================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (I.R.S. Employer Identification No.) incorporation or organization) 437 Madison Avenue, New York, NY 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 415-3600 Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $.50 Par Value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 15, 2000, there were 176,930,039 shares of Common Stock, $.50 par value, outstanding; the aggregate market value of the voting stock held by nonaffiliates at March 15, 2000 was approximately $14,351,645,000 DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's definitive proxy statement relating to its annual meeting of shareholders scheduled to be held on May 16, 2000 are incorporated by reference into Part III of this Report. ================================================================================
OMNICOM GROUP INC. ------------------ Index to Annual Report on Form 10-K Year Ended December 31, 1999 Page ---- PART I Item 1. Business ..................................................... 1 Item 2. Properties ................................................... 3 Item 3. Legal Proceedings ............................................ 3 Item 4. Submission of Matters to a Vote of Security Holders .......... 3 Supplemental Item. Executive Officers of the Registrant ................. 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................ 5 Item 6. Selected Financial Data ...................................... 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ... 9 Item 8. Financial Statements and Supplementary Data .................. 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 9 PART III Item 10. Directors and Executive Officers of the Registrant ........... 10 Item 11. Executive Compensation ....................................... 10 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................................... 10 Item 13. Certain Relationships and Related Transactions ............... 10 The information called for by Items 10, 11, 12 and 13, to the extent not included in this document, is incorporated herein by reference to such information to be included under the captions "Election of Directors," "Common Stock Ownership of Management," "Directors' Compensation" and "Executive Compensation," in the Company's definitive proxy statement which is expected to be filed by April 11, 2000. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................... 11
PART I Item 1. Business Omnicom Group Inc., through its wholly and partially-owned companies (hereinafter collectively referred to as the "Company" or the "Omnicom Group"), provides corporate communications services to clients worldwide on a global, pan-regional, national and local basis. Operations cover the major regions of North America, the United Kingdom, Germany, France, the remainder of Continental Europe, Latin America, the Far East, Australia, the Middle East and Africa. In both 1999 and 1998, approximately 50% of the Omnicom Group's commissions and fees came from its non-U.S. operations. The corporate communications services offered by the Company include advertising in various media such as television, radio, newspaper, magazines, outdoor and the internet, as well as public relations, specialty advertising, direct response and promotional marketing, strategic media planning and buying, and internet and digital media development. According to the unaudited industry-wide figures published in 1999 by the trade journal Advertising Age, the Omnicom Group was ranked as the largest advertising agency group worldwide. Corporate Communications Services The Omnicom Group companies provide a variety of advertising and marketing communication services to their clients, including: the creation and production of advertising, marketing consultation, strategic media planning and buying, financial and business-to-business advertising, directory advertising, healthcare communications, managed care consultancy, recruitment communications, branding consultancy, digital communications, contract publishing, design and image consultancy, direct/database marketing, field marketing, integrated promotional marketing, public affairs, corporate and financial public relations, reputation management, sports and event marketing, telemarketing, and internet and digital media development. Brands The above services are provided to clients through numerous worldwide, national and regional independent agency brands. These brands include, among others, BBDO Worldwide, DDB Worldwide, TBWA Worldwide, Abbott Mead Vickers, Adelphi Group, Alcone Marketing Group, Bernard Hodes Advertising, Brodeur Worldwide, Case Dunlap, Clark & Weinstock, Claydon Heeley, CPM International, Diversified Healthcare Communications Group, Doremus & Company, Fleishman-Hillard, Gavin Anderson & Company, GMR Marketing, Goodby, Silverstein & Partners, GPC International, Griffin Bacal, GSD&M, Health & Medical Communications Group, Integer Group, Interbrand, InterOne Marketing Group, Ketchum, Ketchum Directory Advertising, M/A/R/C Inc., Martin-Williams, Merkley Newman Harty, Moss Dragoti, Optimum Media Direction, PhD, Porter Novelli International, Porter Novelli Convergence Group, Rapp Collins Worldwide, Steve Cram & Associates, TARGIS Healthcare Communications Worldwide, The Designory, TicToc, TLP, Inc., and Zimmerman & Partners Advertising. Additionally, through its wholly-owned subsidiary Communicade, the Company has minority equity investments in several interactive marketing agencies, including: AGENCY.COM, Ltd., Organic, Inc., Razorfish, Inc., Red Sky Interactive, Inc., Critical Mass and Answer Think Consulting Group, Inc. Markets The Omnicom Group agency brands provide services to their clients on a global, pan-regional, national and local basis. These agencies operate throughout the major cities of the United States and through subsidiaries and affiliates in Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, the Czech Republic, Denmark, Dominican Republic, Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, Honduras, Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Kuwait, Latvia, Lebanon, Lithuania, Malaysia, Mexico, the Netherlands, New Zealand, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Portugal, Puerto Rico, Romania, Russia, Saudi Arabia, Singapore,the Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay, Venezuela and other countries around the world. For financial information concerning domestic and foreign operations and segment reporting see Note 5 to the Consolidated Financial Statements. 1
Clients The clients of the Omnicom Group include major consumer products, industrial, financial and service industry companies, as well as smaller, pan-regional, national and local companies. The Omnicom Group's ten largest clients accounted for approximately 19% of 1999 commissions and fees. Twelve Omnicom Group agency brands provided services to the Company's largest client, which accounted for approximately 5% of the 1999 commissions and fees. Commissions and Fees In most cases, fees are generated in lieu of commissions. Several different fee arrangements are used depending on the client and individual agency. In general, fee charges relate to the cost of providing services plus a markup. Commissions charged on media billings are not uniform and are negotiated with the client. In accordance with industry practice, the media source typically bills the agency for the time or space purchased and the Omnicom Group companies bill their clients for this amount plus the commission. Revenues are dependent upon the marketing requirements of clients and tend to be highest in the second and fourth quarters of the calendar year. Competitive Conditions The Company's business is highly competitive and accounts may shift agencies, usually on 90 days' notice. Clients may also reduce advertising and marketing budgets at any time. An agency's ability to compete for new clients is affected in some instances by the policy, which many advertisers and marketers follow, of not permitting their agencies to represent competitive accounts in the same market. As a result, increasing size may limit an agency's potential for securing certain new clients. In the vast majority of cases, however, the Omnicom Group's consistent maintenance of separate, independent agency brands have enabled the Company to represent competing clients. The Omnicom Group agency brands have sought, and will seek, new business by showing potential clients examples of advertising and marketing campaigns and by explaining the variety of related services offered. The Omnicom Group competes in the United States and internationally with a multitude of full service and special service agencies. In addition to the usual risks of the Company's business, international operations are subject to the risk of currency exchange fluctuations, exchange control restrictions and to actions of governmental authorities. Employees The business success of the Omnicom Group is, and will continue to be, highly dependent upon the skills and creativity of its creative, research, media and account personnel and their relationships with clients. The Company believes its agencies have established reputations for creativity and marketing expertise which attract, retain and stimulate talented personnel. There is substantial competition among advertising agencies for talented personnel and all agencies are vulnerable to adverse consequences from the loss of key individuals. Employees are generally not under employment contracts and are free to move to competitors. The Company believes that its compensation arrangements for its key employees, which in addition to base salaries and performance bonuses may include stock options, restricted stock and retirement plans, are highly competitive with those of other advertising agencies. As of December 31, 1999, the Omnicom Group, excluding unconsolidated affiliates, employed approximately 43,000 persons, of which approximately 17,700 were employed in the United States and approximately 25,300 were employed in its international offices. Government Regulation The Company's business is subject to government regulation, both within and outside the United States. In the United States, federal, state and local governments and their agencies and various consumer groups have directly or indirectly affected or attempted to affect the scope, content and manner of presentation of advertising. The continued activity by government and by consumer groups regarding advertising may cause further change in domestic advertising practices in the coming years. While the Company is unable to 2
estimate the effect of these developments on its domestic business, management believes the total volume of advertising in general media in the United States will not be materially reduced due to future legislation or regulation, even though the scope, content and manner of presentation of advertising may be modified. In addition, the Company will continue to ensure that its management and operating personnel are aware of and are responsive to the possible implications of such developments. Item 2. Properties Substantially all of the Company's offices are located in leased premises. The Company actively manages its lease obligations and, where appropriate, consolidates its leased premises. Management has obtained subleases for most of the premises vacated. Where appropriate, management has established reserves for the difference between the cost of the leased premises that were vacated and anticipated sublease income. Domestic The Company's corporate office occupies approximately 50,000 sq. ft. of space at 437 Madison Avenue, New York, New York under a lease expiring in the year 2010. Offices in Atlanta, Boston, Chicago, Coral Gables, Dallas, Detroit, Houston, Irvine, Kansas City, Los Angeles, Minneapolis, New York, Palo Alto, Philadelphia, Pittsburgh, San Francisco, San Jose, Seattle, Stamford, St. Louis and Washington D.C. and at various other locations occupy approximately an aggregate of 5,645,000 sq. ft. of space under leases with varying expiration dates. International The Company's international subsidiaries and affiliates in Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Italy, Japan, Latvia, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Puerto Rico, Romania, Singapore, the Slovak Republic, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand and the United Kingdom occupy premises under leases with various expiration dates. Item 3. Legal Proceedings The Company has no material pending legal proceedings, other than ordinary routine litigation incidental to its business. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the last quarter of 1999. 3
Supplemental Item. Executive Officers of the Registrant The individuals named below are Executive Officers of the Company and, except as indicated below, have held their current position during the last five years: <TABLE> <CAPTION> Name Position Age ---- -------- --- <S> <C> <C> Bruce Crawford ............ Chairman of Omnicom Group 71 John D. Wren .............. Chief Executive Officer & President of Omnicom Group 47 Randall J. Weisenburger ... Executive Vice President and Chief Financial Officer of Omnicom Group 41 Dennis E. Hewitt .......... Treasurer of Omnicom Group 55 Barry J. Wagner ........... Secretary & General Counsel of Omnicom Group 59 Philip J. Angelastro ...... Controller of Omnicom Group 35 Allen Rosenshine .......... Chairman & Chief Executive Officer of BBDO Worldwide 61 James A. Cannon ........... Vice Chairman & Chief Financial Officer of BBDO Worldwide 61 Keith L. Reinhard ......... Chairman & Chief Executive Officer of DDB Worldwide 65 Thomas L. Harrison ........ Chairman & Chief Executive Officer of Diversified Agency Services, a division of the Corporation 52 Michael Greenlees ......... President and Chief Executive Officer of TBWA Worldwide 53 Bernard Brochand .......... President, International Division of DDB Worldwide 61 </TABLE> John D. Wren was appointed Chief Executive Officer of the Company effective January 1, 1997, succeeding Bruce Crawford in the position. Mr. Wren was appointed President of the Company and Chairman of Diversified Agency Services in September 1995. Mr. Wren was appointed Chief Executive Officer of Diversified Agency Services in May 1993. Mr. Wren had served as President of Diversified Agency Services since February 1992, having previously served as its Executive Vice President and General Manager. Randall J. Weisenburger joined the Company in September 1998 and became its Executive Vice President and Chief Financial Officer on January 1, 1999. Mr. Weisenburger was previously with Wasserstein Perella & Co., where he was President and Chief Executive Officer of Wasserstein Perella Management Partners, its merchant banking subsidiary. Barry J. Wagner was promoted to Secretary and General Counsel of the Company in May 1995. Mr. Wagner was previously Assistant Secretary of the Company. Philip J. Angelastro was promoted to Controller of the Company effective February 1, 1999. Mr. Angelastro joined the Company in June 1997 as Vice President of Finance with Diversified Agency Services after being a Partner at Coopers & Lybrand LLP. Thomas L. Harrison has served as Chairman and Chief Executive Officer of the Diversified Agency Services division of the Corporation since May 1998, having previously served as its President since February 1997. He also has served as Chairman of the Diversified Healthcare Communications Group since its formation in 1994. From 1987 to 1994, Mr. Harrison served as Chairman and Chief Executive Officer of the Harrison & Star Business Group. Michael Greenlees has served as President and Chief Executive Officer of TBWA Worldwide since March 1998. Prior thereto, he was Chairman and Chief Executive Officer of GGT Group plc, which was acquired by the Company in February 1998. Bernard Brochand has served as President of the International Division of DDB Worldwide since February 1989. Similar information with respect to the remaining Executive Officers of the Company, who are all directors of the Company, can be found in the Company's definitive proxy statement expected to be filed April 11, 2000. 4
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Price Range of Common Stock and Dividend History The Company's common stock is listed on the New York Stock Exchange under the symbol "OMC". The table below shows the range of quarterly high and low sale prices reported on the New York Stock Exchange Composite Tape for the Company's common stock for the periods indicated and the dividends paid per share on the common stock for such periods; the reported last sales price on March 15, 2000 was $81 3/4. Dividends Paid Per Share of High Low Common Stock ------ ----- ---------------- 1998 First Quarter ............. 47 1/16 37 7/8 .125 Second Quarter ............ 49 7/8 45 1/2 .125 Third Quarter ............. 57 1/4 45 .125 Fourth Quarter ............ 58 38 9/16 .15 1999 First Quarter ............. 79 15/16 56 1/2 .15 Second Quarter ............ 85 1/8 67 .15 Third Quarter ............. 80 11/16 67 1/16 .15 Fourth Quarter ............ 107 1/8 71 5/8 .175 The Company is not aware of any restrictions on its present or future ability to pay dividends. However, in connection with certain borrowing facilities entered into by the Company and its subsidiaries (see Note 7 to the Consolidated Financial Statements), the Company is subject to certain restrictions on the ratio of debt to cash flow, the ratio of total consolidated indebtedness to total consolidated capitalization and its ability to make investments in and loans to affiliates and unconsolidated subsidiaries. On January 31, 2000 the Board of Directors declared a regular quarterly dividend of $0.175 per share of common stock, payable April 6, 2000 to holders of record on March 10, 2000. Approximate Number of Equity Security Holders Approximate Number of Record Holders Title of Class on March 15, 2000 -------------- --------------------- Common Stock, $.50 par value .................... 3,721 Preferred Stock, $1.00 par value ................ None Item 6. Selected Financial Data The following table sets forth selected financial data of the Company and should be read in conjunction with the consolidated financial statements which begin on page F-1. All prior years information has been restated to give effect to the accounting for the acquisition of Abbott Mead Vickers Group Limited (formerly known as Abbott Mead Vickers plc) under the pooling of interests method of accounting (see Note 2 to the Consolidated Financial Statements). Per share amounts for 1995 and 1996 have been restated to give effect to the two-for-one stock split completed December 1997. <TABLE> <CAPTION> (Dollars in Thousands Except Per Share Amounts) --------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> For the year: Commissions and fees .............. $5,130,545 $4,290,946 $3,296,224 $2,775,873 $2,360,688 Net income ........................ 362,882 278,845 217,300 162,076 135,196 Earnings per common share Basic .......................... 2.07 1.61 1.30 1.02 0.92 Diluted ........................ 2.01 1.57 1.28 0.99 0.89 Dividends declared per common share .......................... 0.625 0.525 0.45 0.375 0.33 </TABLE> 5
<TABLE> <CAPTION> (Dollars in Thousands Except Per Share Amounts) --------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> At year end: Total assets ...................... $9,017,637 $7,121,968 $5,114,364 $4,192,156 $3,653,265 Long-term obligations: Long-term debt and convertible subordinated debentures ................... 711,632 717,410 341,665 208,329 293,418 Deferred compensation and other liabilities .............. 300,746 269,966 166,492 130,606 126,725 </TABLE> Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations As discussed in Note 2 to the Consolidated Financial Statements, on February 10, 1999 the Company completed the acquisition of Abbott Mead Vickers Group Limited (formerly known as Abbott Mead Vickers plc) ("AMV"). The AMV acquisition was accounted for under the pooling-of-interests method of accounting. Accordingly, the Company's financial statements have been restated to include the financial results of AMV for all periods presented. The following discussion is made with respect to the restated financial statements. In 1999, domestic revenues from commissions and fees increased 20.7 percent. The effect of acquisitions, net of divestitures, accounted for a 6.1 percent increase. The remaining 14.6 percent increase was due to the growth of existing businesses, including net new business wins and higher net spending by existing clients. In 1998, domestic revenues from commissions and fees increased 29.8 percent. The effect of acquisitions, net of divestitures, accounted for a 12.5 percent increase. The remaining 17.3 percent increase was due to the growth of existing businesses, including net new business wins and higher net spending by existing clients. In 1999, international revenues increased 18.4 percent. The effect of acquisitions, net of divestitures, accounted for a 10.9 percent increase in international revenues. Changes in the translation of foreign currencies to the U.S. dollar decreased international revenues by 6.0 percent. The remaining 13.5 percent increase was due to the growth of existing businesses, including net new business wins and higher net spending by existing clients. In 1998, international revenues increased 30.6 percent. The effect of acquisitions, net of divestitures, accounted for an 18.7 percent increase in international revenues. Changes in the translation of foreign currencies to the U.S. dollar decreased international revenues by 2.5 percent. The remaining 14.4 percent increase was due to the growth of existing businesses, including net new business wins and higher net spending by existing clients. In 1999, worldwide operating expenses increased 18.2 percent. Acquisitions, net of divestitures during the year, accounted for a 7.3 percent increase in worldwide operating expenses. Changes in the translation of foreign currencies to the U.S. dollar decreased worldwide operating expenses by 2.8 percent. The remaining 13.7 percent increase was caused by normal salary increases and growth in out-of-pocket expenditures to service the increased revenue base. Net foreign exchange transaction gains did not significantly impact operating expenses for the year. In 1998, worldwide operating expenses increased 29.3 percent. Acquisitions, net of divestitures during the year, accounted for a 15.6 percent increase in worldwide operating expenses. Changes in the translation of foreign currencies to the U.S. dollar decreased worldwide operating expenses by 1.3 percent. The remaining 15.0 percent increase was caused by normal salary increases and growth in out-of-pocket expenditures to service the increased revenue base. Net foreign exchange transaction gains did not significantly impact operating expenses for the year. Net interest expense in 1999 increased $10 million. This increase primarily reflects higher average borrowings during the year and higher interest rates. 6
Net interest expense in 1998 increased $19.3 million. This increase primarily reflects higher average borrowings during the year, resulting in part from the issuance of the 2 1/4% Convertible Subordinated Debentures and the 5.20% French Franc Notes, partially offset by the effect of higher average amounts of cash and marketable securities invested during the year. The 1999 effective tax rate decreased to 40.6 percent. The decrease reflects lower domestic and international effective tax rates. The effective tax rate for 1998 decreased to 42.0 percent from 42.6 percent and primarily reflects lower effective tax rates at the Company's international subsidiaries. In 1999, consolidated net income increased 30.1 percent. This increase was primarily the result of revenue growth and margin improvement, partially offset by a decrease in equity in affiliates and an increase in minority interest expense. In addition, in connection with the restatement of the prior year amounts, certain costs were recorded by AMV, including transaction costs associated with the merger. Operating margin, which excludes net interest expense, increased to 14.1 percent in 1999 from 13.1 percent in 1998, primarily as a result of greater growth in commission and fee revenue compared to the growth in operating expenses. Changes in the translation of foreign currencies to the U.S. dollar decreased consolidated net income by 4.2 percent. The decrease in equity in affiliates in 1999 was primarily the result of the acquisition of increased ownership interests in certain affiliates that resulted in their consolidation in the December 31, 1999 financial statements, as well as lower aggregate profits by companies accounted for under the equity method. The increase in minority interest expense in 1999 was caused by higher earnings from companies in which minority interests exists and an increase, as a result of acquisitions, in the number of consolidated companies with a minority interest, including the conversion of certain affiliates into subsidiaries. In 1998, consolidated net income increased 28.3 percent. This increase was the result of revenue growth and margin improvement, partially offset by a decrease in equity in affiliates and an increase in minority interest expense. Operating margin, which excludes net interest expense, increased to 13.1 percent in 1998 from 12.5 percent in 1997 as a result of greater growth in commission and fee revenue than the growth in operating expenses. Changes in the translation of foreign currencies to the U.S. dollar decreased consolidated net income by 1.9 percent. The decrease in equity in affiliates was primarily the result of the acquisition of increased ownership interests in certain affiliates that resulted in their consolidation in the December 31, 1998 financial statements, as well as lower aggregate profits by companies accounted for under the equity method. The increase in minority interest expense was caused by higher earnings from companies in which minority interests exist and an increase as a result of acquisitions during the year in the number of consolidated companies with a minority interest, including the conversion of certain affiliates into subsidiaries. At December 31, 1999, accounts receivable, net of allowance for doubtful accounts, increased by $667.0 million from December 31, 1998. At December 31, 1999, accounts payable increased by $746.9 million from December 31, 1998. These increases were primarily due to an increased volume of activity resulting from business growth and acquisitions during the year and, for accounts payable, differences in the timing of payments to media and other suppliers in 1999 as compared to 1998. The Company is subject to the risk of currency exchange rate fluctuations related to its international operations. This risk is generally limited to the net income of the operations as the revenues and expenses of the operations are generally denominated in the same currency. The Company or its international operations may in some cases enter into hedging transactions to minimize the risk of adverse currency exchange rate fluctuations. The Company's major international markets are Brazil, Canada, the Euro currency countries, Japan and the United Kingdom. As part of managing the Company's exposures to currency exchange and market interest rates, the Company periodically enters into derivative financial instruments. Derivative financial instruments are subject to market and counterparty risk. Market risk is the potential for loss resulting from changes in market conditions. The Company periodically determines the potential loss from market risk by performing a value-at-risk computation. Value-at-risk uses a statistical model that utilizes historic currency exchange and interest rate data to measure the potential impact on future earnings of the Company's existing portfolio of derivative financial instruments. The value-at-risk analysis performed on the Company's December 31, 1999 portfolio of derivative financial instruments indicated that the risk of loss was immaterial. Counterparty risk arises 7
from the inability of a counterparty to meet its obligations. To minimize counterparty risk, the Company only enters into derivative contracts with major well-known financial institutions that have credit ratings equal to or better than the Company's. The Company's derivative activities are limited in volume and confined to risk management activities related to the Company's worldwide operations. A reporting system is in place which evaluates the impact on the Company's earnings resulting from changes in interest rates, currency exchange rates and other relevant market risks. This system is structured to enable senior management to initiate prompt remedial action, if appropriate, and results are periodically reviewed with the Audit Committee. At December 31, 1999 and 1998, the Company had forward foreign exchange contracts outstanding with an aggregate notional principal amount of $893 million and $865 million, respectively, most of which were denominated in the Company's major international market currencies. These contracts predominantly hedge certain intercompany receivables and payables which are not recorded in the respective company's functional currency. The terms of these contracts are generally three months or less. At December 31, 1999, the Company had Japanese yen 16.3 billion aggregate notional principal amount of cross currency interest rate swaps. The swaps convert a portion of the Company's U.S. dollar floating rate debt into fixed rate Japanese yen debt and effectively hedge the Company's net investment in Japanese yen denominated assets. At December 31, 1999 and 1998, the Company had no other derivative contracts outstanding. Year 2000 Issue The Company did not experience any significant disruption to its operations related to computer system programming failures or errors associated with the year 2000. The out-of-pocket costs incurred in 1999 for its Year 2000 remediation program were not material to the consolidated results of operations for the year ended December 31, 1999. These costs, substantially all of which were expensed, include third party consultants and the replacement and remediation of existing computer software and hardware. Such costs do not include internal management time, the effects of which were not material to the Company's results of operations or financial condition. Capital Resources and Liquidity Cash and cash equivalents decreased $72.4 million during 1999 to $576.4 million at December 31, 1999. The Company's positive net cash flow provided by operating activities was maintained. After annual cash outlays for dividends paid to shareholders and minority interests and the repurchase of the Company's common stock, primarily for employee programs, the balance of the cash flow, together with the proceeds from the issuance of debt obligations, was used to fund acquisitions, make capital expenditures and repay debt obligations. The Company maintains two revolving credit facilities with a consortium of banks. One facility, for $500 million, expires June 30, 2003 and the other, for $750 million, expires April 28, 2000 (commitments have been delivered to extend this facility until April 28, 2001). Under the terms of these facilities the Company may either borrow directly or issue commercial paper. During the year approximately $6,663 million of commercial paper was issued and $6,584 million was redeemed. The average term of the commercial paper was 21 days. At December 31, 1999, approximately $79 million of commercial paper was outstanding at interest rates ranging from 6.35% to 6.48%. On June 24, 1998, the Company issued French Franc 1 billion (approximately $164 million at the June 24, 1998 exchange rate) of 5.20% Notes with a scheduled maturity in 2005. On March 4, 1998, the Company issued 4,000,000 shares of common stock for aggregate proceeds before expenses of $171 million. On January 6, 1998, the Company issued $230 million of 2 1/4% 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 8
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. On January 3, 1997, the Company issued $218.5 million of 4 1/4% Convertible Subordinated Debentures with a scheduled maturity in 2007. The debentures are convertible into common stock of the Company at a conversion price of $31.50 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. On March 1, 1996, the Company issued Deutsche Mark 100 million Floating Rate Bonds due March 1, 1999. The bonds matured on March 1, 1999 and were repaid at par. The bonds were unsecured, unsubordinated obligations of the Company and bore interest at a per annum rate equal to Deutsche Mark three month LIBOR plus 0.375%. The Company maintains relationships with a number of banks worldwide, which have committed to lines of credit in amounts sufficient to meet the Company's cash needs. At December 31, 1999, the Company had $1,420.9 million in such committed lines of credit, comprised of a $750 million unsecured revolving credit agreement expiring on April 28, 2000 and a $500 million unsecured revolving credit agreement expiring June 30, 2003, as discussed above, and $170.9 million in lines of credit, principally outside of the United States. Of the $1,420.9 million in committed lines, $127.1 million were drawn at December 31, 1999. Management believes that the Company's operating cash flow combined with its available lines of credit (including the expected renewal of the $750 million revolving line of credit) are sufficient to support its foreseeable cash requirements including dividends, capital expenditures, acquisitions and maintenance of working capital. Forward Looking Statements This report 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 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information with respect to quantitative and qualitative disclosure about market risk is set forth under Item 7 in Part II of this Form 10-K. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this item appear beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 9
PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to the directors of the Company and compliance with Section 16 rules is incorporated by reference to the Company's definitive proxy statement expected to be filed by April 11, 2000. Information regarding the Company's executive officers is set forth under the Supplemental Item in Part I of this Form 10-K. Item 11. Executive Compensation Incorporated by reference to the Company's definitive proxy statement expected to be filed by April 11, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's definitive proxy statement expected to be filed by April 11, 2000. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Company's definitive proxy statement expected to be filed by April 11, 2000. 10
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)1. Financial Statements: Page ---- Report of Management .............................................. F-1 Report of Independent Public Accountants .......................... F-2 Consolidated Statements of Income for the three years ended December 31, 1999 ........................................ F-3 Consolidated Balance Sheets at December 31, 1999 and 1998 ......... F-4 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1999 .................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 1999 ........................................ F-6 Notes to Consolidated Financial Statements ........................ F-7 Quarterly Results of Operations (Unaudited) ....................... F-22 2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts (for the three years ended December 31, 1999) .................. S-1 All other schedules are omitted because they are not applicable. 3. Exhibits: Exhibit Number Description ------- ----------- (3)(i) Certificate of Incorporation (as amended on December 4, 1997 and as restated for filing purposes), filed as Exhibit 4.1 to Omnicom Group Inc.'s Registration Statement No. 333-46303, are incorporated herein by reference. (ii) By-laws. Incorporated by reference to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987. (4) Instruments Defining the Rights of Security Holders, Including Indentures. 4.1 Subscription Agreement dated December 14, 1994 by and among the Registrant, BBDO Canada Inc. and Morgan Stanley GmbH and the other Managers listed therein, in connection with the issuance of DM 200,000,000 Floating Rate Bonds of 1995 due January 5, 2000 of BBDO Canada Inc., including form of Guaranty by Registrant, filed as Exhibit 4.2 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 4.2 Paying Agency Agreement dated January 4, 1995 by and among the Registrant, BBDO Canada Inc. and Morgan Stanley GmbH in connection with the issuance of DM 200,000,000 Floating Rate Bonds of 1995 due January 5, 2000 of BBDO Canada Inc. filed as Exhibit 4.3 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 4.3 Subscription Agreement dated February 27, 1996 by and among the Registrant, Morgan Stanley Bank AG and Morgan Stanley & Co. International in connection with the issuance of DM 100,000,000 Floating Rate Bonds of 1996 due March 1, 1999 filed as Exhibit 4.4 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 4.4 Paying Agency Agreement dated March 1, 1996 by and among the Registrant, Morgan Stanley Bank AG and Morgan Stanley & Co. International in connection with the issuance of DM 100,000,000 Floating Rate Bonds of 1996 due March 1, 1999 filed as Exhibit 4.5 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 11
4.5 Indenture dated January 3, 1997 between the Registrant and The Chase Manhattan Bank, as trustee, in connection with the issuance of 4 1/4% Convertible Subordinated Debentures due 2007 filed as Exhibit 4.2 to Omnicom Group Inc.'s Form S-3 Registration Statement No. 333-22589, is incorporated herein by reference. 4.6 Form of Debentures (included in Exhibit 4.5 above) filed as Exhibit 4.3 to Omnicom Group Inc.'s Form S-3 Registration Statement No. 333-22589, is incorporated herein by reference. 4.7 Registration Rights Agreement dated January 3, 1997 between the Registrant and Morgan Stanley & Co. Incorporated related to the Registrant's 4 1/4% Convertible Subordinated Debentures due 2007 filed as Exhibit 4.4 to Omnicom Group Inc.'s Form S-3 Registration No. 333-22589, is incorporated herein by reference. 4.8 Indenture dated January 6, 1998, between Registrant and The Chase Manhattan Bank, as trustee, in connection with the issuance of 2 1/4% Convertible Subordinated Debentures due 2013 filed as Exhibit 4.1 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.9 Form of Debentures (included in Exhibit 4.8 above) filed as Exhibit 4.2 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.10 Registration Rights Agreement dated January 6, 1998, between the Registrant and Morgan Stanley & Co. Incorporated related to the Registrant's 2 1/4% Convertible Subordinated Debentures due 2013 filed as Exhibit 4.3 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.11 Fiscal Agency Agreement dated June 24, 1998, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.1 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 4.12 Subscription Agreement dated June 22, 1998 by and among Omnicom Group Inc., Morgan Stanley S.A. and Others, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.2 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 4.13 Deed of the Covenant dated June 24, 1998, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.3 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. (10) Material Contracts. Management Contracts, Compensatory Plans, Contracts or Arrangements. 10.1 Registrant's 1987 Stock Plan, filed as Exhibit 10.26 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference. 10.2 Amendments to Registrant's 1987 Stock Plan, filed as Exhibit 10.2 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.3 Standard Form of the Registrant's 1998 Executive Salary Continuation Plan Agreement, filed as Exhibit 10.24 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.4 Standard Form of the Registrant's Indemnification Agreement with members of Registrant's Board of Directors, filed as Exhibit 10.25 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.5 Severance Agreement dated July 6, 1993, between Keith Reinhard and DDB Worldwide Communications Group, Inc. (then known as DDB Needham Worldwide, Inc.), filed as Exhibit 10.11 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 12
10.6 Employment Agreement dated May 26, 1993, between William G. Tragos and TBWA International B.V., filed as Exhibit 10.13 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.7 Deferred Compensation Agreement dated October 12, 1984, between William G. Tragos and TBWA Chiat/Day Inc. (then known as TBWA Advertising Inc.), filed as Exhibit 10.14 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.8 Standard Form of Severance Compensation Agreement incorporated by reference to BBDO International Inc.'s Form S-1 Registration Statement filed with the Securities and Exchange Commission on September 28, 1973, is incorporated herein by reference. 10.9 Omnicom Group Inc. 1998 Incentive Compensation Plan, filed as Exhibit A to Omnicom Group Inc.'s Proxy Statement dated April 6, 1998, is incorporated herein by reference. 10.10 Omnicom Group Inc. Restricted Stock Plan for Non-employee Directors. Other Material Contracts. 10.11 $500,000,000 Amended and Restated Credit Agreement, dated as of May 10, 1996 amended and restated as of February 20, 1998, between Omnicom Finance Inc., Omnicom Finance Limited, ABN AMRO Bank N.V., Chase Securities Inc. and the financial institutions party thereto, filed as Exhibit 10.16 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. 10.12 364-Day Credit Agreement, dated as of April 30, 1999, among Omnicom Finance Inc., Omnicom Finance Limited, the financial institutions party thereto, Citibank, N.A., as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent, and Instituto Bancario San Paolo Di Torino Instituto Mobiliare Italiano S.p.A., as Syndication Agent (the "Credit Agreement"), filed as Exhibit 10.1 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.13 List of Contents of Exhibits to the Credit Agreement, filed as Exhibit 10.2 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.14 Guaranty, dated as of April 30, 1999, made by Omnicom Group Inc., filed as Exhibit 10.3 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. (21) Subsidiaries of the Registrant (23) Consents of Experts and Counsel. 23.1 Consent of Arthur Andersen LLP. (24) Powers of Attorney from Bernard Brochand, Robert J. Callander, James A. Cannon, Leonard S. Coleman, Jr., Bruce Crawford, Susan S. Denison, Peter Foy, Thomas L. Harrison, John R. Murphy, John R. Purcell, Keith L. Reinhard, Allen Rosenshine, Gary L. Roubos, Quentin I. Smith, Jr. and Egon P.S. Zehnder. (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 fourth quarter of the year ended December 31, 1999. 13
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 29, 2000 By: /s/ RANDALL J. WEISENBURGER ---------------------------- Randall J. Weisenburger Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ BRUCE CRAWFORD* Chairman and Director March 29, 2000 - ----------------------------------- (Bruce Crawford) /s/ JOHN D. WREN Chief Executive Officer March 29, 2000 - ----------------------------------- and President and Director (John D. Wren) /S/ RANDALL J. WEISENBURGER Executive Vice President and March 29, 2000 - ----------------------------------- Chief Financial Officer (Randall J. Weisenburger) /S/ PHILIP J. ANGELASTRO Controller (Principal March 29, 2000 - ----------------------------------- Accounting Officer) (Philip J. Angelastro) /s/ BERNARD BROCHAND* Director March 29, 2000 - ----------------------------------- (Bernard Brochand) /s/ ROBERT J. CALLANDER* Director March 29, 2000 - ----------------------------------- (Robert J. Callander) /s/ JAMES A. CANNON* Director March 29, 2000 - ----------------------------------- (James A. Cannon) /s/ LEONARD S. COLEMAN, JR.* Director March 29, 2000 - ----------------------------------- (Leonard S. Coleman, Jr.) /s/ SUSAN S. DENISON* Director March 29, 2000 - ----------------------------------- (Susan S. Denison) /s/ PETER FOY* Director March 29, 2000 - ----------------------------------- (Peter Foy) /s/ THOMAS L. HARRISON* Director March 29, 2000 - ----------------------------------- (Thomas L. Harrison) /s/ JOHN R. MURPHY* Director March 29, 2000 - ----------------------------------- (John R. Murphy) /s/ JOHN R. PURCELL * Director March 29, 2000 - ----------------------------------- (John R. Purcell) /s/ KEITH L. REINHARD* Director March 29, 2000 - ----------------------------------- (Keith L. Reinhard) /s/ ALLEN ROSENSHINE* Director March 29, 2000 - ----------------------------------- (Allen Rosenshine) /s/ GARY L. ROUBOS* Director March 29, 2000 - ----------------------------------- (Gary L. Roubos) /s/ QUENTIN I. SMITH, JR.* Director March 29, 2000 - ----------------------------------- (Quentin I. Smith, Jr.) /s/ EGON P.S. ZEHNDER* Director March 29, 2000 - ----------------------------------- (Egon P.S. Zehnder) *By /s/ BARRY J. WAGNER - ----------------------------------- Barry J. Wagner Attorney-in-fact </TABLE> 14
REPORT OF MANAGEMENT The management of Omnicom Group Inc. is responsible for the integrity of the financial data reported by the Company and its subsidiaries. Management uses its best judgment to ensure that the financial statements present fairly, in all material respects, the consolidated financial position and results of operations of Omnicom Group Inc. and subsidiaries. These financial statements have been prepared in accordance with generally accepted accounting principles. The system of internal controls of the Company, augmented by a program of internal audits, is designed to provide reasonable assurance that assets are safeguarded and records are maintained to substantiate the preparation of accurate financial information. Underlying this concept of reasonable assurance is the premise that the cost of control should not exceed the benefits derived therefrom. The financial statements have been audited by independent public accountants. Their report expresses an independent informed judgment as to the fairness of management's reported operating results, cash flows and financial position. This judgment is based on the procedures described in the second paragraph of their report. The Audit Committee meets periodically with representatives of financial management, internal audit and the independent public accountants to assure that each is properly discharging their responsibilities. Additionally, the Audit Committee met periodically to review progress against the Company's Year 2000 readiness plan. In order to ensure complete independence, the Audit Committee communicates directly and separately with the independent public accountants, internal audit and financial management to discuss the results of their audits, the adequacy of internal accounting controls and the quality of financial reporting. JOHN D. WREN RANDALL J. WEISENBURGER - ------------------------------------- ---------------------------------- John D. Wren Randall J. Weisenburger Chief Executive Officer and President Executive Vice President and Chief Financial Officer F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Omnicom Group Inc.: We have audited the accompanying consolidated balance sheets of Omnicom Group Inc. (a New York corporation) and subsidiaries as of December 31, 1999 and 1998, and related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Omnicom Group Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule on page S-1 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York February 17, 2000 F-2
OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Years Ended December 31, (Dollars in Thousands Except Per Share Data) ------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> COMMISSIONS AND FEES .................................... $ 5,130,545 $ 4,290,946 $ 3,296,224 OPERATING EXPENSES: Salaries and Related Costs ........................... 3,054,018 2,558,694 1,955,586 Office and General Expenses .......................... 1,352,397 1,170,045 928,954 ----------- ----------- ----------- 4,406,415 3,728,739 2,884,540 ----------- ----------- ----------- OPERATING PROFIT ........................................ 724,130 562,207 411,684 NET INTEREST EXPENSE: Interest and Dividend Income ......................... (34,486) (34,072) (23,677) Interest Paid or Accrued ............................. 84,908 74,482 44,783 ----------- ----------- ----------- 50,422 40,410 21,106 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES .............................. 673,708 521,797 390,578 INCOME TAXES ............................................ 273,247 219,092 166,539 ----------- ----------- ----------- INCOME AFTER INCOME TAXES ............................... 400,461 302,705 224,039 EQUITY IN AFFILIATES .................................... 15,368 20,506 25,742 MINORITY INTERESTS ...................................... (52,947) (44,366) (32,481 ----------- ----------- ----------- NET INCOME .............................................. $ 362,882 $ 278,845 $ 217,300 =========== =========== =========== NET INCOME PER COMMON SHARE: Basic ................................................ $ 2.07 $ 1.61 $ 1.30 Diluted .............................................. $ 2.01 $ 1.57 $ 1.28 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-3
OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> December 31, (Dollars in Thousands) -------------------------- 1999 1998 ---------- ---------- CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents .................................................... $ 576,427 $ 648,781 Short-term investments at market, which approximates cost .................... 24,522 68,610 Accounts receivable, less allowance for doubtful accounts of $53,720 and $55,764 (Schedule II) ................................................. 3,358,304 2,691,340 Billable production orders in process, at cost ............................... 299,209 255,294 Prepaid expenses and other current assets .................................... 453,862 448,496 ---------- ---------- Total Current Assets ......................................................... 4,712,324 4,112,521 FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less accumulated depreciation and amortization of $522,294 and $444,670 ........... 444,722 376,541 INVESTMENTS IN AFFILIATES ....................................................... 386,549 257,394 INTANGIBLES, less accumulated amortization of $352,081 and $284,663 ............. 2,428,385 2,073,037 DEFERRED TAX BENEFITS ........................................................... 120,346 98,154 LONG-TERM INVESTMENTS ........................................................... 785,406 4,998 DEFERRED CHARGES AND OTHER ASSETS ............................................... 139,905 199,323 ---------- ---------- ................................................................................ $9,017,637 $7,121,968 ========== ========== </TABLE> <TABLE> <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: <S> <C> <C> Accounts payable ............................................................. $4,112,777 $3,365,844 Current portion of long-term debt ............................................ 82,621 83,454 Bank loans ................................................................... 47,748 56,440 Advance billings ............................................................. 417,044 270,312 Accrued taxes on income ...................................................... 77,584 50,454 Other accrued taxes .......................................................... 154,825 136,902 Other accrued liabilities .................................................... 1,085,323 1,006,826 Dividends payable ............................................................ 31,141 25,450 ---------- ---------- Total Current Liabilities .................................................... 6,009,063 4,995,682 ---------- ---------- LONG-TERM DEBT .................................................................. 263,149 268,913 CONVERTIBLE SUBORDINATED DEBENTURES ............................................. 448,483 448,497 DEFERRED COMPENSATION AND OTHER LIABILITIES ..................................... 300,746 269,966 DEFERRED INCOME TAXES ON UNREALIZED GAINS ....................................... 320,176 2,622 MINORITY INTERESTS .............................................................. 123,122 90,778 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10) SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value, 7,500,000 shares authorized, none issued ... -- -- Common stock, $.50 par value, 300,000,000 shares authorized, 187,086,161 and 186,654,985 shares issued in 1999 and 1998, respectively .............. 93,543 93,328 Additional paid-in capital ................................................... 808,154 720,343 Retained earnings ............................................................ 882,051 628,742 Unamortized restricted stock ................................................. (85,919) (58,060) Accumulated other comprehensive income ....................................... 285,234 (94,781) Treasury stock, at cost, 9,598,602 and 8,698,365 shares in 1999 and 1998, respectively .............................................................. (430,165) (244,062) ---------- ---------- Total Shareholders' Equity ................................................ 1,552,898 1,045,510 ---------- ---------- $9,017,637 $7,121,968 ========== ========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-4
OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Years Ended December 31, 1999 (Dollars in Thousands) <TABLE> <CAPTION> Accumulated Common Stock Additional Unamortized Other Comprehensive --------------------- Paid-in Retained Restricted Comprehensive Income Shares Par Value Capital Earnings Stock Income ------------- ----------- --------- ---------- -------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> Balance December 31, 1996, as restated ............. 180,039,367 $90,021 $561,976 $315,756 $(39,445) $ 2,901 Pooling of interests adjustment .................... 1,088,974 544 (492) (14,735) ----------- ------- -------- -------- -------- -------- Balance January 1, 1997, as restated ............. 181,128,341 90,565 561,484 301,021 (39,445) 2,901 Comprehensive income: Net income .................... 217,300 217,300 Translation adjustments, net of taxes of $37,300 ...... (50,259) (50,259) ------- Comprehensive income ............ 167,041 ======= Dividends declared .............. (77,869) Amortization of restricted shares 17,311 Shares transactions under employee stock plans .......... 21,480 11 16,540 (24,611) Shares issued for acquisitions .................. 107,358 53 3,690 Purchase of treasury shares ----------- ------- -------- -------- -------- -------- Balance December 31, 1997, as restated ............. 181,257,179 90,629 581,714 440,452 (46,745) 47,358) Pooling of interests adjustments ................... 3,550,366 1,776 (26,285) (2,455) ----------- ------- -------- -------- -------- -------- Balance January 1, 1998, as restated ............. 184,807,545 92,405 555,429 437,997 (46,745) (47,358) Comprehensive income: Net income .................... 278,845 278,845 Translation adjustments, net of taxes of $34,340 ...... (47,423) (47,423) -------- Comprehensive income .......... 231,422 ======== Dividends declared .............. (88,100) Amortization of restricted shares ............. 21,489 Shares transactions under employee stock plans .......... 2,750 1 40,788 (32,804) Shares issued for acquisitions .. 2,002,187 1,001 34,403 Issuance of new shares .......... 96,962 Purchase of treasury shares Cancellation of shares .......... (157,497) (79) (7,239) ----------- ------- -------- -------- -------- -------- Balance December 31, 1998 as restated .............. 186,654,985 93,328 720,343 628,742 (58,060) (94,781) Comprehensive income: Net income .................... 362,882 362,882 Unrealized gain on investments, net of income taxes of $290,233 ..................... 417,653 417,653 Translation adjustments, net of taxes of $25,726 ....... (37,638) (37,638) -------- Comprehensive income ............ 742,897 ======== Dividends declared .............. (109,573) Amortization of restricted shares ............. 27,812 Shares transactions under employee stock plans .......... 306,381 152 58,197 (55,671) Shares issued for acquisitions .................. 127,069 64 7,136 Conversion of 4.25% debentures .................... (5) Purchase of treasury shares Cancellation of shares .......... (2,274) (1) (177) Gain on initial public offering of common stock of affiliates ........... 22,660 ----------- ------- -------- -------- -------- -------- Balance December 31, 1999 .......................... 187,086,161 $93,543 $808,154 $882,051 $(85,919) $285,234 =========== ======= ======== ======== ======== ======== </TABLE> Total Treasury Shareholders' Stock Equity -------- ------------ Balance December 31, 1996, as restated ......................... $(180,094) $ 751,115 Pooling of interests adjustment ................................ (14,683) --------- ---------- Balance January 1, 1997, as restated ......................... (180,094) 736,432 Comprehensive income: Net income ................................ 217,300 Translation adjustments, net of taxes of $37,300 .................. (50,259) Comprehensive income Dividends declared .......................... (77,869) Amortization of restricted shares .................................... 17,311 Shares transactions under employee stock plans ...................... 35,606 27,546 Shares issued for acquisitions .............................. 313 4,056 Purchase of treasury shares ................. (69,762) (69,762) --------- ---------- Balance December 31, 1997, as restated ......................... (213,937) 804,755 Pooling of interests adjustments ............................... (26,964) --------- ---------- Balance January 1, 1998, as restated ......................... (213,937) 777,791 Comprehensive income: Net income ................................ 278,845 Translation adjustments, net of taxes of $34,340 .................. (47,423) Comprehensive income Dividends declared .......................... (88,100) Amortization of restricted shares ......................... 21,489 Shares transactions under employee stock plans ...................... 43,012 50,997 Shares issued for acquisitions .............. 2,088 37,492 Issuance of new shares ...................... 74,122 171,084 Purchase of treasury shares ................. (149,347) (149,347) Cancellation of shares (7,318) --------- ---------- Balance December 31, 1998 as restated .......................... (244,062) 1,045,510 Comprehensive income: Net income ................................ 362,882 Unrealized gain on investments, net of income taxes of $290,233 ................................. 417,653 Translation adjustments, net of taxes of $25,726 ................... (37,638) Comprehensive income Dividends declared .......................... (109,573) Amortization of restricted shares ......................... 27,812 Shares transactions under employee stock plans ...................... 100,037 102,715 Shares issued for acquisitions .............................. 7,200 Conversion of 4.25% debentures ................................ 19 14 Purchase of treasury shares ................. (286,159) (286,159) Cancellation of shares ...................... (178) Gain on initial public offering of common stock of affiliates ....................... 22,660 --------- ---------- Balance December 31, 1999 ...................................... $ (430,165) $1,552,898 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. F-5
OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Years Ended December 31, (Dollars in Thousands) -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- <S> <C> <C> <C> Cash flows from Operating Activities: Net income ...................................................................... $ 362,882 $ 278,845 $ 217,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of tangible assets ............................. 97,080 84,210 70,928 Amortization of intangible assets ............................................ 70,823 58,248 39,731 Minority interests ........................................................... 52,947 44,366 32,481 Earnings of affiliates in excess of dividends received ....................... (8,333) (6,869) (10,840) (Increase) decrease in deferred tax benefits ................................. (33,064) 22,520 21,342 Provisions for losses on accounts receivable ................................. 14,399 15,586 10,491 Amortization of restricted shares ............................................ 27,812 21,489 17,311 Increase in accounts receivable .............................................. (645,093) (238,174) (379,958) Increase in billable production orders in process ............................ (13,246) (35,113) (27,983) Decrease (increase) in prepaid expenses and other current assets ............. 9,889 (64,044) (46,795) Increase in accounts payable ................................................. 786,071 330,413 560,425 Increase in other accrued liabilities ........................................ 205,214 88,989 171,200 (Decrease) increase in accrued taxes on income ............................... (793) (49,887) 13,441 Increase in advances to affiliates ........................................... (36,283) (13,520) (26,748) (Increase) decrease in deferred charges and other assets ..................... (2,753) 25,254 (49,605) Other ........................................................................ 13,472 (87,329) (16,975) --------- --------- --------- Net Cash Provided by Operating Activities ....................................... 901,024 474,984 595,746 --------- --------- --------- Cash Flows From Investing Activities: Capital expenditures ......................................................... (129,871) (114,522) (114,814) Purchases of equity interests in subsidiaries and affiliates, net of cash acquired ...................................................... (691,392) (586,016) (371,823) Sales of equity interests in subsidiaries and affiliates ..................... 14,380 80,325 6,705 Purchases of investments available-for-sale and other investments ............ (58,069) (65,007) (112,037) Sales of investments available-for-sale and other investments ................ 96,891 101,735 41,798 --------- --------- --------- Net Cash Used in Investing Activities ........................................... (768,061) (583,485) (550,171) --------- --------- --------- Cash Flows From Financing Activities: Proceeds from issuance of shares ............................................. -- 171,084 -- Net (repayments) borrowings under lines of credit ............................ (15,748) 12,786 2,130 Proceeds from issuances of debt obligations .................................. 83,924 411,605 254,652 Repayment of principal of debt obligations ................................... (75,642) (134,606) (81,389) Shares transactions under employee stock plans ............................... 102,715 50,997 27,546 Dividends and loans from (to) affiliates and minority stockholders ........... 93,105 (46,431) (39,061) Dividends paid ............................................................... (103,882) (88,623) (72,753) Purchase of treasury shares .................................................. (286,159) (149,347) (69,762) --------- --------- --------- Net Cash (Used In) Provided by Financing Activities ............................. (201,687) 227,465 21,363 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents ................. (3,630) (35,321) (30,924) --------- --------- --------- Net Increase in Cash and Cash Equivalents ....................................... (72,354) 83,643 36,014 Cash and Cash Equivalents at Beginning of Period ................................ 648,781 565,138 529,124 --------- --------- --------- Cash and Cash Equivalents at End of Period ...................................... $ 576,427 $ 648,781 $ 565,138 ========= ========= ========= Supplemental Disclosures: Income taxes paid ............................................................ $ 235,256 $ 223,921 $ 134,763 ========= ========= ========= Interest paid ................................................................ $ 78,835 $ 60,784 $ 36,590 ========= ========= ========= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-6
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Summary of Significant Accounting Policies Business. Omnicom Group Inc., through its wholly and partially-owned companies (hereinafter collectively referred to as the "Company" or the "Omnicom Group"), provides corporate communications services to clients worldwide on a global, pan-regional, national and local basis. Operations cover the major regions of North America, the United Kingdom, Germany, France, the remainder of Continental Europe, Latin America, the Far East, Australia, the Middle East and Africa. In both 1999 and 1998, approximately 50% of the Omnicom Group's commissions and fees came from its non-U.S. operations. The communications services offered by the Company include advertising in various media such as television, radio, newspaper, magazines, outdoor and the internet, as well as public relations, specialty advertising, direct response and promotional marketing, strategic media planning and buying, and internet and digital media development. Recognition of Commission and Fee Revenue. Substantially all revenues are derived from fees for manpower and for production of advertisements. Additionally, revenues are derived from commissions for placement of advertisements in various media. Revenue is realized when the service is performed, in accordance with the terms of the contractual arrangement, and collection is reasonably assured. Billings are generally rendered upon completion of the earnings process, including: upon presentation date for media, when manpower is used, when costs are incurred for radio and television production and when print production is completed. Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Omnicom Group Inc. and its domestic and international subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. Restatement and Reclassifications. As discussed in Note 2, on February 10, 1999 the Company completed the acquisition of Abbott Mead Vickers Group Limited (formerly known as Abbott Mead Vickers plc) ("AMV"). The AMV acquisition was accounted for as a pooling-of-interests. All prior year amounts have been restated to include the accounts of AMV. In addition, certain prior year amounts have been reclassified to conform with the 1999 presentation. Investments Available-For-Sale. Substantially all of the Company's investments are classified as available-for-sale. Investments available-for-sale, that consist principally of short-term investments and time deposits with financial institutions with original maturity dates between 3 months and one year, are classified as current assets. Strategic investments available-for-sale, which consist principally of publicly traded securities in interactive marketing agencies, are classified as long-term investments. Billable Production. Billable production orders in process consist principally of costs incurred in providing corporate communications services to clients. Such amounts are generally billed to clients when manpower is used, when costs are incurred for radio and television production and when print production is completed. Common Stock. Wholly-owned subsidiaries of the Company have issued securities which are exchangeable into common stock of the Company at the holders' option. Shares of common stock issuable on the exchange of these securities are included in common stock issued at December 31, 1999. Treasury Stock. The Company accounts for treasury share purchases at cost. The reissuance of treasury shares is accounted for at the average cost. Gains or losses on the reissuance of treasury shares are accounted for as additional paid-in capital. Foreign Currency Translation. The Company's financial statements were prepared in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Under this method, net transaction gains of $9.9 million, $15.2 million and $3.6 million are included in 1999, 1998 and 1997 net income, respectively. Earnings Per Common Share. Basic earnings per share is based upon the weighted average number of common shares outstanding during each year. 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 1/4% and 4 1/4% Convertible Subordinated Debentures (assumed to be converted for the full year) and the assumed increase in net income for the after tax interest cost of these debentures. For purposes of computing diluted earnings per share for the years ended December F-7
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 31, 1999, 1998 and 1997, respectively, 3,046,904, 3,518,600 and 3,174,000 shares were assumed to have been outstanding related to common share equivalents and 11,551,936, and 6,936,500 shares in 1999 and 1998, respectively were assumed to have been converted related to the Company's convertible subordinated debentures. Additionally, the assumed increase in net income used in the computations was $17,968,000, $9,627,900 and $318,300 for the years ended December 31, 1999, 1998 and 1997, respectively. The number of shares used in the computations were as follows: 1999 1998 1997 ---- ---- ---- Basic EPS computation .......... 175,285,932 173,104,700 166,857,300 Diluted EPS computation ........ 189,884,772 183,559,800 170,031,300 For purposes of computing diluted earnings per share for the year ended December 31, 1998, the Company's 2 1/4% Convertible Subordinated Debentures and for the year ended December 31, 1997 the 4 1/4% Convertible Subordinated Debentures, were not reflected in the computation as inclusion would have been anti-dilutive. Gains and Losses on Issuance of Stock in Affiliates and Subsidiaries. Gains and losses on the issuance of stock in equity method affiliates and consolidated subsidiaries are recognized directly in the Company's shareholder's equity through an increase or decrease to additional paid-in capital, in the period in which the sale occurs. Severance Agreements. Arrangements with certain present and former employees provide for continuing payments for periods up to 10 years after cessation of their full-time employment in consideration for agreements by the employees not to compete and to render consulting services in the post employment period. Such payments, which are determined, subject to certain conditions and limitations, by earnings in subsequent periods, are expensed in such periods. Depreciation of Furniture and Equipment and Amortization of Leasehold Improvements. Depreciation charges are computed on a straight-line basis or declining balance method over the estimated useful lives of furniture and equipment, up to 10 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the related lease or the useful life of these assets. Intangibles. Intangibles represent acquisition costs in excess of the fair value of tangible net assets of purchased subsidiaries. The intangible values associated with the Company's business consist predominantly of two types: the value of the worldwide agency networks and agency brands and the value of ongoing client relationships. The Company's worldwide agency networks have been operating for an average of over 60 years and intangibles associated with enhancing network value are intended to enhance the long-term value of the networks. Client relationships in the corporate communications services industry are typically long-term in nature and the Company's largest clients have on average been clients for more than 25 years. As such, intangibles are amortized on a straight-line basis principally over a period of 40 years. Each year, the intangibles are written down if, and to the extent, they are determined to be impaired. Intangibles are considered to be impaired if the future anticipated undiscounted cash flows arising from the use of the intangibles is less than the net unamortized cost of the intangibles. Deferred Taxes. Deferred tax liabilities and tax benefits relate to the recognition of certain revenues and expenses in different years for financial statement and tax purposes and to differences between the tax and book basis of assets and liabilities recorded in connection with acquisitions, unrealized gains and losses on investments available for sale and the issuance of stock in affiliates. F-8
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Cash Flows. The Company's cash equivalents are primarily comprised of investments in overnight interest-bearing deposits, commercial paper and money market instruments with original maturity dates of three months or less. The following supplemental schedule summarizes the fair value of non-cash assets acquired, cash paid, common shares issued (valued at the then market value of the shares and excluding shares related to the AMV acquisition) and the liabilities assumed in connection with the acquisition of equity interests in subsidiaries and affiliates, for each of the three years ended December 31: <TABLE> <CAPTION> (Dollars in thousands) 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Fair value of non-cash assets acquired $ 1,059,443 $ 1,586,331 $ 473,800 Cash paid, net of cash acquired ...... (691,392) (586,016) (371,823) Common shares issued ................. (7,200) (175,180) (7,214) ----------- ----------- ----------- Liabilities assumed .................. $ 360,851 $ 825,135 $ 94,763 =========== =========== =========== </TABLE> Concentration of Credit Risk. The Company provides corporate communications services to a wide range of clients who operate in many industry sectors around the world. The Company grants credit to all qualified clients, but does not believe it is exposed to any undue concentration of credit risk to any significant degree. Derivative Financial Instruments. Derivative financial instruments consist principally of forward foreign exchange contracts and interest rate swaps. For derivative financial instruments to qualify for hedge accounting the following criteria must be met: (a) the hedging instrument must be designated as a hedge; (b) the hedged exposure must be specifically identifiable and expose the Company to risk; and (c) it must be highly probable that a change in fair value of the derivative financial instrument and an opposite change in the fair value of the hedged exposure will have a high degree of correlation. The majority of the Company's derivative activity relates to forward foreign exchange contracts. The Company executes these contracts in the same currency as the hedged exposure, whereby 100% correlation is achieved. Gains and losses on derivative financial instruments which are hedges of existing assets or liabilities are included in the carrying amount of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Interest received and/or paid arising from swap agreements which qualify as hedges are recognized in income when the interest is receivable or payable. Derivative financial instruments which do not qualify as hedges are revalued to the current market rate and any gains or losses are recorded in income in the current period. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Acquisitions On February 10, 1999, the Company completed the acquisition of AMV. AMV provides corporate communications services to clients principally in the United Kingdom. The Company issued approximately 9.6 million shares of new common stock in exchange for the 92.3% of AMV ordinary shares not already owned by the Company, at a fixed exchange ratio of .1347 common shares of the Company per AMV ordinary share. The transaction was accounted for under the pooling-of-interests method of accounting. Accordingly, the Company's financial statements have been restated to include the operating results of AMV for all periods presented. F-9
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Selected financial information for the combining entities included in the consolidated statements of income for the years ended December 31, 1998 and 1997 are as follows (in thousands): 1998 1997 ---- ---- Commissions and fees Previously reported ................ $ 4,092,042 $ 3,124,813 AMV ................................ 198,904 171,411 ----------- ----------- Restated ......................... $ 4,290,946 $ 3,296,224 Net income Previously reported ................ $ 285,068 $ 222,415 AMV ................................ (6,223) (5,115) ----------- ----------- Restated ......................... $ 278,845 $ 217,300 =========== =========== The restated results reflect the impact of including the operating results of AMV, net of adjustments to eliminate inter-company transactions between AMV and the Company, and to conform AMV accounting methods to those used by the Company. During 1999, the Company made several other acquisitions whose aggregate cost, in cash or by issuance of the Company's common stock, totaled $748.6 million for net assets, which included intangible assets of $489.3 million. Due to the nature of corporate communications services companies, the companies acquired by the Company generally have tangible net liabilities or minimal tangible net assets. Valuations of these companies are based on a number of factors, including the competitive position of each company's agency networks and agency brands. Included in both figures are payments of $137.0 million made in 1999 related to acquisitions completed in prior years. Certain acquisitions completed in 1999 and prior years require payments in future years if certain results are achieved by the companies that were acquired. Formulas for these contingent future payments vary from acquisition to acquisition. Contingent future payments are not expected to be material to the Company's results of operations or financial position. In January 1998, the Company completed the acquisitions of Fleishman-Hillard, Inc., GPC International Holdings Inc. and Palmer Jarvis Inc. These acquisitions were accounted for under the pooling-of-interests method of accounting and, accordingly, the results of operations of Fleishman-Hillard Inc., GPC International Holdings Inc. and Palmer Jarvis Inc. have been included in the consolidated financial statements since January 1, 1998. Prior year consolidated financial statements were not restated as the impact on such years was not material. The number of shares of common stock issued by the Company in connection with these acquisitions was 3,550,366. In February 1997, the Company completed the acquisitions of Cline Davis & Mann, Inc. and Gavin Anderson & Company (Japan), Inc. Both of these acquisitions were accounted for under the pooling-of-interests method of accounting and, accordingly, the results of operations of Cline Davis & Mann, Inc. and Gavin Anderson & Company (Japan), Inc. have been included in the consolidated financial statements since January 1, 1997. Prior year consolidated financial statements were not restated as the impact on such years was not material. A total of 1,088,974 shares of common stock were issued in connection with these acquisitions. In May 1996, the Company completed the acquisition of Ketchum Communications Holdings, Inc. ("Ketchum"). The acquisition was accounted for under the pooling-of-interests method of accounting and, accordingly, the results of operations of Ketchum have been included in the consolidated financial statements since January 1, 1996. Prior year consolidated financial statements were not restated as the impact on such years was not material. A total of 2,413,706 shares of common stock were issued in connection with this acquisition. 3. Bank Loans and Lines of Credit Bank loans of $47.7 million and $56.4 million at December 31, 1999 and 1998, respectively, are primarily comprised of bank overdrafts of international subsidiaries, which are treated as unsecured loans pursuant to bank agreements. The weighted average interest rate on the borrowings outstanding as of F-10
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 and 1998 was 6.37% and 6.62%, respectively. At December 31, 1999 and 1998, the Company had unsecured committed lines of credit aggregating $1,420.9 million and $742.7 million, respectively. The unused portion of credit lines was $1,293.8 million and $686.4 million at December 31, 1999 and 1998, respectively. The lines of credit, including the credit facilities discussed below, are generally extended at lending rates that the banks grant to their most creditworthy borrowers. On April 30, 1999, the Company entered into a $750 million revolving credit agreement (the "$750 million credit facility"), with a consortium of banks expiring on April 28, 2000. The $750 million credit facility is used primarily to support the issuance of commercial paper. The Company had $79.4 million of commercial paper borrowings outstanding with interest rates ranging from 6.35% to 6.48% as of December 31, 1999, which matured on January 27, 2000. The gross amount of commercial paper issued and redeemed, under this facility, during the year ended December 31, 1999 was $4,617 million and $4,538 million, respectively. Commercial paper is included in long-term debt in the consolidated balance sheet, as it is the Company's intention to refinance these borrowings on a long-term basis through continued commercial paper borrowings supported by available bank facilities (see Note 7). On February 20, 1998, the Company established a $500 million revolving credit agreement (the "$500 million credit facility"), expiring on June 30, 2003. There were no borrowings under this credit facility at December 31, 1999 and 1998. The $500 million credit facility also allows for the issuance of commercial paper backed by a bank letter of credit issued under the terms of the credit facility. The Company had no commercial paper outstanding under this agreement as of December 31, 1999 and 1998. The gross amount of commercial paper issued and redeemed, during the year under this facility was $2,046 million, $4,231 million and $2,017 million in 1999, 1998 and 1997, respectively. 4. Employee Stock Plans Stock Options and Restricted Stock. Under the terms of the Company's 1998 Incentive Compensation Plan (the "1998 Plan"), 4,958,074 shares of common stock of the Company have been reserved as of December 31, 1999 for restricted stock awards and non-qualified stock options to key employees of the Company. The maximum number of shares of common stock of the Company that may be granted in any calendar year, under the 1998 Plan, is 1.5% of the total number of shares of common stock issued and outstanding on the first day of that calendar year. Any remaining reserved shares of common stock may be carried over to subsequent years. The remaining number of such reserved shares was 747,653 at December 31, 1999. Awards under the Company's 1987 Stock Plan, as amended (the "1987 Plan"), ceased to be made when the Company adopted the 1998 Plan. As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," the Company intends to continue to apply the accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and to make annual pro forma disclosures of the effect of adopting the fair value method of accounting for employee stock options and similar instruments. During the initial periods of disclosure, the effects on net income may not be representative of the effects in future years due to the transitional provisions included in SFAS No. 123. Pursuant to the 1987 Plan and 1998 Plan (the "Plans"), the price of options awarded may not be less than 100% of the market value of the stock at the date of the grant. Options become exercisable 30% on each of the first two anniversary dates of the grant date with the final 40% becoming exercisable three years from the grant date. ESPP. Effective September 1, 1999 the Company adopted the Omnicom Group Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP enables substantially all domestic employees to purchase full or fractional shares of the Company's common stock through payroll deductions of up to 10% of eligible compensation. The price an employee pays is 85% of the fair market value on the purchase date of that plan quarter. During 1999 employees purchased 63,408 shares, all of which were treasury shares, for which $4.8 million was paid to the Company. Under the ESPP 2,936,592 shares remain reserved at December 31, 1999. F-11
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of the status of the Company's stock option plan for the three years ended December 31, 1999 is as follows: <TABLE> <CAPTION> 1999 1998 1997 ------------------------- -------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- <S> <C> <C> <C> <C> <C> <C> Shares under option, beginning of year ............... 7,190,800 $23.16 6,867,800 $16.21 6,757,800 $13.16 Options granted .................... 3,467,234 74.65 1,700,000 42.62 1,440,000 24.28 Options exercised .................. (2,304,647) 16.44 (1,377,000) 12.52 (1,330,000) 9.45 Options forfeited .................. (54,000) 46.91 -- -- --------- ------ -------- ------ --------- ----- Shares under option, end of year ... 8,299,387 46.37 7,190,800 23.16 6,867,800 16.21 Options exercisable at ========= ===== ========= ===== ========= ===== year-end ........................ 3,270,887 3,730,800 3,447,800 --------- --------- --------- </TABLE> The following table summarizes information about options outstanding and options exercisable at December 31, 1999: <TABLE> <CAPTION> Options Outstanding Options Exercisable ---------------------------------------------------------------------------------- Weighted Average Range of Exercise Options Remaining Weighted Average Options Weighted Average Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------- ----------- ---------------- -------------- ----------- -------------- <S> <C> <C> <C> <C> <C> <C> 5.81 40,000 1 year $ 5.81 40,000 $ 5.81 8.77 120,000 3 years 8.77 120,000 8.77 10.02 213,800 4 years 10.02 213,800 10.02 12.11 to 26.27 288,194 5 years 12.51 288,194 12.51 12.94 to 16.20 620,000 6 years 13.15 620,000 13.15 19.72 820,000 7 years 19.72 820,000 19.72 24.28 1,170,000 8 years 24.28 594,000 24.28 39.75 to 66.40 1,717,128 9 years 44.05 562,128 46.98 44.62 to 91.22 3,310,265 10 years 75.35 12,765 46.44 --------- --------- 8,299,387 3,270,887 ========= ========= </TABLE> Pro forma. The weighted average fair value of options granted during 1999, 1998 and 1997 was $20.91, $11.45 and $6.27 per option, respectively. The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Expected option lives .............. 5 years 5 years 5 years Risk free interest rate ............ 4.77% - 6.31% 4.66% - 5.75% 6.15% Expected volatility ................ 18.25% - 21.2% 18.36% - 20.15% 19.7% Dividend yield ..................... 0.7% - 0.8% 0.9% - 1.0% 1.5% </TABLE> Using compensation cost for grants of the Company's stock options and shares issued under the ESPP, determined based on the estimated fair value at the grant or issuance date in 1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the effect on the Company's net income and income per share would have been as follows: <TABLE> <CAPTION> Dollars in Thousands Except Per Share Data ------------------------------------------- 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Net income, as reported .................... $362,882 $278,845 $217,300 Net income, pro forma ...................... 347,643 271,031 212,145 Basic income per share, as reported ........ 2.07 1.61 1.30 Basic income per share, pro forma .......... 1.98 1.57 1.27 Diluted income per share, as reported ...... 2.01 1.57 1.28 Diluted income per share, pro forma ........ 1.93 1.53 1.26 </TABLE> F-12
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restricted Shares. A summary of changes in outstanding shares of restricted stock for the three years ended December 31, 1999 is as follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Beginning balance 2,703,612 3,137,350 3,315,516 Amount granted 935,263 783,419 1,105,838 Amount vested (983,251) (1,111,808) (1,123,882) Amount forfeited (53,343) (105,349) (160,122) --------- --------- --------- Ending balance 2,602,281 2,703,612 3,137,350 ========= ========= ========= </TABLE> All restricted shares granted under the Plans were sold at a price per share equal to their par value. The difference between par value and market value on the date of the sale is charged to shareholders' equity and then amortized to expense over the period of restriction. Under the Plans, the restricted shares become transferable to the employee in 20% annual increments provided the employee remains in the employ of the Company. Restricted shares may not be sold, transferred, pledged or otherwise encumbered until the restrictions lapse. Under most circumstances, the employee must resell the shares to the Company at par value if the employee ceases employment prior to the end of the period of restriction. The charge to operations in connection with these restricted stock awards for the years ended December 31, 1999, 1998 and 1997 amounted to $27.8 million, $21.5 million and $17.3 million, respectively. 5. Segment Reporting 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 services that build their clients businesses. A summary of the Company's operations by geographic area as of December 31, 1999, 1998 and 1997, and for the years then ended is presented below: <TABLE> <CAPTION> (Dollars in Thousands) --------------------------------------------------------------------------------- United United Other Other States Kingdom Germany France Europe International Consolidated ------ ------- ------- ------ ------ ------------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> 1999 Commissions and Fees $2,532,917 $720,047 $431,739 $359,042 $554,767 $532,033 $5,130,545 Long-Lived Assets 219,590 101,989 10,883 16,951 38,661 56,648 444,722 1998 Commissions and Fees $2,098,220 $659,658 $358,441 $306,734 $468,878 $399,015 $4,290,946 Long-Lived Assets 156,092 100,242 11,916 17,245 38,446 52,600 376,541 1997 Commissions and Fees $1,616,768 $501,738 $284,544 $172,395 $374,303 $346,476 $3,296,224 Long-Lived Assets 128,563 72,430 9,125 8,712 26,336 26,903 272,069 </TABLE> F-13
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Investments in Affiliates The Company has in excess of 65 unconsolidated affiliates accounted for under the equity method. The equity method is used when the Company has an ownership of less than 50% and exercises significant influence over the operating and financial policies of the affiliate. The following table summarizes the balance sheets and income statements of the Company's unconsolidated affiliates, primarily in the United States, Europe and Australia, as of December 31, 1999, 1998 and 1997, and for the years then ended: (Dollars in Thousands) ---------------------------------- 1999 1998 1997 ---- ---- ---- Current assets ................. $912,791 $773,661 $442,023 Non-current assets ............. 241,385 156,459 75,072 Current liabilities ............ 692,927 657,247 348,753 Non-current liabilities ........ 65,978 87,258 26,741 Minority interests ............. 1,002 2,327 3,219 Gross revenue .................. 522,103 510,730 374,196 Costs and expenses ............. 467,745 444,453 305,144 Net income ..................... 23,662 33,183 46,834 The Company's equity in the net income of these affiliates amounted to $15.4 million, $20.6 million and $25.7 million for 1999, 1998 and 1997, respectively. The Company's equity in the net tangible assets of these affiliated companies was approximately $174.0 million, $110.5 million and $83.1 million at December 31, 1999, 1998 and 1997, respectively. Included in the Company's investments in affiliates is the excess of acquisition costs over the fair value of tangible net assets acquired. These excess acquisition costs are being amortized on a straight-line basis principally over a period of forty years. In 1999 and 1998, the Company disposed of shares held in certain affiliates. The resulting impact of these sales was not material to the 1999 and 1998 consolidated results of operations or financial position. In April 1999, Razorfish, Inc. (Razorfish), an affiliate of the Company, issued shares of its common stock in an initial public offering. The Company, through a wholly-owned subsidiary, owned 32.4% of Razorfish's equity immediately following the initial public offering. Consistent with the Company's accounting policy and based on an offering price of $16 per share, an after tax gain of $5.1 million was recognized by the Company in shareholders' equity as a direct increase to additional paid-in capital. During the fourth quarter of 1999, the Company's ownership interest in Razorfish was diluted below 20% and as a result the Company discontinued accounting for its investment under the equity method. The Company's investment in Razorfish is carried at market value. Substantially all of the Company's long-term investments on the consolidated Balance Sheet at December 31, 1999 are comprised of shares in Razorfish. Unrealized gains resulting from an increase in the market value of the Company's common stock shareholdings of Razorfish were recorded in comprehensive income since the date the equity method of accounting was discontinued. In December 1999, AGENCY.com Ltd (AGENCY), an affiliate of the Company, issued shares of its common stock in an initial public offering. The Company, through a wholly-owned subsidiary, owns 36% of AGENCY's equity. Based on an offering price of $26 per share, an after tax gain of $17.6 million was recognized by the Company in shareholders' equity as a direct increase to additional paid-in capital. The Company accounts for its investment in AGENCY under the equity method. At December 31, 1999, the fair market value of the Company's investment in AGENCY was $944 million, which amount substantially exceeded its carrying value. F-14
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Long-Term Debt and Convertible Subordinated Debentures Long-term debt and convertible subordinated debentures outstanding as of December 31, 1999 and 1998 consisted of the following: <TABLE> <CAPTION> (Dollars in Thousands) -------------------- 1999 1998 ---- ---- U.S. Dollar Commercial Paper with an average <S> <C> <C> interest rate of 6.41% ...................................... $ 79,402 -- Deutsche Mark Floating Rate Bonds, with a scheduled maturity in 2000, interest at DM three month LIBOR, plus 0.65% ....... 57,185 $ 66,522 Deutsche Mark Floating Rate Bonds, with a scheduled maturity in 1999, interest at DM three month LIBOR plus 0.375% ....... -- 59,930 French Franc 5.20% Notes, with a scheduled maturity in 2005 .... 153,394 178,600 Floating Rate Loan Notes, with a scheduled maturity in 2001 .... 1,982 2,033 Sundry notes and loans payable to banks and others at rates from 4.1% to 26%, maturing at various dates through 2018 ............ 53,807 45,282 -------- -------- 345,770 352,367 Less current portion ........................................... 82,621 83,454 -------- -------- Total long-term debt ......................................... $263,149 $268,913 4 1/4% Convertible Subordinated Debentures with a scheduled maturity in 2007 ............................................ $218,483 $218,497 2 1/4% Convertible Subordinated Debentures with a scheduled maturity in 2013 ............................................ 230,000 230,000 -------- -------- Total convertible subordinated debentures ................... $448,483 $448,497 ======== ======== </TABLE> On April 30, 1999, the Company entered into a $750 million revolving credit agreement with a consortium of banks expiring on April 28, 2000. This credit agreement supports the facility for issuing commercial paper. The remaining borrowing capacity under this agreement at December 31, 1999 was $670.6 million. On June 24, 1998, the Company issued French Franc 1 billion of 5.20% Notes. The Notes are unsecured, unsubordinated obligations of the Company. The Notes are subject to redemption in whole at their principal amount at the option of the Company at any time in the event of certain changes affecting taxation in the United States. Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed at their principal amount on June 24, 2005. In March 1998, the Company issued floating rate Loan Notes in connection with the acquisition of the GGT Group plc. The Loan Notes are unsecured obligations and bear interest at a yearly rate offered in the London Inter-Bank Market for six month deposits of sterling. The Loan Notes are redeemable, at the option of the holder, in whole or in part at their nominal amount, together with accrued interest on any interest payment date after December 31, 1998. Under certain conditions, the Company may redeem the Loan Notes, at their nominal amount plus accrued interest on any interest payment date. Unless previously repaid, redeemed or purchased and cancelled, the Loan Notes will be repaid on June 30, 2001 at par. On February 20, 1998, the Company established a $500 million revolving credit agreement (the "$500 million credit facility"). This $500 million credit facility is with a consortium of banks expiring on June 30, 2003. This credit facility includes a facility for issuing commercial paper backed by a bank letter of credit. Because the Company has the ability and intent to refinance commercial paper on a long-term basis under the $500 million credit facility, commercial paper borrowings at December 31, 1999 has been classified as long-term. The credit facility contains certain financial covenants regarding the ratio of total consolidated indebtedness to total consolidated capitalization, the ratio of debt to cash flow, and a limitation on investments in and loans to affiliates and unconsolidated subsidiaries. At December 31, 1999 the Company was in compliance with these convenants. On January 6, 1998, the Company issued $230 million of 2 1/4% 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 F-15
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. On January 3, 1997, the Company issued $218.5 million of 4 1/4% Convertible Subordinated Debentures with a scheduled maturity in 2007. The debentures are convertible into common stock of the Company at a conversion price of $31.50 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. On March 1, 1996, the Company issued Deutsche Mark 100 million Floating Rate Bonds. The bonds are unsecured, unsubordinated obligations of the Company and bear interest at a per annum rate equal to Deutsche Mark three month LIBOR plus 0.375%. The bonds matured on March 1, 1999 and were repaid at par. On January 4, 1995, an indirect wholly-owned subsidiary of the Company issued Deutsche Mark 200 million Floating Rate Bonds. The bonds are unsecured, subordinated obligations of the issuer and are unconditionally and irrevocably guaranteed by the Company. The bonds bear interest at a rate equal to Deutsche Mark three month LIBOR plus 0.65% and, subsequent to January 5, 1997 may be redeemed at the option of the issuer on any interest payment date at their principal amount plus any accrued but unpaid interest. On August 18, 1997 and October 1, 1997, Deutsche Mark 69 million and Deutsche Mark 20 million, respectively, of the Deutsche Mark 200 million Floating Rate Bonds were repurchased. The remaining bonds matured on January 5, 2000 and were repaid at par. Aggregate maturities on long-term debt and convertible subordinated debentures in the next five years are as follows: (Dollars in Thousands) 2000 ......................... $ 82,621 2001 ......................... 6,086 2002 ......................... 2,254 2003 ......................... 83,254 2004 ......................... 1,925 Thereafter ................... 618,113 F-16
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Income Taxes Income before income taxes and the provision for taxes on income consisted of the amounts shown below: Years Ended December 31, (Dollars in Thousands) ---------------------------- 1999 1998 1997 ---- ---- ---- Income before incomes taxes: Domestic ....................... $314,338 $263,058 $182,608 International .................. 359,370 258,739 207,970 -------- -------- -------- Total .................... $673,708 $521,797 $390,578 ======== ======== ======== Provision for taxes on income: Current: Federal .................. $ 80,401 $ 65,180 $ 47,145 State and local .......... 30,577 21,292 17,221 International ............ 144,228 121,367 88,725 -------- -------- -------- 255,206 207,839 153,091 ======== ======== ======== Deferred: Federal .................. 9,499 7,943 7,712 State and local .......... 381 1,853 541 International ............ 8,161 1,457 5,195 -------- -------- -------- 18,041 11,253 13,448 -------- -------- -------- Total .................... $273,247 $219,092 $166,539 ======== ======== ======== The Company's effective income tax rate varied from the statutory federal income tax rate as a result of the following factors: 1999 1998 1997 ---- ---- ---- Statutory federal income tax rate .................... 35.0% 35.0% 35.0% State and local taxes on income, net of federal income tax benefit ................................ 3.0 2.9 3.0 International subsidiaries' tax rate differentials ... 1.3 2.2 2.8 Non-deductible amortization of goodwill .............. 3.2 3.4 3.0 Other ................................................ (1.9) (1.5) (1.2) --- --- --- Effective rate ....................................... 40.6% 42.0% 42.6% ==== ==== ==== Deferred income taxes are provided for the temporary difference between the financial reporting basis and tax basis of the Company's assets and liabilities. Deferred tax benefits result principally from recording certain expenses in the financial statements which are not currently deductible for tax purposes and from differences between the tax and book basis of assets and liabilities recorded in connection with acquisitions. Deferred tax liabilities result principally from non-cash, unrealized financial statement gains associated with investments and capital transactions related to initial public offerings of common stock by affiliates, and expenses which are currently deductible for tax purposes, but have not yet been expensed in the financial statements. F-17
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred tax (liabilities) benefits as of December 31, 1999 and 1998 consisted of the amounts shown below (dollars in millions): 1999 1998 ---- ---- Unrealized gains on investments in and capital transactions of, affiliates ......................... $(320.2) $(2.6) Compensation and severance reserves ................... 52.7 42.9 Acquisition liabilities ............................... 43.1 20.6 Deductible intangibles ................................ 37.1 39.1 Lease reserves ........................................ 4.9 11.3 Financial instruments ................................. 7.3 14.2 Other, net ............................................ 5.2 6.4 ------- ------ $(169.9) $131.9 ======= ====== Current deferred tax benefits as of December 31, 1999 and 1998 were $30.0 million and $36.3 million, respectively, and were included in prepaid expenses and other current assets. Non-current deferred tax benefits as of December 31, 1999 and 1998 were $120.3 million and $98.2 million, respectively. The Company has concluded that it is probable that it will be able to realize these deferred tax benefits in future periods. A provision has been made for additional income and withholding taxes on the earnings of international subsidiaries and affiliates that will be distributed. 9. Employee Retirement Plans The Company's international and domestic subsidiaries provide retirement benefits for their employees primarily through defined contribution plans. Company contributions to the plans, which are determined by the board of directors of the subsidiaries, have been in amounts up to 15% (the maximum amount deductible for federal income tax purposes) of total eligible compensation of participating employees. Expenses related to the Company's contributions to these plans amounted to $77.2 million, $72.7 million and $59.2 million in 1999, 1998 and 1997, respectively. The Company's pension plans are primarily international. These plans are not required to report to governmental agencies pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"). Substantially all of these plans are funded by fixed premium payments to insurance companies which undertake legal obligations to provide specific benefits to the individuals covered. Pension expense amounted to $8.5 million, $5.2 million and $5.3 million in 1999, 1998 and 1997, respectively. Certain subsidiaries of the Company have executive retirement programs under which benefits will be paid to participants or to their beneficiaries over 15 years beginning at age 65 or death. In addition, other subsidiaries have individual deferred compensation arrangements with certain executives which provide for payments over varying terms upon retirement, cessation of employment or death. Some of the Company's domestic subsidiaries provide life insurance and medical benefits for retired employees. Eligibility requirements vary by subsidiary, but generally include attainment of a specified combined age plus years of service factor. The costs related to these benefits were not material to the 1999, 1998 and 1997 consolidated results of operations or financial position. 10. Commitments and Contingent Liabilities At December 31, 1999, the Company was committed under operating leases, principally for office space. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent expense was $341.6 million in 1999, $311.5 million in 1998 and $242.7 million in 1997 after reduction for rents received from subleases of $17.4 million, $14.7 million and $12.8 million, respectively. F-18
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Future minimum base rents under terms of noncancellable operating leases, reduced by rents to be received from existing noncancellable subleases, are as follows: (Dollars in Thousands) Gross Rent Sublease Rent Net Rent ---------- -------------------- -------- 2000 ...................... $267,719 $14,534 $253,185 2001 ...................... 251,577 11,713 239,864 2002 ...................... 229,331 9,358 219,973 2003 ...................... 205,559 8,107 197,452 2004 ...................... 192,817 7,448 185,369 Thereafter ................ 1,096,480 20,539 1,075,941 The present value of the gross future minimum base rents under noncancellable operating leases is $1,338.2 million. Where appropriate, management has established reserves for the difference between the cost of leased premises that were vacated and anticipated sublease income. The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings and unasserted claims in the aggregate will not have a material adverse effect on its results of operations, consolidated financial position or liquidity. 11. Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998. Amounts in parentheses represent liabilities. <TABLE> <CAPTION> 1999 1998 ---------------------- ----------------------- (Dollars in Thousands) (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- <S> <C> <C> <C> <C> Cash, cash equivalents and short-term investments ................. $600,949 $600,949 $717,391 $717,391 Long-term investments ..................... 785,406 785,406 4,998 11,316 Other investments ......................... 6,419 6,419 10,562 10,562 Long-term debt and convertible subordinated debentures ................ (794,253) (1,509,076) (800,864) (1,088,322) Financial Commitments Cross currency interest rate swaps ..... -- (47,038) -- (27,669) Forward foreign exchange contracts ..... -- (1,596) -- 2,514 Guarantees ............................. -- (47,861) -- (6,417) Letters of credit ...................... -- (14,002) -- (922) </TABLE> The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Short-term investments: Short-term investments which consist primarily of short-term investments and investments in short-term interest bearing instruments with original maturity dates between three months and one year are carried at cost which approximates fair value. Long-term investments: Long-term investments consist of available-for-sale securities, primarily in the Company's holdings in interactive marketing agencies that are publicly traded. The investments are carried at market value and the unrealized gains and losses on these securities are included in Shareholders' Equity. Other investments: Included in deferred charges and other assets are other long-term investments carried at cost, which approximates estimated fair value. F-19
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Long-term debt: A portion of the Company's long-term debt included floating rate debt, the carrying value of which approximates fair value. The Company's long-term debt also included convertible subordinated debentures and fixed rate senior debt. The fair value of these instruments was determined by reference to quotations available in markets where these issues were traded. The quotations for the subordinated debentures primarily reflected the conversion value of the debentures into the Company's common stock. Financial Commitments: The estimated fair values of derivative positions are based upon quotations received from independent, third party banks and represent the net amount required to terminate the position, taking into consideration market rates and counterparty credit risk. The fair values of guarantees principally related to affiliated companies, and letters of credit were based upon the face value of the underlying instruments. 12. Financial Instruments and Market Risk The Company utilizes derivative financial instruments predominantly to reduce certain market risks to which the Company is exposed. These 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 derivative activities are limited in volume and confined to risk management activities. Senior management at the Company actively participates in the quantification, monitoring and control of all significant risks. A reporting system is in place which evaluates the impact on the Company's earnings resulting from changes in interest rates, currency exchange rates and other relevant market risks. This system is structured to enable senior management to initiate prompt remedial action, if appropriate. Additionally, senior management reports periodically to the Audit Committee of the Board of Directors concerning derivative activities. In 1993, the Audit Committee established limitations on derivative activities which are reviewed annually. At December 31, 1999 and 1998, the Company had Japanese yen 16.3 billion aggregate notional principal amount of cross currency interest rate swaps. The swaps convert a portion of the Company's U.S. dollar floating rate debt into fixed rate Japanese yen debt and effectively hedge the Company's net investment in Japanese yen denominated assets. The Company enters into forward foreign exchange contracts predominately to hedge intercompany receivables and payables which are recorded in a currency different from that in which they will settle. Gains and losses on these positions are deferred and included in the basis of the transaction upon settlement. The terms of these contracts are generally three months or less. At December 31, 1999 and 1998, the aggregate amount of intercompany receivables and payables subject to this hedge program was $773 million and $628 million, respectively. The table below summarizes by major currency the notional principal amounts of the Company's forward foreign exchange contracts outstanding at December 31, 1999 and 1998. The "buy" amounts represent the U.S. dollar equivalent of commitments to purchase the respective currency, and the "sell" amounts represent the U.S. dollar equivalent of commitments to sell the respective currency. F-20
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) <TABLE> <CAPTION> (Dollars in thousands) Notional Principal Amount --------------------------------- 1999 1998 ------------------------------- ------------------------------ Currency Company Buys Company Sells Company Buys Company Sells -------- ------------ ------------- ------------ ------------- <S> <C> <C> <C> <C> U.S. Dollar $140,704 $ 90,416 $215,157 $ 45,010 Euro 261,228 246,599 204,249 302,667 Canadian Dollar 52,296 60,485 13,077 3,574 Swedish Krona 4,027 1,463 1,621 2,432 Hong Kong Dollar 3,870 2,669 1,485 5,978 Australian Dollar 1,485 124 310 -- Swiss Franc 618 3,902 1,810 1,489 Singapore Dollar 1,088 4,930 1,031 4,669 Greek Drachma 22 3,088 -- 6,183 Norwegian Krone -- 9,453 -- 8,120 Danish Krone -- 4,177 1,851 3,958 Czech Republic Koruna -- 68 -- -- Japanese Yen -- -- 20,365 20,272 -------- -------- -------- -------- Total $465,338 $427,374 $460,956 $404,352 ======== ======== ======== ======== </TABLE> Comparatives have been restated to reflect the rationalization of the 11 eurozone currencies as a result of the introduction of the euro. The derivative financial instrument existing during the years ended December 31, 1999 and 1998 were entered into for the purpose of hedging certain specific currency and interest rate risks. As a result of these financial instruments, the Company reduced financial risk in exchange for foregoing any gain (reward) which might have occurred if the markets moved favorably. In using derivative financial instruments, management exchanged the risks of the financial markets for counterparty risk. To minimize counterparty risk the Company only enters into derivative contracts with major well-known banks that have credit ratings equal to or better than the Company's. 13. Adoption of New Accounting Pronouncements In June 1998, the Financial Accounting Standard Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" 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. Once implemented, SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. 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 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. F-21
OMNICOM GROUP INC. AND SUBSIDIARIES Quarterly Results of Operations (Unaudited) The following table sets forth a summary of the unaudited quarterly results of operations for the two years ended December 31, 1999 and 1998, in thousands of dollars except for per share amounts. All prior years information has been restated to give effect to the accounting for the acquisition of Abbott Mead Vickers Group Limited under the pooling of interest method (see Note 2 to the Consolidated Financial Statements). <TABLE> <CAPTION> First Second Third Fourth --------- ------------ --------- ------------ <S> <C> <C> <C> <C> Commissions & Fees 1999 ................. $ 1,146,877 $ 1,270,369 $ 1,210,880 $ 1,502,419 1998 ................. 905,799 1,094,160 1,032,985 1,258,002 Income Before Income Taxes 1999 ................. 123,323 198,699 131,254 220,432 1998 ................. 94,360 167,268 106,589 153,580 Income Taxes 1999 ................. 50,515 80,573 53,851 88,308 1998 ................. 39,381 71,570 46,104 62,037 Income After Income Taxes 1999 ................. 72,808 118,126 77,403 132,124 1998 ................. 54,979 95,698 60,485 91,543 Equity in Affiliates 1999 ................. 929 2,849 (202) 11,792 1998 ................. 4,086 4,313 4,960 7,147 Minority Interests 1999 ................. (8,175) (13,833) (6,916) (24,023) 1998 ................. (7,741) (13,755) (9,465) (13,405) Net Income 1999 ................. 65,562 107,142 70,285 119,893 1998 ................. 51,324 86,256 55,980 85,285 Basic Earnings Per Share 1999 ................. 0.37 0.61 0.40 0.69 1998 ................. 0.30 0.50 0.32 0.49 Diluted Earnings per Share 1999 ................. 0.37 0.59 0.39 0.66 1998 ................. 0.29 0.48 0.32 0.48 </TABLE> F-22
Schedule II OMNICOM GROUP INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 1999 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------ Additions Deductions ----------- ------------------------- Balance at Charged Removal of Balance Beginning to Costs Uncollectible Translation at End of Description of Period and Expenses Receivables(1) Adjustments Period - ------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Valuation accounts deducted from assets to which they apply -- allowance for doubtful accounts: December 31, 1999 ..................... $55,764 $14,399 $16,007 $ 436 $53,720 December 31, 1998 ..................... 30,475 15,586 (8,573) (1,130) 55,764 December 31, 1997 ..................... 23,166 10,491 1,609 1,573 30,475 </TABLE> - ---------- (1) Net of acquisition date balances in allowance for doubtful accounts of companies acquired of $6.1 million, $13.1 million and $2.0 million in 1999, 1998 and 1997, respectively. S-1
INDEX TO EXHIBITS (3)(i) Certificate of Incorporation (as amended on December 4, 1997 and as restated for filing purposes), filed as Exhibit 4.1 to Omnicom Group Inc.'s Registration Statement No. 333-46303, are incorporated herein by reference. (ii) By-laws. Incorporated by reference to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987. (4) Instruments Defining the Rights of Security Holders, Including Indentures. 4.1 Subscription Agreement dated December 14, 1994 by and among the Registrant, BBDO Canada Inc. and Morgan Stanley GmbH and the other Managers listed therein, in connection with the issuance of DM 200,000,000 Floating Rate Bonds of 1995 due January 5, 2000 of BBDO Canada Inc., including form of Guaranty by Registrant, filed as Exhibit 4.2 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 4.2 Paying Agency Agreement dated January 4, 1995 by and among the Registrant, BBDO Canada Inc. and Morgan Stanley GmbH in connection with the issuance of DM 200,000,000 Floating Rate Bonds of 1995 due January 5, 2000 of BBDO Canada Inc. filed as Exhibit 4.3 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 4.3 Subscription Agreement dated February 27, 1996 by and among the Registrant, Morgan Stanley Bank AG and Morgan Stanley & Co. International in connection with the issuance of DM 100,000,000 Floating Rate Bonds of 1996 due March 1, 1999 filed as Exhibit 4.4 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 4.4 Paying Agency Agreement dated March 1, 1996 by and among the Registrant, Morgan Stanley Bank AG and Morgan Stanley & Co. International in connection with the issuance of DM 100,000,000 Floating Rate Bonds of 1996 due March 1, 1999 filed as Exhibit 4.5 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 4.5 Indenture dated January 3, 1997 between the Registrant and The Chase Manhattan Bank, as trustee, in connection with the issuance of 4 1/4% Convertible Subordinated Debentures due 2007 filed as Exhibit 4.2 to Omnicom Group Inc.'s Form S-3 Registration Statement No. 333-22589, is incorporated herein by reference. 4.6 Form of Debentures (included in Exhibit 4.5 above) filed as Exhibit 4.3 to Omnicom Group Inc.'s Form S-3 Registration Statement No. 333-22589, is incorporated herein by reference. 4.7 Registration Rights Agreement dated January 3, 1997 between the Registrant and Morgan Stanley & Co. Incorporated related to the Registrant's 4 1/4% Convertible Subordinated Debentures due 2007 filed as Exhibit 4.4 to Omnicom Group Inc.'s Form S-3 Registration No. 333-22589, is incorporated herein by reference.
4.8 Indenture dated January 6, 1998, between Registrant and The Chase Manhattan Bank, as trustee, in connection with the issuance of 2 1/4% Convertible Subordinated Debentures due 2013 filed as Exhibit 4.1 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.9 Form of Debentures (included in Exhibit 4.8 above) filed as Exhibit 4.2 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.10 Registration Rights Agreement dated January 6, 1998, between the Registrant and Morgan Stanley & Co. Incorporated related to the Registrant's 2 1/4% Convertible Subordinated Debentures due 2013 filed as Exhibit 4.3 to Omnicom Group Inc.'s Report on Form 8-K dated January 20, 1998, is incorporated herein by reference. 4.11 Fiscal Agency Agreement dated June 24, 1998, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.1 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 4.12 Subscription Agreement dated June 22, 1998 by and among Omnicom Group Inc., Morgan Stanley S.A. and Others, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.2 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. 4.13 Deed of the Covenant dated June 24, 1998, in connection with the issuance of FRF 1,000,000,000 5.20% Notes due 2005 filed as Exhibit 4.3 to Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference. (10) Material Contracts. Management Contracts, Compensatory Plans, Contracts or Arrangements. 10.1 Registrant's 1987 Stock Plan, filed as Exhibit 10.26 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference. 10.2 Amendments to Registrant's 1987 Stock Plan, filed as Exhibit 10.2 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.3 Standard Form of the Registrant's 1998 Executive Salary Continuation Plan Agreement, filed as Exhibit 10.24 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.4 Standard Form of the Registrant's Indemnification Agreement with members of Registrant's Board of Directors, filed as Exhibit 10.25 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference.
10.5 Severance Agreement dated July 6, 1993, between Keith Reinhard and DDB Worldwide Communications Group, Inc. (then known as DDB Needham Worldwide, Inc.), filed as Exhibit 10.11 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.6 Employment Agreement dated May 26, 1993, between William G. Tragos and TBWA International B.V., filed as Exhibit 10.13 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.7 Deferred Compensation Agreement dated October 12, 1984, between William G. Tragos and TBWA Chiat/Day Inc. (then known as TBWA Advertising Inc.), filed as Exhibit 10.14 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.8 Standard Form of Severance Compensation Agreement incorporated by reference to BBDO International Inc.'s Form S-1 Registration Statement filed with the Securities and Exchange Commission on September 28, 1973, is incorporated herein by reference. 10.9 Omnicom Group Inc. 1998 Incentive Compensation Plan, filed as Exhibit A to Omnicom Group Inc.'s Proxy Statement dated April 6, 1998, is incorporated herein by reference. 10.10 Omnicom Group Inc. Restricted Stock Plan for Non-employee Directors. Other Material Contracts. 10.11 $500,000,000 Amended and Restated Credit Agreement, dated as of May 10, 1996 amended and restated as of February 20, 1998, between Omnicom Finance Inc., Omnicom Finance Limited, ABN AMRO Bank N.V., Chase Securities Inc. and the financial institutions party thereto, filed as Exhibit 10.16 to Omnicom Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. 10.12 364-Day Credit Agreement, dated as of April 30, 1999, among Omnicom Finance Inc., Omnicom Finance Limited, the financial institutions party thereto, Citibank, N.A., as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent, and Instituto Bancario San Paolo Di Torino Instituto Mobiliare Italiano S.p.A., as Syndication Agent (the "Credit Agreement"), filed as Exhibit 10.1 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.13 List of Contents of Exhibits to the Credit Agreement, filed as Exhibit 10.2 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.14 Guaranty, dated as of April 30, 1999, made by Omnicom Group Inc., filed as Exhibit 10.3 to Omnicom Group Inc.'s quarterly report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. (21) Subsidiaries of the Registrant
(23) Consents of Experts and Counsel. 23.1 Consent of Arthur Andersen LLP. (24) Powers of Attorney from Bernard Brochand, Robert J. Callander, James A. Cannon, Leonard S. Coleman, Jr., Bruce Crawford, Susan S. Denison, Peter Foy, Thomas L. Harrison, John R. Murphy, John R. Purcell, Keith L. Reinhard, Allen Rosenshine, Gary L. Roubos, Quentin I. Smith, Jr. and Egon P.S. Zehnder. (27) Financial Data Schedule (filed in electronic format only).