CONFORMED COPY
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 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, 10022
New York, New York (Zip Code)
(Address of principal executive offices)
(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, 1997 is 81,011,000.
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 1997, December 31, 1996 and
September 30, 1996 2
Consolidated Condensed Statements of Income -
Three Months Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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 6. Exhibits 15
- 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,
-------- 1997 1996 1996
----------- ----------- -----------
Current assets:
Cash and cash equivalents $ 238,253 $ 510,267 $ 191,027
Investments available-for-sale, at market, which approximates cost 71,644 12,841 15,742
Accounts receivable, less allowance for doubtful accounts
of $27,139, $25,642 and $21,453 1,691,987 1,555,411 1,448,804
Billable production orders in process 217,275 156,667 186,565
Prepaid expenses and other current assets 253,434 189,799 221,592
----------- ----------- -----------
Total current assets 2,472,593 2,424,985 2,063,730
Furniture, equipment and leasehold improvements, less
accumulated depreciation and amortization of $329,403,
$301,102 and $300,069 228,789 221,655 212,623
Investments in affiliates 277,662 223,918 196,142
Intangibles, less amortization of $215,369, $198,880 and $187,632 1,161,287 1,000,312 913,243
Deferred tax benefits 75,693 79,828 65,550
Deferred charges and other assets 172,055 105,245 106,759
----------- ----------- -----------
Total assets $ 4,388,079 $ 4,055,943 $ 3,558,047
=========== =========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,838,341 $ 2,070,026 $ 1,488,205
Payable to banks 104,881 8,772 61,143
Other accrued liabilities 750,439 717,869 636,469
Accrued taxes on income 78,331 66,409 42,950
----------- ----------- -----------
Total current liabilities 2,771,992 2,863,076 2,228,767
Long term debt 596,503 204,744 428,139
Deferred compensation and other liabilities 140,205 124,739 109,152
Minority interests 59,583 62,706 57,385
Shareholders' equity:
Common stock 43,416 43,144 43,144
Additional paid-in capital 570,159 554,511 554,420
Retained earnings 500,435 419,072 374,646
Unamortized restricted stock (51,368) (39,445) (43,551)
Cumulative translation adjustment (46,145) 3,490 (26,519)
Treasury stock (196,701) (180,094) (167,536)
----------- ----------- -----------
Total shareholders' equity 819,796 800,678 734,604
----------- ----------- -----------
Total liabilities and shareholders' equity $ 4,388,079 $ 4,055,943 $ 3,558,047
=========== =========== ===========
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Commissions and fees $746,839 $631,772 $2,229,757 $1,889,838
Operating expenses:
Salaries and related costs 452,927 385,995 1,318,612 1,115,803
Office and general expenses 214,028 186,173 634,397 552,118
-------- -------- ---------- ----------
Total operating expenses 666,955 572,168 1,953,009 1,667,921
-------- -------- ---------- ----------
Operating profit 79,884 59,604 276,748 221,917
Net interest expense:
Interest and dividend income (5,532) (3,043) (14,789) (10,104)
Interest paid or accrued 12,356 7,487 30,923 26,745
-------- -------- ---------- ----------
Net interest expense 6,824 4,444 16,134 16,641
-------- -------- ---------- ----------
Income before income taxes 73,060 55,160 260,614 205,276
Income taxes:
Federal 10,557 9,255 39,497 35,192
State and local 4,935 3,722 15,397 10,707
International 14,387 9,259 51,296 37,034
-------- -------- ---------- ----------
Total income taxes 29,879 22,236 106,190 82,933
-------- -------- ---------- ----------
Income after income taxes 43,181 32,924 154,424 122,343
Equity in affiliates 4,601 3,509 16,027 10,585
Minority interests (6,291) (4,200) (22,493) (16,829)
-------- -------- ---------- ----------
Net income $ 41,491 $ 32,233 $ 147,958 $ 116,099
======== ======== ========== ==========
Earnings per share:
- -------------------
Net income:
Primary $ 0.51 $ 0.42 $ 1.82 $ 1.53
Fully diluted $ 0.51 $ 0.42 $ 1.82 $ 1.50
Dividends declared per common share $ 0.25 $ 0.20 $ 0.65 $ 0.55
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,
----------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 147,958 $ 116,099
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization of tangible assets 42,895 36,736
Amortization of intangible assets 29,421 22,837
Minority interests 22,493 16,829
Earnings of affiliates in excess of dividends received (9,641) (418)
Decrease in deferred tax benefits 2,165 5,172
Provision for losses on accounts receivable 5,030 2,287
Amortization of restricted shares 12,924 10,100
(Increase) decrease in accounts receivable (143,256) 94,964
Increase in billable production (62,714) (52,736)
Increase in other current assets (43,209) (58,975)
Decrease in accounts payable (210,770) (290,891)
Decrease in other accrued liabilities (4,019) (90,360)
Increase (decrease) in accrued income taxes 9,606 (1,438)
Other (37,563) (110)
--------- ---------
Net cash used for operating activities (238,680) (189,904)
--------- ---------
Cash flows from investing activities:
Capital expenditures (47,251) (37,855)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired (300,622) (117,761)
Proceeds from sales of equity interests in
subsidiaries and affiliates 466 49,934
Payments for purchases of investments available-for-sale
and other investments (88,526) (13,318)
Proceeds from sales of investments available-for-sale
and other investments 34,056 20,345
--------- ---------
Net cash used for investing activities (401,877) (98,655)
--------- ---------
Cash flows from financing activities:
Net borrowings under lines of credit 76,784 38,539
Share transactions under employee stock plans 26,247 12,482
Proceeds from issuance of principal of debt obligations 468,447 252,502
Repurchase of debt obligations (38,172) --
Dividends and loans to minority stockholders (27,934) (18,297)
Dividends paid (47,704) (38,532)
Purchase of treasury shares (52,223) (85,812)
--------- ---------
Net cash provided by financing activities 405,445 160,882
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (36,902) 4,705
--------- ---------
Net decrease in cash and cash equivalents (272,014) (122,972)
Cash and cash equivalents at beginning of period 510,267 313,999
--------- ---------
Cash and cash equivalents at end of period $ 238,253 $ 191,027
========= =========
Supplemental Disclosures:
Income taxes paid $ 96,750 $ 89,412
========= =========
Interest paid $ 27,049 $ 28,834
========= =========
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, 1996 reported
amounts to conform them with the September 30, 1997 and December 31,
1996 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, 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 September 30, 1997, the 4.25% Convertible Subordinated
Debentures had been outstanding since January 3, 1997. In 1996, the
4.5%/6.25% Step-Up Convertible Subordinated Debentures had been outstanding
until the September 5, 1996 redemption date. The number of shares used in
the computations of primary and fully diluted earnings per share were as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
Primary 81,434,700 76,629,100 81,286,300 76,120,500
Fully diluted 81,564,300 80,702,800 81,527,500 80,997,000
For purposes of computing fully diluted earnings per share on net
income for the three months and nine months ended September 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
- 6 -
and Fully Diluted Earnings Per 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
September 30, 1997, the Company would have reported the following earnings
per share information:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Earnings per share:
-------------------
Basic $ 0.52 $ 0.43 $ 1.85 $ 1.55
Diluted $ 0.51 $ 0.42 $ 1.82 $ 1.50
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
-7-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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.
-8-
Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter 1997 Compared to Third Quarter 1996
Consolidated worldwide revenues from commission and fee income
increased 18.2% in the third quarter of 1997 compared to the third quarter of
1996. Consolidated domestic revenues increased 17.8% in the third quarter of
1997 to $402.3 million compared to $341.6 million in the third quarter of 1996.
Consolidated international revenues increased 18.7% in the third quarter of 1997
to $344.5 million compared to $290.2 million in the third quarter of 1996.
Absent the effect of the net acquisitions of subsidiary companies and movements
in international currency exchange rates, consolidated worldwide revenues
increased 14.5% in the third quarter of 1997 as compared to the same period in
1996.
Operating expenses increased 16.6% in the third quarter of 1997 as
compared to the third quarter of 1996. Excluding the effect of the net
acquisition activity and movements in international currency exchange rates
mentioned above, operating expenses increased 14.5% 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 increased by $2.4 million in the third quarter of
1997 as compared to the same period in 1996. This increase primarily reflects
higher average borrowings during the quarter partially offset by the effect of
higher average amounts of cash and marketable securities invested during the
quarter.
Pretax profit margin was 9.8% in the third quarter of 1997 as compared
to 8.7% in the same period in 1996. Operating margin, which excludes interest
and dividend income and interest expense, was 10.7% in the third quarter of 1997
as compared to 9.4% in the same period in 1996.
The effective income tax rate was 40.9% in the third quarter of 1997 as
compared to the effective income tax rate of 40.3% in the third quarter of 1996.
The increase primarily reflects higher effective tax rates at certain
international subsidiaries.
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,
partially offset by the conversion of certain affiliates into subsidiaries. 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 28.7% in the third quarter of 1997 as compared to
the same period in 1996. Absent the effect of net
- 10 -
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
acquisitions and movements in international currency exchange rates, net income
increased 17.3% in the third quarter of 1997 as compared to the third quarter of
1996.
Nine Months 1997 Compared to Nine Months 1996
Consolidated worldwide commission and fee income increased 18.0% in the
first nine months of 1997 compared to the first nine months of 1996.
Consolidated domestic commission and fee income increased 17.0% in the first
nine months of 1997 to $1,190.9 million compared to $1,017.8 million in the same
period in 1996. Consolidated international commission and fee income increased
19.1% in the first nine months of 1997 to $1,038.9 million compared to $872.0
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 third quarter of 1996, consolidated worldwide
commission and fee income increased 13.4% in the first nine months of 1997
versus the first nine months of 1996.
Operating expenses increased by 17.1% in the first nine 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 13.3% over 1996 levels.
Net interest expense decreased by $0.5 million in the first nine months of
1997 as compared to the same period in 1996. This decrease primarily reflects
higher average amounts
-11-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of cash and marketable securities invested during the period offset by the
effect of higher average borrowings during the period.
Pretax profit margin for the first nine months of 1997 was 11.7% as
compared to 10.9% in the same period in 1996. Operating margin, which excludes
interest and dividend income and interest expense, was 12.4% in the first nine
months of 1997 as compared to 11.7% in the same period in 1996.
The effective income tax rate was 40.7% in the first nine months of 1997 as
compared to the effective income tax rate of 40.4% in the first nine months of
1996. The increase primarily reflects higher effective tax rates at certain
international subsidiaries.
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,
partially offset by the conversion of certain affiliates into subsidiaries. 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 27.4% in the first nine 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 18.3% in the first
nine months of 1997 as compared to the same period in 1996.
-12-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Capital Resources and Liquidity
Cash and cash equivalents at September 30, 1997 decreased to $238.3
million from $510.3 million at December 31, 1996. The relationship between
payables to the media and suppliers and receivables from clients, at September
30, 1997, is consistent with seasonal and 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, 1997, the Company had $572.0
million in such unsecured committed lines of credit, comprised of a $360.0
million revolving credit agreement expiring June 30, 2001, and $212.0 million in
lines of credit, principally outside of the United States. Of the $572.0 million
in unsecured committed lines, $248.5 million remained available at September 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
-13-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 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 11, 1997 /s/ Fred J. Meyer
-------------------- ------------------
Fred J. Meyer
Chief Financial Officer
(Principal Financial Officer)
Date November 11, 1997 /s/ Jonathan E. Ramsden
-------------------- ------------------------
Jonathan E. Ramsden
Controller
(Principal Accounting Officer)
-15-