UNITED STATES
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
(DATE OF EARLIEST EVENT REPORTED): July 10, 2003
Commission File Number: 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13 -1024020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1271 Avenue of the Americas, New York, New York 10020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 399 -8000
================================================================================
Item 5. Other Events and Regulation FD Disclosure.
On July 10, 2003, The Interpublic Group of Companies, Inc. ("Interpublic" or
"the Company") completed the sale of its NFO WorldGroup ("NFO") research unit to
Taylor Nelson Sofres PLC ("TNS"). The consideration for the sale was $415.6
million in cash, together with approximately 11.7 million ordinary shares of
TNS. TNS will pay the Company an additional $10 million in cash approximately
one year after the sale in the event the stock price of TNS continues to exceed
certain levels.
The disposal of NFO requires that the results of NFO be classified as a
discontinued operation in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The accompanying financial
statements have been presented to show the impact of classifying the results of
NFO as a discontinued operation for all periods presented. Interpublic is filing
this Form 8-K to present its quarterly report on Form 10-Q/A for the period
ended March 31, 2003 to reflect the impact of this required reclassification
stemming from the divestiture.
Exhibit 99.1 to this Form 8-K, which is incorporated by reference herein,
consists of Items 1 and 2 of Part I of the quarterly report on Form 10-Q/A for
the quarter ended March 31, 2003 that was filed by the Company on December 4,
2003. This exhibit includes such reclassified consolidated financial statements
and the Company's amended management's discussion and analysis of financial
condition and results of operations.
For disclosures relating to periods subsequent to March 31, 2003, please see the
Company's reports filed with the Securities and Exchange Commission with respect
to such subsequent periods, including the Company's quarterly report on Form
10-Q and Form 10-Q/A for the quarter ended September 30, 2003.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This current report on Form 8-K, including the Items in the attached Exhibit
99.1, including "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain forward-looking statements. Statements in this
current report that are not historical facts, including statements about the
Company's beliefs and expectations, particularly regarding recent business and
economic trends, the impact of litigation, dispositions, impairment charges, the
integration of acquisitions and restructuring costs, constitute forward-looking
statements. These statements are based on current plans, estimates and
projections, and are subject to change based on a number of factors, including
those outlined in this section. Forward-looking statements speak only as of the
date they are made, and the Company undertakes no obligation to update publicly
any of them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. A number of
important factors could cause actual results to differ materially from those
contained in any forward-looking statement. Such factors include, but are not
limited to, those associated with the effects of global, national and regional
economic and political conditions, the Company's ability to attract new clients
and retain existing clients, the financial success of the Company's clients,
developments from changes in the regulatory and legal environment for
advertising and marketing and communications services companies around the
world, and the successful completion and integration of acquisitions which
complement and expand the Company's business capabilities.
The Company's liquidity could be adversely affected if it is unable to access
capital or to raise proceeds from asset sales. In addition, the Company could be
adversely affected by developments in connection with the purported class
actions and derivative suits that it is defending or the SEC investigation
relating to the restatement of the Company's financial statements. The Company's
financial condition and future results of operations could also be adversely
affected if the Company recognizes additional impairment charges due to future
events or in the event of other adverse accounting-related developments.
At any given time the Company may be engaged in a number of preliminary
discussions that may result in one or more acquisitions or dispositions. These
opportunities require confidentiality and from time to time give rise to bidding
scenarios that require quick responses by the Company. Although there is
uncertainly that any of these discussions will result in definitive agreements
or the completion of any transactions, the announcement of any such transaction
may lead to increased volatility in the trading price of the Company's
securities.
The success of recent or contemplated future acquisitions will depend on the
effective integration of newly-acquired and existing businesses into the
Company's current operations. Important factors for integration include
realization of anticipated synergies and cost savings and the ability to retain
and attract new personnel and clients.
Investors should evaluate any statements made by the Company in light of these
important factors.
AVAILABLE INFORMATION
Information regarding the Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to these
reports, will be made available, free of charge, at the Company's website at
www.interpublic.com, as soon as reasonably practicable after the Company
electronically files such reports with or furnishes them to the Securities and
Exchange Commission. Any document that the Company files with the SEC may also
be read and copied at the SEC's public reference room located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. The
Company's filings are also available to the public from the SEC's website at
http://www.sec.gov/, and at the offices of the New York Stock Exchange. For
further information on obtaining copies of the Company's public filings at the
New York Stock Exchange, please call (212) 656-5060.
Item 7. Financial Statements and Exhibits
Exhibit 99.1: Items 1 and 2 of Part I of the Company's quarterly report on
Form 10-Q/A for the quarter ended March 31, 2003.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
I N D E X
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Operations
Three months ended March 31, 2003
and 2002 (unaudited) 6
Consolidated Balance Sheet
March 31, 2003 and
December 31, 2002 (unaudited) 7
Consolidated Statement of Comprehensive Income
Three months ended March 31, 2003
and 2002 (unaudited) 9
Consolidated Statement of Cash Flows
Three months ended March 31, 2003
and 2002 (unaudited) 10
Notes to consolidated financial statements (unaudited) 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
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 hereunto duly authorized.
THE INTERPUBLIC GROUP OF COMPANIES, INC.
Date: December 8, 2003 by: /s/ NICHOLAS J. CAMERA
----------------------
Nicholas J. Camera
Senior Vice President, General
Counsel and Secretary
PART I - FINANCIAL INFORMATION
ITEM 1.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2003 2002
-------------- --------------
REVENUE $1,315.7 $1,319.0
-------------- --------------
OPERATING EXPENSES:
Salaries and related expenses 854.7 821.7
Office and general expenses 425.9 373.5
Amortization of intangible assets 3.2 1.8
Long-lived asset impairment 11.1 --
-------------- --------------
Total operating expenses 1,294.9 1,197.0
-------------- --------------
OPERATING INCOME 20.8 122.0
-------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (38.8) (35.3)
Interest income 7.9 6.9
Other income (expense) (0.2) 0.3
Investment impairment (2.7) --
-------------- --------------
(33.8) (28.1)
Total other income (expense)
-------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT OF) INCOME TAXES (13.0) 93.9
Provision for (benefit of) income taxes (5.6) 35.3
-------------- --------------
INCOME (LOSS) OF CONSOLIDATED COMPANIES (7.4) 58.6
Income applicable to minority interests (0.6) (3.3)
Equity in net income (loss) of unconsolidated affiliates (3.2) 0.8
-------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (11.2) 56.1
INCOME FROM DISCONTINUED OPERATIONS (Net of tax) 2.6 3.7
-------------- --------------
NET INCOME (LOSS) $(8.6) $59.8
============== ==============
Earnings (loss) per share:
Basic:
Continuing operations $(0.03) $0.15
Discontinued operations $0.01 $0.01
-------------- --------------
Total $(0.02) $0.16
============== ==============
Diluted:
Continuing operations $(0.03) $0.15
Discontinued operations $0.01 $0.01
-------------- --------------
Total $(0.02) $0.16
============== ==============
Weighted average shares:
Basic 381.8 373.0
Diluted 381.8 379.8
Cash dividends per share -- $0.095
The accompanying notes are an integral part of these
consolidated financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ASSETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
-------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $1,188.2 $933.0
Account receivables (net of allowance for doubtful
accounts: 2003- $141.5; 2002-$139.8) 4,254.1 4,517.6
Expenditures billable to clients 390.4 407.6
Deferred taxes on income 58.4 37.0
Prepaid expenses and other current assets 413.6 427.1
Assets held for sale (Note 12) 414.6 --
-------------------- -------------------
6,719.3 6,322.3
Total current assets
-------------------- -------------------
FIXED ASSETS, AT COST:
Land and buildings 139.3 168.2
Furniture and equipment 1,048.9 1,125.1
Leasehold improvements 476.7 487.8
-------------------- -------------------
1,664.9 1,781.1
Less: accumulated depreciation (937.4) (955.4)
-------------------- -------------------
Total fixed assets 727.5 825.7
-------------------- -------------------
OTHER ASSETS:
Investment in less than majority-owned affiliates 388.8 357.3
Deferred taxes on income 508.5 509.9
Other assets 311.9 319.8
Intangible assets (net of accumulated
amortization: 2003- $992.6; 2002-$1,038.5) 3,307.1 3,458.7
-------------------- -------------------
4,516.3 4,645.7
Total other assets
-------------------- -------------------
TOTAL ASSETS $11,963.1 $11,793.7
==================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
-------------------- ---------------------
CURRENT LIABILITIES:
Accounts payable $4,677.4 $5,125.5
Accrued expenses 1,017.4 1,110.8
Accrued income taxes 3.4 33.2
Loans payable 80.1 239.3
Zero-coupon convertible senior notes 582.5 581.0
Liabilities held for sale (Note 12) 121.1 --
-------------------- ---------------------
Total current liabilities 6,481.9 7,089.8
-------------------- ---------------------
NON-CURRENT LIABILITIES:
Long-term debt 1,249.2 1,253.1
Convertible subordinated notes 568.8 564.6
Convertible senior notes 800.0 --
Deferred compensation 472.8 470.5
Accrued postretirement benefits 52.8 55.6
Other non-current liabilities 121.6 189.7
Minority interests in consolidated subsidiaries 64.5 70.4
-------------------- ---------------------
3,329.7 2,603.9
Total non-current liabilities
-------------------- ---------------------
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value,
shares authorized: 20.0, shares issued: none
Common stock, $0.10 par value,
shares authorized: 550.0,
shares issued: 2003- 389.6; 2002 - 389.3 39.0 38.9
Additional paid-in capital 1,765.7 1,797.0
Retained earnings 849.4 858.0
Accumulated other comprehensive loss, net of tax (347.2) (373.6)
-------------------- ---------------------
2,306.9 2,320.3
Less:
Treasury stock, at cost: 2003 - 1.6 shares; 2002 - 3.1 shares (65.0) (119.2)
Unamortized deferred compensation (90.4) (101.1)
-------------------- ---------------------
Total stockholders' equity 2,151.5 2,100.0
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,963.1 $11,793.7
==================== =====================
The accompanying notes are an integral part of these
consolidated financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31,
(AMOUNTS IN MILLIONS)
(UNAUDITED)
2003 2002
------------- -------------
NET INCOME (LOSS) $(8.6) $59.8
------------- -------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 29.6 (18.5)
------------- -------------
ADJUSTMENT FOR MINIMUM PENSION LIABILITY
Adjustment for minimum pension liability (4.7) --
Tax benefit 2.0 --
------------- -------------
(2.7) --
Adjustment for Minimum Pension Liability
------------- -------------
UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES
Unrealized holding gains -- 0.9
Tax expense -- (0.4)
Unrealized holding losses (0.8) --
Tax benefit 0.3 --
------------- -------------
(0.5) 0.5
Unrealized Holding Gains (Losses) on Securities
------------- -------------
COMPREHENSIVE INCOME $17.8 $41.8
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(AMOUNTS IN MILLIONS)
(UNAUDITED)
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income (loss) from continuing operations $(11.2) $56.1
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization of fixed assets 43.4 45.5
Amortization of intangible assets 3.2 1.8
Amortization of restricted stock awards and bond discounts 18.4 18.4
Provision for (benefit of) deferred income taxes (15.0) 43.0
Undistributed equity earnings 3.2 (0.8)
Income applicable to minority interests 0.6 3.3
Long-lived asset impairment 11.1 --
Investment impairment 2.7 --
Other (1.4) (0.2)
CHANGE IN ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable 227.6 142.6
Expenditures billable to clients (15.1) (63.3)
Prepaid expenses and other current assets (36.7) 3.7
Accounts payable, accrued expenses and other current liabilities (496.8) (417.7)
Accrued income taxes 9.7 (46.2)
Other non-current assets and liabilities (20.1) 3.0
--------------- ---------------
Net cash used in operating activities from continuing operations (276.4) (210.8)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Acquisitions, net of cash acquired (52.9) (62.0)
Capital expenditures (29.6) (33.2)
Proceeds from sales of businesses 1.0 0.2
Proceeds from sales of long-term investments 14.2 33.2
Purchases of long-term investments (3.9) (32.7)
Maturities of short-term marketable securities 11.2 11.2
Purchases of short-term marketable securities (18.7) (4.3)
Other investments and miscellaneous assets (8.9) (4.3)
--------------- ---------------
Net cash used in investing activities from continuing operations (87.6) (91.9)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Increase (decrease) in short-term bank borrowings (164.3) 77.3
Proceeds from long-term debt 800.7 7.3
Payments of long-term debt (0.7) (124.0)
Debt issuance costs (22.6) --
Treasury stock acquired -- (2.2)
Issuance of common stock 2.9 26.0
Distributions to minority interests (0.2) (3.3)
Contributions from minority interests 1.0 --
Cash dividends -- (36.0)
--------------- ---------------
Net cash provided by (used in) financing activities from continuing operations 616.8 (54.9)
--------------- ---------------
Effect of exchange rates on cash and cash equivalents 15.3 (10.1)
--------------- ---------------
Net cash (used in) provided by discontinued operations (12.9) 7.6
--------------- ---------------
Increase (decrease) in cash and cash equivalents 255.2 (360.1)
Cash and cash equivalents at beginning of year 933.0 935.2
--------------- ---------------
$1,188.2 $575.1
Cash and cash equivalents at end of period
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the financial statements included herein
contain all adjustments (consisting of normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash
flows at March 31, 2003 and for all periods presented. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in The Interpublic Group of
Companies, Inc.'s (the "Company" or "Interpublic") Current Report on Form
8-K filed on September 9, 2003. The operating results for the first three
months of the year are not necessarily indicative of the results for the
year or other interim periods.
As discussed in Note 12, on July 10, 2003, the Company completed the sale
of its NFO WorldGroup ("NFO") research unit to Taylor Nelson Sofres PLC
("TNS"). The results of NFO are classified as discontinued operations in
accordance with SFAS 144 "Accounting for the Impairment or disposal of
Long-lived Assets" and, accordingly, the results of operations and cash
flows of NFO have been removed from the Company's results of continuing
operations and cash flows from continuing operations for all periods
presented in this document.
2. EARNINGS (LOSS) PER SHARE
The following sets forth the computation of earnings (loss) per share for
the three months ended March 31, 2003 and 2002:
Three Months Ended March 31,
-----------------------------------------
2003 2002
-------------------- -------------------
BASIC
Income (loss) from continuing operations $(11.2) $56.1
Income from discontinued operations 2.6 3.7
-------------------- -------------------
Net Income (loss) $(8.6) $59.8
==================== ===================
Weighted average number of common shares outstanding 381.8 373.0
Earnings (loss) per share from continuing operations $(0.03) $0.15
Earnings per share from discontinued operations 0.01 0.01
-------------------- -------------------
Earnings (loss) per share - basic $(0.02) $0.16
==================== ===================
Diluted(a)
Income (loss) from continuing operations - diluted $(11.2) $56.1
Income from discontinued operations 2.6 3.7
-------------------- -------------------
$(8.6) $59.8
==================== ===================
381.8 373.0
Weighted average number of common shares outstanding
Weighted average number of incremental shares in connection
with restricted stock and assumed exercise of stock options -- 6.8
-------------------- -------------------
Weighted average number of common shares outstanding - diluted 381.8 379.8
Earnings (loss) per share from continuing operations $(0.03) $0.15
Earnings per share from discontinued operations 0.01 0.01
-------------------- -------------------
Earnings (loss) per share - diluted $(0.02) $0.16
==================== ===================
(a) The computation of diluted earnings per share for 2003 and 2002
excludes the assumed conversion of the 1.80% and 1.87% Convertible
Subordinated Notes because they were anti-dilutive. The computation of
diluted earnings per share for 2003 excludes the conversion of
restricted stock and assumed exercise of stock options because they
were anti-dilutive.
3. STOCK OPTION PLANS
The Company has various stock-based compensation plans. The stock-based
compensation plans are accounted for under the intrinsic value recognition
and measurement principles of APB Opinion 25, "Accounting for Stock Issued
to Employees and Related Interpretations". Generally, all employee stock
options are issued with the exercise price equal to the market price of the
underlying shares at the grant date and therefore, no compensation expense
is recorded. The intrinsic value of restricted stock grants and certain
other stock-based compensation issued to employees as of the date of grant
is amortized to compensation expense over the vesting period.
If compensation cost for the Company's stock option plans and its Employee
Stock Purchase Plan ("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
(loss) and earnings (loss) per share for the three months ended March 31
would have been as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2002
-------------------- ------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
As reported, net income (loss) from continuing operations $(11.2) $56.1
Add back:
Stock-based employee compensation expense included in
reported net income, net of tax 10.0 10.1
Deduct:
Total fair value of stock based employee
compensation expense, net of tax (18.1) (19.2)
-------------------- ------------------
$(19.3) $47.0
Pro forma income (loss) from continuing operations
==================== ==================
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
Basic earnings (loss) per share
As reported $(0.03) $0.15
Pro forma $(0.05) $0.13
Diluted earnings (loss) per share
As reported $(0.03) $0.15
Pro forma $(0.05) $0.12
For purposes of this pro forma information, the fair value of shares under
the ESPP was based on the 15% discount received by employees. The
weighted-average fair value (discount) on the date of purchase for stock
purchased under this plan was $1.57 and $4.44 in 2003, and 2002,
respectively.
The weighted-average fair value of options granted during the three months
ended March 31, 2003 and 2002 was $4.51 and $11.03, respectively. The fair
value of each option grant has been estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2002
---------------- -------------
Expected option lives 6 years 6 years
Risk free interest rate 3.38% 4.98%
Expected volatility 43.50% 34.28%
Dividend yield -- 1.29%
4. RESTRUCTURING AND OTHER MERGER RELATED COSTS
Following the completion of the True North acquisition in June 2001, the
Company executed a wide-ranging restructuring plan that included severance,
lease terminations and other actions. The total amount of the charges
incurred in 2001 in connection with the plan was $634.5. An additional
$12.1 was recorded in 2002 related primarily to additional projected lease
losses from premises vacated as part of the 2001 restructuring plan.
A summary of the remaining liability for restructuring and other merger
related costs is as follows:
CASH PAID
LIABILITY AT THROUGH LIABILITY
DECEMBER MARCH AT MARCH
31, 2002 31, 2003 31, 2003
------------------- ----------------- ---------------
TOTAL BY TYPE
Severance and termination costs $15.9 $5.3 $10.6
Lease termination and other exit costs 94.6 10.1 84.5
------------------- ----------------- ---------------
Total $110.5 $15.4 $95.1
=================== ================= ===============
5. LONG-LIVED ASSET IMPAIRMENT CHARGE
During the first quarter of 2003, the Company recorded an $11.1 charge
related to the impairment of long-lived assets at its Motorsports business.
This amount reflects $4.0 of capital expenditure outlays in the three
months ended March 31, 2003, contractually required to upgrade and maintain
certain of its existing racing facilities, as well as an impairment of
assets at other Motorsports entities.
6. NEW ACCOUNTING STANDARDS
In June 2001, Statement of Financial Accounting Standards 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143") was issued. SFAS 143
addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the
associated retirement costs that result from the acquisition, construction,
or development and normal operation of a long-lived asset. Upon initial
recognition of a liability for an asset retirement obligation, SFAS 143
requires an increase in the carrying amount of the related long-lived
assets. The asset retirement cost is subsequently allocated to expense
using a systematic and rational method over the asset's useful life. SFAS
143 is effective for fiscal years beginning after June 15, 2002. The
adoption of this statement did not have an impact on the Company's
financial position or results of operations.
In June 2002, SFAS 146, "Accounting for Costs Associated With Exit or
Disposal Activities" ("SFAS 146") was issued. SFAS 146 changes the
measurement and timing of recognition for exit costs, including
restructuring charges, and is effective for any such activities initiated
after December 31, 2002. It has no effect on charges recorded for exit
activities begun prior to this date.
7. DERIVATIVE AND HEDGING INSTRUMENTS HEDGES OF NET INVESTMENTS
On December 12, 2002, the Company designated the Yen borrowings under its
$375.0 Revolving Credit Facility in the amount of $36.5 as a hedge of its
net investment in Japan.
FORWARD CONTRACTS
As of March 31, 2003, the Company had short-term contracts covering
approximately $38.9 of notional amount of currency. As of March 31, 2003,
the fair value of the forward contracts was a gain of $1.4.
OTHER
The Company has two embedded derivative instruments under the terms of each
of the Zero-Coupon Convertible Notes, and the 4.5% Convertible Senior Notes
issued in March 2003. At March 31, 2003, the fair value of these
derivatives was negligible.
8. SEGMENT INFORMATION
The Company is organized into five global operating groups: a)
McCann-Erickson WorldGroup ("McCann"), b) the FCB Group ("FCB"), c) The
Partnership, d) Advanced Marketing Services ("AMS") and e) Interpublic
Sports and Entertainment Group ("SEG"). Each of the five groups has its own
management structure and reports to senior management of the Company on the
basis of the five groups. McCann, FCB and The Partnership provide a full
complement of global marketing services including advertising and media
management, marketing communications including direct marketing, public
relations, sales promotion, event marketing, on-line marketing and
healthcare marketing in addition to specialized marketing services. AMS
provides specialized and advanced marketing services. SEG includes Octagon
(for sports marketing), Motorsports (for its motorsports business), and
Jack Morton Worldwide (for specialized marketing services including
corporate events, meetings and training/learning).
Each of McCann, FCB, The Partnership, AMS and SEG operate with the same
business objective which is to provide clients with a wide variety of
services that contribute to the delivery of a message and to the
maintenance or creation of a brand. However, the Partnership and AMS
historically have had lower gross margins than the Company average. The
five global operating groups share numerous clients, have similar cost
structures, provide services in a similar fashion and draw their employee
base from the same sources. The annual margins of each of the five groups
may vary due to global economic conditions, client spending and specific
circumstances such as the Company's restructuring activities. However,
based on the respective future prospects of McCann, FCB, The Partnership
and AMS, the Company believes that the long-term average gross margin of
each of these four groups will converge over time and, given the similarity
of the operations, the four groups have been aggregated. SEG has different
margins than the remaining four groups and, given current projections, the
Company believes that the margins for this operating segment will not
converge with the remaining four groups.
SEG revenue is not material to the Company as a whole. However, due to the
recording of long-lived asset impairment charges, the operating
difficulties and resulting higher costs from its motorsports business, SEG
has incurred significant operating losses. Based on the fact that the book
value of long-lived assets relating to Motorsports and other substantial
contractual obligations may not be fully recoverable, the Company no longer
expects that margins of SEG will converge with those of the rest of IPG and
accordingly, reports SEG as a separate reportable segment. Other than the
impairment charges which are discussed below, the operating results of SEG
are not material to those of the Company, and therefore are not discussed
in detail below.
Accordingly, in accordance with SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information", the Company has two reportable
segments. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies.
Management evaluates performance based upon operating earnings before
interest and income taxes.
At March 31, 2003 the assets of the reportable segments have not changed
materially from those levels reported at December 31, 2002. Summary
financial information concerning the Company's reportable segments is shown
in the following table:
IPG
(EXCL. CONSOLIDATED
SEG) SEG TOTAL
----------- ---------- ------------
THREE MONTHS ENDED MARCH 31, 2003
Revenue $1,230.1 $85.6 $1,315.7
Operating income (loss) 41.8 (21.0) 20.8
Depreciation and amortization of fixed assets 40.0 3.4 43.4
Capital expenditures $21.7 $7.9 $29.6
THREE MONTHS ENDED MARCH 31, 2002
Revenue $1,235.3 $83.7 $1,319.0
Operating income 115.9 6.1 122.0
Depreciation and amortization of fixed assets 41.3 4.2 45.5
Capital expenditures $28.9 $4.3 $33.2
A reconciliation of information between reportable segments and the
Company's consolidated pre-tax earnings is shown in the following table:
THREE MONTHS ENDED MARCH 31, 2003 2002
----------------------------------------------------- ---------- ----------
Total operating income for reportable segments $20.8 $122.0
Interest expense (38.8) (35.3)
Interest income 7.9 6.9
Other income (loss) (0.2) 0.3
Investment impairment (2.7) -
----------- ----------
Income (loss) before income taxes $(13.0) $93.9
=========== ==========
9. ACQUISITIONS AND DEFERRED PAYMENTS
During the first three months of 2003, the Company completed one
acquisition for $2.1 in cash. Additionally, the Company paid $7.2 in cash
and $0.1 in stock for additional ownership interests in companies in which
a previous investment had been made.
During the first three months of 2003, the Company paid $44.2 in cash and
$14.9 in stock as deferred payments on acquisitions that had closed in
prior years. During the first three months of 2002, the Company paid $55.8
in cash and $10.0 in stock as deferred payments on acquisitions that had
closed in prior years.
Deferred payments (or "earn-outs") generally tie the aggregate price
ultimately paid for an acquisition to its performance and are recorded as
an increase to goodwill and other intangibles.
As of March 31, 2003, the Company's estimated liability for earn-outs is as
follows:
2006 AND
2003 2004 2005 THEREAFTER TOTAL
-------------- -------------- --------------- --------------- --------------
Cash $104.9 $80.8 $48.8 $24.0 $258.5
Stock 28.4 12.1 16.6 11.6 68.7
-------------- -------------- --------------- --------------- --------------
TOTAL $133.3 $92.9 $65.4 $35.6 $327.2
============== ============== =============== =============== ==============
The amounts above are estimates based on the current projections as to the
amount that will be paid and are subject to revisions as the earn-out
periods progress.
PUT AND CALL OPTIONS
In addition to the estimated liability for earn-outs, the Company has
entered into agreements that require the Company to purchase additional
equity interests in certain companies (put options). In many cases, the
Company also has the option to purchase the additional equity interests
(call options) in certain circumstances.
The total amount of potential payments under put options is $189.8, of
which $6.9 is payable in stock. Exercise of the put options would require
payments to be made as follows:
2003 $74.4
2004 $33.2
2005 $34.3
2006 and thereafter $47.9
The actual amount to be paid is contingent upon the achievement of
projected operating performance targets and satisfying other conditions as
specified in the relevant agreement.
The Company also has call options to acquire additional equity interests in
companies in which it already has an ownership interest. The estimated
amount that would be paid under such call options is $111.4 and, in the
event of exercise, would be paid as follows:
2003 $22.9
2004 $7.6
2005 $15.3
2006 and thereafter $65.6
The actual amount to be paid is contingent upon the achievement of
projected operating performance targets and satisfying other conditions as
specified in the relevant agreement
10. DEBT AND CERTAIN LIQUIDITY MATTERS
Total debt at March 31, 2003 was $3,280.6, an increase of $642.6 from
December 31, 2002. The Company's debt position at March 31, 2003 reflects
both the 4.5% Convertible Notes and the Zero-Coupon Notes outstanding at
that date. In addition, the Company's debt position was positively impacted
by international cash and debt pooling arrangements that were put in place
to optimize the net debt balances in certain markets.
REVOLVING CREDIT AGREEMENTS
On June 27, 2000, the Company entered into a revolving credit facility with
a syndicate of banks providing for a term of five years and for borrowings
of up to $375.0 (the "Five-Year Revolving Credit Facility"). On May 16,
2002, the Company entered into a revolving credit facility with a syndicate
of banks providing for a term of 364 days and for borrowings of up to
$500.0 (the "Old 364-Day Revolving Credit Facility"). The Company replaced
the Old 364-Day Revolving Credit Facility with a new 364-day revolving
credit facility, which it entered into with a syndicate of banks on May 15,
2003 (the "New 364-Day Revolving Credit Facility" and, together with the
Five-Year Revolving Credit Facility, the "Revolving Credit Facilities").
The New 364-Day Revolving Credit Facility provides for borrowings of up to
$500.0, $200.0 of which are available to the Company for the issuance of
letters of credit. The New 364-Day Revolving Credit Facility expires on May
13, 2004. However, the Company has the option to extend the maturity of
amounts outstanding on the termination date under the New 364-Day Revolving
Credit Facility for a period of one year. The Revolving Credit Facilities
are used for general corporate purposes. As of March 31, 2003, no amounts
were borrowed under the Old 364-Day Revolving Credit Facility and $50.6 was
borrowed under the Five-Year Revolving Credit Facility.
The Revolving Credit Facilities bear interest at variable rates based on
either LIBOR or a bank's base rate, at the Company's option. The interest
rates on base rate loans and LIBOR loans under the Revolving Credit
Facilities are affected by the facilities' utilization levels and the
Company's credit ratings. In connection with the New 364-Day Revolving
Credit Facility, based on its current credit ratings, the Company agreed to
new pricing under the Revolving Credit Facilities that increased the
interest spread payable on LIBOR loans by 25 basis points.
The Company's Revolving Credit Facilities include financial covenants that
set i) maximum levels of debt as a function of EBITDA, ii) minimum levels
of EBITDA as a function of interest expense and iii) minimum levels of
EBITDA (in each case, as defined in these agreements). In connection with
the New 364-Day Revolving Credit Facility, the definition of EBITDA in the
Revolving Credit Facilities was amended to include (i) up to $161.4
non-cash, non-recurring charges taken in the fiscal year ended December 31,
2002; (ii) up to $200.0 of non-recurring restructuring charges (up to
$175.0 of which may be cash charges) taken in the fiscal quarter ended
March 31, 2003, June 30, 2003 and September 30, 2003; (iii) up to $70.0 of
non-cash, non-recurring charges taken with respect to the impairment of the
remaining book value of the Company's motor sports business; and (iv) all
impairment charges taken with respect to capital expenditures made on or
after January 1, 2003 with respect to the Company's motor sports business
and to exclude the gain realized by the Company upon the proposed sale of
NFO Worldwide, Inc. The corresponding financial covenant ratio levels in
the Revolving Credit Facilities were also amended. As of March 31, 2003,
the Company was in compliance with all of the covenants (including the
financial covenants, as amended) contained in the Five-Year Revolving
Credit Facility and the Old 364-Day Revolving Credit Facility.
On February 10, 2003, certain defined terms relating to financial covenants
contained in the Five-Year Revolving Credit Facility and the Old 364-Day
Revolving Credit Facility were amended effective as of December 31, 2002.
The definition of debt for borrowed money in the Five-Year Revolving Credit
Facility and the Old 364-Day Revolving Credit Facility was modified to
include the Company's 1.8% Convertible Subordinated Notes due 2004 and
1.87% Convertible Subordinated Notes due 2006. As a result, the definition
of Interest Expense was also amended to include all interest with respect
to these Subordinated Notes.
The Company also amended certain other provisions of the Five-Year
Revolving Credit Facility and the Old 364-Day Revolving Credit Facility
effective as of December 31, 2002, which have been reflected in the New
364-Day Revolving Credit Facility. The terms of the Revolving Credit
Facilities restrict the Company's ability to declare or pay dividends,
repurchase shares of common stock, make cash acquisitions or investments
and make capital expenditures, as well as the ability of the Company's
domestic subsidiaries to incur additional debt. Certain of these
limitations were modified upon the Company's issuance on March 13, 2003 of
4.5% Convertible Senior Notes due 2023 (the "4.5% Notes") in an aggregate
principal amount of $800.0, from which the Company received net cash
proceeds equal to approximately $778.0. In addition, pursuant to a tender
offer commenced on March 10, 2003, the Company purchased $700.5 in
aggregate principal amount at maturity of its Zero-Coupon Convertible
Senior Notes due 2021 (the "Zero-Coupon Notes"). As a result of these
transactions, the Company's permitted level of annual cash acquisition
spending has increased to $100.0 and annual share buybacks and dividend
payments has increased to $25.0. All limitations on dividend payments and
share buybacks expire when earnings before interest, taxes, depreciation
and amortization are at least $1,300.0 for four consecutive quarters.
As a result of the issuance of the 4.5% Notes in the first quarter of 2003
and the settlement of the tender offer for the Zero-Coupon Notes in the
second quarter of 2003, both the 4.5% Notes and the Zero-Coupon Notes were
outstanding at March 31, 2003. Therefore, the Company amended the Five-Year
Revolving Credit Facility and the Old 364-Day Revolving Credit Facility, as
of March 13, 2003, to exclude the Zero-Coupon Notes in calculating the
ratio of debt for borrowed money to consolidated EBITDA for the period
ended March 31, 2003 (this exclusion is also contained in the New 364-Day
Revolving Credit Facility).
On February 26, 2003, the Company obtained waivers of certain defaults
under the Five-Year Revolving Credit Facility and the Old 364-Day Revolving
Credit Facility relating to the restatement of the Company's historical
consolidated financial statements in the aggregate amount of $118.7. The
waivers covered certain financial reporting requirements related to the
Company's consolidated financial statements for the quarter ended September
30, 2002. No financial covenants were breached as a result of this
restatement.
OTHER COMMITTED AND UNCOMMITTED FACILITIES
In addition to the Revolving Credit Facilities, at March 31, 2003, the
Company had $155.3 of committed lines of credit, all of which were provided
by overseas banks that participate in the Revolving Credit Facilities. At
March 31, 2003, $6.3 was outstanding under these lines of credit.
At March 31, 2003 the Company also had $702.9 of uncommitted lines of
credit, 69.2% of which were provided by banks that participate in the
Revolving Credit Agreements. At March 31, 2003, approximately $59.9 was
outstanding under these uncommitted lines of credit. The Company's
uncommitted borrowings are repayable upon demand.
PRUDENTIAL AGREEMENTS
On May 26, 1994, April 28, 1995, October 31, 1996, August 19, 1997 and
January 21, 1999, the Company entered into five note purchase agreements,
respectively, with The Prudential Insurance Company of America (the
"Prudential Agreements"). The notes issued pursuant to the Prudential
Agreements are repayable on May 2004, April 2005, October 2006, August 2007
and January 2009, respectively. The interest rates on these notes range
from 8.05% to 10.01%. As of March 31, 2003 and 2002, respectively, $148.8
and $155.0 were outstanding under the notes.
The Prudential Agreements contain financial covenants that set i) minimum
levels for net worth and for cash flow as a function of borrowed funds, and
ii) maximum levels of borrowed funds as a function of net worth. The most
restrictive of these covenants is that of cash flow to borrowed funds. This
ratio is required to exceed an amount that varies from .16 to .25 for each
quarter in the applicable consecutive four-quarter period.
On February 10, 2003, the Company amended certain provisions of the
Prudential Agreements effective as of December 31, 2002. The new terms of
the Prudential Agreements contain the same restrictions on the Company's
ability to declare or pay dividends, repurchase shares of common stock,
make cash acquisitions or investments and make capital expenditures, as
well as the ability of the Company's domestic subsidiaries to incur
additional debt, as the new terms of the Revolving Credit Agreements
described above. Certain defined terms relating to financial covenants
contained in the Prudential Agreements were also amended effective as of
December 31, 2002. The definitions of cash-flow and consolidated net worth
in the Prudential Agreements were amended to include up to $500.0 of
non-cash, non-recurring charges taken in the fiscal year ended December 31,
2002 and the quarter ended March 31, 2003.
The Company also amended the Prudential Agreements, as of March 28, 2003,
to exclude the Zero-Coupon Notes in calculating the ratio of total borrowed
funds to cash flow for the period ended March 31, 2003. Separately, in May
2003, the ratio level for the financial covenant relating to cash flow as a
function of borrowed funds was amended from .20 to .18 effective for the
period ended March 31, 2003.
On February 26, 2003, the Company obtained waivers of certain defaults
under the Prudential Agreements relating to the restatement of the
Company's historical consolidated financial statements in the aggregate
amount of $118.7. The waivers covered certain financial reporting
requirements related to the Company's consolidated financial statements for
the quarter ended September 30, 2002. No financial covenants were breached
as a result of this restatement.
UBS FACILITY
On February 10, 2003, the Company received from UBS AG a commitment for an
interim credit facility providing for $500.0, maturing no later than July
31, 2004 and available to the Company beginning May 15, 2003, subject to
certain conditions. This commitment terminated in accordance with its terms
when the Company received net cash proceeds in excess of $400.0 from its
sale of the 4.5% Notes. The fees associated with this commitment were not
material to the Company's financial position, cash flows or results of
operations.
OTHER DEBT INSTRUMENTS-- CONVERTIBLE SENIOR NOTES - 4.5%
In March 2003, the Company completed the issuance and sale of $800
aggregate principal amount of the 4.5% Notes. In April 2003, the Company
used $581.3 of the net proceeds of this offering to repurchase the
Zero-Coupon Notes tendered in its concurrent tender offer and will use the
remaining proceeds for the repayment of other indebtedness, general
corporate purposes and working capital. The 4.5% Notes are unsecured,
senior securities that may be converted into common shares if the price of
the Company's common stock reaches a specified threshold, at an initial
conversion rate of 80.5153 shares per one thousand dollars principal
amount, equal to a conversion price of $12.42 per share, subject to
adjustment. This threshold will initially be 120% of the conversion price
and will decline 1/2% each year until it reaches 110% at maturity in 2023.
The 4.5% Notes may also be converted, regardless of the price of the
Company's common stock, if: (i) the credit rating assigned to the 4.5%
Notes by any two of Moody's Investors Service, Inc., Standard & Poor's
Ratings Services and Fitch Ratings are Ba2, BB and BB, respectively, or
lower, or the 4.5% Notes are no longer rated by at least two of these
ratings services, (ii) the Company calls the 4.5% Notes for redemption,
(iii) the Company makes specified distributions to shareholders or (iv) the
Company becomes a party to a consolidation, merger or binding share
exchange pursuant to which its common stock would be converted into cash or
property (other than securities).
The Company, at the investor's option, may be required to redeem the 4.5%
Notes for cash on March 15, 2008. The Company may also be required to
redeem the 4.5% Notes at the investor's option on March 15, 2013 and March
15, 2018, for cash or common stock or a combination of both, at the
Company's election. Additionally, investors may require the Company to
redeem the 4.5% Notes in the event of certain change of control events that
occur prior to May 15, 2008, for cash or common stock or a combination of
both, at the Company's election. The Company at its option may redeem the
4.5% Notes on or after May 15, 2008 for cash. The redemption price in each
of these instances will be 100% of the principal amount of the notes being
redeemed, plus accrued and unpaid interest, if any.
If at any time on or after March 13, 2003 the Company pays cash dividends
on its common stock, the Company will pay contingent interest per 4.5% Note
in an amount equal to 100% of the per share cash dividend paid on the
common stock multiplied by the number of shares of common stock issuable
upon conversion of a note.
OTHER
On March 7, 2003, Standard & Poor's Ratings Services downgraded the
Company's senior secured credit rating to BB+ with negative outlook from
BBB-. On May 14, 2003, Fitch Ratings downgraded the Company's senior
unsecured credit rating to BB+ with negative outlook from BBB-. The
remaining senior unsecured credit rating is Baa3 with stable outlook;
however, as reported by Moody's Investors Services, Inc., on May 8, 2003,
this rating was placed on review for possible downgrade.
Since July 2001, the Company has not repurchased its common stock in the
open market.
The Company has previously paid cash dividends quarterly, with the most
recent quarterly rate of $0.095 per share. The determination of dividend
payments is made by the Company's Board of Directors on a quarterly basis.
However, as previously discussed, the Company's ability to declare or pay
dividends is currently restricted by new terms of its Revolving Credit
Facilities and Prudential Agreements, and the Company has not declared or
paid a dividend in the first quarter of 2003.
11. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
FEDERAL SECURITIES CLASS ACTIONS
Thirteen federal securities purported class actions were filed against The
Interpublic Group of Companies, Inc. (referred to hereinafter as
"Interpublic" or the "Company") and certain of its present and former
directors and officers by a purported class of purchasers of Interpublic
stock shortly after the Company's August 13, 2002 announcement regarding
the restatement of its previously reported earnings for the periods January
1, 1997 through March 31, 2002. These actions, which were all filed in the
United States District Court for the Southern District of New York, were
consolidated by the Court and lead counsel appointed for all plaintiffs, on
November 8, 2002. A consolidated amended complaint was filed thereafter on
January 10, 2003. The purported classes consist of Interpublic shareholders
who purchased Interpublic stock in the period from October 1997 to October
2002. Specifically, the consolidated amended complaint alleges that
Interpublic and certain of its present and former directors and officers
allegedly made misleading statements to its shareholders between October
1997 and October 2002, including the alleged failure to disclose the
existence of additional charges that would need to be expensed and the lack
of adequate internal financial controls, which allegedly resulted in an
overstatement of Interpublic's financial results during those periods. The
consolidated amended complaint alleges that such false and misleading
statements constitute violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder. The consolidated
amended complaint also alleges violations of Sections 11 and 15 of the
Securities Act of 1933 in connection with Interpublic's acquisition of True
North Communications, Inc. ("True North"). No amount of damages is
specified in the consolidated amended complaint. On February 6, 2003,
defendants filed a motion to dismiss the consolidated amended complaint in
its entirety. On February 28, 2003, plaintiffs filed their opposition to
defendants' motion and, on March 14, 2003, defendants filed their reply to
plaintiff's opposition to defendants' motion. The motion is currently
pending.
STATE SECURITIES CLASS ACTIONS
Two state securities purported class actions were filed against the Company
and certain of its present and former directors and officers by a purported
class of purchasers of Interpublic stock shortly after the Company's
November 13, 2002 announcement regarding the restatement of its previously
reported earnings for the periods January 1, 1997 through March 31, 2002.
The purported classes consist of Interpublic shareholders who acquired
Interpublic stock on or about June 25, 2001 in connection with
Interpublic's acquisition of True North. These lawsuits allege that
Interpublic and certain of its present and former directors and officers
allegedly made misleading statements in connection with the filing of a
registration statement on May 9, 2001 in which Interpublic issued
67,644,272 shares of its common stock for the purpose of acquiring True
North, including the alleged failure to disclose the existence of
additional charges that would need to be expensed and the lack of adequate
internal financial controls, which allegedly resulted in an overstatement
of Interpublic's financial results at that time. The suits allege that such
misleading statements constitute violations of Sections 11 and 15 of the
Securities Act of 1933. No amount of damages is specified in the
complaints. These actions were filed in the Circuit Court of Cook County,
Illinois. On December 18, 2002, defendants removed these actions from
Illinois state court to the United States District Court for the Northern
District of Illinois. Thereafter, on January 10, 2003, defendants moved to
transfer these two actions to the Southern District of New York. Plaintiffs
moved to remand these actions. On April 15, 2003, the United States
District Court for the Northern District of Illinois granted plaintiffs'
motions to remand these actions to Illinois state court and denied
defendants' motion to transfer. The Company intends to move to dismiss or
stay these actions at the appropriate time.
DERIVATIVE ACTIONS
In addition to the lawsuits above, several shareholder derivative suits
have been filed. On October 24, 2002, a shareholder derivative suit was
filed in Delaware Court of Chancery, New Castle County, by a single
shareholder acting on behalf of the Company against the Board of Directors.
The suit alleges a breach of fiduciary duties to Interpublic's
shareholders. On November 15, 2002, another suit was filed in Delaware
Court of Chancery, New Castle County, by a single shareholder acting on
behalf of the Company against the Board of Directors. On December 18, 2002,
defendants moved to dismiss these actions. In lieu of a response,
plaintiffs consolidated the actions and filed an Amended Consolidated
Complaint on January 10, 2003, again alleging breach of fiduciary duties to
Interpublic's shareholders. The Amended Consolidated Complaint does not
state a specific amount of damages. On January 27, 2003, defendants filed
motions to dismiss the Consolidated Amended Complaint, and those motions
are currently pending.
On September 4, 2002, a shareholder derivative suit was filed in New York
Supreme Court, New York County, by a single shareholder acting on behalf of
the Company against the Board of Directors and against the Company's
auditors. This suit alleged a breach of fiduciary duties to Interpublic's
shareholders. On November 26, 2002, another shareholder derivative suit,
alleging the same breaches of fiduciary duties, was filed in New York
Supreme Court, New York County. The plaintiffs from these two shareholder
derivative suits filed an Amended Derivative Complaint on January 31, 2003.
On March 18, 2003, plaintiffs filed a motion to dismiss the Amended
Derivative Complaint without prejudice. On April 16, 2003, the Amended
Derivative Complaint was dismissed without prejudice. On February 24, 2003,
plaintiffs also filed a Shareholders' Derivative Complaint in the United
States District Court for the Southern District of New York. On May 2,
2003, plaintiffs filed an Amended Derivative Complaint. This action alleges
the same breach of fiduciary duties claim as the state court actions, and
adds a claim for contribution and forfeiture against two of the individual
defendants pursuant to Section 21D of the Exchange Act and Section 304 of
the Sarbanes-Oxley Act. The complaint does not state a specific amount of
damages.
TAX MATTERS
On April 21, 2003, the Company received a notice from the Internal Revenue
Service ("IRS") proposing adjustments to the Company's taxable income that
would result in additional taxes, including conforming adjustments to state
and local returns, of $41.5 million (plus interest) for the taxable years
1994 to 1996. The Company believes that the tax positions that the IRS has
challenged comply with applicable law, and it intends to defend those
positions vigorously. Although the ultimate resolution of these matters
will likely require the Company to pay additional taxes, any such payments
will not have a material effect on the Company's financial position, cash
flows or results of operations.
SEC INVESTIGATION
The Company was informed in January 2003 by the Securities and Exchange
Commission staff that the SEC has issued a formal order of investigation
related to the Company's restatements of earnings for periods dating back
to 1997. The matters had previously been the subject of an informal
inquiry. The Company is cooperating fully with the investigation.
OTHER
The Company is involved in other legal and administrative proceedings of
various types. While any litigation contains an element of uncertainty, the
Company has no reason to believe that the outcome of such proceedings or
claims will have a material effect on the financial condition of the
Company.
12. SUBSEQUENT EVENT
On July 10, 2003, the Company completed the sale of NFO to TNS. The
consideration for the sale was $415.6 in cash and approximately 11.7
million ordinary shares of TNS valued, for gain calculation purposes, at
approximately $29. TNS will pay the Company an additional $10 in cash
approximately one year following the closing of this divestiture contingent
on the market price per TNS ordinary share continuing to exceed 146 pence
(equivalent to approximately $2.45 at current exchange rates) during a
specified averaging period one year from closing. The portion of the
consideration consisting of ordinary shares of TNS will be admitted for
trading on the London Stock Exchange. As a result of this sale, the Company
recognized a pre-tax gain of $99.1 ($89.1 net of tax) in the third quarter,
after certain post closing adjustments.
The results of NFO are classified as discontinued operations in accordance
with SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" and, accordingly, the results of operations and cash flows of NFO
have been removed from the Company's results of continuing operations and
cash flows from continuing operations for all periods presented in this
document.
Income from discontinued operations consists of the following:
Three Months Ended March 31,
2003 2002
---- ----
Pre-tax income from discontinued operations $ 4.4 $ 6.4
Tax expense 1.8 2.7
-------- ------
Income from discontinued operations $ 2.6 $ 3.7
======== ======
Based on circumstances surrounding the decision to divest NFO, it has been
determined that the assets and liabilities should be classified as assets
and liabilities held for sale in accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". The relevant amounts for
NFO have been separately identified on the accompanying balance sheet as
assets and liabilities held for sale at March 31, 2003.
Included in assets held for sale are accounts receivable of $81.4, prepaid
expenses and other current assets of $52.7, net fixed assets of $46.9,
intangible assets of $214.1 and other assets of $19.5. Included in
liabilities held for sale are accounts payable of $21.7, accrued expenses
of $73.8, and other liabilities of $25.6.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ITEM 2.
RESULTS OF OPERATIONS
All amounts discussed below are reported in accordance with generally accepted
accounting principles ("GAAP"). When comparing performance between years, the
Company discusses non-GAAP financial measures such as the impact that foreign
currency rate changes, acquisitions/dispositions and organic growth have on
reported results. As the Company derives significant revenue from international
operations, changes in foreign currency rates between the years may have
significant impact on reported results. Reported results are also impacted by
the Company's acquisition and disposition activity. Management believes that
discussing the impact of currency fluctuations and acquisitions/dispositions
provides a better understanding of the reported results.
The Company's results of operations are dependent upon: a) maintaining and
growing its revenue, b) the ability to retain and gain new clients, c) the
continuous alignment of its costs to its revenue and d) retaining and attracting
key personnel. Revenue is also highly dependent on overall economic and
political conditions. For a further discussion of these and other factors that
could affect the Company's results of operations and financial conditions, see
"Cautionary Statement".
As discussed in Note 8 to the consolidated financial statements, the Company is
comprised of two reportable segments: the Interpublic Sports and Entertainment
Group ("SEG"), and IPG excluding SEG. SEG was formed during the second quarter
of 2002 through a carve-out from the Company's other operating groups and is
primarily comprised of the operations of Octagon, the Company's sports marketing
business, Motorsports, the Company's motorsports business, and Jack Morton
Worldwide, the Company's event planning business.
SEG revenue is not material to the Company as a whole. However, due to the
recording of long-lived asset impairment charges, the operating difficulties and
resulting higher costs from its motorsports business, SEG incurred significant
operating losses. Based on the fact that the book value of long-lived assets
relating to Motorsports and other substantial contractual obligations may not be
fully recoverable, the Company no longer expects that margins of SEG will
converge with those of the rest of IPG and accordingly reports SEG as a separate
reportable segment. Other than the impairment charges which are discussed below,
the operating results of SEG are not material to those of the Company, and
therefore are not discussed in detail below.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
The Company reported a net loss of $8.6 or $0.02 diluted loss per share, which
is comprised of a $0.03 loss per share from continuing operations and $0.01
earnings per share from discontinued operations for the three months ended March
31, 2003. This compares to net earnings of $59.8 or $0.16 diluted earnings per
share, comprised of $0.15 earnings per share from continuing operations and
$0.01 earnings per share from discontinued operations for the three months ended
March 31, 2002. Net loss in the first quarter of 2003 includes a pre-tax
impairment charge of $11.1 related to the fixed assets of the Company's
motorsports business, and a pre-tax impairment charge of $2.7 related to an
unconsolidated affiliate in Brazil.
The following summarizes certain financial information for purposes of
management's discussion and analysis:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
IPG IPG
(EXCL. TOTAL TOTAL (EXCL. TOTAL TOTAL
SEG) SEG IPG SEG) SEG IPG
------------ ------------ ------------ ------------ ------------ ------------
Revenue $1,230.1 $85.6 $1,315.7 $1,235.3 $83.7 $1,319.0
Salaries and related expenses 804.0 50.7 854.7 775.6 46.1 821.7
Office and general expenses 381.6 44.3 425.9 342.4 31.1 373.5
Amortization of intangible assets 2.7 0.5 3.2 1.4 0.4 1.8
Long-lived asset impairment -- 11.1 11.1 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) $41.8 $(21.0) $20.8 $115.9 $6.1 $122.0
============ ============ ============ ============ ============ ============
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Some of the key factors driving the financial results in the first quarter of
2003 were:
- Higher exchange rates for the first quarter of 2003, primarily the
Euro and Sterling, reflected higher U.S. dollar revenue and expenses
in comparison to the first quarter of 2002;
- Continued softness in demand for the Company's advertising and
marketing services by current clients particularly in public relations
and other project-based businesses, and uncertainty during the onset
of the war with Iraq;
- Higher severance expense as a result of continued headcount reductions
and the Company's attempt to align its costs with the current revenue
environment. The Company's headcount was reduced to 45,500 at March
31, 2003, from 46,900 at December 31,2002;
- Higher bad debt expense, additional professional fees resulting from
litigation matters and the SEC investigation, and the higher costs
related to the Company's Motorsports business within SEG;
- Higher bank/debt financing costs resulting from the issuance of the
Company's 4.5% Convertible Notes and subsequent retiring of the
Company's Zero Coupon Notes.
As a result of the necessity to aggressively reduce the Company's cost structure
in light of the current revenue environment, the Company is planning to execute
a restructuring program to reduce costs permanently through further headcount
reductions and real estate consolidation. The Company currently expects that
costs to be incurred in connection with the restructuring program will
approximate $200.
Additionally, as discussed in Note 12, on July 10, 2003, the Company completed
the sale of NFO WorldGroup, Inc. ("NFO").
REVENUE
The Company is a worldwide global marketing services company, providing clients
with communications expertise in four broad areas: a) advertising and media
management, b) marketing communications, which includes client relationship
management (direct marketing), public relations, sales promotion, event
marketing, on-line marketing, corporate and brand identity and healthcare
marketing, c) marketing intelligence, which includes marketing research, brand
consultancy and database management and d) specialized marketing services, which
includes sports and entertainment marketing, corporate meetings and events,
retail marketing and other marketing and business services.
Worldwide revenue for the three months ended March 31, 2003 was $1,315.7, a
decrease of $3.3 or 0.3% from the three months ended March 31, 2002. Domestic
revenue, which represented 60% of revenue in the three months ended March 31,
2003, decreased $5.2 or 0.7% from the same period in 2002. International
revenue, which represented 40% of revenue in the three months ended March 31,
2003, increased $1.9 or 0.4% from the same period in 2002. International revenue
would have decreased 9.4% excluding the effects of changes in foreign currency.
The decrease in worldwide revenue was primarily a result of continued softness
in the demand for advertising and marketing services by current clients due to
the weak economy and uncertainty during the onset of the war with Iraq offset by
the effects of higher exchange rates. The components of the total revenue change
of (0.3)% were: impact of foreign currency changes 4.0%, net
acquisitions/divestitures 1.8%, and organic revenue decline (6.1)%. Organic
changes in revenue are based on increases or decreases in net new business
activity and increases or decreases in activity from existing client accounts.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING EXPENSES
SALARIES AND RELATED EXPENSES
The Company's expenses related to employee compensation and various employee
incentive and benefit programs amount to approximately 65% of revenue for the
first three months ended March 31, 2003. Salaries and related expenses for the
three months ended March 31, 2003 increased $33.0 or 4.0% to $854.7 compared to
the three months ended March 31, 2002. The increase was primarily due to the
effect of higher exchange rates and higher severance costs resulting from a
reduction in headcount, which was reduced to 45,500 at March 31, 2003 compared
with 46,900 at December 31, 2002 and 49,100 at March 31, 2002. The components of
the total change of 4.0% were: impact of foreign currency changes 4.5% and
reductions in salaries and related expenses from existing operations (0.5)%.
OFFICE AND GENERAL EXPENSES
Office and general expenses were $425.9 in the three months ended in March 31,
2003 and $373.5 in the three months ended March 31,2002, an increase of $52.4 or
14.0 %.The increase in office and general expenses was primarily due to the
effects of higher exchange rates, higher professional fees resulting from the
litigation and SEC investigation, higher bad debt expense, debt financing costs
and higher costs related to the Company's motorsports business within SEG. The
components of the total change of 14.0% were: impact of foreign currency changes
5.2%, net acquisitions/divestitures 6.0% and increases in office and general
expenses from existing operations 2.8%.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $3.2 in the three months ended March 31,
2003 compared with $1.8 in the first three months of 2002. The increase was
primarily due to higher identifiable intangible assets as a result of
acquisitions in the past year.
LONG-LIVED ASSET IMPAIRMENT CHARGE
During the first quarter of 2003, the Company recorded an $11.1 charge related
to the impairment of long-lived assets at its motorsports business. This amount
reflects $4.0 of capital expenditure outlays in the three months ended March 31,
2003 contractually required to upgrade and maintain certain of its existing
racing facilities, as well as an impairment of assets at other Motorsports
entities.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE
Interest expense was $38.8 in the first quarter of 2003 compared with $35.3 in
the first quarter of 2002. The increase was a result of the issuance of $800
4.5% Convertible Notes on March 11, 2003. These proceeds were invested until
early April, at which time the proceeds were used for the settlement of the
tender offer for the Zero-Coupon Notes. Both the 4.5% Convertible Notes and the
Zero-Coupon Notes were outstanding at March 31, 2003.
INTEREST INCOME
Interest income was $7.9 for the three months of 2003 compared with $6.9 in the
same period of 2002. The increase in 2003 is primarily due to the higher cash
balances in the quarter resulting from the issuance of the 4.5% Convertible
Notes.
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of investment income, gains from the
sale of businesses and gains (losses) from the sale of investments, primarily
marketable securities classified as available-for-sale. Other income (expense)
was a loss of $(0.2) for the first three months of 2003 compared with income of
$0.3 for the first three months of 2002. Included in the first quarter of 2003
was a small loss on the sale of an advertising business in Europe.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INVESTMENT IMPAIRMENT
During the first three months of 2003, the Company recorded a charge of $2.7
charge related to the impairment of an unconsolidated affiliate in Brazil.
OTHER ITEMS
EFFECTIVE INCOME TAX RATE
The Company's effective income tax rate was a benefit of 43.1% for the first
three months of 2003 and an expense of 37.6% for the first three months of 2002.
The primary difference between the effective tax rate and the statutory federal
rate of 35% in 2002 is due to state and local taxes and the effect on non-US
operations. The increased tax rate in 2003 reflects a higher proportion of
earnings derived from the US, where it is taxed at higher rates, as well as
losses incurred in non-US jurisdictions with tax benefits lower than the US
statutory rates.
MINORITY INTEREST
Income applicable to minority interests was $0.6 in the first three months of
2003 compared to $3.3 in the first three months of 2002. The decrease in the
first three months of 2003 was primarily due to lower operating results of
certain operations in Europe and Asia Pacific.
UNCONSOLIDATED AFFILIATES
Equity in net income (loss) of unconsolidated affiliates was a loss of $(3.2) in
the first three months of 2003 compared to $0.8 in the first three months of
2002. The reduction is primarily due to reduced earnings of Modem Media and our
unconsolidated affiliate in Brazil.
DERIVATIVE AND HEDGING INSTRUMENTS
HEDGES OF NET INVESTMENTS
On December 12, 2002, the Company designated the Yen borrowings under its $375.0
Revolving Credit Facility in the amount of $36.5 as a hedge of its net
investment in Japan.
FORWARD CONTRACTS
As of March 31, 2003, the Company had short-term contracts covering
approximately $38.9 of notional amount of currency. As of March 31, 2003, the
fair value of the forward contracts was a gain of $1.4.
OTHER
The Company has two embedded derivative instruments under the terms of each of
the Zero-Coupon Convertible Notes, and the 4.5% Convertible Senior notes issued
in March 2003. At March 31, 2003, the fair value of these derivatives was
negligible.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, cash and cash equivalents were $1,188.2, an increase of
$255.2 from the December 31, 2002 balance of $933.0. The March 31, 2003 cash
position was impacted by the issuance of the 4.5% Convertible Notes in March
2003, as the proceeds were used to settle the tender offer of the Zero-Coupon
Notes in early April. The Company collects funds from clients on behalf of media
outlets resulting in cash receipts and disbursements at levels substantially
exceeding its revenue. Therefore, the working capital amounts reported on its
balance sheet and cash flows from operating activities reflect the
"pass-through" of these items.
Cash flow from operations and borrowings under existing credit facilities, and
refinancings thereof, have been the primary sources of the Company's working
capital, and management believes that they will continue to be so in the future.
OPERATING ACTIVITIES
Net cash used by operating activities was $276.4 and $210.8 for the three months
ended March 31, 2003 and 2002, respectively. The increase in cash used for the
first three months of 2003 was primarily attributable to the lower earnings
level in 2003 resulting from continued softness in client demand for advertising
and marketing services.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INVESTING ACTIVITIES
Historically the Company has pursued acquisitions to complement and enhance its
service offerings. In addition, the Company has also sought to acquire
businesses similar to those already owned to expand its geographic scope to
better serve new and existing clients. Acquisitions have historically been
funded using stock, cash or a combination of both. Currently, the Company is
restricted from making acquisitions or investments by new terms of its Revolving
Credit Facilities. See Financing Activities for further discussion.
During the first three months of 2003 and 2002, the Company paid $52.9 and $62.0
respectively, in cash for new acquisitions and earn out payments for previous
acquisitions including payments for a number of specialized marketing and
communications services companies to complement its existing agency systems and
to optimally position itself in the ever-broadening communications market place.
The reduction in 2003 reflects the Company's reduced level of acquisition
activity.
The Company's capital expenditures in the first three months of 2003 were $29.6
compared to $33.2 in the first three months of 2002. The primary purposes of
these expenditures were to upgrade computer and telecommunications systems and
to modernize offices. Currently, the Company is restricted in making capital
expenditures by new terms of its Revolving Credit Facilities. See "Financing
Activities" for further discussion.
FINANCING ACTIVITIES
Total debt at March 31, 2003 was $3,280.6, an increase of $642.6 from December
31, 2002. The Company's debt position at March 31, 2003 reflects both the 4.5%
Convertible Notes and the Zero-Coupon Notes outstanding at that date. In
addition, the Company's debt position was positively impacted by international
cash and debt pooling arrangements that were put in place to optimize the net
debt balances in certain markets.
REVOLVING CREDIT AGREEMENTS
On June 27, 2000, the Company entered into a revolving credit facility with a
syndicate of banks providing for a term of five years and for borrowings of up
to $375.0 (the "Five-Year Revolving Credit Facility"). On May 16, 2002, the
Company entered into a revolving credit facility with a syndicate of banks
providing for a term of 364 days and for borrowings of up to $500.0 (the "Old
364-Day Revolving Credit Facility"). The Company replaced the Old 364-Day
Revolving Credit Facility with a new 364-day revolving credit facility, which it
entered into with a syndicate of banks on May 15, 2003 (the "New 364-Day
Revolving Credit Facility" and, together with the Five-Year Revolving Credit
Facility, the "Revolving Credit Facilities"). The New 364-Day Revolving Credit
Facility provides for borrowings of up to $500.0, $200.0 of which are available
to the Company for the issuance of letters of credit. The New 364-Day Revolving
Credit Facility expires on May 13, 2004. However, the Company has the option to
extend the maturity of amounts outstanding on the termination date under the New
364-Day Revolving Credit Facility for a period of one year. The Revolving Credit
Facilities are used for general corporate purposes. As of March 31, 2003, no
amounts were borrowed under the Old 364-Day Revolving Credit Facility and $50.6
was borrowed under the Five-Year Revolving Credit Facility.
The Revolving Credit Facilities bear interest at variable rates based on either
LIBOR or a bank's base rate, at the Company's option. The interest rates on base
rate loans and LIBOR loans under the Revolving Credit Facilities are affected by
the facilities' utilization levels and the Company's credit ratings. In
connection with the New 364-Day Revolving Credit Facility, based on its current
credit ratings, the Company agreed to new pricing under the Revolving Credit
Facilities that increased the interest spread payable on LIBOR loans by 25 basis
points.
The Company's Revolving Credit Facilities include financial covenants that set
i) maximum levels of debt as a function of EBITDA, ii) minimum levels of EBITDA
as a function of interest expense and iii) minimum levels of EBITDA (in each
case, as defined in these agreements). In connection with the New 364-Day
Revolving Credit Facility, the definition of EBITDA in the Revolving Credit
Facilities was amended to include (i) up to $161.4 non-cash, non-recurring
charges taken in the fiscal year ended December 31, 2002; (ii) up to $200.0 of
non-recurring restructuring charges (up to $175.0 of which may be cash charges)
taken in the fiscal quarter ended March 31, 2003, June 30, 2003 and September
30, 2003; (iii) up to $70.0 of non-cash, non-recurring charges taken with
respect to the impairment of the remaining book value of the Company's motor
sports business; and (iv) all impairment charges taken with respect to capital
expenditures made on or after January 1, 2003 with respect to the Company's
motor sports business and to exclude the gain realized by the Company upon the
proposed sale of NFO Worldwide, Inc. The corresponding financial covenant ratio
levels in the Revolving Credit Facilities were also amended. As of March 31,
2003, the Company was in compliance with all of the covenants (including the
financial covenants, as amended) contained in the Five-Year Revolving Credit
Facility and the Old 364-Day Revolving Credit Facility.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
On February 10, 2003, certain defined terms relating to financial covenants
contained in the Five-Year Revolving Credit Facility and the Old 364-Day
Revolving Credit Facility were amended effective as of December 31, 2002. The
definition of debt for borrowed money in the Five-Year Revolving Credit Facility
and the Old 364-Day Revolving Credit Facility was modified to include the
Company's 1.8% Convertible Subordinated Notes due 2004 and 1.87% Convertible
Subordinated Notes due 2006. As a result, the definition of Interest Expense was
also amended to include all interest with respect to these Subordinated Notes.
The Company also amended certain other provisions of the Five-Year Revolving
Credit Facility and the Old 364-Day Revolving Credit Facility effective as of
December 31, 2002, which have been reflected in the New 364-Day Revolving Credit
Facility. The terms of the Revolving Credit Facilities restrict the Company's
ability to declare or pay dividends, repurchase shares of common stock, make
cash acquisitions or investments and make capital expenditures, as well as the
ability of the Company's domestic subsidiaries to incur additional debt. Certain
of these limitations were modified upon the Company's issuance on March 13, 2003
of 4.5% Convertible Senior Notes due 2023 (the "4.5% Notes") in an aggregate
principal amount of $800.0, from which the Company received net cash proceeds
equal to approximately $778.0. In addition, pursuant to a tender offer commenced
on March 10, 2003, the Company purchased $700.5 in aggregate principal amount at
maturity of its Zero-Coupon Convertible Senior Notes due 2021 (the "Zero-Coupon
Notes"). As a result of these transactions, the Company's permitted level of
annual cash acquisition spending has increased to $100.0 and annual share
buybacks and dividend payments has increased to $25.0. All limitations on
dividend payments and share buybacks expire when earnings before interest,
taxes, depreciation and amortization are at least $1,300.0 for four consecutive
quarters.
As a result of the issuance of the 4.5% Notes in the first quarter of 2003 and
the settlement of the tender offer for the Zero-Coupon Notes in the second
quarter of 2003, both the 4.5% Notes and the Zero-Coupon Notes were outstanding
at March 31, 2003. Therefore, the Company amended the Five-Year Revolving Credit
Facility and the Old 364-Day Revolving Credit Facility, as of March 13, 2003, to
exclude the Zero-Coupon Notes in calculating the ratio of debt for borrowed
money to consolidated EBITDA for the period ended March 31, 2003 (this exclusion
is also contained in the New 364-Day Revolving Credit Facility).
On February 26, 2003, the Company obtained waivers of certain defaults under the
Five-Year Revolving Credit Facility and the Old 364-Day Revolving Credit
Facility relating to the restatement of the Company's historical consolidated
financial statements in the aggregate amount of $118.7. The waivers covered
certain financial reporting requirements related to the Company's consolidated
financial statements for the quarter ended September 30, 2002. No financial
covenants were breached as a result of this restatement.
OTHER COMMITTED AND UNCOMMITTED FACILITIES
In addition to the Revolving Credit Facilities, at March 31, 2003, the Company
had $155.3 of committed lines of credit, all of which were provided by overseas
banks that participate in the Revolving Credit Facilities. At March 31, 2003,
$6.3 was outstanding under these lines of credit.
At March 31, 2003 the Company also had $702.9 of uncommitted lines of credit,
69.2% of which were provided by banks that participate in the Revolving Credit
Agreements. At March 31, 2003, approximately $59.9 was outstanding under these
uncommitted lines of credit. The Company's uncommitted borrowings are repayable
upon demand.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PRUDENTIAL AGREEMENTS
On May 26, 1994, April 28, 1995, October 31, 1996, August 19, 1997 and January
21, 1999, the Company entered into five note purchase agreements, respectively,
with The Prudential Insurance Company of America (the "Prudential Agreements").
The notes issued pursuant to the Prudential Agreements are repayable on May
2004, April 2005, October 2006, August 2007 and January 2009, respectively. The
interest rates on these notes range from 8.05% to 10.01%. As of March 31, 2003
and 2002, respectively, $148.8 and $155.0 were outstanding under the notes.
The Prudential Agreements contain financial covenants that set i) minimum levels
for net worth and for cash flow as a function of borrowed funds, and ii) maximum
levels of borrowed funds as a function of net worth. The most restrictive of
these covenants is that of cash flow to borrowed funds. This ratio is required
to exceed an amount that varies from .16 to .25 for each quarter in the
applicable consecutive four-quarter period.
On February 10, 2003, the Company amended certain provisions of the Prudential
Agreements effective as of December 31, 2002. The new terms of the Prudential
Agreements contain the same restrictions on the Company's ability to declare or
pay dividends, repurchase shares of common stock, make cash acquisitions or
investments and make capital expenditures, as well as the ability of the
Company's domestic subsidiaries to incur additional debt, as the new terms of
the Revolving Credit Agreements described above. Certain defined terms relating
to financial covenants contained in the Prudential Agreements were also amended
effective as of December 31, 2002. The definitions of cash-flow and consolidated
net worth in the Prudential Agreements were amended to include up to $500.0 of
non-cash, non-recurring charges taken in the fiscal year ended December 31, 2002
and the quarter ended March 31, 2003.
The Company also amended the Prudential Agreements, as of March 28, 2003, to
exclude the Zero-Coupon Notes in calculating the ratio of total borrowed funds
to cash flow for the period ended March 31, 2003. Separately, in May 2003, the
ratio level for the financial covenant relating to cash flow as a function of
borrowed funds was amended from .20 to .18 effective for the period ended March
31, 2003.
On February 26, 2003, the Company obtained waivers of certain defaults under the
Prudential Agreements relating to the restatement of the Company's historical
consolidated financial statements in the aggregate amount of $118.7. The waivers
covered certain financial reporting requirements related to the Company's
consolidated financial statements for the quarter ended September 30, 2002. No
financial covenants were breached as a result of this restatement.
UBS FACILITY
On February 10, 2003, the Company received from UBS AG a commitment for an
interim credit facility providing for $500.0, maturing no later than July 31,
2004 and available to the Company beginning May 15, 2003, subject to certain
conditions. This commitment terminated in accordance with its terms when the
Company received net cash proceeds in excess of $400.0 from its sale of the 4.5%
Notes. The fees associated with this commitment were not material to the
Company's financial position, cash flows or results of operations.
OTHER DEBT INSTRUMENTS-- CONVERTIBLE SENIOR NOTES - 4.5% In March 2003, the
Company completed the issuance and sale of $800 aggregate principal amount of
the 4.5% Notes. In April 2003, the Company used $581.3 of the net proceeds of
this offering to repurchase the Zero-Coupon Notes tendered in its concurrent
tender offer and will use the remaining proceeds for the repayment of other
indebtedness, general corporate purposes and working capital. The 4.5% Notes are
unsecured, senior securities that may be converted into common shares if the
price of the Company's common stock reaches a specified threshold, at an initial
conversion rate of 80.5153 shares per one thousand dollars principal amount,
equal to a conversion price of $12.42 per share, subject to adjustment. This
threshold will initially be 120% of the conversion price and will decline 1/2%
each year until it reaches 110% at maturity in 2023.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The 4.5% Notes may also be converted, regardless of the price of the Company's
common stock, if: (i) the credit rating assigned to the 4.5% Notes by any two of
Moody's Investors Service, Inc., Standard & Poor's Ratings Services and Fitch
Ratings are Ba2, BB and BB, respectively, or lower, or the 4.5% Notes are no
longer rated by at least two of these ratings services, (ii) the Company calls
the 4.5% Notes for redemption, (iii) the Company makes specified distributions
to shareholders or (iv) the Company becomes a party to a consolidation, merger
or binding share exchange pursuant to which its common stock would be converted
into cash or property (other than securities).
The Company, at the investor's option, may be required to redeem the 4.5% Notes
for cash on March 15, 2008. The Company may also be required to redeem the 4.5%
Notes at the investor's option on March 15, 2013 and March 15, 2018, for cash or
common stock or a combination of both, at the Company's election. Additionally,
investors may require the Company to redeem the 4.5% Notes in the event of
certain change of control events that occur prior to May 15, 2008, for cash or
common stock or a combination of both, at the Company's election. The Company at
its option may redeem the 4.5% Notes on or after May 15, 2008 for cash. The
redemption price in each of these instances will be 100% of the principal amount
of the notes being redeemed, plus accrued and unpaid interest, if any.
If at any time on or after March 13, 2003 the Company pays cash dividends on its
common stock, the Company will pay contingent interest per 4.5% Note in an
amount equal to 100% of the per share cash dividend paid on the common stock
multiplied by the number of shares of common stock issuable upon conversion of a
note.
OTHER
On March 7, 2003, Standard & Poor's Ratings Services downgraded the Company's
senior secured credit rating to BB+ with negative outlook from BBB-. On May 14,
2003, Fitch Ratings downgraded the Company's senior unsecured credit rating to
BB+ with negative outlook from BBB-. The remaining senior unsecured credit
rating is Baa3 with stable outlook; however, as reported by Moody's Investors
Services, Inc., on May 8, 2003, this rating was placed on review for possible
downgrade.
Since July 2001, the Company has not repurchased its common stock in the open
market.
The Company has previously paid cash dividends quarterly with the most recent
quarterly rate of $0.095 per share. The determination of dividend payments is
made by the Company's Board of Directors on a quarterly basis. However, as
previously discussed, the Company's ability to declare or pay dividends is
currently restricted by new terms of its Revolving Credit Facilities and
Prudential Agreements, and the Company has not declared or paid a dividend in
the first quarter of 2003.
The Company believes that cash flow from operations, proceeds from the expected
sale of NFO, together with its availability under existing lines of credit and
expected refinancings thereof and cash on hand, will be sufficient to fund the
Company's working capital needs (including disbursements related to its upcoming
restructuring program) and other obligations for the next twelve months. In the
event additional funds are required, the Company believes it will have
sufficient resources, including borrowing capacity and access to capital
markets, to meet such requirements. Unanticipated decreases in cash flow from
operations as a result of decreased demand for our services and other
developments may require the Company to seek other sources of liquidity
(including the disposition of certain assets) and modify its operating
strategies.
SUBSEQUENT EVENT
On July 10, 2003, the Company completed the sale of NFO to TNS. The
consideration for the sale was $415.6 in cash and approximately 11.7 million
ordinary shares of TNS valued, for gain calculation purposes, at approximately
$29. TNS will pay the Company an additional $10 in cash approximately one year
following the closing of this divestiture contingent on the market price per TNS
ordinary share continuing to exceed 146 pence (equivalent to approximately $2.45
at current exchange rates) during a specified averaging period one year from
closing. The portion of the consideration consisting of ordinary shares of TNS
will be admitted for trading on the London Stock Exchange. As a result of this
sale, the Company recognized a pre-tax gain of $99.1 ($89.1 net of tax) in the
third quarter, after certain post closing adjustments.
The results of NFO are classified as discontinued operations in accordance with
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and,
accordingly, the results of operations and cash flows of NFO have been removed
from the Company's results of continuing operations and cash flows for all
periods presented in this document.
In addition to the gain discussed above, income from discontinued operations
consists of the following:
Three Months Ended March 31,
2003 2002
---- ----
Pre-tax income from discontinued operations $ 4.4 $ 6.4
Tax expense 1.8 2.7
------- -------
Income from discontinued operations $ 2.6 $ 3.7
======= =======
Based on circumstances surrounding the decision to divest NFO, it has been
determined that the assets and liabilities should be classified as assets and
liabilities held for sale in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The relevant amounts for NFO have
been separately identified on the accompanying balance sheet as assets and
liabilities held for sale at March 31, 2003.
DEFERRED PAYMENTS
Deferred payments (or "earn-outs") generally tie the aggregate price ultimately
paid for an acquisition to its performance and are recorded as an increase to
Goodwill and other intangibles.
As of March 31, 2003, the Company's estimated liability for earn-outs is as
follows:
2006 AND
2003 2004 2005 THEREAFTER TOTAL
-------- ---------- ----------- ------------------- ------------
Cash $104.9 $80.8 $48.8 $24.0 $258.5
Stock 28.4 12.1 16.6 11.6 68.7
-------- ---------------------- ----------------- --------------
TOTAL $133.3 $92.9 $65.4 $35.6 $327.2
======== ========== =========== ================= ==============
The amounts above are estimates based on the current projections as to the
amount that will be paid and are subject to revisions as the earn-out periods
progress.
PUT AND CALL OPTIONS
In addition to the estimated liability for earn-outs, the Company has entered
into agreements that require the Company to purchase additional equity interests
in certain companies (put options). In many cases, the Company also has the
option to purchase the additional equity interests (call options) in certain
circumstances.
The total amount of potential payments under put options is $189.8, of which
$6.9 is payable in stock. Exercise of the put options would require payments to
be made as follows:
2003 $74.4
2004 $33.2
2005 $34.3
2006 and thereafter $47.9
The actual amount to be paid is contingent upon the achievement of projected
operating performance targets and satisfying other conditions as specified in
the relevant agreement.
The Company also has call options to acquire additional equity interests in
companies in which it already has an ownership interest. The estimated amount
that would be paid under such call options is $111.4 and, in the event of
exercise, would be paid as follows:
2003 $22.9
2004 $7.6
2005 $15.3
2006 and thereafter $65.6
The actual amount to be paid is contingent upon the achievement of projected
operating performance targets and satisfying other conditions as specified in
the relevant agreement
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In June 2001, Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143") was issued. SFAS 143 addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs
that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, SFAS 143 requires an increase in the carrying
amount of the related long-lived asset. The asset retirement cost is
subsequently allocated to expense using a systematic and rational method over
the asset's useful life. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of this statement did not have an impact on the
Company's financial position or results of operations.
In June 2002, SFAS 146, "Accounting for Costs Associated With Exit or Disposal
Activities" ("SFAS 146") was issued. SFAS 146 changes the measurement and timing
of recognition for exit costs, including restructuring charges, and is effective
for any such activities initiated after December 31, 2002. It has no effect on
charges recorded for exit activities begun prior to this date.
SEC INVESTIGATION
The Company was informed in January 2003 by the Securities and Exchange
Commission staff that the SEC has issued a formal order of investigation related
to the Company's restatements of earnings for periods dating back to 1997. The
matters had previously been the subject of an informal inquiry. The Company is
cooperating fully with the investigation.