UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1 -6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13 -1024020
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1271 Avenue of the Americas, New York, New York 10020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 399-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Executive Act Rule 12b-2) Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock outstanding at
July 31, 2003: 391,399,332 shares.
EXPLANATORY NOTE
(Dollars in Millions)
The Interpublic Group of Companies ("Interpublic" or the "Company") is filing
this Form 10-Q/A to restate its consolidated statement of cash flows for the six
months ended June 30, 2003 for the presentation of $26.9 in debt issuance costs.
The cash flow related to such costs had been presented as investing activities
and has now been presented as financing activities. The net result of the change
was to reduce cash used in investing activities for the six months ended June
30, 2003, by $26.9 and reduce cash provided by financing activities for the six
months ended June 30, 2003, by $26.9. The restatement of the consolidated
statement of cash flows had no impact on net income (loss) or earnings (loss)
per share, or any balance sheet amounts.
The accompanying Form 10-Q/A amends the Form 10-Q filed by the Company on August
14, 2003 for the six months ended June 30, 2003 to correct only the consolidated
statement of cash flows for the six months ended June 30, 2003.
This Form 10-Q/A amends Item 1 of Part I of the Company's original Form 10-Q
filing only, and except for this item, no other information included in the
Company's original Quarterly Report on Form 10-Q is amended by this filing.
Except for the corrections described above, this Form 10-Q/A does not purport to
update any disclosures contained in the quarterly report, which speaks as of the
date of its original filing on August 14, 2003. For disclosures subsequent to
August 14, 2003, please see the Company's reports filed with the Securities and
Exchange Commission after that date.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
I N D E X
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Consolidated Statement of Operations 4
Three months ended June 30, 2003
and 2002 (unaudited)
Consolidated Statement of Operations 5
Six months ended June 30, 2003
and 2002 (unaudited)
Consolidated Balance Sheet 6
June 30, 2003 and
December 31, 2002 (unaudited)
Consolidated Statement of Comprehensive Income 8
Three months ended June 30, 2003
and 2002 (unaudited)
Consolidated Statement of Comprehensive Income 9
Six months ended June 30, 2003
and 2002 (unaudited)
Consolidated Statement of Cash Flows 10
Six months ended June 30, 2003 (restated)
and 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 11
SIGNATURES 27
CERTIFICATIONS 28
PART I - FINANCIAL INFORMATION
Item 1.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
2003 2002
---- ----
REVENUE $1,499.4 $1,490.4
-------- --------
OPERATING EXPENSES:
Salaries and related expenses 878.4 839.2
Office and general expenses 459.6 435.9
Amortization of intangible assets 4.1 2.6
Restructuring charges 94.4 --
Long-lived asset impairment 11.0 --
-------- --------
Total operating expenses 1,447.5 1,277.7
-------- --------
OPERATING INCOME 51.9 212.7
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (46.1) (36.9)
Interest income 10.2 8.1
Other income 0.3 6.6
Investment impairment (9.8) (16.2)
-------- --------
Total other income (expense) (45.4) (38.4)
-------- --------
Income before provision for income taxes 6.5 174.3
Provision for income taxes 22.4 67.3
-------- --------
INCOME (LOSS) OF CONSOLIDATED COMPANIES (15.9) 107.0
Income applicable to minority interests (8.4) (10.9)
Equity in net income of unconsolidated affiliates 1.3 2.5
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (23.0) 98.6
INCOME FROM DISCONTINUED OPERATIONS (NET OF TAXES) 9.5 10.4
-------- --------
NET INCOME (LOSS) $(13.5) $109.0
======== ========
Earnings (loss) per share:
Basic:
Continuing operations $(0.06) $0.26
Discontinued operations $0.02 $0.03
-------- --------
Total $(0.04) $0.29
======== ========
Diluted:
Continuing operations $(0.06) $0.26
Discontinued operations $0.02 $0.03
-------- --------
Total $(0.04) $0.29
======== ========
Weighted average shares:
Basic 384.3 375.7
Diluted 384.3 382.4
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 STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
2003 2002
---- ----
REVENUE $ 2,815.1 $ 2,809.4
OPERATING EXPENSES:
Salaries and related expenses 1,733.1 1,660.9
Office and general expenses 885.5 809.4
Amortization of intangible assets 7.3 4.4
Restructuring charges 94.4 --
Long-lived asset impairment 22.1 --
----------- ---------
Total operating expenses 2,742.4 2,474.7
----------- ---------
OPERATING INCOME 72.7 334.7
----------- ---------
OTHER INCOME (EXPENSE):
Interest expense (84.9) (72.2)
Interest income 18.1 15.0
Other income 0.1 6.9
Investment impairment (12.5) (16.2)
----------- ---------
Total other income (expense) (79.2) (66.5)
----------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (6.5) 268.2
Provision for income taxes 16.8 102.6
----------- ---------
INCOME (LOSS) OF CONSOLIDATED COMPANIES (23.3) 165.6
Income applicable to minority interests (9.0) (14.2)
Equity in net income (loss) of unconsolidated affiliates (1.9) 3.3
----------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (34.2) 154.7
INCOME FROM DISCONTINUED OPERATIONS (NET OF TAXES) 12.1 14.1
----------- ---------
NET INCOME (LOSS) $ (22.1) $ 168.8
=========== =========
Earnings (loss) per share:
Basic:
Continuing operations $ (0.09) $ 0.41
Discontinued operations 0.03 0.04
----------- ---------
Total $ (0.06) $ 0.45
=========== =========
Diluted:
Continuing operations $ (0.09) $ 0.41
Discontinued operations 0.03 0.04
----------- ---------
Total $ (0.06) $ 0.44(a)
=========== =========
Weighted average shares:
Basic 383.1 374.3
Diluted 383.1 381.1
Cash dividends per share -- $ 0.190
(a) Does not foot due to rounding.
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)
June 30, December 31,
2003 2002
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 700.1 $ 933.0
Accounts receivable (net of allowance for doubtful
accounts: 2003-$153.8; 2002-$139.8) 4,681.4 4,517.6
Expenditures billable to clients 414.8 407.6
Deferred taxes on income 69.4 37.0
Prepaid expenses and other current assets 452.5 427.1
Assets held for sale 452.2 --
--------- ---------
Total current assets 6,770.4 6,322.3
--------- ---------
FIXED ASSETS, AT COST:
Land and buildings 148.2 168.2
Furniture and equipment 1,063.6 1,125.1
Leasehold improvements 496.8 487.8
--------- ---------
1,708.6 1,781.1
Less: accumulated depreciation (968.6) (955.4)
--------- ---------
Total fixed assets 740.0 825.7
--------- ---------
OTHER ASSETS:
Investment in less than majority-owned affiliates 352.2 357.3
Deferred taxes on income 516.3 509.9
Other assets 274.9 319.8
Intangible assets (net of accumulated
amortization: 2003-$993.3; 2002-$1,038.5) 3,442.9 3,458.7
--------- ---------
Total other assets 4,586.3 4,645.7
--------- ---------
TOTAL ASSETS $12,096.7 $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)
June 30, December 31,
2003 2002
--------- --------
CURRENT LIABILITIES:
Accounts payable $ 5,282.7 $5,125.5
Accrued expenses 1,019.3 1,110.8
Accrued income taxes 17.3 33.2
Loans payable 128.5 239.3
Zero-coupon convertible senior notes 1.0 581.0
Liabilities held for sale 149.0 --
--------- --------
Total current liabilities 6,597.8 7,089.8
--------- --------
NON-CURRENT LIABILITIES:
Long-term debt 1,214.1 1,253.1
Convertible subordinated notes 573.0 564.6
Convertible senior notes 800.0 --
Deferred compensation 494.1 470.5
Accrued postretirement benefits 53.3 55.6
Other non-current liabilities 75.9 189.7
Minority interests in consolidated subsidiaries 63.0 70.4
--------- --------
Total non-current liabilities 3,273.4 2,603.9
--------- --------
Commitments and contingencies (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value,
shares authorized: 20.0, shares issued: none
Common stock, $0.10 par value,
shares authorized: 800.0,
shares issued: 2003 - 391.1; 2002 - 389.3 39.1 38.9
Additional paid-in capital 1,742.9 1,797.0
Retained earnings 835.9 858.0
Accumulated other comprehensive loss, net of tax (297.5) (373.6)
--------- --------
2,320.4 2,320.3
Less:
Treasury stock, at cost: 2003- 0.1 shares; 2002 - 3.1 shares (11.3) (119.2)
Unamortized deferred compensation (83.6) (101.1)
--------- --------
Total stockholders' equity 2,225.5 2,100.0
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,096.7 $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 JUNE 30,
(Amounts In Millions)
(Unaudited)
2003 2002
---- ----
Net Income (Loss) $ (13.5) $109.0
------- ------
Foreign Currency Translation Adjustments 47.0 107.7
------- ------
Adjustment for Minimum Pension Liability
Adjustment for minimum pension liability (0.5) --
Unrealized Holding Gains (Losses) on Securities
Unrealized holding gains 5.3 --
Tax expense (2.2) --
Unrealized holding losses -- (5.5)
Tax benefit -- 2.3
------- ------
Unrealized Holding Gains (Losses) on Securities 3.1 (3.2)
------- ------
Comprehensive Income $ 36.1 $213.5
======= ======
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
SIX MONTHS ENDED JUNE 30,
(Amounts In Millions)
(Unaudited)
2003 2002
---- ----
Net Income (Loss) $(22.1) $168.8
------ ------
Foreign Currency Translation Adjustments 76.7 89.2
------ ------
Adjustment for Minimum Pension Liability
Adjustment for minimum pension liability (5.2) --
Tax benefit 2.0 --
------ ------
Adjustment for Minimum Pension Liability (3.2) --
------ ------
Unrealized Holding Gains (Losses) on Securities
Unrealized holding gains 5.3 0.9
Tax expense (2.2) (0.4)
Unrealized holding losses (0.8) (5.5)
Tax benefit 0.3 2.3
------ ------
Unrealized Holding Gains (Losses) on Securities 2.6 (2.7)
------ ------
Comprehensive Income $54.0 $255.3
====== ======
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
SIX MONTHS ENDED JUNE 30,
(Amounts in Millions)
(Unaudited)
2003
(Restated) 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income (loss) from continuing operations $(34.2) $ 154.7
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization of fixed assets 86.9 92.1
Amortization of intangible assets 7.3 4.4
Amortization of restricted stock awards and bond discounts 39.9 39.4
Provision for (benefit of) deferred income taxes (24.7) 60.0
Undistributed equity earnings 1.9 (3.3)
Income applicable to minority interests 9.0 14.2
Restructuring charges - non cash 5.8 --
Long-lived asset impairment 22.1 --
Investment impairment 12.5 16.2
Other 4.6 (9.9)
Change in assets and liabilities, net of acquisitions:
Accounts receivable (72.2) (39.9)
Expenditures billable to clients (32.0) (102.1)
Prepaid expenses and other current assets (23.1) (28.6)
Accounts payable and accrued expenses 34.9 (185.8)
Accrued income taxes (38.5) (45.1)
Other non-current assets and liabilities (37.0) 32.4
------- -------
Net cash used in operating activities from continuing operations (36.8) (1.3)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Acquisitions, net of cash acquired (141.3) (199.6)
Capital expenditures (72.1) (77.8)
Proceeds from sales of businesses 2.0 0.2
Proceeds from sales of long-term investments 21.3 39.3
Purchases of long-term investments (11.0) (38.5)
Maturities of short-term marketable securities 17.2 23.5
Purchases of short-term marketable securities (27.8) (9.3)
Other investments and miscellaneous assets (7.7) (56.4)
------- -------
Net cash used in investing activities from continuing operations (219.4) (318.6)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Increase (decrease) in short-term debt (209.1) 90.3
Payments of zero-coupon convertible senior notes (580.0) --
Proceeds from long-term debt 0.9 1.5
Proceeds from 4.5% convertible senior notes 800.0 --
Payments of long-term debt (1.4) (132.1)
Debt issuance costs (26.9) --
Treasury stock acquired -- (7.7)
Issuance of common stock 8.0 44.2
Distributions to minority interests (7.4) (72.5)
Contributions from minority interests 0.5 --
------- -------
Net cash used in financing activities from continuing operations (15.4) (76.3)
------- -------
Effect of exchange rates on cash and cash equivalents 52.1 (9.6)
------- -------
Net cash (used in) provided by discontinued operations (13.4) 7.9
------- -------
Decrease in cash and cash equivalents (232.9) (397.9)
Cash and cash equivalents at beginning of year 933.0 935.2
------- -------
Cash and cash equivalents at end of period $ 700.1 $ 537.3
======= =======
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 June 30,
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") annual report on Form 10-K for the year ended
December 31, 2002. The operating results for the first six months of the year
are not necessarily indicative of the results for the year or other interim
periods.
As discussed in Note 10, 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 for all
periods presented in this document. Additionally, the assets and liabilities of
NFO have been presented as held for sale in the accompanying balance sheet as of
June 30, 2003.
Restatement
The Company identified a change to the presentation of debt issuance costs in
its consolidated statement of cash flows. The change has been reported through a
restatement of previously recorded amounts in the consolidated statement of cash
flows in this Form 10-Q/A.
The net result of the change was to reduce cash used in investing activities for
the six months ended June 30, 2003, by $26.9 and reduce cash provided by
financing activities for the six months ended June 30, 2003, by $26.9. The
restatement of the consolidated statement of cash flows had no impact on net
income (loss) or earnings (loss) per share, or any balance sheet amounts.
2. Earnings (Loss) Per Share
The following sets forth the computation of earnings per share for the
three and six month periods ended June 30, 2003 and 2002:
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Basic
Income (loss) from continuing operations $(23.0) $ 98.6
Income from discontinued operations 9.5 10.4
------ -------
Net Income (loss) $(13.5) $ 109.0
====== =======
Weighted average number of common shares outstanding 384.3 375.7
Earnings (loss) per share from continuing operations $(0.06) $ 0.26
Earnings per share from discontinued operations 0.02 0.03
------ -------
Earnings (loss) per share - basic $(0.04) $ 0.29
====== =======
Diluted (a)
Income (loss) from continuing operations - diluted $(23.0) $ 98.6
Income from discontinued operations 9.5 10.4
------ -------
Net Income (loss) - diluted $(13.5) $ 109.0
====== =======
Weighted average number of common shares outstanding 384.3 375.7
Weighted average number of incremental shares in connection with
restricted stock and assumed exercise of stock options -- 6.7
------ -------
Weighted average number of common shares outstanding - diluted 384.3 382.4
Earnings (loss) per share from continuing operations $(0.06) $ 0.26
Earnings per share from discontinued operations 0.02 0.03
------ -------
Earnings (loss) per share - diluted $(0.04) $ 0.29
====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Basic
Income (loss) from continuing operations $(34.2) $ 154.7
Income from discontinued operations 12.1 14.1
------ -------
Net Income (loss) $(22.1) $168.8
====== =======
Weighted average number of common shares outstanding 383.1 374.3
Earnings (loss) per share from continuing operations $(0.09) $ 0.41
Earnings per share from discontinued operations 0.03 0.04
------ -------
Earnings (loss) per share - basic $(0.06) $ 0.45
====== =======
Diluted (a)
Income (loss) from continuing operations - diluted $(34.2) $154.7
Income from discontinued operations 12.1 14.1
------ -------
Net Income (loss) - diluted $(22.1) $168.8
====== =======
Weighted average number of common shares outstanding 383.1 374.3
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 383.1 381.1
Earnings (loss) per share from continuing operations $(0.09) $ 0.41
Earnings per share from discontinued operations 0.03 0.04
------ -------
Earnings (loss) per share - diluted $(0.06) $ 0.44 (b)
====== =======
(a) The computation of diluted EPS for 2003 excludes the assumed
conversion of the 1.80% and 1.87% Convertible Subordinated Notes, the
conversion of restricted stock and assumed exercise of stock options
because they were antidilutive. The computation of diluted EPS for
2002 excludes the assumed conversion of the 1.80% and 1.87%
Convertible Subordinated Notes because they were anti-dilutive.
The 1.80% and 1.87% Convertible Subordinated Notes would have added
6.7 and 6.4 shares, respectively, to the diluted shares outstanding
had they been dilutive.
(b) Does not total due to rounding.
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 and six
months ended June 30 would have been as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Income (Loss) from Continuing Operations
As reported, income (loss) from continuing operations $(23.0) $98.6
Add back:
Stock-based employee compensation expense included in
reported net income, net of tax 5.5 7.4
Deduct:
Total fair value of stock based employee
compensation expense, net of tax (16.4) (16.9)
------ -----
Pro forma income (loss) from continuing operations $(33.9) $89.1
====== =====
Earnings (Loss) Per Share From Continuing Operations
Basic earnings (loss) per share
As reported $(0.06) $0.26
Pro forma $(0.09) $0.24
Diluted earnings (loss) per share
As reported $(0.06) $0.26
Pro forma $(0.09) $0.23
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 $1.90 and $4.32 in 2003 and 2002,
respectively.
The weighted-average fair value of options granted during the three months
ended June 30, 2003 and 2002 was $6.13 and $10.87, 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 June 30,
---------------------------
2003 2002
---- ----
Expected option lives 6 years 6 years
Risk free interest rate 2.79% 4.74%
Expected volatility 45.75% 36.63%
Dividend yield -- 1.37%
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Income (Loss) from Continuing Operations
As reported, income (loss) from continuing operations $ (34.2) $154.7
Add back:
Stock-based employee compensation expense included in
reported net income, net of tax 11.3 13.2
Deduct:
Total fair value of stock based employee
compensation expense, net of tax (30.3) (31.8)
------ ------
Pro forma income (loss) from continuing operations $(53.2) $136.1
====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Earnings (Loss) Per Share From Continuing Operations
Basic earnings (loss) per share
As reported $(0.09) $0.41
Pro forma $(0.14) $0.36
Diluted earnings (loss) per share
As reported $(0.09) $0.41
Pro forma $(0.14) $0.36
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 $1.70 and $4.38 in 2003 and 2002,
respectively.
The weighted-average fair value of options granted during the six months
ended June 30, 2003 and 2002 was $4.62 and $11.01, 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:
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Expected option lives 6 years 6 years
Risk free interest rate 3.34% 4.96%
Expected volatility 43.65% 34.41%
Dividend yield -- 1.29%
4. Restructuring Charges
2003 Program
During the second quarter of 2003, the Company announced that it would
undertake restructuring initiatives in response to softness in demand for
advertising and marketing services. The restructuring initiatives include
severance and lease terminations. The total amount of pre-tax charges the
Company expects to incur, over several periods, is up to approximately
$200.0.
In the second quarter of 2003, the Company recorded a pre-tax restructuring
charge of $94.4 ($61.6 after tax). The pre-tax restructuring charge was
composed of severance costs of $66.0 and lease terminations costs of $28.4.
Included in the $28.4 of lease termination costs was $4.8 related to the
write-off of leasehold improvements and $12.4 related to additional losses
on properties vacated as part of the 2001 restructuring program. The
charges related to leases terminated as part of the 2003 program are
recorded at net present value and are net of estimated sublease income
amounts.
The Company expects that the second quarter restructuring charge will
result in cash payments of $88.6 to be paid in 2003 ($64.0), 2004 ($14.6)
and 2005 and thereafter ($10.0). Further actions in this restructuring
program will be undertaken in the third and fourth quarters of 2003.
The severance and termination costs relate to a reduction in workforce of
approximately 1,450 employees worldwide. The employee groups affected
include all levels and functions across the Company: executive, regional
and account management and administrative, creative and media production
personnel. Approximately 35% of the charge relates to severance in the US,
15% to severance in the UK, 10% to severance in France with the remainder
largely relating to the rest of Europe, Asia and Latin America.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Lease termination costs, net of estimated sublease income, relate to the
offices that have been or will be vacated as part of the restructuring.
Approximately 30 locations are to be vacated with substantially all actions
to be completed by December 31, 2003; however, the cash portion of the
charge will be paid out over a period of several years. The majority of the
offices to be vacated are located in the US with approximately one third in
overseas markets principally in Europe.
2001 Program
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.
A summary of the remaining liability for restructuring charges related to
the 2003 restructuring program, together with the remaining liability
related to the 2001 program, is as follows:
Liability at Total 2003 Liability at
December Restructuring Non-cash 2003 cash June
31, 2002 Charges charges Payments 30, 2003
-------- ------- ------- -------- --------
TOTAL BY TYPE
Severance and termination costs $ 15.9 $66.0 $1.0 $21.6 $ 59.3
Lease terminations and other exit costs $ 94.6 28.4 4.8 19.5 98.7
------ ----- ---- ----- ------
Total $110.5 $94.4 $5.8 $41.1 $158.0
====== ===== ==== ===== ======
5. Long-Lived Asset Impairment
During the three and six months ended June 30, 2003, the Company recorded
charges of $11.0 and $22.1, respectively, related to the impairment of
long-lived assets at its Motorsports business. These amounts include $8.7
and $12.7, respectively, of current capital expenditure outlays that the
Company is contractually required to spend to upgrade and maintain certain
of its existing racing facilities, as well as an impairment of assets at
other Motorsports entities.
6. Investment Impairment
During the three and six months ended June 30, 2003, the Company recorded
investment impairment charges of $9.8 and $12.5, respectively, relating to
certain investments in Brazil, India, Canada and Japan that had been
determined to have incurred an "other than temporary" impairment.
During the second quarter of 2002, the Company recorded investment
impairment charges of $16.2, primarily relating to certain investments of
Octagon that had been determined to have incurred an "other than temporary"
impairment.
7. New Accounting Standards
During 2003, FIN 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51" ("FIN 46") was issued. FIN 46 addresses the
consolidation by business enterprises of variable interest entities, as
defined in FIN 46 and is based on the concept that companies that control
another entity through interests other than voting interests should
consolidate the controlled entity. The consolidation requirements apply
immediately to FIN 46 interests held in variable interest entities created
after January 31, 2003 and to interests held in variable interest entities
that existed prior to February 1, 2003 and remain in existence as of July
1, 2003. The application of FIN 46 did not have an impact on, or result in
additional disclosure in, the Company's June 30, 2003 consolidated results
of operations or financial position.
During 2003, SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. SFAS 150
establishes standards for classification and measurement of certain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in certain cases). The standard is to
be adopted effective the third quarter of 2003. The Company does not
believe that the adoption of the standard will a have a material impact on
its consolidated results of operations or financial position.
8. 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 June 30, 2003, the Company had short-term contracts covering
approximately $7.2 of notional amount of currency. As of June 30, 2003, the
fair value of the forward contracts was a loss of $0.2.
Other
The Company has two embedded derivative instruments under the 4.5% Notes
issued in March 2003. At June 30, 2003, the fair value of these derivatives
was negligible.
9. Segment Information
The Company is organized into four global operating groups together with
several stand-alone agencies. The four global operating groups are: a)
McCann-Erickson WorldGroup ("McCann"), b) the FCB Group ("FCB"), c) The
Partnership and d) Interpublic Sports and Entertainment Group ("SEG"). Each
of the four groups and the stand-alone agencies has its own management
structure and reports to senior management of the Company on the basis of
this structure. McCann, FCB, The Partnership and the stand-alone agencies
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. 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).
Prior to the second quarter of 2003, the Company had maintained a fifth
global operating group, Advanced Marketing Services ("AMS"). In connection
with the disposal of NFO (see Note 10), AMS was disbanded and its remaining
components became stand-alone agencies.
Each of McCann, FCB, The Partnership, SEG and the various stand-alone
agencies operates 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 the entities included in the former AMS historically have
had lower gross margins than the Company average. The four 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 four 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 the entities included
in the former AMS, the Company believes that the long-term average gross
margin of each of these agencies will converge over time and, given the
similarity of their operations, these entities have been aggregated. SEG
has different margins than the remaining groups and, given current
projections, the Company believes that the margins for this operating
segment will not converge with the remaining 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 the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Company 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.
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 June 30, 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 for the
three months ended and six months ended June 30 is shown in the following
table:
IPG
(Excl. Consolidated
SEG) SEG Total
---- --- -----
Three Months Ended June 30, 2003
Revenue $1,395.9 $103.5 $1,499.4
Operating income (loss) 76.1 (24.2) 51.9
Depreciation and amortization of fixed assets 40.4 3.0 43.4
Capital expenditures $ 33.2 $ 9.3 $ 42.5
Three Months Ended June 30, 2002
Revenue $1,383.2 $107.2 $1,490.4
Operating income (loss) 216.5 (3.8) 212.7
Depreciation and amortization of fixed assets 42.6 4.0 46.6
Capital expenditures $ 29.2 $ 15.4 $ 44.6
A reconciliation of information between reportable segments and the
Company's consolidated pre-tax earnings is shown in the following table:
Three Months Ended June 30, 2003 2002
---- ----
Total operating income for reportable segments $ 51.9 $212.7
Interest expense (46.1) (36.9)
Interest income 10.2 8.1
Other income 0.3 6.6
Investment impairment (9.8) (16.2)
------- ------
Income before provision for income taxes $ 6.5 $174.3
======= ======
IPG
(Excl. Consolidated
SEG) SEG Total
---- --- -----
Six Months Ended June 30, 2003
Revenue $2,626.0 $189.1 $2,815.1
Operating income (loss) 118.0 (45.3) 72.7
Depreciation and amortization of fixed assets 80.5 6.4 86.9
Capital expenditures $ 54.9 $ 17.2 $ 72.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Six Months Ended June 30, 2002
Revenue $2,618.6 $190.8 $2,809.4
Operating income 332.5 2.2 334.7
Depreciation and amortization of fixed assets 83.9 8.2 92.1
Capital expenditures $ 58.0 $ 19.8 $ 77.8
A reconciliation of information between reportable segments and the
Company's consolidated pre-tax earnings is shown in the following table:
Six Months Ended June 30, 2003 2002
Total operating income for reportable segments $ 72.7 $334.7
Interest expense (84.9) (72.2)
Interest income 18.1 15.0
Other income 0.1 6.9
Investment impairment (12.5) (16.2)
------ ------
Income (loss) before provision for income taxes $ (6.5) $268.2
====== ======
10. Acquisitions, Dispositions and Deferred Payments
Acquisitions
During the first six months of 2003, the Company completed two acquisitions
for $4.0 in cash. Additionally, the Company paid $24.3 in cash and $3.2 in
stock for additional ownership interests in companies in which a previous
investment had been made.
During the first six months of 2002, the Company completed seven
acquisitions for $39.8 in cash and $1.1 in stock. Additionally, the Company
paid $2.0 in cash and $0.8 in stock for additional ownership interests in
companies in which a previous investment had been made.
Deferred Payments
During the first six months of 2003, the Company paid $113.9 in cash and
$37.7 in stock as deferred payments on acquisitions that had closed in
prior years. During the first six months of 2002, the Company paid $162.2
in cash and $42.5 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 June 30, 2003, the Company's estimated liability for earn-outs is as
follows:
2006 and
2003 2004 2005 thereafter Total
---- ---- ---- ---------- -----
Cash $ 48.8 $83.9 $50.4 $24.4 $207.5
Stock 9.5 13.7 18.1 11.4 52.7
------- ----- ----- ----- ------
TOTAL $ 58.3 $97.6 $68.5 $35.8 $260.2
======= ===== ===== ===== ======
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
The total estimated amount of potential payments under put options is
$153.6, of which $7.7 is payable in stock. Exercise of the put options
would require cash payments to be made as follows:
2003 $35.8
2004 $31.9
2005 $33.0
2006 and thereafter $45.2
The actual amount to be paid is contingent upon the achievement of
projected operating performance targets and the satisfaction of 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 total
estimated amount of potential payments under call options is $105.8, of
which $3.6 is payable in stock. Exercise of the call options would require
cash payments to be made as follows:
2003 $15.7
2004 $ 7.1
2005 $15.3
2006 and thereafter $64.1
The actual amount to be paid is contingent upon the achievement of
projected operating performance targets and the satisfaction of other
conditions as specified in the relevant agreement.
Dispositions
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 (which had an approximate market value of
$35.4 as of July 10, 2003). The Company has agreed, subject to specified
conditions, to hold half of the TNS shares until at least December 2003 and
the remainder until at least March 2004. 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 $2.50 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 will realize a pre-tax gain of approximately $110
($100 net of tax) in the third quarter.
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.
Included in assets held for sale are accounts receivable of $94.9, prepaid
expenses and other current assets of $57.4, net fixed assets of $52.0,
intangible assets of $215.2 and other assets of $32.7. Included in
liabilities held for sale are accounts payable of $22.8, accrued expenses
of $81.8 and other liabilities of $44.4.
Income from discontinued operations consists of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended June 30,
---------------------------
2003 2002
---- ----
Pre-tax income from discontinued operations $16.0 $17.1
Tax expense 6.5 6.7
----- -----
Income from discontinued operations $ 9.5 $10.4
===== =====
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Pre-tax income from discontinued operations $20.4 $23.5
Tax expense 8.3 9.4
----- -----
Income from discontinued operations $12.1 $14.1
===== =====
11. Debt and Certain Liquidity Matters
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, if EBITDA for the four fiscal
quarters most recently ended was at least $831.0 (for purposes of this
EBITDA calculation, only $125.0 of non-recurring restructuring charges may
be added back to EBITDA). The Revolving Credit Facilities are used for
general corporate purposes. As of June 30, 2003, $166.4 was utilized under
the New 364-Day Revolving Credit Facility for the issuance of letters of
credit and $57.6 was utilized 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, the Company agreed to new pricing under the Revolving
Credit Facilities that increased the interest spread payable on loans by 25
basis points. Based on the Company's current credit ratings, interest rates
on loans under the New 364-Day Revolving Credit Facility are currently
calculated by adding 1.75% to either the applicable bank base rate (in the
case of base rate loans) or LIBOR (in the case of LIBOR loans), and
interest rates on loans under the Five-Year Revolving Credit Facility are
currently calculated by adding 1.7% to these rates.
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 those agreements). In connection with
entering into 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 of 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 quarters
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 Motorsports
business; and (iv) all impairment charges taken with respect to capital
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
expenditures made on or after January 1, 2003 with respect to the Company's
Motorsports business, and to exclude the gain realized by the Company upon
the sale of NFO. The corresponding financial covenant ratio levels in the
Revolving Credit Facilities were also amended. As of June 30, 2003, the
Company has recorded (i) $94.4 of restructuring charges ($88.6 of which
were cash charges) and (ii) $22.1 of non-cash charges with respect to the
impairment of the remaining book value of its Motorsports business. These
charges counted toward the $200.0 restructuring charges and $70.0 of
non-cash charges relating to Motorsports that, under the loan agreements,
are allowed to be added back to the definition of EBITDA and do not
adversely affect the ability of the Company to comply with its financial
covenants. As explained in Note 4, it is the Company's current expectation
that any charges incurred as a result of its restructuring program during
periods after September 30, 2003 will be taken into account, rather than
added back in the definition of EBITDA in these loan agreements, when
determining whether the Company is in compliance with these financial
covenants during these periods after September 30, 2003. Nonetheless,
despite the incurrence of these restructuring charges after September 30,
2003 the Company expects to be in compliance with both its applicable
financial and other covenants without having to obtain any waivers or
amendments. As of June 30, 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 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 that expired on April 4, 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 the permitted level of 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. The Company's permitted level of annual capital
expenditures is $175.0.
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).
Other Committed and Uncommitted Facilities
In addition to the Revolving Credit Facilities, at June 30, 2003, the
Company had $50.8 of committed lines of credit, a majority of which was
provided by overseas banks. At June 30, 2003, $0.04 was outstanding under
these lines of credit.
At June 30, 2003 the Company also had $795.4 of uncommitted lines of
credit, 70.5% of which were provided by banks that participate in the
Revolving Credit Agreements. At June 30, 2003, approximately $81.5 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 are
10.01%, 9.95%, 9.41%, 9.09% and 8.05%, respectively. As of June 30, 2003,
$142.5 was outstanding under the notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
The Prudential Agreements contained financial covenants that set (i)
minimum levels for net worth and for cash flow as a function of borrowed
funds, (ii) maximum levels of borrowed funds as a function of net worth and
(iii) minimum levels of EBITDA. The most restrictive of these covenants was
that of cash flow to borrowed funds. This ratio was required to exceed an
amount that varied from 0.16 to 0.25 for each quarter in the applicable
consecutive four-quarter period. The definitions of cash flow and
consolidated net worth in the Prudential Agreements were amended as of
December 31, 2002 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 Prudential Agreements contained 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.
The Company 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 0.20 to 0.18 effective for the
period ended March 31, 2003.
Due to the high interest rates on the notes issued under the Prudential
Agreements and the restrictive financial covenants contained in these
agreements, the Company repaid the total principal amount and interest
outstanding under the Prudential Agreements on August 8, 2003, including a
prepayment penalty that will result in a net charge of approximately $24.5.
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 ratings assigned to the 4.5%
Notes by any two of Moody's Investors Service, Inc., Standard & Poor's
Ratings Services and Fitch Ratings are lower than Ba2, BB and BB,
respectively, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
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 4.5% 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.
Through December 2002, the Company had paid cash dividends quarterly with
the most recent quarterly dividend paid in December 2002 at a 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 the Company
has not declared or paid a dividend in the second quarter of 2003.
The Company believes that cash flow from operations, proceeds from the 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
ongoing 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.
12. Commitments and Contingencies
Legal Matters
Federal Securities Class Action
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 consists 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") on behalf of a purported class of
True North shareholders who acquired Interpublic stock. 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. On May 29,
2003, the United States District Court for the Southern District of New
York denied the motion to dismiss as to the Company and granted the motion
as to the present and former directors and officers named in the
consolidated amended complaint. On June 30, 2003, defendants filed an
answer to the consolidated amended complaint.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
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. On June 18, 2003, the Company moved to
dismiss and/or stay these actions. The motions are currently pending.
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 June 30, 2003, after the plaintiffs informed the
court that they had decided to dismiss the Delaware litigation, the court
entered an order dismissing the Delaware action with prejudice to
plaintiffs only.
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. On August 12, 2003, defendants moved to dismiss this action.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
The Company intends to vigorously defend the actions discussed above.
However, as with all litigation, these proceedings contain elements of
uncertainty, and the final resolution of these actions could have a
material impact on the Company's financial position, cash flows or results
of operations.
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 (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 other proceedings
or claims will have a material effect on the financial condition of the
Company.
13. Subsequent Events
Sale of NFO
As discussed in Note 10, on July 10, 2003, the Company completed the sale
of NFO to TNS.
Repayment of Debt
As discussed in Note 11, on August 8, 2003, the Company repaid all of its
outstanding borrowings under the Prudential Agreements. This transaction
required repaying $142.5 principal amount of its outstanding debt. In
connection with this transaction a prepayment penalty was incurred that
will result in a net charge of approximately $24.5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Registrant)
Date: December 8, 2003 BY /S/ DAVID A. BELL
--------------------------------------
DAVID A. BELL
Chairman of the Board, President
and Chief Executive Officer
Date: December 8, 2003 BY /S/ CHRISTOPHER J. COUGHLIN
--------------------------------------
CHRISTOPHER J. COUGHLIN
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
CERTIFICATION
I, David A. Bell, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A for the Period
Ended June 30, 2003 of The Interpublic Group of Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation and;
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date December 8, 2003
/s/ David A. Bell
----------------
David A. Bell
Chief Executive Officer
CERTIFICATION
I, Christopher J. Coughlin, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q/A for the Period
Ended June 30, 2003 of The Interpublic Group of Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation and;
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date December 8, 2003
/s/ Christopher J. Coughlin
---------------------------
Christopher J. Coughlin
Chief Financial Officer
Quarterly Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each
of the undersigned officers of The Interpublic Group of Companies, Inc., a
Delaware corporation (the "Company"), does hereby certify, to such officer's
knowledge, that:
The quarterly report on Form 10-Q/A for the quarter ended June 30,
2003 of the Company fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and information contained in the
Form 10-Q/A fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: December 8, 2003 /s/ David A. Bell
---------------------------
David A. Bell
Chief Executive Officer
Dated: December 8, 2003 /s/ Christopher J. Coughlin
---------------------------
Christopher J. Coughlin
Chief Financial Officer