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: September 30, 2002
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
OMNICOM GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction (IRS Employer
of 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. 188,063,843 (as of October 31,
2002)
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
September 30, 2002 (unaudited) and December 31, 2001 1
Consolidated Condensed Statements of Income (unaudited) --
Three Months and Nine Months Ended September 30, 2002 and 2001 2
Consolidated Condensed Statements of Cash Flows (unaudited) --
Nine Months Ended September 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Disclosure 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30,
2002 December 31,
(Unaudited) 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents .................... $ 357,649 $ 472,151
Short-term investments at market,
which approximates cost .................... 34,994 44,848
Accounts receivable, less allowance
for doubtful accounts of $75,481
and $79,183 ................................ 3,704,876 3,720,790
Billable production orders in process,
at cost .................................... 533,280 382,750
Prepaid expenses and other current assets .... 683,251 613,285
------------ ------------
Total Current Assets ................... 5,314,050 5,233,824
------------ ------------
Furniture, equipment and leasehold
improvements at cost, less
accumulated depreciation and
amortization of $675,789 and $618,661 ...... 547,033 547,801
Investments in affiliates .................... 172,944 186,156
Goodwill, net of accumulated amortization
of $514,871 and $495,715 ................... 4,372,454 3,859,162
Intangibles, net of accumulated
amortization of $64,259 and $44,511 ........ 94,794 88,026
Deferred tax benefits ........................ 93,938 100,418
Other assets ................................. 627,094 602,027
------------ ------------
Total Assets ........................... $ 11,222,307 $ 10,617,414
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................. $ 4,062,253 $ 4,303,152
Advance billings ............................. 557,210 640,750
Current portion of long-term debt ............ 31,208 40,444
Bank loans ................................... 95,126 169,056
Accrued taxes and other liabilities .......... 1,181,646 1,490,385
------------ ------------
Total Current Liabilities .............. 5,927,443 6,643,787
------------ ------------
Long-term debt ................................. 758,709 490,105
Convertible notes .............................. 1,750,000 850,000
Deferred compensation and other liabilities .... 306,876 296,980
Minority interests ............................. 171,174 158,123
Shareholders' equity:
Common stock ................................. 29,800 29,800
Additional paid-in capital ................... 1,436,161 1,400,138
Retained earnings ............................ 1,950,717 1,619,874
Unamortized restricted stock ................. (153,407) (125,745)
Accumulated other comprehensive loss ......... (223,198) (295,358)
Treasury stock ............................... (731,968) (450,290)
------------ ------------
Total Shareholders' Equity ............. 2,308,105 2,178,419
------------ ------------
Total Liabilities and
Shareholders' Equity ................. $ 11,222,307 $ 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUE .................................................. $ 1,768,459 $ 1,571,012 $ 5,417,454 $ 4,918,933
OPERATING EXPENSES:
Salary and service costs ............................ 1,195,574 1,016,141 3,589,962 3,135,205
Office and general expenses ......................... 361,494 372,661 1,056,752 1,119,128
----------- ----------- ----------- -----------
1,557,068 1,388,802 4,646,714 4,254,333
----------- ----------- ----------- -----------
OPERATING PROFIT ......................................... 211,391 182,210 770,740 664,600
NET INTEREST EXPENSE:
Interest expense .................................... 10,365 24,288 34,874 70,743
Interest income ..................................... (4,801) (6,168) (12,045) (12,875)
----------- ----------- ----------- -----------
5,564 18,120 22,829 57,868
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............................... 205,827 164,090 747,911 606,732
INCOME TAXES ............................................. 69,696 64,340 271,568 239,675
----------- ----------- ----------- -----------
INCOME AFTER INCOME TAXES ................................ 136,131 99,750 476,343 367,057
EQUITY IN AFFILIATES ..................................... 2,436 2,521 8,412 5,811
MINORITY INTERESTS ....................................... (12,463) (9,916) (42,770) (33,867)
----------- ----------- ----------- -----------
NET INCOME ....................................... $ 126,104 $ 92,355(a) $ 441,985 $ 339,001(a)
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ............................................ $ 0.68 $ 0.50(a) $ 2.37 $ 1.86(a)
Diluted .......................................... $ 0.68 $ 0.50(a) $ 2.36 $ 1.83(a)
DIVIDENDS DECLARED PER COMMON SHARE ...................... $ 0.200 $ 0.200 $ 0.600 $ 0.575
- ----------
(a) Three Months Ended and Nine Months Ended September 30, 2001, adjusted to
exclude goodwill amortization:
Adjusted Net Income ............................ $114,037 $400,819
Adjusted Net Income Per Common Share - basic ... $ 0.62 $ 2.19
Adjusted Net Income Per Common Share - diluted . $ 0.61 $ 2.15
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)
Nine Months Ended
September 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income .......................................... $ 441,985 $ 339,001
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of tangible assets ..................... 89,965 85,027
Amortization of goodwill ............................ -- 71,454
Amortization of intangible assets ................... 15,441 5,915
Minority interests .................................. 42,770 33,773
Earnings of affiliates less than dividends received . 4,174 17,619
Tax benefit on employee stock plans ................. 12,235 14,432
Provisions for losses on accounts receivable ........ 7,634 9,375
Amortization of restricted stock .................... 45,378 36,215
Decrease in accounts receivable ..................... 152,801 138,314
Increase in billable production orders in process ... (136,566) (9,418)
Increase in prepaid expenses and other current assets (42,728) (67,620)
Decrease / (increase) in other assets, net .......... 42,954 (163,994)
Decrease in accounts payable ........................ (373,580) (507,111)
Decrease in accrued taxes, advanced billings
and other liabilities ............................. (535,135) (412,509)
----------- -----------
Net cash used for operating activities ........... (232,672) (409,527)
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................ (91,281) (131,515)
Payments for purchases of equity interests
in subsidiaries and affiliates, net of
cash acquired ..................................... (342,523) (565,673)
Proceeds from sales of short-term investments
and other, net .................................... 12,607 56,195
----------- -----------
Net cash used for investing activities ........... (421,197) (640,993)
----------- -----------
Cash flows from financing activities:
Net (decrease) / increase in short-term borrowings .. (100,764) 3,406
Net proceeds from issuance on convertible debentures
and long-term debt obligations ................... 1,190,456 1,123,063
Repayments of principal of long-term debt obligations (73,802) (27,242)
Dividends paid ...................................... (110,958) (99,990)
Purchase of treasury shares ......................... (368,819) (60,149)
Other ............................................... (1,622) 43,498
----------- -----------
Net cash provided by financing activities ........ 534,491 982,586
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents ............................................ 4,876 (27,738)
----------- -----------
Net decrease in cash and cash equivalents ................ (114,502) (95,672)
Cash and cash equivalents at beginning of period ......... 472,151 516,817
----------- -----------
Cash and cash equivalents at end of period ............... $ 357,649 $ 421,145
=========== ===========
Supplemental Disclosures:
Income taxes paid ................................... $ 280,513 $ 185,405
=========== ===========
Interest paid ....................................... $ 32,358 $ 60,673
=========== ===========
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
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 September 30, 2001 and December 31, 2001 reported amounts to conform
them to the September 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 our Zero Coupon Zero Yield
Convertible Notes due 2032 or our Liquid Yield Option Notes due 2031
because the conversion criteria applicable to each series of notes have
not been met. For purposes of computing diluted earnings per share for the
three months ended September 30, 2002, 786,000 common share equivalents
were assumed to be outstanding for the current period and 1,746,000 common
share equivalents were assumed to have been outstanding for the comparable
period last year. For the purposes of computing diluted earnings per share
for the nine months ended September 30, 2002, 1,816,000 common share
equivalents were assumed to be outstanding for current period and
2,334,000 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
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
outstanding at September 30, 2002 and were assumed to have been converted
for the September 30, 2001 computation.
The assumed increase in net income related to the after-tax
compensation expense related to dividends on restricted shares used in the
computation was $252.0 for the three months ended September 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
$2,499.0 for the three months ended September 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
$757.0 for the nine months ended September 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 $7,462.0 for the nine months ended
September 30, 2001.
The weighted average number of shares used in our EPS computations were:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic EPS 185,865,000 183,272,000 186,107,000 182,626,000
Diluted EPS 186,652,000 189,631,000 187,923,000 189,573,000
5. Total comprehensive income and its components were:
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2002 2001 2002 2001
--------- -------- -------- ---------
Net income for the period $ 126,104 $ 92,355 $441,985 $ 339,001
Unrealized gain on long-term
investments and reclassification to
cost basis investments (a) -- -- -- 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) (4,913) 43,691 72,160 (38,844)
--------- -------- -------- ---------
Comprehensive income for the period $ 121,191 $136,046 $514,145 $ 319,095
========= ======== ======== =========
- ----------
(a) Net of income taxes of $11,225 for the nine-month period ended September
30, 2001.
(b) Net of income taxes of $3,275 and $29,127 for the three-month period ended
September 30, 2002 and 2001, respectively, and $48,107 and $25,896 for the
nine-month periods ended September 30, 2002, and 2001, respectively.
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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 upon adoption no impairment charge was recognized in our results
of operations and financial position and no changes were made to the
useful lives of our other intangibles.
The following summary table presents the impact of the elimination
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.
(Dollars in Thousands, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- ------------------------------------------
2002 2001 2002 2001
--------- ---------------------------- --------- ----------------------------
as adjusted as reported as adjusted as reported
Operating Income $ 211,391 $ 206,427 $ 182,210 $ 770,740 $ 734,598 $ 664,600
PBT 205,827 188,307 164,090 747,911 676,730 606,732
Equity in Affiliates 2,436 3,112 2,521 8,412 8,871 5,811
Minority Interest (12,463) (10,283) (9,916) (42,770) (34,855) (33,867)
Diluted EPS $ 0.68 $ 0.61 $ 0.50 $ 2.36 $ 2.15 $ 1.83
As of September 30, 2002, the components of our intangible assets
were as follows:
(Dollars in Thousands)
September 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 $4,887,325 $514,871 $4,372,454 $4,354,877 $495,715 $3,859,162
Other intangible assets
subject to amortization:
Purchased and internally
developed software 144,346 60,364 83,982 121,915 41,031 80,884
Client lists 14,707 3,895 10,812 10,622 3,480 7,142
---------- -------- ---------- ---------- -------- ----------
Total $ 159,053 $ 64,259 $ 94,794 $ 132,537 $ 44,511 $ 88,026
========== ======== ========== ========== ======== ==========
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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 September 30, 2001 would have
increased from $92,355 to $114,037 as shown in the following table.
(Dollars in Thousands,
except per share amounts)
As Adjusted As Reported
Three Months Ended September 30, 2002 2001(a) 2001
----------- ----------- -----------
Revenue ........................... $ 1,768,459 $ 1,571,012 $ 1,571,012
Operating expenses:
Salary and service costs ...... 1,195,574 1,016,141 1,016,141
Office and general expenses ... 361,494 348,444 372,661
----------- ----------- -----------
1,557,068 1,364,585 1,388,802
----------- ----------- -----------
Operating profit .................. 211,391 206,427 182,210
Net interest expense:
Interest expense .............. 10,365 24,288 24,288
Interest income ............... (4,801) (6,168) (6,168)
----------- ----------- -----------
5,564 18,120 18,120
----------- ----------- -----------
Income before income taxes ........ 205,827 188,307 164,090
Income taxes ...................... 69,696 67,099 64,340
----------- ----------- -----------
Income after income taxes ......... 136,131 121,208 99,750
Equity in affiliates .............. 2,436 3,112 2,521
Minority interests ................ (12,463) (10,283) (9,916)
----------- ----------- -----------
Net income .................... $ 126,104 $ 114,037 $ 92,355
=========== =========== ===========
Net Income Per Common Share:
Basic ......................... $ 0.68 $ 0.62 $ 0.50
Diluted ....................... $ 0.68 $ 0.61 $ 0.50
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)
Had we stopped recording amortization of goodwill as of January 1,
2001, net income for the nine months ended September 30, 2001 would have
increased from $339,001 to $400,819 as shown in the following table.
(Dollars in Thousands,
except per share amounts)
As Adjusted As Reported
Nine Months Ended September 30, 2002 2001(a) 2001
----------- ----------- -----------
Revenue ........................... $ 5,417,454 $ 4,918,933 $ 4,918,933
Operating expenses:
Salary and service costs ...... 3,589,962 3,135,205 3,135,205
Office and general expenses ... 1,056,752 1,049,130 1,119,128
----------- ----------- -----------
4,646,714 4,184,335 4,254,333
----------- ----------- -----------
Operating profit .................. 770,740 734,598 664,600
Net interest expense:
Interest expense .............. 34,874 70,743 70,743
Interest income ............... (12,045) (12,875) (12,875)
----------- ----------- -----------
22,829 57,868 57,868
----------- ----------- -----------
Income before income taxes ........ 747,911 676,730 606,732
Income taxes ...................... 271,568 249,927 239,675
----------- ----------- -----------
Income after income taxes ......... 476,343 426,803 367,057
Equity in affiliates .............. 8,412 8,871 5,811
Minority interests ................ (42,770) (34,855) (33,867)
----------- ----------- -----------
Net income .................... $ 441,985 $ 400,819 $ 339,001
=========== =========== ===========
Net Income Per Common Share:
Basic ......................... $ 2.37 $ 2.19 $ 1.86
Diluted ....................... $ 2.36 $ 2.15 $ 1.83
Dividends Declared Per Common Share $ 0.600 $ 0.575 $ 0.575
- ----------
(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 adopted SFAS 144 effective January 1, 2002. The adoption
had no material impact on our consolidated results of operations and
financial position.
8
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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. On a regional basis, we believe that 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 September
30, 2002 and 2001, is summarized in the following table.
(Dollars in Thousands)
United United Euro Other
States Kingdom Denominated International Total
------ ------- ----------- ------------- -----
Revenue
3 Months Ended
September 30,
2002 $ 991,446 $206,350 $ 345,442 $225,221 $1,768,459
2001 831,090 181,303 331,416 227,203 1,571,012
Revenue
9 Months Ended
September 30,
2002 $3,131,124 $584,526 $1,025,608 $676,196 $5,417,454
2001 2,653,032 579,030 991,465 695,406 4,918,933
Long-lived Assets
At September 30,
2002 $ 311,177 $ 87,225 $ 69,426 $ 79,205 $ 547,033
2001 301,680 97,502 67,359 88,107 554,648
8. At September 30, 2002, we had a $1,600.0 million 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. In April 2002, the
facility was extended on 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 $1,500.0 million of commercial paper.
9
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
At September 30, 2002, we had issued and outstanding $200.0 million of
commercial paper which is classified as long-term debt.
We also have a $500.0 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. We had $374.0
million outstanding under this facility at September 30, 2002.
We also had short-term bank loans of $95.0 million at September 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
Liquid Yield Option and Zero Coupon Zero Yield 30-year notes outstanding
as further described in Note 9.
At September 30, 2002, the unused portion of our committed credit
facilities was $1,526.0 million.
9. In March 2002, we issued $900.0 million aggregate principal amount of Zero
Coupon Zero Yield 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 $850.0 million
aggregate principal amount of Liquid Yield Option Notes due 2031 that we
issued in February 2001. These
10
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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. The
noteholder put dates for the 2031 notes are in February 2003 and each
February thereafter.
10. Our operating companies completed acquisitions and made investments in
other agencies over the last twelve-month period. The revenue from these
acquired businesses impacts comparability to prior period revenues for
twelve months following the date of acquisition. The revenue of the
acquired businesses 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 revenue that was
disposed of subsequent to the prior period. The aggregate revenue of the
acquired businesses was $76.2 million for the third quarter and $309.8
million for the first nine 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 nine months of this year, the aggregate
consideration for acquisitions, including assumed liabilities, was $385.2
million. As is typical in our business, certain 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 is
$181.9 million related to 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. Eleven 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,
purportedly 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 and are expected to be
consolidated and a lead plaintiff appointed in accordance with
11
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
applicable procedures. A motion has been filed to dismiss this action.
Subsequently, the parties agreed to stay further proceedings in this case
pending additional developments in the class action cases described above.
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.
12. On November 14, 2002, we entered into a new 3-year $800.0 million
revolving credit facility which matures November 14, 2005 and a new
$1,000.0 million 364-day revolving credit facility which matures on
November 13, 2003. These facilities replaced the existing facilities that
are described in Note 8 which were due to mature in the second quarter of
2003. Both facilities provide for credit support of the Company's existing
$1,500.0 million commercial paper program. The new facilities have
substantially the same terms as had previously been in effect. The 364-day
facility continues to include a provision which allows the Company to
convert all amounts outstanding at expiration of the facility into a
one-year term loan. The consortium of banks providing the new facilities
had previously participated in the facilities that were replaced.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
As discussed and presented in footnote 6 of the notes to our third 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 September 30, 2001 and
December 31, 2001 reported amounts to conform them to the September 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 footnote 2 of the notes to our third quarter
financial statements.
Third Quarter 2002 Compared to Third Quarter 2001
Revenue: Our consolidated worldwide revenue in the third quarter of 2002
increased 12.6% to $1,768.5 million from $1,571.0 million in the third quarter
of 2001. The effect of acquisitions, net of disposals, increased worldwide
revenue by $76.2 million, or 4.9%. Internal/organic growth increased worldwide
revenue by $74.9 million, or 4.7%, and foreign exchange impacts increased
worldwide revenue by $46.4 million, or 3.0%. The components of total revenue
growth by category are summarized below ($ in millions):
Total Domestic International
------------------- ------------------- --------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
Third Quarter 2001 ........... $1,571.0 -- $ 831.1 -- $ 739.9 --
Components of Revenue Changes:
Foreign exchange impact ...... 46.4 3.0% -- -- 46.4 6.3%
Acquisitions ................. 76.2 4.9% 56.8 6.8% 19.4 2.6%
Organic ...................... 74.9 4.7% 103.6 12.5% (28.7) (3.9)%
-------- -------- -------- -------- -------- --------
Third Quarter 2002 ........... $1,768.5 12.6% $ 991.5 19.3% $ 777.0 5.0%
======== ======== ======== ======== ======== ========
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
$1,722.1 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 $1,768.5 million less $1,722.1 million for
the Total column in this 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
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 $1,571.0 million
for the Total column in the table).
The present state of the global economy continues to create a difficult
business climate. While U.S. media companies have experienced some recent
improvement in advertising sales, this has not resulted in a similar improvement
for our businesses. Although management believes that the recent improvements
reported by U.S. media companies are a positive sign, management also believes
that the overall demand for advertising and marketing services in the near term
will continue to be challenging. However, several long-term trends continue to
positively affect our business, including our clients increasingly expanding the
focus of their brand strategies from national markets to the global market.
Additionally, in an effort to gain greater efficiency and effectiveness from
their marketing dollars, clients are increasingly requiring greater coordination
of their traditional advertising and marketing activities and concentrating
these activities with a smaller number of service providers. All of these
factors affect the geographic and service mix of our business period to period.
Further, any comparison of current period results to the prior year, especially
when comparing the third quarter of 2002 to the third quarter of 2001, needs to
be made in the context of the events of September 11, which had a significant
adverse impact on our business in the third quarter of 2001. The adverse impact
of September 11 was less significant in the fourth quarter of 2001 and
management believes that the fourth quarter of 2001 also benefited from other
short-term economic stimuli. The impact of these factors on our business and the
results of operations for the third quarter and nine months of 2002 is more
fully discussed below.
The components of revenue and revenue growth (declines), for the third
quarter of 2002 compared to the third quarter of 2001, in our primary geographic
markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States .................... $ 991.5 19.3%
United Kingdom ................... 206.4 13.8%
Euro Markets ..................... 345.4 4.2%
Other ............................ 225.2 (0.9)%
-------- --------
Total ............................ $1,768.5 12.6%
======== ========
As indicated, foreign exchange impacts increased our international revenue
by $46.4 million during the quarter ended September 30, 2002. The most
significant impacts resulted from the strengthening of the Euro and the British
Pound against the U.S. dollar, as our operations in these markets represented
over 70.0% of our international revenue. This was partially offset by the
strengthening of the U.S. dollar against the Brazilian Real.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 42.4%, or $749.4 million, of
our worldwide revenue during the third quarter of 2002. The remainder of our
revenue, 57.6%, or $1,019.1 million, was related to our other marketing and
corporate communications services. The breakdown of this other revenue was CRM:
33.9%, or $599.0 million; public relations: 12.4%, or $220.7 million; and
specialty communication: 11.3%, or $199.4 million. Revenue in the third quarter
of 2002 when compared to the third quarter of 2001 increased by $51.1 million,
or 7.3% for traditional media advertising, by $100.8 million, or 20.2% for CRM,
by $18.1 million, or 9.0%, for public relations and by $27.3 million, or 15.9%,
for specialty communications.
Operating Expenses: Our third quarter 2002 worldwide operating expenses
increased $192.5 million, or 14.1%, to $1,557.1 million from $1,364.6 million in
the third quarter of 2001 as described below.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $179.4 million, or 17.7%, and represent 76.8%
of total operating expenses in the third quarter of 2002 versus 74.5% in the
third quarter of 2001. These expenses increased as a percentage of revenue to
67.6% in the third quarter of 2002 from 64.7% in the third quarter of 2001.
Salaries and incentive compensation costs decreased as a percentage of revenue
in the third 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 primarily from increased
severance related costs and 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 the third quarter of 2002 compared to
the third quarter of 2001.
Office and general expenses increased by $13.1 million, or 3.7%, in the
third 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 23.2% of
our total operating costs in the third quarter of 2002, versus 25.5% in the
third 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 12.0% in the
third quarter of 2002, from 13.1% in the same period in 2001.
Net Interest Expense: Our net interest expense decreased in the third
quarter of 2002 to $5.6 million, compared to $18.1 million in the same period in
2001. Our gross interest expense decreased by $13.9 million to $10.4 million. Of
this decrease, $3.2 million was attributable to the conversion of $230 million
aggregate principal amount 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
the $850.0 million
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquid Yield Option Notes as to which substantially all of the related debt
issuance costs were amortized in prior periods and the issuance in March 2002 of
the $900.0 million principal Zero Coupon Zero Yield Convertible Notes. This was
partially off-set by increased daily average outstanding debt levels resulting
primarily from our repurchase of common stock in the first quarter of 2002.
Income Taxes: Our consolidated effective income tax rate was 33.9% in the
third quarter of 2002, as compared to 35.6% in the third quarter of 2001. This
reduction reflects the realization of our recently implemented tax planning
initiatives.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
third quarter of 2002 increased 10.6% to $126.1 million from $114.0 million in
the third quarter of 2001. Our diluted earnings per share increased 11.5% to
$0.68 in the third quarter of 2002, compared to $0.61 in the prior year period.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Nine Months 2002 Compared to Nine Months 2001
Revenue: Our consolidated worldwide revenue in the first nine months of
2002 increased by $498.6 million, or 10.1% to $5,417.5 million from $4,918.9
million in the first nine months of 2001. The effect of acquisitions, net of
disposals, increased worldwide revenue by $309.8 million, or 6.3%.
Internal/organic growth increased worldwide revenue by $158.6 million, or 3.2%;
and foreign exchange impacts increased worldwide revenue by $30.2 million, or
0.6%. The components of total revenue growth by category are summarized below ($
in millions):
Total Domestic International
------------------- ------------------- --------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
Nine Months Ended
September 30, 2001 ........... $4,918.9 -- $2,653.0 -- $2,265.9 --
Components of Revenue Changes:
Foreign exchange impact ...... 30.2 0.6% -- --% 30.2 1.3%
Acquisitions ................. 309.8 6.3% 246.4 9.3% 63.4 2.8%
Organic ...................... 158.6 3.2% 231.7 8.7% (73.2) (3.2)%
-------- -------- -------- -------- -------- --------
Nine Months Ended
September 30, 2002 ........... $5,417.5 10.1% $3,131.1 18.0% $2,286.4 0.9%
======== ======== ======== ======== ======== ========
The components and percentages are calculated as follows:
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
$5,387.3 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 $5,417.5 million less $5,387.3 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 (in this case $4,918.9 million for the Total
column in the table).
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The components of revenue and revenue growth (declines), for the nine
months 2002 compared to the nine months 2001, in our primary geographic markets
are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States .................... $3,131.1 18.0%
United Kingdom ................... 584.5 0.9%
Euro Markets ..................... 1,025.6 3.4%
Other ............................ 676.3 (2.8)%
-------- --------
Total ............................ $5,417.5 10.1%
======== ========
As indicated, foreign exchange impacts increased our international revenue
by $30.2 million during the nine months ended September 30, 2002, increasing our
international growth by 1.3%. The most significant impact resulted from the
strengthening in the second and third quarters of 2002 compared to the second
and third quarters of 2001, of the Euro and the British Pound against the U.S.
dollar as our operations in these markets represented over 70.0% of our
international revenue, partially offset by the strengthening of the U.S. dollar
against the Brazilian Real.
Traditional media advertising revenue represented 43.4%, or $2,349.1
million, of our worldwide revenue during the first nine months of 2002. The
remainder of our revenue, 56.6%, or $3,068.4 million, was related to our other
marketing and corporate communications services. The breakdown of this other
revenue was CRM: 31.6%, or $1,710.6 million; public relations: 12.8%, or $694.0
million; and specialty communications: 12.2%, or $663.8 million. Revenue in the
first nine months of 2002 when compared to the first nine months of 2001
increased by $184.0 million, or 8.5% for traditional media advertising, by
$243.9 million, or 16.6%, for CRM, decreased by $34.7 million, or 4.8%, for
public relations and increased by $105.3 million, or 18.9%, for specialty
communications.
Operating Expenses: During the first nine months of 2002 worldwide
operating expenses increased $462.4 million, or 11.1%, to $4,646.7 million from
$4,184.3 million in the first nine months of 2001 as described below.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $454.8 million, or 14.5%, and represent 77.3%
of total operating expenses in the first nine months of 2002 versus 74.9% in the
first nine months of 2001. These expenses increased as a percentage of revenue
to 66.3% in the first nine months of 2002 from 63.7% in the first nine months of
2001. Salaries and incentive compensation costs decreased as a percentage of
revenue in the first nine 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 primarily
from increased severance related costs and 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 nine months on a
period-over-period basis, other direct costs increased as a percentage of
revenue in the first nine months of 2002 compared to the first nine months of
2001.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Office and general expenses increased by $7.6 million, or 0.7%, in the
first nine months of 2002. Office and general expenses, similar to the third
quarter alone, represented about 22.7% of our total operating costs in the first
nine months of 2002 versus 25.1% for the first nine 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 14.2% in the
first nine months of 2002, from 14.9% in the same period in 2001.
Net Interest Expense: Our net interest expense decreased in the first nine
months of 2002 to $22.8 million, as compared to $57.9 million in the same period
in 2001. Our gross interest expense decreased by $35.9 million to $34.9 million.
Of this decrease in gross interest expense, $9.6 million was attributable to the
conversion of our $230.0 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 $850.0 million Liquid Yield Option notes as to
which substantially all of the related debt issuance costs were amortized in
prior periods and the issuance in March 2002 of the $900.0 million principal
Zero Coupon Zero Yield Convertible notes. This was partially offset by increased
daily average outstanding debt levels resulting primarily from our repurchase of
common stock in the first quarter of 2002.
Income Taxes: Our consolidated effective income tax rate was 36.3% in the
first nine months of 2002, as compared to 36.9% in the first nine months of
2001. This decrease was primarily due to the realization of our tax planning
initiatives implemented during the third quarter of 2002.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first nine months of 2002 increased 10.3% to $442.0 million from $400.8 million
in the first nine months of 2001. Our diluted earnings per share increased 9.8%
to $2.36 in the first nine months of 2002, compared to $2.15 in the prior year
period.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies and New Accounting Pronouncements
To assist in better understanding our financial statements and the related
management's discussion and analysis of those results, readers are encouraged to
review our summary of critical accounting policies and new accounting
pronouncements included in Item 2 of our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 and 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.
Contingent Acquisition Obligations
As is typical in our business, certain of our acquisitions are structured
as "earn-outs". We utilize earn-out structures in an effort to minimize the risk
to the Company associated with potential future negative changes in the
performance of the acquired entity. We estimate that the amount of contingent
future earn-out payments, assuming that the acquired businesses perform over the
relevant earn-out periods at their current profit levels, that we will be
required to make for prior acquisitions is $452.3 million as of September 30,
2002. The ultimate amounts payable are dependent upon future results, and in
accordance with GAAP, we have not recorded a liability for these items on our
balance sheet. Actual results can differ from these estimates and the actual
amounts that we pay will be different from these estimates. These obligations
change from period to period as a result of earn-out payments made during the
current period, changes in the previous estimate of the acquired entities'
performances, changes in foreign exchange rates and the addition of new
contingent obligations resulting from acquisitions with earn-out structures that
were completed in the current period. These differences could be material. We
estimate these obligations are as follows:
($ in millions)
------------------------------------------------------------------------
Q4 There-
2002 2003 2004 2005 after Total
---- ---- ---- ---- ----- -----
$154.9 $144.0 $72.1 $56.5 $24.8 $452.3
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 perform over the relevant periods at their current profit levels,
could require us in future periods to pay an additional aggregate of $206.3
million, $96.4 million of which relates to currently exercisable rights. The
ultimate amount payable in the future relating to these transactions will vary
because it is dependent on the future results of operations of the subject
businesses and the timing of when these rights are exercised. The actual amounts
that we pay will be different from these estimates. These differences could be
material. We estimate the obligations that exist for these agreements are as
follows:
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
($ in millions)
---------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies ............. $ 81.1 $103.8 $184.9
Affiliated agencies ............. 15.3 6.1 21.4
------ ------ ------
Total .................... $ 96.4 $109.9 $206.3
====== ====== ======
Liquidity and Capital Resources
Liquidity: At September 30, 2002, our cash and cash equivalents and
short-term investments totaled $392.6 million and we had $1,526.0 million
available to us under committed credit facilities. We also had $368.0 million
available under uncommitted credit facilities.
Consistent with our historical trends in the first nine months of the
year, we had negative cash flow from operations of $232.7 million. This compares
to a decrease of $409.5 million in the comparable nine-month period last year.
This is 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 billable
production orders partially off-set by a decrease in accounts receivable at
September 30, 2002 compared to December 31, 2001. Cash used for
acquisition-related expenditures was $342.5 million. In addition, we issued
$900.0 million aggregate principal amount of Zero Coupon Zero Yield notes in
March 2002 and we repurchased $368.8 million of common stock with a portion of
the proceeds. This resulted in an overall decrease in cash and cash equivalents
of $114.5 million for the nine month period ended September 30, 2002.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks. We have a $1,600.0 million 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, which can be drawn down at any time, also supports the
issuance of up to $1,500.0 million of commercial paper, and subject to obtaining
additional commitments may be increased up to $1,800.0 million. At September 30,
2002, we had issued and outstanding $200.0 million of commercial paper all of
which is classified as long-term debt. We have the right to convert all amounts
outstanding at expiration on April 25, 2003, into a one-year term loan.
We also have a $500.0 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, JP Morgan Chase and Wachovia. We had $374.0 million outstanding
under this facility at September 30, 2002.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
At September 30, 2002, we had a total of $1,750.0 million aggregate
principal amount of convertible notes outstanding, including $850.0 million
Liquid Yield Option 30-year notes, which were issued in February 2001, and
$900.0 million Zero Coupon Zero Yield 30-year notes, which were issued in March
2002, as well as, short-term bank loans of $95.0 million. The holders of our
Liquid Yield Option 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
holders of our Zero Coupon Zero Yield notes have the right to cause us to
repurchase up to the entire $900.0 million aggregate face of the notes in August
of 2003.
Below is a summary of our debt position as of September 30, 2002 ($ in
millions):
Debt:
Bank loans (due less than 1 year)............................. $ 95.0
$500 Million Revolver - due June 30, 2003..................... 374.0
Commercial paper issued under 364 Day Facility................ 200.0
5.20 % Euro Notes - due June 24, 2005......................... 151.0
Convertible Notes - due February 7, 2031...................... 850.0
Convertible Notes - due July 31, 2032......................... 900.0
Loan Notes and Sundry - various through 2012.................. 65.0
--------
Total Debt....................................................... $2,635.0
========
On November 14, 2002, we entered into a new 3-year $800.0 million revolving
credit facility which matures November 14, 2005 and a new $1,000.0 million
364-day revolving credit facility which matures on November 13, 2003. These
facilities replaced the existing facilities that are described in Note 8 which
were due to mature in the second quarter of 2003. Both facilities provide for
credit support of the Company's existing $1,500.0 million commercial paper
program. The new facilities have substantially the same terms as had previously
been in effect. The 364-day facility continues to include a provision which
allows the Company to convert all amounts outstanding at expiration of the
facility into a one-year term loan. The consortium of banks providing the new
facilities had previously participated in the facilities that were replaced.
We believe that our operating cash flow combined with availability under
our revolving credit facilities 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.
22
ITEM 3. QUANTITATIVE 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 third quarter and first nine months
results of operations are discussed on pages 13 and 17 of this report. We do not
hedge these exposures against the U.S. 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 not 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.
23
ITEM 4. CONTROLS AND DISCLOSURE
We maintain disclosure controls and procedures designed to ensure that
information required to be included in our SEC reports is recorded, analyzed and
reported within applicable time periods. During the 90-day period prior to the
filing of this report, we conducted an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our CEO and CFO concluded that they believe that our disclosure
controls and procedures are effective to ensure recording, analysis and
reporting of information required to be included in our SEC reports on a timely
basis. There have been no significant changes in our internal controls or other
factors that could be reasonably expected to significantly affect the
effectiveness of these controls since that evaluation was completed.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Item 1 of Part II of our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and note 11 to our financial statements included in this
report for a description of certain pending litigation to which we are a party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. ss. 1350, as adopted pursuant
to ss. 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
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.
On August 14, 2002, we filed a Current Report on Form 8-K without
qualification, the certifications required to be filed by the executive
officer and principal financial officer pursuant to the SEC's order dated
June 27, 2002.
On October 29, 2002, we filed a Current Report on Form 8-K to file under
Item 5 and to furnish under Item 9 (Regulation FD Disclosure) the text of
materials used in investor presentations and our third quarter earnings
release.
25
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.
November 14, 2002 /s/ Randall J. Weisenburger
------------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 14, 2002 /s/ Philip J. Angelastro
------------------------------------
Philip J. Angelastro
Senior Vice President, Finance
and Controller
(Chief Accounting Officer)
26
CERTIFICATION
I, John Wren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omnicom Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ John D. Wren
--------------------------------------------
John D. Wren
Chief Executive Officer and President
27
CERTIFICATION
I, Randall Weisenburger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omnicom Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Randall J. Weisenburger
--------------------------------------------
Randall J. Weisenburger
Executive Vice President and
Chief Financial Officer
28