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 September 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
----------------------------------------------- ------------------
(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
October 31, 2003: 392,238,613 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
nine months ended September 30, 2003 for the presentation of certain items
(principally capital expenditures and debt issuance costs).
The principal changes were to reduce the amount presented as capital
expenditures (in investing activities) and to reclassify debt issuance costs
from investing activities to financing activities. The change in cash paid for
capital expenditures reduced the amount presented as capital expenditures by
$44.2 and increased the amounts presented as cash used in the line items related
to "other non-current assets and liabilities" (in operating activities) and
"other investments in less than majority owned affiliates and miscellaneous
assets" (in investing activities). The change in debt issuance costs related to
$27.5 that had been presented as investing activities and have now been
presented as financing activities. The net result of the changes was to increase
the net cash used in operating activities from continuing operations for the
nine months ended September 30, 2003, by $10.0, increase cash provided by
investing activities for the nine months ended September 30, 2003, by $37.5 and
increase cash used in financing activities from continuing operations for the
nine months ended September 30, 2003, by $27.5. 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
November 14, 2003 for the nine months ended September 30, 2003 to correct only
the following disclosures: a) consolidated statement of cash flows for the nine
months ended September 30, 2003, b) footnote number nine, capital expenditures
as disclosed in "Segment Information" and c) "Liquidity and Capital Resources"
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Form 10-Q/A amends Items 1 and 2 of Part I of the Company's original Form
10-Q filing only, and except for such items, 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 November 14, 2003. For disclosures subsequent to
November 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 September 30, 2003
and 2002 (unaudited)
Consolidated Statement of Operations 5
Nine months ended September 30, 2003
and 2002 (unaudited)
Consolidated Balance Sheet 6
September 30, 2003 and
December 31, 2002 (unaudited)
Consolidated Statement of Comprehensive Income 8
Three months ended September 30, 2003
and 2002 (unaudited)
Consolidated Statement of Comprehensive Income 9
Nine months ended September 30, 2003
and 2002 (unaudited)
Consolidated Statement of Cash Flows 10
Nine months ended September 30, 2003 (restated)
and 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 11
Item 2. Management's Discussion and Analysis of 29
Financial Condition and Results of Operations
SIGNATURES 45
CERTIFICATIONS 46
PART I - FINANCIAL INFORMATION
Item 1.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
2003 2002
-------- --------
REVENUE $1,418.9 $1,386.8
-------- --------
OPERATING EXPENSES:
Salaries and related expenses 810.9 813.2
Office and general expenses 506.6 519.0
Amortization of intangible assets 1.8 2.1
Restructuring charges 48.0 12.1
Long-lived asset impairment 222.7 118.7
-------- --------
Total operating expenses 1,590.0 1,465.1
-------- --------
OPERATING LOSS (171.1) (78.3)
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (43.5) (36.7)
Debt prepayment penalty (24.8) --
Interest income 9.5 5.9
Other income 1.2 2.7
Investment impairment (29.7) (4.9)
Litigation charges (127.6) --
-------- --------
Total other income (expense) (214.9) (33.0)
-------- --------
LOSS before income taxes (386.0) (111.3)
Provision for (benefit of) income taxes 19.5 (23.0)
-------- --------
LOSS OF CONSOLIDATED COMPANIES (405.5) (88.3)
Income applicable to minority interests (10.4) (7.9)
Equity in net loss of unconsolidated affiliates (0.3) (0.2)
-------- --------
LOSS FROM CONTINUING OPERATIONS (416.2) (96.4)
INCOME FROM DISCONTINUED OPERATIONS (NET OF TAXES) 89.1 6.8
-------- --------
NET LOSS $ (327.1) $ (89.6)
======== ========
Loss per share:
Basic:
Continuing operations $ (1.08) $ (0.26)
Discontinued operations $ 0.23 $ 0.02
-------- --------
Total $ (0.85) $ (0.24)
======== ========
Diluted:
Continuing operations $ (1.08) $ (0.26)
Discontinued operations $ 0.23 $ 0.02
Total $ (0.85) $ (0.24)
Weighted average shares:
Basic 385.8 377.3
Diluted 385.8 377.3
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
NINE MONTHS ENDED SEPTEMBER 30,
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
2003 2002
-------- --------
REVENUE $4,234.0 $4,196.2
-------- --------
OPERATING EXPENSES:
Salaries and related expenses 2,544.0 2,474.1
Office and general expenses 1,392.1 1,328.4
Amortization of intangible assets 9.1 6.5
Restructuring charges 142.4 12.1
Long-lived asset impairment 244.8 118.7
-------- --------
Total operating expenses 4,332.4 3,939.8
-------- --------
OPERATING INCOME (LOSS) (98.4) 256.4
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (128.4) (108.9)
Debt prepayment penalty (24.8) --
Interest income 27.6 20.9
Other income 1.3 9.6
Investment impairment (42.2) (21.1)
Litigation charges (127.6) --
-------- --------
Total other income (expense) (294.1) (99.5)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (392.5) 156.9
Provision for income taxes 36.3 79.6
-------- --------
INCOME (LOSS) OF CONSOLIDATED COMPANIES (428.8) 77.3
Income applicable to minority interests (19.4) (22.1)
Equity in net income (loss) of unconsolidated
affiliates (2.2) 3.1
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (450.4) 58.3
INCOME FROM DISCONTINUED OPERATIONS (NET OF TAXES) 101.2 20.9
-------- --------
NET INCOME (LOSS) $ (349.2) $ 79.2
======== ========
Earnings (loss) per share:
Basic:
Continuing operations $ (1.17) $ 0.16
Discontinued operations 0.26 0.06
-------- --------
Total $ (0.91) $ 0.21(a)
======== ========
Diluted:
Continuing operations $ (1.17) $ 0.15
Discontinued operations 0.26 0.05
-------- --------
Total $ (0.91) $ 0.21(a)
======== ========
Weighted average shares:
Basic 384.0 375.3
Diluted 384.0 381.1
Cash dividends per share -- $ 0.285
(a) Does not total 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)
September 30, December 31,
2003 2002
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 695.5 $ 933.0
Accounts receivable (net of allowance for doubtful
accounts: 2003-$162.2; 2002-$139.8) 4,474.9 4,517.6
Expenditures billable to clients 389.1 407.6
Deferred taxes 41.7 37.0
Prepaid expenses and other current assets 411.9 427.1
-------- ---------
Total current assets 6,013.1 6,322.3
-------- ---------
FIXED ASSETS, AT COST:
Land and buildings 152.6 168.2
Furniture and equipment 1,041.1 1,125.1
Leasehold improvements 507.7 487.8
-------- ---------
1,701.4 1,781.1
Less: accumulated depreciation (987.6) (955.4)
-------- ---------
Total fixed assets 713.8 825.7
-------- ---------
OTHER ASSETS:
Investment in less than majority-owned affiliates 371.0 357.3
Deferred taxes 610.5 509.9
Other assets 282.5 319.8
Intangible assets (net of accumulated
amortization: 2003-$1,000.0; 2002-$1,038.5) 3,281.2 3,458.7
-------- ---------
Total other assets 4,545.2 4,645.7
-------- ---------
TOTAL ASSETS $11,272.1 $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)
September 30, December 31,
2003 2002
------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 4,889.0 $ 5,125.5
Accrued expenses 1,074.5 1,110.8
Accrued income taxes 17.6 33.2
Loans payable 83.9 239.3
Convertible subordinated notes 242.0 --
Zero-coupon convertible senior notes 1.0 581.0
--------- ---------
Total current liabilities 6,308.0 7,089.8
--------- ---------
NON-CURRENT LIABILITIES:
Long-term debt 1,055.7 1,253.1
Convertible subordinated notes 335.3 564.6
Convertible senior notes 800.0 --
Deferred compensation 523.0 470.5
Accrued postretirement benefits 53.8 55.6
Other non-current liabilities 190.5 189.7
Minority interests in consolidated subsidiaries 64.7 70.4
--------- ---------
Total non-current liabilities 3,023.0 2,603.9
--------- ---------
Commitments and contingencies (Note 13)
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 - 392.0; 2002 - 389.3 39.2 38.9
Additional paid-in capital 1,752.6 1,797.0
Retained earnings 508.8 858.0
Accumulated other comprehensive loss, net of tax (274.5) (373.6)
--------- ---------
2,026.1 2,320.3
Less:
Treasury stock, at cost: 2003- 0.3 shares;
2002 - 3.1 shares (11.3) (119.2)
Unamortized deferred compensation (73.7) (101.1)
--------- ---------
Total stockholders' equity 1,941.1 2,100.0
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,272.1 $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 SEPTEMBER 30,
(Amounts In Millions)
(Unaudited)
2003 2002
--------- ---------
Net Loss $ (327.1) $ (89.6)
--------- ---------
Foreign Currency Translation Adjustments 11.3 (36.2)
--------- ---------
Adjustment for Minimum Pension Liability
Adjustment for minimum pension liability
(due to sale of NFO) 3.2 --
Unrealized Holding Gains (Losses) on Securities
Unrealized holding gains 14.5 --
Tax expense (6.0) --
Unrealized holding losses -- (9.9)
Tax benefit -- 4.1
--------- ---------
Unrealized Holding Gains (Losses) on Securities 8.5 (5.8)
--------- ---------
Comprehensive Loss $ (304.1) $ (131.6)
========= =========
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
NINE MONTHS ENDED SEPTEMBER 30,
(Amounts In Millions)
(Unaudited)
2003 2002
--------- ---------
Net Income (Loss) $ (349.2) $ 79.2
--------- ---------
Foreign Currency Translation Adjustments 88.0 53.0
--------- ---------
Adjustment for Minimum Pension Liability
Adjustment for minimum pension liability -- --
Tax benefit -- --
--------- ---------
Adjustment for Minimum Pension Liability -- --
--------- ---------
Unrealized Holding Gains (Losses) on Securities
Unrealized holding gains 19.8 0.9
Tax expense (8.2) (0.4)
Unrealized holding losses (0.8) (15.4)
Tax benefit 0.3 6.4
--------- ---------
Unrealized Holding Gains (Losses) on Securities 11.1 (8.5)
--------- ---------
Comprehensive Income (Loss) $ (250.1) $ 123.7
========= =========
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
NINE MONTHS ENDED SEPTEMBER 30,
(Amounts in Millions)
(Unaudited)
2003
(Restated) 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net income (loss) from continuing operations $(450.4) $ 58.3
Adjustments to reconcile net income (loss) from continuing operations to
cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 138.4 140.1
Amortization of intangible assets 9.1 6.5
Amortization of restricted stock awards and bond discounts 56.7 62.9
Provision for (benefit of) deferred income taxes (106.2) 25.1
Undistributed equity earnings 2.2 (3.1)
Income applicable to minority interests 19.4 22.1
Restructuring charges - non cash 6.2 --
Long-lived asset impairment 244.8 118.7
Investment impairment 42.2 21.1
Litigation settlements 127.6 --
Other (2.7) (7.5)
Change in assets and liabilities, net of acquisitions:
Accounts receivable 238.8 390.8
Expenditures billable to clients (5.5) (109.7)
Prepaid expenses and other current assets (38.2) (58.1)
Accounts payable and accrued expenses (419.8) (414.7)
Other non-current assets and liabilities (0.7) (11.4)
------- -------
Net cash provided by (used in) operating activities
from continuing operations (138.1) 241.1
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS:
Acquisitions, net of cash acquired (194.0) (252.2)
Capital expenditures (94.2) (116.6)
Proceeds from the sale of discontinued operations, net of cash sold 376.7 --
Proceeds from sales of businesses 2.0 8.9
Proceeds from sales of long-term investments 25.2 42.6
Purchases of long-term investments (15.0) (42.1)
Maturities of short-term marketable securities 26.3 39.8
Purchases of short-term marketable securities (34.3) (14.0)
Other investments in less than majority owned affiliates and
miscellaneous assets (16.4) (20.4)
------- -------
Net cash provided by (used in) investing activities from
continuing operations 76.3 (354.0)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS:
Increase (decrease) in short-term debt (243.4) 6.3
Payments of zero-coupon convertible senior notes (580.0) --
Proceeds from long-term debt 0.8 5.3
Proceeds from termination of interest swaps -- 41.5
Proceeds from 4.5% convertible senior notes 800.0 --
Payments of long-term debt (163.4) (138.0)
Debt issuance costs (27.5) --
Treasury stock acquired -- (7.9)
Issuance of common stock 3.1 49.7
Distributions to minority interests (12.5) (18.0)
Contributions from minority interests 0.5 1.5
Cash dividends - Interpublic -- (109.0)
------- -------
Net cash used in financing activities from
continuing operations (222.4) (168.6)
------- -------
Effect of exchange rates on cash and cash equivalents 60.1 (42.0)
------- -------
Net cash (used in) provided by discontinued operations (13.4) 3.3
------- -------
Decrease in cash and cash equivalents (237.5) (320.2)
Cash and cash equivalents at beginning of year 933.0 935.2
------- -------
Cash and cash equivalents at end of period $ 695.5 $ 615.0
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts 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 September 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")
current report on Form 8-K filed on September 9, 2003. The operating
results for the first nine 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.
Restatement
The Company identified changes to the presentation of cash paid for
capital expenditures and debt issuance costs in its consolidated statement
of cash flows. The changes have been reported through a restatement of
previously recorded amounts in the consolidated statement of cash flows in
this form 10-Q/A.
The principal changes were to reduce the amount presented as capital
expenditures (in investing activities) and to reclassify debt issuance
costs from investing activities to financing activities. The change in cash
paid for capital expenditures reduced the amount presented as capital
expenditures by $44.2 and increased the amounts presented as cash used in
the line items related to "other non-current assets and liabilities" (in
operating activities) and "other investments in less than majority owned
affiliates and miscellaneous assets" (in investing activities). The change
in debt issuance costs related to $27.5 that had been presented as
investing activities and have now been presented as financing activities.
The net result of the changes was to increase the net cash used in
operating activities from continuing operations for the nine months ended
September 30, 2003, by $10.0, increase cash provided by investing
activities for the nine months ended September 30, 2003, by $37.5 and
increase cash used in financing activities from continuing operations for
the nine months ended September 30, 2003, by $27.5. 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 (loss) per share for
the three and nine month periods ended September 30, 2003 and 2002:
Three Months Ended September 30,
--------------------------------
2003 2002
---- ----
Basic and diluted (a)
Loss from continuing operations $(416.2) $ (96.4)
Income from discontinued operations 89.1 6.8
------- -------
Net loss $(327.1) $ (89.6)
======= =======
Weighted average number of common shares outstanding 385.8 377.3
Loss per share from continuing operations $ (1.08) $ (0.26)
Earnings per share from discontinued operations 0.23 0.02
------- -------
Loss per share - basic and diluted $ (0.85) $ (0.24)
======= =======
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Basic
Income (loss) from continuing operations $(450.4) $ 58.3
Income from discontinued operations 101.2 20.9
------- -------
Net Income (loss) $(349.2) $ 79.2
======= =======
Weighted average number of common shares outstanding 384.0 375.3
Earnings (loss) per share from continuing operations $( 1.17) $ 0.16
Earnings per share from discontinued operations 0.26 0.06
------- -------
Earnings (loss) per share - basic $ (0.91) $ 0.21(b)
======= =======
Diluted (a)
Income (loss) from continuing operations - diluted $(450.4) $ 58.3
Income from discontinued operations 101.2 20.9
------- -------
Net Income (loss) - diluted $(349.2) $ 79.2
======= =======
Weighted average number of common shares outstanding 384.0 375.3
Weighted average number of incremental shares in connection
with restricted stock and assumed exercise of stock options -- 5.8
------- -------
Weighted average number of common shares outstanding - diluted 384.0 381.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Earnings (loss) per share from continuing operations $ (1.17) $ 0.15
Earnings per share from discontinued operations 0.26 0.05
------- -------
Earnings (loss) per share - diluted $ (0.91) $ 0.21(b)
======= =======
(a) The computation of diluted EPS for 2003 excludes the assumed conversion
of the 1.80% and 1.87% Convertible Subordinated Notes, 4.5% Convertible
Senior 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 for the three and nine month periods ended September
30, 2003 and 2002.
The 4.5% Convertible Senior Notes would have added 5.6 and 1.9 shares
to the diluted shares for the three and nine month periods ended
September 30, 2003, respectively, had they been dilutive.
(b) Does not total due to rounding.
3. Stock - Based Compensation 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 nine
months ended September 30 would have been as follows:
Three Months Ended September 30,
--------------------------------
2003 2002
---- ----
Loss from Continuing Operations
As reported, loss from continuing operations $(416.2) $ (96.4)
Add back:
Stock-based employee compensation expense
included in reported net income,
net of tax 5.5 9.6
Deduct:
Total fair value of stock based employee
compensation expense, net of tax (14.0) (18.7)
------- -------
Pro forma loss from continuing operations $(424.7) $(105.5)
======= =======
Loss Per Share From Continuing Operations
Basic loss per share
As reported $ (1.08) $ (0.26)
Pro forma $ (1.10) $ (0.28)
Diluted loss per share
As reported $ (1.08) $ (0.26)
Pro forma $ (1.10) $ (0.28)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
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 $2.14 and $2.76 for the three months ended
September 30, 2003 and 2002, respectively.
The weighted-average fair value of options granted during the three months
ended September 30, 2003 and 2002 was $6.30 and $6.20, 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 September 30,
--------------------------------
2003 2002
---- ----
Expected option lives 6 years 6 years
Risk free interest rate 3.06% 3.70%
Expected volatility 44.72% 38.58%
Dividend yield -- 2.13%
Nine Months Ended September 30,
--------------------------------
2003 2002
---- ----
Income (Loss) from Continuing Operations
As reported, income (loss) from continuing operations $(450.4) $ 58.3
Add back:
Stock-based employee compensation expense included in
reported net income, net of tax 16.9 22.8
Deduct:
Total fair value of stock based employee
compensation expense, net of tax (44.3) (50.5)
------- -------
Pro forma income (loss) from continuing operations $(477.8) $ 30.6
======= =======
Earnings (Loss) Per Share From Continuing Operations
Basic earnings (loss) per share
As reported $ (1.17) $ 0.16
Pro forma $ (1.24) $ 0.08
Diluted earnings (loss) per share
As reported $ (1.17) $ 0.15
Pro forma $ (1.24) $ 0.08
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 $1.80 and $3.73 for the nine months ended
September 30, 2003 and 2002, respectively.
The weighted-average fair value of options granted during the nine months
ended September 30, 2003 and 2002 was $4.83 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2003 2002
---- ----
Expected option lives 6 years 6 years
Risk free interest rate 3.30% 4.94%
Expected volatility 43.78% 34.49%
Dividend yield -- 1.31%
4. Restructuring Charges
During the three and nine months ended September 30, 2003, the Company
recorded restructuring charges of $48.0 and $142.4, respectively, in
connection with the 2003 and 2001 restructuring programs as discussed
below. During the three months ended September 30, 2002, the Company
recorded restructuring charges of $12.1 in connection with the 2001
restructuring program.
The Company expects that the restructuring charges recorded to date will
result in cash payments of $136.2 to be paid in 2003 ($101.1), 2004 ($22.4)
and 2005 and thereafter ($12.7). Further actions in the 2003 restructuring
program will be undertaken in the fourth quarter of 2003 and the first half
of 2004.
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, through the first half of 2004, is up to
approximately $250.0.
During the nine months ended September 30, 2003, the Company recorded
pre-tax restructuring charges of $142.4 ($95.4 after tax). The pre-tax
restructuring charge was composed of severance costs of $103.4 and lease
terminations costs of $39.0. Included in the $39.0 of lease termination
costs was $4.8 related to the write-off of leasehold improvements on
vacated properties and $12.4 related to additional losses on properties
vacated as part of the 2001 restructuring program. See below for further
discussion 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. In addition, a charge of
$9.1 has been incurred in the three months ended September 30, 2003 related
to acceleration of amortization of leasehold improvements on premises which
are to be vacated in the future. The charge related to such amortization is
included in office and general expenses in the accompanying consolidated
statement of operations.
A summary of the remaining liability for restructuring charges related to
the 2003 restructuring plan is as follows:
Ending
Second Balance at
Quarter Third Quarter Non-cash 2003 Cash September
Charges Charges Charges Payments 30, 2003
------- ------------- -------- --------- ----------
TOTAL BY TYPE
Severance and termination costs $66.0 $37.4 $1.4 $54.5 $47.5
Lease terminations and other exit costs 16.0 10.6 4.8 2.4 19.4
----- ----- ---- ----- -----
Total $82.0 $48.0 $6.2 $56.9 $66.9
===== ===== ==== ===== =====
The severance and termination costs recorded to date relate to a reduction
in workforce of approximately 2,200 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
(Amounts 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 35 locations are to be vacated with substantially all actions
to be completed by March 31, 2004; 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 and other merger
related costs related to the 2001 restructuring plan is as follows:
Cash paid
Liability at through Liability at
December 2003 September September
31, 2002 Charge 30, 2003 30, 2003
------------ ------ --------- ------------
TOTAL BY TYPE
Severance and termination costs $ 15.9 $ -- $12.0 $ 3.9
Lease terminations and other exit costs 94.6 12.4 24.9 82.1
------ ------ ----- -----
Total $110.5 $ 12.4 $36.9 $86.0
====== ====== ===== =====
5. Long-Lived Asset Impairment
During the three and nine months ended September 30, 2003, the Company
recorded charges of $222.7 and $244.8, respectively, related to the
impairment of long-lived assets at both its Octagon Worldwide ("OWW") and
Motorsports businesses. These amounts include $1.7 and $14.4, respectively,
of current capital expenditure outlays that the Company is contractually
required to spend to upgrade and maintain certain of its existing
Motorsports racing facilities, as well as an impairment of assets at other
Motorsports entities.
During the third quarter of 2003, the Company performed its annual
impairment review for goodwill and other intangible assets and recorded a
non-cash charge of $221.0, which is reflected as a component of "Long-lived
asset impairment" in the accompanying consolidated statement of operations.
The charge was required to reduce the carrying value of goodwill at the
Company's OWW reporting unit. OWW is separate from Motorsports and offers a
variety of sports marketing services including athlete representation, TV
rights distribution and other marketing and consulting services.
The OWW charges reflect the reporting unit's lower than expected
performance in 2003 and revised future projections indicating that the
factors behind the poor 2003 performance are likely to persist.
Specifically, during 2003 it became apparent that there was significant
pricing pressure in both overseas and domestic TV rights distribution.
Further, declining athlete pay scales are expected to result in
significantly lower fees from athlete representation, and proceeds from
events (including ticket revenue and sponsorship) to which the Company is
committed will be lower than amounts that had been anticipated when the
event rights were acquired. Various factors, including the operating loss
incurred at OWW in 2003, have indicated that lower revised growth
projections are required, reflecting lower projected gross margins than OWW
has earned historically.
In 2002, the Motorsports businesses experienced significant operational
difficulties, including significantly lower than anticipated attendance at
the marquee British Grand Prix race in July 2002. These events and a change
in management at Motorsports in the third quarter of 2002 led the Company
to begin assessing its long-term strategy for Motorsports. Based on
valuations of the Motorsports businesses, the Company determined that the
goodwill and the book value of certain asset groupings at Motorsports were
significantly higher than their expected future cash flows and that an
impairment had occurred.
Accordingly, the Company recognized a non-cash impairment loss and related
charge of $118.7 ($83.8, net of tax) as of September 30, 2002. The charges
included $82.1 of goodwill impairment, $24.6 of fixed asset write-offs, and
$12.0 to record the fair value of an associated put option.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
6. Investment Impairment
During the three and nine months ended September 30, 2003, the Company
recorded investment impairment charges of $29.7 and $42.2, respectively,
relating primarily to international investments that had been determined to
have incurred an "other than temporary" impairment.
During the third quarter of 2002, the Company recorded investment
impairment charges of $4.9, primarily related to European marketable
securities and certain venture funds 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 OWW.
The determination as to impairment was largely based on the entity's
current and projected operating results.
7. New Accounting Standards
In December 2002, SFAS 148, "Accounting for Stock-Based Compensation ---
Transition and Disclosure (an Amendment of SFAS 123)" ("SFAS 148") was
issued. SFAS 148 provides alternative methods of transition for making a
voluntary change to fair value-based accounting for stock-based
compensation. The Company continues to account for its stock option plans
under the intrinsic value recognition and measurement principles of APB 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Effective for interim periods beginning after December 15, 2002, SFAS 148
also requires disclosure of pro forma results on a quarterly basis as if
the Company had applied the fair value recognition provisions of SFAS No.
123. This disclosure requirement did not have an impact on our consolidated
results of operations or financial position. The FASB recently indicated
that they will issue a new accounting standard that will require
stock-based employee compensation to be recorded as a charge to earnings.
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. On October 9, 2003, the FASB released FASB Staff Position 46-6,
which deferred the effective date for the consolidation guidance of FIN 46
from July 1, 2003 to December 31, 2003 for variable interest entities
existing prior to February 1, 2003. Pursuant to the transition requirements
of FSP 46-6, the Company will adopt the consolidation guidance as of
December 31, 2003. As a result of the emerging interpretations of and
amendments to FIN 46, the Company is continuing to evaluate the impact of
FIN 46 and its related guidance. Their application, however, is not
expected to have an impact on, or result in additional disclosure in, the
Company's consolidated results of operations or financial position.
During 2003, SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150") was issued.
SFAS 150 establishes standards for classification and measurement of
certain 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
provisions of SFAS 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of July 1,
2003. On October 29, 2003, the FASB voted to indefinitely defer the
effective date of SFAS 150 for mandatorily redeemable instruments as they
relate to minority interests in consolidated finite-lived entities through
the issuance of FASB Staff Position 150-3. The standard was adopted
effective the third quarter of 2003, as modified by FSP 150-3, and did not
have a material impact on its consolidated results of operations or
financial position.
In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") was issued. SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". This statement is effective
for contracts entered into or modified after June 30, 2003. The adoption of
this statement did not have a material impact on the Company's consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
8. Derivative and Hedging Instruments
Hedges of Net Investments
On August 15, 2003, the Company repaid approximately $36.5 in the Yen
borrowings under its $375.0 Five-Year Revolving Credit Facility that had
been designated as a hedge of a net investment.
Forward Contracts
As of September 30, 2003, the Company had short-term contracts covering
approximately $7.5 of notional amount of currency. As of September 30,
2003, the fair value of the forward contracts was negligible.
Other
The Company has two embedded derivative instruments under the terms of the
4.5% Convertible Senior Notes due 2023 ("the 4.5% Notes") issued in March
2003. At September 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 OWW (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 revenue is not material to the Company as a whole. However, due to the
recording of long-lived asset impairment charges, operating difficulties
and resulting higher costs principally 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 and revised
projections for OWW, the Company no longer expects that margins of SEG will
converge with those of the rest of the Company and accordingly, reports SEG
as a separate reportable segment. Other than the impairment charges
discussed in Note 5 above and the commitments discussed under Note 13
below, the operating results of SEG are not material to those of the
Company, and therefore are not discussed in detail below. The Company is
currently evaluating the manner in which SEG and its component parts are
managed and reported.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
At September 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 nine months ended September 30 is shown in the
following table:
IPG
(Excl. Consolidated
SEG) SEG Total
--- --- -----
Three Months Ended September 30, 2003
Revenue $ 1,297.3 $ 121.6 $ 1,418.9
Operating income (loss) 74.6 (245.7) (171.1)
Depreciation and amortization of fixed assets 48.5 3.0 51.5
Capital expenditures $ 20.3 $ 1.8 $ 22.1
Three Months Ended September 30, 2002
Revenue $ 1,277.4 $ 109.4 $ 1,386.8
Operating income (loss) 78.8 (157.1) (78.3)
Depreciation and amortization of fixed assets 44.1 3.9 48.0
Capital expenditures $ 26.6 $ 12.2 $ 38.8
A reconciliation of information between reportable segments and the
Company's consolidated pre-tax earnings is shown in the following table:
Three Months Ended September 30, 2003 2002
---- ----
Total operating loss for reportable segments $ (171.1) $ (78.3)
Interest expense (43.5) (36.7)
Debt prepayment penalty (24.8) --
Interest income 9.5 5.9
Other income 1.2 2.7
Investment impairment (29.7) (4.9)
Litigation charges (127.6) --
-------- ---------
Loss before income taxes $ (386.0) $ (111.3)
======== =========
IPG
(Excl. Consolidated
SEG) SEG Total
---- --- -----
Nine Months Ended September 30, 2003
Revenue $3,925.3 $ 308.7 $4,234.0
Operating income (loss) 190.5 (288.9) (98.4)
Depreciation and amortization of fixed assets 129.1 9.3 138.4
Capital expenditures $ 75.2 $ 19.0 $ 94.2
Nine Months Ended September 30, 2002
Revenue $3,898.9 $ 297.3 $4,196.2
Operating income (loss) 415.1 (158.7) 256.4
Depreciation and amortization of fixed assets 128.2 11.9 140.1
Capital expenditures $ 84.6 $ 32.0 $ 116.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
A reconciliation of information between reportable segments and the
Company's consolidated pre-tax earnings is shown in the following table:
Nine Months Ended September 30, 2003 2002
---- ----
Total operating income (loss) for reportable segments $ (98.4) $ 256.4
Interest expense (128.4) (108.9)
Debt prepayment penalty (24.8) --
Interest income 27.6 20.9
Other income 1.3 9.6
Investment impairment (42.2) (21.1)
Litigation charges (127.6) --
-------- ---------
Income (loss) before income taxes $ (392.5) $ 156.9
======== =========
10. Acquisitions, Dispositions and Deferred Payments
Acquisitions
During the first nine months of 2003, the Company completed two
acquisitions for $4.0 in cash. Additionally, the Company paid $45.2 in cash
and $4.6 in stock for additional ownership interests in companies in which
a previous investment had been made.
During the first nine months of 2002, the Company completed nine
acquisitions for $48.9 in cash and $1.1 in stock. Additionally, the Company
paid $30.6 in cash and $10.4 in stock for additional ownership interests in
companies in which a previous investment had been made.
Deferred Payments
During the first nine months of 2003, the Company paid $126.2 in cash and
$45.7 in stock as deferred payments on acquisitions that had closed in
prior years. During the first nine months of 2002, the Company paid $166.9
in cash and $56.7 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 September 30, 2003, the Company's estimated liability for earn-outs,
including less than majority-owned affiliates, is as follows:
2006 and
2003 2004 2005 thereafter Total
---- ---- ---- ---------- -----
Cash $35.9 $76.4 $43.7 $23.4 $179.4
Stock 6.6 13.1 18.9 8.3 46.9
----- ----- ----- ----- ------
TOTAL $42.5 $89.5 $62.6 $31.7 $226.3
===== ===== ===== ===== ======
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
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
The total estimated amount of potential payments under put options is
$142.9, of which $6.5 is payable in stock. Exercise of the put options
would require cash payments to be made as follows:
2003 $17.4
2004 $30.7
2005 $39.7
2006 and thereafter $48.6
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 $99.2, of
which $2.4 is payable in stock. Exercise of the call options would require
cash payments to be made as follows:
2003 $13.8
2004 $ 6.5
2005 $12.6
2006 and thereafter $63.9
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.
Other Payments
During the first nine months of 2003, the Company paid $19.1 in cash and
$0.1 in stock to settle, principally, loan notes and guarantees that have
been previously recognized on the balance sheet. During the first nine
months of 2002, $11.6 in cash was paid for such items.
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 valued, for gain calculation purposes, at
approximately $29. (The approximate market value of the shares on November
10, 2003 was $42.8). 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 $2.45 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 September 30,
2003 2002
---- ----
Pre-tax income from discontinued operations $ -- $11.8
Tax expense -- 5.0
------ -----
Income from discontinued operations $ -- $ 6.8
====== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30,
2003 2002
---- ----
Pre-tax income from discontinued operations $20.4 $35.3
Tax expense 8.3 14.4
----- -----
Income from discontinued operations $12.1 $20.9
===== =====
The results of operations of NFO for the ten days ended July 10, 2003 were
not material and, accordingly, the Company accounted for the disposition as
of June 30, 2003.
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 September 30, 2003, $151.4 was utilized
under the New 364-Day Revolving Credit Facility for the issuance of letters
of credit and there were no borrowings 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 175 basis points 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 170 basis points 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
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
As of September 29, 2003, these additions to the definition of EBITDA were
replaced with the following items: (i) up to $161.4 of non-cash,
non-recurring charges taken in the fiscal year ended December 31, 2002;
(ii) up to $275.0 of non-recurring restructuring charges (up to $240.0 of
which may be cash charges) taken in the fiscal quarters ended March 31,
2003, June 30, 2003, September 30, 2003, December 31, 2003 and March 31,
2004; (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; (iv) all impairment charges taken with respect to
capital expenditures made on or after January 1, 2003 with respect to the
Company's Motorsports business; (v) up to $300.0 of non-cash, non-recurring
goodwill or investment impairment charges taken in the fiscal periods
ending September 30, 2003, December 31, 2003, March 31, 2004, June 30, 2004
and September 30, 2004; (vi) up to $135.0 in payments made by the Company
(up to $40.0 of which may be in cash) with respect to the fiscal periods
ending September 30, 2003, December 31, 2003 and March 31, 2004, relating
to the settlement of certain litigation matters; (vii) $24.8 in respect of
the early repayment by the Company of all amounts outstanding under each of
its five Note Purchase Agreements with The Prudential Insurance Company of
America dated as of May 26, 1994, April 28, 1995, October 31, 1996, August
19, 1997 and January 21, 1999, respectively, with respect to the fiscal
quarter ending September 30, 2003; and (viii) non-cash charges related to
the adoption by the Company of the fair value based method of accounting
for stock-based employee compensation in accordance with Statement of
Financial Accounting Standards No. 123 and Statement of Financial
Accounting Standards No. 148. In determining the Company's compliance with
the financial covenants as of September 30, 2003, the following charges
were added back to the definition of EBITDA: (i) $137.0 of restructuring
charges ($122.1 of which were cash charges), (ii) $9.4 of non-cash charges
with respect to the impairment of the remaining book value of the Company's
Motorsports business, (iii) $250.7 of goodwill or investment impairment
charges and (iv) $115.0 of charges (primarily non-cash) relating to certain
litigation matters. Since these charges and payments were added back to the
definition of EBITDA, they do not affect the ability of the Company to
comply with its financial covenants. Any charges incurred by the Company as
a result of its restructuring program during periods after March 31, 2004
will not be added back to EBITDA in determining whether the Company is in
compliance with its financial covenants.
The definition of EBITDA has also been separately amended to give the
Company flexibility to settle its commitments under certain leasing and
motorsports event contractual arrangements.
The Company paid a fee of 10 basis points on the total commitments under
each of the Revolving Credit Facilities in consideration for these
amendments to the definition of EBITDA. As of September 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 Company currently expects to be in compliance with both its applicable
financial and other covenants in the Revolving Credit Facilities without
having to obtain any additional waivers or amendments, except such
non-financial covenants as may be necessary in connection with possible
capital markets transactions if the Company should choose to enter into
such transactions.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Uncommitted Facilities
At September 30, 2003 the Company also had $731.7 of uncommitted lines of
credit, 65.1% of which were provided by banks that participate in the
Revolving Credit Agreements. At September 30, 2003, approximately $83.5 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 were repayable on May 2004, April 2005, October 2006, August
2007 and January 2009, respectively, and had interest rates of 10.01%,
9.95%, 9.41%, 9.09% and 8.05%, respectively.
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 resulted in a net charge of approximately $24.8.
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.
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 is using 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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
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 2003.
The Company believes that cash flow from operations and 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.
During the third quarter of 2003, the Company filed a universal shelf
registration in the amount of $1,800. The Company intends to act
opportunistically in accessing the capital markets as the need for
additional funding arises.
12. Income Taxes
The Company's effective income tax rate for the nine months ended September
30, 2003 was negatively impacted by the restructuring charges, long-lived
asset impairment charges and non-deductible investment impairment charges
relating to unconsolidated affiliates, as well as the establishment of
valuation allowances on certain deferred tax assets. In addition, the
increased tax rate in 2003 reflects losses incurred in non-US jurisdictions
with tax benefits at rates lower than the US statutory rates. All of these
factors contributed to the Company's recording a tax provision of $36.3 on
a pre-tax loss of $392.5 for the nine months ended September 30, 2003.
As required by SFAS 109 "Accounting for Income Taxes", the Company
evaluates the adequacy of its valuation allowances relating to deferred tax
assets. The Company's cumulative loss in the most recent three year period,
inclusive of the significant loss for the quarter ended September 30, 2003,
represents sufficient negative evidence to require a valuation allowance
with respect to certain of its deferred tax assets. As a result, the
Company determined that certain of its deferred tax assets required the
establishment of a valuation allowance. The deferred tax assets for which
an allowance was established relate primarily to foreign loss
carryforwards. As a result of the evaluation, a charge of $48.7 was
recorded in the third quarter of 2003 to increase the Company's valuation
allowance. The total valuation allowance as of September 30, 2003 was
$118.0.
The valuation allowance that has been established will be maintained until
there is sufficient positive evidence to conclude that it is "more likely
than not" that such assets will be realized.
13. Commitments and Contingencies
Legal Matters
Federal Securities Class Action
Thirteen federal securities purported class actions were filed against
Interpublic 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
on November 8, 2002. A consolidated amended complaint was filed thereafter
on January 10, 2003. The purported class 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 of 1934 and Rule 10b-5 promulgated thereunder. The
consolidated amended complaint also alleges violations of Sections 11 and
15 of the Securities Act of 1933, as amended (the "Securities Act") 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, in part, 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. On November 6, 2003, the Court granted
plaintiffs' motion to certify a class consisting of persons who purchased
Interpublic stock between October 28, 1997 and October 16, 2002 and a class
consisting of persons who acquired shares of Interpublic stock in exchange
for shares of True North stock.
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. On September 10, 2003, the Illinois
state court stayed these actions and on September 24, 2003, plaintiffs
filed a notice that they will appeal the stay.
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 Amended Consolidated Complaint. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
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. On July 11, 2003, plaintiffs filed a Second Amended
Derivative Complaint, asserting the same claims. The complaint does not
state a specific amount of damages. On August 12, 2003, defendants moved to
dismiss this action.
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. The Company is presently attempting to settle the litigations
described above. The Company cannot give any assurances that any attempts
will result in a settlement agreement, that any such agreement will receive
the approval of the court or as to the amount or type of consideration that
the Company might agree to pay in connection with any settlement.
Litigation Charges
During the three months ended September 30, 2003, the Company has recorded
litigation charges of $127.6 for various legal matters, including
principally the matters discussed above. The principal amount of the charge
relates to the Company's current estimate of amounts that may be payable,
which the Company currently believes would be paid primarily in Interpublic
common stock.
Other Legal Matters
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.
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. The Company filed a Protest with the IRS Appeals
Office on July 21, 2003. 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 Contingencies
The Company continues to have commitments under certain leasing and
motorsports event contractual arrangements. As of September 30, 2003, the
Company is committed to remaining payments under these arrangements of
approximately $460. This amount relates to undiscounted payments through
2015 principally under an executory contract and an operating lease and
assumes payments over the maximum remaining term of the relevant
agreements. This obligation has not been reduced by any future operating
results to be generated from
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
the arrangements. The Company is continuing to explore various options with
respect to these commitments, at least one of which may involve a cash
payment. The Company has obtained amendments of certain definitions
contained in its Revolving Credit Agreements (as discussed in Note 11) to
give it flexibility to settle these commitments. Additionally, the book
value of long-lived assets relating to Motorsports is approximately $60 at
September 30, 2003 and this amount may not be fully recoverable depending
upon the exit strategy ultimately followed.
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
When comparing performance between years, The Interpublic Group of Companies,
Inc. ("Interpublic") or ("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 a 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 impact of foreign currency is the difference between prior year results
converted to US Dollars at prior year exchange rates and prior year results
converted to US Dollars at current year exchange rates (constant currency). The
impact of acquisitions and dispositions relates to the results of acquisitions
and dispositions that occurred since January 1st of the prior year. Organic
revenue is calculated as revenue in constant currency eliminating acquisitions
and dispositions.
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 9 to the consolidated financial statements, the Company is
comprised of two reportable segments: the Interpublic Sports and Entertainment
Group ("SEG") and Interpublic 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 Worldwide ("OWW"), for
the Company's sports marketing business, Motorsports, for the Company's
motorsports business, and Jack Morton Worldwide, for specialized marketing
services including corporate events, meeting and training/learning.
SEG revenue is not material to the Company as a whole. However, due to the
recording of long-lived asset impairment charges, operating difficulties and
resulting higher costs principally 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 and revised projections for OWW, the
Company no longer expects that margins of SEG will converge with those of the
rest of the Company and, accordingly, reports SEG as a separate reportable
segment. Other than the impairment charges which are discussed below and the
commitments discussed in "Other Matters", the operating results of SEG are not
material to those of the Company, and therefore are not discussed in detail
below.
Discontinued Operations
As discussed in Note 10 to the consolidated financial statements, 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 flow for all periods presented in this document.
Continuing Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
The Company reported a net loss of $327.1, or $0.85 diluted loss per share,
which is comprised of a $1.08 loss per share from continuing operations and
$0.23 earnings per share from discontinued operations for the three months ended
September 30, 2003. This compares to a net loss of $89.6, or $0.24 diluted loss
per share, comprised of $0.26 loss per share from continuing operations and
$0.02 earnings per share from discontinued operations for the three months ended
September 30, 2002. Net loss in the third quarter of 2003 includes a pre-tax
restructuring charge of $48.0, a pre-tax long-lived asset impairment charge of
$222.7 primarily related to the write-down of goodwill at OWW, pre-tax
investment impairment charge of $29.7 related to unconsolidated affiliates, an
accrual for estimated litigation settlement charges of $127.6 primarily in
connection with the shareholder suits related to the restatement of earnings for
prior years, a debt prepayment penalty of $24.8 incurred in retiring the
Company's term loans and a
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)
$48.7 increase to the valuation allowance for deferred income tax assets. Net
earnings in the third quarter of 2002 include a pre-tax restructuring charge of
$12.1, a pre-tax impairment charge of $118.7 related to the long-lived assets of
the Company's Motorsports business and a pre-tax investment impairment charge of
$4.9.
The following summarizes certain financial information for purposes of
management's discussion and analysis:
Three Months Ended September 30,
2003 2002
----------------------------------- -----------------------------------
IPG IPG
(Excl. Total (Excl. Total
SEG) SEG IPG SEG) SEG IPG
------ ----- ------- ------ ----- -------
Revenue $1,297.3 $ 121.6 $1,418.9 $1,277.4 $ 109.4 $1,386.8
Salaries and related expenses 762.2 48.7 810.9 764.0 49.2 813.2
Office and general expenses 412.3 94.3 506.6 422.6 96.4 519.0
Amortization of intangible assets 1.7 0.1 1.8 1.3 0.8 2.1
Restructuring charges 46.5 1.5 48.0 10.7 1.4 12.1
Long-lived asset impairment -- 222.7 222.7 - 118.7 118.7
-------- ------- -------- -------- ------- -------
Operating income (loss) $ 74.6 $(245.7) $ (171.1) $ 78.8 $(157.1) $ (78.3)
======== ======= ======== ======== ======= =======
Some of the key factors driving the financial results in the third quarter of
2003 were:
- Higher exchange rates for the third quarter of 2003, primarily the Euro
and Sterling, reflected higher U.S. dollar revenue and expenses in
comparison to the third quarter of 2002;
- While there are signs of economic improvement, there is still softness
in demand for the Company's advertising and marketing communications
services by current clients, particularly in public relations and other
project-based businesses in international markets;
- Restructuring charges of $48.0 were recorded in the third quarter. In
connection with the Company's restructuring program, a charge of $9.1
was also recorded in office and general expenses related to the
amortization of leasehold improvements on properties to be vacated as
part of the 2003 restructuring program. The Company expects that the
total cost of its restructuring initiatives underway will not exceed
$250.0 and will be completed during the first six months of 2004;
- A long-lived asset impairment charge of $221.0 was recorded related to
the goodwill of OWW, the Company's sports marketing business.
- An investment impairment charge of $29.7 was recorded in the third
quarter related to unconsolidated, principally international,
affiliates.
- A charge of $127.6 anticipated to be funded principally with
Interpublic stock, was recorded primarily related to various legal
matters including the shareholder suits.
- A debt prepayment penalty of $24.8 was recorded as a result of retiring
all of the Company's outstanding borrowings under the Prudential
Agreements.
- A charge of $48.7 was recorded in the third quarter to increase the
Company's valuation allowance for deferred income tax assets primarily
relating to foreign loss carryforwards.
A pre-tax gain on the sale of NFO of $99.1 ($89.1 after tax) was
recorded to reflect the closing of the sale in the third quarter.
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)
REVENUE
The Company is a worldwide global marketing services company, providing clients
with communications expertise in three 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, and c) 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 September 30, 2003 was $1,418.9, an
increase of $32.1 or 2.3% from the three months ended September 30, 2002.
Domestic revenue, which represented 56% of revenue in the three months ended
September 30, 2003, decreased $7.3 or 0.9% from the same period in 2002.
International revenue, which represented 44% of revenue in the three months
ended September 30, 2003, increased $39.4 or 6.8% from the same period in 2002.
International revenue would have decreased 4.2% excluding the effects of changes
in foreign currency of $66.4. The increase in worldwide revenue was primarily a
result of the effects of higher exchange rates offset by continued softness in
the demand for advertising and marketing services by current clients due to the
weak economy primarily in international markets. The components of the total
revenue change of 2.3% were: impact of foreign currency changes 4.7%, net
acquisitions/divestitures (0.7)%, and organic revenue decline (1.7)%. Organic
changes in revenue reflect increases or decreases in net new business activity
and increases or decreases in activity from existing client accounts.
OPERATING EXPENSES
Salaries and Related Expenses
The Company's expenses related to employee compensation and various employee
incentive and benefit programs amount to approximately 57% of revenue for the
three months ended September 30, 2003. Salaries and related expenses for the
three months ended September 30, 2003 decreased $2.3 or 0.3% to $810.9 compared
to the three months ended September 30, 2002. The decrease was primarily due to
the effect of higher exchange rates for the third quarter of 2003, primarily the
Euro and Sterling, in comparison to the third quarter of 2002, partially offset
by a reduction in severance expense and salary expense resulting from previous
headcount reductions and the Company's restructuring program. The Company's
headcount was reduced to 43,500 at September 30, 2003 compared with 46,900 at
December 31, 2002 and 47,500 at September 30, 2002. The components of the total
change of (0.3)% were: impact of foreign currency changes 4.5%, net
acquisitions/divestitures (0.2)% and decreases in salaries and related expenses
from existing operations (4.6)%.
Office and General Expenses
Office and general expenses were $506.6 in the three months ended in September
30, 2003 and $519.0 in the three months ended September 30, 2002, a decrease of
$12.4 or 2.4 %. The decrease in office and general expenses was primarily due to
reduction in occupancy and overhead costs as a result of the restructuring
program partially offset by the effects of higher exchange rates and higher bad
debt expense. The components of the total change of (2.4)% were: impact of
foreign currency changes 5.5%, net acquisitions/divestitures (1.8)% and
decreases in office and general expenses from existing operations (6.1)%.
Amortization of Intangible Assets
Amortization of intangible assets was $1.8 in the three months ended September
30, 2003 compared with $2.1 in the three months ended September 30, 2002. The
decrease relates primarily to the write-off of intangible assets in the third
quarter of 2002 at the Company's Motorsports business.
Restructuring Charges
See "Restructuring Charges" below.
Long-Lived Asset Impairment
See "Long-Lived Asset Impairment" below.
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)
OTHER INCOME (EXPENSE)
Interest Expense
Interest expense was $43.5 in the third quarter of 2003 compared with $36.7 in
the third quarter of 2002. The increase was a result of the issuance of $800
4.5% Convertible Notes on March 13, 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.
Debt Prepayment Penalty
During the third quarter of 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 of $24.8 was recorded.
Interest Income
Interest income was $9.5 for the three months ended September 30, 2003 compared
with $5.9 in the same period of 2002. The increase in 2003 is primarily due to
the higher cash balances resulting from the proceeds of the sale of NFO.
Other Income
Other income 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 was $1.2 for the three
months ended September 30, 2003 compared with income of $2.7 for the three
months ended September 30, 2002. The gain in the third quarter of 2003 reflects
the sale of an advertising business in South America. Included in the third
quarter of 2002 was a gain on the sale of an unconsolidated affiliate in the US.
Investment Impairment
During the third quarter of 2003, the Company recorded investment impairment
charges of $29.7 relating primarily to international investments that had been
determined to have incurred an "other than temporary" impairment.
During the third quarter of 2002, the Company recorded investment impairment
charges of $4.9, primarily relating to marketable securities and certain venture
funds that had been determined to have incurred an "other than temporary"
impairment.
Litigation Charges
During the three months ended September 30, 2003, the Company has recorded
litigation charges of $127.6 for various legal matters, including principally
the matters discussed in Note 13 to the consolidated financial statements. The
principal amount of the charge relates to the Company's current estimate of
amounts that may be payable, which the Company currently believes would be paid
primarily in Interpublic common stock.
OTHER ITEMS
Effective Income Tax Rate
The Company's effective income tax rate for the third quarter of 2003 was
negatively impacted by the restructuring charges, long-lived asset impairment
charges and non-deductible investment impairment charges relating to
unconsolidated affiliates, as well as the establishment of valuation allowances
on certain deferred tax assets. In addition, the increased tax rate in 2003
reflects losses incurred in non-US jurisdictions with tax benefits at rates
lower than the US statutory rates. All of these factors contributed to the
Company's recording of a tax provision of $19.5 on a pre-tax loss of $386.0 in
the third quarter.
Valuation Allowance
As required by SFAS 109 "Accounting for Income Taxes", the Company evaluates the
adequacy of its valuation allowances relating to deferred tax assets. The
Company's cumulative loss in the most recent three year period, inclusive of the
significant loss for the quarter ended September 30, 2003, represents sufficient
negative evidence to require a valuation allowance with respect to certain of
its deferred tax assets. As a result, the Company determined that certain of its
deferred tax assets required the establishment of a valuation allowance. The
deferred tax assets for which an allowance was established relate primarily to
foreign loss carryforwards. As a result of the evaluation, a charge of $48.7 was
recorded in the third quarter of 2003 to increase the Company's valuation
allowance. The total valuation allowance as of September 30, 2003 was $118.0.
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)
The valuation allowance that has been established will be maintained until there
is sufficient positive evidence to conclude that it is "more likely than not"
that such assets will be realized.
Minority Interest
Income applicable to minority interests was $10.4 in the third quarter of 2003
compared to $7.9 in the third quarter of 2002. The increase in the third quarter
of 2003 was primarily due to higher operating results of certain operations in
Asia Pacific and an increase in minority interest recorded in certain operations
in the U.S.
Unconsolidated Affiliates
Equity in net income of unconsolidated affiliates, virtually unchanged, was a
loss of $0.3 in the third quarter of 2003 compared to a loss of $0.2 in the
third quarter of 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
The Company reported a net loss of $349.2, or $0.91 diluted loss per share which
is comprised of a $1.17 loss per share from continuing operations and $0.26
earnings per share from discontinued operations for the nine months ended
September 30, 2003. This compares to net earnings of $79.2, or $0.21 diluted
earnings per share, which is comprised of $0.15 earnings per share from
continuing operations and $0.05 earnings per share from discontinued operations
for the nine months ended September 30, 2002. Net loss in the nine months ended
September 30, 2003 includes a pre-tax restructuring charge of $142.4, a pre-tax
long-lived asset impairment charge of $244.8 related to the fixed assets of the
Company's Motorsports business and write-down of goodwill at OWW, a pre-tax
investment impairment charge of $42.2 related to unconsolidated affiliates,
primarily international, an accrual for estimated litigation settlement charges
of $127.6 primarily in connection with the shareholder suits related to the
restatement of earnings for prior years and a debt prepayment penalty of $24.8
incurred in retiring the Company's term loans. Net earnings in the first nine
months of 2002 includes a pre-tax restructuring charge of $12.1, a pre-tax
impairment charge of $118.7 related to the long-lived assets of the Company's
Motorsports business and a pre-tax investment impairment charge of $21.1
primarily related to OWW.
The following summarizes certain financial information for purposes of
management's discussion and analysis:
Nine Months Ended September 30,
2003 2002
----------------------------------- -----------------------------------
IPG IPG
(Excl. Total (Excl. Total
SEG) SEG IPG SEG) SEG IPG
------ ----- ------- ------ ----- -------
Revenue $3,925.3 $ 308.7 $4,234.0 $3,898.9 $297.3 $4,196.2
Salaries and related expenses 2,398.4 145.6 2,544.0 2,332.5 141.6 2,474.1
Office and general expenses 1,187.9 204.2 1,392.1 1,140.9 187.5 1,328.4
Amortization of intangible assets 7.9 1.2 9.1 4.0 2.5 6.5
Restructuring charges 140.6 1.8 142.4 6.4 5.7 12.1
Long-lived asset impairment -- 244.8 244.8 - 118.7 118.7
-------- ------- -------- -------- ------- --------
Operating income (loss) $ 190.5 $(288.9) $ (98.4) $ 415.1 $(158.7) $ 256.4
======== ======= ======== ======== ======= ========
REVENUE
Worldwide revenue for the nine months ended September 30, 2003 was $4,234.0, an
increase of $37.8 or 0.9% from the nine months ended September 30, 2002.
Domestic revenue, which represented 57% of revenue in the nine months ended
September 30, 2003, increased $1.1 or 0.0% from the same period in 2002.
International revenue, which represented 43% of revenue in the nine months ended
September 30, 2003, increased $36.7 or 2.1% from the same period in 2002.
International revenue would have decreased 7.7% excluding the effects of changes
in foreign currency. The increase in worldwide revenue was primarily a result of
the effects of higher exchange rates offset by continued softness in the demand
for advertising and marketing services by current clients due to the weak
economy, particularly in international markets. The components of the total
revenue change of 0.9% were: impact of foreign currency changes 4.3%, net
acquisitions/divestitures (0.2)%, and organic revenue decline (3.2)%. Organic
changes in revenue reflect 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 60% of revenue for the
first nine months ended September 30, 2003. Salaries and related expenses for
the nine months ended September 2003 increased $69.9 or 2.8% to $2,544.0
compared to the nine months ended September 30, 2002. The increase was primarily
due to the effect of higher exchange rates partially offset by a reduction in
salary expense resulting from previous headcount reductions and the
restructuring program. The Company's headcount was reduced to 43,500 at
September 30, 2003 compared with 46,900 at December 31, 2002 and 47,500 at
September 30, 2002. The components of the total change of 2.8% were: impact of
foreign currency changes 4.3%, net acquisitions/divestitures 0.0% and decreases
in salaries and related expenses from existing operations (1.5)%.
Office and General Expenses
Office and general expenses were $1,392.1 in the nine months ended September 30,
2003 and $1,328.4 in the nine months ended September 30, 2002, an increase of
$63.7 or 4.8%. 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 and debt financing costs partially offset
by a reduction in occupancy and overhead costs as a result of the restructuring
program. The components of the total change of 4.8% were: impact of foreign
currency changes 5.3%, net acquisitions/divestitures (1.0)% and increases in
office and general expenses from existing operations 0.5%.
Amortization of Intangible Assets
Amortization of intangible assets was $9.1 in the nine months ended September
30, 2003 compared with $6.5 in the first nine months of 2002. The increase was
primarily due to the amortization of higher identifiable intangible assets
resulting from the adoption of SFAS 141 and 142.
Restructuring Charges
See "Restructuring Charges" below.
Long-Lived Asset Impairment
See "Long-Lived Asset Impairment" below.
OTHER INCOME (EXPENSE)
Interest Expense
Interest expense was $128.4 in the first nine months of 2003 compared with
$108.9 in the first nine months of 2002. The increase was a result of the
issuance of $800 4.5% Notes on March 13, 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.
Debt Prepayment Penalty
During the third quarter of 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 of $24.8 was recorded.
Interest Income
Interest income was $27.6 for the nine months of 2003 compared with $20.9 in the
same period of 2002. The increase in 2003 is primarily due to the higher cash
balances resulting from the issuance of the 4.5% Notes in early April, in
addition to the proceeds from the sale of NFO in July.
Other Income
Other income primarily consists of investment income, gains (losses) from the
sale of businesses and gains (losses) from the sale of investments, primarily
marketable securities classified as available-for-sale. Other income was $1.3
for the first nine months of 2003 compared with income of $9.6 for the first
nine months of 2002. Included in the first nine months of 2002 was a gain on the
sale of an advertising business and an unconsolidated affiliate in the US.
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 nine months ended September 30, 2003, the Company recorded investment
impairment charges of $42.2 primarily relating to certain international
investments in unconsolidated affiliates that had been determined to have
incurred an "other than temporary" impairment.
During the nine months ended September 30, 2002, the Company recorded investment
impairment charges of $21.1, primarily relating to certain investments of OWW
that had been determined to have incurred an "other than temporary" impairment.
Litigation Charges
During the nine months ended September 30, 2003, the Company has recorded
litigation charges of $127.6 for various legal matters, including principally
the matters discussed in Note 13. The principal amount of the charge relates to
the Company's current estimate of amounts that may be payable, which the Company
currently believes would be paid primarily in Interpublic common stock.
OTHER ITEMS
Effective Income Tax Rate
The Company's effective income tax rate for the nine months ended September 30,
2003 was negatively impacted by the restructuring charges, long-lived asset
impairment charges and non-deductible investment impairment charges relating to
unconsolidated affiliates, as well as the establishment of valuation allowances
on certain deferred tax assets in the third quarter of 2003. In addition, the
increased tax rate in 2003 reflects losses incurred in non-US jurisdictions with
tax benefits at rates lower than the US statutory rates. All of these factors
contributed to the Company's recording of a tax provision of $36.3 on a pre-tax
loss of $392.5 for the nine months ended September 30, 2003.
Valuation allowance
See "Valuation Allowance" in discussion of the three months ended September 30,
2003, above.
Minority Interest
Income applicable to minority interests was $19.4 in the first nine months of
2003 compared to $22.1 in the first nine months of 2002. The reduction in the
first nine months of 2003 was primarily due to lower operating results of
certain operations in Europe partially offset by an increase in minority
interest recorded in certain operations in the US.
Unconsolidated Affiliates
Equity in net income (loss) of unconsolidated affiliates was a loss of $(2.2) in
the first nine months of 2003 compared to income of $3.1 in the first nine
months of 2002. The reduction is primarily due to the reduced earnings of
unconsolidated affiliates in Europe and Brazil.
Restructuring Charges
During the three and nine months ended September 30, 2003, the Company recorded
restructuring charges of $48.0 and $142.4, respectively, in connection with the
2003 and 2001 restructuring programs as discussed below. During the three months
ended September 30, 2002, the Company recorded restructuring charges of $12.1 in
connection with the 2001 restructuring program.
The Company expects that the restructuring charges recorded to date will result
in cash payments of $136.2 to be paid in 2003 ($101.1), 2004 ($22.4) and 2005
and thereafter ($12.7). Further actions in the 2003 restructuring program will
be undertaken in the fourth quarter of 2003 and the first half of 2004.
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,
through the first half of 2004, is up to approximately $250.0.
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)
During the nine months ended September 30, 2003, the Company recorded pre-tax
restructuring charges of $142.4 ($95.4 after tax). The pre-tax restructuring
charge was composed of severance costs of $103.4 and lease terminations costs of
$39.0. Included in the $39.0 of lease termination costs was $4.8 related to the
write-off of leasehold improvements on vacated properties and $12.4 related to
additional losses on properties vacated as part of the 2001 restructuring
program. See below for further discussion 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. In addition,
a charge of $9.1 has been incurred in the three months ended September 30, 2003
related to acceleration of amortization of leasehold improvements on premises
which are to be vacated in the future. The charge related to such amortization
is included in office and general expenses in the accompanying consolidated
statement of operations.
A summary of the remaining liability for restructuring charges related to the
2003 restructuring plan is as follows:
Ending
Second Third Balance at
Quarter Quarter Non-cash 2003 Cash September
Charges Charges Charges Payments 30, 2003
------- ------- ------- -------- --------
TOTAL BY TYPE
Severance and termination costs $66.0 $ 37.4 $1.4 $54.5 $47.5
Lease terminations and other exit costs 16.0 10.6 4.8 2.4 19.4
----- ------ ---- ----- -----
Total $82.0 $ 48.0 $6.2 $56.9 $66.9
===== ====== ==== ===== =====
The severance and termination costs recorded to date relate to a reduction in
workforce of approximately 2,200 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.
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 35
locations are to be vacated with substantially all actions to be completed by
March 31, 2004; 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 and other merger related
costs related to the 2001 restructuring plan is as follows:
Cash paid
Liability at through Liability at
December 2003 September September
31, 2002 Charge 30, 2003 30, 2003
-------- ------ -------- --------
TOTAL BY TYPE
Severance and termination costs $ 15.9 $ -- $12.0 $ 3.9
Lease terminations and other exit costs 94.6 12.4 24.9 82.1
------ ----- ----- -----
Total $110.5 $12.4 $36.9 $86.0
====== ===== ===== =====
LONG-LIVED ASSET IMPAIRMENT
During the three and nine months ended September 30, 2003, the Company recorded
charges of $222.7 and $244.8, respectively, related to the impairment of
long-lived assets at OWW and its Motorsports businesses. These amounts include
$1.7 and $14.4, respectively, of current capital expenditure outlays that the
Company is contractually required to spend to upgrade and maintain certain of
its existing Motorsports racing facilities, as well as an impairment of assets
at other Motorsports entities.
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)
During the third quarter of 2003, the Company performed its annual impairment
review for goodwill and other intangible assets and recorded a non-cash charge
of $221.0, which is reflected as a component of "Long-lived asset impairment" in
the accompanying consolidated statement of operations. The charge was required
to reduce the carrying value of goodwill at the Company's OWW reporting unit.
OWW is separate from Motorsports and offers a variety of sports marketing
services including athlete representation, TV rights distribution and other
marketing and consulting services.
The OWW charges reflect the reporting unit's lower than expected performance in
2003 and revised future projections indicating that the factors behind the poor
2003 performance are likely to persist. Specifically, during 2003 it became
apparent that there was significant pricing pressure in both overseas domestic
TV rights distribution. Further, declining athlete pay scales are expected to
result in significantly lower fees from athlete representation, and proceeds
from events (including ticket revenue and sponsorship) to which the Company is
committed will be lower than amounts that had been anticipated when the event
rights were acquired. Various factors, including the operating loss incurred at
OWW in 2003, have indicated that lower revised growth projections are required,
reflecting lower projected gross margins than OWW has earned historically.
In 2002, the Motorsports businesses experienced significant operational
difficulties, including significantly lower than anticipated attendance at the
marquee British Grand Prix race in July 2002. These events and a change in
management at Motorsports in the third quarter of 2002 led the Company to begin
assessing its long-term strategy for Motorsports. Based on valuations of the
Motorsports businesses, the Company determined that the goodwill and the book
value of certain asset groupings at Motorsports were significantly higher than
their expected future cash flows and that an impairment had occurred.
Accordingly, the Company recognized a non-cash impairment loss and related
charge of $118.7 ($83.8, net of tax) as of September 30, 2002. The charges
included $82.1 of goodwill impairment, $24.6 of fixed asset write-offs, and
$12.0 to record the fair value of an associated put option.
DERIVATIVE AND HEDGING INSTRUMENTS
Hedges of Net Investments
On August 15, 2003, the Company repaid approximately $36.5 in the Yen borrowings
under its $375.0 Five-Year Revolving Credit Facility that had been designated as
a hedge of a net investment.
Forward Contracts
As of September 30, 2003, the Company had short-term contracts covering
approximately $7.5 of notional amount of currency. As of September 30, 2003, the
fair value of the forward contracts was negligible.
Other
The Company has two embedded derivative instruments under the terms of the 4.5%
Convertible Senior Notes due 2023 ("the 4.5% Notes") issued in March 2003. At
September 30, 2003, the fair value of these derivatives was negligible.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, cash and cash equivalents were $695.5, a decrease of
$237.5 from the December 31, 2002 balance of $933.0. 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.
During the third quarter of 2003, the Company filed a universal shelf
registration in the amount of $1,800. The Company intends to act
opportunistically in accessing the capital markets as the need for additional
funding arises.
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 Activities
Net cash used in operating activities was $138.1 for the nine months ended
September 30, 2003 and net cash provided by operations was $241.1 for the nine
months ended September 30, 2002, respectively. The increase in cash used for the
first nine months of 2003 was primarily attributable to the lower earnings level
in 2003 resulting from continued softness in client demand for advertising and
marketing communication services and the Company's restructuring program.
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 the terms of its Revolving
Credit Facilities. See "Financing Activities" for further discussion.
During the first nine months of 2003 and 2002, the Company paid $194.0 and
$252.2, 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 payments in 2003 reflects the Company's reduced level of
acquisition activity.
The Company's capital expenditures in the first nine months of 2003 were $94.2
compared to $116.6 in the first nine 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 the terms of its Revolving Credit Facilities. The Company's
permitted level of annual capital expenditures is $175.0. See "Financing
Activities" for further discussion.
Financing Activities
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 September 30, 2003, $151.4 was utilized under the New
364-Day Revolving Credit Facility for the issuance of letters of credit and
there were no borrowings 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 175 basis points 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 170 basis points to these
rates.
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 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 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 September 29, 2003, these additions to the definition of EBITDA were
replaced with the following items: (i) up to $161.4 of non-cash, non-recurring
charges taken in the fiscal year ended December 31, 2002; (ii) up to $275.0 of
non-recurring restructuring charges (up to $240.0 of which may be cash charges)
taken in the fiscal quarters ended March 31, 2003, June 30, 2003, September 30,
2003, December 31, 2003 and March 31, 2004; (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; (iv) all impairment charges taken
with respect to capital expenditures made on or after January 1, 2003 with
respect to the Company's Motorsports business; (v) up to $300.0 of non-cash,
non-recurring goodwill or investment impairment charges taken in the fiscal
periods ending September 30, 2003, December 31, 2003, March 31, 2004, June 30,
2004 and September 30, 2004; (vi) up to $135.0 in payments made by the Company
(up to $40.0 of which may be in cash) with respect to the fiscal periods ending
September 30, 2003, December 31, 2003 and March 31, 2004, relating to the
settlement of certain litigation matters; (vii) $24.8 in respect of the early
repayment by the Company of all amounts outstanding under each of its five Note
Purchase Agreements with The Prudential Insurance Company of America dated as of
May 26, 1994, April 28, 1995, October 31, 1996, August 19, 1997 and January 21,
1999, respectively, with respect to the fiscal quarter ending September 30,
2003; and (viii) non-cash charges related to the adoption by the Company of the
fair value based method of accounting for stock-based employee compensation in
accordance with Statement of Financial Accounting Standards No. 123 and
Statement of Financial Accounting Standards No. 148. In determining the
Company's compliance with the financial covenants as of September 30, 2003, the
following charges were added back to the definition of EBITDA: (i) $137.0 of
restructuring charges ($122.1 of which were cash charges), (ii) $9.4 of non-cash
charges with respect to the impairment of the remaining book value of the
Company's Motorsports business, (iii) $250.7 of goodwill or investment
impairment charges and (iv) $115.0 of charges (primarily non-cash) relating to
certain litigation matters. Since these charges and payments were added back to
the definition of EBITDA, they do not affect the ability of the Company to
comply with its financial covenants. Any charges incurred by the Company as a
result of its restructuring program during periods after March 31, 2004 will not
be added back to EBITDA in determining whether the Company is in compliance with
its financial covenants.
The definition of EBITDA has been separately amended to give the Company
flexibility to settle its commitments under certain leasing and motorsports
event contractual arrangements.
The Company paid a fee of 10 basis points on the total commitments under each of
the Revolving Credit Facilities in consideration for these amendments to the
definition of EBITDA. As of September 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 Company currently expects to be in compliance with both its applicable
financial and other covenants in the Revolving Credit Facilities without having
to obtain any additional waivers or amendments, except such non-financial
covenants as may be necessary in connection with possible capital markets
transactions if the Company should choose to enter into such transactions.
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
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)
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.
Uncommitted Facilities
At September 30, 2003 the Company also had $731.7 of uncommitted lines of
credit, 65.1% of which were provided by banks that participate in the Revolving
Credit Agreements. At September 30, 2003, approximately $83.5 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 were repayable on May
2004, April 2005, October 2006, August 2007 and January 2009, respectively, and
had interest rates of 10.01%, 9.95%, 9.41%, 9.09% and 8.05%, respectively.
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 resulted in a net charge of approximately $24.8.
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.
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 is using 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.
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)
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 2003.
The Company believes that cash flow from operations and 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. If
additional funds are required to meet the Company's operating activities and to
execute on its long term business strategy the Company believes it will have
sufficient resources, including borrowing capacity and access to capital
markets. However, there can be no assurance such additional funding will be
available to the Company on terms it considers favorable, if at all.
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.
In October 2003, the Company received a federal tax refund of approximately $90
as a result of its carryback of its 2002 loss for US federal income tax
purposes, and certain capital losses, to earlier periods.
Acquisitions, Dispositions and Deferred Payments
Acquisitions
During the first nine months of 2003, the Company completed two acquisitions for
$4.0 in cash. Additionally, the Company paid $45.2 in cash and $4.6 in stock for
additional ownership interests in companies in which a previous investment had
been made.
During the first nine months of 2002, the Company completed nine acquisitions
for $48.9 in cash and $1.1 in stock. Additionally, the Company paid $30.6 in
cash and $10.4 in stock for additional ownership interests in companies in which
a previous investment had been made.
Deferred Payments
During the first nine months of 2003, the Company paid $126.2 in cash and $45.7
in stock as deferred payments on acquisitions that had closed in prior years.
During the first nine months of 2002, the Company paid $166.9 in cash and $56.7
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.
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)
As of September 30, 2003, the Company's estimated liability for earn-outs,
including less than majority-owned affiliates, is as follows:
2006 and
2003 2004 2005 thereafter Total
Cash $35.9 $76.4 $43.7 $23.4 $179.4
Stock 6.6 13.1 18.9 8.3 46.9
----- ----- ----- ----- ------
TOTAL $42.5 $89.5 $62.6 $31.7 $226.3
===== ===== ===== ===== ======
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 estimated amount of potential payments under put options is $142.9, of
which $6.5 is payable in stock. Exercise of the put options would require cash
payments to be made as follows:
2003 $17.4
2004 $30.7
2005 $39.7
2006 and thereafter $48.6
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 $99.2, of which $2.4 is
payable in stock. Exercise of the call options would require cash payments to be
made as follows:
2003 $13.8
2004 $ 6.5
2005 $12.6
2006 and thereafter $63.9
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.
Other Payments
During the first nine months of 2003, the Company paid $19.1 in cash and $0.1 in
stock to settle, principally, loan notes and guarantees that have been
previously recognized on the balance sheet. During the first nine months of
2002, $11.6 in cash was paid for such items.
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 valued, for gain calculation purposes, at approximately
$29. (The approximate market value of the shares on November 10, 2003 was $42.8.
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 $2.45
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 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 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.
OTHER MATTERS
New Accounting Standards
In December 2002, SFAS 148, "Accounting for Stock-Based Compensation ---
Transition and Disclosure (an Amendment of SFAS 123)" ("SFAS 148") was issued.
SFAS 148 provides alternative methods of transition for making a voluntary
change to fair value-based accounting for stock-based compensation. The Company
continues to account for its stock option plans under the intrinsic value
recognition and measurement principles of APB 25, "Accounting for Stock Issued
to Employees" and related interpretations. Effective for interim periods
beginning after December 15, 2002, SFAS 148 also requires disclosure of pro
forma results on a quarterly basis as if the Company had applied the fair value
recognition provisions of SFAS No. 123. This disclosure requirement did not have
an impact on our consolidated results of operations or financial position. The
FASB recently indicated that they will issue a new accounting standard that will
require stock-based employee compensation to be recorded as a charge to
earnings.
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. On October 9, 2003, the FASB
released FASB Staff Position 46-6, which deferred the effective date for the
consolidation guidance of FIN 46 from July 1, 2003 to December 31, 2003 for
variable interest entities existing prior to February 1, 2003. Pursuant to the
transition requirements of FSP 46-6, the Company will adopt the consolidation
guidance as of December 31, 2003. As a result of the emerging interpretations of
and amendments to FIN 46, the Company is continuing to evaluate the impact of
FIN 46 and its related guidance. Their application, however, is not expected to
have an impact on, or result in additional disclosure in, the Company's
consolidated results of operations or financial position.
During 2003, SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150") was issued. SFAS
150 establishes standards for classification and measurement of certain
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 provisions of SFAS 150 are
effective for instruments entered into or modified after May 31, 2003 and
pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted
to indefinitely defer the effective date of SFAS 150 for mandatorily redeemable
instruments as they relate to minority interests in consolidated finite-lived
entities through the issuance of FASB Staff Position 150-3. The standard was
adopted effective the third quarter of 2003, as modified by FSP 150-3, and did
not have a material impact on its consolidated results of operations or
financial position.
In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" ("SFAS 149") was issued. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities". This
statement is effective for contracts entered into or modified after June 30,
2003. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements.
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.
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)
Other Contingencies
The Company continues to have commitments under certain leasing and motorsports
event contractual arrangements. As of September 30, 2003, the Company is
committed to remaining payments under these arrangements of approximately $460.
This amount relates to undiscounted payments through 2015 principally under an
executory contract and an operating lease and assumes payments over the maximum
remaining term of the relevant agreements. This obligation has not been reduced
by any future operating results to be generated from the arrangements. The
Company is continuing to explore various options with respect to these
commitments, at least one of which may involve a cash payment. The Company has
obtained amendments of certain definitions contained in its Revolving Credit
Agreements (as discussed in Note 11) to give it flexibility to settle these
commitments. Additionally, the book value of long-lived assets relating to
Motorsports is approximately $60 at September 30, 2003 and this amount may not
be fully recoverable depending upon the exit strategy ultimately followed.
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 September 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 control
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 September 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 control
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 September 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