FORM 10-Q================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
(Mark One)
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1998ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to________________----------------
Commission file numberFile Number: 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrantRegistrant 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'sRegistrant's telephone number, including area code)code (212) 399-8000
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Indicate by check mark whether the registrantRegistrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X .|X| No .|_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock outstanding at
October 31,1998: 138,984,743April 30, 1999: 140,544,975 shares.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
I N D E X
Page
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PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheet
September 30, 1998March 31, 1999 (unaudited) and
December 31, 19971998 3-4
Consolidated Income Statement of Income
Three months ended September 30,March 31, 1999
and 1998
and 1997 (unaudited) 5
Consolidated Statement of Comprehensive Income
NineThree months ended September 30,March 31, 1999
and 1998
and 1997 (unaudited) 6
Consolidated Statement of Comprehensive Income
NineCash Flows
Three months ended September 30,March 31, 1999
and 1998 and 1997 (unaudited) 7
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998
and 1997 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9 - 108
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 149-11
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
2
PART I - FINANCIAL INFORMATIONTHEINFORMATION
Item 1
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIESCONSOLIDATEDSUBSIDIARIES
CONSOLIDATED BALANCE SHEET(DollarsSHEET
(Dollars in Thousands)ASSETS
March 31, December 31,
1999 1998
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
Current Assets:------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (includes
certificates of deposit: 1999-$86,285;
1998-$104,194;
1997-$256,934)152,064) $ 621,698666,009 $ 735,440808,803
Marketable securities, at cost which
approximates market 46,440 31,94447,488 31,733
Receivables (less allowance for doubtful
accounts: 1999-$44,898; 1998-$52,161; 1997-$39,896) 3,152,671 3,050,91753,093) 3,477,067 3,522,616
Expenditures billable to clients 314,666 240,000326,521 276,610
Prepaid expenses and other current assets 156,530 105,504165,208 137,183
---------- ----------
Total current assets 4,292,005 4,163,805
Other Assets:4,682,293 4,776,945
---------- ----------
OTHER ASSETS:
Investment in unconsolidated affiliates 51,183 46,66547,099 47,561
Deferred taxes on income 65,242 59,42480,565 97,350
Other investments and miscellaneous assets 229,513 219,839340,099 299,967
---------- ---------
Total other assets 345,938 325,928
Fixed Assets,467,763 444,878
---------- ---------
FIXED ASSETS, at cost:
Land and buildings 88,202 83,62192,935 95,228
Furniture and equipment 573,648 503,823
661,850 587,444
Less647,444 650,037
---------- ---------
740,379 745,265
Less: accumulated depreciation 378,570 330,593
283,280 256,851424,211 420,864
---------- ---------
316,168 324,401
Unamortized leasehold improvements 111,123 103,494115,753 115,200
---------- ---------
Total fixed assets 394,403 360,345
Intangible Assets (less431,921 439,601
---------- ---------
INTANGIBLE ASSETS (net of accumulated
amortization:amortization): 1999-$519,515;
1998-$268,878;
1997-$227,401) 1,172,387 1,027,527
Total assets $6,204,733 $5,877,605
3504,787 1,324,553 1,281,399
---------- ----------
TOTAL ASSETS $6,906,530 $6,942,823
========== ==========
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIESCONSOLIDATEDSUBSIDIARIES
CONSOLIDATED BALANCE SHEET(DollarsSHEET
(Dollars in Thousands Except Per Share Data)LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1999 1998
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
Current Liabilities:------------ ------------
CURRENT LIABILITIES:
Payable to banks $ 227,104416,165 $ 162,807214,464
Accounts payable 3,193,273 3,156,0493,479,967 3,613,699
Accrued expenses 465,432 448,054516,240 624,517
Accrued income taxes 176,968 151,138190,098 205,672
---------- ----------
Total current liabilities 4,062,777 3,918,048
Noncurrent Liabilities:4,602,470 4,658,352
---------- ----------
NONCURRENT LIABILITIES:
Long-term debt 262,211 253,910341,992 298,691
Convertible subordinated debentures 201,847 201,768notes 209,507 207,927
Deferred compensation and reserve
for termination allowances 280,811 263,463liabilities 316,793 319,526
Accrued postretirement benefits 48,049 47,40448,616 48,616
Other noncurrent liabilities 64,266 70,79181,403 88,691
Minority interests in
consolidated subsidiaries 52,274 31,91757,296 55,928
---------- ----------
Total noncurrent liabilities 909,458 869,253
Stockholders' Equity:1,055,607 1,019,379
---------- ----------
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:
1999 - 146,858,194
1998 - 145,365,365
1997 - 143,567,843 14,537 14,357145,722,579 14,686 14,572
Additional paid-in capital 665,282 552,282710,297 652,692
Retained earnings 1,134,785 995,702
Adjustment for minimum pension
liability (13,207) (13,207)
Net unrealized gain on equity
securities 10,017 12,405
Cumulative translation adjustment (136,483) (154,093)
1,674,931 1,407,4461,139,452 1,116,365
Accumulated other comprehensive income (198,170) (160,476)
---------- ----------
1,666,265 1,623,153
Less: Treasury stock, at cost:
1999 - 6,814,714 shares
1998 - 9,055,1376,187,172 shares 1997 - 8,063,983 shares 371,169 253,088
Unearned ESOP compensation - 7,420345,794 286,713
Unamortized expense of restricted
stock grants 71,264
56,634 Total stockholders' equity 1,232,498 1,090,304 Total
liabilities and stockholders'
equity $6,204,733 $5,877,60572,018 71,348
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,248,453 1,265,092
---------- ----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,906,530 $6,942,823
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Restated to reflect the aggregate effect of acquisitions accounted for
as poolings of interests. See Note (c).
4
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)STATEMENT
THREE MONTHS ENDED SEPTEMBER 30MARCH 31
(Dollars in Thousands Except Per Share Data)
(unaudited)
1999 1998
1997 ---- ----
Revenue $ 837,371908,081 $ 710,872817,030
Other income, 24,077 22,086net 16,999 14,153
----------- -----------
Gross income 861,448 732,958925,080 831,183
----------- -----------
Costs and expenses:
Operating expenses 759,869 660,465830,131 752,956
Interest 14,210 14,34313,945 12,801
----------- -----------
Total costs and expenses 774,079 674,808844,076 765,757
----------- -----------
Income before provision for income taxes 87,369 58,15081,004 65,426
Provision for income taxes 38,207 26,12433,618 25,498
----------- -----------
Income of consolidated companies 49,162 32,02647,386 39,928
Income applicable to minority interests (5,488) (3,403)(3,599) (2,840)
Equity in net income of unconsolidated
affiliates 1,488 2,460998 651
----------- -----------
Net income $ 45,16244,785 $ 31,08337,739
=========== ===========
Weighted average shares:
Basic 132,792,504 127,078,261136,266,930 135,187,048
Diluted 137,567,041 132,181,681141,674,772 140,238,988
Earnings Per Share:
Basic $ .34.33 $ .24.28
Diluted $ .33.32 $ .24.27
Dividend per share - Interpublic $ .15 $ .13
The accompanying notes are an integral part of these consolidated financial
statements.
Restated to reflect the aggregate effect of acquisitions accounted for
as poolings of interests. See Note (c).
5
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
NINE MONTHS ENDED SEPTEMBER 30
(Dollars in Thousands Except Per Share Data)
1998 1997
Revenue $ 2,541,729 $ 2,177,268
Other income 67,382 60,345
Gross income 2,609,111 2,237,613
Costs and expenses:
Operating expenses 2,211,957 1,924,630
Interest 37,819 36,347
Total costs and expenses 2,249,776 1,960,977
Income before provision for income taxes 359,335 276,636
Provision for income taxes 150,846 114,142
Income of consolidated companies 208,489 162,494
Income applicable to minority interests (14,688) (14,185)
Equity in net income of unconsolidated
affiliates 3,554 5,425
Net income $ 197,355 $ 153,734
Weighted average shares:
Basic 132,704,118 126,991,427
Diluted 137,783,816 136,285,448
Earnings Per Share:
Basic $ 1.49 $ 1.21
Diluted $ 1.44 $ 1.17
Dividend per share - Interpublic $ .43 .37
The accompanying notes are an integral part of these consolidated financial
statements.
Restated to reflect the aggregate effect of acquisitions accounted for
as poolings of interests. See Note (c).
6
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
NINETHREE MONTHS ENDED SEPTEMBER 30MARCH 31
(Dollars in Thousands)
(unaudited)
1999 1998
1997 ---- ----
Net Income $ 197,35544,785 $ 153,73437,739
--------- ---------
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments 17,610 (54,509)(60,467) (14,808)
Net Unrealized Gains on Securities (2,388) -22,773 4,161
--------- ---------
Other Comprehensive Income 15,222 (54,509)(37,694) (10,647)
--------- ---------
Comprehensive Income $ 212,5777,091 $ 99,22527,092
========= =========
The accompanying notes are an integral part of these consolidated financial
statements. Restated to reflect the aggregate effect of acquisitions accounted for
as poolings of interests. See Note (c).
7
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
NINETHREE MONTHS ENDED SEPTEMBER 30MARCH 31
(Dollars in Thousands)
(unaudited)
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
1998 1997 Net income $ 197,35544,785 $ 153,73437,739
Adjustments to reconcile net income to cash
provided by/(used in)in operating activities:
Depreciation and amortization of fixed assets 64,248 54,72624,317 22,351
Amortization of intangible assets 41,477 26,67414,728 12,663
Amortization of restricted stock awards 14,634 11,8835,929 5,052
Equity in net income of unconsolidated
affiliates (3,554) (5,425)(998) (651)
Income applicable to minority interests 14,688 14,1853,599 2,840
Translation losses 854 743974 (6,271)
Net gain from sale of investments (7,579)(223) -
Other (2,764) (7,790)(9,692) (4,096)
Changes in assets and liabilities, net of acquisitions:
Receivables 4,289 47,105(29,760) 53,288
Expenditures billable to clients (70,490) (90,751)(51,014) (20,259)
Prepaid expenses and other assets (29,472) (4,737)(31,263) (11,612)
Accounts payable and other liabilities (66,665) (143,338)(158,581) (278,565)
Accrued income taxes 3,817 (24,443)(9,447) (9,702)
Deferred income taxes (3,436) 2,328(2,963) 4,831
Deferred compensation and reserve for
termination allowances 2,249 9303,936 7,261
--------- ---------
Net cash provided byused in operating activities 159,651 35,824(195,673) (185,131)
CASH FLOWS FROM INVESTING ACTIVITIES: --------- ---------
Acquisitions (83,857) (79,494)
Capital expenditures (83,281) (72,389)(55,286) (48,051)
Proceeds from sale of assets 22,518 590investments 1,436 607
Capital expenditures (28,468) (29,093)
Net purchases of marketable securities (9,331) (14,933)(18,104) (14,559)
Other investments and miscellaneous assets (4,146) (4,169)(5,359) (5,918)
Investments in unconsolidated affiliates (7,923) (5,742)236 (612)
--------- ---------
Net cash used in investing activities (166,020) (176,137)(105,545) (97,626)
CASH FLOWS FROM FINANCING ACTIVITIES: --------- ---------
Increase in short-term borrowings 75,002 11,725209,956 75,004
Proceeds from long-term debt 6,535 253,21252,721 2,084
Payments of long-term debt (22,101) (25,642)(1,534) (390)
Treasury stock acquired (148,639) (106,163)
Payments from Unearned ESOP 7,420 -(79,474) (32,917)
Issuance of common stock 26,795 31,589
Cash dividends - Interpublic (56,557) (44,932)26,285 9,832
Cash dividends - pooled - (7,158)(118)
Cash dividends - Interpublic (20,450) (17,015)
--------- ---------
Net cash (used in)/provided by
financing activities (111,545) 112,631187,504 36,480
--------- ---------
Effect of exchange rates on cash and cash
equivalents 4,172 (25,261)(29,080) (3,733)
--------- ---------
Decrease in cash and cash equivalents (113,742) (52,943)(142,794) (250,010)
Cash and cash equivalents at
beginning of year 735,440 507,394808,803 738,112
--------- ---------
Cash and cash equivalents at end of period $ 621,698666,009 $ 454,451488,102
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Restated to reflect the aggregate effect of acquisitions accounted for
as poolings of interests. See Note (c).
8
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIESNOTESSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(Unaudited)
1. Consolidated Financial Statements
(a) In the opinion of management, the consolidated balance sheet as of
September 30, 1998,March 31, 1999, the consolidated income statements of income for the three
months ended March 31, 1999 and nine months ended September 30, 1998, and 1997, the consolidated statement of
comprehensive income for the ninethree months ended September
30,1998March 31, 1999 and
1997,1998, and the consolidated statement of cash flows for the ninethree
months ended September 30,March 31, 1999 and 1998, and 1997, contain all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September 30, 1998March
31, 1999 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 consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in The Interpublic Group of
Companies, Inc.'s (the "Company") December 31, 19971998 annual report to
stockholders and with the supplemental
consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K dated July 1, 1998.stockholders.
(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 $140.1$36.3
million and $91.1$49.5 million in the first ninethree months of 19981999 and 1997,1998,
respectively. Interest payments during the first ninethree months of 1999
and 1998 were approximately $27.0 million. Interest payments during the
comparable period of 1997 were approximately $22.1 million.$5.6 million and $9.3 million,
respectively.
(c) 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 1997
consolidated financial statements, including the related notes, have
been restated to include the results of operations, financial position
and cash flows of the April 1998 pooled entities in addition to all
prior pooled entities.
(d) In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133)., which the Company is required to adopt effective January 1,
2000. SFAS No. 133 is effective forwill require the Company to record all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). SFAS No. 133 requires
that all derivative instruments be recordedderivatives on
the balance sheet at their
fair value. Changes in derivative fair values
will either be recognized in earnings as offsets to the changes in
fair value of derivatives are recorded each
periodrelated hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and later recognized in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. Management of the Company believes
that the adoptionearnings. The impact of SFAS No. 133 will not have a material impact on the Company's resultsfinancial statements
will depend on a variety of operations orfactors, including future interpretative
guidance from the FASB, the future level of forecasted and actual
foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the
effectiveness of such instruments. However, the Company does not
believe the effect of adopting SFAS 133 will be material to its
financial position.
9condition.
(e) Subsequent event
Effective October 1998, the Company acquired International Public
Relations, plc.
10 Item 2
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 September 30, 1998March 31, 1999 was $229.2$79.8 million, a decrease of $16.5$38.8 million
from December 31, 1997.1998. The ratio of current assets to current liabilities remained relatively unchanged from Decemberwas
slightly above 1 to 1 at March 31, 1997 at
approximately 1.1 to 1.1999.
Historically, cash flow from operations has been the primary source of working
capital and management believes that it will continue to be so 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 ninethree months of 1998,1999, the Company acquired
2,659,0651,061,659 shares of its own stock for approximately $148.6$79.5 million for the
purposespurpose of fulfilling the Company's obligations under its various compensation
plans.
11 RESULTS OF OPERATIONSThreeOPERATIONS
Three Months Ended September 30, 1998March 31, 1999 Compared to Three Months Ended September 30, 1997TotalMarch 31, 1998
Total revenue for the three months ended September 30, 1998March 31, 1999 increased $126.5$91.1 million,
or 17.8%11.1%, to $837.4$908.1 million compared to the same period in 1997.1998. Domestic
revenue increased $65.1$51.7 million or 18.0%11.8% from 19971998 levels. Foreign revenue
increased $61.4$39.4 million or 17.6%10.4% during the thirdfirst quarter of 19981999 compared to 1997. The
impact of foreign currency was negligible for the three months ended
September 30,
1998. Other income, net, increased by $2.0$2.8 million during the thirdfirst quarter of
19981999 compared to the same period in 1997.1998.
Operating expenses increased $99.4$77.2 million or 15.1%10.2% during the three months
ended September 30, 1998March 31, 1999 compared to the same period in 1997.1998. Interest expense
decreased 0.9%increased 8.9% as compared to the same period in 1997. Included1998.
Pretax income increased $15.6 million or 23.8% during the three months ended
March 31, 1999 compared to the same period in operating expenses were net1998.
Net losses from exchange and translation of foreign currencies of $.4 million and $3.1 million in 1998 and 1997, respectively.
Pretax income increased $29.2 million or 50.2% duringfor the three
months ended September 30, 1998 compared toMarch 31, 1999 were approximately $.9 million versus $.8 million
for 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 and acquisitions.1998.
The effective tax rate for the three months ended September 30, 1998March 31, 1999 was 43.7%41.5%, as
compared to 44.9%39.0% in 1997.1998.
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.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Total revenue for the nine months ended September 30, 1998 increased $364.5
million, or 16.7%, to $2,541.7 million compared to the same period in 1997.
Domestic revenue increased $215.7 million or 19.9% from 1997 levels.
Foreign revenue increased $148.8 million or 13.6% during the first nine
months of 1998 compared to 1997. Worldwide revenue would have increased an
additional 3.1% in 1998 except for the strengthening of the U.S. dollar
against major currencies. Other income increased $7.0 million in the first
nine months of 1998 compared to the same period in 1997.
Operating expenses increased $287.3 million or 14.9% during the nine months
ended September 30, 1998 compared to the same period in 1997. Interest
expense increased 4.0% during the nine months ended September 30, 1998 as
compared to the same nine month period in 1997. Included in operating
expenses were net losses from exchange and translation of foreign
currencies of $2.6 million and $4.5 million in 1998 and 1997, respectively.
Pretax income increased $82.7 million or 29.9% during the nine months ended
September 30, 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 and acquisitions offset
by the impact of foreign currency.
The effective tax rate for the nine months ended September 30, 1998 was
42.0%, as compared to 41.3% in 1997.
12
Year 2000 Issue
The Year 2000 (or "Y2K") Issue refers to the problem caused by computer programs
that have been written to reflect two digittwo-digit years, with the century being
assumed as "19". This practice was widely accepted by the applications
development community in the 1960's through the early 1980's, with many of these
programs remaining in use today. As a result, programs that are date sensitive
may recognize the year "00" as 1900, rather than the year 2000. This may cause
programs to fail or cause them to incorrectly report and accumulate data.
IPGThe Company and each of its operating subsidiaries are in the processfinal phases of implementingexecuting
a Year 2000 readiness program with the goal of having all mission critical"mission critical"
systems functioning properly prior to January 1, 2000. Many of ourthe subsidiaries
in ourthe Company's larger markets are dependent upon third party systems
providers, while our subsidiaries in the secondary markets rely primarily on
off-the-shelf applications or home-grown applications. Considerable progress has
been made with our third party systems providers in larger markets.markets with respect to
remediating their Year 2000 issues. Although the secondary markets present a
greater challenge, they typically involve smaller offices that are less
dependent upon automated solutions.
In 1997, IPGthe Company established a Y2K Project Management Office and shortly
thereafter created a Y2K Task Force, comprised of representatives from the
operating companies. Through the Y2K Task Force, IPGthe Company in conjunction with
outside consultants, is working to address the impact of the Year 2000 Issue on
IPG. IPG is inventoryingthe Company. The Company has inventoried and assessingassessed date sensitive computer
software applications, with initial indications being thatand approximately 35% of systems will requirewere identified as
requiring some degree of remediation. In addition, IPGthe Company has reviewed a
large majorityall
of ourits hardware containingbelieved to contain embedded chips, including personal
computers, file servers, mid-range and mainframe computers, telephone switches
and routers. We haveThe Company has also reviewed the majority of ourinvestigated its security systems, life safety
systems, HVAC systems and elevators in ourthe majority of its facilities. As part
of this effort, IPGthe Company has identified those systems and applications that
are deemed "mission critical", which we are handlingbeing handled on a priority basis. Utilizing this approachbasis and
has allowed us to make
considerable progress in our larger offices that in aggregate contribute to
most of our revenue. We have developed a detailed project and remediation plan that includes system
testing schedules and contingency planning that
are designed to achieve our goalplanning. To date the Company has completed
approximately 90% of having allits remediation and compliance testing for "mission
critical" elements
remedied and compliance testedapplications, with the remaining 10% scheduled for completion by December 31, 1998. We are currently well
into the remediation and testing stage.June
30, 1999. The Company's Board of Directors, through the Audit Committee, has
been monitoring the progress of this project. Project progress reports are given
to the Audit Committee at each regularly scheduled Audit Committee meeting.
IPGThe Company estimates that the modification and testing of ourits hardware and
software will cost approximately $10$22 million, of which 50%60% has been spent to
date in order to meet the Y2K compliance deadline.date. These costs are being expensed. In addition, IPGthe Company has accelerated
the implementation of a number of business process reengineeringre-engineering projects over
the past few years that have provided both Year 2000 readiness and increased
functionality of certain systems. IPGThe Company estimates that the hardware and
software costs incurred in connection with these projects isare approximately $50$60
million, which isare being capitalized. Included in the abovementionedabove-mentioned Y2K costs
are internal costs incurred for the Y2K project which are primarily payroll
related payroll costs for the information systems groups. A substantial portion of these
estimated costs relaterelates to systems and applications that were anticipated and
budgeted. 13
IPGAll of the above amounts have been updated to include companies
acquired during the first quarter of 1999.
The Company is also in the process of developing contingency plans for affected
areas of our operation.its operations. The Y2K Project Management Office has drafted a
Contingency Plan Guideline. This guideline requires the development of
contingency plans for applications, vendors, facilities, business partners and
clients. The contingency plans willare being developed to cover those elements of
the business that have been deemed "mission critical" elements that are not Year 2000 compliant by December 31,1998. In
addition, theand extend beyond software
applications. The contingency plans will include procedures for workforce
mobilization, crisis management, facilities management, disaster recovery and
damage control, whichand are targetedscheduled for completion by March ofJune 30, 1999. The Company
nevertheless recognizes that contingency plans may need to be adjusted
thereafter and therefore considers them working documents.
The Company is assessing the Year 2000 readiness of material third parties by
asking all critical vendors, business partners and facility managers to provide
letters of compliance. In addition IPGto having sent out over 70,000 vendor
compliance letters, the Company is conducting detailed tests and face to face
Y2K working sessions with those identified as key vendors with respect to
"mission critical" systems. Furthermore, the Company is working with the
American Association of Advertising Agencies and other trade associations to
form Year 2000 working groups that are addressing the issues on an industry
level.
IPGThe Company's efforts to address the Year 2000 Issue are designed to avoid any
material adverse effect on ourits operations or financial condition.
Notwithstanding these efforts, however, there is no assurance that IPGthe Company
will not encounter difficulties due to the Year 2000 Issue. The "most reasonably
likely worst case scenario" would be a significant limitation on ourthe Company's
ability to continue to provide business services. IPGservices for an undetermined duration.
The Company also recognizes that it is dependent upon infrastructure services
and third parties, including suppliers, broadcasters, utility providers and
business partners, whose failure may also significantly impact ourits ability to
provide business services.
Cautionary Statement
Statements by IPGthe Company in this Form 10-Qdocument and in other contexts concerning its
Year 2000 compliance efforts that are not historical fact are forward-
lookingforward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those anticipated in
the forward-looking statements, including, but not limited to, the following:
(i) uncertainties relating to the ability of IPGthe Company to identify and address
Year 2000 issues successfully and in a timely manner and at costs that are
reasonably in line with IPG'sthe Company's estimates; and (ii) the ability of IPG'sthe
Company's vendors, suppliers, other service providers and customers to identify
and address successfully their own Year 2000 issues in a timely manner.
14Conversion to the Euro
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (the "Euro"). The Company conducts business in member
countries. The transition period for the introduction of the Euro will be
between January 1, 1999, and June 30, 2002. The Company is addressing the issues
involved with the introduction of the Euro. The major important issues facing
the Company include: converting information technology systems; reassessing
currency risk; negotiating and amending contracts; and processing tax and
accounting records.
Based upon progress to date the Company believes that use of the Euro will not
have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the Euro is not expected to have a material effect on the
Company's financial condition or results of operations.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
(c) RECENT SALES OF UNREGISTERED SECURITIES
(1) On July 20, 1998,january 4, 1999, a subsidiary of the Registrantregistrant acquired
a companysubstantially all of the assets and assumed substantially all the
liabilities of two affiliated companies in consideration for which itthe
registrant paid $8,321,000 in cash and issued a total of 152,760123,435 shares of
itsthe registrant's common stock par value $.10 perPer share ("Interpublic Stock"interpublic
stock"), to the acquired company's former
shareholder.security holders of the affiliated companies. The shares of
Interpublic Stockinterpublic stock had a market value of $9,200,000$8,321,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Rule 506Section 4(2) of
Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"), based.
(2) On January 4, 1999, the Registrant issued a total of 30,843 shares
of Interpublic Stock to shareholders of a foreign company as an installment
payment of purchase price for 40% of the capital stock of the foreign
company. The Interpublic Stock issued had a market value of $2,129,000 on
the accredited investor status or
sophisticationdate of issuance.
The shares of Interpublic Stock were issued by the former shareholderRegistrant without
registration in an "offshore transaction" and solely to "non-U.S. persons"
in reliance on Rule 903(b)(3) of Regulation S under the acquired company.
(2)Securities Act.
(3) On September 17, 1998,January 11, 1999, a subsidiary of the Registrant acquired 80%all
of the issued and outstanding shares of a company in consideration for
which itthe Registrant paid $500,000 in cash and issued a
total of 16,4529,477 shares of
Interpublic Stock to the acquired
company's former shareholders.shareholder of the company. The shares of
Interpublic Stock had a market value of $800,000$750,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Regulation S under the Securities Act.
(4) On January 13, 1999, the Registrant paid $544,000 and issued a
total of 16,618 shares of Interpublic Stock to shareholders of a foreign
company as an installment payment of purchase price for 75% of the capital
stock of the foreign company. The Interpublic Stock issued had a market
value of $1,282,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in an "offshore transaction" and solely to "non-U.S. persons"
in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.
(5) On January 15, 1999 the Registrant paid $2,535,000 and issued a
total of 33,150 shares to shareholders of a company as an installment of
purchase price for the acquisition of the assets and assumption of the
liabilities of the company by a subsidiary of the Registrant. The
Interpublic Stock issued had a market value of $2,578,000 on the date of
issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Rule 506 of Regulation D under the Securities
Act based on the accredited investor status or sophistication of the
shareholders.
(6) On January 21, 1999, the Registrant acquired a company in
consideration for which it issued a total of 52,500 shares of Interpublic
Stock to the acquired company's shareholders. The shares of Interpublic
Stock had a market value of $4,000,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Rule 506 of Regulation D under the Securities
Act, based on the accredited investor status or sophistication of the
shareholders of the acquired company.
(7) On February 23, 1999, the Registrant acquired 75% of the capital
stock of each of two companies and 60% of the capital stock of each of two
other companies all of which are affiliated in consideration for which the
Registrant paid a total of $2,519,000 in cash and issued 14,101 shares of
Interpublic Stock to the stockholders of the affiliated companies. The
Interpublic Stock was valued at $1,097,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in an "offshore transaction" and solely to "non-U.S. persons"
in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.
(8) On February 24, 1999, a subsidiary of the Registrant acquired 49%
of each of two companies in consideration for which the Registrant paid
$9,100,000 and issued a total 64,788 shares of its common stock to the
acquired company's shareholder. The shares of Interpublic stock had a
market value of $4,900,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in an "off-shore transaction" and solely to "non-U.S. persons"
in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.
(9) On February 28, 1999, the Registrant acquired a company in
consideration for which it issued a total of 91,017 shares of Interpublic
Stock to the acquired company's former shareholder. The shares of
Interpublic Stock had a market value of $6,981,500 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Rule 506 of Regulation D, based on the
accredited investor status or sophistication of the former shareholder of
the acquired company.
(10) On March 4, 1999, a subsidiary of the Registrant acquired 19.56%
of the capital stock of a company in consideration for which the Registrant
paid $535,000 in cash and issued 3,885 shares of Interpublic Stock to the
minority shareholders of the company. The shares of Interpublic Stock were
valued at $291,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in an "offshore transaction" and solely to "non-U.S. persons"
in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.
(11) On March 5, 1999, a subsidiary of the Registrant, acquired a
company in consideration for which the Registrant paid $6,000,000 and
issued a total of 39,526 shares of its common stock to the acquired
company's former shareholders. The shares of Interpublic stock had a market
value of $3,000,000 on the date of issuance.
The shares of Interpublic Stock were issued by the Registrant without
registration in reliance on Section 4(2) under the Securities Act, based on
the sophistication of the acquired company's former stockholders.
Item 5. OTHER INFORMATION
The deadline is(12) On March 4,31, 1999, for notificationa subsidiary of the Registrant, acquired 49%
of a company in consideration for which the Registrant paid $3,500,000 and
issued a total of 20,000 shares of Interpublic Stock to the acquired
company's shareholders. The shares of Interpublic Stock had a market value
of $1,500,000 the date of issuance.
The shares of Interpublic Stock were issued by stockholders of proposalsthe Registrant without
registration in reliance on Section 4(2) under Rule 14a-4the Securities Act, based on
the sophistication of the Securities and Exchange Commission.acquired company's former stockholders.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 10 Executive Severance10(a) Note Purchase Agreement, dated January 1,
1998,21, 1999
between The Interpublic Group of Companies, Inc.
("Interpublic"Registrant") and Frank B. Lowe.The Prudential Insurance Company
of America.
Exhibit 10(b) Note, dated January 21, 1999 of the Registrant in the
principal amount of $20,000,000.
Exhibit 10(c) Note, dated January 21, 1999 of the Registrant in the
principal amount of $5,000,000.
Exhibit 10(d) Supplemental Agreement made as of January 21, 1999 to
an Employment Agreement made as of July 1, 1995
between Registrant and Eugene P. Beard.
Exhibit 10(e) Supplemental Agreement made as of January 1, 1999 to
an Employment Agreement made as of January 1, 1994
between the Registrant and John J. Dooner, Jr.
Exhibit 10(f) Supplemental Agreement made as of March 24, 1999 to
an Employment Agreement made as of August 11, 1994
among Registrant, Ammirati Puris Lintas Inc. and
Martin F. Puris.
Exhibit 10(g) Term Loan Agreement between Registrant and Wachovia
Bank, N.A., dated January 27, 1999.
Exhibit 10(h) Note of the Registrant, dated January 27, 1999 in the
Principal Amount of $25,000,000.
Exhibit 11 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
15 (b) Reports on FormREPORTS ON FORM 8-K
(1) The followingNo reports on Form 8-K were filed without
financial statements duringon behalf of the Registrant
for the quarter ended September 30, 1998:
(a) Item 9 - Sale of Equity Securities Pursuant
to Regulation S, dated June 24, 1998.
(b) Item 9 - Sale of Equity Securities Pursuant
to Regulation S, dated July 23, 1998.
(c) Item 9 - Sale of Equity Securities Pursuant
to Regulation S, dated August 5, 1998.
(d) Item 9 - Sale of Equity Securities Pursuant
to Regulation S, dated August 24, 1998.
(2) The following reports on Form 8-K were filed with financial
statements during the quarter ended September 30, 1998:
(a) Item 5 - Other Events and
Item 7 - Financial Statements and Exhibits, dated July 1,
1998. Supplemental Financial Statements of the Registrant
At and For the Period Ended December 31, 1997 and
Supplemental Financial Statements At and For the Period
Ended March 31, 1998.
(b) Item 5 - Other Events and Item 7 - Financial Statements
and Exhibits, dated July 17, 1998. Interim Results For
the Six Months Ended April 30, 1998 of a company
subsequently acquired by Registrant.
(c) Item 5 - Other Events and Item 7 - Financial Statements
and Exhibits, dated July 27, 1998. Financial Statements
of the Registrant At and For the Period Ended
June 30, 1998.
161999.
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: November 13, 1998May 14, 1999 BY /S/ PHILIP H. GEIER, JR.
PHILIPPhilip H. GEIER, JR.Geier, Jr.
Chairman of the Board
President and Chief Executive
Officer
Date: November 13,1998May 14, 1999 BY /S/ EUGENE P. BEARD
EUGENEEugene P. BEARDBeard
Vice Chairman -
Finance and Operations
17
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
Exhibit 10 Executive SeveranceNo. Description
- ----------- -----------
Exhibit 10(a) Note Purchase Agreement, dated January 21, 1999 between The
Interpublic Group of Companies, Inc. ("Registrant") and The
Prudential Insurance Company of America.
Exhibit 10(b) Note, dated January 21, 1999 of the Registrant in the
principal amount of $20,000,000.
Exhibit 10(c) Note, dated January 21, 1999 of the Registrant in the
principal amount of $5,000,000.
Exhibit 10(d) Supplemental Agreement made as of January 21, 1999 to an
Employment Agreement made as of July 1, 1998,1995 between
InterpublicRegistrant and Frank B. Lowe.Eugene P. Beard.
Exhibit 10(e) Supplemental Agreement made as of January 1, 1999 to an
Employment Agreement made as of January 1, 1994 between the
Registrant and John J. Dooner, Jr.
Exhibit 10(f) Supplemental Agreement made as of March 24, 1999 to an
Employment Agreement made as of August 11, 1994 among
Registrant, Ammirati Puris Lintas Inc. and Martin F. Puris.
Exhibit 10(g) Term Loan Agreement between Registrant and Wachovia
Bank, N.A., dated January 27, 1999.
Exhibit 10(h) Note of the Registrant, dated January 27, 1999 in the
Principal Amount of $25,000,000.
Exhibit 11 Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
18 Schedule.