $200 million for 1997, $193
million for 1996 and $180 million for 1995, which was reduced by sublease
income of $30.5 million in 1997, $29.1 million in 1996 and $19.5 million in
1995.
During 1995, the Company entered into a transaction whereby it acquired the
leasing operations of a third party at a cost of approximately $7 million.
These leasing operations include equipment leased from the equipment owner
(the "Owner"), which was in turn leased to a third party (the "Sublessee").
These leases were accounted for by the Company as operating leases. The
Sublessee prepaid $46.6 million of its obligations under the sublease
agreement. This prepayment is held in an interest-bearing escrow account and
is used to meet the Company's lease obligations to the Owner. At December
31, 1997, the remaining escrow balance was $5.2 million and is reflected in
prepaid expenses and other current assets. The unearned sublease income
amount was $3.3 million and is reflected in other noncurrent liabilities.
The deferred tax asset attributable to the prepaid sublease obligation
amounted to $4.4 million at December 31, 1997.
Minimum rental commitments for the rental of office premises and equipment
under noncancellable leases, some of which provide for rental adjustments
due to increased property taxes and operating costs for 1998 and thereafter,
are as follows:
(Dollars in thousands) Gross Sublease
Period Amount Income
1998 $159,588 $13,385
1999 144,811 10,071
2000 127,787 7,812
2001 110,785 6,898
2002 98,090 4,105
2003 and thereafter 437,627 4,020
Certain of the Company's acquisition agreements provide for the payment by
the Company of future contingent consideration based upon future revenues or
profits of the companies acquired.
The Company and certain of its subsidiaries are party to various tax
examinations, some of which have resulted in assessments. The Company
intends to vigorously defend any and all assessments and believes that
additional taxes (if any) that may ultimately result from the settlement of
such assessments and open examinations would not have a material adverse
effect on the consolidated financial statements.
NOTE 16: SUBSEQUENT EVENTS
In April 1998, the Company issued 4,685,334 shares of its common stock for
three acquisitions, which were accounted for as poolings of interests. These
included Hill, Holliday, Connors, Cosmopulos Inc. - 2,062,434 shares, The
Jack Morton Company - 2,135,996 shares and Carmichael Lynch Inc. - 486,904
shares. The Company's consolidated financial statements, including the
related notes, have been restated as of the earliest period presented to
include the results of operations, financial position and cash flows of the
April 1998 pooled entities in addition to all prior pooled entities.
<TABLE> SELECTED FINANCIAL DATA FOR FIVE YEARS
<F1>
(Dollars in thousands except per share data)
1997 1996 1995
1994 1993
<S> <C> <C> <C> <C> <C>
Operating Data
Gross income $ 3,264,120 $ 2,786,655 $ 2,429,341 $
2,185,411 $ 2,032,541
Operating expenses 2,774,811 2,375,566 2,082,197
1,886,529 1,783,854
Restructuring charges - - -
48,715 -
Write-down of goodwill and other
related assets - - 38,177
- - -
Special compensation charges 32,229 - -
- - -
Interest expense 50,574 43,041 40,924
34,095 27,906
Provision for income taxes 184,227 154,507 126,619
89,445 103,523
Income before effect of accounting
changes 205,033 211,113 139,588
127,107 110,466
Effect of accounting changes:
Postemployment benefits <F2> - -
- - (29,564) -
Income taxes <F3> - - -
- - (512)
Net Income $ 205,033 $ 211,113 $ 139,588 $
97,543 $ 109,954
Per Share Data
Basic
Income before effect of accounting
changes $ 1.61 $ 1.66 $ 1.12 $
1.04 $ .90
Effect of accounting changes<F2><F3> - - -
(.25) -
Net Income $ 1.61 $ 1.66 $ 1.12 $
0.79 $ .90
Weighted-average shares 127,457,013 127,504,436 125,009,700
122,770,794 121,920,904
Diluted
Income before effect of accounting
changes $ 1.55 $ 1.60 $ 1.09 $
1.01 $ .88
Effect of accounting changes<F2><F3> - - -
(.23) -
Net Income $ 1.55 $ 1.60 $ 1.09 $
0.78 $ .88
Weighted-average shares 136,016,598 135,795,875 129,011,690
126,165,896 125,964,561
Financial Position
Working capital $ 245,757 $ 143,859 $ 128,687 $
75,159 $ 161,798
Total assets 5,877,605 5,017,419 4,531,686
3,995,901 3,335,832
Long-term debt 455,678 354,603 303,894
255,052 229,882
Book value per share $ 8.05 $ 6.73 $ 5.77 $
4.98 $ 4.58
Other Data
Cash dividends (Interpublic) $ 61,242 $ 51,786 $ 46,124 $
40,360 $ 35,901
Cash dividends per share (IPG) $ .50 $ .44 $ .40 $
.36 $ .33
Number of employees 28,100 23,600 22,000
19,800 20,100
<F1> All periods have been restated to reflect the aggregate effect of
acquisitions accounted for as poolings of interests. See Note 16.
<F2> Reflects the cumulative effect of adopting SFAS 112, "Employers' Accounting
for Postemployment Benefits."
<F3> Reflects the cumulative effect of adopting SFAS 109, "Accounting for Income
Taxes."
</TABLE>
<TABLE>
SCHEDULE VIII
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
<S> <C> <C> <C> <C> <C>
Additions
Balance Charged Charged
at to to Other Balance
Beginning Costs & Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
Allowance for
Doubtful Accounts -
deducted from
Receivables in the
Consolidated
Balance Sheet:
1997 $34,953 $12,698 $2,256<F1> $ (2,566)<F2> $39,896
848<F5> (5,919)<F3>
(2,374)<F4>
1996 $22,811 $17,219 $ 240 <F1> $ (815)<F2> $34,953
1,060 <F5> (5,234)<F3>
(328)<F4>
1995 $22,839 $10,448 $1,324 <F1> $(10,421)<F3> $22,811
137 <F2> (819)<F4>
(697)<F5>
<FN>
<F1> Allowance for doubtful accounts of acquired and newly consolidated
companies.
<F2> Foreign currency translation adjustment.
<F3> Principally amounts written off.
<F4> Reversal of previously recorded allowances on accounts receivable.
<F5> Miscellaneous.
</FN>
</TABLE>
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(Dollars in thousands except per share data)
ASSETS
(unaudited)
MARCH 31, DECEMBER 31,
1998 1997
Current Assets:
Cash and cash equivalents (includes
certificates of deposit: 1998-$80,777
1997 - $256,934) $ 486,103 $ 735,440
Marketable securities, at cost which
approximates market 45,868 31,944
Receivables (less allowance for doubtful
accounts: 1998-$39,782; 1997-$39,896) 2,983,028 3,050,917
Expenditures billable to clients 259,167 240,000
Prepaid expenses and other current assets 116,185 105,504
Total current assets 3,890,351 4,163,805
Other Assets:
Investment in unconsolidated affiliates 46,015 46,665
Deferred taxes on income 56,750 59,424
Other investments and miscellaneous assets 230,887 219,839
Total other assets 333,652 325,928
Fixed Assets, at cost:
Land and buildings 83,227 83,621
Furniture and equipment 518,126 503,823
601,353 587,444
Less accumulated depreciation 340,292 330,593
261,061 256,851
Unamortized leasehold improvements 104,928 103,494
Total fixed assets 365,989 360,345
Intangible Assets (less accumulated
amortization: 1998-$239,981;
1997-$227,401)
1,113,549 1,027,527
Total assets $5,703,541 $5,877,605
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(Dollars in Thousands Except Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
MARCH 31, DECEMBER 31,
1998 1997
Current Liabilities:
Payable to banks $ 225,110 $ 162,807
Accounts payable 2,894,050 3,156,049
Accrued expenses 423,045 448,054
Accrued income taxes 140,502 151,138
Total current liabilities 3,682,707 3,918,048
Noncurrent Liabilities:
Long-term debt 256,954 253,910
Convertible subordinated notes 201,018 201,768
Deferred compensation and reserve
for termination liabilities 271,753 263,463
Accrued postretirement benefits 47,404 47,404
Other noncurrent liabilities 66,805 70,791
Minority interests in consolidated
subsidiaries 31,967 31,917
Total noncurrent liabilities 875,901 869,253
Stockholders' Equity:
Preferred Stock, no par value
shares authorized: 20,000,000
shares issued:none
Common Stock, $.10 par value
shares authorized: 225,000,000
shares issued:
1998 - 144,322,587
1997 - 143,567,843 14,432 14,357
Additional paid-in capital 606,863 552,282
Retained earnings 1,014,527 995,702
Adjustment for minimum pension
liability (13,207) (13,207)
Net unrealized gain on
equity securities 16,566 12,405
Cumulative translation adjustments (161,600) (154,093)
1,477,581 1,407,446
Less:
Treasury stock, at cost:
1998 - 7,785,786 shares
1997 - 8,063,983 shares 266,906 253,088
Unearned ESOP compensation 7,420 7,420
Unamortized expense of restricted
stock grants 58,322 56,634
Total stockholders' equity 1,144,933 1,090,304
Total liabilities and stockholders'
equity $5,703,541 $5,877,605
The accompanying notes are an integral part of these consolidated financial
statements.
All periods have been restated to reflect the aggregate effect of acquisitions
accounted for as poolings of interests. See Note (d).
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (unaudited)
THREE MONTHS ENDED MARCH 31
(Dollars in Thousands Except Per Share Data)
1998 1997
Revenue $ 761,147 $ 665,064
Other income 14,153 14,233
Gross income 775,300 679,297
Costs and expenses:
Operating expenses 700,567 614,874
Interest 10,936 10,698
Total costs and expenses 711,503 625,572
Income before provision for income taxes 63,797 53,725
Provision for income taxes 25,768 21,590
Income of consolidated companies 38,029 32,135
Income applicable to minority
interests (2,840) (4,257)
Equity in net income of unconsolidated
affiliates 651 1,553
Net income $ 35,840 $ 29,431
Weighted average shares:
Basic 132,394,115 126,734,506
Diluted 137,446,055 130,669,256
Earnings per share:
Basic EPS $ .27 $ .23
Diluted EPS $ .26 $ .23
Dividend per share - Interpublic $ .13 $ .11
The accompanying notes are an integral part of these consolidated financial
statements.
All periods have been restated to reflect the aggregate effect of acquisitions
accounted for as poolings of interests. See Note (d).
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
THREE MONTHS ENDED MARCH 31
(Dollars in Thousands)
1998 1997
Net Income $ 35,840 $ 29,431
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments (7,507) (35,163)
Net Unrealized Gains on Securities 4,161 -
Other Comprehensive Income (3,346) (35,163)
Comprehensive Income $ 32,494 $( 5,732)
The accompanying notes are an integral part of these consolidated financial
statements.
All periods have been restated to reflect the aggregate effect of acquisitions
accounted for as poolings of interests. See Note (d).
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
THREE MONTHS ENDED MARCH 31
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
Net income $ 35,840 $ 29,431
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization of fixed assets 21,062 18,680
Amortization of intangible assets 12,580 7,972
Amortization of restricted stock awards 5,052 3,733
Equity in net income of unconsolidated
affiliates (651) (1,553)
Income applicable to minority interests 2,840 4,257
Translation losses 276 873
Other (4,096) (174)
Changes in assets and liabilities, net of acquisitions:
Receivables 53,951 28,752
Expenditures billable to clients (20,102) (35,846)
Prepaid expenses and other assets (11,511) (13,450)
Accounts payable and accrued expenses (270,173) (180,224)
Accrued income taxes (9,303) (23,278)
Deferred income taxes 2,907 632
Deferred compensation and reserve for termination
liabilities 7,261 (4,808)
Net cash used in operating activities (174,067) (165,003)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (48,051) (13,130)
Proceeds from sale of investments 607 102
Capital expenditures (27,978) (19,029)
Net purchases of marketable securities (14,559) (8,580)
Other investments and miscellaneous assets (5,684) (1,497)
Unconsolidated affiliates (612) 2,000
Net cash used in investing activities (96,277) (40,134)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 63,263 188,530
Proceeds from long-term debt 1,997 1,870
Payments of debt (390) (1,511)
Treasury stock acquired (32,917) (34,437)
Issuance of common stock 9,832 11,048
Cash dividends - Interpublic (17,015) (13,464)
Cash dividends - pooled companies - (1,560)
Net cash provided by financing activities 24,770 150,476
Effect of exchange rates on cash and cash
equivalents (3,763) (12,282)
Decrease in cash and cash equivalents (249,337) (66,943)
Cash and cash equivalents at beginning of year 735,440 507,394
Cash and cash equivalents at end of period $486,103 $440,451
The accompanying notes are an integral part of these consolidated financial
statements.
All periods have been restated to reflect the aggregate effect of
acquisitions accounted for as poolings of interests. See Note (d).
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Supplemental Consolidated Financial Statements
(a) In the opinion of management, the supplemental consolidated balance
sheet as of March 31, 1998, the supplemental consolidated statement of
income for the three months ended March 31, 1998 and 1997, the
supplemental consolidated statement of comprehensive income for the
three months ended March 31, 1998 and 1997 and the supplemental
consolidated statement of cash flows for the three months ended March
31, 1998 and 1997, contain all adjustments necessary to present fairly
the financial position, results of operations and cash flows at March
31, 1998 and for all periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
supplemental consolidated financial statements be read in conjunction
with the consolidated financial statements and related notes included
in The Interpublic Group of Companies, Inc.'s (the "Company's")
December 31, 1997 annual report to stockholders and the supplemental
consolidated financial statements and related notes included in the
Current Report on Form 8-K dated July 1, 1998.
(b) Statement of Financial Accounting Standards (SFAS) No. 95 "Statement of
Cash Flows" requires disclosures of specific cash payments and noncash
investing and financing activities. The Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents. Income tax cash payments were approximately $49.1
million and $33.3 million in the first three months of 1998 and 1997,
respectively. Interest payments during the first three months of 1998
and 1997 were approximately $7.7 million and $4.7 million,
respectively.
(c) In July 1997, a three-for-two stock split was effected by payment of a
stock dividend. This split has been reflected in the accompanying
supplemental consolidated financial statements.
(d) Subsequent events
In April 1998, the Company issued 4,685,334 shares of its common stock
for acquisitions accounted for as poolings if interests. These included
Hill, Holliday, Connors, Cosmopulos Inc. - 2,062,434 shares, The Jack
Morton Company - 2,135,996 shares and Carmichael Lynch Inc. - 486,904
shares. The Company's consolidated financial statements, including the
related notes, have been restated as of the earliest period presented
to include the results of operations, financial position and cash flows
of the April 1998 pooled entities in addition to all prior pooled
entities.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1998 was $207.6 million, a decrease of $38.1
million from December 31, 1997. The ratio of current assets to current
liabilities was approximately 1.1 to 1 at March 31, 1998.
Historically, cash flow from operations has been the primary source of
working capital and management believes that it will continue to be in the
future. The principal use of the Company's working capital is to provide
for the operating needs of its advertising agencies, which include payments
for space or time purchased from various media on behalf of its clients.
The Company's practice is to bill and collect from its clients in sufficient
time to pay the amounts due media. Other uses of working capital include the
payment of cash dividends, acquisitions, capital expenditures and the
reduction of long-term debt. In addition, during the first three months of
1998, the Company acquired 649,915 shares of its own stock for approximately
$32.9 million for the purpose of fulfilling the Company's obligations under
its various compensation plans.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Total revenue for the three months ended March 31, 1998 increased $96.1
million, or 14.4%, to $761.1 million compared to the same period in 1997.
Domestic revenue increased $67.4 million or 20% from 1997 levels. Foreign
revenue increased $28.7 million or 8.8% during the first quarter of 1998
compared to 1997. Other income during the first quarter of 1998 was flat
compared to the same period in 1997.
Operating expenses increased $85.7 million or 13.9% during the three months
ended March 31, 1998 compared to the same period in 1997. Interest expense
increased 2.2% as compared to the same period in 1997.
Pretax income increased $10.1 million or 18.7% during the three months ended
March 31, 1998 compared to the same period in 1997.
The increase in total revenue, operating expenses, and pretax income is
primarily due to the effect of new business gains.
Net losses from exchange and translation of foreign currencies for the three
months ended March 31, 1998 were approximately $.6 million versus $2.0
million for the same period in 1997.
The effective tax rate for the three months ended March 31, 1998 was 40.4%,
as compared to 40.2% in 1997.
The difference between the effective and statutory rates is primarily due to
foreign losses with no tax benefit, losses from translation of foreign
currencies which provided no tax benefit, state and local taxes, foreign
withholding taxes on dividends and nondeductible goodwill expense.
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.
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Registrant)
Date: July 1, 1998 BY /S/ EUGENE P. BEARD
Eugene P. Beard
Vice Chairman -
Finance and Operations
Date: July 1, 1998 BY /S/ JOSEPH M. STUDLEY
Joseph M. Studley
Chief Accounting Officer
EXHIBIT 11
<TABLE> Page 1 of
2
<CAPTION> THE INTERPUBLIC GROUP OF COMPANIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands Except Per Share Data)
Year Ended December 31
1997 1996 1995 1994
1993
<S> <C> <C> <C> <C>
<C>
BASIC:
Net Income before effect of
accounting changes $205,033 $211,113 $139,588 $127,107
$110,466
Effect of accounting changes - - - (29,564)
(512)
________ ________ ________ ________
________Net income, as adjusted $205,033 $211,113 $139,588 $
97,543 $109,954
Weighted average number of common shares outstanding 127,457,013 127,504,436
125,009,700 122,770,794 121,920,904Basic earnings per share data:Income before
effect of accounting changes $1.61 $1.66 $1.12
$1.04 $ .90
Effect of accounting changes - - - (.25)
- -
________ _______ _______ _______
_______Net Income $1.61 $1.66 $1.12 $
.79 $ .90
</TABLE>
<TABLE>
EXHIBIT 11
<CAPTION>
Page 2 of 2
THE INTERPUBLIC GROUP OF COMPANIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands Except Per Share Data)
Year Ended December 31
1997 1996 1995 1994
1993
<S> <C> <C> <C> <C>
<C>
DILUTED:
Net Income before effect of
accounting changes $ 205,033 $ 211,113 $ 139,588 $ 127,107
$ 110,466
Effect of accounting changes - - -
(29,564) (512)
After tax interest savings
on assumed conversion of
subordinated debentures<F1> 5,929 6,410 - -
- -
Add: Dividends paid net of
related income tax applicable
to the Restricted Stock Plan 447 384 461 366
330
Net income, as adjusted $ 211,409 $ 217,907 $ 140,049 $ 97,909
$ 110,284
Weighted average number of
common shares outstanding 127,457,013 127,504,436 125,009,700 122,770,794
121,920,904
Assumed conversion of
subordinated debentures<F1> 4,010,291 4,466,502 - -
- -
Weighted average number of
incremental shares in
connection with assumed
exercise of stock options 2,910,648 2,219,373 1,921,923 1,523,756
1,646,618
Weighted average number of
incremental shares in
connection with the
Restricted Stock Plan 1,638,646 1,605,564 2,080,067 1,871,346
2,397,039
Total 136,016,598 135,795,875 129,011,690 126,165,896
125,964,561
Diluted Earnings Per Share Data:
Income before effect of
accounting changes 1.55 1.60 1.09 1.01
.88
Effect of accounting changes - - -
(.23) -
Net Income 1.55 1.60 1.09 .78
.88
<FN>
<F1> The computation of diluted EPS for 1997 excludes the assumed conversion of
the 1.80% Convertible Subordinated Notes due 2004 because they were
antidilutive. Similarly, the computation of diluted EPS for 1995, 1994 and 1993
excludes the assumed conversion of the 3 3/4% Convertible Subordinated
Debentures due 2002 as they were antidilutive.
</TABLE>
Exhibit 11
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
SUPPLEMENTAL COMPUTATION OF EARNINGS PER SHARE (unaudited)
(Dollars in Thousands Except Per Share Data)
Three Months Ended March 31
Basic 1998 1997
Net income $ 35,840 $ 29,431
Weighted average number of common shares
outstanding 132,394,115 126,734,506
Earnings per common and
common equivalent share $ .27 $ .23
Three Months Ended March 31
Diluted <F1> 1998 1997
Net income $ 35,840 $ 29,431
Add:
Dividends paid net of related income tax
applicable to restricted stock 123 91
Net income, as adjusted $ 35,963 $ 29,522
Weighted average number of common shares
outstanding 132,394,115 126,734,506
Weighted average number of incremental shares
in connection with restricted stock
and assumed exercise of stock options 5,051,940 3,934,750
Total 137,446,055 130,669,256
Earnings per common and common equivalent
share $ .26 $ .23
<F1> The computation of diluted EPS for 1998 excludes the assumed
conversion of the 1.80% Convertible Subordinated Notes because they were
anti-dilutive. Similarly, the computation of diluted EPS for 1997 excludes
the assumed conversion of the 3 3/4% Convertible Subordinated Debentures as
they were anti-dilutive.
REPORT OF INDEPENDENT ACCOUNTANTS
ON SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
The Interpublic Group of Companies, Inc.
Our audits of the supplemental consolidated financial statements
referred to in our report dated February 20, 1998 except for Note 16
which is as of April 16, 1998, which appears in this Current Report
on Form 8-K also included an audit of the Supplemental Financial
Statement Schedule listed in Item 7 of this Form 8-K. In our
opinion, this Supplemental Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein
when read in conjunction with the related supplemental consolidated
financial statements.
/s/ By: PRICE WATERHOUSE LLP
Price Waterhouse LLP
New York, New York
February 20, 1998 except
for Note 16 which is as of
April 16, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 of The Interpublic Group of
Companies, Inc. (the "Company"), of our reports dated February 20,
1998, except for Note 16 which is as of April 16, 1998, which appear
in this Current Report on Form 8-K: Registration Statements No. 2-
79071; No. 2-43811; No. 2-56269; No. 2-61346; No. 2-64338; No. 2-
67560; No. 2-72093; No. 2-88165; No. 2-90878; No. 2-97440 and No. 33-
28143, relating variously to the Stock Option Plan (1971), the Stock
Option Plan (1981), the Stock Option Plan (1988) and the Achievement
Stock Award Plan of the Company; Registration Statements No. 2-
53544; No. 2-91564; No. 2-98324; No. 33-22008; No. 33-64062 and No.
33-61371, relating variously to the Employee Stock Purchase Plan
(1975), the Employee Stock Purchase Plan (1985) and the Employee
Stock Purchase Plan of the Company (1995); Registration Statements
No. 33-20291 and No. 33-2830 relating to the Management Incentive
Compensation Plan of the Company; Registration Statements No. 33-
5352; No. 33-21605; No. 333-4747 and No. 333-23603 relating to the
1986 Stock Incentive Plan, the 1986 United Kingdom Stock Option Plan
and the 1996 Stock Incentive Plan, of the Company; Registration
Statements No. 33-10087 and No. 33-25555 relating to the Long-Term
Performance Incentive Plan of the Company; Registration Statement
No. 333-28029 relating to The Interpublic Outside Directors' Stock
Incentive Plan of the Company; and Registration Statement No. 33-
42675 relating to the 1997 Performance Incentive Plan of the
Company. We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Form S-3 (No. 333-42243 and No. 333-45569) of The Interpublic Group
of Companies, Inc. of our reports dated February 20, 1998, except
for Note 16 which is as of April 16, 1998, which appear in this
Current Report on Form 8-K.
/s/ BY: PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
July 1, 1998
F-2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements on Form S-8 of The Interpublic Group of Companies, Inc. ("IPG"
or the "Company"), of our report dated March 13, 1998, included in this
Current Report on Form 8-K, with respect to the consolidated financial
statements of Hill, Holliday, Connors, Cosmopulos, Inc. for the twelve-
month period ended December 31, 1997 (not separately presented herein),
which statements are included in the supplemental consolidated financial
statements of IPG,: Registration Statements No. 2-79071; No. 2-43811; No. 2-
56269; No. 2-61346; No. 2-64338; No. 2-67560; No. 2-72093; No. 2-88165; No.
2-90878; No. 2-97440 and No. 33-28143, relating variously to the Stock
Option Plan (1971), the Stock Option Plan (1981), the Stock Option Plan
(1988) and the Achievement Stock Award Plan, of the Company; Registration
Statements No. 2-53544; No. 2-91564; No. 2-98324; No. 33-22008; No. 33-
64062 and No. 33-61371, relating variously to the Employee Stock Purchase
Plan (1975), the Employee Stock Purchase Plan (1985) and the Employee Stock
Purchase Plan, of the Company (1995); Registration Statements No. 33-20291
and No. 33-2830 relating to the Management Incentive Compensation Plan, of
the Company; Registration Statements No. 33-5352; No. 33-21605; No. 333-
4747 and No. 333-23603 relating to the 1986 Stock Incentive Plan, the 1986
United Kingdom Stock Option Plan and the 1996 Stock Incentive Plan, of the
Company; Registration Statements No. 33-10087 and No. 33-25555 relating to
the Long-Term Performance Incentive Plan, of the Company; Registration
Statement No. 333-28029 relating to The Interpublic Outside Directors'
Stock Incentive Plan, of the Company; and Registration Statement No. 33-
42675 relating to the 1997 Performance Incentive Plan, of the Company.
We also consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-42243
and No. 333-45569) of IPG of our report dated March 13, 1998, included in
this Current Report on Form 8-K, with respect to the consolidated financial
statements of Hill, Holliday, Connors, Cosmopulos, Inc., for the twelve-
month period ended December 31, 1997 (not separately included herein),
which statements are included in the supplemental consolidated financial
statements of IPG.
/s/ BY: ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
July 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. THE EPS PRIMARY NUMBER BELOW REFLECTS THE BASIC
EARNINGS PER SHARE AS REQUIRED BY FINANCIAL ACCOUNTING STANDARDS NUMBER 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 486,103 440,451
<SECURITIES> 45,868 42,690
<RECEIVABLES> 2,983,028 2,785,257
<ALLOWANCES> 39,782 36,053
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,890,351 3,583,267
<PP&E> 601,353 541,278
<DEPRECIATION> 340,292 308,299
<TOTAL-ASSETS> 5,703,541 5,078,481
<CURRENT-LIABILITIES> 3,682,707 3,506,148
<BONDS> 201,018 115,929
0 0
0 0
<COMMON> 14,432 13,695
<OTHER-SE> 1,144,933 842,647
<TOTAL-LIABILITY-AND-EQUITY> 5,703,541 5,078,481
<SALES> 0 0
<TOTAL-REVENUES> 775,300 679,297
<CGS> 0 0
<TOTAL-COSTS> 711,503 625,572
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,936 10,698
<INCOME-PRETAX> 63,797 53,725
<INCOME-TAX> 25,768 21,590
<INCOME-CONTINUING> 35,840 29,431
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 35,840 29,431
<EPS-PRIMARY> .27 .23
<EPS-DILUTED> .26 .23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND THE INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATMENTS. THE EPS PRIMARY NUMBER BELOW REFLECTS THE
BASIC EARNINGS PER SHARE AS REQUIRED BY FINANCIAL ACCOUNTING STANDARDS NUMBER
128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 735,440
<SECURITIES> 31,944
<RECEIVABLES> 3,050,917
<ALLOWANCES> 39,896
<INVENTORY> 0
<CURRENT-ASSETS> 4,163,805
<PP&E> 587,444
<DEPRECIATION> 330,593
<TOTAL-ASSETS> 5,877,605
<CURRENT-LIABILITIES> 3,918,048
<BONDS> 201,768
0
0
<COMMON> 14,357
<OTHER-SE> 1,090,304
<TOTAL-LIABILITY-AND-EQUITY> 5,877,605
<SALES> 0
<TOTAL-REVENUES> 3,264,120
<CGS> 0
<TOTAL-COSTS> 2,857,614
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,574
<INCOME-PRETAX> 406,506
<INCOME-TAX> 184,227
<INCOME-CONTINUING> 205,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,033
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.55
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. THE EPS PRIMARY NUMBER BELOW REFLECTS THE BASIC
EARNINGS PER SHARE AS REQUIRED BY FINANCIAL ACCOUNTING STANDARDS NUMBER 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 454,885 507,394
<SECURITIES> 39,831 36,940
<RECEIVABLES> 2,422,811 2,747,323
<ALLOWANCES> 22,811 34,953
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,175,929 3,560,889
<PP&E> 480,665 536,088
<DEPRECIATION> 265,533 302,681
<TOTAL-ASSETS> 4,531,686 5,017,419
<CURRENT-LIABILITIES> 3,047,242 3,417,030
<BONDS> 113,235 115,192
0 0
0 0
<COMMON> 8,963 13,641
<OTHER-SE> 759,402 877,688
<TOTAL-LIABILITY-AND-EQUITY> 4,531,686 5,017,419
<SALES> 0 0
<TOTAL-REVENUES> 2,429,341 2,786,655
<CGS> 0 0
<TOTAL-COSTS> 2,161,298 2,418,607
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 40,924 43,041
<INCOME-PRETAX> 268,043 368,048
<INCOME-TAX> 126,619 154,507
<INCOME-CONTINUING> 139,588 211,113
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 139,588 211,113
<EPS-PRIMARY> 1.12 1.66
<EPS-DILUTED> 1.09 1.60
</TABLE>
