CONFORMED COPY
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: June 30, 1997
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
July 31, 1997 is 81,405,000.
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
June 30, 1997, December 31, 1996 and
June 30, 1996 2
Consolidated Condensed Statements of Income -
Three Months Ended June 30, 1997 and 1996
Six Months Ended June 30, 1997 and 1996 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Condensed Financial
Statements 5-8
Item 2. Management's Discussion of Financial Condition
and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 6. Exhibits 16
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
Assets June 30, December 31, June 30,
1997 1996 1996
----------- ------------ ----------
Current assets:
Cash and cash equivalents $ 294,028 $ 510,267 $ 250,132
Investments available-for-sale, at market, which approximates cost 95,471 12,841 21,887
Accounts receivable, less allowance for doubtful accounts
of $26,232, $25,642 and $23,159 1,685,742 1,555,411 1,614,465
Billable production orders in process 200,731 156,667 171,147
Prepaid expenses and other current assets 238,882 189,799 200,243
----------- ---------- -----------
Total current assets 2,514,854 2,424,985 2,257,874
Furniture, equipment and leasehold improvements, less
accumulated depreciation and amortization of $317,156,
$301,102 and $287,450 228,883 221,655 211,334
Investments in affiliates 236,615 223,918 197,239
Intangibles, less amortization of $214,605, $198,880 and $168,234 1,148,131 1,000,312 877,240
Deferred tax benefits 73,410 79,828 68,180
Deferred charges and other assets 139,598 105,245 109,259
----------- ----------- -----------
Total assets $ 4,341,491 $ 4,055,943 $ 3,721,126
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,903,841 $ 2,070,026 $ 1,716,675
Payable to banks 28,640 8,772 30,318
4.5%/6.25% Step-Up Convertible Subordinated Debentures -- -- 143,750
Other accrued liabilities 729,713 717,869 598,960
Accrued taxes on income 77,333 66,409 62,529
----------- ---------- -----------
Total current liabilities 2,739,527 2,863,076 2,552,232
Long term debt 545,014 204,744 400,141
Deferred compensation and other liabilities 143,461 124,739 111,309
Minority interests 71,964 62,706 62,368
Shareholders' equity:
Common stock 43,417 43,144 40,525
Additional paid-in capital 569,110 554,511 406,801
Retained earnings 478,861 419,072 358,206
Unamortized restricted stock (56,104) (39,445) (46,810)
Cumulative translation adjustment (34,558) 3,490 (26,031)
Treasury stock (159,201) (180,094) (137,615)
----------- ---------- -----------
Total shareholders' equity 841,525 800,678 595,076
----------- ---------- -----------
Total liabilities and shareholders' equity $ 4,341,491 $ 4,055,943 $ 3,721,126
=========== ========== ===========
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 June 30, Six Months Ended June 30,
---------------------------- --------------------------------
1997 1996 1997 1996
--------- --------- ----------- -----------
Revenues:
Commissions and fees $ 786,341 $ 666,465 $ 1,482,918 $ 1,258,066
Operating expenses:
Salaries and related costs 444,200 371,220 865,685 729,808
Office and general expenses 219,267 194,036 420,369 365,945
--------- --------- ----------- -----------
Total operating expenses 663,467 565,256 1,286,054 1,095,753
--------- --------- ----------- -----------
Operating profit 122,874 101,209 196,864 162,313
Net interest expense:
Interest and dividend income (6,273) (3,748) (9,257) (7,061)
Interest paid or accrued 11,234 9,856 18,567 19,258
--------- --------- ----------- -----------
Net interest expense 4,961 6,108 9,310 12,197
--------- --------- ----------- -----------
Income before income taxes 117,913 95,101 187,554 150,116
Income taxes:
Federal 17,491 15,638 28,940 25,937
State and local 5,771 4,055 10,462 6,984
International 24,783 18,733 36,909 27,776
--------- --------- ----------- -----------
Total income taxes 48,045 38,426 76,311 60,697
--------- --------- ----------- -----------
Income after income taxes 69,868 56,675 111,243 89,419
Equity in affiliates 7,282 4,023 11,426 7,076
Minority interests (10,751) (7,745) (16,202) (12,629)
--------- --------- ----------- -----------
Net income $ 66,399 $ 52,953 $ 106,467 $ 83,866
========= ========= =========== ===========
Earnings per share:
Net income:
Primary $ 0.81 $ 0.70 $ 1.31 $ 1.11
Fully diluted $ 0.81 $ 0.68 $ 1.31 $ 1.08
Dividends declared per common share $ 0.20 $ 0.175 $ 0.40 $ 0.35
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)
Six Months Ended
June 30,
----------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 106,467 $ 83,866
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization of tangible assets 28,111 24,031
Amortization of intangible assets 18,781 14,807
Minority interests 16,202 12,629
Earnings of affiliates in excess of dividends received (6,523) (1,988)
Decrease in deferred tax benefits 9,776 1,567
Provision for losses on accounts receivable 3,160 2,119
Amortization of restricted shares 8,525 6,372
Increase in accounts receivable (130,993) (70,822)
Increase in billable production (46,033) (37,620)
Increase in other current assets (33,198) (37,413)
Decrease in accounts payable (148,406) (60,196)
Decrease in other accrued liabilities (44,103) (122,527)
Increase in accrued income taxes 8,867 18,245
Other (26,634) (10,422)
--------- ---------
Net cash used for operating activities (236,001) (177,352)
--------- ---------
Cash flows from investing activities:
Capital expenditures (31,502) (25,384)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired (181,271) (86,559)
Proceeds from sales of equity interests in
subsidiaries and affiliates 320 45,341
Payments for purchases of investments available-for-sale
and other investments (84,931) (11,325)
Proceeds from sales of investments available-for-sale
and other investments 6,849 12,007
--------- ---------
Net cash used for investing activities (290,535) (65,920)
--------- ---------
Cash flows from financing activities:
Net borrowings under lines of credit 10,283 7,135
Share transactions under employee stock plans 20,971 12,715
Proceeds from issuance of principal of debt obligations 346,330 227,886
Dividends and loans to minority stockholders (6,389) (9,953)
Dividends paid (31,743) (25,576)
Purchase of treasury shares (11,043) (37,938)
--------- ---------
Net cash provided by financing activities 328,409 174,269
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (18,112) 5,136
--------- ---------
Net decrease in cash and cash equivalents (216,239) (63,867)
Cash and cash equivalents at beginning of period 510,267 313,999
--------- ---------
Cash and cash equivalents at end of period $ 294,028 $ 250,132
========= =========
Supplemental Disclosures:
Income taxes paid $ 59,109 $ 39,924
========= =========
Interest paid $ 8,662 $ 20,361
========= =========
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, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
2) These statements reflect all adjustments, consisting of normal recurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the information contained therein. Certain reclassifications
have been made to the June 30, 1996 reported amounts to conform them with
the June 30, 1997 and December 31, 1996 presentation. It is suggested that
these consolidated condensed financial statements 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, 1996.
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) Primary earnings per share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period.
Fully diluted earnings per share is based on the above, and if dilutive,
adjusted for the assumed conversion of convertible debentures and the
assumed increase in net income for the after tax interest cost of such
debentures. At June 30, 1997, the 4.25% Convertible Subordinated Debentures
had been outstanding since January 3, 1997. At June 30, 1996, the 4.5%/6.25%
Step-Up Convertible Subordinated Debentures were outstanding. The number of
shares used in the computations of primary and fully diluted earnings per
share were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Primary 81,634,000 75,793,600 81,263,500 75,706,700
Fully diluted 85,223,400 81,111,200 81,456,000 81,089,400
For purposes of computing fully diluted earnings per share on net income for
the six months ended June 30, 1997, the Company's 4.25% Convertible
Subordinated Debentures were not reflected in the computation as their
inclusion would have been anti-dilutive.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". Under
SFAS No. 128, the presentation of Primary and Fully Diluted Earnings Per
-6-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Share will be replaced by Basic and Diluted Earnings Per Share. Adoption of
SFAS No. 128 is required for periods ending after December 15, 1997, at
which time restatement for prior periods will be necessary. Had the
provisions of SFAS No. 128 been in effect as of June 30, 1997, the Company
would have reported the following earnings per share information:
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Earnings per share:
Basic $ 0.83 $ 0.71 $ 1.33 $ 1.13
Diluted $ 0.81 $ 0.68 $ 1.31 $ 1.08
5) On February 28, 1997, the Company exchanged 544,487 shares of common stock
for all of the outstanding shares of Cline Davis & Mann, Inc. and Gavin
Anderson & Company (Japan), Inc. These combinations have been accounted for
as poolings of interests. 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.
6) On January 3, 1997, the Company issued $218,500,000 of 4.25% Convertible
Subordinated Debentures with a scheduled maturity in 2007. The debentures
are convertible into common stock of the Company at a
-7-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
conversion price of $63.00 per share subject to adjustment in certain
events. Debenture holders have the right to require the Company to redeem
the debentures on January 3, 2003 at a price of 112.418%, 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 29, 2000 initially at 108.324%
and at increasing prices thereafter to 112.418% until January 2, 2003 and
100% thereafter. Unless the debentures are redeemed, repaid or converted
prior thereto, the debentures will mature on January 3, 2007 at their
principal amount. The proceeds of this issuance are being used for general
corporate purposes including working capital.
-8-
Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations
Second Quarter 1997 Compared to Second Quarter 1996
Consolidated worldwide revenues from commission and fee income increased
18.0% in the second quarter of 1997 compared to the second quarter of 1996.
Consolidated domestic revenues increased 15.3% in the second quarter of 1997 to
$406.9 million compared to $353.0 million in the second quarter of 1996.
Consolidated international revenues increased 21.0% in the second quarter of
1997 to $379.4 million compared to $313.5 million in the second quarter of 1996.
Absent the effect of the net acquisitions of subsidiary companies and movements
in international currency exchange rates, consolidated worldwide revenues
increased 12.6% in the second quarter of 1997 as compared to the same period in
1996.
Operating expenses increased 17.4% in the second quarter of 1997 as
compared to the second quarter of 1996. Excluding the effect of the net
acquisition activity and movements in international currency exchange rates
mentioned above, operating expenses increased 13.6% over 1996 levels. This
increase reflects normal salary increases and growth in client service
expenditures to support the increased revenue base.
-9-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Net interest expense decreased by $1.1 million in the second quarter of
1997 as compared to the same period in 1996. This decrease primarily reflects
higher average amounts of cash and marketable securities invested during the
period partially offset by the effect of higher average borrowings during the
quarter.
Pretax profit margin was 15.0% in the second quarter of 1997 as compared to
14.3% in the same period in 1996. Operating margin, which excludes interest and
dividend income and interest expense, was 15.6% in the second quarter of 1997 as
compared to 15.2% in the same period in 1996.
The effective income tax rate of 40.7% in the second quarter of 1997
approximated the effective income tax rate of 40.4% in the second quarter of
1996.
The increase in equity in affiliates is indicative of greater profits
earned by companies in which the Company owns less than a 50% equity interest.
The increase in minority interest expense is primarily due to greater earnings
by companies where minority interests exist and additional minority interests
resulting from acquisitions.
Net income increased 25.4% in the second quarter of 1997 as compared to the
same period in 1996. Absent the effect of net acquisitions and movements in
international currency exchange rates, net income increased 14.1% in the second
quarter of 1997 as compared to the second quarter of 1996.
-10-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Six Months 1997 Compared to Six Months 1996
Consolidated worldwide commission and fee income increased 17.9% in the
first six months of 1997 compared to the first six months of 1996. Consolidated
domestic commission and fee income increased 16.6% in the first six months of
1997 to $788.5 million compared to $676.3 million in the same period in 1996.
Consolidated international commission and fee income increased 19.4% in the
first six months of 1997 to $694.4 million compared to $581.8 million in the
same period in 1996. Absent the effect of movements in international currency
exchange rates and net acquisitions of subsidiary companies made subsequent to
the second quarter of 1996, consolidated worldwide commission and fee income
increased 12.9% in the first six months of 1997 versus the first six months of
1996.
Operating expenses increased by 17.4% in the first six months of 1997 as
compared to the same period in 1996. Excluding the effect of movements in
international currency exchange rates and net acquisition activity, operating
expenses increased 12.6% over 1996 levels.
Net interest expense decreased by $2.9 million in the first six months of
1997 as compared to the same period in 1996. This decrease primarily reflects
higher average amounts of cash and marketable securities invested during the
period.
Pretax profit margin for the first six months of 1997 was 12.6% as compared
to 11.9% in the same period in 1996. Operating margin, which excludes interest
and dividend income
-11-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
and interest expense, was 13.3% in the first six months of 1997 as compared to
12.9% in the same period in 1996.
The effective income tax rate of 40.7% in the first six months of 1997
approximated the effective income tax rate of 40.4% in the first six months of
1996.
The increase in equity in affiliates is indicative of greater profits
earned by companies in which the Company owns less than a 50% equity interest.
The increase in minority interest expense is primarily due to greater earnings
by companies where minority interests exist and additional minority interests
from acquisitions.
Net income increased 26.9% in the first six months of 1997 as compared to
the same period in 1996. Absent the effect of net acquisitions and movements in
international currency exchange rates, net income increased 17.2% in the first
six months of 1997 as compared to the same period in 1996.
Capital Resources and Liquidity
Cash and cash equivalents at June 30, 1997 decreased to $294.0 million from
$510.3 million at December 31, 1996. The relationship between payables to the
media and suppliers and receivables from clients, at June 30, 1997, is
consistent with seasonal and industry norms.
-12-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The Company maintains relationships with a number of banks worldwide, which
have extended unsecured committed lines of credit in amounts sufficient to meet
the Company's cash needs. At June 30, 1997, the Company had $501.0 million in
such unsecured committed lines of credit, comprised of a $360.0 million
revolving credit agreement expiring June 30, 2001, and $141.0 million in lines
of credit, principally outside of the United States. Of the $501.0 million in
unsecured committed lines, $361.2 million remained available at June 30, 1997.
On January 3, 1997, the Company issued $218,500,000 of 4.25% Convertible
Subordinated Debentures with a scheduled maturity in 2007. The debentures are
convertible into common stock of the Company at a conversion price of $63.00 per
share subject to adjustment in certain events. Debenture holders have the right
to require the Company to redeem the debentures on January 3, 2003 at a price of
112.418%, 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 29, 2000 initially
at 108.324% and at increasing prices thereafter to 112.418% until January 2,
2003 and 100% thereafter. Unless the debentures are redeemed, repaid or
converted prior thereto, the debentures will mature on January 3, 2007 at their
principal amount. The proceeds of this issuance are being used for general
corporate purposes including working capital.
-13-
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.
-14-
PART II. OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Company was held on May 19,
1997 in New York, New York, at which two matters were submitted to a vote of the
share owners:
(a) Votes cast for or where authority to vote for was withheld regarding
the re-election of six Directors were as follows:
AUTHORITY
FOR WITHHELD
--- ---------
(Term Expiring in 2000:)
Robert J. Callander 68,065,341 333,556
John R. Murphy 68,089,696 309,221
John R. Purcell 68,079,484 319,413
William G. Tragos 68,059,370 339,527
Quentin I. Smith, Jr. 68,073,935 324,962
Egon P.S. Zehnder 68,071,679 327,218
(b) Votes cast for or against and the number of abstentions regarding the
ratification of the appointment of Arthur Andersen LLP as independent auditors
of the Company to serve for 1997 were as follows:
FOR 68,176,454
AGAINST 49,502
ABSTAIN 172,941
-15-
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 August 13, 1997 /s/ Fred J. Meyer
------------------------ ----------------------------------
Fred J. Meyer
Chief Financial Officer
(Principal Financial Officer)
Date August 13, 1997 /s/ Jonathan E. Ramsden
------------------------ ----------------------------------
Jonathan E. Ramsden
Controller
(Principal Accounting Officer)
-16-