================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10551
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OMNICOM GROUP INC.
(Exact name of registrant as specified in its charter)
New York 13-1514814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
437 Madison Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 415-3600
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which Registered
---------------------------- -----------------------
Common Stock, $.15 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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The registrant has (1) 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
and (2) been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is
not contained herein and will not be contained in the definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes X No
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At March 17, 2003, 188,601,495 shares of Omnicom Common Stock, $.15 par
value, were outstanding; the aggregate market value of the voting stock held by
nonaffiliates as of the last business day of the registrant's most recently
completed second fiscal quarter was $8,321,783,000.
Certain portions of Omnicom's definitive proxy statement relating to its
annual meeting of shareholders scheduled to be held on May 20, 2003 are
incorporated by reference into Part III of this report.
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OMNICOM GROUP INC.
------------------
ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business .................................................... 1
Item 2. Properties .................................................. 3
Item 3. Legal Proceedings ........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders ......... 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................... 5
Item 6. Selected Financial Data ..................................... 6
Items 7/7A. Management's Discussion and Analysis of Financial Condition
and Results of Operations: Critical Accounting Policies;
and Quantitative and Qualitative Disclosures about Market
Risk ...................................................... 7
Item 8. Financial Statements and Supplementary Data ................. 20
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant .......... 21
Item 11. Executive Compensation ...................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................ *
Item 13. Certain Relationships and Related Transaction ............... *
Item 14. Controls and Disclosure ..................................... 21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ............................................... 22
Index to Financial Statements ............................... 22
Index to Financial Statements Schedules ..................... 22
Exhibit Index ............................................... 22
Signatures ................................................................ 24
Certifications of Senior Executive Officers ............................... 25
Management Report ......................................................... F-1
Independent Auditor's Report .............................................. F-2
Consolidated Financial Statements ......................................... F-4
Notes to Consolidated Financial Statements ................................ F-8
- ----------
* The information called for by Items 10, 11, 12 and 13, to the extent not
included in this document, is incorporated herein by reference to the
information to be included under the captions "Election of Directors",
"Management's Stock Ownership", "Director Compensation" and "Executive
Compensation" in Omnicom's definitive proxy statement, which is expected to
be filed by April 11, 2003.
PART I
Introduction
This report is both our 2002 annual report to shareholders and our 2002
annual report on Form 10-K required under federal securities laws.
We are a holding company. Our business is conducted through subsidiaries.
For simplicity, however, the terms "Omnicom", "we", "our" and "us" each refer to
Omnicom Group Inc. and our subsidiaries unless the context indicates otherwise.
Statements of our beliefs or expectations regarding future events are
"forward-looking statements" within the meaning of the federal securities laws.
These statements are subject to various risks and uncertainties, including as a
result of the specific factors identified under the captions "Risks and
Competitive Conditions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 3 and 7 and elsewhere in this
report. There can be no assurance that these beliefs or expectations will not
change or be affected by actual future events.
1. Business
Our Business: We are one of the largest marketing and corporate
communications companies in the world. Our company was formed through a 1986
combination of three marketing and corporate communications networks, BBDO,
Doyle Dane Bernbach and Needham Harper.
Since then, we have grown our strategic holdings to over 1,500 subsidiary
agencies operating in virtually all markets worldwide. Our agencies provide an
extensive range of marketing and corporate communications services, including:
advertising investor relations
brand consultancy marketing research
crisis communications media planning and buying
custom publishing multi-cultural marketing
database management non-profit marketing
digital and interactive marketing organizational communications
direct marketing package design
directory advertising product placement
entertainment marketing promotional marketing
environmental design public affairs
experiential marketing public relations
field marketing real estate advertising and
financial/corporate business-to-business marketing
advertising recruitment communications
graphic arts reputation consulting
healthcare communications retail marketing
instore design sports and event marketing
1
Marketing and corporate communications services are provided to clients
through global, pan-regional and national independent agency brands. Our brands
include:
BBDO Worldwide Ketchum
DDB Worldwide Ketchum Directory Advertising
TBWA Worldwide KPR
OMD Worldwide Lieber Levett Koenig Farese Babcock
AWE Lyons Lavey Nickel Swift
Accel Healthcare M/A/R/C Research
Adelphi Group Marketing Advantage
Alcone Marketing Group MarketStar
Anderson DDB Martin/Williams
ARA Group Matthews Media Group
Arnell Group Merkley Newman Harty & Partners
atmosphere MicroMedia
Auditoire Millsport
BDDP & Fils Moss Dragoti
Bernard Hodes Group National In-Store
Brodeur Worldwide New Solutions
Carlson and Partners Nouveau Monde
Changing Our World Novus
Clark & Weinstock Organic
Claydon Heeley Jones Mason Paris Venise Design
Clemenger Communications Limited Pentamark
Cline, Davis & Mann PGC Advertising
Cone PhD
Corbett Healthcare Group Porter Novelli International
CPM Proximity Worldwide
Davie-Brown Radiate Sports & Entertainment Group
del Rivero Messianu Rapp Collins Worldwide
Dieste, Harmel & Partners Russ Reid Company
Direct Partners Salesforce
Doremus Screen
Eden Communications Group Sellbytel
Eigen Fabrikaat Serino Coyne
Element 79 Partners Spike DDB
European Communication Consultants Spot Plus
FKGB Staniforth
Fame Steiner Sports Marketing
Fleishman-Hillard Targetbase
Gavin Anderson & Company TARGIS Healthcare Communications
Generator Worldwide
Goodby, Silverstein & Partners Tequila
Grizzard Communications Textuel
GSD&M The Ant Farm
Gutenberg On-Line The Designory
Harrison & Star Business Group The Marketing Arm
Heye & Partner TicToc
Horrow Sports Ventures TPG
ICON Tracy Locke Partnership
Integrated Merchandising Services The Promotion Network
Integer Group Tribal DDB
Interbrand U.S. Marketing & Promotions
InterOne Washington Speakers Bureau
InterScreen Wolff Olins
Jump Zimmerman & Partners Advertising
Kaleidoscope
The various components of our business and material factors that affected
us in 2002 are discussed in our "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" of this report. None of our
acquisitions in 2002, 2001 or 2000 were material to our consolidated financial
position or results of operations. For information concerning our acquisitions,
see note 2 to our consolidated financial statements on page F-11 of this report.
2
Geographic Regions: Our total consolidated revenue is about evenly divided
between U.S. and non-U.S. operations. For financial information concerning
domestic and foreign operations and segment reporting, see note 5 to our
consolidated financial statements at page F-15 of this report.
Our Clients: We had over 5,000 clients in 2002, many of which were served
by more than one of our agency brands. Our 10 largest and 200 largest clients in
the aggregate accounted for 17.9% and 50.7%, respectively, of our 2002
consolidated revenue. Our largest client was served by 41 of our agency brands.
This client accounted for 5.0% of our 2002 consolidated revenue. No other client
accounted for more than 2.4% of our 2002 consolidated revenue.
Our Employees: We employed approximately 57,600 people at December 31,
2002. We are not party to any significant collective bargaining agreements. See
our management discussion and analysis beginning on page 7 of this report for a
discussion of the effect of salary and service costs on our 2002 results of
operations.
Risks and Competitive Conditions: The marketing and corporate
communications businesses which we are in are highly competitive. We face risks
typical of marketing and corporate communications services companies and other
services businesses generally, including risks arising out of geographical
factors, changes in general and regional economic conditions, competitive
factors, client communication requirements and the hiring and retention of key
employees. In general, the financial and technological barriers to entry are
low, with the key competitive considerations for keeping existing business and
winning new business being the quality and effectiveness of the services
offered, including our ability to efficiently provide our services to clients.
While many of our client relationships are long-standing, companies often put
their advertising, marketing services and public and corporate communications
business up for competitive review from time to time. In addition, an important
aspect of our competitiveness is our ability to retain key employees and
management personnel.
Our revenue is dependent upon the marketing and corporate communication
requirements of our clients and tends to be lowest in the first and third
quarters of the calendar year as a result of the post-holiday slowdown in client
spending at the beginning of January and lower client spending in August
primarily as a result of the vacation season. See our management discussion and
analysis beginning on page 7 of this report for a discussion of the effect of
market conditions and other factors on our 2002 results of operations.
Directly or indirectly, government agencies and consumer groups have from
time to time affected or attempted to affect the scope, content and manner of
presentation of advertising and other marketing communications through
regulations and other governmental action. We believe the total volume of
advertising and marketing communications will not be materially affected by
future legislation or regulation, although the scope, content and manner of
presentation will likely continue to change.
In addition, due to our international operations, we are subject to
translation risk associated with currency fluctuations, exchange controls and
political and other risks as discussed in our management discussion and analysis
at pages 7 to 20 of this report. For financial information on our operations by
geographic area, see note 5 to our consolidated financial statements at page
F-15 of this report.
2. Properties
We maintain office space in many major cities around the world. This space
is primarily used for office and administrative purposes by our employees in
performing professional services. Our principal corporate offices are at 437
Madison Avenue, New York and Greenwich, Connecticut. We also maintain executive
offices in London, England.
Our office space is utilized for performing professional services and is
in suitable and well-maintained condition for our current operations.
Substantially all of our office space is leased from third parties with varying
expiration dates ranging from one to 19 years. Certain of our leases are subject
to rent reviews under various escalation clauses and certain of our leases
require our payment of various operating expenses, which may also be subject to
escalation. Our consolidated rent expense was $311.3 million in 2002, $305.4
million in 2001 and $258.9 million in 2000, after reduction for rents received
from subleases of $15.5 million, $8.0 million and $7.2 million, respectively.
Our obligations for future minimum base rents under terms of
3
non-cancelable real estate lease, reduced by rents to be received from existing
non-cancelable subleases, and other operating leases, which include primarily
office furniture and computer and technology equipment, are (in millions):
Net Rent
--------
2003 .............................. $381.7
2004 .............................. 312.2
2005 .............................. 249.0
2006 .............................. 208.6
2007 .............................. 170.5
Thereafter ........................ 825.3
See note 10 to our consolidated financial statements on page F-21 of this
report for a discussion of our lease commitments and our management discussion
and analysis for the impact of leases on our operating expenses.
3. 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. 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. 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, 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.
Management presently expects to defend these cases vigorously. Currently,
we are unable to determine the outcome of these cases and the effect on our
financial position or results of operations. 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.
We are also involved from time to time in various legal proceedings in the
ordinary course of business. We do not presently expect that these proceedings
will have a material adverse effect on our consolidated financial position or
results of operations.
For additional information concerning our legal proceedings, including the
class action and derivative action described above, see note 14 to our
consolidated financial statements on page F-25 of this report, which is
incorporated into this section by reference.
4. Submission of Matters to a Vote of Security Holders
Our annual shareholders meeting has historically been held in the second
quarter of the year. No matters were submitted to a vote of our shareholders
during the last quarter of 2002.
4
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common shares are listed on the New York Stock Exchange under the
symbol "OMC". On March 17, 2003, we had 3,777 holders of record of our common
shares. The table below shows the range of quarterly high and low sales prices
reported on the New York Stock Exchange Composite Tape for our common shares and
the dividends paid per share for these periods.
Dividends Paid
Period High Low Per Share
------ ---- --- --------------
Q1 2001......................... $95.45 $76.69 $0.175
Q2 2001......................... 98.20 78.00 0.200
Q3 2001......................... 89.20 59.10 0.200
Q4 2001......................... 90.69 61.25 0.200
Q1 2002......................... $96.30 $82.76 $0.200
Q2 2002......................... 94.10 36.27 0.200
Q3 2002......................... 65.61 38.54 0.200
Q4 2002......................... 70.29 48.10 0.200
Q1 2003*........................ $68.25 $46.50 $0.200
* through March 17, 2003
5
6. Selected Financial Data
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes which begin on page F-1,
as well as our management's discussion and analysis which begins on page 7 of
this report.
(Dollars in Thousands Except Per Share Amounts)
--------------------------0------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
For the year:
Revenue ....................... $ 7,536,299 $ 6,889,406 $ 6,154,230 $ 5,130,545 $ 4,290,946
Operating Profit .............. 1,104,115 968,184 878,090 724,130 562,207
Net Income .................... 643,459 503,142 498,795 362,882 278,845
Income After Income Taxes ..... 697,987 543,257 542,477 400,461 302,705
Earnings per common share:
Basic ...................... 3.46 2.75 2.85 2.07 1.61
Diluted .................... 3.44 2.70 2.73 2.01 1.57
Dividends declared per common
share ....................... 0.800 0.775 0.700 0.625 0.525
At year end:
Cash and short-term investments $ 695,881 $ 516,999 $ 576,539 $ 600,949 $ 717,391
Total assets .................. 11,819,802 10,617,414 9,853,707 9,017,637 7,121,968
Long-term obligations:
Long-term debt ............. 197,861 490,105 1,015,419 263,149 268,913
Convertible notes .......... 1,747,037 850,000 229,968 448,483 448,497
Deferred compensation and
other liabilities ........ 293,638 296,980 296,921 300,746 269,966
As discussed in footnote 13 of the notes to our consolidated financial
statements, as required by SFAS 142, beginning with our 2002 results, goodwill
and other intangible assets that have indefinite lives due to a change in
generally accepted accounting principles are not amortized. To make our results
for each period more directly comparable, in the table that follows, we adjusted
our historical results for periods prior to 2002 to eliminate goodwill
amortization for all periods, as well as a non-recurring gain on the sale of
Razorfish shares in 2000, and the related tax impacts.
(Dollars in Thousands Except Per Share Amounts)
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
As adjusted:
Net Income ....................... $643,459 $503,142 $498,795 $362,882 $278,845
Add-back goodwill amortization,
net of income taxes ........... -- 83,065 76,518 66,490 54,112
Less: gain on sale of Razorfish
shares, net of income taxes ... -- -- 63,826 -- --
-------- -------- -------- -------- --------
Net Income, excluding goodwill
amortization and Razorfish gain $643,459 $586,207 $511,487 $429,372 $332,957
Earnings per common share,
excluding goodwill amortization
and Razorfish gain
Basic ......................... 3.46 3.21 2.93 2.45 1.92
Diluted ....................... 3.44 3.13 2.80 2.36 1.87
6
7/7 A. Management's Discussion and Analysis of Financial Condition and Results
of Operations; Critical Accounting Policies; and Quantitative and
Qualitative Information about Market Risk
As discussed in footnote 13 of the notes to our consolidated financial
statements, as required by SFAS 142, beginning with our 2002 results goodwill
and other intangible assets that have indefinite lives due to a change in
generally accepted accounting principles are not amortized. To make the
discussion of periods comparable, 2001 and 2000 income statement information in
the discussion that follows has been adjusted to eliminate goodwill amortization
as presented in the following table and the table on page 11. In addition,
certain reclassifications have been made to the 2001 and 2000 reported amounts
to conform them to the 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. 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.
Furthermore, to provide better comparability period to period, in our
Financial Results from Operations - 2001 Compared with 2000 starting on page 11,
we have excluded the $63.8 million after-tax gain recorded in the year 2000 on
sale of Razorfish shares.
Financial Results from Operations-- 2002 Compared with 2001
(Dollars in Millions, except per share amounts)
2001
------------------------------------
Twelve Months Ended As Goodwill As
December 31, 2002 Reported Amortization Adjusted(a)
---- -------- ------------ -----------
Revenue ..................... $7,536.3 $6,889.4 $ -- $6,889.4
Operating expenses:
Salary and service costs .. 4,952.9 4,420.9 -- 4,420.9
Office and general expenses 1,479.3 1,500.3 94.8 1,405.5
-------- -------- ----- --------
6,432.2 5,921.2 94.8 5,826.4
Operating profit ............ 1,104.1 968.2 -- 1,063.0
Net interest expense:
Interest expense .......... 45.5 90.9 -- 90.9
Interest income ........... (15.0) (18.1) -- (18.1)
-------- -------- ----- --------
30.5 72.8 -- 72.8
Income before taxes ......... 1,073.6 895.4 94.8 990.2
Income taxes ................ 375.6 352.1 13.0 365.1
Income after income taxes ... 698.0 543.3 81.8 625.1
Equity in affiliates ........ 13.8 12.6 2.8 15.4
Minority interests .......... (68.3) (52.8) (1.5) (54.3)
-------- -------- ----- --------
Net income ................ $ 643.5 $ 503.1 $83.1 $ 586.2
======== ======== ===== ========
Net Income Per Common Share:
Basic ..................... $ 3.46 $ 2.75 -- $ 3.21
Diluted ................... 3.44 2.70 -- 3.13
Dividends Declared Per Common
Share ..................... $ 0.800 $ 0.775 -- $ 0.775
- ----------
(a) Excludes amortization of goodwill and related tax impact.
7
Revenue: Our 2002 consolidated worldwide revenue increased 9.4% to
$7,536.3 million from $6,889.4 million in 2001. The effect of acquisitions, net
of disposals, increased 2002 worldwide revenue by $362.5 million.
Internal/organic growth increased worldwide revenue by $193.1 million, and
foreign exchange impacts increased worldwide revenue by $91.3 million. The
components of total 2002 revenue growth in the U.S. ("domestic") and the
remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International
-------------------- -------------------- ------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
December 31, 2001..................... $6,889.4 -- $3,717.0 -- $3,172.4 --
Components of Revenue Changes:
Foreign exchange impact............... 91.3 1.3% 91.3 2.9%
Acquisitions.......................... 362.5 5.3% 269.1 7.3% 93.4 2.9%
Organic............................... 193.1 2.8% 298.5 8.0% (105.4) (3.4)%
-------- --- ------- ---- -------- ---
December 31, 2002..................... $7,536.3 9.4% $4,284.6 15.3% $3,251.7 2.4%
======== === ======= ==== ======== ===
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
$7,445.0 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 $7,536.3 million less $7,445.0 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 $6,889.4 million
for the Total column in the table).
The components of revenue and revenue growth for 2002 compared to 2001, in
our primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- ---------
United States ........................... $4,284.6 15.3%
Euro Markets ............................ 1,458.6 3.2%
United Kingdom .......................... 814.1 1.1%
Other ................................... 979.0 2.7%
-------- ---
Total ................................... $7,536.3 9.4%
======== ===
As indicated, foreign exchange impacts increased our international revenue
by $91.3 million for 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 approximately 70.0% of our international
revenue. This was partially offset by the strengthening of the U.S. dollar
against the Brazilian Real. Additional geographic information relating to our
business is contained in note 5 to our consolidated financial statements at page
F-15 of this report.
The current geopolitical uncertainty combined with the prolonged weak
economic conditions have created a challenging business climate. Management
believes that the recent improvements reported by U.S. media companies are a
positive sign. However, management also believes that the overall demand for
advertising and other marketing and corporate communications services in the
near term will continue to be more unpredictable as clients maintain caution
until the current political tensions moderate.
8
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 needs to be made in the context of the events of September 11, 2001, which
had a significant adverse impact on our business in the third quarter of 2001.
The adverse impact of September 11, 2001, 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 and delayed spending from the
third quarter of 2001. The impact of these factors on our business and our 2002
and 2001 results of operations is more fully discussed below.
Due to a variety of factors, in the normal course, our agencies both gain
and lose business from clients each year. The net result in 2002 and
historically each year for Omnicom as a whole, was an overall gain in new
business. Due to our multiple independent agency structure and the breadth of
our service offerings and geographic reach, our agencies have more than 5,000
active client relationships in the aggregate. Revenue from our single largest
client in 2002 increased by 2.4%. This client represented 5.0% of worldwide
revenue in 2002 and 5.4% in 2001 and no other client represented more than 2.5%
in 2002 and 2001. Our ten largest and 200 largest clients represented 17.9% and
50.7% of our 2002 worldwide revenue, respectively and 17.0% and 48.0% of our
2001 worldwide revenue.
Driven by clients' continuous demand for more effective and efficient
branding activities, we strive to provide an extensive range of marketing and
corporate communications services through various client centric networks that
are organized to meet specific client objectives. These services include
advertising, brand consultancy, crisis communications, custom publishing,
database management, digital and interactive marketing, direct marketing,
directory advertising, entertainment marketing, environmental design,
experiential marketing, field marketing, financial/corporate
business-to-business advertising, graphic arts, healthcare communications,
instore design, investor relations, marketing research, media planning and
buying, multi-cultural marketing, non-profit marketing, organizational
communications, package design, product placement, promotional marketing, public
affairs, public relations, real estate advertising and marketing, recruitment
communications, reputation consulting, retail marketing and sports and event
marketing. In an effort to monitor the changing needs of our clients and to
further expand the scope of our services to key clients, we monitor revenue
across a broad range of disciplines and group them into the following four
categories: traditional media advertising, customer relationship management
referred to as CRM, public relations and specialty communications.
Traditional media advertising revenue represented 43.5%, or $3,276.4
million, of our worldwide revenue during 2002 as compared to 43.6%, or $3,006.3
million in 2001. The remainder of our 2002 revenue, 56.5%, or $4,259.9 million,
was related to our other marketing and corporate communications services. The
breakdown of this other revenue was CRM: 32.1%, or $2,421.8 million; specialty
communications: 12.2%, or $917.1 million; and public relations: 12.2%, or $921.0
million. When compared to 2001, revenue in 2002 increased by $270.1 million, or
9.0% for traditional media advertising; by $300.8 million, or 14.2% for CRM; and
by $137.1 million, or by 17.6%, for specialty communications; and decreased by
$61.1 million, or 6.2%, for public relations.
Operating Expenses: Our 2002 worldwide operating expense increased $605.8
million, or 10.4%, to $6,432.2 million from $5,826.4 million in 2001, as
described below.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $532.0 million, or 12.0%, and represented
77.0% of total operating expenses in 2002 versus 75.9% in 2001. These expenses
increased as a percentage of revenue to 65.7% in 2002 from 64.2% in 2001.
Salaries and incentive compensation costs, which include bonuses, decreased as a
percentage of revenue in 2002 primarily as a result of continuing efforts to
align permanent staffing with current work levels on a location by location
basis, as well as our attempts to increase the variability of our cost structure
by relying more upon freelance labor for project work as necessary. This was
offset by increased direct service costs resulting in, as mentioned above,
greater utilization of freelance labor, changes in the mix of our revenues and
increased severance related costs.
9
Office and general expenses increased by $73.8 million, or 5.3%, in 2002.
Office and general expenses represented 23.0% of our total operating costs in
2002 versus 24.1% in 2001. Additionally, as a percentage of revenue office and
general expenses decreased in 2002 to 19.6% from 20.4%. This decrease was
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 14.7% in
2002, from 15.4% in 2001.
Net Interest Expense: Our net interest expense decreased in 2002 to $30.5
million, as compared to $72.8 million in 2001. Our gross interest expense
decreased by $45.4 million to $45.5 million. Of this decrease in gross interest
expense, $12.4 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 aggregate principal amount of Zero Coupon Zero Yield
Convertible notes of which $530.0 million was used to reduce existing interest
bearing bank debt thereby reducing interest expense. The reduction in gross
interest expense was partially offset by increased daily average outstanding
debt levels resulting from our repurchase of common stock in the first quarter
of 2002.
On February 3, 2003, we offered to pay holders of the Liquid Yield Option
notes due in 2031, $30 per $1,000 principal amount of notes as an incentive to
the holders not to exercise their put right. We paid $25.4 million to qualified
noteholders on February 21, 2003. As a result, we expect interest expense to
increase by $23.3 million in 2003 compared to 2002. In addition, depending on
future market conditions, we may make a similar offer to holders of the Zero
Coupon Zero Yield Convertible notes in July 2003. We cannot determine at this
time if such an offer will be made or, if one is made, the amount that may be
offered. If an offer is made and a payment results, our interest expense would
further increase in the second-half of 2003 compared to 2002.
See "Liquidity and Capital Resources" for a discussion of our indebtedness
and related matters.
Income Taxes: Our consolidated effective income tax rate was 35.0% in 2002
as compared to 36.9% (on an as adjusted basis) in 2001. This reduction reflects
the realization of our ongoing focus on tax planning initiatives.
Minority Interests: In 2002, minority interests increased to $68.3 million
from $54.3 million in 2001. The increase was primarily due to increased earnings
compared to 2001 in companies in which we do not own a 100% interest and an
increase in the number of entities in which a minority interest is held.
Earnings Per Share (EPS): For the foregoing reasons, our net income for
2002 increased by 9.8% to $643.5 million from $586.2 million in 2001 and our
diluted EPS increased by 9.9% to $3.44 from $3.13. While our net income in 2002
was positively impacted by the conversion of the 2 1/4% Convertible Subordinated
Debentures at the end of 2001, the conversion of these debentures were included
in computing basic and diluted EPS in 2002 and diluted EPS in 2001.
10
Financial Results from Operations-- 2001 Compared with 2000
(Dollars in Millions, except per share amounts)
2000
---------------------------------------------------
As adjusted As Goodwill Razorfish As
Twelve Months Ended December 31, 2001(a) Reported Amortization Gain Adjusted(b)
----------- -------- ------------ --------- ---------
Revenue ................................... $6,889.4 $6,154.2 $ -- $ -- $6,154.2
Operating Expenses:
Salary and service costs ................ 4,420.9 3,847.7 -- -- 3,847.7
Office and general expenses ............. 1,405.5 1,428.4 81.7 -- 1,346.7
-------- -------- ----- ----- --------
5,826.4 5,276.1 81.7 -- 5,194.4
Operating profit .......................... 1,063.0 878.1 81.7 -- 959.8
Realized gain ............................. -- 110.0 -- 110.0 --
Net interest expense:
Interest expense ........................ 90.9 116.7 -- -- 116.7
Interest income ......................... (18.1) (40.2) -- -- (40.2)
-------- -------- ----- ----- --------
72.8 76.5 -- -- 76.5
Income before taxes ....................... 990.2 911.6 81.7 110.0 883.3
Income taxes .............................. 365.1 369.1 5.7 46.2 328.6
Income after taxes ........................ 625.1 542.5 76.0 63.8 554.7
Equity in affiliates ...................... 15.4 10.9 1.9 -- 12.8
Minority interests ........................ (54.3) (54.6) (1.4) -- (56.0)
-------- -------- ----- ----- --------
Net income .............................. $586.2 $498.8 $76.5 $63.8 $511.5
======== ======== ===== ===== ========
Net Income Per Common Share:
Basic ................................... $3.21 $2.85 -- -- $2.93
Diluted ................................. 3.13 2.73 -- -- 2.80
Dividends Declared Per Common Share ....... $ 0.775 $ 0.700 -- -- $ 0.700
- ----------
(a) As presented in our 2002 vs 2001 discussion on page 7 of this report.
(b) Excludes amortization of goodwill and gain on sale of Razorfish shares and
their related tax impacts.
Revenue: Our 2001 consolidated worldwide revenue increased 11.9% to
$6,889.4 million from $6,154.2 million in 2000. The effect of acquisitions, net
of disposals, increased 2001 worldwide revenue by $385.0 million.
Internal/organic growth increased 2001 worldwide revenue by $524.2 million, and
foreign exchange impacts decreased worldwide revenue by $174.0 million. The
components of 2001 total revenue growth in the U.S. ("domestic") and the
remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International
--------------------- --------------------- ------------------
$ % $ % $ %
---------- -------- --------- -------- --------- --------
December 31, 2000..................... $6,154.2 -- $3,258.2 -- $2,896.0 --
Components of Revenue Changes:
Foreign exchange impact............... (174.0) (2.8)% (174.0) (6.0)%
Acquisitions.......................... 385.0 6.3% 220.4 6.8% 164.6 5.7%
Organic............................... 524.2 8.5% 238.4 7.3% 285.8 9.8%
-------- ----- -------- ----- -------- ----
December 31, 2001..................... $6,889.4 11.9% $3,717.0 14.1% $3,172.4 9.5%
======== ===== ======== ===== ======== ====
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
$7,063.4 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 $6,889.4 million less $7,063.4 million for
the Total column in the table).
11
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 $6,154.2 million
for the Total column in the table).
The components of revenue and revenue growth (declines), for 2001 compared
to 2000, in our primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States......................... $3,717.0 14.1%
Euro Markets.......................... 1,413.8 10.0%
United Kingdom........................ 805.2 (0.1)%
Other................................. 953.4 19.2%
------- ----
Total................................. $6,889.4 11.9%
======== ====
As indicated, foreign exchange impacts reduced our international revenue
by $174.0 million during the year, reducing our international growth by 6.0% and
our overall growth by 2.8%. The most significant impacts came from the Euro and
the British Pound as these markets represented 70.0% of our international
operations. The effect of acquisitions, net of divestitures, increased our
worldwide revenue by 6.3%, domestic revenue by 6.8% and international revenue by
5.7%. The balance of the increase in revenue represents net new business wins
and additional revenue from expanding the scope of services provided to existing
clients. Additional geographic information relating to our business is contained
in note 5 to our consolidated financial statements at page F-15 of this report.
In addition to expanding our client base, expanding the scope of services
and the extension of additional services to clients, several market trends
affected our business. These trends included clients increasingly expanding the
focus of their brand strategies from a national market to the global market.
And, in an effort to gain greater efficiency and effectiveness from their
marketing dollars, clients required greater coordination of their traditional
advertising and marketing activities and tended to concentrate these activities
with a smaller number of service providers.
Due to a variety of factors, including the trends mentioned above, in the
normal course of business, our agencies both gain and lose clients each year.
The net result in 2001 and historically each year for Omnicom as a whole, was an
overall gain in new business. Due to our multiple independent agency structure
and the breadth of our service offerings and geographic reach, our agencies have
more than 5,000 active client relationships in the aggregate. Our single largest
client in 2001 represented 5.4% of worldwide revenue and no other client
represented more than 2.5%. Our ten largest and 200 largest clients represented
17.0% and 48.0% of our worldwide revenue, respectively.
As previously stated, 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
43.6%, or $3,006.3 million, of our worldwide revenue during 2001, as compared to
44.2%, or $2,718.9 million, in 2000. The remainder of our revenue, 56.4%, or
$3,883.1 million, was related to our other marketing and corporate
communications services. The breakdown of this other revenue was CRM: 30.8%, or
$2,121.0 million; public relations: 14.3%, or $982.1 million; and specialty
communications: 11.3%, or $779.9 million. When compared to 2000, revenue in 2001
increased by $287.4 million, or 10.6% for traditional media advertising; by
$300.5 million, or 16.5% for CRM; by $40.5 million, or 4.3%, for public
relations; and by $106.7 million, or by 15.9%, for specialty communications.
September 11th and Market Conditions: The tragic events of September 11th
adversely impacted our business. We experienced disruptions in client spending
patterns related to the cancellation and postponement of activities. As a
result, operating margins deteriorated during the third quarter of 2001. This
decline occurred primarily because we had only a limited ability to adjust our
cost structure in response to the sudden reduction in revenues.
12
We do not believe September 11th permanently impacted any of our agencies.
While the specific effects of September 11th began to dissipate over the
remainder of 2001, overall economic conditions remained weak. We believe that
the diversity of our clients across industries, the broad range of services our
agencies provide, the diversity of our geographic locations and the flexibility
of certain elements of our cost structure mitigated much of the economic impact
on our business as a whole.
Operating Expenses: Our 2001 worldwide operating expense increased 12.2%
to $5,826.4 million from $5,194.4 million in 2000.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $573.2 million, or 14.9%, and represents
75.9% of total operating expenses in 2001 versus 74.1% in 2000. These expenses
increased as a percentage of revenue to 64.2% in 2001 from 62.5% in 2000.
Salaries and incentive compensation costs decreased as a percentage of revenue
in 2001 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 on a period-over-period basis, other direct costs increased as a
percentage of revenue in 2001 compared to 2000.
Office and general expenses increased by $58.8 million, or 4.4%, in 2001.
Office and general expenses represented about 24.1% of our total operating costs
in 2001 versus 25.9% in 2000. 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 15.4% in 2001
from 15.6% in 2000.
Net Interest Expense: Our net interest expense for 2001 decreased to $72.8
million from $76.5 million in 2000. Our gross interest expense decreased by
$25.8 million to $90.9 million. This decrease resulted from the conversion of
our 4 1/4% convertible subordinated debentures at the end of 2000 and the
general lowering of short-term interest rates as the year progressed. These
benefits were partially offset by increased borrowings used to fund acquisitions
and stock repurchases completed during the year.
Income Taxes: On an as adjusted basis, our consolidated effective income
tax rate was 36.9% in 2001 as compared to 37.2% in 2000. This reduction reflects
the initial realization of our recently implemented tax planning initiatives.
Equity in Affiliates: In 2001, our equity in affiliates increased to $15.4
million from $12.8 million in 2000. The increase resulted from new acquisitions
of affiliated companies and increased ownership of existing affiliated
companies, partially offset by increased ownership in certain affiliates that
resulted in their consolidation during the year and lower earnings of certain
affiliates.
Earnings Per Share (EPS): Our net income for 2001 increased by 14.6% to
$586.2 million from $511.5 million in 2000 and our diluted EPS increased by
11.8% to $3.13 from $2.80. While our net income in 2001 was positively impacted
by the conversion of the 4 1/4% Convertible Subordinated Debentures at the end
of 2000, the shares associated with the conversion of these debentures were
included in computing diluted EPS for both 2001 and 2000.
Critical Accounting Policies and New Accounting Pronouncements
We are a holding company. Our business is conducted through more than
1,500 subsidiary agencies operating in more than 100 countries. Our agencies
provide a broad range of marketing and corporate communications services to more
the 5,000 clients representing nearly every industry sector.
Critical Accounting Policies: We have prepared the following supplemental
summary of accounting policies to assist in better understanding our financial
statements and the related management discussion and analysis. Readers are
encouraged to consider this supplement together with our consolidated financial
statements and the related notes to our consolidated financial statements for a
more complete understanding of accounting policies discussed below.
Estimates: Readers are reminded that the preparation of our financial
statements in conformity with generally accepted accounting principles, or
"GAAP", requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities including
valuation allowances for receivables and deferred tax assets, accruals for bonus
compensation and the disclosure of contingent liabilities
13
at the date of the financial statements, as well as the reported amounts of
revenue and expenses during a reporting period. We evaluate these estimates on
an ongoing basis and we base our estimates on historical experience, current
conditions and various other assumptions we believe are reasonable under the
circumstances. Actual results can differ from those estimates, and it is
possible that 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 and capital structure.
Additionally, estimates must be made regarding 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 used and it is possible that differences and changes
could be material. Additional information about valuation of cost based
investments and impairment testing under SFAS 142, appears in notes 1 and 6, and
2 and 13, respectively to our consolidated financial statements.
Revenue: Substantially all revenue is derived from fees for services.
Additionally, we earn commissions based upon the placement of advertisements in
various media. Revenue is realized when the service is performed, in accordance
with terms of the arrangement with our clients, and upon completion of the
earnings process, including when services are rendered, upon presentation date
for media, when costs are incurred for radio and television production and when
print production is completed and collection is reasonably assured.
In the majority of our businesses we record revenue at the net amount
retained when the fee or commission is earned. In the delivery of certain
services to our clients, we incur costs on their behalf for which we are
reimbursed. Substantially all of our reimbursed costs relate to purchases on
behalf of our clients of media and production services. We normally have no
latitude in establishing the reimbursement price for these expenses and invoice
our clients for these expenses in an amount equal to the amount of costs
incurred. These reimbursed costs, which are a multiple of our revenue, are
significant. However, the majority of these costs are incurred on behalf of our
largest clients and we have not historically experienced significant losses in
connection with the reimbursement of these costs by clients.
A small portion of our contractual arrangements with clients includes
performance incentive provisions designed to link a portion of our revenue to
our performance relative to both quantitative and qualitative goals. We
recognize this portion of revenue when the specific quantitative goals are
achieved, or when our performance against qualitative goals is determined by our
clients. Additional information about revenue appears in note 1 to our
consolidated financial statements on pages F-8 to F-11 of this report.
Acquisitions and Goodwill: We have historically made and expect to
continue to make selective acquisitions. In making acquisitions, the price we
pay is determined by various factors, including service offerings, competitive
position, reputation and geographic coverage, as well as our prior experience
and judgment. The amount we paid for acquisitions, including cash, stock and
assumption of net liabilities totaled $680.1 million in 2002 and $844.7 million
in 2001.
Our acquisition strategy is to continue to build upon the core
capabilities of our various strategic business platforms and agency brands
through the expansion of their service capabilities and/or their geographic
reach. In executing our acquisition strategy, one of the primary drivers in
identifying and executing a specific transaction is the existence of, or the
ability to, expand our existing client relationships. As a result, a significant
portion of an acquired company's revenues are often from clients that are
already our clients. In addition, due to the nature of marketing services
communications companies, the companies we acquire have minimal tangible and
identifiable intangible net assets. Accordingly, a substantial portion of the
purchase price is allocated to goodwill. Historically, goodwill and other
identifiable intangibles have been amortized on a straight-line basis over a
period not to exceed 40 years and have been written down if, and to the extent,
they have been determined to be impaired. Beginning in 2002, and as required by
SFAS 142, we are no longer amortizing goodwill and other intangible assets that
have indefinite lives. However, we perform an annual impairment test in order to
assess the reported value of the acquired intangibles.
14
A summary of our contingent purchase price obligations, sometimes referred
to as earn-outs, and obligations to purchase additional interests in certain
subsidiary and affiliate companies is set forth on page 20 of this report. The
contingent purchase price obligations and obligations to purchase additional
interests in certain subsidiary and affiliate companies are based on future
performance. Contingent purchase price obligations are accrued, in accordance
with GAAP, when the contingency is resolved and payment is certain.
Additional information about acquisitions and goodwill appears in notes 1
and 2 to our consolidated financial statements on pages F-10 and F-11 of this
report and information about changes in GAAP relative to accounting for
acquisitions and goodwill is described below in New Accounting Pronouncements
and in note 13 to our consolidated financial statements at page F-23 of this
report.
Other Investments: Management continually monitors the value of its
investments to determine whether an other than temporary impairment has
occurred. A variety of factors are considered when making this determination
including the fair value of the investment and the financial condition and
prospects of the investee.
At December 31, 2002, we held a non-voting, non-participating preferred
stock interest in Seneca Investments LLC, a holding company with investments
primarily in the e-services industry. Management believes that the fair value of
our Seneca investment exceeded our carrying value at December 31, 2002 and that
an other than temporary impairment has not occurred. The primary approach
utilized to determine fair value is a discounted cash flow methodology. We also
used comparative market multiples to supplement the discounted cash flow
analysis. As part of the valuation process, management also hired an
independent, third party valuation firm to perform a fair value analysis as of
December 31, 2002. In addition, we considered the ability for Seneca to continue
to conduct its operations as well as its financial prospects. Certain companies
owned by Seneca have profitable operations and are leaders in their industry. We
also consider our Seneca investment to be long-term and we have no current plans
or intentions of disposing of our investment. Additional information about
Seneca is contained in note 6 to our consolidated financial statements at pages
F-15 to F-16 of this report.
Employee Stock-based Compensation: We account for employee stock option
grants in accordance with Accounting Principles Board Opinion 25 - Accounting
for Stock Issued to Employees ("APB 25"). We issue stock option awards with an
exercise price equal to the quoted market price on the grant date and therefore
we do not record any expense in our statement of income. In accordance with SFAS
No. 123, "Accounting for Stock Based Compensation" we have elected to make
annual pro forma disclosures (see note 7 to our consolidated financial
statements) of the effect of our reported net income and earnings per share as
if we adopted the fair value method of accounting for stock options. The FASB is
currently re-evaluating the accounting for stock-based compensation under APB 25
and SFAS 123 and whether to require that the theoretical fair value of employee
stock options be treated as an expense. We are evaluating our current method of
accounting for stock options and we are monitoring the FASB's consideration of
the matter, which will include a review of the valuation and measurement
concepts in SFAS 123. However, beginning in the first quarter of 2003, we will
include the pro forma disclosure requirements of SFAS 123, as recently amended
by SFAS 148, in all of our future interim financial statements. We will continue
to monitor the developments at the FASB for future guidance in the area of
accounting for stock-based compensation. The FASB has indicated that it expects
to issue an exposure draft during 2003 that could become effective in 2004.
New Accounting Pronouncements: Several new accounting pronouncements were
issued recently and impact our financial statements as discussed below.
SFAS 141 -- Business Combinations requires all business combinations
initiated after June 30, 2001 to be accounted for under the purchase method.
SFAS 141 superseded Accounting Pronouncement Bulletin ("APB") Opinion No. 16,
Business Combinations, and Statement of Financial Accounting Standards No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises, and is
effective for all business combinations initiated after June 30, 2001.
SFAS 142 - Goodwill and Other Intangible Assets addresses the financial
accounting and reporting for acquired goodwill and other intangible assets. SFAS
142 supersedes APB Opinion No. 17, Intangible Assets. 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.
15
We completed the annual 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. Therefore,
no impairment charge was recognized in 2002 and no changes were made to the
useful lives of our intangibles. Additional information about SFAS 142 is
contained in note 13 to our consolidated financial statements on page F-23 of
this report.
SFAS 144 -- Accounting for the Impairment or Disposal of Long-Lived Assets
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. Effective January 1, 2002,
the Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". Adoption of SFAS 144 has not resulted in an impairment
charge.
SFAS 146 -- Accounting for Costs Associated with Exit or Disposal
Activities requires costs associated with exit or disposal activities be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal costs that are initiated
after December 31, 2002. We plan to adopt SFAS 146 effective January 1, 2003.
The impact of SFAS 146 on our financial statements will depend on a variety of
factors, including interpretative guidance from the FASB. However, we do not
expect that the adoption will have a material impact on our consolidated results
of operations or financial position.
SFAS 148 -- Accounting for Stock-Based Compensation -- Transition and
Disclosure --- An Amendment of FASB No. 123 was issued as an amendment to FASB
No. 123, Accounting for Stock-Based Compensation and provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation (in accordance
with SFAS 123). We have applied the accounting provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and we have made the annual pro
forma disclosures of the effect of adopting the fair value method of accounting
for employee stock options and similar instruments as required by SFAS 123 and
permitted under SFAS 148. SFAS 148 also requires pro forma disclosure to be
provided on a quarterly basis. We will begin the quarterly disclosures for the
first quarter of 2003 and will continue to closely monitor developments in the
area of accounting for stock-based compensation.
FASB Interpretation No. 45 -- Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others (FIN 45). FIN 45 sets forth the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. If
the initial recognition and measurement issues were in effect at December 31,
2002, we would have recorded both an asset and a liability of an equal amount of
$11.3 million related to certain real estate lease guarantees and letters of
credit. Additional information appears in note 11 to our consolidated financial
statements on pages F-21 and F-22 of this report.
FASB Interpretation No. 46 -- Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses the consolidation by business enterprises of variable
interest entities, as defined in the FIN 46 and is based on the concept that
companies that control another entity through interests, other than voting
interests, should consolidate the controlled entity. The consolidation
requirements apply immediately to FIN 46 interests held in variable interest
entities created after January 31, 2003, and to interests held in variable
interest entities that existed prior to February 1, 2003 and remain in existence
as of July 1, 2003. Additionally, FIN 46 would require certain disclosure in our
2002 financial statements if it was reasonably possible that we will consolidate
or disclose information about variable interest entities in existence as of July
1, 2003. The application of FIN 46 did not result in additional disclosure in
our 2002 financial statements and is not expected to have a material impact on
our 2003 consolidated results of operations or financial position.
The Emerging Issues Task Force ("EITF") of the FASB also released
interpretive guidance covering several topics that impact our financial
statements. These topics include revenue arrangements with multiple deliverables
(EITF 00-21), customer relationship intangible assets acquired (EITF 02-17) and
vendor rebates (EITF 02-16). The application of this guidance did not have a
material impact on our consolidated results of operations or financial position.
16
Liquidity and Capital Resources
Liquidity: We had cash and cash equivalents totaling $667.0 million and
$472.2 million and short-term investments totaling $28.9 million and $44.8
million at December 31, 2002 and 2001, respectively. Net cash provided by our
operating activities was $1,000.6 million in 2002 compared to $775.6 million in
2001. Our operating cash flows in 2002 reflect net income and cash provided from
decreases in prepaid expenses and other current assets and accounts receivable,
partially offset by cash utilized due to a net decrease in accounts payable and
other liabilities which include accruals for incentive compensation. At December
31, 2002 and 2001, our current liabilities exceeded our current assets by
$1,202.5 million and $1,410.0 million respectively. This occurred primarily
because accounts payable, which includes payables to vendors for media and other
pass-through costs, were in excess of accounts receivable because we generally
require payment from our clients before paying vendors for media, production
costs and other pass-through expenditures.
Net cash flows used in our investing activities in 2002 were $683.1
million, including $586.3 million used for acquisitions, net of cash acquired,
and $117.2 million used for capital expenditures. Of the $586.3 million used for
acquisitions and investments, $324.8 million related to acquisitions completed
in prior years.
Net cash flows used in our financing activities in 2002 were $119.8
million, including repayments of short-term borrowings of $127.7 million,
repayments of long-term debt of $340.0 million, dividends paid to shareholders
of $148.4 million and payments to repurchase stock of $371.7 million, offset by
borrowings of $900.0 million.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks. On November 14, 2002, we entered into a new 3-year $800.0
million revolving credit facility which matures November 14, 2005. In addition,
we entered into a new $1,025.0 million 364-day revolving credit facility which
matures on November 13, 2003. These facilities replaced the existing facilities
which were due to mature in the second quarter of 2003. The company is an active
participant in the commercial paper market with a $1,500.0 million program. Each
of our bank credit facilities mentioned above are available to provide credit
support for issuances under this program. As of December 31, 2002, we had no
borrowings outstanding under these credit facilities. The new facilities are
substantially the same as the facilities they replaced. 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 under the 364-day credit facility consists of 19 banks for
which Citibank N.A. acts as agent. Other significant lending institutions
include JPMorgan Chase Bank, HSBC Bank USA, San Paolo IMI S.p.A., Barclays,
Wachovia and Societe Generale. A similar consortium of 15 banks provides support
under the 3-year revolving credit facility for which Citibank N.A. acts as
administrative agent and ABN AMRO Bank acts as syndication agent. Other
significant lending institutions include HSBC Bank USA, JPMorgan Chase Bank,
Wachovia and Societe Generale. These facilities provide us with the ability to
classify up to $1,825.0 million of our borrowings due within one year as
long-term debt, as it is our intention to keep the borrowings outstanding on a
long-term basis.
During 2002, we issued $32.8 billion of commercial paper and we redeemed
$33.1 billion. The average term of the commercial paper issued was 5.6 days. At
December 31, 2002, the Company had no commercial paper outstanding.
We had short-term bank loans of $50.4 million at December 31, 2002,
primarily comprised of bank overdrafts by our international subsidiaries which
are treated as unsecured loans pursuant to the subsidiaries' bank agreements.
At December 31, 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. The holders of our Liquid Yield Option notes have the right to cause us to
repurchase up to the entire aggregate face amount of the notes then outstanding
for par value in February of each year and the holders of our Zero Coupon Zero
Yield notes have the right to cause us to repurchase up to the entire aggregate
face amount of the notes then outstanding for par value in August of each year.
These notes are convertible, at a 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 by at least three notches from their December 31, 2002 level of A to
BBB or lower by Standard & Poor's Ratings Services, or from their December 31,
2002 level of A3 to Baa3 or lower by Moody's Investors Services, Inc. The notes
are convertible at the specified ratio if our long-term debt ratings are
downgraded by at least two notches from their March 14, 2003 level of A- to BBB
or lower by Standard & Poor's Investors Services, Inc., and Baa1 to Baa3 or
17
lower by Moody's Investors Services, Inc. These events would not, however,
result in an adjustment of the number of shares issuable upon conversion. On
February 3, 2003, we offered to pay holders of the Liquid Yield Option notes due
in 2031, $30 in cash per $1,000 principal amount of notes. On February 7, 2003,
we repurchased for cash, $2.9 million of these notes from holders who tendered
their notes in lieu of the cash payment, reducing the outstanding aggregate face
amount of the Liquid Yield Option notes to $847.0 million. We paid $25.4 million
to qualified noteholders on February 21, 2003. Additional information about the
notes appears in notes 4 and 15 to our consolidated financial statements on
pages F-13 to F-25 of this report.
At December 31, 2002, we had approximately $160.0 million of
Euro-denominated bonds outstanding. The bonds pay a fixed rate of 5.2% to
maturity in June 2005. The bonds serve as a hedge of our investment in
Euro-denominated net assets. While an increase in the value of the euro against
the dollar will result in a greater liability for interest and principal, there
will be a corresponding increase in the dollar value of our euro-denominated net
assets.
Below is a summary of our debt position as of December 31, 2002 ($ in
millions):
Debt:
Bank loans (due in less than 1 year)................ $ 50.4
$800.0 Million Revolver-- due November 14, 2005..... --
Commercial paper issued under 364-day Facility ..... --
5.20% Euro notes-- due June 24, 2005................ 160.0
Convertible notes-- due February 7, 2031............ 850.0
Convertible notes-- due July 31, 2032............... 900.0
Loan notes and sundry-- various through 2012........ 70.1
--------
Total Debt.......................................... $2,030.5
========
On December 31, 2001, we redeemed our 2 1/4% Convertible Subordinate
Debentures, which had a scheduled maturity in 2013. The debentures were
convertible into 4.6 million common shares. Prior to redemption, substantially
all of the bondholders exercised their conversion rights.
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,
dividends and acquisitions.
Additional information about our indebtedness is included in notes 3 and 4
of our consolidated financial statements at pages F-12 to F-14 of this report.
Quantitative and Qualitative Disclosures Regarding 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 results of operations are discussed
on pages F-22 and F-23 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. To the
extent that our treasury centers require liquidity, they can access local
currency lines of credit, our committed bank facilities or dollar-denominated
commercial paper. A foreign treasury center borrowing dollar-denominated
commercial paper will enter into a short-term foreign exchange contract to hedge
its position. Outside of major markets, our subsidiaries generally borrow funds
directly in their local currency. In addition, we periodically enter into
cross-currency interest rate swaps to hedge our net yen investments. While our
agencies conduct business in more than 70 different currencies, our major
non-U.S. currency markets are the European Monetary Union (EMU), the United
Kingdom, Japan, Brazil and Canada.
18
At December 31, 2002, we had foreign exchange contracts outstanding with
an aggregate notional principal of $791.7 million, most of which were
denominated in our major international market currencies. Additionally, at
December 31, 2002, we had several cross-currency interest rate swaps in place
with an aggregate notional principal amount of 19,100 million Yen maturing in
2005. See note 12 to our consolidated financial statements at pages F-22 to F-23
of this report for information about the fair value of each type of derivative
instrument.
The forward foreign exchange and swap contracts discussed above are
subject to counterparty risk. Counterparty risk is the capacity of a
counterparty to meet its obligations upon settlement. To mitigate counterparty
risk, we only enter into contracts with major well-known banks and financial
institutions that have credit ratings at least equal to our own.
These hedging activities are limited in volume and confined to risk
management activities related to our international operations. We have
established a centralized reporting system to evaluate the effects of changes in
interest rates, currency exchange rates and other relevant market risks. We
periodically determine the potential loss from market risk by performing a
value-at-risk computation. Value-at-risk analysis is a statistical model that
utilizes historic currency exchange and interest rate data to measure the
potential impact on future earnings of our existing portfolio of derivative
financial instruments. The value-at-risk analysis we performed on our December
31, 2002 portfolio of derivative financial instruments indicated that the risk
of loss was immaterial. This overall system is designed to enable us to initiate
remedial action, if appropriate.
We maintain two revolving credit facilities aggregating $1,825.0 million
with two consortia of banks. We are an active participant in the commercial
paper market with a $1,500.0 million program. Our bank credit facilities
mentioned above are available to provide credit support for issuances under this
program.
The majority of our long-term debt consists of convertible notes. The
holders of these convertible notes have the annual right to cause us to
repurchase up to the entire aggregate face amount. We may offer the holders of
our notes a cash payment to induce them to not put the notes to us in advance of
an annual put date. As a result, our interest expense could increase based on
market factors at the time. On February 3, 2003, we offered to pay holders of
the Liquid Yield Option notes due in 2031, $30 per $1,000 principal amount as an
incentive to the holders not to exercise their put right. In addition, on
February 7, 2003, we repurchased for cash, notes from holders who tendered their
notes for $2.9 million, reducing the outstanding amount of the Liquid Yield
Option notes due 2031 to $847.0 million.
We enter into numerous contractual and commercial undertakings in the
normal course of our business. The following table summarizes information about
certain of our obligations as of December 31, 2002. The table should be read
together with note 3 (bank loans and lines of credit), note 4 (long-term debt
and convertible notes), note 10 (commitments and contingent liabilities), note
11 (fair value of financial instruments) and note 12 (financial instruments and
market risk) to our consolidated financial statements at pages F-8 to F-25 of
this report.
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
--------- --------- --------- ---------
Contractual Obligations at
December 31, 2002 (in millions)
Long-term debt........................... $ 32.4 $ 197.9 $ -- $ 230.3
Convertible notes........................ 2.9 -- 1,747.0 1,749.9
Lease obligations........................ 381.7 940.2 825.3 2,147.2
------ -------- -------- --------
Total.................................... $417.0 $1,138.1 $2,572.3 $4,125.4
====== ======== ======== ========
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
--------- --------- --------- ---------
Other Commercial Commitments at
December 31, 2002 (in millions)
Lines of Credit.......................... $ -- $ -- $ -- $ --
Guarantees and letters of credit......... 3.3 7.1 0.9 11.3
---- ---- ---- -----
Total.................................... $3.3 $7.1 $0.9 $11.3
==== ==== ==== =====
19
In the normal course of business, our agencies enter into various media
commitments on behalf of our clients. These commitments are included in our
accounts payable balance when the media services are delivered by the providers.
Historically, we have not experienced significant losses for media commitments
entered into on behalf of our clients and we believe that we do not have any
substantial exposure to potential losses of this nature in the future.
Contingent Acquisition Obligations
Certain of our acquisitions are structured with additional contingent
purchase price obligations. We utilize contingent purchase price 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 future contingent purchase price payments, assuming that the acquired
businesses perform over the relevant future periods at their current profit
levels, that we will be required to make for prior acquisitions is $471.3
million as of December 31, 2002. The ultimate amounts payable are dependent upon
future results, are subject to changes in foreign currency exchange rates and,
in accordance with GAAP, we have not recorded a liability for these items on our
balance sheet. Actual results can differ from these estimates and the actual
amounts that we pay are likely to be different from these estimates. These
obligations change from period to period as a result of payments made during the
current period, changes in the previous estimate of the acquired entities'
performance and changes in foreign currency exchange rates. These differences
could be material. We estimate these contingent purchase price obligations as of
December 31, 2002, on an annual basis, are as follows:
($ in millions)
------------------------------------------------------------------------
There-
2003 2004 2005 2006 after Total
------- ------- ------- ------- ------- -------
$220.3 $121.1 $82.1 $29.2 $18.6 $471.3
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 in these subsidiaries or affiliates 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 $234.5 million, $134.4 million of
which are currently exercisable. The ultimate amount payable in the future
relating to these transactions will vary because it is dependent on the future
results of operations of the subject businesses and the timing of when these
rights are exercised. The actual amounts that we pay are likely to be different
from these estimates. These differences could be material. We estimate the
obligations that exist for these agreements as of December 31, 2002 are as
follows:
($ in millions)
---------------------------------------
Currently Not Currently
Exercisable Exercisable Total
---------- ---------- --------
($ in millions)
Subsidiary agencies ............... $ 115.4 $ 94.0 $ 209.4
Affiliated agencies ............... 19.0 6.1 25.1
-------- -------- --------
Total ............................. $ 134.4 $ 100.1 $ 234.5
======== ======== ========
If these rights are exercised, there would likely be an increase in our
net income as a result of our increased ownership and the reduction of minority
interest expense.
8. Financial Statements and Supplementary Data
Our financial statements and supplementary data are included at the end of
this report beginning on page F-1 of this report. See the index appearing on
page 22 of this report.
9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
20
PART III
10. Executive Officers
The executive officers of Omnicom Group Inc. as of March 15, 2003 are:
Name Position Age
---- -------- ---
Bruce Crawford............. Chairman 74
John D. Wren............... President and Chief Executive Officer 50
Philip J. Angelastro....... Senior Vice President of Finance and
Controller 38
Jean-Marie Dru............. President and Chief Executive Officer
of TBWA Worldwide 56
Thomas L. Harrison......... Chairman and Chief Executive Officer of
Diversified Agency Services 55
Peter Mead................. Vice Chairman 63
Keith L. Reinhard.......... Chairman of DDB Worldwide 68
Allen Rosenshine........... Chairman and Chief Executive Officer of
BBDO Worldwide 64
Barry J. Wagner............ Secretary and General Counsel 62
Randall J. Weisenburger.... Executive Vice President and Chief
Financial Officer 44
All of the executive officers have held their present positions at Omnicom
for at least five years except as specified below.
Philip Angelastro was promoted to Senior Vice President of Finance in
January 2002 and was made Controller on February 1, 1999. Mr. Angelastro joined
the Company in June 1997 as Vice President of Finance of Diversified Agency
Services after being a Partner at Coopers & Lybrand LLP.
Jean-Marie Dru was appointed President and Chief Executive Officer of TBWA
Worldwide in March 2001. He had previously been President International of TBWA
Worldwide. Mr. Dru was co-founder and Chairman of BDDP Group, which merged with
TBWA in 1998.
Thomas Harrison has served as Chairman and Chief Executive Officer of
Diversified Agency Services since May 1998, having previously served as its
President since February 1997. He also has served as Chairman of the Diversified
Healthcare Communications Group since its formation in 1994.
Peter Mead was appointed Vice Chairman on May 16, 2000. He had previously
been Group Chief Executive of Abbot Mead Vickers plc and Joint Chairman of AMV
BBDO.
Randall Weisenburger joined the Company in September 1998 and became
Executive Vice President and Chief Financial Officer on January 1, 1999. Mr.
Weisenburger was previously President and Chief Executive Officer of Wasserstein
Perella Management Partners.
Additional information about our directors and executive officers appears
under the captions "Election of Directors", "Management's Stock Ownership",
"Director Compensation" and "Executive Compensation" in our 2003 proxy
statement.
14. 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 others
factors that could be reasonably expected to significantly affect the
effectiveness of these controls since that evaluation was completed.
21
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements: Page
----
Management Report ................................................ F-1
Report of Independent Public Accountants ......................... F-2
Consolidated Statements of Income for the Three Years Ended
December 31, 2002 ............................................. F-3
Consolidated Balance Sheets at December 31, 2002 and 2001 ........ F-4
Consolidated Statements of Shareholders' Equity for the Three
Years Ended December 31, 2002 ................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2002 ............................................. F-6
Notes to Consolidated Financial Statements ....................... F-7
Quarterly Results of Operations (Unaudited) ...................... F-26
(a)(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts (for the three
years ended December 31, 2002) ................................ S-1
All other schedules are omitted because they are not applicable.
(a)(3) Exhibits:
Exhibit
Numbers Description
------- -----------
(3)(i) Certificate of Incorporation (Exhibit 4.1 to our
Registration Statement No. 333-46303 and incorporated by
reference).
(ii) Amendment to Certificate of Incorporation (Exhibit A to our
Proxy Statement filed on April 11, 2000 ("2000 Proxy
Statement") and incorporated by reference).
(iii) By-laws (incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 1987).
4.1 Fiscal Agency Agreement, dated June 24, 1998, in connection
with our issuance of 1,000,000,000 5.20% Notes due 2005
(the "5.20% Notes") (Exhibit 4.1 to our Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (the "6-30-98
10-Q") and incorporated herein by reference).
4.2 Subscription Agreement, dated June 22, 1998, in connection
with our issuance of the 5.20% notes (Exhibit 4.2 to our
6-30-98 10-Q and incorporated by reference).
4.3 Deed of Covenant, dated June 24, 1998, in connection with
our issuance of the 5.20% notes (Exhibit 4.3 to the 6-30-98
10-Q and incorporated by reference).
4.4 Indenture, dated February 7, 2001, between JPMorgan Chase
Manhattan Bank, as trustee, and us in connection with our
issuance of $850,000,000 Liquid Yield Option notes due 2031
(Exhibit 4.1 to our Registration Statement on Form S-3
(Registration Statement No. 333-55386 and incorporated by
reference).
4.5 Form of Liquid Yield Option notes due 2031 (included in
Exhibit 4.4 above).
4.6 Indenture, dated March 6, 2002, between JPMorgan Chase Bank
as trustee and us in connection with our issuance of
$900,000,000 Zero Coupon Zero Yield Convertible notes due
2032 (Exhibit 4.6 to our Annual Report on Form 10-K for the
year ended December 31, 2001 and incorporated by
reference).
4.7 Form of Zero Coupon Zero Yield Convertible notes due 2032
(included in Exhibit 4.6).
10.1 $800,000,000 Credit Agreement, dated November 14, 2002,
among Omnicom Finance Inc., Omnicom Capital Inc., Omnicom
Finance PLC, Omnicom Group Inc., Salomon Smith Barney Inc.
and ABN AMRO Incorporated, as lead arrangers for the
institutions party thereto.
10.2 364-Credit Agreement, dated November 14, 2002, among
Omnicom Finance Inc., Omnicom Capital Inc., Omnicom Finance
PLC, the financial institutions party thereto, Citibank,
N.A.,
22
as Administrative Agent and Salomon Smith Barney Inc., as
Lead Arranger, ABN AMRO Bank N.V., as syndication agent,
HSBC Bank USA, Wachovia Bank, National Association and
Societe Generale, as documentation agents.
10.3 List of Contents of Exhibits to the $800,000,000 Credit
Agreement dated November 14, 2002.
10.4 List of Contents of Exhibits to the 364-Day Credit
Agreement, dated November 14, 2002.
10.5 Guaranty, dated November 14, 2002, made by Omnicom Group
Inc. for the $800,000,000 Credit Agreement.
10.6 Guaranty, dated November 14, 2002, made by Omnicom Group
Inc. for the 364-Day Credit Agreement.
10.7 Amended and Restated 1998 Incentive Compensation Plan
(Exhibit B to our 2000 Proxy Statement and incorporated by
reference).
10.8 Restricted Stock Plan for Non-employee Directors (Exhibit
10.10 to our Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated by reference).
10.9 Standard form of our Executive Salary Continuation Plan
Agreement (Exhibit 10.24 to our Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated by
reference).
10.10 Standard form of the Director Indemnification Agreement
(Exhibit 10.25 to our Annual Report on Form 10-K for the
year ended December 31, 1989 and incorporated by
reference).
10.11 Severance Agreement, dated July 6, 1993, between Keith
Reinhard and DDB Worldwide Communications Group, Inc.
(Exhibit 10.11 to our Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated by
reference).
10.12 Long-Term Shareholder Value Plan, dated March 19, 2002
(Exhibit 4.4 to our Registration Statement on Form S-8 No.
333-84498 and incorporated by reference).
10.13 Executive Salary Continuation Plan Agreement - Thomas
Harrison (Exhibit 10.7A to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 (the "6-30-02
10-Q") and incorporated by reference).
10.14 Executive Salary Continuation Plan Agreement - Peter Mead
(Exhibit 10.7B to our 6-30-02 10-Q and incorporated by
reference).
10.15 Executive Salary Continuation Plan Agreement - Keith L.
Reinhard (Exhibit 10.7C to our 6-30-02 10-Q and
incorporated by reference).
10.16 Executive Salary Continuation Plan Severance Compensation
Agreement - Allen Rosenshine (Exhibit 10.7D to our 6-30-02
10-Q and incorporated by reference).
10.17 Executive Salary Continuation Plan Agreement - John Wren
(Exhibit 10.7E to our 6-30-02 10-Q and incorporated by
reference).
10.18 Employment Agreement, Executive Salary Continuation Plan
Agreement and Note - Michael Greenlees (Exhibit 10.7F to
our 6-30-02 10-Q and incorporated by reference).
10.19 Equity Incentive Plan, dated May 22, 2002.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
24.1 Powers of Attorney from Leonard S. Coleman, Jr., Errol M.
Cook, Bruce Crawford, Susan S. Denison, Michael A. Henning,
John R. Murphy, John R. Purcell, Linda Johnson Rice and
Gary L. Roubos.
99.1 Certification of Annual Report on Form 10-K.
(b) Reports on Form 8-K
On October 29, 2002, we filed a Current Report on Form 8-K to file under
Item 5 our third quarter earnings release and to furnish under Item 9
(Regulation FD Disclosure) the text of materials used in our investor
presentation.
On December 31, 2002, we filed a Current Report on Form 8-K describing
under Item 9 changes to the Board of Directors effective December 31, 2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMNICOM GROUP INC.
March 26, 2003
By: /s/ RANDALL J. WEISENBURGER
--------------------------------------
Randall J. Weisenburger
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ BRUCE CRAWFORD* Chairman and Director March 26, 2003
- ----------------------------
(Bruce Crawford)
/s/ JOHN D. WREN Chief Executive Officer March 26, 2003
- ---------------------------- and President and Director
(John D. Wren)
/s/ RANDALL J. WEISENBURGER Executive Vice President and March 26, 2003
- ---------------------------- Chief Financial Officer
(Randall J. Weisenburger)
/s/ PHILIP J. ANGELASTRO Senior Vice President and Controller March 26, 2003
- ---------------------------- (Principal Accounting Officer)
(Philip J. Angelastro)
Director
- ----------------------------
(Robert Charles Clark)
/s/ LEONARD S. COLEMAN, JR.* Director March 26, 2003
- ----------------------------
(Leonard S. Coleman, Jr.)
/s/ ERROL M. COOK* Director March 26, 2003
- ----------------------------
(Errol M. Cook)
/s/ SUSAN S. DENISON* Director March 26, 2003
- ----------------------------
(Susan S. Denison)
/s/ MICHAEL A. HENNING* Director March 26, 2003
- ----------------------------
(Michael A. Henning)
/s/ JOHN R. MURPHY* Director March 26, 2003
- ----------------------------
(John R. Murphy)
/s/ JOHN R. PURCELL* Director March 26, 2003
- ----------------------------
(John R. Purcell)
/s/ LINDA JOHNSON RICE* Director March 26, 2003
- ----------------------------
(Linda Johnson Rice)
/s/ GARY L. ROUBOS* Director March 26, 2003
- ----------------------------
(Gary L. Roubos)
The undersigned, by signing his name below, does hereby sign this report
pursuant to powers of attorney signed by the persons identified by asterisks
above.
By: /s/ BARRY J. WAGNER
----------------------------------
(Barry J. Wagner,
Attorney-in-fact)
24
CERTIFICATION
I, John D. Wren, certify that:
1. I have reviewed this annual report on Form 10-K of Omnicom Group
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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 the 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 annual 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: March 26, 2003 /s/ JOHN D. WREN
----------------------------------------
John D. Wren
Chief Executive Officer and President
25
CERTIFICATION
I, Randall J. Weisenburger, certify that:
1. I have reviewed this annual report on Form 10-K of Omnicom Group
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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 the 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 annual 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:March 26, 2003 /s/ RANDALL J. WEISENBURGER
------------------------------------
Randall J. Weisenburger
Executive Vice President and
Chief Financial Officer
26
MANAGEMENT REPORT
Omnicom Group Inc. management is responsible for the integrity of the
financial data reported by Omnicom. Management uses its best judgement to ensure
that the financial statements present fairly, in all material respects,
Omnicom's consolidated financial position and results of operations. These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States.
Omnicom's system of internal controls, augmented by a program of internal
audits, is designed to provide reasonable assurance that assets are safeguarded
and records are maintained to substantiate the preparation of financial
information in accordance with accounting principles generally accepted in the
United States. Underlying this concept of reasonable assurance is the premise
that the cost of controls should not exceed the benefits derived therefrom.
The financial statements have been audited by independent public
accountants. Their report expresses the independent accountant's judgement as to
the fairness of management's reported operating results, cash flows and
financial position. This judgement is based on the procedures described in the
second paragraph of their report.
Omnicom's Audit Committee meets periodically with representatives of
financial management, internal audit and the independent public accountants as
part of its oversight functions. To aid in ensuring independence, the Audit
Committee communicates directly and separately with the independent public
accountants, internal audit and financial management to discuss their respective
activities.
/s/ JOHN D. WREN /s/ RANDALL J. WEISENBURGER
- --------------------------------------- ---------------------------------
John D. Wren Randall J. Weisenburger
Chief Executive Officer and President Executive Vice President and
Chief Financial Officer
February 21, 2003
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Omnicom Group Inc.:
We have audited the accompanying consolidated balance sheet of Omnicom
Group Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the related 2002 financial statement schedule.
These consolidated financial statements and financial statement schedule are the
responsibility of Omnicom Group Inc.'s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit. The consolidated financial statements and
related financial statement schedules of Omnicom Group Inc. and subsidiaries as
of December 31, 2001 and 2000 and for the years then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements and related financial statement schedules
in their report dated February 18, 2002 (except with respect to the matter
discussed in Note 14, as to which the date is March 20, 2002).
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Omnicom Group Inc. and subsidiaries as of December 31, 2002 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related 2002 financial statement schedule on page S-1, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 13 to the consolidated financial statements, Omnicom
Group Inc. changed its method of accounting for goodwill and other intangibles
in 2002.
/s/ KPMG LLP
New York, New York
February 21, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Omnicom Group Inc.:
We have audited the accompanying consolidated balance sheets of Omnicom
Group Inc. (a New York corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Omnicom Group Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on page S-1 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 18, 2002 (except with respect to the matter discussed in Note 14, as to
which the date is March 20, 2002)
THIS IS A COPY OF A REPORT ISSUED BY ARTHUR ANDERSEN LLP, OUR FORMER INDEPENDENT
AUDITORS, AS OF THE DATES INDICATED ABOVE, AND HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP SINCE THOSE DATES.
F-3
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in Thousands
Except Per Share Data)
--------------------------------------------
2002 2001 2000
REVENUE ................................. $ 7,536,299 $ 6,889,406 $ 6,154,230
OPERATING EXPENSES:
Salary and service costs ............. 4,952,929 4,420,929 3,847,765
Office and general expenses .......... 1,479,255 1,500,293 1,428,375
----------- ----------- -----------
6,432,184 5,921,222 5,276,140
----------- ----------- -----------
OPERATING PROFIT ........................ 1,104,115 968,184 878,090
REALIZED GAIN ON SALE OF RAZORFISH SHARES -- -- 110,044
NET INTEREST EXPENSE:
Interest expense ..................... 45,509 90,922 116,681
Interest income ...................... (15,017) (18,123) (40,164)
----------- ----------- -----------
30,492 72,799 76,517
----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............. 1,073,623 895,385 911,617
INCOME TAXES ............................ 375,637 352,128 369,140
----------- ----------- -----------
INCOME AFTER INCOME TAXES ............... 697,986 543,257 542,477
EQUITY IN AFFILIATES .................... 13,811 12,667 10,914
MINORITY INTERESTS ...................... (68,338) (52,782) (54,596)
----------- ----------- -----------
NET INCOME .............................. $ 643,459 $ 503,142 $ 498,795
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ................................ $ 3.46 $ 2.75(a) $ 2.85(a)
Diluted .............................. $ 3.44 $ 2.70(a) $ 2.73(a)
- ----------
(a) Years Ended December 31, 2001 and 2000, adjusted to exclude goodwill
amortization:
Adjusted Net Income $ 586,208 $ 575,313
Adjusted Net Income Per Common Share - basic $ 3.21 $ 3.30
Adjusted Net Income Per Common Share - diluted $ 3.13 $ 3.13
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in Thousands)
----------------------------
2002 2001
------------ ------------
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 666,951 $ 472,151
Short-term investments at market, which approximates cost ................ 28,930 44,848
Accounts receivable, less allowance for doubtful accounts
of $75,575 and $79,183 ................................................ 3,966,550 3,720,790
Billable production orders in process, at cost ........................... 371,816 382,750
Prepaid expenses and other current assets ................................ 602,819 613,285
------------ ------------
Total Current Assets ..................................................... 5,637,066 5,233,824
------------ ------------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less
accumulated depreciation and amortization of $717,294 and $611,756 ....... 557,735 537,955
INVESTMENTS IN AFFILIATES ................................................... 137,303 186,156
GOODWILL .................................................................... 4,850,829 3,859,162
INTANGIBLES, net of accumulated amortization of $88,132 and $57,804 ......... 97,730 93,682
DEFERRED TAX BENEFITS ....................................................... 42,539 100,418
OTHER ASSETS ................................................................ 496,600 606,217
------------ ------------
TOTAL ASSETS ............................................................. $ 11,819,802 $ 10,617,414
============ ============
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 4,833,681 $ 4,303,152
Advance billings ......................................................... 648,577 640,750
Current portion of long-term debt ........................................ 35,256 40,444
Bank loans ............................................................... 50,394 169,056
Accrued taxes ............................................................ 294,420 366,821
Other liabilities ........................................................ 977,196 1,123,564
------------ ------------
Total Current Liabilities ................................................ 6,839,524 6,643,787
------------ ------------
LONG-TERM DEBT .............................................................. 197,861 490,105
CONVERTIBLE NOTES ........................................................... 1,747,037 850,000
DEFERRED COMPENSATION AND OTHER LIABILITIES ................................. 293,638 296,980
MINORITY INTERESTS .......................................................... 172,815 158,123
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 7,500,000 shares authorized, none issued
Common stock, $0.15 par value, 1,000,000,000 shares authorized,
198,600,891 and 198,669,254 shares issued in 2002 and 2001,
respectively .......................................................... 29,790 29,800
Additional paid-in capital ............................................... 1,419,910 1,400,138
Retained earnings ........................................................ 2,114,506 1,619,874
Unamortized restricted stock ............................................. (136,357) (125,745)
Accumulated other comprehensive loss ..................................... (154,142) (295,358)
Treasury stock, at cost 10,199,215 and 8,040,688 shares
in 2002 and 2001, respectively ........................................ (704,780) (450,290)
------------ ------------
Total Shareholders' Equity ............................................... 2,568,927 2,178,419
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: .............................. $ 11,819,802 $ 10,617,414
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 2002
(Dollars in Thousands)
Accumulated
Common Stock Additional Unamortized Other Total
Comprehensive ---------------------- Paid-in Retained Restricted Comprehensive Treasury Shareholders'
Income Shares Par Value Capital Earnings Stock (Loss) Income Stock Equity
------------- ------ --------- ---------- -------- ---------- ------------- -------- -------------
Balance December 31,
1999 187,086,161 $93,543 $ 808,154 $ 882,051 $ (85,919) $285,234 $(430,165) $1,552,898
Comprehensive Income:
Net Income ............. $498,795 498,795 498,795
Unrealized loss on
investments net of
taxes of $251,589 ...... (372,764) (372,764) (372,764)
Translation adjustments,
net of taxes of
$54,912 ................ (80,707) (80,707) (80,707)
Reclassification
adjustment for gain on
sale of securities ne
of taxes of $46,218 .... (63,826) (63,826) (63,826)
--------
Comprehensive (loss) ..... (18,502)
========
Dividends Declared ....... (122,278) (122,278)
Amortization of
restricted shares ...... 39,098 39,098
Shares transactions
under employee stock
plans .................. 65,521 (72,975) 107,291 99,837
Shares issued for
acquisitions ........... 81,508 12 10,080 5,939 16,031
Conversion of 4.25%
debentures ............. 6,935,143 1,040 216,841 594 218,475
Purchase of treasury
shares (237,082) (237,082)
Adjustment for change
in par value ........... (65,480) 65,480 --
----------- ------- ---------- ---------- --------- --------- --------- ----------
Balance December 31,
2000 ................... 194,102,812 29,115 1,166,076 1,258,568 (119,796) (232,063) (553,423) 1,548,477
Comprehensive Income:
Net Income ............... 503,142 503,142 503,142
Unrealized gain on
investments net of
taxes of $11,518 ....... 18,976 18,976 18,976
Translation adjustments,
net of taxes of
$49,939 ................ (82,271) (82,271) (82,271)
--------
Comprehensive income ..... 439,847
========
Dividends Declared ....... (141,836) (141,836)
Amortization of
restricted shares ...... 47,078 47,078
Shares transactions
under employee stock
plans .................. 28,477 (53,027) 106,583 82,033
Shares issued for
acquisitions ........... 25,538 4 3,891 3,441 7,336
Conversion of 2.25%
debentures ............. 4,614,443 692 254,995 (54) 255,633
Purchase of treasury
shares ................. (49,200) (10,949) (60,149)
Cancellation of
shares ................. (73,539) (11) (4,101) 4,112 --
----------- ------- ---------- ---------- --------- --------- --------- ----------
Balance December 31,
2001 ................... 198,669,254 29,800 1,400,138 1,619,874 (125,745) (295,358) (450,290) 2,178,419
Comprehensive Income:
Net Income ............... 643,459 643,459 643,459
Translation adjustments,
net of taxes of
$(91,791) .............. 141,216 141,216 141,216
--------
Comprehensive income ..... $784,675
========
Dividends Declared ....... (148,827) (148,827)
Amortization of
restricted shares ...... 54,487 54,487
Shares transactions under
employee stock plans ... 25,767 (65,099) 89,696 50,364
Shares issued for
acquisitions ........... (1,289) 22,762 21,473
Purchase of treasury
shares ................. (371,664) (371,664)
Cancellation of shares ... (68,363) (10) (4,706) 4,716 --
----------- ------- ---------- ---------- --------- --------- --------- ----------
Balance December 31,
2002 ................... 198,600,891 $29,790 $1,419,910 $2,114,506 $(136,357) $(154,142) $(704,780) $2,568,927
=========== ======= ========== ========== ========= ========= ========= ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Dollars in Thousands)
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income ......................................................... $ 643,459 $ 503,142 $ 498,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of tangible assets ............................ 119,987 114,661 103,903
Amortization of goodwill ................................... -- 95,581 81,690
Amortization of intangible assets .......................... 30,332 17,853 10,588
Minority interests ......................................... 68,338 52,782 54,596
Earnings of affiliates less than dividends received ........ 3,374 15,711 33,430
Tax benefit on employee stock plans ........................ 14,341 16,640 49,837
Amortization of restricted stock ........................... 54,487 47,078 39,098
Gain on sale of Razorfish shares ........................... -- -- (110,044)
Provisions for losses on accounts receivable ............... 21,846 30,739 25,989
Decrease (increase) in accounts receivable ................. 25,602 200,836 (513,646)
Decrease (increase) in billable production orders in process 33,967 23,117 (97,736)
Decrease (increase) in prepaid expenses and other
current assets ........................................... 62,120 (33,021) (124,854)
(Increase) in other assets, net ............................ (13,592) (72,411) (39,258)
Increase in accrued taxes .................................. 3,521 37,028 97,986
(Decrease) increase in other liabilities ................... (320,208) (185,310) 298,210
Increase (decrease) in accounts payable .................... 253,027 (88,866) 277,295
----------- ----------- -----------
Net Cash Provided by Operating Activities .......................... 1,000,601 775,560 685,879
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures ............................................ (117,198) (149,423) (150,289)
Payment for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired ............ (586,349) (818,819) (795,686)
Purchases of long-term and short-term investments ............... (15,890) (105,916) (292,939)
Proceeds from sales of investments .............................. 36,303 126,306 204,340
----------- ----------- -----------
Net Cash Used in Investing Activities .............................. (683,134) (947,852) (1,034,574)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net (decrease) increase in short-term borrowings ................ (127,703) 76,789 24,543
Net proceeds from issuance of convertible notes
and long-term debt obligations ............................... 900,000 1,144,369 792,995
Repayments of principal of long-term debt obligations ........... (339,950) (866,445) (85,988)
Dividends paid .................................................. (148,411) (135,676) (122,278)
Purchase of treasury shares ..................................... (371,664) (60,149) (237,082)
Other ........................................................... (32,061) 11,913 (90,055)
----------- ----------- -----------
Net Cash (Used In) Provided by Financing Activities ................ (119,789) 170,801 282,135
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents .... (2,878) (43,175) 6,950
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ............... 194,800 (44,666) (59,610)
Cash and Cash Equivalents at Beginning of Period ................... 472,151 516,817 576,427
----------- ----------- -----------
Cash and Cash Equivalents at End of Period ......................... $ 666,951 $ 472,151 $ 516,817
=========== =========== ===========
Supplemental Disclosures:
Income taxes paid ............................................... $ 338,638 $ 233,287 $ 227,492
Interest paid ................................................... $ 42,423 $ 84,693 $ 118,077
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Omnicom Group Inc. and its domestic and
international subsidiaries. Intercompany balances and transactions have been
eliminated.
Revenue Recognition. Substantially all revenue is derived from fees for
services. Additionally, we earn commissions based upon the placement of
advertisements in various media. Revenue is realized when the service is
performed, in accordance with the terms of each client arrangement, and upon
completion of the earnings process, including when services are rendered, upon
presentation date for media, when costs are incurred for radio and television
production and when print production is completed and collection is reasonably
assured.
A small portion of our contractual arrangements with clients includes
performance incentive provisions which allow us to earn additional revenues as a
result of our performance relative to both quantitative and qualitative goals.
We recognize the incentive portion of revenue under these arrangements when
specific quantitative goals are achieved, or when performance against
qualitative goals is determined by our clients.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
Our revenue recognition policies are in compliance with SAB 101. Also, 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 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. Our revenue recognition policies
are in compliance with SAB 101, EITF 99-19 and EITF 01-14. In the majority of
our businesses we act as an agent and record revenue equal to the net amount
retained, when the fee or commission is earned.
Billable Production. Billable production orders in process consist
principally of costs incurred on behalf of clients when providing corporate
communications services to clients. Such amounts are generally invoiced to
clients at various times over the course of the production process.
Investments Available for Sale. Investments available for sale are
comprised of the following two categories of investments:
Short-term investments and time deposits with financial institutions,
which consist principally of investments with original maturity dates between
three months and one year and are therefore classified as current assets.
Long-term investments are included in other assets in our balance sheet
and are comprised of minority ownership interests in certain marketing and
corporate communications services companies where we do not exercise significant
influence over the operating and financial policies of the investee. We account
for these investments under the cost method. During 2001 and 2000, we held
minority investments in several publicly traded marketing and corporate
communication companies and the book value of these investments was adjusted to
market value with any unrealized gains or losses recorded to comprehensive
income. We periodically evaluate our cost based investments to determine if
there have been any non-temporary declines in value. A variety of factors are
considered when determining if a decline in market value below book value is
other than temporary, including, among others, the financial condition and
prospects of the investee, as well as our investment intent.
Cost-Based Investments. Cost-based long-term investments are primarily
comprised of preferred equity interests in non-public marketing and corporate
communications services companies where we do not exercise
F-8
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
significant influence over the operating and financial policies of the investee.
These minority interests are accounted for under the cost method and are
included in our other assets account. These investments are periodically
evaluated to determine if there have been any other than temporary declines
below book value. A variety of factors are considered when determining if a
decline in fair value below book value is other than temporary, including, among
others, the financial condition and prospects of the investee, as well as our
investment intent.
Equity Method Investments. The equity method is used to account for
investments in entities in which we have an ownership of less than 50% and have
significant influence over the operating and financial policies of the
affiliate. Prior to the adoption of SFAS No. 142, the excess of cost of the
stock of those affiliates over our share of their net assets at the acquisition
date was recognized as goodwill and was being amortized on a straight-line basis
over a period not to exceed 40 years. Subsequent to the adoption of SFAS No.
142, equity method goodwill is not amortized. We periodically evaluate these
investments to determine if there have been any other than temporary declines in
value.
Common Stock. During 2000, the par value of common stock was decreased
from $.50 to $.15 per share and the number of authorized common shares was
increased from 300 million shares to 1 billion shares.
Treasury Stock. We account for treasury share purchases at cost. The
reissuance of treasury shares is accounted for at the average cost. Gains or
losses on the reissuance of treasury shares are accounted for as additional
paid-in capital and do not affect reported results of operations.
Foreign Currency Translation. Our financial statements were prepared in
accordance with the requirements of Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation". All of our foreign subsidiaries
use their local currency as their functional currency in accordance with SFAS
52. Accordingly, the currency impacts of the translation of the balance sheets
of our foreign subsidiaries to U.S. dollar statements are included as
translation adjustments in other accumulated comprehensive income. The income
statements of foreign subsidiaries are translated at average exchange rates for
the year. Net foreign currency transaction gains included in net income were
$0.6 million in 2002, $1.1 million in 2001 and $1.7 million in 2000.
Earnings Per Common Share. Basic earnings per share is based upon the
weighted average number of common shares outstanding during each year. Diluted
earnings per share is based on the above, plus, if dilutive, common share
equivalents which include outstanding options and restricted shares and
adjustments for the assumed conversion of our 2 1/4% and 4 1/4% Convertible
Subordinated Debentures. For purposes of computing diluted earnings per share
for the years ended December 31, 2002, 2001 and 2000, respectively, 1,509,203,
2,821,850 and 2,688,589 shares were assumed to have been outstanding related to
common share equivalents and 4,599,909 and 11,468,018 shares in 2001 and 2000,
respectively were assumed to have been converted related to our convertible
subordinated debentures. Additionally, the assumed increase in net income
related to the after tax interest costs of convertible debentures and the after
tax compensation expense related to dividends on restricted shares used in the
computations was $975,269, $9,728,117 and $17,939,255 for the years ended
December 31, 2002, 2001 and 2000, respectively. The number of shares used in the
computations were as follows:
2002 2001 2000
----------- ----------- -----------
Basic EPS computation........... 186,093,600 182,867,900 174,881,000
Diluted EPS computation......... 187,602,800 190,289,700 189,037,600
The Company's 2 1/4% Convertible Subordinated Debentures were converted in
the fourth quarter of 2001 and its 4 1/4% Convertible Subordinated Debentures
were converted in the fourth quarter of 2000 (see Note 4).
Gains and Losses on Issuance of Stock in Affiliates and Subsidiaries.
Gains and losses on the issuance of stock in equity method affiliates and
consolidated subsidiaries are recognized directly in our shareholders' equity
through an increase or decrease to additional paid-in capital in the period in
which the sale occurs and do not affect reported results of operations.
F-9
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Salary Continuation Agreements. Arrangements with certain present and
former employees provide for continuing payments for periods up to 10 years
after cessation of their full-time employment in consideration for agreements by
the employee not to compete with us and to render consulting services during the
post-employment period. Such payments, the amounts of which are also subject to
certain limitations, including our operating performance during the
post-employment period, represent the fair value of the services rendered and
are expensed in such periods.
Depreciation of Furniture and Equipment and Amortization of Leasehold
Improvements. Depreciation charges are computed on a straight-line basis over
the estimated useful lives of furniture of seven to ten years and equipment of
three to five years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the terms of the related lease or the estimated useful
life of these assets.
Goodwill and Other Intangibles. In accordance with SFAS 142 - Goodwill and
Other Intangible Assets, goodwill acquired resulting from a business combination
for which the acquisition date was after June 30, 2001 is no longer amortized,
but is periodically tested for impairment. Additionally, in accordance with SFAS
141 - Business Combinations, we allocate the cost of an acquired entity to the
assets acquired and liabilities assumed based on their estimated fair values
including other identifiable intangible assets, as applicable, such as trade
names, customer relationships and client lists. Information about acquisitions
can be found in Note 2.
Historically and before the effective date of SFAS 142, intangibles were
amortized on a straight-line basis over a period not to exceed 40 years. The
intangibles were written down if and to the extent they were determined to be
impaired. Under SFAS 142, we no longer amortize goodwill and intangibles with
indefinite lives and we are required to perform an annual impairment test on
goodwill balances and intangibles with indefinite lives. The initial test for
impairment required us to assess whether there was an indication that goodwill
was impaired as of the date of adoption of SFAS 142. To accomplish this, we
identified our reporting units and determined the carrying value of each unit,
including goodwill and other intangible assets. We then determined the fair
value of each reporting unit and compared it to its carrying value. In
performing this test in accordance with SFAS 142, we aggregated the components
of the reporting units to the level where operating decisions are made. We
completed our initial SFAS 142 impairment test during the second quarter of
2002. We perform the annual impairment test during the second quarter of each
year, unless certain events, as defined in SFAS 142, trigger an earlier
evaluation for impairment.
Deferred Taxes. Deferred income taxes are provided for the temporary
difference between the financial reporting basis and tax basis of our assets and
liabilities. Deferred tax benefits result principally from recording certain
expenses in the financial statements which are not currently deductible for tax
purposes and from differences between the tax and book basis of assets and
liabilities recorded in connection with acquisitions. Deferred tax liabilities
result principally from deductions recorded for tax purposes, in excess of that
recorded in the financial statements and non-cash, unrealized financial
statement gains in prior years associated with investments and capital
transactions including initial public offerings of common stock by affiliates.
Employee Stock Options. Options are accounted for in accordance with
Accounting Principles Board Opinion 25 - Accounting for Stock Issued to
Employees ("APB 25"). APB 25 is based upon an intrinsic value method of
accounting for stock-based compensation. Under this method, compensation cost is
measured as the excess, if any, of the quoted market price of the stock issuance
at the measurement date over the amount to be paid by the employee. It has been
our policy to issue stock awards at the quoted market price. Information about
our specific awards and stock plans can be found in Note 7.
Cash Flows. Our cash equivalents are primarily comprised of investments in
overnight interest-bearing deposits, commercial paper and money market
instruments and other short-term investments with original maturity dates of
three months or less at the time of purchase.
Concentration of Credit Risk. We provide marketing and corporate
communications services to over 5,000 clients who operate in nearly every
industry sector. We grant credit to qualified clients in the ordinary course of
business. Due to the diversified nature of our client base, we do not believe
that we are exposed to a concentration of credit risk as our largest client
accounted for 5.0% of our 2002 consolidated revenue and no other client
accounted for more than 2.5% of our 2002 consolidated revenue.
F-10
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments. We adopted Statement Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", on January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Our derivative financial instruments consist principally of forward
foreign exchange contracts and cross- currency interest rate swaps. For
derivative financial instruments to qualify for hedge accounting the following
criteria must be met: (1) the hedging instrument must be designated as a hedge;
(2) the hedged exposure must be specifically identifiable and expose us to risk;
and (3) it must be highly probable that a change in fair value of the derivative
financial instrument and an opposite change in the fair value of the hedged
exposure will have a high degree of correlation.
If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of the change in fair
value of a derivative used as hedge is required to be immediately recognized in
the statement of income.
The majority of our activity relates to forward foreign exchange
contracts. We execute these contracts in the same currency as the hedged
exposure, whereby 100% correlation is achieved based on spot rates. Gains and
losses on derivative financial instruments which are hedges of foreign currency
assets or liabilities are recorded at market value and changes in market value
are recognized in the statement of income in the current period. Gains and
losses on derivative financial instruments which are hedges of net investments,
are recorded to accumulated comprehensive income as translation adjustments to
the extent of change in the spot exchange rate. The remaining difference is
recorded in the statement of income in the current period.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts or revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the 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.
2. Acquisitions
During 2002, we completed 40 acquisitions of new subsidiaries and made
additional investments in companies in which we already had an ownership
interest. In addition, we made contingent purchase price payments related to
acquisitions completed in prior years. The aggregate cost of these transactions,
including cash payments, the assumption of liabilities and the issuance of
common stock, for 2002 was as follows (dollars in thousands):
New and existing subsidiaries ......................... $355,232
Contingent purchase price payments .................... 324,811
--------
$680,043
========
In addition, in December 2002, we acquired all of the common stock of
Organic, Inc. in a non-cash transaction. Refer to note 6 for additional
information.
F-11
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuations of these companies were based on a number of factors, including
service offerings, competitive position, reputation and geographic coverage.
Consistent with our acquisition strategy and past practice, most acquisitions
completed in 2002 include an initial payment at the time of closing and provide
for additional contingent purchase price payments. Contingent payments for these
transactions, as well as certain acquisitions completed in prior years, are
derived using the performance of the acquired entity and are based on
pre-determined formulas. These contingent purchase price obligations are accrued
when the contingency is resolved and payment is certain.
Our acquisition strategy is to continue to build upon the core
capabilities of our various strategic business platforms (agency brands) through
the expansion of their service capabilities and/or their geographic reach. In
executing our acquisition strategy, one of the primary drivers in identifying
and executing a specific transaction is the existence of or the ability to
expand an existing client relationship. As a result, a significant portion of an
acquired company's revenues are often from clients that are already our clients.
In addition, due to the nature of marketing services communication companies,
the companies we acquire have minimal tangible and identifiable intangible net
assets. Accordingly, upon completion of our SFAS 141 purchase accounting
procedures, substantially all of the above purchase price was allocated to
goodwill as of December 31, 2002. In some cases the process of allocating
purchase price to other intangible assets has not been completed for
transactions completed during the later part of the year and could result in a
re-allocation of purchase price to software, trade names, client relationships,
client contracts or other intangible assets from goodwill. This re-allocation
will be recorded in the 2003 financial statements. We do not believe that the
amounts that may be re-allocated to other intangibles will have a material
impact on our consolidated results of operations and financial position.
As of December 31, 2002, the components of our intangible assets were as
follows:
(Dollars in Thousands)
December 31, 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 $5,382,478 $531,649 $4,850,829 $4,354,877 $495,715 $3,859,162
Other intangible assets
subject to amortization:
Purchased and internally
developed software 170,357 84,489 85,868 140,864 54,323 86,541
Customer related and other 15,505 3,643 11,862 10,622 3,481 7,141
---------- -------- --------- ---------- -------- ---------
Total $ 185,862 $ 88,132 $ 97,730 $ 151,486 $ 57,804 $ 93,682
========== ======== ========= ========== ======== =========
The other intangible assets continue to be amortized on a straight-line
basis over, on average, an eight-year period.
3. Bank Loans and Lines of Credit
Bank loans of $50.4 million and $169.1 million at December 31, 2002 and
2001, respectively, are primarily comprised of the bank overdrafts of our
international subsidiaries, which are treated as unsecured loans pursuant to our
bank agreements. The weighted average interest rate on these bank loans as of
December 31, 2002 and 2001 was 5.4% and 4.6% respectively.
At December 31, 2002 and 2001, we had committed and uncommitted lines of
credit aggregating $2,277.2 million and $1,832.8 million, respectively. The
unused portion of these credit lines was $2,226.8 million and $1,394.1 million
at December 31, 2002 and 2001, respectively. The lines of credit, including the
credit facilities discussed below, are generally extended to us on terms that
the banks grant to their most creditworthy borrowers.
F-12
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 14, 2002, we entered into a new 3-year $800.0 million
revolving credit facility which matures November 14, 2005. In addition, we
entered into a new $1,025.0 million 364-day revolving credit facility which
matures on November 13, 2003. These facilities replaced the existing facilities
which were due to mature in the second quarter of 2003. Both facilities provide
for credit support of our existing $1,500.0 million commercial paper program.
The new facilities are substantially the same as the facilities they replaced
except for the maturity dates and the size of the facilities. The 364-day
facility continues to include a provision which allows us to convert all amounts
outstanding at expiration of the facility into a one-year term loan. The
consortium of banks under the 364-day credit facility consists of 19 banks for
which Citibank N.A. acts as agent. Other significant lending institutions
include JPMorgan Chase Bank, HSBC Bank USA, San Paolo IMI S.p.A., Barclays,
Wachovia and Societe Generale. A similar consortium of 15 banks provides support
under the 3-year revolving credit facility for which Citibank N.A. acts as
administrative agent and ABN AMRO Bank acts as syndication agent. Other
significant lending institutions include HSBC Bank USA, JPMorgan Chase, Wachovia
and Societe Generale. These facilities provide us with the ability to classify
up to $1,825.0 million of our borrowings due within one year as long-term debt,
as it is our intention to keep the borrowings outstanding on a long-term basis.
We are an active participant in the commercial paper market with a
$1,500.0 million program. Each of our bank credit facilities mentioned above are
available to provide credit support for issuances under this program. As of
December 31, 2002, we had no commercial paper borrowings outstanding. We had
$269.6 million of commercial paper borrowings outstanding as of December 31,
2001, with various maturities through January 30, 2002 which is included in
long-term debt in the consolidated balance sheet.
The gross amount of commercial paper issued and redeemed under our
commercial paper programs during 2002 was $32.8 billion and $33.1 billion,
respectively. During 2001, $45.3 billion of commercial paper was issued and
$45.9 billion was redeemed.
The credit facilities contain financial covenants limiting the ratio of
total consolidated indebtedness to total consolidated EBITDA (EBITDA is defined
as: earnings before interest, taxes, depreciation and amortization) to 3.0
times. In addition, we are required to maintain a minimum ratio of EBITDA to
interest expense of 5.0 times. At December 31, 2002, our ratio of debt to EBITDA
was 1.6 times and our ratio of EBITDA to interest expense was 27.6 times and we
were in compliance with these covenants.
4. Long-Term Debt and Convertible Notes
Long-term debt and convertible notes outstanding as of December 31, 2002
and 2001 consisted of the following:
(Dollars in Thousands)
2002 2001
---------- ----------
U.S. Dollar commercial paper with an average interest
rate of 2.5% ....................................... -- $ 269,618
5.20% Euro Notes, due in 2005 ........................ $ 159,950 135,603
Other notes and loans at rates from 3.0% to 8.1%,
due through 2012 ................................... 70,251 125,328
---------- ----------
230,201 530,549
Less current portion ................................. 32,340 40,444
---------- ----------
Total long-term debt ............................... $ 197,861 $ 490,105
========== ==========
Liquid Yield Option notes due 2031 ................... $ 849,953 $ 850,000
Zero Coupon Zero Yield Convertible notes due 2032 .... 900,000 --
---------- ----------
1,749,953 850,000
Less current portion ................................. 2,916 --
---------- ----------
Total long-term convertible notes .................. $1,747,037 $ 850,000
========== ==========
F-13
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2002, 2001 and 2000, we incurred gross
interest expense on our borrowings of $45.5 million, $90.9 million, and $116.7
million, respectively.
On June 24, 1998, we issued 152.4 million 5.20% Euro notes. The notes are
senior unsecured obligations of the Company. Unless previously redeemed, or
purchased and cancelled, the notes mature on June 24, 2005.
The $850.0 million aggregate principal amount of Liquid Yield Option notes
due 2031 were issued by us in February 2001. These notes are senior unsecured
zero-coupon securities that are convertible into 7.7 million common shares,
implying a conversion price of $110.01 per common share, subject to normal
anti-dilution adjustments. These notes are convertible at a 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 by at least three notches from their
December 31, 2002 level of A to BBB or lower by Standard & Poor's Ratings
Services, or from their December 31, 2002 level of A3 to Baa3 or lower by
Moody's Investors Services, Inc. The notes are convertible at the specified
ratio if our long-term debt ratings are downgraded by at least two notches from
their March 14, 2003 level of A- to BBB or lower by Standard & Poor's Investors
Services, Inc., and Baa1 to Baa3 or lower by Moody's Investors Services, Inc.
These events would not, however, result in an adjustment of the number of shares
issuable upon conversion. Holders of the notes due 2031 have the right to put
the notes back to us, at our election, for cash, stock or a combination of both,
in February of each year and we have the right to redeem the notes for cash
beginning in 2006. There are no events that accelerate the noteholders' put
rights. Beginning in February 2006, 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. See note 15 for
additional information about these notes.
The $900.0 million aggregate principal amount of Zero Coupon Zero Yield
Convertible notes were issued by us in March 2002. The notes are senior
unsecured zero-coupon 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 a 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 December
31, 2002 level of A to BBB or lower by Standard & Poor's Ratings Services, or
from their December 31, 2002 level of A3 to Baa3 or lower by Moody's Investors
Services, Inc. The notes are convertible at the specified ratio if our long-term
debt ratings are downgraded by at least two notches from their March 14, 2003
level of A- to BBB or lower by Standard & Poor's Investors Services, Inc., and
Baa1 to Baa3 or lower by Moody's Investors Services, Inc. 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, for 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.
Aggregate stated maturities of long-term debt and convertible notes are as
follows:
(Dollars in Thousands)
2003......................................... $ 35,256
2004......................................... 13,188
2005......................................... 21,313
2006......................................... 161,470
2007......................................... 107
Thereafter................................... 1,748,820
F-14
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Segment Reporting
Our wholly and partially owned businesses operate within the marketing and
corporate communications services industry. These agencies are organized into
strategic platforms, client centric networks, geographic regions and operating
groups. Our businesses provide communications services to similar type clients
on a global, pan-regional and national basis. The businesses have similar cost
structures, and are subject to the same general economic and competitive risks.
Given these similarities, we have aggregated their results into one reporting
segment. A summary of our revenue and long-lived assets by geographic area for
the years then ended, and as of December 31, 2002, 2001 and 2000 is presented
below:
(Dollars in Thousands)
---------------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Consolidated
----------- ------------ --------- ------------ -----------
2002
Revenue .................... $4,284,630 $1,458,558 $814,134 $978,977 $7,536,299
Long-Lived Assets .......... 319,730 75,198 86,866 75,941 557,735
2001
Revenue .................... $3,717,011 $1,413,795 $805,188 $953,412 $6,889,406
Long-Lived Assets .......... 310,556 61,555 93,355 72,489 537,955
2000
Revenue .................... $3,258,193 $1,284,977 $811,401 $799,659 $6,154,230
Long-Lived Assets .......... 254,654 59,562 93,653 75,236 483,105
6. Equity and Cost Based Investments
Equity Investments. We have 100 unconsolidated affiliated companies
accounted for under the equity method. The affiliate companies offer marketing
and corporate communications services similar to those offered by our operating
companies. The equity method is used when we have an ownership of less than 50%
but exercise significant influence over the operating and financial policies of
the affiliate. The following table summarizes the balance sheets and income
statements of our unconsolidated affiliates, as of December 31, 2002 and 2001
and for the years then ended:
(Dollars in Thousands)
---------------------------
2002 2001
--------- ---------
Current assets............................. $502,685 $582,257
Non-current assets......................... 101,280 142,128
Current liabilities........................ 369,344 443,461
Non-current liabilities.................... 55,747 108,212
Minority interests......................... 2,214 4,734
Gross revenue.............................. 399,446 378,423
Costs and expenses......................... 329,825 316,132
Net income................................. 42,188 43,773
Our equity interest in the net income of these affiliated companies was
$13.8 million and $12.7 million for 2002 and 2001, respectively. Our equity
interest in the net assets of these affiliated companies was $77.2 million and
$116.8 million at December 31, 2002 and 2001, respectively. Owners of interests
in certain of our affiliated companies have the right in certain circumstances
to require us to purchase additional ownership stakes at fair value. The terms
of these rights vary for each arrangement and the ultimate amount payable in the
future also varies based upon the future earnings of the affiliated companies,
changes in the applicable foreign currency exchange rates and the timing of when
these rights are exercised.
Cost Based Investments. Our cost based investments at December 31, 2002
were primarily comprised of preferred stock interests representing equity
interests of less than 20% in various service companies. This method is used
when we own less than a 20% equity interest and do not exercise significant
influence over the operating and financial policies of the investee.
F-15
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total cost basis of these investments, which are included in other
assets on our balance sheet, as of December 31, 2002 and 2001 was $224.5 million
and $318.8 million, respectively.
In May 2001, we received a non-voting non-participating preferred stock
interest in a newly formed company, Seneca Investments LLC ("Seneca"), in
exchange for our contribution of Communicade, our subsidiary that conducted its
e-services industry investment activities. All of Communicade's investments at
that time were comprised of minority interests in e-services industry
businesses. The common shareholder of Seneca, who owns all of the common stock
is an established private equity investment firm. We do not have a commitment
obligating us to advance funds or provide other capital to Seneca. The preferred
stock is nonvoting, except on certain extraordinary events, including Seneca's
issuance of senior securities or dividends on junior securities in violation of
the preference; related party transactions involving Seneca's management or
common stockholders other than management compensation, fees and other payments
in the ordinary course of business; changes in control or conversion of Seneca
into a partnership for tax purposes; and changes in Seneca's governing documents
adversely affecting preferred shareholders' rights. The preferred stock is
entitled to preferential cumulative dividends at a rate of 8.5% compounded
semiannually and is redeemable on the 10th anniversary of issuance or earlier
upon the occurrence of certain extraordinary events. Unpaid dividends accrue on
a cumulative basis. No dividends were paid by Seneca in 2002 and 2001. The
transaction was accounted for in accordance with SFAS 140, Accounting for
Transfers and Servicing Financial Assets and Extinguishments of Liabilities, and
resulted in no gain or loss being recognized by us on Seneca's formation.
In December 2002, we acquired all of the common stock of Organic, Inc.
from Seneca. The transaction was effected by the redemption of $99.0 million of
the preferred stock and the assumption of $7.2 million of liabilities. At
December 31, 2002, substantially all of the purchase price was allocated to
goodwill. We are currently performing a valuation of the intangible assets of
Organic and upon completion, some portion of the purchase price may be assigned
to intangible assets other than goodwill in the 2003 financial statements. The
transaction closed in December 2002 and we do not believe that any amounts that
may be allocated to other intangibles in 2003 would have had a material impact
on our 2002 consolidated results of operations and financial position had the
allocation been completed at December 31, 2002.
Management believes that the fair value of our Seneca investment exceeded
our carrying value of $181.0 million at December 31, 2002 and that an other than
temporary impairment has not occurred. In arriving at this conclusion, a
discounted cash flow analysis of Seneca was utilized, supported by an
independent third-party valuation.
7. Employee Stock Plans
We adopted a new equity incentive compensation plan in 2002 (the "Equity
Incentive Plan"). Under the Equity Incentive Plan, 7,700,000 common shares were
reserved for options and other awards, of which up to 1,200,000 were for
restricted stock awards. As of December 31, 2002, 7,671,851 shares were
available for future grants, of which 1,200,000 shares were available for
restricted stock awards. Pursuant to the Equity Incentive Plan, the exercise
price of options awarded may not be less than 100% of the market price of the
stock at the date of grant and the option term cannot be longer than seven years
from the date of grant. The terms of each option and the times at which each
option will be exercisable will be determined by the Compensation Committee of
the Board of Directors. It is anticipated that the full vesting period for
options will be no shorter than three years, and that some of the options
granted will have vesting schedules like those under the long-term shareholder
value plan described below. Current year option grants become exercisable 30% on
each of the first two anniversary dates of the grant date with the final 40%
becoming exercisable three years from the grant date. The restricted shares
typically vest in 20% annual increments provided the employee remains in our
employ.
Our prior incentive compensation plan was adopted in 1998 (the "1998
Plan") and amended in 2000. Under the 1998 Plan, 8,250,000 common shares were
reserved for options and other awards, of which up to 2,250,000 were for
restricted stock awards. As a result of the adoption of the Equity Incentive
Plan during 2002, no new awards may be granted under Omnicom's the 1998 Plan,
except with respect to shares relating to awards
F-16
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that are forfeited or cancelled. Therefore, as of December 31, 2002, no shares
were available for future option grants under the 1998 Plan, while 120,000
shares remained available for restricted stock awards. Pursuant to the 1998
Plan, the exercise price of options awarded may not be less than 100% of the
market price of the stock at the date of grant. Options become exercisable 30%
on each of the first two anniversary dates of the grant date with the final 40%
becoming exercisable three years from the grant date.
Under the terms of our long-term shareholder value plan ("LTSV"),
9,000,000 common shares were reserved for option awards to key employees of the
Company at an exercise price that is no less than 100% of the market price of
the stock at the date of the grant. The options become exercisable after the
sixth anniversary date of grant. The shares can become exercisable prior to this
anniversary date in increments of one-third if the market value for the
Company's common stock increases compared to the market price on the date of
grant by at least 50%, 75% and 100%, respectively. At December 31, 2002, options
for 3,281,642 shares were available for future grants.
Options included under all prior incentive compensation plans, all of
which were approved by our shareholders, for the past three years are:
2002 2001 2000
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Shares under option,
beginning of year .................... 17,743,823 $66.30 9,547,138 $57.50 8,299,387 $46.37
Options granted under:
1998 Plan ............................ 2,259,607 91.80 3,542,500 81.10 2,452,500 78.31
LTSV Plan ............................ -- -- 5,732,725 66.84 -- --
Equity Incentive Plan ................ 28,149 60.39 -- -- -- --
Options exercised ....................... (634,917) 44.56 (1,058,540) 39.83 (1,207,749) 23.15
Options forfeited ....................... (269,167) 81.69 (20,000) 42.69 -- --
---------- ------ ---------- ------ --------- ------
Shares under option, end of year ........ 19,127,495 $69.80 17,743,823 $66.30 9,547,138 $57.50
========== ====== ========== ====== ========= ======
Options exercisable at year-end ......... 9,413,333 5,456,848 4,142,888
========== ========== =========
The following table summarizes the information above about options
outstanding and options exercisable at December 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted Average
Range of Exercise Options Remaining Weighted Average Options Weighted Average
Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------- ----------- -------------- -------------- ---------- --------------
$10.02 48,800 1 year $10.02 48,800 $10.02
12.11 to 26.27 280,361 1-2 years 12.13 280,361 12.13
12.94 340,000 2-3 years 12.94 340,000 12.94
19.72 360,000 3-4 years 19.72 360,000 19.72
24.28 549,500 4-5 years 24.28 549,500 24.28
39.75 to 66.40 1,099,676 5-6 years 43.59 1,099,676 43.59
44.62 to 91.22 3,005,855 6-7 years 76.37 2,977,706 76.53
78.32 to 84.00 2,263,000 7-8 years 78.50 1,339,000 78.51
62.35 to 87.16 9,010,496 8-9 years 72.36 2,407,983 70.43
85.84 to 93.55 2,169,807 9-10 years 91.80 10,307 86.09
---------- ---------
19,127,495 9,413,333
========== =========
F-17
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro Forma. As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation", we intend to continue to apply the accounting provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and to make annual
pro forma disclosures of the effect of adopting the fair value method of
accounting for employee stock options and similar instruments.
The weighted average fair value, calculated on the basis summarized below,
of each option granted was as follows; 2002: $28.01; 2001: $21.45 and 2000:
$24.85. The fair value of each option grant has been determined as of the date
of grant using the Black-Scholes option valuation model and with the following
assumptions (without adjusting for the risk of forfeiture and lack of
liquidity):
2002 2001 2000
-------------- -------------- --------------
Expected option lives .... 5 years 5 years 5 years
Risk free interest rate .. 2.4% - 4.7% 4.0% - 4.9% 5.0% - 6.7%
Expected volatility ...... 28.20% - 35.30% 28.58% - 30.79% 21.88% - 26.49%
Dividend yield ........... 0.9% - 1.3% 0.9% - 1.4% 0.6% - 0.9%
Using compensation cost for grants of the Company's stock options and
shares issued under the employee stock purchase plan ("ESPP"), determined based
on the fair value at the grant or issuance date in 2002, 2001 and 2000,
consistent with the provision of SFAS No. 123, the effect on our net income and
net income per share would have been as follows:
Dollars in Thousands Except Per Share Data
-----------------------------------------------------------
2000
---------------------------------
As Razorfish As
2002 2001 Reported Gain Adjusted
---- ---- -------- ---- --------
Net income, as reported ....................... $643,459 $503,142 $498,795 $63,826 $434,969
Net income, pro forma ......................... 583,638 455,702 475,650 63,826 411,824
Stock-based employee compensation cost,
net of tax, as reported .................... 32,692 26,604 22,810 -- 22,810
Additional stock-based employee
compensation cost, net of tax,
pro forma .................................. 59,821 47,440 23,145 -- 23,145
Basic net income per share, as reported ....... 3.46 2.75 2.85 -- 2.49
Basic net income per share, pro forma ......... 3.14 2.49 2.72 -- 2.36
Diluted net income per share, as reported ..... 3.44 2.70 2.73 -- 2.40
Diluted net income per share, pro forma ....... 3.12 2.47 2.62 -- 2.29
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized / expensed over the
vesting period, additional options may be granted in future years, awards may be
forfeited or cancelled and the fair value of future awards may differ from the
current fair values.
Restricted Shares. Changes in outstanding shares of restricted stock for
the three years ended December 31, 2002 were as follows:
2002 2001 2000
--------- --------- ---------
Restricted shares at beginning of year 2,227,022 2,493,505 2,602,281
Number granted ..................... 769,964 649,915 904,429
Number vested ...................... (806,626) (830,822) (906,197)
Number forfeited ................... (119,516) (85,576) (107,008)
--------- --------- ---------
Restricted shares at end of year ..... 2,070,844 2,227,022 2,493,505
========== ========== ==========
All restricted shares were sold at a price per share equal to their par
value. The difference between par value and market value on the date of the
grant is charged to shareholders' equity and then amortized to expense over the
period of restriction. The restricted shares typically vest in 20% annual
increments provided the employee remains in our employ.
F-18
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted shares may not be sold, transferred, pledged or otherwise
encumbered until the restrictions lapse. Under most circumstances, the employee
must resell the shares to us at par value if the employee ceases employment
prior to the end of the period of restriction.
The charge to operations in connection with these restricted stock awards
for the years ended December 31, 2002, 2001 and 2000 amounted to $54.5 million,
$47.1 million and $39.1 million, respectively.
ESPP. We have an employee stock purchase plan that enables employees to
purchase our common stock through payroll deductions over each plan quarter at
85% of the market price on the last trading day of the plan quarter. Purchases
are limited to 10% of eligible compensation as defined by ERISA. During 2002,
2001 and 2000, employees purchased 349,181 shares, 323,269 shares and 311,171
shares, respectively, all of which were treasury shares, for which $22.5
million, $23.7 million and $22.3 million, respectively, was paid to us. For this
plan, 1,952,971 shares remain reserved at December 31, 2002.
8. Income Taxes
Income before income taxes and the provision for taxes on income consisted
of the amounts shown below:
Years Ended December 31,
(Dollars in Thousands)
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Income before income taxes:
Domestic ......................... $ 700,209 $ 588,322 $ 534,913
International .................... 373,414 307,063 376,704
----------- ----------- -----------
Total .......................... $ 1,073,623 $ 895,385 $ 911,617
=========== =========== ===========
Provision for taxes on income:
Current:
Federal ........................ $ 154,567 $ 155,414 $ 153,786
State and local ................ 35,104 32,214 36,391
International .................. 136,854 123,770 159,389
----------- ----------- -----------
Total Current .................. 326,525 311,398 349,566
----------- ----------- -----------
Deferred:
Federal ........................ 58,985 39,643 16,326
State and local ................ 4,262 7,178 2,402
International .................. (14,135) (6,091) 846
----------- ----------- -----------
Total Deferred ................. 49,112 40,730 19,574
----------- ----------- -----------
Total .......................... $ 375,637 $ 352,128 $ 369,140
=========== =========== ===========
Our effective income tax rate varied from the statutory federal income tax
rate as a result of the following factors:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate ................... 35.0% 35.0% 35.0%
Non-deductible amortization of goodwill ............. -- 2.9 2.6
State and local taxes on income,
net of federal income tax benefit ................. 2.4 2.8 3.0
International subsidiaries' tax rate differentials .. (0.9) (0.2) 1.1
Other ............................................... (1.5) (1.2) (1.2)
---- ---- ----
Effective rate ...................................... 35.0% 39.3% 40.5%
==== ==== ====
Deferred income taxes are provided for the temporary difference between
the financial reporting basis and tax basis of our assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements which are not currently deductible for tax purposes and
from differences between the tax and book basis of assets and liabilities
recorded in connection with acquisitions. Deferred tax liabilities
F-19
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
result principally from non-cash, unrealized financial statement gains
associated with investments and capital transactions, including initial public
offerings of common stock by affiliates, and expenses which are currently
deductible for tax purposes, but have not yet been expensed in the financial
statements.
Deferred tax assets (liabilities) as of December 31, 2002 and 2001
consisted of the amounts shown below (dollars in thousands):
2002 2001
--------- ---------
Deferred tax assets:
Compensation and severance ............................. $ 115,748 $ 83,263
Basis differences arising from acquisitions ............ 67,738 83,286
Basis differences from short term assets and liabilities 40,852 26,395
Tax loss carryforwards ................................. 54,446 34,906
Other .................................................. 8,876 2,666
--------- ---------
Total deferred tax assets ................................ 287,660 230,516
Valuation allowance .................................... (42,334) (24,501)
--------- ---------
Total deferred tax assets net of valuation allowance ..... $ 245,326 $ 206,015
========= =========
Deferred tax liabilities:
Unrealized gain on investments and capital transaction
of affiliates ........................................ 40,556 40,233
Basis differences arising from tangible and deductible
intangible assets .................................... 14,077 (18,056)
Financial instruments .................................. 69,643 29,306
--------- ---------
Total deferred tax liabilities ........................... $ 124,276 $ 51,483
========= =========
Net current deferred tax assets as of December 31, 2002 and 2001 were
$78.5 million and $54.1 million, respectively, and were included in prepaid
expenses and other current assets. Net non-current deferred tax assets as of
December 31, 2002 and 2001 were $42.5 million and $100.4 million, respectively.
We have concluded that it is more likely than not that we will be able to
realize these deferred tax assets in future periods.
A provision has been made for additional income and withholding taxes on
the earnings of international subsidiaries and affiliates that will be
distributed.
9. Employee Retirement Plans
Our international and domestic subsidiaries provide retirement benefits
for their employees primarily through defined contribution plans. Company
contributions to the plans, which are determined by the boards of directors of
the subsidiaries, have generally been in amounts up to 15% (the maximum amount
deductible for U.S. federal income tax purposes) of total eligible compensation
of participating employees. Expenses related to the Company's contributions to
these plans in 2002 were $63.8 million, in 2001 were $69.2 million and in 2000
were $82.0 million.
Our pension plans are primarily related to non-U.S. businesses. These
plans are not subject to the Employee Retirement Income Security Act of 1974.
Substantially all of these plans are funded by fixed premium payments to
insurance companies which undertake to provide specific benefits to the
individuals covered. Pension expense recorded for these plans in 2002 was $12.4
million, in 2001 was $14.9 million and in 2000 was $11.1 million.
Certain of our subsidiaries have executive retirement programs under which
benefits will be paid to participants or to their beneficiaries over periods up
to 15 years beginning after cessation of full-time employment, at age 65 or
death. In addition, other subsidiaries have individual deferred compensation
arrangements with certain executives which provide for payments over varying
terms upon retirement, cessation of employment or death. The costs related to
these benefits, which are accrued during the employee's service period with us,
were not material to the 2002, 2001 and 2000 consolidated results of operations
or financial
F-20
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
position. Our obligation with respect to these programs is included in deferred
compensation and other liabilities on the balance sheet.
10. Commitments and Contingent Liabilities
At December 31, 2002, we were committed under operating leases,
principally for office space in many of the major cities around the world.
Certain leases are subject to rent reviews with various escalation clauses and
require payment of various operating expenses which may also be subject to
escalation clauses. Rent expense for the years ended December 31, 2002, 2001 and
2000 was reported as follows:
(Dollars in Thousands)
2002 2001 2000
--------- --------- ---------
Office Rent .................... $ 326,815 $ 313,449 $ 266,195
Third Party Sublease ........... (15,534) (8,046) (7,280)
--------- --------- ---------
Total Office Rent .............. 311,281 305,403 258,915
Equipment Rent ................. 152,146 147,338 127,901
--------- --------- ---------
Total Rent ..................... $ 463,427 $ 452,741 $ 386,816
========= ========= =========
Future minimum office and equipment base rents under terms of
non-cancelable operating leases, reduced by rents to be received from existing
non-cancelable subleases, are as follows:
(Dollars in Thousands)
Gross Sublease Net
Rent Rent Rent
---- ---- ----
2003 ....................... $395,730 $(14,045) $381,685
2004 ....................... 323,231 (11,063) 312,168
2005 ....................... 256,887 (7,891) 248,996
2006 ....................... 213,985 (5,401) 208,584
2007 ....................... 174,586 (4,079) 170,507
Thereafter ................. 840,908 (15,642) 825,266
The present value of the gross future minimum base rents under
non-cancelable operating leases is $1,564.4 million.
See note 14 for a discussion of legal proceedings to which we are subject.
11. Fair Value of Financial Instruments
The following table presents the carrying amounts and fair values of our
financial instruments at December 31, 2002 and 2001. Amounts in parentheses
represent liabilities.
2002 2001
--------------------------- ---------------------------
(Dollars in Thousands) (Dollars in Thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Cash, cash equivalents and
short-term investments ........... $ 695,881 $ 695,881 $ 516,999 $ 516,999
Other investments .................. 224,478 224,478 318,807 318,807
Long-term debt and convertible notes (1,944,898) (1,953,251) (1,340,105) (1,399,022)
Financial Commitments
Cross-currency interest rate swaps (27,556) (27,556) (11,626) (11,626)
Forward foreign exchange contracts (3,747) (3,747) (749) (749)
Guarantees ....................... -- (8,449) -- (19,435)
Letters of credit ................ -- (2,854) -- (8,080)
F-21
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Short-term investments:
Short-term investments which consist primarily of short-term investments
and investments in short-term interest bearing instruments with original
maturity dates between three months and one year are carried at cost which
approximates fair value.
Other investments:
Other investments are carried at cost, which approximates fair value. Our
investment in Seneca represents $181.0 million of the balance at December 31,
2002. Refer to note 6 for additional information about this investment.
Long-term debt and convertible notes:
A portion of our long-term debt includes floating rate debt, the carrying
value of which approximates fair value. Our long-term debt also includes
convertible notes and fixed rate debt. The fair value of these instruments was
determined by reference to quotations available in markets where these issues
were traded.
Financial commitments:
The estimated fair values of derivative positions are based upon
quotations received from independent, third party banks and represent the net
amount required to terminate the positions, taking into consideration market
rates and counterparty credit risk. The fair values of guarantees and letters of
credit are based upon the stated value of the underlying instruments. The
guarantees, which relate to real estate leases, were issued by us for affiliated
companies. The letters of credit represent guarantees issued by us on behalf of
our operating companies for activities in the normal course of business.
12. Financial Instruments and Market Risk
We adopted Statement Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and hedging Activities", on January 1,
2001. SFAS No. 133 establishes accounting and reporting standards requiring that
derivative instruments which meet the SFAS 133 definition of a derivative
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value.
Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of the change in fair
value of a derivative used as a hedge is required to be immediately recognized
in our statement of income.
In the first quarter of 2001, we recorded a $2.9 million after tax charge
in earnings ($4.9 million pre-tax) for the cumulative effect of adopting SFAS
No. 133. The charge resulted from our accounting for a hedge in our net Yen
investments. We utilized cross-currency interest rate swap contracts to hedge
our net Yen investments. Consistent with our policy with respect to derivative
instruments and hedging activities and in accordance with SFAS No. 133, we
designated the change in Yen spot rates as the hedged risk in our net Yen
investments. Since the contract was a hedge of our net Yen investments, the
change in the fair value of the contract attributable to changes in spot rates,
which was the effective portion of the hedge, was recorded as an offset in the
cumulative translation account, the same account in which translation gains and
losses on the net Yen investment are recorded. All other changes in the fair
value of the contract were recorded currently in operating income or expense as
ineffectiveness. During the first quarter of 2001, we replaced the contract with
a floating rate cross-currency swap contract. As a result, minimal
ineffectiveness will result for the remaining term.
F-22
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our derivative activities are limited in volume and confined to risk
management activities related to our international operations. We have
established a centralized reporting system to evaluate the effects of changes in
interest rates, currency exchange rates and other relevant market risks. We
periodically determine the potential loss from market risk by performing a
value-at-risk computation. Value-at-risk analysis is a statistical model that
utilizes historic currency exchange and interest rate data to measure the
potential impact on future earnings of our existing portfolio of derivative
financial instruments. The value-at-risk analysis we performed on our December
31, 2002 portfolio of derivative financial instruments indicated that the risk
of loss was immaterial. Counterparty risk arises from the inability of a
counterparty to meet its obligations. To mitigate counterparty risk, we entered
into derivative contracts with major well-known banks and financial institutions
that have credit ratings at least equal to our credit rating. This system is
designed to enable us to initiate remedial action, if appropriate.
At December 31, 2002 and 2001, we had Japanese Yen 19.1 billion and 16.3
billion, respectively, aggregate notional principal amount of cross-currency
interest rate swaps which mature in 2005. The swaps effectively hedge our net
investment in Japanese Yen denominated assets.
We routinely enter into forward foreign exchange contracts to hedge
intercompany cash movements between subsidiaries with different functional
currencies. Changes in market value of the forward contracts are included in the
income statement and are offset by the corresponding change in value of the
underlying asset or liability being hedged. The terms of these contracts are
generally ninety days or less. At December 31, 2002 and 2001, the aggregate
amount of intercompany receivables and payables subject to this hedge program
was $791.7 million and $657.1 million, respectively. The table below summarizes
by major currency the notional principal amounts of the Company's forward
foreign exchange contracts outstanding at December 31, 2002 and 2001. The "buy"
amounts represent the U.S. dollar equivalent of commitments to purchase the
respective currency, and the "sell" amounts represent the U.S. dollar equivalent
of commitments to sell the respective currency. Refer to note 11 for a
discussion of the value of these instruments.
(Dollars in Thousands)
Notional Principal Amount
---------------------------------------------------
2002 2001
----------------------- -----------------------
Company Company Company Company
Buys Sells Buys Sells
-------- -------- -------- --------
U.S. Dollar ............ $ 32,058 $ 43,575 $100,613 $ 16,109
British Pound .......... 271,074 92,970 182,267 66,773
Euro ................... 3,941 160,657 9,006 178,565
Japanese Yen ........... 20,734 3,346 -- 12,477
Other .................. 66,369 96,988 36,165 55,103
-------- -------- -------- --------
Total ................ $394,176 $397,536 $328,051 $329,027
======== ======== ======== ========
The foreign currency and yen swap contracts existing during the years
ended December 31, 2002 and 2001 were entered into for the purpose of hedging
certain specific currency risks. As a result of these financial instruments, we
reduced financial risk in exchange for foregoing any gain (reward) which might
have occurred if the markets moved favorably. In using these contracts,
management exchanged the risks of the financial markets for counterparty risk.
To minimize counterparty risk, we only enter into these contracts with major
well-known banks and financial institutions that have credit ratings equal to or
better than our credit rating.
13. New Accounting Pronouncements
The following pronouncements were issued by the FASB in 2001 and 2002 and
impact our financial statements as discussed below: Statement of Financial
Accounting Standards No. 141, Business Combinations (SFAS 141); Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142); Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations (SFAS 143); Statements of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144); Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146); and
Statement of Financial
F-23
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB No. 123 (SFAS 148).
SFAS 141 requires all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 superseded Accounting
Pronouncement Bulletin ("APB") Opinion No. 16, Business Combinations, and
Statement of Financial Accounting Standards No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises, and is effective for all
business combinations initiated after June 30, 2001. Given that all of our
acquisitions in 2000 and 2001 were accounted for under the purchase method, the
adoption of SFAS 141 on July 1, 2001 and the cessation of goodwill amortization
on post July 1, 2001 acquisitions as required by SFAS 142, as discussed below,
was not material to our 2001 results of operations and financial position.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. SFAS 142 supersedes APB Opinion No. 17,
Intangible Assets. Effective January 1, 2002, companies are no longer required
to amortize goodwill and other intangibles that have indefinite lives, but these
assets will be subject to periodic testing for impairment. Additionally,
goodwill acquired in a business combination for which the acquisition date was
after June 1, 2001 is no longer required to be amortized. We adopted SFAS 142
effective January 1, 2002. We completed the initial impairment test during the
second quarter of 2002 and we expect to complete the next annual impairment test
by the end of the second quarter of 2003. At this time we do not expect that the
results of the impairment testing will be material to our results of operations
and financial position.
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)
2002 2001
----------- ----------------------------
as adjusted as reported
Operating profit ............... $ 1,104,115 $ 1,062,974 $ 968,184
Income before Income Taxes ..... 1,073,623 990,175 895,385
Equity in Affiliates ........... 13,811 15,444 12,667
Minority Interest .............. (68,338) (54,266) (52,782)
Diluted EPS .................... $ 3.44 $ 3.13 $ 2.70
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. Effective
January 1, 2002, we adopted SFAS 144. The adoption did not result in an
impairment charge.
SFAS 146 requires costs associated with exit or disposal activities be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal costs that are initiated
after December 31, 2002. We plan to adopt SFAS 146 effective January 1, 2003. We
do not expect that the adoption will have a material impact on our consolidated
results of operations or financial position.
SFAS 148 is issued as an amendment to FASB No. 123, Accounting for
Stock-Based Compensation and provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation (in accordance with SFAS 123). We have applied
the accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and we have made the annual pro forma disclosures of the effect of
adopting the fair value method of accounting for employee stock options and
similar instruments as required by SFAS 123 and permitted under SFAS 148. SFAS
148 also requires pro forma disclosure to be provided on a quarterly basis. We
plan on adopting the quarterly disclosure requirement during the first quarter
of 2003, and will continue to closely monitor developments in the area of
accounting for stock-based compensation.
FIN 45 sets forth the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees issued.
FIN 45 also clarifies that a guarantor is required to recognize, at inception of
a guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. If the initial
recognition and measurement issues were in effect at December 31, 2002, we would
have recorded
F-24
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
both an asset and a liability of an equal amount of $11.3 million related to
certain real estate lease guarantees and letters of credit. Additional
information appears in note 11 to our consolidated financial statements on pages
F-21 and F-22 of this report.
FIN 46 addresses the consolidation by business enterprises of variable
interest entities, as defined in the FIN 46 and is based on the concept that
companies that control another entity through interests, other than voting
interests, should consolidate the controlled entity. The consolidation
requirements apply immediately to FIN 46 interests held in variable interest
entities created after January 31, 2003, and to interests held in variable
interest entities that existed prior to February 1, 2003 and remain in existence
as of July 1, 2003. Additionally, FIN 46 would require certain disclosure in our
2002 financial statements if it was reasonably possible that we will consolidate
or disclose information about variable interest entities in existence as of July
1, 2003. The application of FIN 46 did not result in additional disclosure in
our 2002 financial statements and is not expected to have a material impact on
our 2003 consolidated results of operations or financial position.
The Emerging Issues Task Force ("EITF") of the FASB also released
interpretive guidance covering several topics that impact our financial
statements. These topics include revenue arrangements with multiple deliverables
(EITF 00-21), customer relationship intangible assets acquired (EITF 02-17) and
vendor rebates (EITF 02-16). The application of this guidance did not have a
material impact on our consolidated results of operations or financial position.
14. 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 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 relating to among other things our calculation of our growth rate,
accounting for acquisitions and our future acquisition obligations and our
transfer of our Communicade subsidiary to Seneca Investments LLC. 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. All but two of
the complaints have been consolidated into a single proceeding, and the
remaining two are expected to be included as well, with one or more lead
plaintiffs to be appointed in accordance with applicable procedures.
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. 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.
Management presently expects to defend these cases vigorously. Currently,
we are unable to determine the outcome of these cases and the effect on our
financial position or results of operations. 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.
We are also involved from time to time in various legal proceedings in the
ordinary course of business. We do not presently expect that these proceedings
will have a material adverse effect on our consolidated financial position or
results of operations.
15. Subsequent Events (Unaudited)
On February 3, 2003, we offered to pay holders of the Liquid Yield Option
notes due in 2031, $30 per $1,000 principal amount of notes as an incentive to
the holders not to exercise their put right. In addition, on February 7, 2003,
we repurchased for cash, notes from holders who tendered their notes for $2.9
million, reducing the aggregate amount of the notes due 2031 to $847.0 million.
F-25
OMNICOM GROUP INC. AND SUBSIDIARIES
Quarterly Results of Operations (Unaudited)
The following table sets forth a summary of the Company's unaudited
quarterly results of operations for the years ended December 31, 2002 and 2001,
in thousands of dollars except for per share amounts. The 2001 amounts have been
adjusted to exclude goodwill amortization.
Quarter
--------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
Revenue
2002 .................... $ 1,732,426 $ 1,916,569 $ 1,768,459 $ 2,118,845
2001 .................... 1,601,133 1,746,788 1,571,012 1,970,473
Income Before Income Taxes
2002 .................... 217,536 324,548 205,827 325,712
2001 .................... 170,975 271,667 164,090 288,653
Income Taxes
2002 .................... 79,858 122,014 69,696 104,069
2001 .................... 67,723 107,613 64,340 112,452
Income After Taxes
2002 .................... 137,678 202,534 136,131 221,643
2001 .................... 103,252 164,054 99,750 176,201
Equity in Affiliates
2002 .................... 2,522 3,454 2,436 5,399
2001 .................... 410 2,880 2,521 6,858
Minority Interests
2002 .................... (11,634) (18,673) (12,463) (25,568)
2001 .................... (8,382) (15,568) (9,916) (18,918)
Net Income
2002 .................... 128,566 187,315 126,104 201,474
2001 .................... 95,280 151,366 92,355 164,141
Basic Net Income Per Share
2002 .................... 0.69 1.01 0.68 1.08
2001 .................... 0.52 0.83 0.50 0.89
Diluted Net Income Per Share
2002 .................... 0.68 1.00 0.68 1.08
2001 .................... 0.52 0.81 0.50 0.87
F-26
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Schedule II
OMNICOM GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 2002
(Dollars in Thousands)
================================================================================================================
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Balance at Charged Removal of Translation Balance
Beginning to Costs Uncollectable Adjustments at End of
Description of Period and Expenses Receivables (1) (increase) Period
- ----------------------------------------------------------------------------------------------------------------
Valuation accounts deducted from
Assets to which they apply --
Allowance for doubtful accounts:
December 31, 2002 ......................... $79,183 $21,846 $30,113 $(4,659) $75,575
December 31, 2001 ......................... 72,745 30,739 23,764 537 79,183
December 31, 2000 ......................... 53,720 25,989 5,224 1,740 72,745
- ----------------------------------------------------------------------------------------------------------------
(1) Net of acquisition date balances in allowance for doubtful accounts of
companies acquired of $2.0 million, $3.1 million and $7.7 million in 2002,
2001 and 2000, respectively.
S-1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Significant Subsidiaries
Percentage of Voting Number Number
Jurisdiction of Securities Owned of US of Non-US
Company Incorporation by Registrant subsidiaries subsidiaries
-------- ------------- ------------------ ----------- ----------
Omnicom Capital Inc. ........................... Connecticut 100% 0 0
Omnicom Finance Inc. ........................... Delaware 100% 0 0
Omnicom Europe Limited ......................... United Kingdom 100% 3 384
Omnicom Holdings Inc. .......................... Delaware 100% 1 0
BBDO Worldwide Inc. ............................ New York 100% 15 331
DDB Worldwide Communications Group, Inc. ....... New York 100% 12 221
TBWA Worldwide Inc. ............................ New York 100% 20 233
DAS Holdings Inc. .............................. Delaware 100% 10 2
Omnicom Media Group Holdings Inc. .............. Delaware 100% 4 7
Fleishman-Hillard Inc. ......................... Delaware 100% 7 16
Ketchum Inc. ................................... Delaware 100% 3 3
InterOne Marketing Group, Inc. ................. Michigan 100% 1 1
Bernard Hodes Group, Inc ....................... Delaware 100% 2 0
Rapp Partnership Holdings Inc. ................. Delaware 100% 5 0
Cline, Davis & Mann, Inc. ...................... New York 100% 0 0
Zimmerman and Partners Advertising ............. Delaware 100% 8 0
S-2
Other Agencies
Percentage of Voting
Jurisdiction of Security Owned by
Company Incorporation Registrant
-------- ------------ ------------------
Accel Healthcare Delaware 63%
Adelphi Group United Kingdom 100%
Alcone Marketing Group California 100%
Anderson DDB Canada 100%
ARA Group Netherlands 100%
Arnell Group Delaware 100%
atmosphere Delaware 90%
Auditoire France 100%
AWE Delaware 100%
Brodeur Worldwide Massachusetts 100%
Carlson and Partners New York 100%
Changing Our World Delaware 100%
Clark & Weinstock Delaware 100%
Claydon Heeley Jones Mason United Kingdom 100%
Cone Massachusetts 100%
Corbett Healthcare Group Illinois 100%
CPM United Kingdom 100%
Davie-Brown California 100%
del Rivero Messianu Delaware 80%
Dieste, Harnel & Partners Texas 100%
Direct Partners Delaware 100%
Doremus Delaware 100%
Eden Communications Group Delaware 100%
Element 79 Partners Delaware 80%
Gavin Anderson & Company Delaware 100%
Generator Canada 100%
Goodby, Silverstein & Partners California 100%
Grizzard Communications Delaware 100%
GSD&M Texas 100%
Harrison & Star Business Group New York 100%
Heye & Partner Germany 100%
Horrow Sports Ventures Florida 80%
ICON Connecticut 51%
Integer Group Colorado 100%
Integrated Merchandising Services Delaware 100%
Interbrand New York 100%
InterScreen Germany 100%
Jump France 90%
Kaleidoscope New York 100%
Ketchum Directory Advertising Delaware 100%
KPR New York 100%
Lieber Levett Koenig Farese Babcock New York 100%
Lyons Lavey Nickel Swift New York 100%
M/A/R/C Research Texas 100%
Market Star Utah 100%
Martin/Williams Minnesota 100%
Matthews Media Group Maryland 100%
Merkley Newman Harty & Partners Delaware 100%
MicroMedia Finland 100%
Millsport Delaware 60%
Moss Dragoti N/A N/A
National In-Store Florida 100%
New Solutions United Kingdom 100%
Novus Delaware 100%
OMD USA Inc. Delaware 100%
S-3
Other Agencies
Percentage of Voting
Jurisdiction of Security Owned by
Company Incorporation Registrant
-------- ------------ ------------------
Organic Delaware 100%
Paris Venise Design France 100%
PGC Advertising Texas 100%
PhD United Kingdom 100%
Porter Novelli Inc. Delaware 100%
Radiate Sports & Entertainment Group Delaware 100%
Russ Reid Company Illinois 50%
Salesforce Australia 100%
Screen Germany 100%
Sellbytel Germany 76.3%
Serino Coyne New York 80%
Staniforth United Kingdom 100%
Steiner Sports Marketing New York 100%
TARGIS Healthcare Communications Worldwide Germany 85%
Tequila Delaware 100%
The Ant Farm California 90%
The Designory California 100%
The Marketing Arm Delaware 100%
The Promotion Network Texas 51%
TicToc Delaware 85%
TPG Delaware 100%
Tracy Locke Partnership Texas 100%
Tribal DDB Delaware 100%
U.S. Marketing & Promotions Delaware 100%
Washington Speakers Bureau Delaware 100%
Wolff Olins United Kingdom 100%
S-4