-----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, ChfUngtiQ4iAiT8ohPf1CYdFsSEpKoerhSrqxuLAnM2Ib6zEZOXRVKb4JVuZw4ae O8vvVMbo/Uxo3uvfxwPbrg== 0000891092-99-000726.txt : 19991115 0000891092-99-000726.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891092-99-000726 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748938 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 QUARTERLY REPORT 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 ------- 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) Not Applicable - ------------------------------------------------------------------------------- (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) OMNICOM GROUP INC. AND SUBSIDIARIES INDEX Page No. -------- 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 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, ------ 1999 1998 1998 --------- --------- ---------- 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 =========== =========== ===========
The accompanying notes to consolidated condensed financial statements are an integral part of these statements. 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, -------------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- 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
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, ------------------------ 1999 1998 --------- --------- Cash flows from operating activities: 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 ======== ========
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. 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 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 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 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 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 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 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:
(Dollars in Thousands) --------------------------------------------------------------------------------- United United Other Other States Kingdom Germany France Europe International Consolidated -------- ------- ------- ------- -------- ------------- ------------ Commissions and Fees - 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
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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 SEP-30-1999 $296,015 41,142 3,048,684 49,373 0 4,235,089 896,753 506,419 7,461,809 4,902,544 1,153,719 0 0 93,544 966,746 7,461,809 0 3,628,126 0 2,145,264 990,636 3,070 60,111 453,276 184,939 242,989 0 0 0 242,989 1.39 1.35
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