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: March 31, 2000
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OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________.
Commission File Number: 1-10551
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OMNICOM GROUP INC.
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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 Number)
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. 177,644,800 (as of April 30,
2000)
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2000 and 1999 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
2000 1999
---- ----
Assets
------
Current assets:
Cash and cash equivalents ................................... $ 353,462 $ 576,427
Short-term investments at market, which approximates cost ... 39,421 24,522
Accounts receivable, less allowance for doubtful accounts
of $50,435 and $53,720 ................................... 3,163,812 3,358,304
Billable production orders in process, at cost .............. 398,510 299,209
Prepaid expenses and other current assets ................... 565,031 453,862
---------- ----------
Total Current Assets ................................. 4,520,236 4,712,324
Furniture, equipment and leasehold improvements at cost, less
accumulated depreciation and amortization of $542,911,
and $522,254 ............................................. 448,573 444,722
Investments in affiliates ................................... 360,711 369,311
Intangibles, less amortization of $363,377 and $352,081 ..... 2,491,103 2,428,385
Deferred tax benefits ....................................... 81,934 120,346
Long-term investments, at market............................. 669,521 802,644
Deferred charges and other assets ........................... 231,168 139,905
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Total Assets ......................................... $8,803,246 $9,017,637
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ............................................ $3,182,275 $4,112,777
Advance billings ............................................ 431,180 417,044
Bank loans .................................................. 261,685 130,369
Accrued taxes and other liabilities.......................... 1,176,020 1,317,732
Dividends payable ........................................... 31,103 31,141
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Total Current Liabilities .............................. 5,082,263 6,009,063
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Long-term debt .................................................. 1,101,728 263,149
Convertible subordinated debentures ............................. 448,419 448,483
Deferred compensation and other liabilities ..................... 311,121 300,746
Deferred income taxes on unrealized gains ....................... 237,294 320,176
Minority interests .............................................. 121,357 123,122
Shareholders' equity:
Common stock ................................................ 93,543 93,543
Additional paid-in capital .................................. 807,776 808,154
Retained earnings ........................................... 995,084 882,051
Unamortized restricted stock ................................ (78,103) (85,919)
Accumulated other comprehensive income ...................... 181,737 285,234
Treasury stock .............................................. (498,973) (430,165)
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Total Shareholders' Equity ............................. 1,501,064 1,552,898
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Total Liabilities and Shareholders' Equity ............. $8,803,246 $9,017,637
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(unaudited)
Three Months Ended March 31,
2000 1999
---- ----
Commissions and fees ........................ $1,379,015 $1,146,877
Operating expenses:
Salaries and related costs .............. 838,867 688,301
Office and general expenses ............. 376,461 324,006
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1,215,328 1,012,307
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Operating profit ............................ 163,687 134,570
Gain on sale of Razorfish shares ............ 110,044 --
Net interest expense:
Interest and dividend income ............ (7,274) (7,225)
Interest paid or accrued ................ 18,595 18,472
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11,321 11,247
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Income before income taxes .................. 262,410 123,323
Income taxes ................................ 108,469 50,515
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Income after income taxes ................... 153,941 72,808
Equity in affiliates ........................ 876 929
Minority interests .......................... (11,279) (8,175)
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Net income ............................ $ 143,538 $ 65,562
========== ==========
Net Income Per Common Share:
Net income:
Basic ................................... $0.82 $0.37
Diluted ................................. $0.78 $0.37
Dividends declared per common share ......... $0.175 $0.15
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 CASH FLOWS
(Dollars in Thousands)
(unaudited)
Three Months Ended March 31,
2000 1999
---- ----
Cash flows from operating activities:
Net income ............................................................... $ 143,538 $ 65,562
Adjustments to reconcile net income to net cash
used for operating activities:
Gain on sale of long-term investments .................................... (110,044) --
Depreciation and amortization of tangible assets ......................... 25,339 22,889
Amortization of intangible assets ........................................ 19,832 16,849
Minority interests ....................................................... 11,279 8,175
Earnings of affiliates less than dividends received ...................... 794 945
Decrease in deferred tax benefits ........................................ 1,759 1,065
Provision for losses on accounts receivable .............................. 2,341 2,344
Amortization of restricted stock ......................................... 7,465 5,273
Decrease (increase) in accounts receivable ............................... 171,051 (140,594)
Increase in billable production orders in process ........................ (102,949) (20,605)
Increase in prepaid expenses and other current assets .................... (113,490) (39,394)
Decrease in accounts payable ............................................. (882,291) (465,440)
Decrease in other accrued liabilities .................................... (159,401) (114,084)
Increase in accrued taxes on income ...................................... 36,943 10,211
Decrease in advances to affiliates ....................................... 40,916 21,019
Other increases (decreases)............................................... 4,671 (19,300)
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Net cash used for operating activities ................................ (902,247) (645,085)
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Cash flows from investing activities:
Capital expenditures ..................................................... (33,089) (27,163)
Payments for purchases of equity interests in subsidiaries and affiliates,
net of cash acquired .................................................. (129,065) (108,409)
Proceeds from sales of equity interests in subsidiaries and affiliates ... 6,017 634
Payments for purchases of long-term investments and other assets ......... (132,602) (21,278)
Proceeds from sales of long-term investments and other assets ............ 145,628 37,518
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Net cash used for investing activities ................................ (143,111) (118,698)
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Cash flows from financing activities:
Net borrowings under lines of credit ..................................... 192,527 109,117
Share transactions under employee stock plans ............................ 17,328 13,484
Proceeds from issuance of debt obligations ............................... 934,336 476,778
Repayments of principal of debt obligations .............................. (146,019) (59,345)
Dividends and loans to affiliates and minority shareholders .............. (55,112) (16,473)
Dividends paid ........................................................... (30,677) (25,069)
Purchase of treasury shares .............................................. (86,270) (72,524)
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Net cash provided by financing activities ............................. 826,113 425,968
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Effect of exchange rate changes on cash and cash equivalents ................. (3,720) (293)
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Net decrease in cash and cash equivalents ............................. (222,965) (338,108)
Cash and cash equivalents at beginning of period ............................. 576,427 648,781
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Cash and cash equivalents at end of period ................................... $ 353,462 $ 310,673
========= =========
Supplemental Disclosures:
Income taxes paid ......................................................... $ 65,622 $ 35,205
========= =========
Interest paid ............................................................. $ 18,092 $ 19,191
========= =========
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
3
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 normally
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 March 31, 1999 and December 31,
1999 reported amounts to conform them with the March 31, 2000
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, 1999.
3. Results of operations for interim periods are not necessarily
indicative of annual results.
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 March 31, 2000 and 1999,
the Debentures were assumed to be converted for the entire quarter. For
purposes of computing diluted earnings per share for the three months
ended March 31, 2000 and 1999, respectively, 177,484,000 and 178,357,000
common share equivalents were assumed to have been outstanding.
Additionally, 11,552,000 and 6,936,000 shares, respectively were assumed
to have been converted related to the Debentures and the assumed increase
in net income used in the computation was $4,441,000 and $2,385,000,
respectively. The number of shares used in the computations of basic and
diluted earnings per share were as follows:
Three Months
Ended March 31,
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2000 1999
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Basic EPS 174,669,000 175,329,000
Diluted EPS 189,036,000 185,293,000
For purposes of computing diluted earnings per share for the three
months ended March 31, 1999, the Company's 2.25% Convertible Subordinated
Debentures were not reflected in the computation, as their inclusion would
have been antidilutive.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5. Total comprehensive income and its components were as follows:
Three Months Ended
March 31,
($ in 000's)
--------------------------
2000 1999
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Net income for the period $143,538 $ 65,562
Unrealized loss on Long-Term
Investments, net of income taxes of $8,910 (12,910) --
Reclassification to realized gain on sale of
Razorfish shares, net of income taxes of $46,218 (63,826) --
Foreign currency translation adjustment,
net of income taxes of $18,596 and
$16,937 in 2000 and 1999, respectively (26,761) (24,373)
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Comprehensive income for the period $ 40,041 $ 41,189
======== ========
During the three month period ended March 31, 2000, the Company sold
a portion of its ownership interest in Razorfish Inc. and realized a
pre-tax gain of approximately $110 million. Included in net income for the
period is $63,826,000 related to this transaction and comprehensive income
for the period has been adjusted to reflect the reclassification of the
gain from unrealized to realized.
During the period certain interactive marketing agencies, in which
the Company holds an ownership interest in, filed initial public offerings
of their equity securities. Accordingly, the Company adjusted the carrying
value of these holdings to reflect market value as of March 31, 2000 and
recorded an unrealized pre-tax gain of $284 million in comprehensive
income. These investments are included in Long-Term Investments on the
accompanying March 31, 2000 balance sheet.
6. In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which
the Company is required to adopt effective January 1, 2001. 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. 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.
5
OMNICOM GROUP INC. AND SUBSISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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 clients businesses. A summary of the Company's
operations by geographic area as of March 31, 2000 and 1999, and for the
three months then ended is presented below:
Dollars in Thousands
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United United Other Other
States Kingdom Germany France Europe International Consolidated
2000
Commissions and Fees $717,378 $188,902 $100,677 $89,037 $130,688 $152,333 $1,379,015
Long-Lived Assets 225,809 102,393 10,259 16,599 34,447 59,066 444,464
1999
Commissions and Fees $587,212 $164,751 $91,621 $83,895 $116,195 $103,203 $1,146,877
Long-Lived Assets 162,619 99,698 11,441 15,648 25,179 59,439 374,024
8. On April 27, 2000, the Company extended its $750 million
revolving credit facility ("the Facility"). The Facility was renewed under
the same terms with an additional provision which allows the Company to
convert all amounts outstanding under the Facility to a one-year term
loan. The Facility, which allows for the issuance of commercial paper
expires on April 26, 2001. In addition to the $750 million credit facility
the Company has a $500 million 5-year revolving credit facility available
which also allows for the issuance of commercial paper and expires on
June 30, 2003.
Amounts borrowed or issued under the Facilities at March 31, 2000
include commercial paper, which amounted to $622.7 million, and bank loans
of $200 million, were classified as long-term debt. Amounts available
under both credit facilities at March 31, 2000 were $427.3 million.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
First Quarter 2000 Compared to First Quarter 1999
Consolidated worldwide revenues from commission and fee income increased
20.2% in the first quarter of 2000 to $1,379.0 million compared to $1,146.9
million in the first quarter of 1999. Consolidated domestic revenues increased
22.2% in the first quarter of 2000 to $717.4 million compared to $587.2 million
in the first quarter of 1999. Consolidated international revenues increased
18.2% in the first quarter of 2000 to $661.6 million compared to $559.7 million
in the first quarter of 1999. The effect of acquisitions, net of divestitures
increased worldwide revenues by 9.2% and changes in the foreign exchange value
of the U.S. dollar decreased worldwide revenues by 3.8%. The remaining 14.8%
increase in consolidated worldwide revenues was due to the growth of existing
businesses, including net new business wins.
Worldwide operating expenses, including net interest expense increased
19.8% in the first quarter of 2000 compared to in the first quarter of 1999. The
effect of acquisitions, net of divestitures, increased worldwide operating
expenses by 9.2% and changes in the foreign exchange value of the U.S. dollar
decreased worldwide operating expenses by 3.7%. The remaining increase of 14.3%
reflects normal salary increases and growth in client services expenditures to
support the increased revenue base.
Net interest expense increased slightly in the first quarter of 2000 to
$11.3 million as compared to $11.2 million in the same period in 1999. This
reflected higher average interest rates during the period, substantially offset
by the effect of higher average amounts of cash and marketable securities
invested during the period.
Excluding the gain on sale of Razorfish shares, pretax profit margin was
11.0% in the first quarter of 2000 as compared to 10.8% in the same period in
1999 and operating margin, which excludes interest and dividend income and
interest expense, was 11.9% in the first quarter of 2000 as compared to 11.7% in
the same period in 1999.
The effective income tax rate was 41.3% in the first quarter of 2000 as
compared to 41.0% in the first quarter of 1999. This increase is due principally
to the impact of the gain on sale of Razorfish shares which resulted in a higher
marginal tax rate.
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 March 31, 2000 financial statements and lower profits
earned by certain companies in which the Company owns less than a 50% equity
interest.
The increase in minority interest expense is primarily due to acquisitions
and greater earnings by companies where minority interests exist.
Including the gain on sale of Razorfish shares, net income increased
118.9% to $143.5 million and diluted earnings per share increased 110.8% to
$0.78 in the first quarter of 2000. Excluding this gain, net income increased
21.6% to $79.7 million in the first quarter of 2000 as
7
compared to $65.6 million in the same period in 1999 and diluted earnings per
share increased 21.6% to $0.45 in the current quarter compared to $0.37 in the
prior year period.
Capital Resources and Liquidity
Cash and cash equivalents at March 31, 2000 decreased to $353.5 million
from $576.4 million at December 31, 1999. The relationship between payables to
the media and suppliers and receivables from clients, at March 31, 2000, is
consistent with industry norms.
On April 27, 2000 the Company renewed its $750 million revolving credit
facility (the "Facility"). The Facility, which allows for the issuance of
commercial paper, was renewed under the same terms, with an additional provision
that allows the Company to convert all amounts outstanding at expiration of the
Facility on April 26, 2001, into a one-year term loan.
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 March 31, 2000, the Company had $1,705 million
in such unsecured committed lines of credit, including the $750 million
revolving credit facility renewed April 27, 2000, of which $564 million was
available.
Management believes the aggregate lines of credit available to the Company
and cash flow from operations provide the Company with sufficient liquidity and
are adequate to support foreseeable operating requirements.
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 1999 Form 10-K provides a more detailed discussion of the
market risks affecting its operations. As of March 31, 2000, no material change
had occurred in the Company's market risks, as compared to the disclosure in its
Form 10-K for the year ending December 31, 1999.
Forward-Looking Statements
"Management's Discussion and Analysis 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 no 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
and business conditions; loss of significant customers; changes in levels of
client advertising; the impact of competition; risks relating to acquisition
activities; and the complexity of integrated computer systems. 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.
8
PART II. OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
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10.1 364-Day Credit Agreement, dated as of April 30, 1999,
amended and restated April 27, 2000, among Omnicom
Finance Inc., Omnicom Finance PLC, Omnicom Capital
Inc., the financial institutions party thereto,
Citibank, N.A., as Administrative Agent, The Bank of
Nova Scotia, as Documentation Agent, and San Paolo IMI
SPA, as Syndication Agent.
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 first quarter of 2000.
9
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 May 15, 2000 /s/ Randall J. Weisenburger
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Randall J. Weisenburger
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date May 15, 2000 /s/ Philip J. Angelastro
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Philip J. Angelastro
Controller
(Chief Accounting Officer)
10