-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TTrC99Oyn3ozucc596aYvW8I1g020ukTZTCzOzvb9omvH1+VAw4qng/XmVx4ClOE gOK/QePB4zPhW4FGLwlu+Q== 0000891092-98-000399.txt : 19981116 0000891092-98-000399.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891092-98-000399 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OMNICOM GROUP INC CENTRAL INDEX KEY: 0000029989 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 131514814 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10551 FILM NUMBER: 98748512 BUSINESS ADDRESS: STREET 1: 437 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124153700 MAIL ADDRESS: STREET 1: 437 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH GROUP INC DATE OF NAME CHANGE: 19861117 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH INTERNATIONAL INC DATE OF NAME CHANGE: 19850604 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH INC DATE OF NAME CHANGE: 19781226 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: September 30, 1998 Commission file number: 1-10551 Omnicom Group Inc. (Exact name of registrant as specified in its charter) New York 13-1514814 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 437 Madison Avenue, New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 415-3600 (Registrant's telephone number, including area code) 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 ___ The number of shares of common stock of the Company issued and outstanding at October 31, 1998 is 168,695,900. OMNICOM GROUP INC. AND SUBSIDIARIES INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets - September 30, 1998, December 31, 1997 and September 30, 1997 2 Consolidated Condensed Statements of Income - Three Months and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 4 Notes to Consolidated Condensed Financial Statements 5-11 Item 2. Management's Discussion of Financial Condition and Results of Operations 12-21 PART II. OTHER INFORMATION Item 6. Exhibits 22 -1- PART I. FINANCIAL INFORMATION Item 1. Financial Statements OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands)
Assets September 30, December 31, September 30, ------ 1998 1997 1997 ---------- ----------- ---------- Current assets: Cash and cash equivalents $ 313,234 $ 556,436 $ 238,253 Investments available-for-sale, at market, which approximates cost 34,271 87,668 71,644 Accounts receivable, less allowance for doubtful accounts of $43,333, $32,190 and $27,139 2,286,340 1,908,532 1,691,987 Billable production orders in process 287,412 183,145 217,275 Prepaid expenses and other current assets 428,201 252,617 253,434 ---------- ---------- ---------- Total current assets 3,349,458 2,988,398 2,472,593 Furniture, equipment and leasehold improvements at cost, less accumulated depreciation and amortization of $388,967, $336,926 and $329,403 301,528 239,667 228,789 Investments in affiliates 324,422 281,264 277,662 Intangibles, less amortization of $277,484, $235,257 and $215,369 1,927,443 1,234,539 1,161,287 Deferred tax benefits 90,941 68,086 75,693 Deferred charges and other assets 230,545 153,789 172,055 ---------- ---------- ---------- Total assets $6,224,337 $4,965,743 $4,388,079 ========== ========== ========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $2,404,932 $2,595,255 $1,838,341 Payable to banks and current portion of long term debt 123,154 17,672 104,881 Other accrued liabilities 1,186,694 885,569 750,439 Accrued taxes on income 51,005 80,489 78,331 ---------- ---------- ---------- Total current liabilities 3,765,785 3,578,985 2,771,992 Long term debt 619,603 123,165 378,003 Convertible subordinated debentures 448,500 218,500 218,500 Deferred compensation and other liabilities 245,780 114,668 140,205 Minority interests 77,292 63,686 59,583 Shareholders' equity: Common stock 88,656 86,918 86,832 Additional paid-in capital 643,682 533,412 526,743 Retained earnings 680,782 555,038 500,435 Unamortized restricted stock (64,873) (46,745) (51,368) Cumulative translation adjustment (55,366) (47,947) (46,145) Treasury stock (225,504) (213,937) (196,701) ---------- ---------- ---------- Total shareholders' equity 1,067,377 866,739 819,796 ---------- ---------- ---------- Total liabilities and shareholders' equity $6,224,337 $4,965,743 $4,388,079 ========== ========== ==========
The accompanying notes to consolidated condensed financial statements are an integral part of these balance sheets. -2- OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Data)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Commissions and fees $981,577 $746,839 $2,894,063 $2,229,757 Operating expenses: Salaries and related costs 587,246 452,927 1,708,881 1,318,612 Office and general expenses 283,311 214,028 800,176 634,397 -------- -------- ---------- ---------- Total operating expenses 870,557 666,955 2,509,057 1,953,009 -------- -------- ---------- ---------- Operating profit 111,020 79,884 385,006 276,748 Net interest expense: Interest and dividend income (6,429) (5,532) (20,547) (14,789) Interest paid or accrued 17,935 12,356 50,151 30,923 -------- -------- ---------- ---------- Net interest expense 11,506 6,824 29,604 16,134 -------- -------- ---------- ---------- Income before income taxes 99,514 73,060 355,402 260,614 Income taxes: Federal 14,610 10,557 58,940 39,497 State and local 4,911 4,935 17,353 15,397 International 22,685 14,387 73,676 51,296 -------- -------- ---------- ---------- Total income taxes 42,206 29,879 149,969 106,190 -------- -------- ---------- ---------- Income after income taxes 57,308 43,181 205,433 154,424 Equity in affiliates 5,948 4,601 16,206 16,027 Minority interests (9,464) (6,291) (30,952) (22,493) -------- -------- ---------- ---------- Net income $ 53,792 $ 41,491 $ 190,687 $ 147,958 ======== ======== ========== ========== Earnings per share: Net income: Basic $ 0.32 $ 0.26 $ 1.15 $ 0.93 Diluted $ 0.32 $ 0.26 $ 1.13 $ 0.91 Dividends declared per common share $ 0.125 $ 0.125 $ 0.375 $ 0.325
The accompanying notes to consolidated condensed financial statements are an integral part of these statements. -3- OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Nine Months Ended September 30, --------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net income $ 190,687 $ 147,958 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization of tangible assets 55,531 42,895 Amortization of intangible assets 39,415 29,421 Minority interests 30,952 22,493 Earnings of affiliates in excess of dividends received (5,874) (9,641) Decrease in deferred tax benefits 3,704 2,165 Provision for losses on accounts receivable 6,135 5,030 Amortization of restricted shares 15,446 12,924 Increase in accounts receivable (30,754) (143,256) Increase in billable production (80,990) (62,714) Increase in other current assets (72,912) (43,209) Decrease in accounts payable (470,376) (210,770) Decrease in other accrued liabilities (28,242) (4,019) (Decrease) increase in accrued income taxes (36,967) 9,606 Other (29,935) (37,563) --------- --------- Net cash used for operating activities (414,180) (238,680) --------- --------- Cash flows from investing activities: Capital expenditures (65,270) (47,251) Payments for purchases of equity interests in subsidiaries and affiliates, net of cash acquired (460,623) (300,622) Proceeds from sales of equity interests in subsidiaries and affiliates 4,147 466 Payments for purchases of investments available-for-sale and other investments (38,930) (88,526) Proceeds from sales of investments available-for-sale and other investments 92,776 34,056 --------- --------- Net cash used for investing activities (467,900) (401,877) --------- --------- Cash flows from financing activities: Net borrowings under lines of credit 8,090 76,784 Share transactions under employee stock plans 46,815 26,247 Proceeds from issuance of shares 171,084 -- Proceeds from issuance of principal of debt obligations 751,368 471,997 Repayment of principal of debt obligations (111,924) (41,722) Dividends and loans to minority stockholders (28,254) (27,934) Dividends paid (61,619) (47,704) Purchase of treasury shares (128,334) (52,223) --------- --------- Net cash provided by financing activities 647,226 405,445 --------- --------- Effect of exchange rate changes on cash and cash equivalents (8,348) (36,902) --------- --------- Net decrease in cash and cash equivalents (243,202) (272,014) Cash and cash equivalents at beginning of period 556,436 510,267 --------- --------- Cash and cash equivalents at end of period $ 313,234 $ 238,253 ========= ========= Supplemental Disclosures: Income taxes paid $ 151,702 $ 96,750 ========= ========= Interest paid $ 44,309 $ 27,049 ========= ========= The accompanying notes to consolidated condensed financial statements are an integral part of these statements. -4- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS =============================================================================== 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. 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, 1997 reported amounts to conform them with the September 30, 1998 and December 31, 1997 presentation. Also, all amounts presented give effect to a two-for-one stock split in the form of a 100% stock dividend completed in December 1997. 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, 1997. 3) Results of operations for interim periods are not necessarily indicative of annual results. -5- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ 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 such average number of common shares outstanding, common share equivalents outstanding, and if dilutive, is adjusted for the assumed conversion of the Company's convertible subordinated debentures and the assumed increase in net income for the after tax interest cost of such debentures. At September 30, 1998, the 2.25% Convertible Subordinated Debentures had been outstanding since January 6, 1998 and the 4.25% Convertible Subordinated Debentures had been outstanding for the entire nine months. At September 30, 1997, the 4.25% Convertible Subordinated Debentures had been outstanding since January 3, 1997. The number of shares used in the computations of basic and diluted earnings per share were as follows: Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic EPS 166,599,500 159,657,500 165,604,400 159,575,600 Diluted EPS 169,915,300 162,869,500 175,845,400 162,572,500 For purposes of computing diluted earnings per share for the three months ended September 30, 1998, neither the Company's 2.25% Convertible Subordinated Debentures nor the Company's 4.25% Convertible Subordinated Debentures were reflected in the computation, as their inclusion would have been anti-dilutive. For the purposes of computing diluted -6- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ earnings per share for the nine months ended September 30, 1998, the 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 and nine months ended September 30, 1997, the 4.25% Convertible Subordinated Debentures were not reflected in the computation, as their inclusion would have been anti-dilutive. 5) The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires presentation of information on comprehensive income and its components in financial statements. In the Company's case, comprehensive income includes net income and foreign currency translation adjustments. Total comprehensive income and its components were as follows: Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- (Dollars in Thousands) (Dollars in Thousands) 1998 1997 1998 1997 ---- ---- ---- ---- Net Income $ 53,792 $ 41,491 $ 190,687 $ 147,958 Foreign Currency Translation Adjustments (14,537) (11,587) (7,142) (49,635) -------- -------- --------- --------- Total Comprehensive Income $ 39,255 $ 29,904 $ 183,545 $ 98,323 ======== ======== ========= ========= -7- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ 6) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities". 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. 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. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. Once implemented, SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that -8- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ were issued, acquired, or substantively modified after December 31, 1997 (and, at a company's election, before January 1, 1998). The Company intends to adopt SFAS No. 133 for its fiscal year ending December 31, 2000. The adoption of the provisions of SFAS No. 133 would not have had a material effect on the Company's results of operations for the quarter or nine months ending September 30, 1998 or on its financial position as of that date. 7) In January 1998, the Company completed the acquisitions of Fleishman-Hillard, Inc., GPC International Holdings Inc. and Palmer Jarvis Inc. These acquisitions have been accounted for under the pooling of interests method of accounting. The number of shares issued or to be issued by the Company in connection with these acquisitions is 3,550,366. The assets, liabilities, shareholders' equity and results of operations of the companies acquired are not, either individually or in the aggregate, material to the Company and, therefore, the Company's prior year financial statements have not been restated. 8) On January 6, 1998, the Company issued $230,000,000 of 2.25% Convertible Subordinated Debentures with a scheduled maturity in 2013. The debentures are convertible into common stock of the Company at a -9- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ conversion price of $49.83 per share subject to adjustment in certain events. Debenture holders have the right to require the Company to redeem the debentures on January 6, 2004 at a price of 118.968%, or upon the occurrence of a Fundamental Change, as defined in the indenture agreement, at the prevailing redemption price. The Company may redeem the debentures, as a whole or in part, on or after December 31, 2001 initially at 112.841% and at increasing prices thereafter to 118.968% until January 6, 2004, and 100% thereafter. Unless the debentures are redeemed, repaid or converted prior thereto, the debentures will mature on January 6, 2013 at their principal amount. The proceeds of this issuance are being used for general corporate purposes, including working capital. 9) On January 29, 1998, the Company announced that it had reached agreement on the terms of a recommended cash offer for The GGT Group plc ("GGT"), an advertising and marketing services group headquartered in the United Kingdom and operating primarily in France, the United Kingdom and the United States. The offer price of 200p for each share of GGT valued GGT's fully diluted ordinary share capital at (pound)143 million (approximately $235 million at the January 29, 1998 exchange rate). The acquisition of the entire issued ordinary share capital of GGT was completed during the second quarter of 1998. 10) On March 4, 1998, the Company issued 4,000,000 shares of common stock for aggregate proceeds before expenses of -10- OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED) ================================================================================ $171,400,000. The proceeds of this issuance are being used for general corporate purposes, including the funding of the acquisition of GGT. 11) On June 24, 1998, the Company issued French Francs 1,000,000,000 (approximately $164 million at the June 24, 1998 exchange rate) of 5.20% Notes with a scheduled maturity in 2005. The proceeds of this issuance are being used for general corporate purposes. -11- Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Results of Operations - --------------------- Third Quarter 1998 Compared to Third Quarter 1997 - ------------------------------------------------- Consolidated worldwide revenues from commission and fee income increased 31.4% in the third quarter of 1998 compared to the third quarter of 1997. Consolidated domestic revenues increased 26.6% in the third quarter of 1998 to $509.2 million compared to $402.3 million in the third quarter of 1997. Consolidated international revenues increased 37.1% in the third quarter of 1998 to $472.4 million compared to $344.5 million in the third quarter of 1997. Absent the effect of the net acquisitions of subsidiary companies and movements in international currency exchange rates, consolidated worldwide revenues increased 14.9% in the third quarter of 1998 compared to the same period in 1997. Operating expenses increased 30.5% in the third quarter of 1998 compared to the third quarter of 1997. Excluding the effect of the net acquisition activity and movements in international currency exchange rates mentioned above, operating expenses increased 14.7% over 1997 levels. This increase reflects normal salary increases and growth in client service expenditures to support the increased revenue base. -12- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- Net interest expense increased by $4.7 million in the third quarter of 1998 as compared to the same period in 1997. This increase primarily reflects higher average borrowings during the period, resulting in part from the issuance of the 2.25% Convertible Subordinated Debentures and the 5.20% French Francs Notes, partially offset by the effect of higher average amounts of cash and marketable securities invested during the period. Pretax profit margin was 10.1% in the third quarter of 1998 as compared to 9.8% in the same period in 1997. Operating margin, which excludes interest and dividend income and interest expense, was 11.3% in the third quarter of 1998 as compared to 10.7% in the same period in 1997. The effective income tax rate was 42.4% in the third quarter of 1998 as compared to 40.9% in the third quarter of 1997. This increase primarily reflects higher tax rates at the Company's international subsidiaries. The increase in equity in affiliates is the result of greater profits reported by certain companies in which the Company owns less than a 50% equity interest. The increase in minority interest expense is primarily due to new minorities resulting from acquisitions and greater earnings by companies where minority interests exist. -13- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- Net income increased 29.6% in the third quarter of 1998 as compared to the same period in 1997. Absent the effect of net acquisitions and movements in international currency exchange rates, net income increased 14.3% in the third quarter of 1998 as compared to the third quarter of 1997. Nine Months 1998 Compared to Nine Months 1997 - --------------------------------------------- Consolidated worldwide revenues from commission and fee income increased 29.8% in the first nine months of 1998 compared to the same period in 1997. Consolidated domestic revenues increased 28.8% in the first nine months of 1998 to $1,534.1 million compared to $1,190.9 million in the same period in 1997. Consolidated international revenues increased 30.9% in the first nine months of 1998 to $1,360.0 million compared to $1,038.9 million in the same period in 1997. Absent the effect of the net acquisitions of subsidiary companies and movements in international currency exchange rates, consolidated worldwide revenues increased 16.2% in the first nine months of 1998 compared to the first nine months of 1997. Operating expenses increased 28.5% in the first nine months of 1998 as compared to the same period in 1997. Excluding the effect of the net acquisition activity and movements in international currency exchange rates mentioned above, operating expenses increased 15.3% over 1997 levels. -14- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- This increase reflects normal salary increases and growth in client service expenditures to support the increased revenue base. Net interest expense increased by $13.5 million in the first nine months of 1998 as compared to the same period in 1997. This increase primarily reflects higher average borrowings during the period, resulting in part from the issuance of the 2.25% Convertible Subordinated Debentures and the 5.20% French Francs Notes, partially offset by the effect of higher average amounts of cash and marketable securities invested during the period. Pretax profit margin for the first nine months of 1998 was 12.3% as compared to 11.7% in the same period in 1997. Operating margin, which excludes interest and dividend income and interest expense, was 13.3% in the first nine months of 1998 as compared to 12.4% in the same period in 1997. The effective income tax rate was 42.2% in the first nine months of 1998 as compared to 40.7% in the same period in 1997. This increase primarily reflects higher tax rates at the Company's international subsidiaries. Income from equity in affiliates for the first nine months of 1998 was comparable to the same period in 1997. -15- 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 28.9% in the first nine months of 1998 as compared to the same period in 1997. Absent the effect of net acquisitions and movements in international currency exchange rates, net income increased 16.8% in the first nine months of 1998 as compared to the same period in 1997. Capital Resources and Liquidity - ------------------------------- Cash and cash equivalents at September 30, 1998 decreased to $313.2 million from $556.4 million at December 31, 1997. The relationship between payables to the media and suppliers and receivables from clients, at September 30, 1998, 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, 1998, the Company had $707.5 million in such unsecured committed lines of credit, comprised of a $500.0 million revolving credit agreement expiring June 30, 2003, and $207.5 million in lines of credit, principally outside of the United States. Of the $707.5 million in unsecured committed lines, $324.7 million remained available at September 30, 1998. -16- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- On January 6, 1998, the Company issued $230,000,000 of 2.25% Convertible Subordinated Debentures with a scheduled maturity in 2013. The debentures are convertible into common stock of the Company at a conversion price of $49.83 per share subject to adjustment in certain events. Debenture holders have the right to require the Company to redeem the debentures on January 6, 2004 at a price of 118.968%, or upon the occurrence of a Fundamental Change, as defined in the indenture agreement, at the prevailing redemption price. The Company may redeem the debentures, as a whole or in part, on or after December 31, 2001 initially at 112.841% and at increasing prices thereafter to 118.968% until January 6, 2004, and 100% thereafter. Unless the debentures are redeemed, repaid or converted prior thereto, the debentures will mature on January 6, 2013 at their principal amount. The proceeds of this issuance are being used for general corporate purposes, including working capital. On March 4, 1998, the Company issued 4,000,000 shares of common stock for aggregate proceeds before expenses of $171,400,000. The proceeds of this issuance are being used for general corporate purposes, including the funding of the acquisition of GGT. On June 24, 1998, the Company issued French Francs 1,000,000,000 (approximately $164 million at the June 24, 1998 exchange rate) of 5.20% Notes with a scheduled maturity in 2005. The proceeds of this issuance are being used for general corporate purposes. -17- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- 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 comprehensive 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 properly 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 and external managers and consultants. The Company's comprehensive plan includes an assessment phase, a testing phase and an implementation phase. As part of its assessment phase, the Company has compiled a detailed inventory of systems and potential Year 2000 readiness issues at all of its principal locations. Based on this information, the Company has determined that it is required to modify portions of its software so that its -18- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- 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 critical tasks as accounting, billing and buying, planning and paying for media, as well as on its own computer systems and internally developed applications. The Company intends to modify or replace all 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 all critical third-party vendors, and is currently testing and monitoring the Year 2000 readiness of such vendors. The Company envisages that the testing phase of its Year 2000 readiness plan will be substantially completed by March 1999, and that the implementation phase will be substantially completed by the middle of 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. Based on the Company's current estimates, incremental out-of-pocket costs of its Year 2000 program are expected to be immaterial in each of 1998 and 1999. These costs, a portion of which will be capitalizable, include third party consultants -19- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- and replacement and remediation of existing computer software and hardware. Such costs do not include internal management time, the effects of which are 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 the update of reports from each location and through the completion of its annual capital expenditure budget review process. To the extent applicable, more detailed information on costs will be included in the Company's Annual Report on Form 10-K. 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 decentralized nature of the Company's structure and systems, the Company believes that a reasonable worst case scenario would involve the failures of significant third parties (including entities with which the Company has no direct involvement) that continue for more than several days and affect a significant number of the Company's operating locations. The Company is considering various contingency plans in the event of such failures. The development of the Company's contingency plans will be 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 -20- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- 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 compliant. Forward-Looking Statements This "Management's Discussion of Financial Condition and Results of Operations" contains 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," "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 conditions; the impact of competition in the marketing and communications industry; 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 differ from those expressed in any forward-looking statements made by or on behalf of the Company. -21- PART II. OTHER INFORMATION Item 6. Exhibits Exhibit Number Description of Exhibit - -------------- ---------------------- 27 Financial Data Schedule (filed in electronic format only) 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 13, 1998 /s/ John D. Wren ----------------------------- John D. Wren Chief Executive Officer and President Date November 13, 1998 /s/ Jonathan E. Ramsden ----------------------------- Jonathan E. Ramsden Controller (Principal Accounting Officer) -22- EX-27 2 FDS --
5 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 313,234 34,271 2,329,673 43,333 0 3,349,458 690,495 388,967 6,224,337 3,765,785 1,068,103 0 0 88,656 978,721 6,224,337 0 2,894,063 0 1,708,881 800,176 6,135 50,151 355,402 149,969 190,687 0 0 0 190,687 1.15 1.13
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