SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2002
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-10551
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OMNICOM GROUP INC.
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(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 187,984,268 (as of July 31,
2002)
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 2002 (unaudited) and
December 31, 2001 1
Consolidated Condensed Statements of
Income (unaudited) -
Three Months and Six Months Ended
June 30, 2002 and 2001 2
Consolidated Condensed Statements of
Cash Flows (unaudited) -
Six Months Ended June 30, 2002 and 2001 3
Notes to Unaudited Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
June 30, 2002 December 31,
(Unaudited) 2001
------------- ------------
Assets
Current assets:
Cash and cash equivalents ................. $ 409,971 $ 472,151
Short-term investments at market,
which approximates cost ................. 44,421 44,848
Accounts receivable, less allowance
for doubtful accounts of $78,311
and $79,183 ............................. 4,055,363 3,720,790
Billable production orders in
process, at cost ........................ 499,641 382,750
Prepaid expenses and other
current assets .......................... 680,150 613,285
----------- -----------
Total Current Assets ............ 5,689,546 5,233,824
----------- -----------
Furniture, equipment and leasehold
improvements at cost, less
accumulated depreciation and
amortization of $673,474 and
$618,661 ................................ 557,901 547,801
Investments in affiliates ................. 179,148 186,156
Goodwill, net of accumulated
amortization of $514,369 and
$495,715 ................................ 4,290,769 3,859,162
Intangibles, net of accumulated
amortization of $46,431 and
$38,769 ................................. 89,733 75,350
Deferred tax benefits ..................... 90,748 100,418
Other assets .............................. 677,708 614,703
----------- -----------
Total Assets .................... $11,575,553 $10,617,414
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .......................... $ 4,361,927 $ 4,303,152
Advance billings .......................... 549,011 640,750
Current portion of long-term debt ......... 62,173 40,444
Bank loans ................................ 103,593 169,056
Accrued taxes and other liabilities ....... 1,251,873 1,490,385
----------- -----------
Total Current Liabilities ....... 6,328,577 6,643,787
----------- -----------
Long-term debt ................................. 806,063 490,105
Convertible notes .............................. 1,750,000 850,000
Deferred compensation and other liabilities .... 301,917 296,980
Minority interests ............................. 182,260 158,123
Shareholders' equity:
Common stock .............................. 29,800 29,800
Additional paid-in capital ................ 1,437,955 1,400,138
Retained earnings ......................... 1,861,489 1,619,874
Unamortized restricted stock .............. (166,591) (125,745)
Accumulated other comprehensive loss ...... (218,285) (295,358)
Treasury stock ............................ (737,632) (450,290)
----------- -----------
Total Shareholders' Equity ...... 2,206,736 2,178,419
----------- -----------
Total Liabilities and
Shareholders' Equity .......... $11,575,553 $10,617,414
=========== ===========
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------- -----------
REVENUE ........................... $1,916,569 $1,746,788 $3,648,995 $3,347,921
OPERATING EXPENSES:
Salary and service costs ..... 1,204,608 1,058,996 2,369,331 2,102,144
Office and general expenses .. 381,471 396,686 720,315 763,387
---------- ---------- ---------- ----------
1,586,079 1,455,682 3,089,646 2,865,531
---------- ---------- ---------- ----------
OPERATING PROFIT .................. 330,490 291,106 559,349 482,390
NET INTEREST EXPENSE:
Interest expense ............. 10,658 22,548 24,510 46,455
Interest income .............. (4,716) (3,109) (7,245) (6,707)
---------- ---------- ---------- ----------
5,942 19,439 17,265 39,748
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ........ 324,548 271,667 542,084 442,642
INCOME TAXES ...................... 122,014 107,613 201,872 175,336
---------- ---------- ---------- ----------
INCOME AFTER INCOME TAXES ......... 202,534 164,054 340,212 267,306
EQUITY IN AFFILIATES .............. 3,454 2,880 5,976 3,290
MINORITY INTERESTS ................ (18,673) (15,568) (30,307) (23,950)
---------- ---------- ---------- ----------
NET INCOME ................ $ 187,315 $ 151,366(a) $ 315,881 $ 246,646(a)
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic ..................... $ 1.01 $ 0.83(a) $ 1.70 $ 1.35(a)
Diluted ................... $ 1.00 $ 0.81(a) $ 1.67 $ 1.32(a)
DIVIDENDS DECLARED PER COMMON SHARE $ 0.200 $ 0.200 $ 0.400 $ 0.375
- ----------
(a) Three Months Ended and Six Months Ended June 30, 2001, adjusted to exclude
goodwill amortization:
Adjusted Net Income .............................. $171,451 $286,782
Adjusted Net Income Per Common Share - basic ..... $ 0.94 $ 1.57
Adjusted Net Income Per Common Share - diluted ... $ 0.91 $ 1.54
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income .................................. $ 315,881 $ 246,646
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of tangible assets ............. 59,866 55,965
Amortization of goodwill .................... -- 45,780
Amortization of intangible assets ........... 7,297 1,450
Minority interests .......................... 30,307 23,950
Earnings of affiliates less than
dividends received ........................ 3,212 15,777
Tax benefit on employee stock plans ......... 12,243 8,297
Provisions for losses on accounts
receivable ................................ 2,892 8,712
Amortization of restricted stock ............ 31,924 22,646
(Increase)/decrease in accounts
receivable ................................ (161,371) 108,524
Increase in billable production
orders in process ......................... (101,347) (46,319)
Increase in prepaid expenses and
other current assets ...................... (37,615) (54,605)
Increase in other assets, net ............... (22,203) (81,637)
Decrease in accounts payable ................ (101,221) (485,248)
Decrease in accrued taxes, advanced
billings and other liabilities ............ (432,662) (392,761)
---------- ----------
Net cash used for operating activities .... (392,797) (522,823)
---------- ----------
Cash flows from investing activities:
Capital expenditures ........................ (62,011) (85,862)
Payments for purchases of equity
interests in subsidiaries and
affiliates, net of cash acquired ......... (278,938) (299,400)
Proceeds from sales of short-term
investments and other, net ................ 164 45,531
---------- ----------
Net cash used for investing activities .... (340,785) (339,731)
---------- ----------
Cash flows from financing activities:
Net decrease in short-term borrowings ....... (73,708) (3,775)
Net proceeds from issuance on
convertible debentures and
long-term debt obligations ................ 1,503,689 926,933
Repayments of principal of long-term
debt obligations .......................... (309,073) (21,625)
Dividends paid .............................. (73,964) (62,403)
Purchase of treasury shares ................. (368,819) (60,149)
Other ....................................... 14,611 13,115
---------- ----------
Net cash provided by financing
activities ............................. 692,736 792,096
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents ........................... (21,334) (21,114)
---------- ----------
Net decrease in cash and cash
equivalents .................................... (62,180) (91,572)
Cash and cash equivalents at
beginning of period ............................ 472,151 516,817
---------- ----------
Cash and cash equivalents at
end of period .................................. $ 409,971 $ 425,245
========== ==========
Supplemental Disclosures:
Income taxes paid ........................... $ 243,546 $ 162,612
========== ==========
Interest paid ............................... $ 24,379 $ 41,849
========== ==========
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands, except for per share amounts)
1. We have prepared the consolidated condensed interim financial statements
included herein without audit pursuant to Securities and Exchange
Commission rules. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles, or "GAAP", have been condensed or omitted
pursuant to these rules. All dollar amounts in these footnotes are in
thousands (unless otherwise specifically indicated by the word
"millions").
2. The accompanying financial statements reflect all adjustments, consisting
of normally recurring accruals, which in the opinion of management are
necessary for a fair presentation, in all material respects, of the
information contained therein. Certain reclassifications have been made to
the June 30, 2001 and December 31, 2001 reported amounts to conform them
to the June 30, 2002 presentation. These reclassifications include
changing the income statement line item from "Salary and related costs" to
a new category entitled "Salary and service costs", and reallocating
certain items previously shown in "Office and general expenses" to this
new category. We have regrouped certain direct service costs such as
freelance labor, travel, entertainment, reproduction, client service costs
and other expenses from "Office and general expenses" into "Salary and
service costs" in order to better segregate the expense items between
those that are more closely related to directly serving clients versus
those expenses, such as facilities, overhead, depreciation and other
administrative expenses, which in nature are not directly related to
servicing clients. These statements should be read in conjunction with the
consolidated financial statements and related notes included in our annual
report on Form 10-K for the year ended December 31, 2001, which we refer
to later in this report as our "2001 10-K".
3. Results of operations for interim periods are not necessarily indicative
of annual results.
4. Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based on the above, plus, if dilutive, common share equivalents which
include outstanding options and restricted shares. No adjustments to
diluted earnings per share were made for the zero-coupon convertible notes
because the conversion criteria have not been met. For purposes of
computing diluted earnings per share, 2,414,000 common share equivalents
were assumed to be outstanding for the three months ended June 30, 2002
and 2,606,000 common share equivalents were assumed to have been
outstanding for the comparable period last year. For the purposes of
computing diluted earnings per share, 2,828,000 common share equivalents
were assumed to be outstanding for the six months ended June 30, 2002 and
2,643,000 common share equivalents were assumed to have been outstanding
for the comparable period last year. In December 2001, our $230.0 million
aggregate principal amount of 2 1/4% convertible subordinated debentures
were called for redemption and subsequently converted by holders into
4,612,000 shares of common stock. The additional shares are included in
shares outstanding at June 30, 2002 and were assumed to have been
converted for the June 30, 2001 computation.
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
The assumed increase in net income related to the after-tax
compensation expense related to dividends on restricted shares used in the
computation was $187.5 for the three months ended June 30, 2002 and the
assumed increase in net income related to the after-tax interest cost of
the convertible debentures and the after-tax compensation expense related
to dividends on restricted shares used in the computation was $2,255.4 for
the three months ended June 30, 2001. The assumed increase in net income
related to the after-tax compensation expense related to dividends on
restricted shares used in the computation was $375.1 for the six months
ended June 30, 2002 and the increase in net income related to the
after-tax interest of the convertible debentures and the after-tax
compensation expense related to dividends on restricted shares used in the
computation was $4,487.8 for the six months ended June 30, 2001.
The number of shares used in our EPS computations were:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic EPS 185,705,000 182,824,000 186,227,000 182,332,000
Diluted EPS 188,119,000 190,042,000 189,056,000 189,587,000
5. Total comprehensive income and its components were:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------- ------------ ----------- ----------
Net income for the period $187,315 $151,366 $315,881 $246,646
Unrealized gain on long-term
investments and reclassification to
cost basis investments (a) -- 26,308 -- 16,838
Reclassification to realized loss on sale of
certain marketable securities, net of income
taxes of $1,400 -- -- -- 2,100
Foreign currency translation adjustment (b) 106,297 (11,957) 77,073 (82,535)
-------- -------- -------- --------
Comprehensive income for the period $293,612 $165,717 $392,954 $183,049
======== ======== ======== ========
- ----------
(a) Net of income taxes of $17,539 for the three-month period ended June 30,
2001 and $11,225 for the six-month period ended June 30, 2001.
(b) Net of income tax benefit of $64,051 and net of income tax expense of
$7,971 for the three-month periods ended June 30, 2002 and 2001,
respectively, and net of income tax benefit of $45,655 and net of income
tax expense of $55,023 for the six-month periods ended June 30, 2002, and
2001, respectively.
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
6. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"), in June 2001 and Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), in August 2001.
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill
and Other Intangible Assets", and no longer amortizes goodwill and other
intangibles with indefinite lives. These assets are subject to periodic
testing for impairments at least annually. Substantially all of our assets
subject to the impairment test consisted of goodwill. We completed the
impairment test required by SFAS 142 in the second quarter of 2002 by
comparing the fair value of our reporting units to their carrying values.
We also reassessed the useful lives of other intangibles that are
amortized. As of January 1, 2002, we concluded that the fair values of the
reporting units exceeded the carrying values of the reporting units, and
therefore no impairment charge was recognized in the results of operations
and financial position upon adoption and no changes were made to the
useful lives of our other intangibles.
The following summary table presents the impact of the elmimination
of goodwill amortization as required by the adoption of SFAS 142 on
operating income, profit before tax ("PBT"), equity in affiliates,
minority interest and earnings per share ("EPS") had the statement been in
effect at the beginning of 2001.
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
-------- ------------------------- -------- --------------------------
as adjusted as reported as adjusted as reported
Operating Income $330,490 $314,215 $291,106 $559,349 $528,171 $482,390
PBT 324,548 294,776 271,667 542,084 488,423 442,642
Equity in Affiliates 3,454 3,864 2,880 5,976 5,759 3,290
Minority Interest (18,673) (15,898) (15,568) (30,307) (24,572) (23,950)
Diluted EPS $ 1.00 $ 0.91 $ 0.81 $ 1.67 $ 1.54 $ 1.32
As of June 30, 2002, the components of our intangible assets were as
follows:
June 30, 2002 December 31, 2001
------------------------------------ ------------------------------------
Gross Net Gross Net
Carry Accumulated Book Carry Accumulated Book
Value Amortization Value Value Amortization Value
----- ------------ -------- ------- ------------ --------
Intangible assets subject to
SFAS 142 impairment tests:
Goodwill $4,805,138 $514,369 $4,290,769 $4,354,877 $ 495,715 $3,859,162
Other intangible assets
subject to amortization:
Purchased and internally
developed software 121,357 42,529 78,828 103,497 35,289 68,208
Client lists 14,807 3,902 10,905 10,622 3,480 7,142
--------- -------- ---------- ---------- --------- ----------
Total $ 136,164 $ 46,431 $ 89,733 $ 114,119 $ 38,769 $ 75,350
========= ======== ========== ========== ========= ==========
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
The other intangible assets continue to be amortized on a
straight-line basis over, on average, an eight-year period.
Had we stopped recording amortization of goodwill as of January 1,
2001, net income for the three months ended June 30, 2001 would have
increased from $151.3 million to $171.5 million as shown in the following
table.
As Adjusted As Reported
Three Months Ended June 30, 2002 2001 (a) 2001
----------- ----------- -----------
Revenue ........................... $ 1,916,569 $ 1,746,788 $ 1,746,788
Operating expenses:
Salary and service costs ...... 1,204,608 1,058,996 1,058,996
Office and general expenses ... 381,471 373,577 396,686
----------- ----------- -----------
1,586,079 1,432,573 1,455,682
----------- ----------- -----------
Operating profit .................. 330,490 314,215 291,106
Net interest expense:
Interest expense .............. 10,658 22,548 22,548
Interest income ............... (4,716) (3,109) (3,109)
----------- ----------- -----------
5,942 19,439 19,439
----------- ----------- -----------
Income before income taxes ........ 324,548 294,776 271,667
Income taxes ...................... 122,014 111,291 107,613
----------- ----------- -----------
Income after income taxes ......... 202,534 183,485 164,054
Equity in affiliates .............. 3,454 3,864 2,880
Minority interests ................ (18,673) (15,898) (15,568)
----------- ----------- -----------
Net income .................... $ 187,315 $ 171,451 $ 151,366
=========== =========== ===========
Net Income Per Common Share:
Basic ......................... $ 1.01 $ 0.94 $ 0.83
Diluted ....................... $ 1.00 $ 0.91 $ 0.81
Dividends Declared Per Common Share $ 0.200 $ 0.200 $ 0.200
- ----------
(a) Excludes amortization of goodwill and related tax impact.
7
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
Had we stopped recording amortization of goodwill as of January 1,
2001, net income for the six months ended June 30, 2001 would have
increased from $246.6 million to $286.8 million as shown in the following
table.
As Adjusted As Reported
Six Months Ended June 30, 2002 2001 (a) 2001
----------- ----------- -----------
Revenue ........................... $ 3,648,995 $ 3,347,921 $ 3,347,921
Operating expenses:
Salary and service costs ...... 2,369,331 2,102,144 2,102,144
Office and general expenses ... 720,315 717,606 763,387
----------- ----------- -----------
3,089,646 2,819,750 2,865,531
----------- ----------- -----------
Operating profit .................. 559,349 528,171 482,390
Net interest expense:
Interest expense .............. 24,510 46,455 46,455
Interest income ............... (7,245) (6,707) (6,707)
----------- ----------- -----------
17,265 39,748 39,748
----------- ----------- -----------
Income before income taxes ........ 542,084 488,423 442,642
Income taxes ...................... 201,872 182,828 175,336
----------- ----------- -----------
Income after income taxes ......... 340,212 305,595 267,306
Equity in affiliates .............. 5,976 5,759 3,290
Minority interests ................ (30,307) (24,572) (23,950)
----------- ----------- -----------
Net income .................... $ 315,881 $ 286,782 $ 246,646
=========== =========== ===========
Net Income Per Common Share:
Basic ......................... $ 1.70 $ 1.57 $ 1.35
Diluted ....................... $ 1.67 $ 1.54 $ 1.32
Dividends Declared Per Common Share $ 0.400 $ 0.375 $ 0.375
- ----------
(a) Excludes amortization of goodwill and related tax impact.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. We
8
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
adopted SFAS 144 effective January 1, 2002. The adoption had no material
impact on our consolidated results of operations and financial position.
In July 2000, the Emerging Issues Task Force of the FASB ("EITF")
released Issue 99-19, Reporting Revenue Gross as a Principal versus Net as
an Agent. This Issue summarized the EITF's views on when revenue should be
recorded at the gross amount billed because it has earned revenue from the
sale of goods or services, or the net amount retained because it has
earned a fee or commission. Additionally, in January 2002, the EITF
released Issue 01-14, Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred. This Issue summarized the
EITF's views on when out-of-pocket expenses should be characterized as
revenue. The Company's revenue recognition policies are in compliance with
EITF 99-19 and EITF 01-14. In substantially all of our businesses we act
as an agent and record revenue for reimbursements when the fee or
commission is earned.
7. Our wholly and partially owned businesses operate within the marketing and
corporate communications services operating segment. These businesses
provide a variety of communications services to clients on a global,
pan-regional and national basis. By geographic location, the businesses
have similar cost structures and are subject to the same general economic
and competitive risk.
Our revenue and long-lived assets by geographic area as of June 30,
2002 and 2001, is summarized in the following table.
United United Euro Other
States Kingdom Denominated International Total
------ ------- ----------- ------------- -----
Revenue
3 Months Ended June 30,
2002 $1,117,548 $ 195,272 $ 360,269 $ 243,480 $1,916,569
2001 925,343 202,082 339,652 279,711 1,746,788
Revenue
6 Months Ended June 30,
2002 $2,139,678 $ 378,174 $ 680,167 $ 450,976 $3,648,995
2001 1,821,942 397,729 660,045 468,205 3,347,921
Long-lived Assets
At June 30,
2002 $ 317,293 $ 93,388 $ 72,595 $ 74,625 $ 557,901
2001 278,027 96,317 55,331 93,001 522,676
8. On April 26, 2002, we extended our 364-day revolving credit facility with
a consortium of banks for which Citibank N.A. acts as administrative agent
and Salomon Smith Barney Inc. acts as lead arranger. The consortium
consists of 23 banks. Other significant lending institutions include The
Bank of Nova Scotia, JPMorgan Chase Bank, Fleet National Bank, HSBC Bank
USA and San Paolo IMI S.p.A. The facility was increased from $1.0 billion
to $1.6 billion under substantially the same terms as had previously been
in effect,
9
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
including a provision which allows us to convert all amounts outstanding
at expiration on April 25, 2003, into a one-year term loan. The facility,
which can be drawn down at any time, also supports the issuance of up to
$1.5 billion of commercial paper and subject to obtaining additional
commitments may be increased up to $1.8 billion. At June 30, 2002, we had
issued and outstanding $621.0 million of commercial paper which is
classified as long-term debt.
We also have a $500 million 5-year revolving credit facility, which
expires on June 30, 2003, with a similar consortium of 13 banks for which
ABN AMRO Bank acts as agent. Other significant lending institutions
include Bank of America, HSBC, JPMorgan Chase and Wachovia. No amounts
were outstanding under this facility at June 30, 2002.
We also had short-term bank loans of $103.6 million at June 30,
2002, primarily comprised of unsecured overdrafts of international
subsidiaries which are classified as bank loans.
We had a total of $1,750.0 million aggregate principal amount of
zero-coupon zero-accretion 30-year notes outstanding as further described
in Note 9.
At June 30, 2002, the unused portion of our committed credit
facilities was $1,479.0 million.
9. In March 2002, we issued $900.0 million aggregate principal amount of
zero-coupon zero-accretion convertible notes due 2032. The notes are
senior unsecured securities that are convertible into 8.2 million common
shares, implying a conversion price of $110.01 per common share, subject
to normal anti-dilution adjustments. These notes are convertible at the
specified ratio only upon the occurrence of certain events, including if
our common shares trade above certain levels, if we effect extraordinary
transactions or if our long-term debt ratings are downgraded at least
three notches from their current level to Baa3 or lower by Moody's
Investors Services, Inc. or BBB or lower by Standard & Poor's Ratings
Services. These events would not, however, result in an adjustment of the
number of shares issuable upon conversion. Holders of these notes have the
right to put the notes back to us for, at our election, cash, stock or a
combination of both in August of each year beginning in August 2003 and we
have the right to redeem the notes for cash beginning in 2007. There are
no events that accelerate the noteholders' put rights. Beginning in August
2007, if the market price of our common shares exceeds certain thresholds,
we may be required to pay contingent cash interest on the notes equal to
the amount of dividends that would be paid on the common shares into which
the notes are contingently convertible.
The net proceeds of the issuance of these notes were $905.0 million.
We used a portion of these proceeds to repurchase 3.0 million of our
common shares. We applied the balance of the net proceeds to reduce our
short-term borrowings pending use for working capital and other general
corporate purposes.
These notes are substantially similar to the $850 aggregate
principal amount of zero-coupon zero-accretion notes due 2031 that we
issued in 2001. The noteholder put dates for those notes is in February
2003 and each February thereafter.
10
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Thousands, except for per share amounts)
10. Our operating companies completed acquisitions and made investments in
other agencies in the first six months of this year. The aggregate revenue
of the acquired businesses included in our consolidated revenue was $142.8
million for the second quarter and $233.6 million for the first six months
of the year. These acquisitions and investments are consistent with our
strategy of pursuing business transactions that are expected to expand
relationships with existing clients, expand the geographic reach of our
networks or increase service offerings to meet client requirements.
During the first six months of this year, the aggregate
consideration for acquisitions including assumed liabilities was $312.1
million. As is typical in our business, many of the acquisitions were
structured as "earn-outs," or transactions in which the ultimate purchase
price payable is determined in part by reference to the future financial
performance of the acquired business. Included in the above amount, we
paid $147.4 million and issued $14.6 million of loan notes in the first
six months of the year for transactions closed in prior periods.
11. On June 13, 2002, a lawsuit was filed against us and certain of our senior
executives in the federal court in the Southern District of New York on
behalf of a purported class of purchasers of our common shares during the
period April 25, 2000 to June 11, 2002. The complaint alleges, among other
things, that our press releases and SEC filings during the alleged class
period contained materially false and misleading statements or omitted to
state material information. The complaint seeks an unspecified amount of
money damages plus attorneys' fees and other costs. Ten other complaints
were subsequently filed in the same court, each making similar allegations
and referencing the same class period.
In addition to the proceedings described above, a shareholder
derivative action was filed on June 28, 2002 by a plaintiff stockholder,
purported on our behalf alleging breaches of fiduciary duty, disclosure
failures, abuse of control and gross mismanagement in connection with the
formation of Seneca Investments LLC, including as a result of open-market
sales of our common shares by our chairman and two former employee
directors. The complaint seeks the imposition of a constructive trust on
profits received in the stock sales, an unspecified amount of money
damages and attorneys' fees and other costs.
We are also subject to numerous lawsuits and other claims in the
ordinary course of business.
Management presently expects that the matters referred to above will
not individually or in the aggregate have a material adverse effect on our
financial position or results of operations. However, the outcome of any
of these matters is inherently uncertain and may be affected by future
events. Accordingly, there can be no assurance as to the ultimate effect
of these matters.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
As discussed and presented in footnote 2 to our second quarter financial
statements, beginning in 2002 and as required by SFAS 142, we are no longer
amortizing goodwill and other intangible assets that have indefinite lives due
to a change in generally accepted accounting principles. To make the discussion
of periods comparable, 2001 income statement information in the discussion that
follows has been adjusted to eliminate goodwill amortization. In addition,
certain reclassifications have been made to the June 30, 2001 and December 31,
2001 reported amounts to conform them to the June 30, 2002 presentation,
including changing the income statement line item from "Salary and related
costs" to a new category entitled "Salary and service costs", and reallocating
certain items previously shown in "Office and general expenses" to this new
category as described in Note 2 of the notes to our second quarter financial
statements.
Second Quarter 2002 Compared to Second Quarter 2001
Revenue: Our consolidated worldwide revenue in the second quarter of 2002
increased 9.7% to $1,916.6 million from $1,746.8 million in the second quarter
of 2001. The effect of acquisitions, net of disposals, increased worldwide
revenue by $142.8 million, or 8.2%. Internal/organic growth increased worldwide
revenue by $25.7 million, or 1.5%, and foreign exchange impacts increased
worldwide revenue by $1.3 million, or 0.1%. The components of total revenue
growth are summarized below ($'s in millions):
Total Domestic International
--------------- --------------- -------------
$ % $ % $ %
-------- --- -------- --- ------ ---
Second Quarter 2001............... $1,746.8 -- $925.3 -- $821.4 --
Components of Revenue Changes:
Foreign exchange impact........... 1.3 0.1% -- -- 1.3 0.2%
Acquisitions...................... 142.8 8.2% 122.8 13.3% 20.1 2.5%
Organic........................... 25.7 1.5% 69.4 7.5% (43.7) (5.3)%
-------- --- -------- ---- ------ ----
Second Quarter 2002............... $1,916.6 9.7% $1,117.5 20.8% $799.1 (2.8)%
======== === ======== ==== ====== ====
The components and percentages are calculated as follows:
o The foreign exchange impact component shown in the table is
calculated by first converting the current period's local currency
revenue using the average exchange rates from the equivalent prior
period to arrive at a constant currency revenue (in this case
$1,915.3 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $1,916.6 million less $1,915.3 million for
the Total column in the table).
o The acquisition component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any
business included in the prior period reported revenue that was
disposed of subsequent to the prior period.
o The organic component shown in the table is calculated by
subtracting both the foreign exchange and acquisition revenue
components from total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base of that component (in this case $1,746.8 million
for the Total column in the table).
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Several fundamental trends continue to affect our business, including our
clients increasingly expanding the focus of their brand strategies from national
markets to the global market. Additionally, in an effort to gain greater
efficiency and effectiveness from their marketing dollars, clients are
increasingly requiring greater coordination of their traditional advertising and
marketing activities and concentrating these activities with a smaller number of
service providers. These factors affect the geographic and service mix of our
business and the impact for the second quarter of 2002 is summarized below.
The components of revenue and revenue growth (declines) for the second
quarter of 2002 compared to the second quarter of 2001 in our primary geographic
markets are summarized below ($'s in millions):
$ Revenue % Growth
--------- --------
United States.................... $ 1,117.5 20.8%
United Kingdom................... 195.3 (3.4)%
Euro Markets..................... 360.3 6.1%
Other............................ 243.5 (13.0)%
--------- -----
Total............................ $ 1,916.6 9.7%
========= =====
As indicated, foreign exchange impacts increased our international revenue
by $1.3 million during the quarter ended June 30, 2002. The most significant
impacts resulted from the strengthening of the Euro and the British Pound
against the US dollar, as our operations in these markets represented over 70.0%
of our international revenue, partially offset by the strengthening of the US
dollar against the Japanese Yen and Brazilian Real.
We monitor revenue across a broad range of disciplines and group them into
the following four categories: traditional media advertising, customer
relationship management ("CRM"), public relations and specialty communications.
Traditional media advertising revenue represented 42.9%, or $821.8 million, of
our worldwide revenue during the second quarter of 2002. The remainder of our
revenue, 57.1%, or $1,094.8 million, was related to our other marketing and
corporate communications services. The breakdown of this revenue was CRM: 30.7%,
or $589.0 million; public relations: 12.8%, or $245.9 million; and specialty
communication: 13.6%, or $259.9 million. Revenue for these services in the
second quarter of 2002 when compared to the second quarter of 2001 increased by
$76.6 million, or 15.0% for CRM, decreased by $29.5 million, or 10.7%, for
public relations and increased by $54.8 million, or 26.7%, for specialty
communications.
Operating Expenses: Our second quarter 2002 worldwide operating expenses
increased $153.5 million, or 10.7%, to $1,586.1 million from $1,432.6 million in
the second quarter of 2001, consistent with the percentage increase in revenues
over the same period.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $145.6 million, or 13.8%, and represent 75.9%
of total operating expenses in the second quarter of 2002. These expenses
increased as a percentage of revenue to 62.9% in the second quarter of 2002 from
60.6% in the second quarter of 2001. Salaries and incentive
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
compensation costs decreased as a percentage of revenue in the second quarter
primarily as a result of continuing efforts to align staffing with current work
levels on a location by location basis. This was off-set by increased direct
service costs resulting from greater utilization of freelance labor. In
addition, as a result of the increase in our revenues as well as changes in the
mix of our revenues in the quarter on a period-over-period basis, other direct
costs increased as a percentage of revenue in 2002 compared to the second
quarter of 2001.
Office and general expenses increased by $7.9 million, or 2.1%, in the
second quarter of 2002. Office and general expenses primarily consist of
occupancy costs, general office service costs, technology costs, depreciation
and amortization and bad debt expense. These costs represented about 24.1% of
our total operating costs in the second quarter of 2002, versus 26.1% in the
second quarter of 2001. This decrease is primarily the result of our efforts to
better align costs with business levels on a location by location basis.
For the foregoing reasons, our operating margin decreased to 17.2% in the
second quarter of 2002, from 18.0% in the same period in 2001.
Net Interest Expense: Our net interest expense decreased in the second
quarter of 2002 to $5.9 million, compared to $19.4 million in the same period in
2001. Our gross interest expense decreased by $11.9 million to $10.7 million. Of
this decrease, $3.2 million was attributable to the conversion of our $230
million aggregate principal amount 2 1/4% convertible notes in December of 2001.
The balance of the reduction was attributable to generally lower short-term
interest rates as compared to the prior year, the issuance in February 2001 of
the $850 million zero-coupon convertible notes as to which substantially all of
the related debt issuance costs were amortized in the prior year and the
issuance in March 2002 of the $900.0 million zero-coupon convertible notes. This
was partially offset by increased daily average outstanding debt levels
resulting primarily from our repurchase of common stock. Interest income
increased slightly primarily as a result of higher daily average cash balances.
Income Taxes: Our consolidated effective income tax rate was 37.6% in the
second quarter of 2002, as compared to 37.8% in the second quarter of 2001. This
decrease was attributable to the continued implementation of various tax
planning initiatives designed to reduce the tax inefficiency of our holding
company structure.
Equity in Affiliates and Minority Interests: In the second quarter of
2002, our equity in affiliates was essentially flat compared to the same period
of 2001. In the second quarter of 2002, minority interest expense increased to
$18.7 million from $15.9 million in the same period in 2001, primarily due to
higher earnings by companies where minority interests exist and the acquisition
of additional entities in which there is a third party minority interest.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
second quarter of 2002 increased 9.2% to $187.3 million from $171.5 million in
the second quarter of 2001. Our diluted earnings per share increased 9.9% to
$1.00 in the second quarter of 2002, compared to $0.91 in the prior year period.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Six Months 2002 Compared to Six Months 2001
Revenue: Our consolidated worldwide revenue in the first six months of
2002 increased by $301.1 million, or 9.0% to $3,649.0 million from $3,347.9
million in the first six months of 2001. The effect of acquisitions, net of
disposals, increased worldwide revenue by $233.6 million, or 7.0%.
Internal/organic growth increased worldwide revenue by $83.7 million, or 2.5%;
and foreign exchange impacts decreased worldwide revenue by $16.2 million, or
0.5%. The components of total revenue growth are summarized below ($'s in
millions):
Total Domestic International
--------------- --------------- -------------
$ % $ % $ %
-------- --- -------- --- ------ ---
Six Months Ended June 30, 2001..... $3,347.9 -- $1,822.0 -- $1,526.0 --
Components of Revenue Changes:
Foreign exchange impact............ (16.2) (0.5)% -- -- (16.2) (1.1)%
Acquisitions....................... 233.6 7.0% 189.5 10.4% 44.1 2.9%
Organic............................ 83.7 2.5% 128.2 7.0% (44.5) (2.9)%
-------- --- -------- ---- -------- ----
Six Months Ended June 30, 2002..... $3,649.0 9.0% $2,139.7 17.4% $1,509.4 (1.1)%
======== === ======== ==== ======== ====
The components and percentages are calculated as follow:
o The foreign exchange impact shown in the table component is
calculated by first converting the current period's local currency
revenue using the average exchange rates from the equivalent prior
period to arrive at a constant currency revenue (in this case
$3,665.2 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $3,649.0 million less $3,665.2 million for
the Total column in the table).
o The acquisition component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any
business included in the prior period reported revenue that was
disposed of subsequent to the prior period.
o The organic component shown in the table is calculated by
subtracting both the foreign exchange and acquisition revenue
components from total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base (in this case $3,347.9 million for the Total
column in the table).
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The components of revenue and revenue growth (declines) for the six months
2002 compared to the six months 2001 in our primary geographic markets are
summarized below ($'s in millions):
$ Revenue % Growth
--------- --------
United States.................... $2,139.7 17.4%
United Kingdom................... 378.2 (4.9)%
Euro Markets..................... 680.2 3.0%
Other............................ 450.9 (3.7)%
-------- ------
Total............................ $3,649.0 9.0%
======== ======
As indicated, foreign exchange impacts further reduced our international
revenue by $16.2 million during the six months ended June 30, 2002, reducing our
international growth by 1.1%. The most significant impacts resulted from the
strengthening in the first half of the US dollar against the Japanese Yen and
Brazilian Real, partially offset by the strengthening in the second quarter of
2002 compared to the second quarter of 2001, of the Euro and the British Pound
against the US dollar as our operations in these markets represented over 70.0%
of our international revenue.
Traditional media advertising revenue represented 43.8%, or $1,599.6
million, of our worldwide revenue during the first six months of 2002. The
remainder of our revenue, 56.2%, or $2,049.4 million, was related to our other
marketing and corporate communications services. The breakdown of this revenue
was CRM: 30.5%, or $1,111.6 million; public relations: 13.0%, or $473.3 million;
and specialty communications: 12.7%, or $464.5 million. Revenue for these
services in the first six months of 2002 when compared to the first six months
of 2001 increased by $143.1 million, or 14.8%, for CRM, decreased by $52.9
million, or 10.1%, for public relations and increased by $78.0 million, or
20.2%, for specialty communications.
Operating Expenses: Our first half 2002 worldwide operating expenses
increased $269.8 million, or 9.6%, to $3,089.6 million from $2,819.8 million in
the first six months of 2001, essentially the same percentage increase as in
revenues over the same period.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $267.2 million, or 12.7%, and represent 76.7%
of total operating expenses in the first six months of 2002. These expenses
increased as a percentage of revenue to 64.9% in the first six months of 2002
from 62.8% in the first six months of 2001. Salaries and incentive compensation
costs decreased as a percentage of revenue in the first six months of 2002
primarily as a result of continuing efforts to align staffing with current work
levels on a location by location basis. This was off-set by increased direct
service costs resulting from greater utilization of freelance labor. In
addition, as a result of the increase in our revenues as well as changes in the
mix of our revenues in the first six months on a period-over-period basis, other
direct costs increased as a percentage of revenue in the first half of 2002
compared to the first half of 2001.
Office and general expenses increased by $2.7 million, or 0.4%, in the
first six months of 2002. Office and general expenses, similar to the second
quarter alone, represented about 23.3%
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
of our total operating costs in the first six months of 2002 versus 25.4% for
the first six months of 2001. This decrease is primarily the result of our
efforts to better align costs with business levels on a location by location
basis.
For the foregoing reasons, our operating margin decreased to 15.3% in the
first six months of 2002, from 15.8% in the same period in 2001.
Net Interest Expense: Our net interest expense decreased in the first six
months of 2002 to $17.3 million, as compared to $39.7 million in the same period
in 2001. Our gross interest expense decreased by $22.0 million to $24.5 million.
Of this decrease, $6.4 million was attributable to the conversion of our 2 1/4%
convertible notes in December of 2001; the balance of the reduction was
attributable to generally lower short-term interest rates as compared to the
prior year, the issuance in February 2001 of $850 million zero-coupon
convertible notes as to which substantially all of the related debt issuance
costs were amortized in the prior year and the issuance in March 2002 of the
$900.0 million zero-coupon convertible notes. This was partially offset by
increased daily average outstanding debt levels resulting primarily from our
repurchase of common stock. Interest income increased slightly primarily as a
result of higher daily average cash balances.
Income Taxes: Our consolidated effective income tax rate was 37.2% in the
first six months of 2002, as compared to 37.4% in the first six months of 2001.
This decrease was attributable to the continued implementation of various tax
planning initiatives designed to reduce the tax inefficiency of our holding
company structure.
Equity in Affiliates and Minority Interests: In the first six months of
2002, our equity in affiliates was essentially flat compared to the same period
of 2001. In the first six months of 2002, minority interest expense increased to
$30.3 million from $24.6 million in the same period in 2001, primarily due to
higher earnings by companies where minority interests exist and the acquisition
of additional entities in which there is a third party minority interest.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first six months of 2002 increased 10.1% to $315.8 million from $286.8 million
in the first six months of 2001. Our diluted earnings per share increased 8.4%
to $1.67 in the first six months of 2002, compared to $1.54 in the prior year
period.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies and New Accounting Pronouncements
We have prepared the following summary of critical accounting policies to
assist in better understanding our financial statements and the related
management's discussion and analysis of those results. Readers are encouraged to
consider this information together with our discussion of critical accounting
policies in the MD&A in our 2001 10-K, as well as our consolidated financial
statements and the related notes included in our 2001 10-K, for a more complete
understanding of all of our accounting policies.
Estimates: The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosures of contingent liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during a reporting
period. Actual results can differ from those estimates or assumptions, and the
differences could be material.
A fair value approach is used when evaluating cost based investments,
which consist of ownership interests in non-public companies, to determine if an
other than temporary impairment has occurred and in testing goodwill for
impairment under SFAS 142. The primary approach utilized to determine fair
values is a discounted cash flow methodology. When available and as appropriate,
we also use comparative market multiples to supplement the discounted cash flow
analysis. Numerous estimates and assumptions necessarily have to be made when
completing a discounted cash flow valuation, including estimates and assumptions
regarding interest rates, appropriate discount rates, capital structure, revenue
growth, operating margins, tax rates, working capital requirements and capital
expenditures. Estimates and assumptions also need to be made when determining
the appropriate comparative market multiples to be used. Actual results of
operations, cash flows and other factors used in a discounted cash flow
valuation will likely differ from the estimates utilized and the comparative
market multiples used are subject to change based on future public market
conditions; and these differences and changes could be material.
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets", and no longer amortize goodwill and other intangibles with
indefinite lives. These assets are subject to periodic testing for impairments
at least annually. Substantially all of our assets subject to the impairment
test consisted of goodwill. We completed the impairment test required by SFAS
142 in the second quarter of 2002, by comparing the fair value of our reporting
units to their carrying values and reassessed the useful lives of other
intangibles. As of January 1, 2002 we concluded that the fair values of the
reporting units exceeded the carrying values of the reporting units. Therefore,
no impairment charge was recognized in the results of operation and financial
position upon adoption and no changes were made to the useful lives of our other
intangibles.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Contingent Acquisition Obligations
As is typical in our business, many of our acquisitions are structured as
"earn-outs". We estimate that the amount of contingent future earn-out payments,
assuming that the acquired businesses performed over the relevant earn-out
periods at their current profit levels, that we will be required to make for
prior acquisitions is $418.2 million as of June 30, 2002. The ultimate amounts
payable are dependent upon future results, and in accordance with GAAP, we have
not recorded a liability for these items on our balance sheet. Actual results
can differ from these estimates and the actual amounts that we pay will be
different from these estimates. These differences could be material. We estimate
these obligations are as follows:
($ in millions)
Q3 & Q4 There-
2002 2003 2004 2005 after Total
---- ---- ---- ---- ----- -----
$122.1 $130.8 $100.2 $45.9 $19.2 $418.2
In addition, owners of interests in certain of our subsidiaries or
affiliates have the right in certain circumstances to require us to purchase
additional ownership stakes which we estimate assuming that the subsidiaries and
affiliates peformed over the relevant periods at their current profit levels,
could require us in future periods to pay an additional aggregate of $165.4
million, $84.5 million of which relates to currently exercisable rights. The
ultimate amount payable in the future relating to these transactions will vary
because it is dependent on the future results of operations of the subject
businesses and the timing of when these rights are exercised. The actual amounts
that we pay will be different from these estimates. These differences could be
material. We estimate the obligations that exist for these agreements are as
follows:
($ in millions)
-------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $ 73.2 $ 78.8 $152.0
Affiliated agencies 11.3 2.1 13.4
------ ------ ------
Total $ 84.5 $ 80.9 $165.4
====== ====== ======
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources
Liquidity: At June 30, 2002, our cash and cash equivalents and short-term
investments totaled $454.4 million and we had $1,479.0 million available to us
under committed credit facilities. We also had $415.0 million available under
uncommitted credit facilities.
Consistent with our historical trends in the first half of the year, we
had negative cash flow from operations of $392.8 million, primarily as a result
of payments of accrued incentive compensation, tax payments and payments to the
media on behalf of clients, as well as seasonal year-end reductions of our
current liabilities and, increases in accounts receivable and billable
production orders at June 30, 2002 compared to December 31, 2001. Cash used for
acquisition-related expenditures was $278.9 million. In addition, we issued
$900.0 million aggregate principal amount of convertible debt in March 2002 and
we repurchased $368.8 million of common stock. This resulted in an overall
decrease in cash and cash equivalents of $62.2 million for the six month period.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks. On April 26, 2002, we extended our 364-day revolving credit
facility with a consortium of banks for which Citibank N.A. acts as
administrative agent and Salomon Smith Barney Inc. acts as lead arranger. The
consortium consists of 23 banks. Other significant lending institutions include
The Bank of Nova Scotia, JPMorgan Chase Bank, Fleet National Bank, HSBC Bank USA
and San Paolo IMI S.p.A. The facility was increased from $1.0 billion to $1.6
billion under substantially the same terms as had previously been in effect,
including a provision which allows us to convert all amounts outstanding at
expiration on April 25, 2003, into a one-year term loan. The facility, which can
be drawn down at any time, also supports the issuance of up to $1.5 billion of
commercial paper, and subject to obtaining additional commitments may be
increased up to $1.8 billion. At June 30, 2002, we had issued and outstanding
$621.0 million of commercial paper which is classified as long-term debt.
We also have a $500 million 5-year revolving credit facility, which
expires on June 30, 2003, with a similar consortium of 13 banks for which ABN
AMRO Bank acts as agent. Other significant lending institutions include Bank of
America, HSBC, JPMorgan Chase and Wachovia. No amounts were outstanding under
this facility at June 30, 2002.
We had a total of $1,750.0 million aggregate principal amount of
zero-coupon zero-accretion 30-year notes outstanding, as well as, short-term
bank loans of $103.6 million at June 30, 2002.
In March 2002, we issued $900 million aggregate principal amount of
zero-coupon, zero-accretion convertible notes due 2032. The notes are senior
unsecured securities that are convertible into 8.2 million common shares,
implying a conversion price of $110.01 per common share, subject to normal
anti-dilution adjustments. These notes are convertible at the specified ratio
only upon the occurrence of certain events, including if our common shares trade
above certain levels, if we effect extraordinary transactions or if our
long-term debt ratings are downgraded at least three notches from their current
level to Baa3 or lower by Moody's
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Investors Services, Inc., or BBB or lower by Standard & Poor's Ratings Services.
These events would not, however, result in an adjustment of the number of shares
issuable upon conversion. Holders of the notes due 2032 have the right to put
the notes back to us for, at our election, cash, stock or a combination of both
in August of each year beginning in August 2003 and we have the right to redeem
the notes for cash beginning in 2007. There are no events that accelerate the
noteholders' put rights. Beginning in August 2007, if the market price of our
common shares exceeds certain thresholds, we may be required to pay contingent
cash interest on the notes equal to the amount of dividends that would be paid
on the common shares into which the notes are contingently convertible.
Below is a summary of our debt position (in millions) as of June 30, 2002.
Debt:
Bank loans (due less than 1 year) ............................. $ 103
$500 Million Revolver - due June 30, 2003 ..................... --
Commercial paper issued ....................................... 621
(supported by a $1.6 Billion 364 Day Facility)
5.20 % Euro Notes - due June 24, 2005 ......................... 151
Convertible Notes - due February 7, 2031 ...................... 850
Convertible Notes - due July 31, 2032 ......................... 900
Loan Notes and Sundry - various through 2012 .................. 97
------
Total Debt ........................................................ $2,722
======
The holders of our convertible notes have the right to cause us to
repurchase up to the entire $850.0 million aggregate face of the notes in
February 2003 and the remaining $900.0 million aggregate face amount of the
notes in August of 2003.
We believe that our operating cash flow combined with our available lines
of credit and our access to the capital markets are sufficient to support our
foreseeable cash requirements, including working capital, capital expenditures,
future acquisitions, earn-outs and other contingent payments, dividends, debt
maturities and possible debt repurchase obligations.
21
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our results of operations are subject to the risk of currency exchange
rate fluctuations related to our international operations. Our net income is
subject to risk from the translation of the revenue and expenses of our foreign
operations, which are generally denominated in the local currency. The effects
of currency exchange rate fluctuation on our second quarter and first half
results of operations are discussed on pages 13 and 16 of this report. We do not
hedge these exposures against the US dollar in the normal course of our
business. We do, however, conduct global treasury operations to improve
liquidity and manage third party interest expense centrally. As an integral part
of these operations, we enter into short-term forward foreign exchange contracts
to hedge intercompany cash movements between subsidiaries operating in different
currency markets. While our agencies operate in more than 100 countries and
invoice clients in more than 70 different currencies, our major international
markets are the E.U., the United Kingdom, Japan, Brazil and Canada.
Our 2001 10-K provides a more detailed discussion of the market risks
affecting our operations. As of June 30, 2002, no material change had occurred
in our market risks, as compared to the disclosure in our 2001 10-K.
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
set forth in this report contain disclosures which are forward-looking
statements within the meaning of the federal securities laws. Forward-looking
statements include all statements that do no relate solely to historical or
current facts, and in some instances are identifiable by the use of words such
as "may," "will," "expect," "project," "estimate," "anticipate," "envisage,"
"plan" or "continue." These forward-looking statements are based upon our
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans and anticipated actions and
our future financial condition and results. The uncertainties and risks include,
but are not limited to, changes in general economic conditions, competitive
factors, client communication requirements, the hiring and retention of human
resources and other factors. In addition, our international operations are
subject to the risk of currency fluctuations, exchange controls and similar
risks discussed above. 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 us or on our behalf.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 13, 2002, a lawsuit was filed against us and certain of our senior
executives in the federal court in the Southern District of New York on behalf
of a purported class of purchasers of our common shares during the period April
25, 2000 to June 11, 2002. The executives named as defendants are our chairman,
chief executive officer, chief financial officer and controller. The complaint
alleges, among other things, that our press releases and SEC reports during the
alleged class period contained materially false and misleading statements or
omitted to state material information relating to (1) our calculation of the
organic component of period-to-period revenue growth, (2) the formation of
Seneca Investments LLC in May 2001, and (3) the characterization of acquisition
payments and the existence and amount of our future obligations in respect of
acquisitions. The complaint seeks an unspecified amount of money damages plus
attorneys' fees and other costs. Ten other complaints were subsequently filed in
the same court, each making similar allegations and referencing the same class
period. All of the cases are at a preliminary stage. Management believes that
the allegations in the complaints in these lawsuits are without merit and we
presently intend to vigorously defend the cases.
In addition to the proceedings described above, a shareholder derivative
action was filed on June 28, 2002 in New York state court in New York City by a
plaintiff shareholder, proportedly on our behalf, against current and certain
former directors alleging breaches of fiduciary duty, disclosure failures, abuse
of control and gross mismanagement in connection with the formation of Seneca,
including as a result of open-market sales of our common shares by our chairman
and two former employee directors during the period August 2001 to May 2002. The
complaint seeks the imposition of a constructive trust on profits received in
the stock sales, an unspecified amount of money damages and attorneys' fees and
other costs.
The cases follow the publication of several press reports about us in June
2002. We have received requests from the Staff of the Securities and Exchange
Commission for information on topics referred to in those reports. We have fully
cooperated and intend to continue to cooperate in any SEC inquiry into these
matters.
We also are subject to numerous lawsuits and other claims in the ordinary
course of business.
Management presently expects that the matters referred to in this Item 1
will not individually or in the aggregate have a material adverse effect on our
financial position or results of operations. However, the outcome of any of
these matters is inherently uncertain and may be affected by future events.
Accordingly, there can be no assurance as to the ultimate effect of these
matters.
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Item 4. Submission of Matters to a Vote of Security Holders
We held our annual shareholders' meeting on May 21, 2002. At the meeting,
votes cast regarding the election of four Directors to serve in the class of
Directors whose term expires in 2005 were as follows:
Votes For Votes Withheld
--------- --------------
Robert Charles Clark 152,181,951 1,545,866
Leonard S. Coleman, Jr. 152,564,719 1,163,098
Peter Foy 152,624,878 1,102,939
Gary L. Roubos 152,796,417 931,400
Votes cast regarding the approval of the Omnicom Group Inc. Equity
Incentive Plan were as follows:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
142,118,350 9,941,157 1,668,310
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.7a Thomas Harrison (Chief Executive Officer of Diversified Agency
Services) Executive Salary Continuation Plan Agreement
10.7b Peter Mead (Vice Chairman) Executive Salary Continuation Plan
Agreement
10.7c Keith L. Reinhard (Chairman and Chief Executive Officer of DDB
Worldwide) Executive Salary Continuation Plan Agreement
10.7d Allen Rosenshine (Chairman and Chief Executive Officer of BBDO
Worldwide) Executive Salary Continuation Plan Severance
Compensation Agreement
10.7e John Wren (Chief Executive Officer of Omnicom) Executive Salary
Continuation Plan Agreement
10.7f Michael Greenlees (former Chairman and CEO of TBWA Worldwide)
Employment Agreement, Executive Salary Continuation Plan
Agreement and Note
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(b) Reports on Form 8-K
On June 5, 2002, we filed a Current Report on Form 8-K disclosing under
Item 5 changes in the composition of our Board of Directors.
On June 13, 2002, we filed a Current Report on Form 8-K disclosing under
Item 4 changes in our certifying accountants.
On June 21, 2002, we filed a Current Report on Form 8-K disclosing under
Item 4 changes in the certifying accountants for our employee retirement
savings plan.
On July 8, 2002, we filed a Current Report on Form 8-K to furnish under
Item 9 (Regulation FD disclosure) the text of materials used in investor
presentations.
On August 6, 2002, we filed a Current Report on Form 8-K to furnish under
Item 9 (Regulation FD disclosure) the text of materials used in investor
presentations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Omnicom
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
August 14, 2002 /s/ Randall J. Weisenburger
---------------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 14, 2002 /s/ Philip J. Angelastro
---------------------------------------
Philip J. Angelastro
Senior Vice President, Finance
and Controller
(Chief Accounting Officer)
26