FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1998
Commission file number: 1-10551
Omnicom Group Inc.
(Exact name of registrant as specified in its charter)
New York 13-1514814
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
437 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 415-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares of common stock of the Company issued and outstanding at
October 31, 1998 is 168,695,900.
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 1998, December 31, 1997 and
September 30, 1997 2
Consolidated Condensed Statements of Income -
Three Months and Nine Months
Ended September 30, 1998 and 1997 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Condensed Financial
Statements 5-11
Item 2. Management's Discussion of Financial Condition
and Results of Operations 12-21
PART II. OTHER INFORMATION
Item 6. Exhibits 22
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
Assets September 30, December 31, September 30,
------ 1998 1997 1997
---------- ----------- ----------
Current assets:
Cash and cash equivalents $ 313,234 $ 556,436 $ 238,253
Investments available-for-sale, at
market, which approximates cost 34,271 87,668 71,644
Accounts receivable, less allowance
for doubtful accounts of
$43,333, $32,190 and $27,139 2,286,340 1,908,532 1,691,987
Billable production orders in process 287,412 183,145 217,275
Prepaid expenses and other current assets 428,201 252,617 253,434
---------- ---------- ----------
Total current assets 3,349,458 2,988,398 2,472,593
Furniture, equipment and leasehold improvements
at cost, less accumulated depreciation and
amortization of $388,967, $336,926 and $329,403 301,528 239,667 228,789
Investments in affiliates 324,422 281,264 277,662
Intangibles, less amortization of $277,484,
$235,257 and $215,369 1,927,443 1,234,539 1,161,287
Deferred tax benefits 90,941 68,086 75,693
Deferred charges and other assets 230,545 153,789 172,055
---------- ---------- ----------
Total assets $6,224,337 $4,965,743 $4,388,079
========== ========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $2,404,932 $2,595,255 $1,838,341
Payable to banks and current portion of
long term debt 123,154 17,672 104,881
Other accrued liabilities 1,186,694 885,569 750,439
Accrued taxes on income 51,005 80,489 78,331
---------- ---------- ----------
Total current liabilities 3,765,785 3,578,985 2,771,992
Long term debt 619,603 123,165 378,003
Convertible subordinated debentures 448,500 218,500 218,500
Deferred compensation and other liabilities 245,780 114,668 140,205
Minority interests 77,292 63,686 59,583
Shareholders' equity:
Common stock 88,656 86,918 86,832
Additional paid-in capital 643,682 533,412 526,743
Retained earnings 680,782 555,038 500,435
Unamortized restricted stock (64,873) (46,745) (51,368)
Cumulative translation adjustment (55,366) (47,947) (46,145)
Treasury stock (225,504) (213,937) (196,701)
---------- ---------- ----------
Total shareholders' equity 1,067,377 866,739 819,796
---------- ---------- ----------
Total liabilities and shareholders' equity $6,224,337 $4,965,743 $4,388,079
========== ========== ==========
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
-2-
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Commissions and fees $981,577 $746,839 $2,894,063 $2,229,757
Operating expenses:
Salaries and related costs 587,246 452,927 1,708,881 1,318,612
Office and general expenses 283,311 214,028 800,176 634,397
-------- -------- ---------- ----------
Total operating expenses 870,557 666,955 2,509,057 1,953,009
-------- -------- ---------- ----------
Operating profit 111,020 79,884 385,006 276,748
Net interest expense:
Interest and dividend income (6,429) (5,532) (20,547) (14,789)
Interest paid or accrued 17,935 12,356 50,151 30,923
-------- -------- ---------- ----------
Net interest expense 11,506 6,824 29,604 16,134
-------- -------- ---------- ----------
Income before income taxes 99,514 73,060 355,402 260,614
Income taxes:
Federal 14,610 10,557 58,940 39,497
State and local 4,911 4,935 17,353 15,397
International 22,685 14,387 73,676 51,296
-------- -------- ---------- ----------
Total income taxes 42,206 29,879 149,969 106,190
-------- -------- ---------- ----------
Income after income taxes 57,308 43,181 205,433 154,424
Equity in affiliates 5,948 4,601 16,206 16,027
Minority interests (9,464) (6,291) (30,952) (22,493)
-------- -------- ---------- ----------
Net income $ 53,792 $ 41,491 $ 190,687 $ 147,958
======== ======== ========== ==========
Earnings per share:
Net income:
Basic $ 0.32 $ 0.26 $ 1.15 $ 0.93
Diluted $ 0.32 $ 0.26 $ 1.13 $ 0.91
Dividends declared per common share $ 0.125 $ 0.125 $ 0.375 $ 0.325
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
-3-
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
September 30,
---------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 190,687 $ 147,958
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization of tangible assets 55,531 42,895
Amortization of intangible assets 39,415 29,421
Minority interests 30,952 22,493
Earnings of affiliates in excess of
dividends received (5,874) (9,641)
Decrease in deferred tax benefits 3,704 2,165
Provision for losses on accounts receivable 6,135 5,030
Amortization of restricted shares 15,446 12,924
Increase in accounts receivable (30,754) (143,256)
Increase in billable production (80,990) (62,714)
Increase in other current assets (72,912) (43,209)
Decrease in accounts payable (470,376) (210,770)
Decrease in other accrued liabilities (28,242) (4,019)
(Decrease) increase in accrued income taxes (36,967) 9,606
Other (29,935) (37,563)
--------- ---------
Net cash used for operating activities (414,180) (238,680)
--------- ---------
Cash flows from investing activities:
Capital expenditures (65,270) (47,251)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired (460,623) (300,622)
Proceeds from sales of equity interests in
subsidiaries and affiliates 4,147 466
Payments for purchases of investments
available-for-sale and other investments (38,930) (88,526)
Proceeds from sales of investments
available-for-sale and other investments 92,776 34,056
--------- ---------
Net cash used for investing activities (467,900) (401,877)
--------- ---------
Cash flows from financing activities:
Net borrowings under lines of credit 8,090 76,784
Share transactions under employee stock plans 46,815 26,247
Proceeds from issuance of shares 171,084 --
Proceeds from issuance of principal of debt
obligations 751,368 471,997
Repayment of principal of debt obligations (111,924) (41,722)
Dividends and loans to minority stockholders (28,254) (27,934)
Dividends paid (61,619) (47,704)
Purchase of treasury shares (128,334) (52,223)
--------- ---------
Net cash provided by financing activities 647,226 405,445
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents (8,348) (36,902)
--------- ---------
Net decrease in cash and cash equivalents (243,202) (272,014)
Cash and cash equivalents at beginning of period 556,436 510,267
--------- ---------
Cash and cash equivalents at end of period $ 313,234 $ 238,253
========= =========
Supplemental Disclosures:
Income taxes paid $ 151,702 $ 96,750
========= =========
Interest paid $ 44,309 $ 27,049
========= =========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
-4-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
===============================================================================
1) The consolidated condensed interim financial statements included
herein have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
2) These statements reflect all adjustments, consisting of normal
recurring accruals which, in the opinion of management, are necessary for a
fair presentation of the information contained therein. Certain
reclassifications have been made to the September 30, 1997 reported amounts
to conform them with the September 30, 1998 and December 31, 1997
presentation. Also, all amounts presented give effect to a two-for-one
stock split in the form of a 100% stock dividend completed in December
1997. These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
3) Results of operations for interim periods are not necessarily
indicative of annual results.
-5-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
4) Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based on such average number of common shares outstanding, common share
equivalents outstanding, and if dilutive, is adjusted for the assumed
conversion of the Company's convertible subordinated debentures and the
assumed increase in net income for the after tax interest cost of such
debentures. At September 30, 1998, the 2.25% Convertible Subordinated
Debentures had been outstanding since January 6, 1998 and the 4.25%
Convertible Subordinated Debentures had been outstanding for the entire
nine months. At September 30, 1997, the 4.25% Convertible Subordinated
Debentures had been outstanding since January 3, 1997. The number of shares
used in the computations of basic and diluted earnings per share were as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS 166,599,500 159,657,500 165,604,400 159,575,600
Diluted EPS 169,915,300 162,869,500 175,845,400 162,572,500
For purposes of computing diluted earnings per share for the three
months ended September 30, 1998, neither the Company's 2.25% Convertible
Subordinated Debentures nor the Company's 4.25% Convertible Subordinated
Debentures were reflected in the computation, as their inclusion would have
been anti-dilutive. For the purposes of computing diluted
-6-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
earnings per share for the nine months ended September 30, 1998, the 2.25%
Convertible Subordinated Debentures were not reflected in the computation,
as their inclusion would have been anti-dilutive.
For purposes of computing diluted earnings per share for the three and
nine months ended September 30, 1997, the 4.25% Convertible Subordinated
Debentures were not reflected in the computation, as their inclusion would
have been anti-dilutive.
5) The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires presentation of information on comprehensive income and its
components in financial statements. In the Company's case, comprehensive
income includes net income and foreign currency translation adjustments.
Total comprehensive income and its components were as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(Dollars in Thousands) (Dollars in Thousands)
1998 1997 1998 1997
---- ---- ---- ----
Net Income $ 53,792 $ 41,491 $ 190,687 $ 147,958
Foreign Currency
Translation Adjustments (14,537) (11,587) (7,142) (49,635)
-------- -------- --------- ---------
Total Comprehensive Income $ 39,255 $ 29,904 $ 183,545 $ 98,323
======== ======== ========= =========
-7-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
6) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement SFAS No. 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. Once
implemented, SFAS No. 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that
-8-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
were issued, acquired, or substantively modified after December 31, 1997
(and, at a company's election, before January 1, 1998).
The Company intends to adopt SFAS No. 133 for its fiscal year ending
December 31, 2000. The adoption of the provisions of SFAS No. 133 would not
have had a material effect on the Company's results of operations for the
quarter or nine months ending September 30, 1998 or on its financial
position as of that date.
7) In January 1998, the Company completed the acquisitions of
Fleishman-Hillard, Inc., GPC International Holdings Inc. and Palmer Jarvis
Inc. These acquisitions have been accounted for under the pooling of
interests method of accounting. The number of shares issued or to be issued
by the Company in connection with these acquisitions is 3,550,366. The
assets, liabilities, shareholders' equity and results of operations of the
companies acquired are not, either individually or in the aggregate,
material to the Company and, therefore, the Company's prior year financial
statements have not been restated.
8) On January 6, 1998, the Company issued $230,000,000 of 2.25%
Convertible Subordinated Debentures with a scheduled maturity in 2013. The
debentures are convertible into common stock of the Company at a
-9-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
conversion price of $49.83 per share subject to adjustment in certain
events. Debenture holders have the right to require the Company to redeem
the debentures on January 6, 2004 at a price of 118.968%, or upon the
occurrence of a Fundamental Change, as defined in the indenture agreement,
at the prevailing redemption price. The Company may redeem the debentures,
as a whole or in part, on or after December 31, 2001 initially at 112.841%
and at increasing prices thereafter to 118.968% until January 6, 2004, and
100% thereafter. Unless the debentures are redeemed, repaid or converted
prior thereto, the debentures will mature on January 6, 2013 at their
principal amount. The proceeds of this issuance are being used for general
corporate purposes, including working capital.
9) On January 29, 1998, the Company announced that it had reached
agreement on the terms of a recommended cash offer for The GGT Group plc
("GGT"), an advertising and marketing services group headquartered in the
United Kingdom and operating primarily in France, the United Kingdom and
the United States. The offer price of 200p for each share of GGT valued
GGT's fully diluted ordinary share capital at (pound)143 million
(approximately $235 million at the January 29, 1998 exchange rate). The
acquisition of the entire issued ordinary share capital of GGT was
completed during the second quarter of 1998.
10) On March 4, 1998, the Company issued 4,000,000 shares of common stock
for aggregate proceeds before expenses of
-10-
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(CONTINUED)
================================================================================
$171,400,000. The proceeds of this issuance are being used for general
corporate purposes, including the funding of the acquisition of GGT.
11) On June 24, 1998, the Company issued French Francs 1,000,000,000
(approximately $164 million at the June 24, 1998 exchange rate) of 5.20%
Notes with a scheduled maturity in 2005. The proceeds of this issuance are
being used for general corporate purposes.
-11-
Item 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Third Quarter 1998 Compared to Third Quarter 1997
- -------------------------------------------------
Consolidated worldwide revenues from commission and fee income increased
31.4% in the third quarter of 1998 compared to the third quarter of 1997.
Consolidated domestic revenues increased 26.6% in the third quarter of 1998 to
$509.2 million compared to $402.3 million in the third quarter of 1997.
Consolidated international revenues increased 37.1% in the third quarter of 1998
to $472.4 million compared to $344.5 million in the third quarter of 1997.
Absent the effect of the net acquisitions of subsidiary companies and movements
in international currency exchange rates, consolidated worldwide revenues
increased 14.9% in the third quarter of 1998 compared to the same period in
1997.
Operating expenses increased 30.5% in the third quarter of 1998 compared
to the third quarter of 1997. Excluding the effect of the net acquisition
activity and movements in international currency exchange rates mentioned above,
operating expenses increased 14.7% over 1997 levels. This increase reflects
normal salary increases and growth in client service expenditures to support the
increased revenue base.
-12-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Net interest expense increased by $4.7 million in the third quarter of
1998 as compared to the same period in 1997. This increase primarily reflects
higher average borrowings during the period, resulting in part from the issuance
of the 2.25% Convertible Subordinated Debentures and the 5.20% French Francs
Notes, partially offset by the effect of higher average amounts of cash and
marketable securities invested during the period.
Pretax profit margin was 10.1% in the third quarter of 1998 as compared to
9.8% in the same period in 1997. Operating margin, which excludes interest and
dividend income and interest expense, was 11.3% in the third quarter of 1998 as
compared to 10.7% in the same period in 1997.
The effective income tax rate was 42.4% in the third quarter of 1998 as
compared to 40.9% in the third quarter of 1997. This increase primarily reflects
higher tax rates at the Company's international subsidiaries.
The increase in equity in affiliates is the result of greater profits
reported by certain companies in which the Company owns less than a 50% equity
interest.
The increase in minority interest expense is primarily due to new
minorities resulting from acquisitions and greater earnings by companies where
minority interests exist.
-13-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Net income increased 29.6% in the third quarter of 1998 as compared to the
same period in 1997. Absent the effect of net acquisitions and movements in
international currency exchange rates, net income increased 14.3% in the third
quarter of 1998 as compared to the third quarter of 1997.
Nine Months 1998 Compared to Nine Months 1997
- ---------------------------------------------
Consolidated worldwide revenues from commission and fee income increased
29.8% in the first nine months of 1998 compared to the same period in 1997.
Consolidated domestic revenues increased 28.8% in the first nine months of 1998
to $1,534.1 million compared to $1,190.9 million in the same period in 1997.
Consolidated international revenues increased 30.9% in the first nine months of
1998 to $1,360.0 million compared to $1,038.9 million in the same period in
1997. Absent the effect of the net acquisitions of subsidiary companies and
movements in international currency exchange rates, consolidated worldwide
revenues increased 16.2% in the first nine months of 1998 compared to the first
nine months of 1997.
Operating expenses increased 28.5% in the first nine months of 1998 as
compared to the same period in 1997. Excluding the effect of the net acquisition
activity and movements in international currency exchange rates mentioned above,
operating expenses increased 15.3% over 1997 levels.
-14-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
This increase reflects normal salary increases and growth in client service
expenditures to support the increased revenue base.
Net interest expense increased by $13.5 million in the first nine months
of 1998 as compared to the same period in 1997. This increase primarily reflects
higher average borrowings during the period, resulting in part from the issuance
of the 2.25% Convertible Subordinated Debentures and the 5.20% French Francs
Notes, partially offset by the effect of higher average amounts of cash and
marketable securities invested during the period.
Pretax profit margin for the first nine months of 1998 was 12.3% as
compared to 11.7% in the same period in 1997. Operating margin, which excludes
interest and dividend income and interest expense, was 13.3% in the first nine
months of 1998 as compared to 12.4% in the same period in 1997.
The effective income tax rate was 42.2% in the first nine months of 1998
as compared to 40.7% in the same period in 1997. This increase primarily
reflects higher tax rates at the Company's international subsidiaries.
Income from equity in affiliates for the first nine months of 1998 was
comparable to the same period in 1997.
-15-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The increase in minority interest expense is primarily due to new
minorities resulting from acquisitions and greater earnings by companies where
minority interests exist.
Net income increased 28.9% in the first nine months of 1998 as compared to
the same period in 1997. Absent the effect of net acquisitions and movements in
international currency exchange rates, net income increased 16.8% in the first
nine months of 1998 as compared to the same period in 1997.
Capital Resources and Liquidity
- -------------------------------
Cash and cash equivalents at September 30, 1998 decreased to $313.2
million from $556.4 million at December 31, 1997. The relationship between
payables to the media and suppliers and receivables from clients, at September
30, 1998, is consistent with industry norms.
The Company maintains relationships with a number of banks worldwide,
which have extended unsecured committed lines of credit in amounts sufficient to
meet the Company's cash needs. At September 30, 1998, the Company had $707.5
million in such unsecured committed lines of credit, comprised of a $500.0
million revolving credit agreement expiring June 30, 2003, and $207.5 million in
lines of credit, principally outside of the United States. Of the $707.5 million
in unsecured committed lines, $324.7 million remained available at September 30,
1998.
-16-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
On January 6, 1998, the Company issued $230,000,000 of 2.25% Convertible
Subordinated Debentures with a scheduled maturity in 2013. The debentures are
convertible into common stock of the Company at a conversion price of $49.83 per
share subject to adjustment in certain events. Debenture holders have the right
to require the Company to redeem the debentures on January 6, 2004 at a price of
118.968%, or upon the occurrence of a Fundamental Change, as defined in the
indenture agreement, at the prevailing redemption price. The Company may redeem
the debentures, as a whole or in part, on or after December 31, 2001 initially
at 112.841% and at increasing prices thereafter to 118.968% until January 6,
2004, and 100% thereafter. Unless the debentures are redeemed, repaid or
converted prior thereto, the debentures will mature on January 6, 2013 at their
principal amount. The proceeds of this issuance are being used for general
corporate purposes, including working capital.
On March 4, 1998, the Company issued 4,000,000 shares of common stock for
aggregate proceeds before expenses of $171,400,000. The proceeds of this
issuance are being used for general corporate purposes, including the funding of
the acquisition of GGT.
On June 24, 1998, the Company issued French Francs 1,000,000,000
(approximately $164 million at the June 24, 1998 exchange rate) of 5.20% Notes
with a scheduled maturity in 2005. The proceeds of this issuance are being used
for general corporate purposes.
-17-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Management believes the aggregate lines of credit available to the Company
plus cash flows from operations will be adequate to support its anticipated
requirements.
Year 2000 Issue
- ---------------
The Year 2000 issue is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Accordingly, any of
the computer programs utilized by the Company that have date sensitive software
may cause system failures or miscalculations if data entry of "00" is recognized
as a date other than 2000.
The Company has developed a comprehensive plan to address Year 2000
issues. This plan has included the establishment of Omnicom 2000, a special
purpose entity dedicated to ensuring that Omnicom companies are addressing and
properly resolving Year 2000 compliance issues. Omnicom 2000 comprises an
Executive Committee of senior executives from Omnicom and its principal
subsidiaries, and a team of dedicated internal and external managers and
consultants. The Company's comprehensive plan includes an assessment phase, a
testing phase and an implementation phase.
As part of its assessment phase, the Company has compiled a detailed
inventory of systems and potential Year 2000 readiness issues at all of its
principal locations. Based on this information, the Company has determined that
it is required to modify portions of its software so that its
-18-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
computer systems will properly utilize dates beyond December 31, 1999. In
addition, the Company is dependent on third-party computer systems and
applications, particularly with respect to such critical tasks as accounting,
billing and buying, planning and paying for media, as well as on its own
computer systems and internally developed applications. The Company intends to
modify or replace all affected systems, and is also evaluating the adequacy of
the processes and progress of third-party vendors of systems that may be
affected by the Year 2000 issue. The Company believes that it has identified all
critical third-party vendors, and is currently testing and monitoring the Year
2000 readiness of such vendors. The Company envisages that the testing phase of
its Year 2000 readiness plan will be substantially completed by March 1999, and
that the implementation phase will be substantially completed by the middle of
1999.
The Company believes that, through upgrades, modifications, and
replacement of its existing hardware, software and non-IT systems, it will
achieve Year 2000 readiness. However, if such upgrades, modifications and
replacements are not made, or are not made in a timely manner, the Year 2000
issue could have a material impact on the Company's operations.
Based on the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program are expected to be immaterial in each of 1998 and 1999.
These costs, a portion of which will be capitalizable, include third party
consultants
-19-
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
and replacement and remediation of existing computer software and hardware. Such
costs do not include internal management time, the effects of which are not
expected to be material to the Company's results of operations or financial
condition. The Company will continue to refine its estimates of the costs of its
Year 2000 efforts, through the update of reports from each location and through
the completion of its annual capital expenditure budget review process. To the
extent applicable, more detailed information on costs will be included in the
Company's Annual Report on Form 10-K.
At this stage of the process, the Company believes that it is difficult to
specifically identify the cause of the most reasonable worst case Year 2000
scenario. Due to the decentralized nature of the Company's structure and
systems, the Company believes that a reasonable worst case scenario would
involve the failures of significant third parties (including entities with which
the Company has no direct involvement) that continue for more than several days
and affect a significant number of the Company's operating locations. The
Company is considering various contingency plans in the event of such failures.
The development of the Company's contingency plans will be ongoing and will
reflect additional information with regard to third parties' Year 2000 readiness
as it is received.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes
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MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
available. While the Company anticipates continuity of its business activities,
that continuity will be dependent upon its ability, and the ability of third
parties with whom the Company relies on directly, or indirectly, to be Year 2000
compliant.
Forward-Looking Statements
This "Management's Discussion of Financial Condition and Results of
Operations" contains disclosures which are forward-looking statements.
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "will," "expect," "project," "estimate," "anticipate," "envisage," "plan"
or "continue." These forward-looking statements are based upon the Company's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans and anticipated actions and
the Company's future financial condition and results. The uncertainties and
risks include, but are not limited to, general economic conditions; the impact
of competition in the marketing and communications industry; risks relating to
acquisition activities; the complexity of integrated computer systems; and the
success and expense of the remediation efforts of the Company, its subsidiaries
and third parties in achieving Year 2000 compliance. As a consequence, current
plans, anticipated actions and future financial condition and results may differ
from those expressed in any forward-looking statements made by or on behalf of
the Company.
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PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
27 Financial Data Schedule (filed in electronic
format only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnicom Group Inc.
(Registrant)
Date November 13, 1998 /s/ John D. Wren
-----------------------------
John D. Wren
Chief Executive Officer
and President
Date November 13, 1998 /s/ Jonathan E. Ramsden
-----------------------------
Jonathan E. Ramsden
Controller
(Principal Accounting Officer)
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