CONFORMED
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: June 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
Omnicom Group Inc.
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(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. 177,468,900 (as of July 31,
1999) -----------
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets -
June 30, 1999, December 31, 1998 and
June 30, 1998 2
Consolidated Condensed Statements of Income -
Three Months and Six Months
Ended June 30, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 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 4. Submission of Matters to a Vote of
Security Holders. 25
Item 6. Exhibits and Reports on Form 8-K. 26
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Assets 1999 1998 1998
------ -------- ------------ --------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 306,690 $ 648,781 $ 337,918
Investments available-for-sale, at market, which approximates cost 30,423 68,610 36,620
Accounts receivable, less allowance for doubtful accounts
of $53,244, $58,240 and $39,142 2,944,009 2,688,649 2,446,752
Billable production orders in process, at cost 321,716 255,294 307,832
Prepaid expenses and other current assets 484,584 448,496 440,246
------------ ------------ -------------
Total Current Assets 4,087,422 4,109,830 3,569,368
Furniture, equipment and leasehold improvements at cost, less
accumulated depreciation and amortization of $477,969,
$444,670 and $390,307 380,573 375,649 345,480
Investments in affiliates 321,832 262,392 233,354
Intangibles, less amortization of $314,408, $284,663 and $258,636 2,134,534 2,071,724 1,888,983
Deferred tax benefits 72,180 104,875 81,037
Deferred charges and other assets 230,054 199,056 186,926
------------ ------------ -------------
$ 7,226,595 $ 7,123,526 $ 6,305,148
============ ============ =============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,075,038 $ 3,366,086 $ 2,735,819
Payable to banks and current portion of long-term debt 279,595 139,894 139,387
Other accrued liabilities 1,325,238 1,474,811 1,184,212
Accrued taxes on income 58,137 59,797 79,523
------------ ------------ -------------
Total Current Liabilities 4,738,008 5,040,588 4,138,941
Long term debt 699,821 268,913 389,424
Convertible subordinated debentures 448,495 448,497 448,500
Deferred compensation and other liabilities 231,094 229,239 245,304
Minority interests 77,177 90,778 71,526
Shareholders' equity:
Common stock 93,544 93,328 92,337
Additional paid-in capital 789,404 720,343 681,698
Retained earnings 748,738 628,743 532,322
Unamortized restricted stock (98,021) (58,060) (71,306)
Accumulated other comprehensive income (128,271) (94,781) (40,785)
Treasury stock (373,394) (244,062) (182,813)
------------ ------------ -------------
Total Shareholders' Equity 1,032,000 1,045,511 1,011,453
------------ ------------ -------------
Total Liabilities and Shareholders' Equity $ 7,226,595 $ 7,123,526 $ 6,305,148
============ ============ =============
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
2
<PAGE>
<TABLE>
<CAPTION>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Commissions and fees $ 1,270,369 $ 1,094,160 $ 2,417,246 $ 1,999,959
Operating expenses:
Salaries and related costs 722,703 630,952 1,411,004 1,183,116
Office and general expenses 337,170 285,412 661,176 537,400
------------- -------------- -------------- --------------
1,059,873 916,364 2,072,180 1,720,516
------------- -------------- -------------- --------------
Operating profit 210,496 177,796 345,066 279,443
Net interest expense:
Interest and dividend income (9,251) (9,557) (16,476) (16,484)
Interest paid or accrued 21,048 20,085 39,520 34,299
------------- -------------- -------------- --------------
11,797 10,528 23,044 17,815
------------- -------------- -------------- --------------
Income before income taxes 198,699 167,268 322,022 261,628
Income taxes 80,573 71,570 131,088 110,951
------------- -------------- -------------- --------------
Income after income taxes 118,126 95,698 190,934 150,677
Equity in affiliates 2,849 4,313 3,778 8,399
Minority interests (13,833) (13,755) (22,008) (21,496)
------------- -------------- -------------- --------------
Net income $ 107,142 $ 86,256 $ 172,704 $ 137,580
============= ============== ============== ==============
Net Income Per Common Share:
- ----------------------------
Net income:
Basic $ 0.61 $ 0.50 $ 0.98 $ 0.80
Diluted $ 0.59 $ 0.48 $ 0.95 $ 0.78
Dividends declared per common share $ 0.15 $ 0.125 $ 0.30 $ 0.25
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
3
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OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 172,704 $ 137,580
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization of tangible assets 46,445 37,354
Amortization of intangible assets 32,871 25,189
Minority interests 22,008 21,496
Earnings of affiliates less than (in excess of)
dividends received 1,538 (3,910)
Decrease in deferred tax benefits 14,600 4,354
Provision for losses on accounts receivable 3,817 3,957
Amortization of restricted stock 12,654 9,968
Increase in accounts receivable (348,650) (144,904)
Increase in billable production orders in process (60,814) (99,320)
Increase in prepaid expenses and other current assets (27,491) (84,499)
Decrease in accounts payable (183,353) (171,745)
Decrease in other accrued liabilities (121,631) (89,391)
Increase (decrease) in accrued taxes on income 1,002 (24,967)
Other (40,235) (14,331)
------------- ------------
Net cash used for operating activities (474,535) (393,169)
------------- ------------
Cash flows from investing activities:
Capital expenditures (58,687) (65,028)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired (250,038) (345,814)
Proceeds from sales of equity interests in
subsidiaries and affiliates 1,047 3,426
Payments for purchases of investments available-for-sale
and other investments (39,906) (42,819)
Proceeds from sales of investments available-for-sale
and other investments 71,951 93,611
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Net cash used for investing activities (275,633) (356,624)
------------- ------------
Cash flows from financing activities:
Net borrowings under lines of credit 143,016 13,508
Share transactions under employee stock plans 73,670 29,090
Proceeds from issuance of shares - 171,035
Proceeds from issuance of debt obligations 536,567 578,914
Repayments of principal of debt obligations (74,546) (144,273)
Dividends and loans to minority shareholders (28,685) (18,665)
Dividends paid (51,439) (44,826)
Purchase of treasury shares (198,581) (71,921)
------------ ------------
Net cash provided by financing activities 400,002 512,862
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 8,075 9,711
------------- ------------
Net decrease in cash and cash equivalents (342,091) (227,220)
Cash and cash equivalents at beginning of period 648,781 565,138
------------ ------------
Cash and cash equivalents at end of period $ 306,690 $ 337,918
============ ============
Supplemental Disclosures:
Income taxes paid $ 93,139 $ 130,705
============ ============
Interest paid $ 46,697 $ 30,518
============ ============
</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 June 30, 1998 reported amounts
to conform them with the June 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
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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 (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 June 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 June 30, 1999 and 1998,
respectively, 179,100,000 and 178,323,000 common share equivalents
were assumed to have been outstanding. Additionally, for both the
three months ended June 30, 1999 and 1998, 11,552,000 shares were
assumed to have been converted related to the Debentures and the
assumed increase in net income used in the computation was $4,488,000
and $4,494,000, respectively. For purposes of computing diluted
earnings per share for the six months ended June 30, 1999 and 1998,
respectively, 178,784,000 and 176,354,000 common share equivalents
were assumed to have been outstanding. Additionally, for the six
months ended June 30, 1999 and 1998, 11,552,000 and 6,937,000 shares
were assumed to have been converted related to the Debentures,
respectively, and the assumed increase in net income used in the
computation was $8,987,000 and $4,826,000, respectively. The number of
6
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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shares used in the computations of basic and diluted earnings per
share were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Basic EPS 175,806,000 174,233,000 175,558,000 172,530,000
Diluted EPS 190,652,000 189,875,000 190,336,000 183,291,000
For purposes of computing diluted earnings per share for the
six months ended June 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
(Dollars in Thousands) (Dollars in Thousands)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 107,142 $ 86,256 $ 172,704 $ 137,580
Other Comprehensive Income:
Foreign Currency Translation
Adjustments (9,117) 8,200 (33,490) 6,574
------------ ----------- ------------ --------------
Total Comprehensive Income $ 98,025 $ 94,456 $ 139,214 $ 144,154
============ =========== ============= ==============
</TABLE>
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
7
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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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
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
8
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 clients' businesses. A
summary of the Company's operations by geographic area as of June 30,
1999 and 1998, and for the three and six months then ended is
presented below:
9
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OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands)
-----------------------------------------------------------------------------------
United United Other Other
States Kingdom Germany France Europe International Consolidated
------ ------- ------- ------ ------ ------------- ------------
Commissions and Fees -
Three Months Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $638,937 $171,470 $100,229 $91,641 $139,797 $128,295 $1,270,369
1998 550,248 161,498 85,555 82,716 117,822 96,321 1,094,160
Commissions and Fees -
Six Months Ended June 30,
1999 $1,226,149 $336,221 $191,850 $175,536 $255,992 $231,498 $2,417,246
1998 1,025,409 299,322 155,690 124,482 209,898 185,158 1,999,959
Long-Lived Assets
1999 $166,860 $99,337 $11,776 $16,268 $34,426 $51,906 $380,573
1998 169,979 89,066 10,870 14,447 28,859 32,259 345,480
</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.
For the three month period ended June 30, 1998, previously
reported commissions and fees and net income for the Company were
$1,051,510,000 and $85,992,000,
10
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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respectively. The amounts presented in the restated consolidated
condensed financial statements reflect an increase from the previously
reported amounts of $42,650,000 to commissions and fees and an increase
of $264,000 to net income. These increases reflect the impact of
including the operating results of AMV for the three month period ended
June 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 six month period ended June 30, 1998, previously
reported commissions and fees and net income for the Company were
$1,912,486,000 and $136,895,000, respectively. The amounts presented in
the restated consolidated condensed financial statements reflect an
increase from the previously reported amounts of $87,473,000 to
commissions and fees and an increase of $685,000 to net income. These
increases reflect the impact of including the operating results of AMV
for the six month period ended June 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.
9) On April 30, 1999, the Company entered into a $750 million
revolving credit agreement with a consortium of
11
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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. As a result of the
initial public offering, the Company owns 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
---------------------
Second Quarter 1999 Compared to Second Quarter 1998
---------------------------------------------------
Consolidated worldwide revenues from commission and fee income
increased 16.1% in the second quarter of 1999 to $1,270.4 million
compared to $1,094.2 million in the second quarter of 1998.
Consolidated domestic revenues increased 16.2% in the second quarter of
1999 to $638.9 million compared to $550.0 million in the second quarter
of 1998. Consolidated international revenues increased 16.0% in the
second quarter of 1999 to $631.5 million compared to $544.2 million in
the second 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 13.4% in the second
quarter of 1999 as compared to the same period in 1998.
Worldwide operating expenses increased 15.7% in the second
quarter of 1999 as compared to the second 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 13.6%
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 $1.3 million in the second
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 15.6% in the second quarter of 1999
as compared to 15.3% in the same period in 1998. Operating margin,
which excludes interest and dividend income and interest expense, was
16.6% in the second quarter of 1999 as compared to 16.2% in the same
period in 1998.
The effective income tax rate was 40.6% in the second quarter
of 1999 as compared to 42.8% in the second 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 June 30, 1999 financial
statements and lower profits earned by certain companies in which the
Company owns less than a 50% equity interest.
Minority interest expense is consistent with the prior period.
Net income increased 24.2% to $107.1 million in the second
quarter of 1999 as compared to $86.3 million in the
14
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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 18.8% in the second quarter of 1999 as
compared to the second quarter of 1998.
Six Months 1999 Compared to Six Months 1998
- -------------------------------------------
Consolidated worldwide revenues from commission and fee income
increased 20.9% in the first six months of 1999 to $2,417.2 million
compared to $2,000.0 million in the first six months of 1998.
Consolidated domestic revenues increased 19.6% in the first six months
of 1999 to $1,226.1 million compared to $1,025.4 million in the same
period in 1998. Consolidated international revenues increased 22.2% in
the first six months of 1999 to $1,191.1 million compared to $974.6
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, consolidated worldwide revenues increased 13.7% in the
first six months of 1999 as compared to the same period in 1998.
Worldwide operating expenses increased 20.4% in the first six
months of 1999 as compared to the first six months 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 13.7%
over
15
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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 $5.2 million in the first
six 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 13.3% for the first six months of
1999 as compared to 13.1% in the same period in 1998. Operating margin,
which excludes interest and dividend income and interest expense, was
14.3% for the first six months of 1999 as compared to 14.0% in the same
period in 1998.
The effective income tax rate was 40.7% for the first six
months of 1999 as compared to 42.4% 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 June 30, 1999 financial
statements and lower profits earned by certain companies in which the
Company owns less than a 50% equity interest.
16
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The increase in minority interest expense is primarily due to
new minorities resulting from acquisitions and greater earnings by
companies where minority interests exist.
Net income increased 25.5% to $172.7 million in the first six
months of 1999 as compared to $137.6 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 17.4% in the first six months of 1999 as compared to the
first six months of 1998.
Capital Resources and Liquidity
-------------------------------
Cash and cash equivalents at June 30, 1999 decreased to $307.0
million from $648.8 million at December 31, 1998. The relationship
between payables to the media and suppliers and receivables from
clients, at June 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 June 30, 1999,
the Company had $1,480.0 million in such unsecured committed lines of
credit, comprised of a $750.0 million revolving credit agreement
expiring April 28, 2000, a $500.0 million revolving credit
17
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
agreement expiring June 30, 2003, and $230.0 million in lines of
credit, principally outside of the United States. Of the $1,480.0
million in unsecured committed lines, $782.1 million remained
available at June 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 Company's plan includes an
assessment phase, a testing
18
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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 and believes
that the implementation phase of its Year 2000 readiness plan will be
substantially completed during the
19
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
third quarter. 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 six 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 June 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Company was held on
May 17, 1999 in New York, New York, at which three matters were submitted to a
vote of the shareholders:
(a) Votes cast for or where authority to vote for was withheld
regarding the re-election of six Directors were as follows:
AUTHORITY
FOR WITHHELD
(Term Expiring in 2002)
Barnard Brochand 155,196,900 573,929
James A. Cannon 155,172,199 598,630
Leonard S. Coleman, Jr. 155,153,534 617,295
Peter Foy 154,797,559 973,270
Thomas L. Harrison 155,206,789 564,040
Gary L. Roubos 155,173,977 596,852
24
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
(b) Votes cast for or against and the number of abstentions regarding
the confirmation of the appointment of Arthur Andersen LLP as independent
auditors of the Company to serve for the year ending December 31, 1999 were as
follows:
FOR 155,383,378
AGAINST 72,460
ABSTAIN 314,991
(c) Votes cast for or against and the number of absentions regarding
the approval of the Omnicom Group Inc. Employee Stock Purchase Plan were as
follows:
FOR 154,207,487
AGAINST 1,022,001
ABSTAIN 541,341
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 second quarter of 1999.
25
<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 August 12, 1999 /s/Randall J. Weisenburger
----------------------- --------------------------------
Randall J. Weisenburger
Chief Financial Officer
(Principal Financial
Officer)
Date August 12, 1999 /s/Philip J. Angelastro
----------------------- -------------------------------
Philip J. Angelastro
Controller
(Chief Accounting
Officer)
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF OMNICOM GROUP INC. AND
SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 306,690
<SECURITIES> 30,423
<RECEIVABLES> 2,997,253
<ALLOWANCES> 53,244
<INVENTORY> 0
<CURRENT-ASSETS> 4,087,422
<PP&E> 858,542
<DEPRECIATION> 477,969
<TOTAL-ASSETS> 7,226,595
<CURRENT-LIABILITIES> 4,738,008
<BONDS> 1,148,316
0
0
<COMMON> 93,544
<OTHER-SE> 938,456
<TOTAL-LIABILITY-AND-EQUITY> 7,226,595
<SALES> 0
<TOTAL-REVENUES> 2,417,246
<CGS> 0
<TOTAL-COSTS> 1,411,004
<OTHER-EXPENSES> 661,176
<LOSS-PROVISION> 3,817
<INTEREST-EXPENSE> 39,520
<INCOME-PRETAX> 322,022
<INCOME-TAX> 131,088
<INCOME-CONTINUING> 172,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,704
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.95
</TABLE>
