FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to___________.
Commission File Number: 1-10551
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Omnicom Group Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 177,446,000(as of October 31,
1999)
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets -
September 30, 1999, December 31, 1998 and
September 30, 1998 2
Consolidated Condensed Statements of Income -
Three Months and Nine Months
Ended September 30, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 5-12
Item 2. Management's Discussion of Financial Condition
And Results of Operations. 13-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 24
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets September 30, December 31, September 30,
------ 1999 1998 1998
--------- --------- ----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 296,015 $ 648,781 $ 313,234
Investments available-for-sale, at market, which approximates cost 41,142 68,610 34,271
Accounts receivable, less allowance for doubtful accounts
of $49,373, $58,240 and $43,777 2,999,311 2,688,649 2,423,787
Billable production orders in process, at cost 331,680 255,294 294,073
Prepaid expenses and other current assets 566,941 448,496 444,330
----------- ----------- -----------
Total Current Assets 4,235,089 4,109,830 3,509,695
Furniture, equipment and leasehold improvements at cost, less
accumulated depreciation and amortization of $506,419,
$444,670 and $416,577 390,334 375,649 346,695
Investments in affiliates 333,558 262,392 268,127
Intangibles, less amortization of $340,788, $284,663 and $279,198 2,214,221 2,071,724 1,971,616
Deferred tax benefits 76,057 104,875 90,941
Deferred charges and other assets 212,550 199,056 242,837
----------- ----------- -----------
$ 7,461,809 $ 7,123,526 $ 6,429,911
=========== =========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,055,543 $ 3,366,086 $ 2,497,319
Payable to banks and current portion of long-term debt 395,632 139,894 189,892
Other accrued liabilities 1,374,936 1,474,811 1,271,868
Accrued taxes on income 76,433 59,797 67,177
----------- ----------- -----------
Total Current Liabilities 4,902,544 5,040,588 4,026,256
Long term debt 705,231 268,913 619,603
Convertible subordinated debentures 448,488 448,497 448,500
Deferred compensation and other liabilities 248,201 229,239 256,542
Minority interests 97,055 90,778 77,350
Shareholders' equity:
Common stock 93,544 93,328 92,369
Additional paid-in capital 788,627 720,343 688,167
Retained earnings 792,825 628,743 567,460
Unamortized restricted stock (93,199) (58,060) (64,873)
Accumulated other comprehensive income (101,386) (94,781) (55,959)
Treasury stock (420,121) (244,062) (225,504)
----------- ----------- -----------
Total Shareholders' Equity 1,060,290 1,045,511 1,001,660
----------- ----------- -----------
Total Liabilities and Shareholders' Equity $ 7,461,809 $7,123,526 $ 6,429,911
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
2
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Commissions and fees $ 1,210,880 $ 1,032,985 $ 3,628,126 $ 3,032,944
Operating expenses:
Salaries and related costs 734,260 619,909 2,145,264 1,803,025
Office and general expenses 329,460 294,381 990,636 831,781
----------- ----------- ----------- -----------
1,063,720 914,290 3,135,900 2,634,806
----------- ----------- ----------- -----------
Operating profit 147,160 118,695 492,226 398,138
Net interest expense:
Interest and dividend income (4,685) (7,504) (21,161) (23,988)
Interest paid or accrued 20,591 19,610 60,111 53,909
----------- ----------- ----------- -----------
15,906 12,106 38,950 29,921
----------- ----------- ----------- -----------
Income before income taxes 131,254 106,589 453,276 368,217
Income taxes 53,851 46,104 184,939 157,055
----------- ----------- ----------- -----------
Income after income taxes 77,403 60,485 268,337 211,162
Equity in affiliates (202) 4,960 3,576 13,359
Minority interests (6,916) (9,465) (28,924) (30,961)
----------- ----------- ----------- -----------
Net income $ 70,285 $ 55,980 $ 242,989 $ 193,560
=========== =========== =========== ===========
Net Income Per Common Share:
- ---------------------------
Net income:
Basic $ 0.40 $ 0.32 $ 1.39 $ 1.12
Diluted $ 0.39 $ 0.32 $ 1.35 $ 1.09
Dividends declared per common share $ 0.15 $ 0.125 $ 0.45 $ 0.375
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
3
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 242,989 $ 193,560
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization of tangible assets 70,374 61,588
Amortization of intangible assets 50,552 40,042
Minority interests 28,924 30,960
Earnings of affiliates less than (in excess of)
dividends received 573 (4,248)
Decrease in deferred tax benefits 10,382 3,626
Provision for losses on accounts receivable 3,070 6,135
Amortization of restricted stock 20,165 15,446
Increase in accounts receivable (339,807) (51,363)
Increase in billable production orders in process (64,664) (78,868)
Increase in prepaid expenses and other current assets (108,398) (70,747)
Decrease in accounts payable (258,118) (482,859)
Decrease in other accrued liabilities (74,101) (33,460)
Increase (decrease) in accrued taxes on income 9,821 (38,320)
Other (13,771) (32,170)
---------- --------
Net cash used for operating activities (422,009) (440,678)
---------- --------
Cash flows from investing activities:
Capital expenditures (83,379) (78,280)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired (295,794) (474,860)
Proceeds from sales of equity interests in
subsidiaries and affiliates 1,108 1,919
Payments for purchases of investments available-for-sale
and other investments (63,100) (38,930)
Proceeds from sales of investments available-for-sale
and other investments 83,684 92,776
--------- --------
Net cash used for investing activities (357,481) (497,375)
---------- --------
Cash flows from financing activities:
Net borrowings under lines of credit 252,109 53,218
Share transactions under employee stock plans 77,727 46,848
Proceeds from issuance of shares - 171,084
Proceeds from issuance of debt obligations 530,941 758,213
Repayments of principal of debt obligations (75,035) (111,924)
Dividends and loans to minority shareholders (30,182) (28,254)
Dividends paid (77,758) (65,813)
Purchase of treasury shares (252,786) (128,334)
--------- --------
Net cash provided by financing activities 425,016 695,038
-------- --------
Effect of exchange rate changes on cash and cash equivalents 1,708 (8,889)
-------- --------
Net decrease in cash and cash equivalents (352,766) (251,904)
Cash and cash equivalents at beginning of period 648,781 565,138
-------- --------
Cash and cash equivalents at end of period $ 296,015 $ 313,234
======== ========
Supplemental Disclosures:
Income taxes paid $ 126,687 $ 178,480
======== ========
Interest paid $ 70,066 $ 48,067
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
4
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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1) The consolidated condensed interim financial statements included
herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. All prior period amounts included in these financial
statements have been restated to reflect the effect of accounting for the
acquisition of Abbott Mead Vickers plc as a pooling-of-interests (see
footnote number 8).
2) These statements reflect all adjustments, consisting of normal
recurring accruals, which in the opinion of management are necessary for a
fair presentation of the information contained therein. Certain
reclassifications have been made to the September 30, 1998 reported
amounts to conform them with the September 30, 1999 and December 31, 1998
presentation. These consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1998.
3) Results of operations for interim periods are not necessarily
indicative of annual results.
5
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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4) Basic earnings per share is based upon the weighted average number
of common shares outstanding during the period. Diluted earnings per share
is based on the above, plus, if dilutive, common share equivalents which
include outstanding options and restricted shares, and if dilutive,
adjusted for the assumed conversion of the Company's 2.25% and 4.25%
Convertible Subordinated Debentures (collectively, the "Debentures") and
the assumed increase in net income for the after tax interest cost of the
Debentures. In determining if the Debentures were dilutive at September
30, 1999 and 1998, the Debentures were assumed to be converted for the
entire period. For purposes of computing diluted earnings per share for
the three months ended September 30, 1999 and 1998, 178,071,000 and
177,541,000 common share equivalents, respectively, were assumed to have
been outstanding. Additionally, for the three months ended September 30,
1999, 6,936,000 shares were assumed to have been converted related to the
Debentures and the assumed increase in net income used in the computation
was $2,396,000. For purposes of computing diluted earnings per share for
the nine months ended September 30, 1999 and 1998, 178,532,000 and
176,550,000 common share equivalents, respectively, were assumed to have
been outstanding. Additionally, for the nine months ended September 30,
1999 and 1998, 11,552,000 and 6,937,000 shares, respectively, were assumed
to have been converted related to the Debentures, and the assumed increase
in net income used in the computation was $13,469,000 and $7,225,000,
respectively. The number of shares used in the
6
<PAGE>
computations of basic and diluted earnings per share were as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic EPS 175,111,000 173,929,000 175,391,000 172,950,000
Diluted EPS 185,007,000 177,541,000 190,084,000 183,487,000
For purposes of computing diluted earnings per share for the three
months ended September 30, 1999, the Company's 2.25% Convertible
Subordinated Debentures were not reflected in the computation, as their
inclusion would have been anti-dilutive. For purposes of computing diluted
earnings per share for the three months ended September 30, 1998, the
Debentures were not reflected in the computation, as their inclusion would
have been anti-dilutive.
For purposes of computing diluted earnings per share for the nine
months ended September 30, 1998, the Company's 2.25% Convertible
Subordinated Debentures were not reflected in the computation, as their
inclusion would have been anti-dilutive.
5) Total comprehensive income and its components were as follows:
7
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
(Dollars in Thousands) (Dollars in Thousands)
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 70,285 $ 55,980 $ 242,989 $ 193,560
Other Comprehensive Income:
Foreign Currency Translation
Adjustments 26,885 (15,175) (6,605) (8,601)
------- ------- --------- ---------
Total Comprehensive Income $ 97,170 $ 40,805 $ 236,384 $ 184,959
======== ======= ======== =========
6) In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). In
June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an amendment of
FASB Statement No. 133" ("SFAS No. 137") which delayed the effecive date
of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for
8
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
Consistent with the requirements of SFAS No. 137, the Company
intends to adopt SFAS No. 133 for its fiscal year ending December 31,
2001. The impact of SFAS No. 133 on the Company's financial statements
will depend on a variety of factors, including future interpretative
guidance from the FASB, the future level of forecasted and actual foreign
currency transactions, the extent of the Company's hedging activities, the
types of hedging instruments used and the effectiveness of such
instruments. However, the Company does not believe the effect of adopting
SFAS No. 133 will be material to its financial position.
7) The Company's wholly-owned and partially-owned businesses operate
within the corporate communications services operating segment. These
businesses provide a variety of communications services to clients through
several worldwide, national and regional independent agency brands. The
businesses exhibit similar economic characteristics driven from their
consistent efforts to create customer driven marketing communications and
services that build their
9
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
clients' businesses. A summary of the Company's operations by geographic
area as of September 30, 1999 and 1998, and for the three and nine months
then ended is presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------------------------------------------------------------
United United Other Other
States Kingdom Germany France Europe International Consolidated
-------- ------- ------- ------- -------- ------------- ------------
Commissions and Fees -
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended September 30,
1999 $608,673 $174,240 $98,946 $79,813 $125,317 $123,891 $1,210,880
1998 509,152 166,723 80,469 76,517 107,072 93,052 1,032,985
Commissions and Fees -
Nine Months Ended September 30,
1999 $1,832,113 $510,461 $290,796 $255,349 $381,309 $358,098 $3,628,126
1998 1,534,049 464,312 236,159 200,999 316,970 280,455 3,032,944
Long-Lived Assets
1999 $165,721 $101,907 $11,887 $15,784 $37,320 $57,715 $390,334
1998 155,816 96,772 11,202 14,916 32,565 35,424 346,695
</TABLE>
8) On February 10, 1999, the Company completed the acquisition of
Abbott Mead Vickers plc ("AMV"). AMV provides corporate communications
services to clients principally in the United Kingdom. The Company issued
approximately 9.6 million shares of new common stock in exchange for the
92.3% of AMV ordinary shares not already owned by the Company, at a fixed
exchange ratio of .1347 common shares of the Company per AMV ordinary
share. The transaction was accounted for under the pooling-of-interests
method of accounting. Accordingly, the Company's financial statements have
been restated to include the operating results of AMV for all periods
presented.
10
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
For the three month period ended September 30, 1998, previously
reported commissions and fees and net income for the Company were
$981,577,000 and $53,792,000, respectively. The amounts presented in the
restated consolidated condensed financial statements reflect an increase
from the previously reported amounts of $51,408,000 to commissions and
fees and an increase of $2,188,000 to net income. These increases reflect
the impact of including the operating results of AMV for the three month
period ended September 30, 1998, net of adjustments to eliminate
inter-company transactions between AMV and the Company and adjustments to
conform AMV accounting methods to those used by the Company.
For the nine month period ended September 30, 1998, previously
reported commissions and fees and net income for the Company were
$2,894,063,000 and $190,687,000, respectively. The amounts presented in
the restated consolidated condensed financial statements reflect an
increase from the previously reported amounts of $138,881,000 to
commissions and fees and an increase of $2,873,000 to net income. These
increases reflect the impact of including the operating results of AMV for
the nine month period ended September 30, 1998, net of adjustments to
eliminate inter-company transactions between
11
<PAGE>
AMV and the Company and adjustments to conform AMV accounting methods to
those used by the Company.
9) On April 30, 1999, the Company entered into a $750 million revolving
credit agreement with a consortium of banks expiring on April 28, 2000.
This revolving credit agreement includes a facility for issuing commercial
paper.
10) In April 1999, Razorfish, Inc., an affiliate of the Company, issued
3,450,000 shares of its common stock in an initial public offering. The
Company, through a wholly-owned subsidiary, owns 7,958,333 shares of
Razorfish, Inc.'s common stock. Immediately following the initial
public offering, the Company owned 32.4% of Razorfish, Inc.'s equity.
Razorfish's proceeds from the offering, based on the offering price of
$16.00 per share, totaled $55.2 million ($48.3 million net of expenses).
Consistent with the Company's accounting policy, an after tax gain of
$5,063,000 was recognized by the Company in shareholders' equity as a
direct increase to additional paid-in capital.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations
---------------------
Third Quarter 1999 Compared to Third Quarter 1998
-------------------------------------------------
Consolidated worldwide revenues from commission and fee income
increased 17.2% in the third quarter of 1999 to $1,210.9 million compared
to $1,033.0 million in the third quarter of 1998. Consolidated domestic
revenues increased 19.5% in the third quarter of 1999 to $608.7 million
compared to $509.2 million in the third quarter of 1998. Consolidated
international revenues increased 15.0% in the third quarter of 1999 to
$602.2 million compared to $523.8 million in the third quarter of 1998.
Absent the effect of acquisitions, net of divestitures and changes in the
foreign exchange value of the U.S. dollar, consolidated worldwide revenues
increased 12.5% in the third quarter of 1999 as compared to the same
period in 1998.
Worldwide operating expenses increased 16.3% in the third quarter of
1999 as compared to the third quarter of 1998. Absent the effect of
acquisitions, net of divestitures and changes in the foreign exchange
value of the U.S. dollar, operating expenses increased 12.7% over 1998
levels. This increase reflects normal salary increases and growth in
client service expenditures to support the increased revenue base.
13
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
Net interest expense increased by $3.8 million in the third quarter
of 1999 as compared to the same period in 1998. This increase primarily
reflects higher average borrowings during the period and lower average
amounts of cash and marketable securities invested during the period.
Pretax profit margin was 10.8% in the third quarter of 1999 as
compared to 10.3% in the same period in 1998. Operating margin, which
excludes interest and dividend income and interest expense, was 12.2% in
the third quarter of 1999 as compared to 11.5% in the same period in 1998.
The effective income tax rate was 41.0% in the third quarter of 1999
as compared to 43.3% in the third quarter of 1998. This decrease primarily
reflects a reduction in the Company's domestic effective tax rates.
The decrease in equity in affiliates is the result of the
acquisition of additional ownership interests in certain affiliates that
resulted in their consolidation in the September 30, 1999 financial
statements and lower profits earned by certain companies in which the
Company owns less than a 50% equity interest.
The decrease in minority interest expense is primarily due to lower
earnings by companies where minority interests exist.
14
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
Net income increased 25.6% to $70.3 million in the third quarter of
1999 as compared to $56.0 million in the same period in 1998. Absent the
effect of acquisitions, net of divestitures and changes in the foreign
exchange value of the U.S. dollar, net income increased 20.2% in the third
quarter of 1999 as compared to the third quarter of 1998.
Nine Months 1999 Compared to Nine Months 1998
---------------------------------------------
Consolidated worldwide revenues from commission and fee income
increased 19.6% in the first nine months of 1999 to $3,628.1 million
compared to $3,032.9 million in the first nine months of 1998.
Consolidated domestic revenues increased 19.4% in the first nine months of
1999 to $1,832.1 million compared to $1,534.0 million in the same period
in 1998. Consolidated international revenues increased 19.8% in the first
nine months of 1999 to $1,796.0 million compared to $1,498.9 million in
the same period in 1998. Absent the effect of acquisitions, net of
divestitures and changes in the foreign exchange value of the U.S. dollar,
consolidated worldwide revenues increased 12.8% in the first nine months
of 1999 as compared to the same period in 1998.
Worldwide operating expenses increased 19.0% in the first nine
months of 1999 as compared to the first nine months of 1998. Absent the
effect of acquisitions, net of divestitures and changes in the foreign
exchange value of
15
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
the U.S. dollar, operating expenses increased 12.8% over 1998 levels. This
increase reflects normal salary increases and growth in client service
expenditures to support the increased revenue base.
Net interest expense increased by $9.0 million in the first nine
months of 1999 as compared to the same period in 1998. This increase
primarily reflects higher average borrowings during the period and lower
average amounts of cash and marketable securities invested during the
period.
Pretax profit margin was 12.5% for the first nine months of 1999 as
compared to 12.1% in the same period in 1998. Operating margin, which
excludes interest and dividend income and interest expense, was 13.6% for
the first nine months of 1999 as compared to 13.1% in the same period in
1998.
The effective income tax rate was 40.8% for the first nine months of
1999 as compared to 42.7% for the same period in 1998. This decrease
reflects a reduction in effective tax rates at both the Company's domestic
and international subsidiaries.
The decrease in equity in affiliates is the result of the
acquisition of additional ownership interests in certain affiliates that
resulted in their consolidation in the September 30, 1999 financial
statements and lower profits
16
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
earned by certain companies in which the Company owns less than a 50%
equity interest.
The decrease in minority interest expense is primarily due to lower
earnings by companies where minority interests exist.
Net income increased 25.5% to $243.0 million in the first nine
months of 1999 as compared to $193.6 million in the same period in 1998.
Absent the effect of acquisitions, net of divestitures and changes in the
foreign exchange value of the U.S. dollar, net income increased 18.2% in
the first nine months of 1999 as compared to the first nine months of
1998.
Capital Resources and Liquidity
-------------------------------
Cash and cash equivalents at September 30, 1999 decreased to $296.0
million from $648.8 million at December 31, 1998. The relationship between
payables to the media and suppliers and receivables from clients, at
September 30, 1999, is consistent with industry norms.
The Company maintains relationships with a number of banks
worldwide, which have extended unsecured committed lines of credit in
amounts sufficient to meet the Company's cash needs. At September 30,
1999, the Company had $1,589.5 million in such unsecured committed lines
of credit, comprised of a $750.0 million revolving credit agreement
17
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
expiring April 28, 2000, a $500.0 million revolving credit agreement
expiring June 30, 2003, and $339.5 million in lines of credit, principally
outside of the United States. Of the $1,589.5 million in unsecured
committed lines, $777.6 million remained available at September 30, 1999.
Management believes the aggregate lines of credit available to the
Company, plus cash flows from operations will be adequate to support its
anticipated requirements.
Year 2000 Issue
---------------
The Year 2000 issue is the result of computer programs being written
using two digits, rather than four, to define the applicable year.
Accordingly, any of the computer programs utilized by the Company that
have date sensitive software may cause system failures or miscalculations
if data entry of "00" is recognized as a date other than 2000.
The Company has developed a Year 2000 readiness plan to address Year
2000 issues. This plan has included the establishment of Omnicom 2000, a
special purpose entity dedicated to ensuring that Omnicom companies are
addressing and resolving Year 2000 compliance issues. Omnicom 2000
comprises an Executive Committee of senior executives from Omnicom and its
principal subsidiaries, and a team of dedicated internal managers and
consultants. Omnicom 2000 has also retained external managers and
consultants to assist in project management and quality control. The
18
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
Company's plan includes an assessment phase, a testing phase, an
implementation phase and a contingency planning phase. Additionally, the
Audit Committee of the Board of Directors meets periodically to review
progress against the plan.
As part of its assessment phase, the Company compiled a detailed
inventory of systems and potential Year 2000 readiness issues at all of
its principal locations. Based on this information, the Company determined
that it was required to modify portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. In
addition, the Company is dependent on third-party computer systems and
applications, particularly with respect to such tasks as accounting,
billing, buying and planning and paying for media. The Company is in the
process of modifying or replacing affected systems, and is also evaluating
the adequacy of the processes and progress of third-party vendors of
systems that may be affected by the Year 2000 issue. The Company believes
that it has identified critical third-party vendors, and it recently
completed its testing of these critical vendors to determine their Year
2000 readiness. The Company has been working with and will continue to
work with these and other vendors and believes these vendors will be Year
2000 ready.
The Company has completed the assessment phase. The testing and
implementation phases of its Year 2000 readiness plan are
19
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
substantially complete. Contingency planning will continue throughout
1999.
The Company believes that, through upgrades, modifications, and
replacement of its existing hardware, software and non-IT systems, it will
achieve Year 2000 readiness. However, if such upgrades, modifications and
replacements are not made, or are not made in a timely manner, the Year
2000 issue could have a material impact on the Company's operations.
The out-of-pocket costs incurred in the first nine months of 1999
for its Year 2000 program were not material to consolidated results of
operations and are expected to be immaterial for the year ended December
31, 1999. These costs, the majority of which will not be capitalizable,
include third party consultants and the replacement and remediation of
existing computer software and hardware. Such costs do not include
internal management time, the effects of which are also not expected to be
material to the Company's results of operations or financial condition.
The Company will continue to refine its estimates of the costs of its Year
2000 efforts through progress reports from each location and through its
capital expenditure budget review process.
At this stage of the process, the Company believes that it is
difficult to specifically identify the cause of the most reasonable worst
case Year 2000 scenario. Due to the
20
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
decentralized nature of the Company's structure and systems, the Company
believes that a reasonable worst case scenario could involve the failures
of significant third parties (including entities with which the Company
has no direct involvement such as telecommunications companies and public
utilities) that continue for more than several days and affect a
significant number of the Company's operating locations. The Company is
considering various contingency planning approaches in the event of such
failures and has developed a model for its operations to follow in the
event of a Year 2000 failure. The development of the Company's contingency
plans is ongoing and will reflect additional information with regard to
third parties' Year 2000 readiness as it is received.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as
new information becomes available. While the Company anticipates
continuity of its business activities, that continuity will be dependent
upon its ability, and the ability of third parties with whom the Company
relies on directly, or indirectly, to be Year 2000 ready.
21
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------
Market Risk
-----------
The Company's market risks primarily consist of the impact of
changes in currency exchange rates on assets and liabilities of non-U.S.
operations and the impact of changes in interest rates on debt.
The Company's 1998 Form 10-K provides a more detailed discussion of
the market risks affecting its operations. As of September 30, 1999, no
material change has occurred in the Company's market risks, as compared to
the disclosure in its Form 10-K for the year ending December 31, 1998.
22
<PAGE>
Forward-Looking Statements
--------------------------
"Management's Discussion of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market
Risk" set forth in this report contain disclosures which are
forward-looking statements. Forward-looking statements include all
statements that do not relate solely to historical or current facts, and
can be identified by the use of words such as "may," "might," "will,"
"expect," "project," "estimate," "anticipate," "envisage," "plan" or
"continue." These forward-looking statements are based upon the Company's
current plans or expectations and are subject to a number of uncertainties
and risks that could significantly affect current plans and anticipated
actions and the Company's future financial condition and results. The
uncertainties and risks include, but are not limited to, general economic
and business conditions; loss of significant customers; changes in levels
of client advertising; the impact of competition; risks relating to
acquisition activities; the complexity of integrated computer systems; and
the success and expense of the remediation efforts of the Company, its
subsidiaries and third parties in achieving Year 2000 compliance. As a
consequence, current plans, anticipated actions and future financial
condition and results may
23
<PAGE>
differ from those expressed in any forward-looking statements made by or
on behalf of the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number Description of Exhibit
-------------- ----------------------
27 Financial Data Schedule (filed in
electronic format only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1999.
24
<PAGE>
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.
Omnicom Group Inc.
(Registrant)
------------------
Date November 12, 1999 /s/ Randall J. Weisenburger
-------------------- ------------------------------
Randall J. Weisenburger
Chief Financial Officer
(Principal Financial Officer)
Date November 12, 1999 /s/ Philip J. Angelastro
-------------------- ------------------------------
Philip J. Angelastro
Controller
(Chief Accounting
Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF OMNICOM GROUP INC. AND
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> $296,015
<SECURITIES> 41,142
<RECEIVABLES> 3,048,684
<ALLOWANCES> 49,373
<INVENTORY> 0
<CURRENT-ASSETS> 4,235,089
<PP&E> 896,753
<DEPRECIATION> 506,419
<TOTAL-ASSETS> 7,461,809
<CURRENT-LIABILITIES> 4,902,544
<BONDS> 1,153,719
0
0
<COMMON> 93,544
<OTHER-SE> 966,746
<TOTAL-LIABILITY-AND-EQUITY> 7,461,809
<SALES> 0
<TOTAL-REVENUES> 3,628,126
<CGS> 0
<TOTAL-COSTS> 2,145,264
<OTHER-EXPENSES> 990,636
<LOSS-PROVISION> 3,070
<INTEREST-EXPENSE> 60,111
<INCOME-PRETAX> 453,276
<INCOME-TAX> 184,939
<INCOME-CONTINUING> 242,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,989
<EPS-BASIC> 1.39
<EPS-DILUTED> 1.35
</TABLE>
