SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-10551
OMNICOM GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1514814
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
437 Madison Avenue, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 415-3600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). YES X NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 190,036,900 (as of July 31,
2003)
OMNICOM GROUP INC. AND SUBSIDIAIRES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 2003 and December 31, 2002........................ 1
Consolidated Condensed Statements of Income - Three Months
and Six Months Ended June 30, 2003 and 2002................ 2
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002.................... 3
Notes to Consolidated Condensed Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 20
Item 4. Controls and Procedures......................................... 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
Signatures...................................................... 24
Certifications of Senior Executive Officers..................... 25
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 523,032 $ 666,951
Short-term investments at market, which approximates cost ..... 20,547 28,930
Accounts receivable, less allowance for doubtful accounts
of $69,307 and $75,575 ..................................... 4,176,515 3,966,550
Billable production orders in process, at cost ................ 519,676 371,816
Prepaid expenses and other current assets ..................... 679,263 602,819
------------ ------------
Total Current Assets ............................. 5,919,033 5,637,066
------------ ------------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of
$770,449 and $717,294 ......................................... 569,110 557,735
INVESTMENTS IN AFFILIATES .......................................... 147,006 137,303
GOODWILL ........................................................... 5,462,458 4,850,829
INTANGIBLES, net of accumulated amortization of $106,044 and $88,132 99,832 97,730
DEFERRED TAX BENEFITS .............................................. 54,413 42,539
OTHER ASSETS ....................................................... 337,843 496,600
------------ ------------
TOTAL ASSETS ..................................... $ 12,589,695 $ 11,819,802
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 4,543,047 $ 4,833,681
Advance billings .............................................. 678,551 648,577
Current portion of long-term debt ............................. 20,403 35,256
Bank loans .................................................... 64,889 50,394
Accrued taxes and other liabilities ........................... 1,262,638 1,271,616
------------ ------------
Total Current Liabilities ........................ 6,569,528 6,839,524
------------ ------------
LONG-TERM DEBT ..................................................... 184,430 197,861
CONVERTIBLE NOTES .................................................. 2,339,310 1,747,037
DEFERRED COMPENSATION AND OTHER LIABILITIES ........................ 326,895 293,638
MINORITY INTERESTS ................................................. 183,991 172,815
SHAREHOLDERS' EQUITY:
Common stock .................................................. 29,790 29,790
Additional paid-in capital .................................... 1,384,244 1,419,910
Retained earnings ............................................. 2,359,122 2,114,506
Unamortized restricted stock .................................. (155,432) (136,357)
Accumulated other comprehensive loss .......................... (23,311) (154,142)
Treasury stock ................................................ (608,872) (704,780)
------------ ------------
Total Shareholders' Equity ....................... 2,985,541 2,568,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 12,589,695 $ 11,819,802
============ ============
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE ........................... $ 2,149,508 $ 1,916,569 $ 4,086,753 $ 3,648,995
OPERATING EXPENSES:
Salary and service costs ..... 1,409,367 1,221,850 2,748,764 2,394,388
Office and general expenses .. 403,496 364,229 777,989 695,258
----------- ----------- ----------- -----------
1,812,863 1,586,079 3,526,753 3,089,646
----------- ----------- ----------- -----------
OPERATING PROFIT .................. 336,645 330,490 560,000 559,349
NET INTEREST EXPENSE:
Interest expense ............. 16,164 10,658 27,385 24,510
Interest income .............. (3,212) (4,716) (6,164) (7,245)
----------- ----------- ----------- -----------
12,952 5,942 21,221 17,265
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ........ 323,693 324,548 538,779 542,084
INCOME TAXES ...................... 110,555 122,014 185,766 201,872
----------- ----------- ----------- -----------
INCOME AFTER INCOME TAXES ......... 213,138 202,534 353,013 340,212
EQUITY IN AFFILIATES .............. 1,865 3,454 4,351 5,976
MINORITY INTERESTS ................ (24,256) (18,673) (38,033) (30,307)
----------- ----------- ----------- -----------
NET INCOME ................ $ 190,747 $ 187,315 $ 319,331 $ 315,881
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ..................... $1.02 $1.01 $1.71 $1.70
Diluted ................... $1.02 $1.00 $1.70 $1.67
DIVIDENDS DECLARED PER COMMON SHARE $0.20 $0.20 $0.40 $0.40
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income ............................................................... $ 319,331 $ 315,881
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation tangible assets ........................................ 60,233 59,866
Amortization of intangible assets ................................... 16,185 7,297
Minority interests .................................................. 38,033 30,307
Earnings of affiliates less than dividends received ................. 1,924 3,212
Tax benefit on employee stock plans ................................. 5,624 12,243
Provisions for losses on accounts receivable ........................ 2,251 2,892
Amortization of restricted shares ................................... 23,836 31,924
Increase in accounts receivable ..................................... (58,724) (161,371)
Increase in billable production orders in process ................... (138,069) (101,347)
Increase in prepaid expenses and other current assets ............... (60,969) (37,615)
Increase in other assets, net ....................................... (1,680) (22,203)
Net decrease in advance billings, accrued taxes and other liabilities (127,194) (432,662)
Decrease in accounts payable ........................................ (444,050) (101,221)
----------- -----------
Net cash used for operating activities ........................... (363,269) (392,797)
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................................ (60,119) (62,011)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired ................................. (173,391) (278,938)
Purchases of short-term investments ................................. (2,402) (10,849)
Proceeds from sale of short-term investments ........................ 12,330 11,013
----------- -----------
Net cash used in investing activities ............................ (223,582) (340,785)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings .................... 10,382 (73,708)
Net proceeds from issuance of new convertibles and debt ............. 586,500 1,503,689
Repayments of principal of long-term debt obligations ............... (41,461) (309,073)
Dividends paid ...................................................... (74,716) (73,964)
Purchase of treasury shares ......................................... -- (368,819)
Other, net .......................................................... (29,303) 14,611
----------- -----------
Net cash provided by financing activities ........................ 451,402 692,736
----------- -----------
Effect of exchange rate changes on cash and cash equivalents ............. (8,470) (21,334)
----------- -----------
Net Decrease in cash and cash equivalents ........................ (143,919) (62,180)
Cash and cash equivalents at beginning of period ......................... 666,951 472,151
----------- -----------
Cash and cash equivalents at end of period ............................... $ 523,032 $ 409,971
=========== ===========
Supplemental disclosures:
Income taxes paid ................................................... $ 130,186 $ 243,546
Interest paid ....................................................... $ 43,501 $ 24,379
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. We have prepared the consolidated condensed interim financial statements
included herein without audit pursuant to Securities and Exchange
Commission rules. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") have been condensed or omitted
pursuant to these rules.
2. The accompanying financial statements reflect all adjustments, consisting
of normally recurring accruals, which in the opinion of management are
necessary for a fair presentation, in all material respects, of the
information contained therein. Certain reclassifications have been made to
the June 30, 2002 and December 31, 2002 reported amounts to conform them to
the June 30, 2003 presentation. These statements should be read in
conjunction with the consolidated financial statements and related notes
included in our annual report on Form 10-K for the year ended December 31,
2002.
3. Results of operations for interim periods are not necessarily indicative of
annual results.
4. Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based on the above, plus, if dilutive, common share equivalents which
include outstanding options and restricted shares, some of which were not
dilutive for the periods presented. No adjustments were made for our $2.3
billion aggregate principal amount of convertible notes because the
conversion criteria have not been met. For purposes of computing diluted
earnings per share, 953,000 and 2,414,000 common share equivalents were
assumed to be outstanding for the three months ended June 30, 2003 and
2002, respectively, and 793,000 and 2,828,000 common share equivalents were
assumed to be outstanding for the six months ended June 30, 2003 and 2002,
respectively.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was $302,000
and $187,500 for the three months ended June 30, 2003 and 2002,
respectively and $604,000 and $375,100 for the six months ended June 30,
2003 and 2002, respectively.
The number of shares used in our EPS computations were:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic EPS Computation 187,172,000 185,705,000 186,864,000 186,227,000
Diluted EPS Computation 188,125,000 188,119,000 187,658,000 189,056,000
4
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
5. Total comprehensive income and its components were:
(in thousands of dollars)
------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income for the period.................... $ 190,747 $ 187,315 $ 319,331 $ 315,881
Foreign currency translation adjustment, net
of income taxes of $61,055 and $64,051 and
$70,447 and $45,655 for the three months
and six months ended June 30, 2003 and 2002,
respectively................................. 113,388 106,297 130,831 77,073
--------- --------- --------- ---------
Comprehensive income for the period.......... $ 304,135 $ 293,612 $ 450,162 $ 392,954
========= ========= ========= =========
6. The following pronouncements were issued by the Financial Accounting
Standards Board ("FASB") in 2002: Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146); Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB No. 123 (SFAS 148); Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity (SFAS 150).
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 adopted SFAS 146 effective January 1,
2003. The adoption did not have an impact on our consolidated results of
operations or financial position.
SFAS 148 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
under SFAS 123 and SFAS 148. We have adopted the quarterly disclosure
requirement as required under SFAS 148 as set forth in note 7 below. This
disclosure requirement did not have an impact on our consolidated results
of operations or financial position. The FASB recently indicated that they
will issue a new accounting standard that will require stock-based employee
compensation to be recorded as a charge to earnings beginning in 2004. We
will continue to monitor the progress of the FASB with regard to the
issuance of this standard.
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
5
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
some circumstances). While adoption is not required until the third quarter
of 2003, we believe that the application will not have an impact on, or
result in additional disclosure in, our consolidated results of operations
or financial position.
The following FASB Interpretations ("FINs") were issued in 2002 and
2003: FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others - an
Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34; and FIN 46, Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51.
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 application of FIN 45 did not have an impact
on, or result in additional disclosure, in our June 30, 2003 consolidated
results of operations or financial position.
FIN 46 addresses the consolidation by business enterprises of variable
interest entities, as defined in 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. The application of FIN 46 did not
have an impact on, or result in additional disclosure in, our June 30, 2003
consolidated results of operations or financial position.
7. The table below summarizes the quarterly pro forma effect of adopting the
fair value method of accounting for employee stock options and similar
instruments for the three months and six months ended June 30, 2003 and
2002.
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands of dollars, except per share amounts)
Net income, as reported.......................... $ 190,747 $ 187,315 $ 319,331 $ 315,881
Net income, pro forma............................ 180,081 171,856 295,235 274,297
Stock-based employee compensation cost,
net of tax, as reported...................... 9,030 8,619 17,125 16,173
Additional stock-based employee compensation
cost, net of tax, pro forma................. 10,666 15,459 24,096 41,584
Basic net income per share, as reported.......... 1.02 1.01 1.71 1.70
Basic net income per share, pro forma............ 0.96 0.93 1.58 1.47
Diluted net income per share, as reported........ 1.02 1.00 1.70 1.67
Diluted net income per share, pro forma.......... 0.96 0.92 1.58 1.47
6
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
8. All of 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. We believe that the businesses have similar cost structures and are
subject to the same general economic and competitive risks. Given these
similarities, we aggregate their results into one reportable segment.
A summary of our revenue and long-lived assets by geographic area as
of June 30, 2003 and 2002 is set forth in the following table.
(in thousands of dollars)
---------------------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Total
------ ----------- ------- ------------- -----
Revenue
3 Months Ended June 30,
2003 $1,182,273 $ 446,856 $ 232,093 $ 288,286 $2,149,508
2002 1,117,548 360,269 195,272 243,480 1,916,569
Revenue
6 Months Ended June 30,
2003 $2,281,848 $ 834,228 $ 443,683 $ 526,994 $4,086,753
2002 2,139,678 680,167 378,174 450,976 3,648,995
Long-lived Assets
At June 30,
2003 $ 315,622 $ 82,657 $ 86,375 $ 84,456 $ 569,110
2002 317,293 72,595 93,388 74,625 557,901
9. At June 30, 2003, we had unsecured committed credit lines of $64.9 million,
which were fully drawn and are reflected as short-term bank loans. These
unsecured loans were comprised of domestic borrowings and bank overdrafts
of our international subsidiaries. In addition, we had unsecured committed
revolving credit facilities of $1,875.0 million. There were no drawings
under the revolving credit facilities and no commercial paper outstanding
as of June 30, 2003.
10. In June 2003, we issued $600.0 million aggregate principal amount of
Zero Coupon Zero Yield Convertible Notes due 2033. The notes are senior
unsecured obligations that are convertible into 5.8 million common shares,
implying a conversion price of $103.00 per common share, subject to normal
anti-dilution adjustments. These notes are convertible at the specified
ratio only upon the occurrence of certain events, including if our common
shares trade above certain levels, if we effect extraordinary transactions
or if our long-term debt ratings are downgraded from their current level to
Ba1 or lower by Moody's Investors Services, Inc. ("Moody's") or BBB- or
lower by Standard & Poor's Ratings Services ("S&P"). The occurrence of
these events will not result in an adjustment of the number of shares
issuable upon conversion. Holders of these notes have the right to put the
notes back to us for, at our election, cash, stock or a combination of both
on June 15, 2006, 2008, 2010, 2013, 2018, 2023 and on each June 15 annually
thereafter through June 15, 2032 and we have a right to redeem the notes
for cash beginning on June 15, 2010. There are no
7
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
events that accelerate the noteholders' put rights. Beginning in June
2010, if the market price of our common shares exceeds certain thresholds,
we may be required to pay contingent cash interest on the notes.
The net proceeds of the issuance of these notes were $586.5 million which
was used to pay down short-term bank loans and our outstanding commercial
paper.
11. On February 21, 2003, we paid $25.4 million to qualified noteholders of our
Liquid Yield Option Notes due in 2031, equal to $30 per $1,000 principal
amount of notes as an incentive to the holders not to exercise their put
right. This payment is being amortized ratably over a 12-month period. In
addition, on February 7, 2003, we repurchased for cash, notes from holders
who exercised their put right for $2.9 million, reducing the aggregate
amount outstanding of the notes due 2031 to $847.0 million.
12. In June 2003, we acquired all of the common stock of AGENCY.COM from Seneca
Investments LLC ("Seneca"). The transaction was effected by the redemption
of our preferred stock in Seneca, including cumulative dividends, with a
value of $181.0 million and the assumption of $15.8 million of liabilities.
The redemption of the preferred stock was applied against our remaining
carrying value in the preferred stock using the cost recovery method. The
remaining shares of preferred stock are entitled to cumulative dividends at
a rate of 8.5% compounded semiannually. Unpaid dividends accrue on a
cumulative basis. No cash dividends have been paid by Seneca or accrued by
the Company in 2003 and prior. Any future dividends will not be recognized
until they are realized.
At June 30, 2003, substantially all of the purchase price was allocated to
goodwill. We are currently performing a valuation of the intangible assets
of AGENCY.COM, and upon completion, some portion of the purchase price may
be assigned to intangible assets other than goodwill. The transaction
closed in June 2003 and we do not believe that any amounts that may be
allocated to other intangibles will have a material impact on our June 30,
2003 interim results of operations and financial position had the
allocation been completed at June 30, 2003.
13. On August 6, 2003, we paid $6.7 million to qualified noteholders holders of
our Zero Coupon Zero Yield Convertible Notes due in 2032, equal to $7.50
per $1,000 principal amount of notes as an incentive to the holders not to
exercise their put right. This payment is being amortized ratably over a
12-month period. In addition, on August 1, 2003, we repurchased for cash,
notes from holders who exercised their put right for $7.7 million, reducing
the aggregate amount outstanding of the notes due 2032 to $892.3 million.
In addition, for those holders who did not exercise their put right the no
call period on the notes has been extended for the period ended July 31,
2007 to July 31, 2009.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Results of Operations
Second Quarter 2003 Compared to Second Quarter 2002
Revenue: Our second quarter of 2003 consolidated worldwide revenue
increased 12.2% to $2,149.5 million from $1,916.6 million in the second quarter
of 2002. The effect of acquisitions, net of disposals, increased worldwide
revenue by $56.7 million in the second quarter of 2003. Internal/organic growth
increased worldwide revenue by $49.9 million, and foreign exchange impacts
increased worldwide revenue by $126.3 million. The components of the second
quarter 2003 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
-------------------- ------------------- -------------------
$ % $ % $ %
----------- --- ---------- --- ----------- ---
Second Quarter ended June 30, 2002... $ 1,916.6 -- $ 1,117.5 -- $ 799.1 --
Components of Revenue Changes:
Foreign exchange impact.............. 126.3 6.6% -- -- 126.3 15.8%
Acquisitions......................... 56.7 3.0% 32.1 2.9% 24.6 3.0%
Organic.............................. 49.9 2.6% 32.7 2.9% 17.2 2.2%
--------- ---- ---------- --- ---------- ----
Second Quarter ended June 30, 2003... $ 2,149.5 12.2% $ 1,182.3 5.8% $ 967.2 21.0%
========== ==== ========== === ========== ====
The components and percentages are calculated as follows:
o The foreign exchange impact component shown in the table is calculated
by first converting the current period's local currency revenue using
the average exchange rates from the equivalent prior period to arrive
at a constant currency revenue (in this case $2,023.2 million for the
Total column in the table). The foreign exchange impact equals the
difference between the current period revenue in U.S. dollars and the
current period revenue in constant currency (in this case $2,149.5
million less $2,023.2 million for the Total column in the table).
o The acquisition component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any business
included in the prior period reported revenue that was disposed of
subsequent to the prior period.
o The organic component shown in the table is calculated by subtracting
both the foreign exchange and acquisition revenue components from
total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base of that component (in this case $1,916.6 million
for the Total column in the table).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
The components of revenue and revenue growth for the second quarter of 2003
compared to the second quarter of 2002, in our primary geographic markets are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $1,182.3 5.8%
Euro Markets........................ 446.8 24.0%
United Kingdom...................... 232.1 18.9%
Other............................... 288.3 18.4%
-------- ----
Total............................... $2,149.5 12.2%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $126.3 million during the quarter ended June 30, 2003. The most significant
impacts resulted from the continued strength 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.
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.
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 as summarized below.
10
(Dollars in millions)
------------------------------------------------------------------------
Three Months Ended June 30,
------------------------------------------------------------------------
2003 % of 2002 % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising $ 944.2 43.9% $ 821.8 42.9% $ 122.4 14.9%
CRM 693.3 32.3% 589.0 30.7% 104.3 17.7%
Public relations 249.3 11.6% 245.9 12.8% 3.4 1.4%
Specialty communications 262.7 12.2% 259.9 13.6% 2.8 1.1%
--------- --------- -------
$ 2,149.5 $ 1,916.6 $ 232.9
========= ========= =======
Operating Expenses: Our second quarter of 2003 worldwide operating expense
increased $226.8 million, or 14.3%, to $1,812.9 million from $1,586.1 million in
the second quarter of 2002, as described below.
Salary and service costs, which are comprised of direct service costs and
salary and related costs, increased by $187.5 million, or 15.3%, and represented
77.7% of total operating expenses in the second quarter of 2003 versus 77.0% in
the second quarter of 2002. These expenses increased as a percentage of revenue
to 65.6% in the second quarter of 2003 from 63.8% in the second quarter of 2002.
The increases were primarily the result of changes in the mix of our revenues,
greater utilization of freelance labor, increased severance costs and increased
investment in key personnel. This increase was offset by reductions in incentive
compensation and bonuses and our continuing efforts to align permanent staffing
with current work levels on a location-by-location basis, as well as our
continued attempts to increase the variability of our cost structure.
Office and general expenses increased by $39.3 million, or 10.8%, in the
second quarter of 2003. Office and general expenses represented 22.3% of our
total operating costs in the second quarter of 2003 versus 23.0% in the second
quarter of 2002. Additionally, as a percentage of revenue, office and general
expenses decreased marginally in the second quarter of 2003 to 18.8% from 19.0%.
This relatively consistent year-over-year performance results from our continued
efforts to better align costs with business levels on a location-by-location
basis.
For the foregoing reasons, our operating margin decreased to 15.7% in the
second quarter of 2003, from 17.2% in the second quarter of 2002.
Net Interest Expense: Our net interest expense increased in the second
quarter of 2003 to $13.0 million as compared to $5.9 million in the same period
in 2002. Our gross interest expense increased by $5.5 million to $16.2 million.
This increase resulted from additional interest costs associated with our
payment on February 21, 2003, of $30 per $1,000 principal amount of our Liquid
Yield Option Notes due 2031 as an incentive to the holders not to exercise their
put right. This payment to qualified noteholders amounted to $25.4 million which
is being amortized ratably over a 12-month period. This was partially offset by
generally lower short-
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
term interest rates and cash management efforts during the quarter and the
issuance in June 2003 of the $600.0 million Zero Coupon Zero Yield Convertible
Notes due 2033.
In addition, on August 6, 2003 we paid $6.7 million to qualified
noteholders of the Zero Coupon Zero Yield Convertible Notes dues 2032 as an
incentive to the holders not to exercise their put right. This payment is being
amortized ratably over a twelve-month period.
As a result of the amortization of the February and August payments, we
expect interest expense to increase by $23.3 million for the full-year 2003
compared to 2002.
Income Taxes: Our consolidated effective income tax rate was 34.2% in the
second quarter of 2003, which is less than the 37.6% rate in the second quarter
of 2002 and is slightly less than our full year rate for 2002 of 35.0%. This
reduction reflects the realization of our ongoing focus on tax planning.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
second quarter of 2003, increased to $190.7 million. Diluted earnings per share
increased 2.0% to $1.02 in the second quarter of 2003, as compared to $1.00 in
the prior year period.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Six Months 2003 Compared to Six Months 2002
Revenue: Our consolidated worldwide revenue in the first six months of
2003 increased 12.0% to $4,086.8 million from $3,649.0 million in 2002. The
effect of acquisitions, net of disposals, increased worldwide revenue by $109.5
million. Internal/organic growth increased worldwide revenue by $94.7 million,
and foreign exchange impacts increased worldwide revenue by $233.6 million. The
components of total 2003 revenue growth in the U.S. ("domestic") and the
remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International
-------------------- ------------------- -------------------
$ % $ % $ %
----------- --- ---------- --- ----------- ---
Six Months ended June 30, 2002....... $ 3,649.0 -- $ 2,139.6 -- $ 1,509.4 --
Components of Revenue Changes:
Foreign exchange impact.............. 233.6 6.4% -- -- 233.6 15.5%
Acquisitions......................... 109.5 3.0% 65.6 3.1% 43.9 2.9%
Organic.............................. 94.7 2.6% 76.6 3.6% 18.1 1.2%
--------- --- --------- --- ---------- ---
Six Months ended June 30, 2003....... $ 4,086.8 12.0% $ 2,281.8 6.7% $ 1,805.0 19.6%
========== ==== ========== === ========== ====
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 $3,853.2 million for the Total
column in the table). The foreign exchange impact equals the difference
between the current period revenue in U.S. dollars and the current period
revenue in constant currency (in this case $4,086.8 million less $3,853.2
million for the Total column in the table).
o The acquisition component shown in the table is calculated by aggregating
the applicable prior period revenue of the acquired businesses. Netted
against this number is the revenue of any business included in the prior
period reported revenue that was disposed of subsequent to the prior
period.
o The organic component shown in the table is calculated by subtracting both
the foreign exchange and acquisition revenue components from total revenue
growth.
o The percentage change shown in the table of each component is calculated by
dividing the individual component amount by the prior period revenue base
of that component (in this case $3,649.0 million for the Total column in
the table).
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
The components of total revenue and revenue growth for the six months ended
June 30, 2003 compared to the six months ended June 30, 2002, in our primary
geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $ 2,281.8 6.6%
Euro Markets........................ 834.2 22.7%
United Kingdom...................... 443.7 17.3%
Other............................... 527.1 16.9%
---------- ----
Total............................... $ 4,086.8 12.0%
========== ====
As indicated, foreign exchange impacts increased our international revenue
by $233.6 million during the six months ended June 30, 2003. The most
significant impacts resulted from the continued strength 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.
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.
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 as summarized below.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
(Dollars in millions)
------------------------------------------------------------------------
Six Months Ended June 30,
------------------------------------------------------------------------
2003 % of 2002 % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising $ 1,803.9 44.1% $ 1,599.6 43.8% $ 204.3 12.8%
CRM 1,324.5 32.4% 1,111.6 30.5% 212.9 19.2%
Public relations 474.4 11.6% 473.3 13.0% 1.1 0.2%
Specialty communications 484.0 11.9% 464.5 12.7% 19.5 4.2%
--------- --------- ---------
$ 4,086.8 $ 3,649.0 $ 437.8
========= ========= =========
Operating Expenses: Our first half of 2003 worldwide operating expense
increased $437.2 million, or 14.2%, to $3,526.8 million from $3,089.6 million in
the second quarter of 2002, as described below.
Salary and service costs, which are comprised of direct service costs and
salary and related costs, increased by $354.4 million, or 14.8%, and represented
77.9% of total operating expenses in the first half of 2003 versus 77.5% in the
first half of 2002. These expenses increased, both in absolute terms and as a
percentage of revenue to 67.3% in the first half of 2003 from 65.6% in the first
half of 2002. The increases were primarily as a result of changes in the mix of
our revenues, greater utilization of freelance labor, increased severance costs
and increased investment in key personnel. This increase was offset by
reductions in incentive compensation and bonuses and our continuing efforts to
align permanent staffing with current work levels on a location by location
basis, as well as our continued attempts to increase the variability of our cost
structure.
Office and general expenses increased by $82.7 million, or 11.9%, in the
first half of 2003. Office and general expenses represented 22.1% of our total
operating costs in the first half of 2003 versus 22.5% in the first half of
2002. Additionally, as a percentage of revenue office and general expenses
decreased marginally in the first half of 2003 to 19.0% from 19.1%. This
relatively consistent year-over-year performance results from our continued
efforts to better align costs with business levels on a location-by-location
basis.
For the foregoing reasons, our operating margin decreased to 13.7% in the
first half of 2003, from 15.3% in the first half of 2002.
Net Interest Expense: Our net interest expense increased in the first half
of 2003 to $21.2 million as compared to $17.3 million in the same period in
2002. Our gross interest expense increased by $2.9 million to $27.4 million.
This increase resulted from the additional interest costs associated with our
payment on February 21, 2003, of $30 per $1,000 principal amount of our Liquid
Yield Option Notes due 2031 as an incentive to the holders not to exercise their
put right. This payment to qualified noteholders amounted to $25.4 million and
is being amortized ratably over the 12-month period. This was partially offset
by generally lower short-
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
term interest rates and cash management efforts during the quarter and the
issuance in June 2003 of the $600.0 million Zero Coupon Zero Yield Convertible
Notes due 2033.
In addition, on August 6, 2003 we paid $6.7 million to qualified
noteholders of the Zero Coupon Zero Yield Convertible Notes dues 2032 as an
incentive to the holders not to exercise their put right. This payment is being
amortized ratably over a twelve-month period.
As a result of the amortization of the February and August payments, we
expect interest expense to increase by $23.3 million for the full-year 2003
compared to 2002.
Income Taxes: Our consolidated effective income tax rate was 34.5% in the
first half of 2003, which is less than the 37.2% rate in the first half of 2002
and which is slightly less than our full year rate for 2002 of 35.0%. This
reduction reflects the realization of our ongoing focus on tax planning.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first half of 2003, increased to $319.3 million. Diluted earnings per share
increased 1.8% to $1.70 in the first half of 2003, as compared to $1.67 in the
prior year period.
Critical Accounting Policies and New Accounting Pronouncements
To assist in better understanding our financial statements and the related
management's discussion and analysis of those results, readers are encouraged to
consider this information together with our discussion of critical accounting
policies in the MD&A in our 2002 10-K, as well as our consolidated financial
statements and the related notes included in our 2002 10-K for a more complete
understanding of all of our accounting policies.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
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 us associated with potential future negative
changes in the performance of the acquired entity. The amount of future
contingent purchase price payments that we would be required to pay for prior
acquisitions, assuming that the acquired businesses perform over the relevant
future periods at their current profit levels, is approximately $375 million as
of June 30, 2003. The ultimate amounts payable cannot be predicted with
reasonable certainty because they are dependent upon future results, are subject
to changes in foreign currency exchange rates and, in accordance with GAAP, we
have not recorded a liability for these items on our balance sheet since the
definitive amount is not determinable or distributable. Actual results can
differ from these estimates and the actual amounts that we pay are likely to be
different from these estimates. Our obligations change from period to period as
a result of payments made during the current period, changes in the previous
estimate of the acquired entities' performance, changes in foreign currency
exchange rates and other factors. These differences could be material. The
contingent purchase price obligations as of June 30, 2003, calculated using the
assumptions above, are as follows:
($ in millions)
---------------------------------------------------------------------
Remainder There-
2003 2004 2005 2006 after Total
---- ---- ---- ---- ----- -----
$115 $104 $89 $37 $30 $375
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. Assuming that
the subsidiaries and affiliates perform over the relevant periods at their
current profit levels, the aggregate amount we could be required to pay in
future periods is approximately $257 million, $129 million of which are
currently exercisable. The ultimate amount payable in the future relating to
these transactions will vary because it is dependent on the future results of
operations of the subject businesses and the timing of when these rights are
exercised. The actual amounts that we pay are likely to be different from these
estimates. These differences could be material. The obligations that exist for
these agreements as of June 30, 2003, calculated using the assumptions above,
are as follows:
($ in millions)
---------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $ 114 $ 118 $ 232
Affiliated agencies 15 10 25
---- ----- -----
Total $ 129 $ 128 $ 257
==== ===== =====
If these rights were to be exercised, there would be an increase in our net
income as a result of our increased ownership and the corresponding reduction in
minority interest expense.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources
Liquidity: We had cash and cash equivalents totaling $523.0 million and
$667.0 million and short-term investments totaling $20.5 million and $28.9
million at June 30, 2003 and December 31, 2002, respectively. Consistent with
our historical trends in the first half of the year, we had negative cash flow
from operations of $363.3 million, including tax payments and payments to
vendors and to the media on behalf of clients. This resulted in a significant
reduction to our year-end current liabilities. We funded these liabilities with
cash on hand and by drawing down on available credit facilities. As discussed
below, during June 2003 we issued $600.0 million of Zero Coupon Zero Yield
Convertible Notes which were used to pay down our outstanding credit facilities
prior to June 30, 2003.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks, a three-year revolving $835.0 million credit facility with a
maturity date of November 14, 2005 and a $1,040.0 million 364-day revolving
credit facility with a maturity date of November 13, 2003. We are also an active
participant in the commercial paper market with a $1,500.0 million program. Each
of our bank credit facilities provide credit support for issuances under this
program. As of June 30, 2003, we had no borrowings outstanding under these
credit facilities. The 364-day facility includes 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
20 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 16 banks
provides support under the three-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 $1,875.0 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 had short-term bank loans of $64.9 million and $50.4 million at June 30,
2003 and December 31, 2002, respectively, comprised of domestic borrowings and
bank overdrafts of our international subsidiaries which are unsecured loans.
At June 30, 2003, we had a total of $2,347.0 million aggregate principal
amount of convertible notes outstanding, including $847.0 million Liquid Yield
Option Convertible Notes due 2031, which were issued in February 2001, $900.0
million Zero Coupon Zero Yield Convertible Notes due 2032, which were issued in
March 2002, and $600.0 million Zero Coupon Zero Yield Convertible Notes due
2033, which were issued in June 2003. The holders of our Liquid Yield Option
Convertible Notes due 2031 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. The holders of our Zero Coupon Zero Yield Convertible
Notes due 2032 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. The holders of our Zero Coupon Zero Yield Convertible Notes
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
due 2033 have the right to cause us to repurchase up to the entire aggregate
face amount of the notes then outstanding for par value on June 15, 2006, 2008,
2010, 2013, 2018, 2023 and on each June 15 annually thereafter through June 15,
2032. The $847.0 million Liquid Yield Option Convertible Notes due 2031 and the
$900.0 million Zero Coupon Zero Yield Convertible Notes due 2032 are
convertible, at specified ratios, 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 to
BBB or lower by S&P, and to Baa3 or lower by Moody's or to BBB- or lower by S&P
and Ba1 or lower by Moody's for the $600.0 million Zero Coupon Zero Yield
Convertible Notes due 2033. These events would not, however, result in an
adjustment of the number of shares issuable upon conversion.
On February 21, 2003, we paid $25.4 million to qualified noteholders of
our Liquid Yield Option Notes due in 2031, equal to $30 per $1,000 principal
amount of notes as an incentive to the holders not to exercise their put right.
This payment is being amortized ratably over a 12-month period. In addition, on
February 7, 2003, we repurchased for cash, notes from holders who exercised
their put right for $2.9 million, reducing the aggregate amount outstanding of
the notes due 2031 to $847.0 million.
On August 6, 2003, we paid $6.7 million to qualified noteholders of our
Zero Coupon Zero Yield Convertible Notes due 2032, equal to $7.50 per $1,000
principal amount of notes as an incentive to the holders not to exercise their
put right. This payment is being amortized ratably over a 12-month period.
At June 30, 2003, we had Euro-denominated bonds outstanding equal to $175.0
million. The bonds pay a fixed rate of 5.2% to maturity in June 2005. The bonds
serve as a hedge of our investment in Euro-denominated net assets. While an
increase in the value of the euro against the dollar will result in a greater
liability for interest and principal, there will be a corresponding increase in
the dollar value of our euro-denominated net assets.
Below is a summary of our debt position as of June 30, 2003 ($ in
millions):
Debt:
Bank loans (due in less than 1 year)......................... $ 64.9
$835.0 Million Revolver - due November 14, 2005............ 0.0
Commercial paper issued under 364-day Facility............... 0.0
5.20% Euro notes - due June 24, 2005....................... 175.0
Convertible notes - due February 7, 2031................... 847.0
Convertible notes - due July 31, 2032...................... 900.0
Convertible notes - due June 15, 2033...................... 600.0
Loan notes and sundry - various through 2012............... 22.1
--------
Total Debt....................................................... $2,609.0
========
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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our operations are subject to the risk of currency exchange rate
fluctuations related to our international operations. 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. 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 fluctuations on our
first six months of operations were positive as discussed above.
We do not hedge our exposure against the US dollar in the normal course of
our business. We do, however, conduct global treasury operations to improve
liquidity and manage third-party interest expense centrally. As an integral part
of these operations, we enter into short-term forward foreign exchange contracts
to hedge intercompany cash movements between subsidiaries operating in different
currency markets. 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 U.S.
dollar-denominated commercial paper will generally enter into a short-term
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.
Our Annual Report on Form 10-K for the year ended December 31, 2002
provides a more detailed discussion of the market risks affecting our
operations. As of June 30, 2003, no material change had occurred in our market
risks from the disclosure contained in that 10-K.
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk" set
forth in this report contain disclosures which are forward-looking statements
within the meaning of the federal securities laws. Forward-looking statements
include all statements that do not relate solely to historical or current facts,
and can be identified by the use of words such as "may," "will," "expect,"
"project," "estimate," "anticipate," "envisage," "plan" or "continue." These
forward-looking statements are based upon our current plans or expectations and
are subject to a number of uncertainties and risks that could significantly
affect current plans and anticipated actions and our future financial condition
and results. The uncertainties and risks include, but are not limited to,
changes in general economic conditions, competitive factors, client
communication requirements, the hiring and retention of human resources and
other factors. In addition, our international operations are subject to the risk
of currency fluctuations, exchange controls and similar risks discussed above.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by us or on our behalf, and those differences could be material.
20
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be included in our SEC reports is recorded, analyzed and
reported within applicable time periods. During the 90-day period prior to the
filing of this report, we conducted an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our CEO and CFO concluded that they believe that our disclosure
controls and procedures are effective to ensure recording, analysis and
reporting of information required to be included in our SEC reports on a timely
basis. There have been no significant changes in our internal controls or other
factors that could be reasonably expected to significantly affect the
effectiveness of these controls since that evaluation was completed.
21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual shareholders' meeting on May 20, 2003. At the meeting,
votes were cast for the following proposals as follows:
To declassify Board of Director terms:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
155,562,355 972,930 1,322,865
To elect the following Directors:
Votes For Votes Withheld
--------- --------------
Errol M. Cook 157,088,153 769,997
Susan S. Denison 157,489,256 368,894
Michael A. Henning 157,506,709 351,441
John R. Murphy 157,510,278 347,872
John R. Purcell 157,474,176 383,974
Linda Johnson Rice 151,472,982 6,385,168
To approve an amendment to the Omnicom Group Inc. Equity Incentive Plan:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
139,264,143 16,939,074 1,654,933
To act upon a shareholder proposal to amend the Bylaws of Omnicom Group
Inc.:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
8,416,412 129,460,491 19,981,250
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of Omnicom Group Inc. filed with the
Secretary of State of New York on May 20, 2003.
3.2 Amended and Restated By-laws of Omnicom Group Inc.
10.1 Amendment to the Revolving Credit Agreement, dated April 30, 2003 among
Omnicom Finance Inc., Omnicom Capital Inc., Omnicom Finance PLC, Omnicom
Group Inc. and UBS AG.
22
10.2 Amendment to the 364-Day Credit Agreement, dated June 30, 2003 among
Omnicom Finance Inc., Omnicom Capital Inc., Omnicom Finance plc, Omnicom
Group Inc. and Fifth Third Center.
31.1 Certification of Chief Executive Officer and President required by Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Executive Vice President and Chief Financial Officer
required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
32.1 Certification of the Chief Executive Officer and President and the
Executive Vice President and Chief Financial Officer required by Rule
13a-14(b) under the Exchange Act of 1934, as amended, and 18
U.S.C.ss.1350.
(b) Reports on Form 8-K
On April 29, 2003, we filed a Current Report on Form 8-K to furnish under
Item 9 (Regulation FD Disclosure) our press release announcing our
operating results for the first quarter of 2003 and the text of materials
used in the related call at which such results were discussed.
On June 11, 2003, we filed a Current Report on Form 8-K to file under Item
5 our press release announcing the completion of the offering of the Zero
Coupon Zero Yield Notes due 2033.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNICOM GROUP INC.
August 8, 2003 /s/ Randall J. Weisenburger
---------------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(on behalf of Omnicom Group Inc.
and as Principal Financial Officer)
24