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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, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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:
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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
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 1, 2004, 190,531,541 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 $13,173,641,000.
Certain portions of Omnicom's definitive proxy statement relating to its
annual meeting of shareholders scheduled to be held on May 25, 2004 are
incorporated by reference into Part III of this report.
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OMNICOM GROUP INC.
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ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2003
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................................ 8
Item 8. Financial Statements and Supplementary Data.................... 24
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 24
Item 9A. Controls and Disclosure........................................ 24
PART III
Item 10. Directors and Executive Officers of the Registrant............. 25
Item 11. Executive Compensation......................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... *
Item 13. Certain Relationships and Related Transactions................. *
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 26
Index to Financial Statements.................................. 26
Index to Financial Statements Schedules........................ 26
Exhibit Index.................................................. 26
Signatures.................................................................. 29
Management Report ........................................................ F-1
Independent Auditors' Report................................................ F-2
Consolidated Financial Statements........................................... F-4
Notes to Consolidated Financial Statements.................................. F-8
Certifications of Senior Executive Officers................................. S-7
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* 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",
"Stock Ownership", "Director Compensation" and "Executive Compensation" in
Omnicom's definitive proxy statement, which is expected to be filed by
April 23, 2004.
PART I
Introduction
This report is both our 2003 annual report to shareholders and our 2003
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 advertising, marketing and
corporate communications companies in the world. Our company was formed through
a 1986 combination of three advertising, 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 all major markets worldwide. Our agencies provide an
extensive range of advertising, marketing and corporate communications services,
including:
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
sports and event marketing
1
Advertising, marketing and corporate communications services are provided
to clients through global, pan-regional and national independent agency brands.
Our brands include:
BBDO Worldwide
DDB Worldwide
TBWA Worldwide
OMD Worldwide
Adelphi Group
AGENCY.COM
Alcone Marketing Group
Anderson DDB
ARA Group
Arnell Group
Atmosphere BBDO
Auditoire
BDDP & Fils
Bernard Hodes Group
Brand Architecture International
Brodeur Worldwide
Carlson and Partners
Carre Bleu Marine
Changing Our World
Clark & Weinstock
Claydon Heeley Jones Mason
Clemenger Communications Limited
Cline, Davis & Mann
Cone
Corbett Accel Healthcare Group
CPM
Creative Juice
Davie-Brown Entertainment
del Rivero Messianu
Dieste, Harmel & Partners
Direct Partners
Doremus
Eigen Fabrikaat
Element 79 Partners
Etcetera Groep
European Communication Consultants
FitzGerald Communications
FKGB
Fleishman-Hillard
Full Circle Entertainment
G1
Gavin Anderson & Company
Goodby, Silverstein & Partners
Grizzard Communications
GSD&M
Hall & Partners Group
Harrison & Star Business Group
Health Science Communications
Heye & Partner
Horrow Sports Ventures
ICON
Integrated Merchandising Services
Integer Group
Interbrand
InterScreen
i\tec
Jump
Kaleidoscope
Ketchum
Ketchum Directory Advertising
KPR
Lieber Levett Koenig Farese Babcock
Lyons Lavey Nickel Swift
M/A/R/C Research
Marketing Advantage
MarketStar
Martin/Williams
Matthews Media Group
MBA
Mercury Public Affairs
Merkley & Partners
MicroMedia
Millsport
Moss Dragoti
Multi-M
National In-Store
New Solutions
Nouveau Monde
Novus
Organic
Paris Venise Design
Pentamark
PGC Advertising
PhD
Porter Novelli International
Proximity Worldwide
Radiate Sports & Entertainment Group
Rapp Collins Worldwide
Russ Reid Company
Salesforce
Screen
Sellbytel
Serino Coyne
Siegel & Gale
Spike DDB
Spot Plus
Staniforth
Steiner Sports Marketing
Targetbase
TARGIS
Tequila
Textuel
The Ant Farm
The Designory
The Marketing Arm
The Promotion Network
TPG
Tracy Locke Partnership
Tribal DDB
Washington Speakers Bureau
Wolff Olins
Zimmerman & Partners Advertising
2
The various components of our business and material factors that affected
us in 2003 are discussed in our "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" of this report. None of our
acquisitions in 2003, 2002 or 2001 were material to our consolidated financial
position or results of operations. For information concerning our acquisitions,
see note 2 to our consolidated financial statements.
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.
Our Clients: We had over 5,000 clients in 2003, many of which were served
by more than one of our agency brands. Our 10 largest and 250 largest clients in
the aggregate accounted for 18.7% and 53.8%, respectively, of our 2003
consolidated revenue. Our largest client was served by 50 of our agency brands.
This client accounted for 4.7% of our 2003 consolidated revenue. No other client
accounted for more than 2.9% of our 2003 consolidated revenue.
Our Employees: We employed approximately 58,500 people at December 31,
2003. 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 historical results
of operations.
Risks and Competitive Conditions: We face the risks normally associated
with global services businesses. The operational and financial performance of
our businesses are typically tied to overall economic and regional market
conditions, competition for client assignments and talented staff, new business
wins and losses and the risks associated with extensive international
operations. We do not believe that our international operations as a whole
present any material risk to our overall business because they invoice clients
and pay expenses in their local currency. However, there are some risks of doing
business abroad, including those of currency fluctuations, political instability
and exchange controls, which do not affect domestic-focused firms as discussed
in our management's discussion and analysis starting on page 7. For financial
information on our operations by geographic area, see note 5 to our consolidated
financial statements.
The particular businesses in which we participate are highly competitive.
Typically, 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 serve clients, particularly large international
clients, on a broad geographic basis. While many of our client relationships are
long-standing, companies put their advertising, marketing services and public
and corporate communications businesses up for competitive review from time to
time. To the extent that we are not able to remain competitive or to keep key
clients, our business and financial results could be adversely affected.
Our ability to retain existing clients and to attract new clients may, in
some cases, be limited by clients' policies on, or perceptions of, conflicts of
interest arising out of other client relationships. In addition, an important
aspect of our competitiveness is our ability to retain key employee and
management personnel. Our continuing ability to attract and retain these
employees may have a material effect on our business and financial results.
Our revenue is dependent upon the advertising, 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 activity at the beginning of January and a slowdown in client activity
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 historical 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, marketing and corporate communications services
through regulations and other governmental action. We believe the total volume
of advertising, marketing and corporate communications services will not be
materially affected by future legislation or regulation, however the scope,
content and manner of presentation may continue to change.
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, New York and One East Weaver Street, Greenwich,
Connecticut. We also maintain executive offices in London, England.
3
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 or contain various escalation clauses and certain of our leases
require our payment of various operating expenses, which may also be subject to
escalation. In addition, leases are denominated in the local currency of the
operating entity and are therefore subject to changes in foreign exchange rates.
Our consolidated rent expense was $335.5 million in 2003, $311.3 million in 2002
and $305.4 million in 2001, after reduction for rents received from subleases of
$17.3 million, $15.5 million and $8.0 million, respectively. Our obligations for
future minimum base rents under terms of non-cancelable real estate leases and
other operating leases, which include primarily office furniture and computer
and technology equipment, reduced by rents receivable from non-cancelable
subleases are (in millions):
Net Rent
--------
2004 ................................................. $435.9
2005 ................................................. 362.7
2006 ................................................. 288.4
2007 ................................................. 231.3
2008 ................................................. 190.9
Thereafter............................................ 949.3
See note 10 to our consolidated financial statements 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
Beginning on June 13, 2002, several proposed class actions were filed
against us and certain senior executives in the United States District Court for
the Southern District of New York. The actions have since been consolidated
under the caption In re Omnicom Group Inc. Securities Litigation, No. 02-CV4483
(RCC) on behalf of a proposed class of purchasers of our common stock between
February 20, 2001 and June 11, 2002. The consolidated complaint alleges among
other things that our public filings and other public statements during that
period contained false and misleading statements or omitted to state material
information relating to (1) our calculation of the organic growth component of
period-to-period revenue growth, (2) our valuation of certain internet
investments made by our Communicade Group, which we contributed to Seneca
Investments LLC in 2001, and (3) the existence and amount of certain contingent
future obligations in respect of acquisitions. The complaint seeks an
unspecified amount of compensatory damages plus costs and attorneys' fees.
Defendants have moved to dismiss the complaint. The court has not yet decided
the motion. 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, we
cannot assure investors as to the ultimate effect of these matters on our
financial position or results of operations.
We are also involved from time to time in various routine 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, 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 2003.
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 1, 2004, we had 3,633 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 2002......................... $96.30 $82.76 $0.20
Q2 2002......................... 94.10 36.27 0.20
Q3 2002......................... 65.61 38.54 0.20
Q4 2002......................... 70.29 48.10 0.20
Q1 2003......................... $68.25 $46.50 $0.20
Q2 2003......................... 76.43 53.15 0.20
Q3 2003......................... 81.18 69.61 0.20
Q4 2003......................... 87.60 71.80 0.20
Q1 2004*........................ $88.50 $76.85 $0.20
* through March 1, 2004
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)
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
For the year:
Revenue ............................... $ 8,621,404 $ 7,536,299 $ 6,889,406 $ 6,154,230 $ 5,130,545
Operating Profit ...................... 1,164,675 1,104,115 968,184 878,090 724,130
Income After Income Taxes ............. 740,922 697,987 543,257 542,477 400,461
Net Income ............................ 675,883 643,459 503,142 498,795 362,882
Net Income per common share:
Basic .............................. 3.61 3.46 2.75 2.85 2.07
Diluted ............................ 3.59 3.44 2.70 2.73 2.01
Dividends declared per common
share .............................. 0.800 0.800 0.775 0.700 0.625
At year end:
Cash, cash equivalents and
short-term investments ............. $ 1,548,935 $ 695,881 $ 516,999 $ 576,539 $ 600,949
Total assets .......................... 14,499,456 11,819,802 10,617,414 9,853,707 9,017,637
Long-term obligations:
Long-term debt ..................... 197,291 197,861 490,105 1,015,419 263,149
Convertible notes .................. 2,339,304 1,747,037 850,000 229,968 448,483
Deferred compensation and
other liabilities ................ 342,894 293,638 296,980 296,921 300,746
As discussed in footnote 13 of the notes to our consolidated financial
statements, as required by statements of Financial Accounting Standards 142 --
"Goodwill and Other Intangibles" ("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 ("GAAP") are not amortized. To make
our results for the periods prior to 2002 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. As a
result of these exclusions, this presentation is a non-GAAP financial measure.
We believe that by excluding the items noted above, the table below presents
selected financial data using amounts that are more comparable year-to-year and
thus more meaningful for purposes of this analysis.
(Dollars in thousands except per share amounts)
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net Income, as adjusted:
Net Income, as reported, GAAP .............. $675,883 $643,459 $503,142 $498,795 $362,882
Add-back goodwill amortization,
net of income taxes ..................... -- -- 83,065 76,518 66,490
Less: gain on sale of Razorfish
shares, net of income taxes ............. -- -- -- 63,826 --
-------- -------- -------- -------- --------
Net Income, excluding goodwill
amortization and Razorfish gain ......... $675,883 $643,459 $586,207 $511,487 $429,372
======== ======== ======== ======== ========
Basic Net Income per share:
as reported, GAAP ....................... $3.61 $3.46 $2.75 $2.85 $2.07
as adjusted ............................. $3.61 $3.46 $3.21 $2.93 $2.45
Diluted Net Income per share:
as reported, GAAP ....................... $3.59 $3.44 $2.70 $2.73 $2.01
as adjusted ............................. $3.59 $3.44 $3.13 $2.80 $2.36
6
The following is a reconciliation of the "as reported" to "as adjusted"
Net Income per share on a basic and diluted basis.
(Dollars in thousands except per share amounts)
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Basic Net Income per share, as adjusted:
Net Income per common share:
Basic, as reported, GAAP ............................. $ 3.61 $ 3.46 $ 2.75 $ 2.85 $ 2.07
Add-back goodwill amortization
per common share, net of
income taxes ...................................... -- -- 0.46 0.44 0.38
Less: gain on sale of Razorfish
shares, per common share, net
of income taxes ................................... -- -- -- 0.36 --
-------- -------- -------- -------- --------
Net Income per common share,
excluding goodwill amortization
and Razorfish gain:
Basic ........................................... $ 3.61 $ 3.46 $ 3.21 $ 2.93 $ 2.45
======== ======== ======== ======== ========
Diluted Net Income per share, as adjusted:
Net Income per common share:
Diluted, as reported, GAAP ........................ $ 3.59 $ 3.44 $ 2.70 $ 2.73 $ 2.01
Add-back goodwill amortization
per common share, net of
income taxes ...................................... -- -- 0.43 0.41 0.35
Less: gain on sale of Razorfish
shares, per common share, net
of income taxes ................................... -- -- -- 0.34 --
-------- -------- -------- -------- --------
Net Income per common share,
excluding goodwill amortization
and Razorfish gain:
Diluted ......................................... $ 3.59 $ 3.44 $ 3.13 $ 2.80 $ 2.36
======== ======== ======== ======== ========
7
7/7A. Management's Discussion and Analysis of Financial Condition and Results of
Operations; Critical Accounting Policies; and Quantitative and Qualitative
Information about Market Risk
Executive Summary
We are a holding company. We own industry-leading advertising, marketing
and corporate communications companies that span more than 30 marketing
disciplines, 100 countries, 1,500 subsidiary agencies and 5,000 clients. On a
global, pan-regional and local basis, our agencies provide traditional media
advertising services as well as marketing services including customer
relationship management, public relations and specialty communications. We
continually seek to grow our business with our existing clients by maintaining a
client-centered approach, as well as expanding our existing business
relationships into new markets and new clients. In addition, we pursue selective
acquisitions of complementary companies with strong, entrepreneurial management
teams that either currently serve or have the ability to serve our existing
client base.
During the past few years, overall industry and margin growth continued to
be affected by geopolitical unrest, lagging economic conditions, lack of
consumer confidence and cautious client spending. All of these factors
contributed to a difficult business environment and industry-wide margin
contraction. Our diversified portfolio of companies, both from a geographical
and a service offerings perspective, has allowed us to perform ahead of the
industry in general. During this period we have continued to invest in our
businesses and our personnel, and have taken action to reduce costs at some of
our companies to deal with the changing economic circumstances.
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 pan-regional and global markets. 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.
Although the overall business environment has been difficult, as a result
of the diversity and balance of our portfolio of companies and service
offerings, we continued to grow our revenues. However, as a result of changes in
our business mix, increased severance costs incurred, under-utilization of
staff, increased professional fees and increased amortization of other
intangible assets, our margins were lower in 2003 and in 2002 than our
historical performance. We are hopeful that with continuing improvements in the
U.S. economy, combined with the cost-reduction actions taken by our companies,
margins should begin to stabilize.
Given our size and breadth, we manage the business by monitoring several
financial and non-financial performance indicators. The key indicators that we
review focus on the areas of revenues and operating expenses.
Revenue growth is analyzed by reviewing the components and mix of the
growth, including: growth by major geographic location; growth by major
marketing discipline; growth from currency changes; growth from acquisition and
growth from our largest clients.
In recent years, our revenue has been divided almost evenly between
domestic and international operations. In 2003, our overall revenue growth was
14.4%, of which 6.2% was related to changes in foreign exchange rates and 3.6%
was related to acquired entities. The remainder, 4.6%, was organic growth.
In 2003, traditional media advertising represented about 44% of the total
revenue and grew by 14.1%. Marketing services represented about 56% of total
revenue and grew by 14.6% over the previous year.
We believe that our ability to increase revenues as a result of our
client-centered approach to the business is demonstrated most clearly in our
relationships with our largest clients. While consolidated revenues on a U.S.
dollar basis increased 14.4% in 2003, revenue from our ten largest clients
increased 19.3%. By expanding the breadth of our relationships with these
clients we not only increase revenues, but we also enhance the overall
consistency and stability of our operations, which in turn drives our financial
performance.
We measure operating expenses in two distinct cost categories, salary and
service costs, and office and general expenses. Because we are a service
business, we monitor these costs on a percentage of revenue basis. Salary and
service costs tend to fluctuate in conjunction with changes in revenues, whereas
office and general expenses, which are not directly related to servicing
clients, tend to decrease as revenues increase because a
8
significant portion of these expenses are relatively fixed in nature. Over the
past three years, salary and service costs have grown from 64.2% of revenue to
67.7% of revenue, while office and general expenses have declined from 21.8% of
revenue to 18.8% of revenue.
Our net income for 2003 increased by 5.0% to $675.9 million from $643.5
million in 2002 and our diluted EPS increased by 4.4% to $3.59 from $3.44.
The following year-over-year analysis gives further details and insight
into the changes in our financial performance.
Financial Results from Operations -- 2003 Compared with 2002
(Dollars in millions,
except per share amounts)
Twelve Months Ended December 31, 2003 2002
--------- ---------
Revenue ...................................... $ 8,621.4 $ 7,536.3
Operating expenses:
Salary and service costs .................. 5,839.0 4,952.9
Office and general expenses ............... 1,617.7 1,479.3
--------- ---------
7,456.7 6,432.2
--------- ---------
Operating profit ............................. 1,164.7 1,104.1
Net interest expense:
Interest expense .......................... 57.9 45.5
Interest income ........................... (15.1) (15.0)
--------- ---------
42.8 30.5
--------- ---------
Income before income taxes ................... 1,121.9 1,073.6
Income taxes ................................. 380.9 375.6
--------- ---------
Income after income taxes .................... 741.0 698.0
Equity in earnings of affiliates ............. 15.1 13.8
Minority interests ........................... (80.2) (68.3)
--------- ---------
Net income ................................ $ 675.9 $ 643.5
========= =========
Net Income Per Common Share:
Basic ..................................... $ 3.61 $ 3.46
Diluted ................................... 3.59 3.44
Dividends Declared Per Common Share .......... $ 0.80 $ 0.80
Revenue: When comparing performance between years, we discuss non-GAAP
financial measures such as the impact that foreign currency rate changes,
acquisitions/dispositions and organic growth have on reported revenues. As we
derive significant revenue from international operations, changes in foreign
currency rates between the years impact reported results. Reported results are
also impacted by our acquisition and disposition activity and organic growth.
Accordingly, we provide this information to supplement the discussion of changes
in revenue period-to-period.
9
Our 2003 consolidated worldwide revenue increased 14.4% to $8,621.4
million from $7,536.3 million in 2002. The effect of acquisitions, net of
disposals, increased 2003 worldwide revenue by $271.7 million. Organic growth
increased worldwide revenue by $347.8 million, and foreign exchange impacts
increased worldwide revenue by $465.6 million. The components of total 2003
revenue growth in the U.S. ("domestic") and the remainder of the world
("international") are summarized below ($ in millions):
Total Domestic International
-------------------- -------------------- --------------------
$ % $ % $ %
-------- ---- -------- ---- -------- ----
December 31, 2002 ........................... $7,536.3 -- $4,284.6 -- $3,251.7 --
Components of Revenue Changes:
Foreign exchange impact ..................... 465.6 6.2% -- -- 465.6 14.3%
Acquisitions ................................ 271.7 3.6% 174.7 4.1% 97.0 3.0%
Organic ..................................... 347.8 4.6% 261.5 6.1% 86.2 2.7%
-------- ---- -------- ---- -------- ----
December 31, 2003 ........................... $8,621.4 14.4% $4,720.9 10.2% $3,900.5 20.0%
======== ==== ======== ==== ======== ====
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
$8,155.8 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 $8,621.4 million less $8,155.8 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 $7,536.3 million
for the Total column in the table).
During the past few years, geopolitical unrest, lagging economic
conditions, lack of consumer confidence and cautious client spending have
continued to affect overall industry growth. However, our diversified portfolio
of companies, both from a geographical and service offerings perspective, has
allowed us to perform ahead of the industry in general and we have continued to
grow our revenues.
The components of revenue and revenue growth for 2003 compared to 2002, in
our primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States ..................... $4,720.9 10.2%
Euro Markets ...................... 1,789.9 22.6%
United Kingdom .................... 941.9 15.9%
Other ............................. 1,168.7 19.4%
-------- ----
Total ............................. $8,621.4 14.4%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $465.6 million for 2003. The most significant impacts resulted from the
continued 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. Additional geographic information relating to our
business is contained in note 5 to our consolidated financial statements.
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 2003, 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
10
geographic reach, our agencies have more than 5,000 active client relationships
in the aggregate. Revenue from our single largest client in 2003 increased by
7.9%. This client represented 4.7% of worldwide revenue in 2003 and 5.0% in 2002
and no other client represented more than 2.9% in 2003 or 2002. Revenue from our
ten largest and 250 largest clients grew by more than 19.0% and 15.0%,
respectively. Our ten largest and 250 largest clients represented 18.7% and
53.8% of our 2003 worldwide revenue, respectively and 17.9% and 53.4% of our
2002 worldwide revenue.
Driven by clients' continuous demand for more effective and efficient
branding activities, we strive to provide an extensive range of advertising,
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.
(Dollars in millions)
----------------------------------------------------------------------------
Twelve Months Ended December 31,
2003 2002 2003 vs 2002
-------------------- ----------------------- ------------------
% of % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising ............ $3,739.7 43.4% $3,276.4 43.5% $ 463.3 14.1%
CRM ...................................... 2,918.6 33.8% 2,421.8 32.1% 496.8 20.5%
Public relations ......................... 955.1 11.1% 921.0 12.2% 34.1 3.7%
Specialty communications ................. 1,008.0 11.7% 917.1 12.2% 90.9 9.9%
-------- -------- -------- ----
$8,621.4 $7,536.3 $1,085.1 14.4%
======== ======== ======== ====
Operating Expenses: Our 2003 worldwide operating expense increased
$1,024.5 million, or 15.9%, to $7,456.7 million from $6,432.2 million in 2002,
as shown below.
(Dollars in millions)
---------------------------------------------------------------------------------
2003 2002 2003 vs 2002
---------------------------- ---------------------------- ----------------
% of % of
% of Total Op. % of Total Op. $ %
Revenue Revenue Costs Revenue Revenue Costs Growth Growth
------- ------- -------- ------- ------- --------- ------ ------
Revenue .............................. $8,621.4 $7,536.3 $1,085.1 14.4%
Operating expenses:
Salary and service costs ........... 5,839.0 67.7% 78.3% 4,952.9 65.7% 77.0% 886.1 17.9%
Office and general expenses ........ 1,617.7 18.8% 21.7% 1,479.3 19.6% 23.0% 138.4 9.4%
-------- ---- ---- -------- ---- ---- ----- ----
Total Operating Costs ................ 7,456.7 86.5% 6,432.2 85.3% 1,024.5 15.9%
Operating profit ..................... $1,164.7 13.5% $1,104.1 14.7% $ 60.6 5.5%
======== ======== ========
Salary and service costs represent the largest part of operating expenses.
During 2003, we have continued to invest in our businesses and their personnel,
and have taken action to reduce costs at some of our companies to deal with the
changing economic circumstances. As a percentage of operating expenses, salary
and service costs were 78.3% in 2003 and 77.0% in 2002. These costs are
comprised of direct service costs and salary and related costs. Most, or 86.5%,
of the $1,024.5 million increase in operating expenses in 2003 resulted from
increases in salary and service costs. The $886.1 million increase in salary and
service costs was attributable to increased revenue levels, including changes in
the mix of our revenues which resulted in greater utilization of freelance
labor. In addition, although we incurred increased severance costs and did not
reach optimal utilization
11
levels for our staff, we continued to make investments in new key personnel.
Furthermore, we increased incentive compensation where performance dictated. As
a result, salary and service costs as a percentage of revenues increased
year-to-year from 65.7% in 2002 to 67.7% in 2003.
Office and general expenses represented 21.7% and 23.0% of our operating
expenses in 2003 and 2002, respectively. These costs are comprised of office and
equipment rent, depreciation and amortization of other intangibles, professional
fees and other overhead expenses. As a percentage of revenue, office and general
expenses decreased in 2003 from 19.6% to 18.8%. This year-over-year decrease,
which was offset by increases in professional fees and amortization of other
intangible assets, resulted from our continuing efforts to better align these
costs with business levels on a location-by-location basis, as well as from
increased revenue levels.
For the foregoing reasons, as well as changes in our business mix, our
operating margin decreased from 14.7% in 2002 to 13.5% in 2003.
We expect our efforts to control operating expenses will continue, but we
anticipate that it will remain difficult. Accordingly, we continue to look for
ways to increase the variability of our cost structure. We are hopeful that with
the continuing improvements in the U.S. economy combined with the cost reduction
actions taken by our companies, margins should begin to stabilize.
Net Interest Expense: Our net interest expense increased in 2003 to $42.8
million, as compared to $30.5 million in 2002. Our gross interest expense
increased by $12.4 million to $57.9 million. This increase resulted from the
additional interest costs associated with our payments on February 21, 2003, of
$30 per $1,000 principal amount of our Liquid Yield Option Notes due 2031 and,
on August 6, 2003, of $7.50 per $1,000 principal amount of our Zero Coupon Zero
Yield Convertible Notes due 2032 as incentives to the holders not to exercise
their put rights. These payments to qualified noteholders amounted to $25.4
million and $6.7 million, respectively, and are being amortized ratably over
12-month periods. In addition, interest expense relative to the (Euro)152.4
million 5.20% Euro note increased by $2.2 million due to the change in the value
of the Euro relative to the U.S. dollar in 2003. These increases were partially
offset by marginally lower short-term interest rates and cash management efforts
during the course of the year.
The amortization of the February and August 2003 payments increased
interest expense by $25.4 million for the full-year 2003 compared to 2002. These
payments will also impact 2004 by approximately $6.7 million.
See "Liquidity and Capital Resources" for a discussion of our indebtedness
and related matters.
Income Taxes: Our consolidated effective income tax rate was 34.0% in 2003
as compared to 35.0% in 2002. This reduction reflects the realization of our
ongoing focus on tax planning initiatives including a reduction of the
inefficiencies of our international and state tax structures.
12
Financial Results from Operations -- 2002 Compared with 2001
Certain reclassifications have been made to the 2002 and 2001 reported
amounts to conform them to the 2003 presentation. In addition, 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 are not amortized. In addition to discussing
2002 and 2001 on a reported basis and to make the discussion of periods
comparable, our 2001 income statement information in the discussion that follows
has been adjusted to eliminate goodwill amortization as presented in the
following table. As a result of these adjustments, this presentation is a
non-GAAP financial measure. We believe that the table below presents selected
financial data that is more comparable year-to-year and thus more meaningful for
purposes of analysis.
(Dollars in millions, except per share amounts)
2001
-------------------------------------------------
GAAP Non-GAAP
As Goodwill As
Twelve Months Ended 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 94.8 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 income 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 earnings of 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 0.46 $3.21
Diluted ........................................... 3.44 2.70 0.43 3.13
Dividends Declared Per Common Share .................. $0.800 $0.775 -- $0.775
- ----------
(a) Excludes amortization of goodwill and related tax impact.
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%
======== ==== ======== ==== ======== ====
13
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.
Comparisons of 2002 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 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 250 largest clients represented 17.9% and 53.4% of our
2002 worldwide revenue, respectively and 17.0% and 50.6% of our 2001 worldwide
revenue.
14
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.
(Dollars in millions)
-----------------------------------------------------------------
Twelve Months Ended December 31,
2002 2001 2002 vs 2001
----------------- ----------------- ---------------
% of % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising.......... $3,276.4 43.5% $3,006.3 43.6% $270.1 9.0%
CRM ................................. 2,421.8 32.1% 2,121.0 30.8% 300.8 14.2%
Public relations....................... 921.0 12.2% 982.1 14.3% (61.1) (6.2)%
Specialty communications............... 917.1 12.2% 780.0 11.3% 137.1 17.6%
-------- -------- ------
$7,536.3 $6,889.4 $646.9 9.4%
======== ======== ======
Operating Expenses: Our 2002 worldwide operating expense increased $511.0
million, or 8.6% to $6,432.2 million from $5,921.2 million, or on an as adjusted
basis by $605.8 million, or 10.4%, from $5,826.4 million in 2001, as described
below.
(Dollars in millions)
--------------------------------------------------------------------------
2002 2001 - GAAP - as reported 2002 vs 2001
-------------------------- -------------------------- ----------------
% of % of
% of Total Op. % of Total Op. $ %
Revenue Revenue Costs Revenue Revenue Costs Growth Growth
------- ------- -------- ------- ------- -------- ------ ------
Revenue............................. $7,536.3 $6,889.4 $646.9 9.4%
Operating expenses:
Salary and service costs.......... 4,952.9 65.7% 77.0% 4,420.9 64.2% 74.7% 532.0 12.0%
Office and general expenses....... 1,479.3 19.6% 23.0% 1,500.3 21.8% 25.3% (21.0) (1.4)%
-------- ---- ---- -------- ---- ---- ------ ----
Total Operating Costs............... 6,432.2 85.3% 5,921.2 85.9% 511.0 8.6%
Operating profit.................... $1,104.1 14.7% $968.2 14.1% $135.9 14.0%
======== ====== ======
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 74.7% 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 greater utilization of
freelance labor, changes in the mix of our revenues and increased severance
related costs.
Office and general expenses decreased by $21.0 million, or 1.4%, in 2002.
Office and general expenses represented 23.0% of our total operating costs in
2002 versus 25.3% in 2001. Additionally, as a percentage of revenue, office and
general expenses decreased in 2002 to 19.6% from 21.8%. This decrease was the
result of our efforts to better align costs with business levels on a
location-by-location basis and the elimination of goodwill amortization in 2002,
as a result of adopting SFAS 142 which represented $94.8 million in 2001.
On an as adjusted, non-GAAP basis, 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%. These decreases were 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 increased to 14.7% in
2002, from 14.1% on an as reported basis in 2001. However, on an as adjusted,
non-GAAP basis, excluding goodwill amortization expense in 2001 our margins
decreased from 15.4%.
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
15
principal amount 2.25% 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.
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 39.3% in 2001. The rate declined by 2.4% directly as a result of
the cessation of the amortization of goodwill in 2002. The remainder of
reduction in the tax rate reflects the realization of our ongoing focus on tax
planning initiatives.
Earnings Per Share (EPS): For the foregoing reasons, our net income for
2002 increased by 27.9% to $643.5 million from $503.1 million in 2001 and our
diluted EPS increased by 27.4% to $3.44 from $2.70. While our net income in 2002
was positively impacted by the conversion of the 2.25% 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.
On an as adjusted, non-GAAP basis, 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.
Critical Accounting Policies and New Accounting Pronouncements
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: The preparation of our financial statements in conformity with
generally accepted accounting principles in the United States of America, 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 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 in testing goodwill for impairment under
SFAS 142 and when evaluating cost based investments, which consist of ownership
interests in non-public companies, to determine if an other than temporary
impairment has occurred. 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 impairment testing under SFAS
142 and valuation of cost based investments appears in notes 2 and 13, and notes
1 and 6, respectively to our consolidated financial statements.
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 $472.3 million in 2003 and $680.1 million
in 2002.
16
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 derived from existing
clients. Additional key factors we consider include the competitive position,
reputation and specialized know-how of acquisition targets. In addition, due to
the nature of advertising, marketing and corporate communications services
companies, the companies we acquire frequently have minimal tangible net assets
and identifiable intangible assets which primarily consist of customer
relationships. Accordingly, a substantial portion of the purchase price is
allocated to goodwill. We perform an annual impairment test in order to assess
that the fair value of our reporting units exceeds their carrying value,
inclusive of goodwill.
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 in the "Liquidity and Capital
Resources" section 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 of this report and information
about changes in GAAP relative to accounting for acquisitions and goodwill is
described below in the "New Accounting Pronouncements" section and in note 13 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. This includes when services are rendered, generally 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.
Employee Stock-based Compensation: In accordance with SFAS No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), we have elected to account
for employee stock option grants in accordance with Accounting Principles Board
Opinion 25 -- "Accounting for Stock Issued to Employees" ("APB 25") and make
annual pro forma disclosures (see note 7 to our consolidated financial
statements) of the effect on our reported net income and earnings per share as
if we adopted the fair value method of accounting for stock options for the
relevant periods. Also in accordance with APB 25 we issue stock option awards
with an exercise price equal to the quoted market price on the grant date and
therefore we historically have not recorded any expense in our income statement.
SFAS 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- An Amendment of FASB Statement No. 123" ("SFAS 148"), was issued
as an amendment to FASB No. 123, 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. We continue to apply the
accounting provisions of APB 25.
17
We adopted the quarterly disclosure requirement as required under SFAS 148 as
set forth in our Form 10-Q filings during the 2003 year. Adopting this
disclosure requirement did not have an impact on our consolidated results of
operations or financial position. The FASB recently concluded that the fair
value of stock options will need to be expensed and indicated that they will
limit the transition methods for implementing SFAS 123 to the modified
prospective method. The FASB is also considering alternative valuation
methodologies. We will continue to monitor the progress of the FASB with regard
to their guidance and the adoption of these standards.
We plan to adopt the fair value method of accounting for stock-based
compensation during the first quarter of 2004 utilizing the modified prospective
method and the restatement approach. We expect the effect will be to reduce net
income and earnings per share in future periods. The impact on our net income
and earnings per share for prior periods will be consistent with the pro forma
disclosures included in note 7 to our financial statements.
New Accounting Pronouncements:
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 adopted SFAS 146 effective January 1, 2003. The
adoption did not have a significant impact on our consolidated results of
operations or financial position.
SFAS 150 -- Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity 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 some circumstances). The provisions of SFAS 150 are effective for
instruments entered into or modified after May 31, 2003 and pre-existing
instruments as of July 1, 2003. On October 29, 2003, the FASB voted to
indefinitely defer the effective date of SFAS 150 through the issuance FASB
Staff Position 150-3 for mandatorily redeemable instruments as they relate to
minority interests in consolidated entities. We adopted SFAS 150 in the third
quarter of 2003, as modified by FSP 150-3. The adoption did not have a material
impact on our consolidated results of operations or financial position. We will
continue to closely monitor developments in the area of accounting for certain
financial investments with characteristics of both liabilities and equity.
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 equal to $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.
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 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 FASB subsequently issued FIN 46R in December 2003 which
modified certain provisions of FIN 46. The effective date of FIN 46R applies to
the first reporting period after March 15, 2004. The application of FIN 46 as
originally issued and as revised by the issuance of FIN 46R are not expected to
have an impact on, or result in additional disclosure in our 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.
18
Liquidity and Capital Resources
Cash Requirements, including contractual obligations
Our principal non-discretionary funding requirement is our working capital
requirement. In addition, as discussed below, we have contractual obligations
related to our debt and convertible notes, our recurring business operations
primarily related to lease obligations, as well as certain contingent
acquisition obligations related to acquisitions made in prior years.
Historically, substantially all of our non-discretionary cash requirements have
been funded from operating cash flow.
Our principal discretionary cash requirements include dividend payments to
our shareholders, purchases of treasury stock, payments for strategic
acquisitions and capital expenditures. In 2003 and 2002, our discretionary
spending was funded from operating cash flow. However, in any given year,
depending on the level of discretionary activity, we may use other sources of
funding available to finance these activities.
We have a seasonal working capital cycle. Working capital requirements are
lowest at year-end and highest during the second and third quarters, the
difference being approximately $1.0 billion during these periods in 2003 and
2002. This occurs because in the majority of our businesses we act as agent on
behalf of our clients, including when we place media and incur production costs
on their behalf. We generally require collection from our clients prior to our
payment for the media and production cost obligations and these obligations are
greatest at the end of the year. This pattern was similar during the past three
years. During the year we manage liquidity through our credit facilities as
discussed below under "Cash Management".
Contractual Obligations and Other Commercial Commitments: 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, 2003 and 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.
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
-------- -------- -------- --------
Contractual Obligations at
December 31, 2003 (in millions)
Long-term debt ............................... $ 12.4 $ 195.7 $ 1.6 $ 209.7
Convertible notes ............................ -- -- 2,339.3 2,339.3
Lease obligations ............................ 435.9 1,073.3 949.3 2,582.5
-------- -------- -------- --------
Total ........................................ $ 448.3 $1,269.0 $3,290.2 $5,131.5
======== ======== ======== ========
As more fully described on pages 21 and 22, the holders of the convertible
notes included in the table above have the right to cause us to repurchase up to
the entire aggregate face amount of the notes then outstanding for par value at
certain dates in the future. If these rights were exercised at the earliest
possible future date, as set forth in note 4 to our consolidated financial
statements, $1,739.3 million of the convertible notes could be due in less than
one year, and $600.0 million could be due in the "1 to 5 Years" category above.
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
----------- ------ ------- -----
Other Commercial Commitments at
December 31, 2003 (in millions)
Lines of Credit ................ $ -- $ -- $ -- $ --
Guarantees and letters of credit 0.1 0.7 0.1 0.9
---- ---- ---- ----
Total .......................... $0.1 $0.7 $0.1 $0.9
==== ==== ==== ====
In the normal course of business, our agencies enter into various
contractual media commitments on behalf of our clients at levels substantially
exceeding our revenue. 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
19
have any substantial exposure to potential losses of this nature in the future
as we receive payment in advance and we monitor the credit worthiness of our
clients. In the event that we are committed to the media services and our client
has not paid us, we believe that the risk of material loss is minimal because we
believe that we have reasonable options available to substantially mitigate any
potential losses.
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 during the post acquisition
transition period. 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 $462 million as of December 31, 2003. The ultimate
amounts payable cannot be predicted with reasonable certainty because they are
dependent upon future results and are subject to changes in foreign currency
exchange rates. In accordance with GAAP, we have not recorded a liability for
these items on our balance sheet since the definitive amount is not determinable
or distributable. Actual results can differ from these estimates and the actual
amounts that we pay are likely to be different from these estimates. Our
obligations change from period to period as a result of payments made during the
current period, changes in the previous estimate of the acquired entities'
performance, changes in foreign currency exchange rates and other factors. These
differences could be significant. The contingent purchase price obligations as
of December 31, 2003, calculated assuming that the acquired businesses perform
over the relevant future periods at their current profit levels, are as follows:
($ in millions)
- ------------------------------------------------------------------------------
There-
2004 2005 2006 2007 after Total
- ------ ------ ------ ------ ------- -------
$175 $152 $54 $37 $44 $462
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 $294 million, $178 million of which relate to
obligations that are currently exercisable. The ultimate amount payable in the
future relating to these transactions will vary because it is dependent on the
future results of operations of the subject businesses, the timing of when these
rights are exercised and changes in foreign currency exchange rates and other
factors. The actual amounts that we pay are likely to be different from these
estimates. These differences could be significant. The obligations that exist
for these agreements as of December 31, 2003, calculated using the assumptions
above, are as follows:
($ in millions)
----------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies ........... $154 $105 $259
Affiliated agencies ........... 24 11 35
---- ---- ----
Total ......................... $178 $116 $294
==== ==== ====
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.
Sources and Uses of Cash
Although our cash requirements in 2003 and 2002 were funded by operating
cash flow, during the past three years, we have opportunistically accessed the
capital markets by issuing convertible debt of $600 million, $900 million and
$850 million in 2003, 2002 and 2001, respectively. The proceeds were used for
general corporate purposes, including the repayment of maturing debt, the
purchase of treasury shares and the funding of selected investing activities.
At year-end 2003, we had $1,528.7 million in cash and cash equivalents. In
addition, we had $2.0 billion in unused committed credit facilities available
for immediate use to fund our cash needs. These credit facilities are more fully
described in note 3 in the accompanying financial statements.
20
Our operating cash flow and access to the capital markets could be
impacted by macroeconomic factors outside our control. Additionally, liquidity
could be impaired by short and long-term debt ratings assigned by independent
rating agencies, which are based on our performance as measured by credit
ratios.
Standard and Poor's Rating Service currently rates our long-term debt A-,
Moody's Investor Service rates our long-term debt Baa1 and Fitch Rating rates
our long-term debt A-. Our short-term ratings are A2, P2 and F2 by the
respective agencies. Neither our outstanding convertible bonds nor our bank
credit facilities contain provisions that require acceleration of cash payments
should our ratings be downgraded.
Our committed bank facilities, described in detail in note 3, contain only
two financial covenants, relating to cash flow and interest coverage, which the
company met by a significant margin as of December 31, 2003.
We believe that our financial condition is strong and that our cash
balances, operational cash flows, unused committed borrowing capacity and access
to capital markets, taken together, are sufficient to support our foreseeable
cash requirements, including working capital, capital expenditures, dividends
and acquisitions.
Cash Management
We manage our cash and liquidity centrally through treasury centers in
North America, Europe and Asia/Pacific. Each day, operations with excess funds
invest these funds with their regional treasury center. Likewise, operations
that require funding will borrow funds from their regional treasury center. The
treasury centers then aggregate the net position of all of our operating
companies. The net position is either invested with or borrowed from third party
providers. To the extent that our treasury centers require liquidity, they have
the ability to access local currency lines of credit, our $2.0 billion committed
bank facilities, or our U.S. dollar-denominated commercial paper. This enables
us to reduce our consolidated debt levels and minimize interest expense as well
as centrally manage our exposure to foreign exchange.
While our cash on hand balance at December 31, 2003 increased $861.8
million from the prior year, we manage our net debt position, which we define as
total debt outstanding less cash on hand, centrally through our treasury centers
as discussed above. Our net debt outstanding at December 31, 2003 decreased
$292.2 million as compared to the prior year-end.
Debt Instruments, Guarantees and Related Covenants
We maintain two revolving credit facilities with two consortia of banks
totaling $2,035.0 million as described in note 3 to our consolidated financial
statements. These credit facilities are available to provide credit support for
issuances under our $1,500.0 million commercial paper program. We fund our daily
borrowing needs by issuing commercial paper. During 2003, we issued and redeemed
$19.6 billion and the average term was 5.9 days. As of December 31, 2003, we had
no commercial paper or bank loans outstanding under these credit facilities. We
had short-term bank loans of $42.4 million at December 31, 2003, primarily
comprised of bank overdrafts by our international subsidiaries, which are
treated as unsecured loans pursuant to the subsidiaries' bank agreements.
Our credit facilities contain financial covenants that restrict our
ability to incur indebtedness as defined in the agreements. The credit
facilities contain financial covenants limiting the ratio of total consolidated
indebtedness to total consolidated EBITDA (EBITDA for these purposes being
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, 2003, we were in compliance with
these covenants, as our ratio of debt to EBITDA was 2.0 times and our ratio of
EBITDA to interest expense was 22.9 times.
At December 31, 2003, we had a total of $2,339.3 million aggregate
principal amount of convertible notes outstanding, including $847.0 million
Liquid Yield Option Notes due 2031, which were issued in February 2001, $892.3
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 dues
2033, which were issued in June 2003.
The holders of our Liquid Yield Option 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
21
Zero Coupon Zero Yield Convertible Notes 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 Liquid Yield Option Notes due
2031, the Zero Coupon Zero Yield Convertible Notes due 2032 and the Zero Coupon
Zero Yield Convertible Notes due 2033 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, in the case of
the Liquid Yield Option Notes due 2031 and the Zero Coupon Zero Yield
Convertible Notes due 2032, if our long-term debt ratings are downgraded to BBB
or lower by Standard & Poor's Ratings Services, or Baa3 or lower by Moody's
Investors Services, Inc. or in the case of the Zero Coupon Zero Yield
Convertible Notes due 2033, to BBB- or lower by S&P, and Ba1 or lower by
Moody's. These events would not, however, result in an adjustment of the number
of shares issuable upon conversion and would not accelerate the holder's right
to cause us to repurchase the notes. For additional information about the terms
of these notes, see note 4 to our consolidated financial statements.
On February 21, 2003, we paid $25.4 million to qualified noteholders of
our Liquid Yield Option Notes due 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 over the 12-month period ended February 2004. 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 dues 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 over the 12-month period ended August
2004. 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.
On February 6, 2004, we repurchased for cash, notes from holders who
exercised their put right for $0.006 million principal amount of Liquid Yield
Option Notes due 2031.
At December 31, 2003, we had Euro-denominated bonds outstanding of
(Euro)152.4 million or $192.0 million. The bonds pay a fixed rate of 5.2% to
maturity in June 2005. The bonds serve as a hedge of our investment in
Euro-denominated net assets. While an increase in the value of the euro against
the dollar will result in a greater liability for interest and principal, there
will be a corresponding increase in the dollar value of our Euro-denominated net
assets.
Our outstanding debt and amounts available under these facilities as of
December 31, 2003 ($ in millions) were as follows:
Debt Available
Outstanding Credit
----------- --------
Bank loans (due in less than 1 year) ..................... $ 42.4 --
$835.0 million revolver -- due November 14, 2005 ......... -- $ 835.0
Commercial paper issued under 364-day facility ........... -- 1,200.0
(euro)152.4 million 5.20% Euro notes -- due June 24, 2005 192.0 --
Convertible notes -- due February 7, 2031 ................ 847.0 --
Convertible notes -- due July 31, 2032 ................... 892.3 --
Convertible notes -- due June 15, 2033 ................... 600.0 --
Loan notes and sundry -- various through 2012 ............ 17.7 --
-------- --------
Total .................................................... $2,591.4 $2,035.0
======== ========
Additional information about our indebtedness is included in notes 3 and 4
of our consolidated financial statements.
Quantitative and Qualitative Disclosures Regarding Market Risk
Foreign Exchange: Our results of operations are subject to risk from the
translation to the U.S. dollar 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 the translation of our results of
operations are discussed in note
22
12 of our consolidated financial statements. For the most part, our revenues and
the expenses incurred related to those revenues are denominated in the same
currency. This minimizes the impact that fluctuations in exchange rates will
have on profit margins.
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. Outside of major markets, our
subsidiaries generally borrow funds directly in their local currency. As an
integral part of our treasury operations, we enter into short-term forward
foreign exchange contracts which hedge the intercompany cash movements between
subsidiaries operating in different currency markets from that of our treasury
centers from which they borrow or invest. In the limited number of instances
where operating expenses and revenues are not denominated in the same currency,
amounts are promptly settled or hedged in the foreign currency market with
forward contracts. At December 31, 2003, we had foreign exchange contracts
outstanding with an aggregate notional principal of $1,251.0 million, most of
which were denominated in our major international market currencies with
maturities ranging from 2 to 365 days with an average duration of less than 30
days.
Additionally, at December 31, 2003 we had cross-currency interest rate
swaps in place with an aggregate notional principal amount of 19,100.0 million
Yen maturing in 2005. See note 12 to our consolidated financial statements for
information about the fair value of each type of derivative instrument.
The forward foreign exchange and swap contracts discussed above 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, we 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.
These hedging activities are 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, 2003 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.
Debt Instruments: Our bank credit facilities mentioned above are available
to provide credit support, including issuances of commercial paper. We currently
have a 364-day facility with a one-year term out option and a 3-year facility.
Accordingly we classify outstanding borrowings under these facilities as
long-term debt. We normally replace our 364-day facility each year with a new
364-day facility with similar provisions. We also plan to renew the 3-year
facility with a new multi-year facility with similar terms. Our ability to
obtain the required bank syndication commitments depends in part on conditions
in the bank market at the time of syndication.
Our bank syndicates typically include large global banks such as Citibank,
JP Morgan Chase, HSBC, ABN Amro, Societe Generale, Barclays, Bank of America and
BBVA. We also include large regional banks in the U.S. such as Wachovia, Fleet,
US Bancorp, Northern Trust, PNC and Wells Fargo. We also include banks that have
a major presence in countries where we conduct business such as Sumitomo in
Japan, San Paolo in Italy, Scotia in Canada and Westpac in Australia.
Our other long-term debt consists principally of convertible notes. The
holders of these convertible notes have the right to cause us to repurchase up
to the entire aggregate face amount. We may offer the holders of our notes a
cash payment or other incentives, such as extending the no-call period of the
note to induce them to not put the notes to us in advance of a put date. If we
were to decide to pay a cash incentive, our interest expense could increase
based on market factors at the time.
Since our existing convertible notes do not pay or accrue interest, our
interest expense could increase if notes are put. The extent, if any, of the
increase in interest expense will depend on the portion of the amount
repurchased that was refinanced, when we refinance, the type of instrument we
use to refinance and the term of the instrument.
23
The one-time payments made in 2003 to qualified noteholders, as described
above under "Debt Instruments, Guarantees and Related Covenants", are one method
of keeping the convertible notes outstanding and preserving our liquidity. We
can also preserve liquidity by satisfying some of or the entire put obligation
with common equity, provided we notify the noteholders in advance of their put
that we intend to do so. If a put were to be satisfied in cash, we expect to
have sufficient unused credit commitments to fund the put, while still
preserving ample capacity under these commitments to meet cash requirements for
the normal course of our business operations after the put event.
Our credit commitments support either the issuance of commercial paper or
bank loans, and we would likely fund the put initially using some combination of
these instruments. We would then evaluate all funding alternatives available to
us to restore our credit capacity and liquidity to the level prior to any such
put. We believe the funding alternatives would include substantially all forms
of debt, equity and convertible instruments available to us by accessing the
public or private capital markets. Our evaluation would likely include the
expected cash flows from the normal course of our business operations and the
credit capacity to fund additional potential puts on the remaining outstanding
convertible notes.
If we were to replace the convertible notes with another form of debt on a
dollar-for-dollar basis, it would have no impact on either our debt to capital
ratios or our debt to EBITDA ratio. However, an increase in interest expense
would negatively impact our coverage ratios, such as EBITDA to interest expense,
if the replacement debt were to be interest bearing. Currently our coverage
ratios applicable to our current rating levels are well above the thresholds
since the majority of our long-term debt does not pay or accrue interest. Based
on present expectations of our future operating cash flows and expected access
to debt and equity capital markets, we believe any increase in interest expense
and reduction in coverage ratios would still place us comfortably within an
acceptable range. Thus, we do not expect any negative impact on our credit
ratings if the convertible notes are put in the near future.
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 26 of this report.
9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
9A. 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 the date that evaluation was completed.
24
PART III
10. Executive Officers
The executive officers of Omnicom Group Inc. as of March 1, 2004 are:
Name Position Age
---- -------- ---
Bruce Crawford................ Chairman 75
John D. Wren.................. President and Chief Executive Officer 51
Randall J. Weisenburger....... Executive Vice President and Chief Financial Officer 45
Philip J. Angelastro.......... Senior Vice President of Finance and Controller 39
Jean-Marie Dru................ President and Chief Executive Officer of TBWA Worldwide 57
Thomas L. Harrison............ Chairman and Chief Executive Officer of Diversified Agency Services 56
Kenneth R. Kaess, Jr.......... President and Chief Executive Officer of DDB Worldwide 49
Peter Mead.................... Vice Chairman 64
Michael J. O'Brien............ Senior Vice President, General Counsel and Secretary 42
Keith L. Reinhard............. Chairman of DDB Worldwide 69
Allen Rosenshine.............. Chairman and Chief Executive Officer of BBDO Worldwide 65
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 appointed 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.
Ken Kaess has been Chief Executive Officer and President of DDB Worldwide
since January 2001, and President since December 1999. Prior to that he was
President of DDB North America.
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.
Michael O'Brien joined Omnicom in November 2003 and was appointed Senior
Vice President, General Counsel and Secretary in December 2003. Prior to that,
he was a partner in the law firm of Goodwin Procter LLP (since April 2002).
Prior to that, he was a partner in the law firm of O'Sullivan LLP.
Additional information about our directors and executive officers appears
under the captions "Election of Directors", "Stock Ownership", "Director
Compensation" and "Executive Compensation" in our 2004 proxy statement.
25
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, 2003 ......................... F-4
Consolidated Balance Sheets at December 31, 2003 and 2002 ...... F-5
Consolidated Statements of Shareholders' Equity for the
Three Years Ended December 31, 2003 ......................... F-6
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 2003 ..................................... F-7
Notes to Consolidated Financial Statements ..................... F-8
Quarterly Results of Operations (Unaudited) .................... F-28
(a)(2) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
(for the three years ended December 31, 2003)................ S-1
All other schedules are omitted because they are not applicable.
(a)(3) Exhibits:
Exhibit
Numbers Description
------- -----------
(3)(i) Restated Certificate of Incorporation (Exhibit 3.1 to our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 and incorporated by reference).
(ii) By-laws (Exhibit 3.2 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003) and incorporated by
reference (File No. 1-10551).
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") (File No. 1-10551) 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
(the "2031 Indenture") (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 First Supplemental Indenture to the 2031 Indenture, dated as
of February 13, 2004, between us, Omnicom Capital Inc.,
Omnicom Finance Inc. and JPMorgan Chase Bank (Exhibit 4.3 to
our Registration Statement on Form S-3 (File No. 112840) and
incorporated herein by reference).
4.7 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 (the "2032 Indenture") (Exhibit 4.6 to our Annual
Report on Form 10-K for the year ended December 31, 2001 and
incorporated by reference).
4.8 Form of Zero Coupon Zero Yield Convertible notes due 2032
(included in Exhibit 4.7).
4.9 First Supplemental Indenture to the 2032 Indenture, dated as
of February 13, 2004, between us, Omnicom Capital Inc.,
Omnicom Finance Inc. and JPMorgan Chase Bank (Exhibit 4.3 to
our Registration Statement on Form S-3 (File No. 112841) and
incorporated herein by reference).
26
4.10 Indenture, dated as of June 30, 2003, between JPMorgan Chase
Bank, as trustee, and us in connection with our issuance of
$600,000,000 Zero Coupon Zero Yield Convertible Notes due
2033 (the "2033 Indenture") (Exhibit 4.1 to Registration
Statement 333-108611 and incorporated by reference).
4.11 Form of the Zero Coupon Zero Yield Convertible Notes due
2033 (included in 4.10 above).
4.12 First Supplemental Indenture, to the 2033 Indenture, dated
as of November 5, 2003, between JPMorgan Chase Bank, as
trustee, and us, Omnicom Capital Inc. and Omnicom Finance
Inc. (Exhibit 4.4 to Registration Statement 333-108611 and
incorporated by reference).
10.1 Credit Agreement, dated November 14, 2002, among Omnicom
Finance Inc., Omnicom Capital Inc., Omnicom Finance PLC, us,
Salomon Smith Barney Inc. and ABN AMRO Incorporated, as lead
arrangers for the institutions party thereto (Exhibit 10.1
to our Annual Report on Form 10-K for the year ended
December 31, 2002 and incorporated by reference).
10.2 364-day Credit Agreement, dated November 13, 2003, among
Omnicom Finance Inc., Omnicom Capital Inc., Omnicom Finance
PLC, the financial institutions party thereto, Citibank,
N.A., 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 (Exhibit 10.1 to
our Periodic Report on Form 8-K filed on December 2, 2003
and incorporated by reference).
10.3 Amendment to the Credit Agreement, dated as of April 30,
2003, among Omnicom Finance Inc., Omnicom Capital Inc.,
Omnicom Finance PLC, collectively as borrowers, us, as
guarantor and UBS AG as lender (Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.4 Amended and Restated 1998 Incentive Compensation Plan
(Exhibit B to our Proxy Statement filed on April 10, 2000
and incorporated by reference).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Long-Term Shareholder Value Plan (Exhibit 4.4 to our
Registration Statement on Form S-8 dated March 19, 2002,
(File No. 333-84498) and incorporated by reference).
10.10 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).
10.11 Executive Salary Continuation Plan Agreement -- Peter Mead
(Exhibit 10.7B to our 6-30-02 10-Q and incorporated by
reference).
10.12 Executive Salary Continuation Plan Agreement -- Keith L.
Reinhard (Exhibit 10.7C to our 6-30-02 10-Q and incorporated
by reference).
10.13 Executive Salary Continuation Plan Severance Compensation
Agreement -- Allen Rosenshine (Exhibit 10.7D to our 6-30-02
10-Q and incorporated by reference).
10.14 Executive Salary Continuation Plan Agreement -- John Wren
(Exhibit 10.7E to our 6-30-02 10-Q and incorporated by
reference).
10.15 Equity Incentive Plan (Exhibit 4.3 to our Registration
Statement on Form S-8 dated August 18, 2003 (File No.
333-108063) and incorporated by reference).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
27
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 Securities Exchange Act
of 1934, as amended and 18 U.S.C ss.1350.
(b) Reports on Form 8-K
On October 28, 2003, we filed a Current Report on Form 8-K to furnish
under Item 9 (Regulation FD Disclosure) and Item 12 (Results of Operations and
Financial Condition) our press release announcing our operating results for the
third quarter of 2003 and the text of materials used in the related call at
which such results were discussed.
On December 2, 2003, we filed a Current Report on Form 8-K to file under
Item 5 and Item 7 of our 364-day revolving credit facility.
28
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 15, 2004
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 15, 2004
- ----------------------------
(Bruce Crawford)
/s/ JOHN D. WREN Chief Executive Officer March 15, 2004
- ---------------------------- and President and Director
(John D. Wren)
/s/ RANDALL J. WEISENBURGER Executive Vice President and March 15, 2004
- ---------------------------- Chief Financial Officer
(Randall J. Weisenburger)
/s/ PHILIP J. ANGELASTRO Senior Vice President March 15, 2004
- ---------------------------- and Controller
(Philip J. Angelastro) (Principal Accounting Officer)
/s/ ROBERT CHARLES CLARK Director March 15, 2004
- ----------------------------
(Robert Charles Clark)
/s/ LEONARD S. COLEMAN, JR. Director March 15, 2004
- ----------------------------
(Leonard S. Coleman, Jr.)
/s/ ERROL M. COOK Director March 15, 2004
- ----------------------------
(Errol M. Cook)
/s/ SUSAN S. DENISON Director March 15, 2004
- ----------------------------
(Susan S. Denison)
/s/ MICHAEL A. HENNING Director March 15, 2004
- ----------------------------
(Michael A. Henning)
/s/ JOHN R. MURPHY Director March 15, 2004
- ----------------------------
(John R. Murphy)
/s/ JOHN R. PURCELL Director March 15, 2004
- ----------------------------
(John R. Purcell)
/s/ LINDA JOHNSON RICE Director March 15, 2004
- ----------------------------
(Linda Johnson Rice)
/s/ GARY L. ROUBOS Director March 15, 2004
- ----------------------------
(Gary L. Roubos)
29
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. Omnicom also maintains disclosure controls to ensure that
information required to be included in its SEC reports is recorded, analyzed and
reported within applicable time periods. 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 13, 2004
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Omnicom Group Inc.:
We have audited the accompanying consolidated balance sheets of Omnicom
Group Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. In connection with our audits of the consolidated financial
statements, we also have audited the related 2003 and 2002 financial statement
schedules. These consolidated financial statements and financial statement
schedules are the responsibility of Omnicom Group Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits. The
consolidated financial statements and related financial statement schedule of
Omnicom Group Inc. and subsidiaries as of and for the year ended December 31,
2001 were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements and related
financial statement schedule 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 audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the 2003 and 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, 2003 and
2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related 2003 and 2002
financial statement schedules on page S-1, when considered in relation to the
basic consolidated financial statements taken as a whole, present 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 13, 2004
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)
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUE ........................ $ 8,621,404 $ 7,536,299 $ 6,889,406
OPERATING EXPENSES:
Salary and service costs .... 5,839,006 4,952,929 4,420,929
Office and general expenses . 1,617,723 1,479,255 1,500,293
----------- ----------- -----------
7,456,729 6,432,184 5,921,222
----------- ----------- -----------
OPERATING PROFIT ............... 1,164,675 1,104,115 968,184
NET INTEREST EXPENSE:
Interest expense ............ 57,932 45,509 90,922
Interest income ............. (15,106) (15,017) (18,123)
----------- ----------- -----------
42,826 30,492 72,799
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ..... 1,121,849 1,073,623 895,385
INCOME TAXES ................... 380,927 375,637 352,128
----------- ----------- -----------
INCOME AFTER INCOME TAXES ...... 740,922 697,986 543,257
EQUITY IN EARNINGS OF AFFILIATES 15,104 13,811 12,667
MINORITY INTERESTS ............. (80,143) (68,338) (52,782)
----------- ----------- -----------
NET INCOME ..................... $ 675,883 $ 643,459 $ 503,142
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ....................... $ 3.61 $ 3.46 $ 2.75(a)
Diluted ..................... $ 3.59 $ 3.44 $ 2.70(a)
- ----------
(a) Year Ended December 31, 2001, adjusted to exclude goodwill amortization:
Adjusted Net Income ............ $ 586,208
Adjusted Net Income Per
Common Share - basic ......... $ 3.21
Adjusted Net Income Per
Common Share - diluted ....... $ 3.13
The accompanying notes to the 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)
---------------------------
2003 2002
------------ ------------
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents .................... $ 1,528,710 $ 666,951
Short-term investments at market, which
approximates cost ......................... 20,225 28,930
Accounts receivable, less allowance for
doubtful accounts of $69,657 and $75,575 .. 4,529,995 3,966,550
Billable production orders in process, at cost 440,436 371,816
Prepaid expenses and other current assets .... 766,579 602,819
------------ ------------
Total Current Assets ......................... 7,285,945 5,637,066
------------ ------------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
at cost, less accumulated depreciation and
amortization of $817,108 and $717,294 ........ 596,796 557,735
INVESTMENTS IN AFFILIATES ....................... 151,181 137,303
GOODWILL ........................................ 5,886,176 4,850,829
INTANGIBLES, net of accumulated amortization
of $127,774 and $88,132 ...................... 121,443 97,730
DEFERRED TAX BENEFITS ........................... 144,092 166,815
OTHER ASSETS .................................... 313,823 496,600
------------ ------------
TOTAL ASSETS ................................. $ 14,499,456 $ 11,944,078
============ ============
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 ............................. $ 5,513,301 $ 4,833,681
Advance billings ............................. 775,232 648,577
Current portion of long-term debt ............ 12,379 35,256
Bank loans ................................... 42,408 50,394
Accrued taxes ................................ 221,664 294,420
Other liabilities ............................ 1,197,474 977,196
------------ ------------
Total Current Liabilities .................... 7,762,458 6,839,524
------------ ------------
LONG-TERM DEBT .................................. 197,291 197,861
CONVERTIBLE NOTES ............................... 2,339,304 1,747,037
DEFERRED COMPENSATION AND OTHER LIABILITIES ..... 342,894 293,638
LONG TERM DEFERRED TAX LIABILITY ................ 204,104 124,276
MINORITY INTERESTS .............................. 187,346 172,815
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, 198,663,916 and
198,600,891 shares issued in 2003
and 2002, respectively .................... 29,800 29,790
Additional paid-in capital ................... 1,380,934 1,419,910
Retained earnings ............................ 2,640,623 2,114,506
Unamortized restricted stock ................. (123,820) (136,357)
Accumulated other comprehensive income (loss) 109,694 (154,142)
Treasury stock, at cost, 8,239,072 and
10,199,215 shares in 2003 and 2002,
respectively .............................. (571,172) (704,780)
------------ ------------
Total Shareholders' Equity ................... 3,466,059 2,568,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 14,499,456 $ 11,944,078
============ ============
The accompanying notes to the 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, 2003
(Dollars in Thousands)
Un- Accumulated Total
Common Stock Additional amortized Other Comp- Share-
Comprehensive -------------------- Paid-in Retained Restricted rehensive Treasury holders'
Income Shares Par Value Capital Earnings Stock (Loss)Income Stock Equity
------------- -------- --------- ---------- ---------- ---------- ------------ -------- ----------
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
Comprehensive Income:
Net Income .................. 675,883 675,883 675,883
Translation adjustments,
net of taxes of $(142,065) 263,836 263,836 263,836
--------
Comprehensive income......... $939,719
========
Dividends Declared .......... (149,766) (149,766)
Amortization of restricted
shares .................... 60,268 60,268
Shares transactions under
employee stock plans ...... (41,627) (47,731) 146,072 56,714
Shares issued for
acquisitions .............. 79,940 13 4,853 11,259 16,125
Purchase of treasury shares . (25,928) (25,928)
Cancellation of shares ...... (16,915) (3) (2,202) 2,205 --
----------- ------- ---------- ---------- --------- --------- --------- ----------
Balance December 31, 2003 ... 198,663,916 $29,800 $1,380,934 $2,640,623 $(123,820) $ 109,694 $(571,172) $3,466,059
=========== ======= ========== ========== ========= ========= ========= ==========
The accompanying notes to the 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)
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income ...................................................................... $ 675,883 $ 643,459 $ 503,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of tangible assets ......................................... 124,394 119,987 114,661
Amortization of goodwill ................................................ -- -- 95,581
Amortization of intangible assets ....................................... 36,529 30,332 17,853
Minority interests ...................................................... 80,143 68,338 52,782
Earnings of affiliates less than dividends received ..................... 843 3,374 15,711
Tax benefit on employee stock plans ..................................... 15,710 14,341 16,640
Amortization of restricted stock ........................................ 60,268 54,487 47,078
Provisions for losses on accounts receivable ............................ 12,941 21,846 30,739
(Increase) decrease in accounts receivable .............................. (207,702) 25,602 200,836
(Increase) decrease in billable production orders in process ............ (49,486) 33,967 23,117
(Increase) decrease in prepaid expenses and other
current assets ........................................................ (116,756) 62,120 (33,021)
Decrease (increase) in other assets, net ................................ 19,168 (13,592) (72,411)
Increase (decrease) in advanced billings ................................ 91,757 (14,853) 17,564
(Decrease) in accrued taxes and other liabilities ....................... (18,607) (301,834) (165,846)
Increase (decrease) in accounts payable ................................. 329,157 253,027 (88,866)
----------- ----------- -----------
Net Cash Provided by Operating Activities ....................................... 1,054,242 1,000,601 775,560
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures ......................................................... (141,108) (117,198) (149,423)
Payment for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired ......................... (410,028) (586,349) (818,819)
Purchases of investments ..................................................... (3,580) (15,890) (105,916)
Proceeds from sales of investments ........................................... 25,905 36,303 126,306
----------- ----------- -----------
Net Cash Used in Investing Activities ........................................... (528,811) (683,134) (947,852)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net (decrease) increase in short-term borrowings ............................. (15,535) (127,703) 76,789
Net proceeds from issuance of convertible notes
and long-term debt obligations ............................................ 796,296 900,000 1,144,369
Repayments of principal of long-term debt obligations ........................ (234,120) (339,950) (866,445)
Dividends paid ............................................................... (149,323) (148,411) (135,676)
Purchase of treasury shares .................................................. (25,928) (371,664) (60,149)
Other ........................................................................ (16,801) (32,061) 11,913
----------- ----------- -----------
Net Cash Provided by (Used In) Financing Activities ............................. 354,589 (119,789) 170,801
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents ................. (18,261) (2,878) (43,175)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ............................ 861,759 194,800 (44,666)
Cash and Cash Equivalents at Beginning of Year .................................. 666,951 472,151 516,817
----------- ----------- -----------
Cash and Cash Equivalents at End of Year ........................................ $ 1,528,710 $ 666,951 $ 472,151
=========== =========== ===========
Supplemental Disclosures:
Income taxes paid ............................................................ $ 344,029 $ 338,638 $ 233,287
Interest paid ................................................................ $ 56,902 $ 42,423 $ 84,693
The accompanying notes to the 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. This includes 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.
Our revenue recognition policies are in compliance with the Securities and
Exchange Commissions ("SEC") Staff Accounting Bulletin ("SAB") 101, "Revenue and
Recognition in Financial Statements" as updated by SAB 104, "Revenue
Recognition". SAB 101 and 104 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Also, in July 2000, the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") released Issue
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent". This
Issue summarized the EITF's views on when revenue should be recorded at the
gross amount billed because it has earned revenue from the sale of goods or
services, or the net amount retained because it has earned a fee or commission.
Additionally, in January 2002, the EITF released Issue 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. This Issue summarized the EITF's views on when out-of-pocket expenses
should be characterized as revenue. Our revenue recognition policies are in
compliance with SAB 101, SAB 104, 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 advertising,
marketing and corporate communications services to clients. Such amounts are
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
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, 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 other than 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 significant influence
over the operating and financial policies of the investee. These minority
interests are
F-8
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 142, "Goodwill and Other Intangible
Assets", 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 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.
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
$4.7 million in 2003, $0.6 million in 2002 and $1.1 million in 2001.
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. For
purposes of computing diluted earnings per share for the years ended December
31, 2003, 2002 and 2001, respectively, 1,398,200, 1,509,200 and 2,821,800 shares
were assumed to have been outstanding related to common share equivalents. The
Company's 2.25% Convertible Subordinated Debentures were converted in the fourth
quarter of 2001 into 4,599,900 shares. 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 $1,114.2 thousand, $975.3 thousand and $9,728.1 thousand
for the years ended December 31, 2003, 2002 and 2001, respectively. The number
of shares used in the computations were as follows:
2003 2002 2001
----------- ----------- -----------
Basic EPS computation .......... 187,258,200 186,093,600 182,867,900
Diluted EPS computation ........ 188,656,400 187,602,800 190,289,700
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.
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.
F-9
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
and a subsequent annual test was performed during the second quarter of 2003 and
concluded that there was no impairment at either date. We plan on performing the
annual impairment test during the second quarter of each year, unless certain
events, as defined in SFAS 142, trigger the need for 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 gains in prior
years associated with investments and capital transactions resulting in a higher
book basis in the common stock of certain subsidiaries as compared to their tax
basis.
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. We have adopted the
quarterly disclosure requirement as required under SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an Amendment of FASB
Statement No. 123". 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. Information about our specific awards
and stock plans can be found in note 7 and information regarding a recent
development can be found in note 15.
F-10
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information about the historical pro forma impact on net income and
earnings per share is summarized below and in note 7.
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 2003, 2002 and 2001,
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
---------------------------------
2003 2002 2001
--------- --------- ---------
Net income, as reported .................. $ 675,883 $ 643,459 $ 503,142
Net income, pro forma .................... 630,906 570,452 455,702
Stock-based employee compensation cost,
net of tax, as reported ................ 36,161 32,692 26,604
Additional stock-based employee
compensation cost, net of tax, pro forma 44,977 73,007 47,440
Basic net income per share, as reported .. 3.61 3.46 2.75
Basic net income per share, pro forma .... 3.37 3.07 2.49
Diluted net income per share, as reported 3.59 3.44 2.70
Diluted net income per share, pro forma .. 3.37 3.07 2.47
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized, or 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.
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 4.7% of our 2003 consolidated revenue and no other client
accounted for more than 2.9% of our 2003 consolidated revenue.
Derivative Financial Instruments. We adopted 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
F-11
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain prior amounts have been reclassified to conform
with the 2003 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 2003, we completed 13 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 2003 was as follows (dollars in thousands):
New and existing subsidiaries ...................... $236,364
Contingent purchase price payments ................. 235,916
--------
$472,280
========
In addition, in June 2003, we acquired all of the common stock of
AGENCY.COM in a non-cash transaction. Refer to note 6 for additional
information.
Valuations of these companies were based on a number of factors, including
service offerings, competitive position, reputation, specialized know-how and
geographic coverage. Consistent with our acquisition strategy and past practice,
most acquisitions completed in 2003 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.
Additional key factors we consider include the competitive position, reputation
and specialized know-how of acquisition targets. In addition, due to the nature
of advertising, marketing and corporate communications services companies, the
companies we acquire have minimal tangible net assets and identifiable
intangible net assets which primarily consists of customer relationships.
Accordingly, upon completion of our SFAS 141 purchase accounting procedures, a
substantial portion of the purchase price was allocated to goodwill as of
December 31, 2003.
F-12
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2003 and 2002, the components of our intangible assets
were as follows:
(Dollars in Thousands)
December 31, 2003 December 31, 2002
-------------------------------- ------------------------------
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 ............................... $6,467,011 $580,835 $5,886,176 $5,382,478 $531,649 $4,850,829
Other intangible assets
subject to amortization:
Purchased and internally
developed software .................. 188,192 114,483 73,709 168,789 83,724 85,065
Customer related and other ............. 61,025 13,291 47,734 17,073 4,408 12,665
---------- -------- ---------- ---------- -------- ----------
Total .................................. $ 249,217 $127,774 $ 121,443 $ 185,862 $ 88,132 $ 97,730
========== ======== ========== ========== ======== ==========
The other intangible assets are amortized on a straight-line basis ranging
from 5 to 10 years.
3. Bank Loans and Lines of Credit
Bank loans of $42.4 million and $50.4 million at December 31, 2003 and
2002, 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, 2003 and 2002 was 5.2% and 5.4% respectively.
At December 31, 2003 and 2002, we had committed and uncommitted lines of
credit aggregating $2,468.2 million and $2,277.2 million, respectively. The
unused portion of these credit lines was $2,425.8 million and $2,226.8 million
at December 31, 2003 and 2002, 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.
During 2003 we amended our 3-year $800.0 million revolving credit facility
which matures November 14, 2005 to include an additional $35.0 million. In
addition, on November 13, 2003, we entered into a $1,200.0 million 364-day
revolving credit facility which matures on November 12, 2004. The 364-day
facility replaced a similar facility that expired November 13, 2003 and
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 3-year credit facility consists of 16 banks for which Citibank N.A.
acts as administrative agent and ABN AMRO Bank acts as syndication agent. The
364-day credit facility consists of 24 banks for which Citibank N.A. acts as
agent. Other significant lending institutions include HSBC Bank USA, JPMorgan
Chase Bank, Wachovia, Societe Generale and Barclays.
These credit facilities provide support for our $1,500.0 million
commercial paper program. The gross amount of commercial paper issued and
redeemed under our commercial paper program during 2003 was $19.6 billion, with
an average term of 5.9 days. During 2002, $32.8 billion of commercial paper was
issued with an average term of 5.6 days and $33.1 billion was redeemed. As of
December 31, 2003 and 2002, we had no commercial paper borrowings outstanding.
The credit facilities contain financial covenants limiting the ratio of
total consolidated indebtedness to total consolidated EBITDA (EBITDA for
purposes of this covenant being 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, 2003, our ratio of debt to EBITDA was 2.0 times and our ratio of EBITDA to
interest expense was 22.9 times and we were in compliance with these covenants.
F-13
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Long-Term Debt and Convertible Notes
Long-term debt and convertible notes outstanding as of December 31, 2003
and 2002 consisted of the following:
(Dollars in Thousands)
2003 2002
---------- ----------
Euro 152.4 million 5.20% Euro Notes, due
June 24, 2005 ...................................... $ 192,010 $ 159,950
Other notes and loans at rates from 3.4% to 10.3%,
due through 2018 ................................... 17,654 70,251
---------- ----------
209,664 230,201
Less current portion ................................. 12,373 32,340
---------- ----------
Total long-term debt ............................... $ 197,291 $ 197,861
========== ==========
Convertible notes -- due February 7, 2031 ............ $ 847,037 $ 849,953
Convertible notes -- due July 31, 2032 ............... 892,273 900,000
Convertible notes -- due June 15, 2033 ............... 600,000 --
---------- ----------
2,339,310 1,749,953
Less current portion ................................. 6 2,916
---------- ----------
Total convertible notes ............................ $2,339,304 $1,747,037
========== ==========
For the years ended December 31, 2003, 2002 and 2001, we incurred gross
interest expense on our borrowings of $57.9 million, $45.5 million and $90.9
million, respectively. The 2003 expense of $57.9 million was impacted by $25.4
million related to the amortization of the cash payments to noteholders as an
incentive not to exercise their put rights of $25.4 million and $6.7 million
made on February 21, 2003 and on August 6, 2003 to qualified noteholders of
Convertible Notes due 2031 and 2032, respectively.
On June 24, 1998, we issued (Euro)152.4 million 5.20% 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 $847.0 million aggregate principal amount of Liquid Yield Option notes
due February 7, 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 two notches from their
December 31, 2003 level of A- to BBB or lower by Standard & Poor's Ratings
Services ("S&P"), or from their December 31, 2003 level of Baa1 to Baa3 or lower
by Moody's Investors Services, Inc. ("Moody's"). 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 cash, stock or a combination of both at our election, in February of each
year and we have agreed not to redeem the notes for cash before February 7,
2009. 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.
The $892.3 million aggregate principal amount of Zero Coupon Zero Yield
Convertible notes due July 31, 2032 were issued by us in March 2002. The notes
are senior unsecured zero-coupon securities that are convertible into 8.1
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 two
notches from their December 31, 2003 level of A- to BBB or lower by S&P, or from
their December 31, 2003 level of Baa1 to Baa3 or lower by Moody's. 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 cash, stock or a combination of both at our election, in August of each
year and we have agreed not to redeem the notes for cash before July 31, 2009.
There are no
F-14
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
In June 2003, we issued $600.0 million aggregate principal amount of Zero
Coupon Zero Yield Convertible notes due June 15, 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 or BBB- or lower by 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 cash,
stock or a combination of both at our election, 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 events that accelerate the noteholders' put rights. Beginning in
June 2010, if the market price of the notes exceeds certain thresholds, we may
be required to pay contingent cash interest on the notes.
The net proceeds of the issuance of the $600.0 million Zero Coupon Zero
Yield Convertible notes due 2033 were $586.5 million which was used to pay down
short-term bank loans and our outstanding commercial paper. The issuance costs
of $13.5 million are being amortized over a period through the first put date of
June 2006.
Aggregate stated maturities of long-term debt and convertible notes are as
follows:
(Dollars in Thousands)
2004 ....................................... $ 12,379
2005 ....................................... 194,190
2006 ....................................... 923
2007 ....................................... 428
2008 ....................................... 89
2009 ....................................... 77
Thereafter ................................. 2,340,888
5. Segment Reporting
Our wholly and partially owned businesses operate within the advertising,
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, 2003, 2002 and
2001 is presented below:
(Dollars in Thousands)
-------------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Consolidated
------ ----------- ------- ------------- ------------
2003
Revenue.......................... $4,720,828 $1,789,952 $941,941 $1,168,683 $8,621,404
Long-Lived Assets................ 309,192 98,413 95,549 93,642 596,796
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
F-15
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Equity and Cost Based Investments
Equity Investments. We have 90 unconsolidated affiliated companies
accounted for under the equity method. The affiliated companies offer marketing
and corporate communications services similar to those offered by our operating
companies. The equity method is used when we own less than 50% of the common
stock 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, 2003 and
2002 and for the years then ended:
(Dollars in Thousands)
-----------------------
2003 2002
-------- --------
Current assets ....................... $591,499 $502,685
Non-current assets ................... 115,376 101,280
Current liabilities .................. 464,407 369,344
Non-current liabilities .............. 52,998 55,747
Minority interests ................... 5,930 2,214
Gross revenue ........................ 493,207 399,446
Costs and expenses ................... 442,384 329,825
Net income ........................... 46,930 42,188
Our equity interest in the net income of these affiliated companies was
$15.1 million and $13.8 million for 2003 and 2002, respectively. Our equity
interest in the net assets of these affiliated companies was $96.0 million and
$77.2 million at December 31, 2003 and 2002, 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, 2003
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.
The total cost basis of these investments, which are included in other
assets on our balance sheet, as of December 31, 2003 and 2002 was $27.1 million
and $224.5 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
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. 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.
F-16
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
In June 2003, we acquired all of the common stock of AGENCY.COM from
Seneca. The transaction was effected by the redemption of $181.0 million of the
preferred stock and the assumption of $15.8 million of liabilities.
The redemptions of the preferred stock were applied against our remaining
carrying value in the preferred stock using the cost recovery method bringing
our carrying value to zero. No cash dividends have been paid by Seneca or
accrued by us in 2003 and prior. Any future dividends will not be recognized
until they are realized.
7. Employee Stock Plans
We adopted a new equity incentive compensation plan in 2002 ("Equity
Incentive Plan"). Under the Equity Incentive Plan, 9.2 million common shares are
reserved for options and other awards, of which 3.3 million were 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 ("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 1998 Plan, except with respect to
shares relating to awards that are forfeited or cancelled. Therefore, as of
December 31, 2003, no shares were available for future option grants under the
1998 Plan. 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 Plan"),
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 options 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. As a result of the adoption
of the Equity Incentive Plan during 2002, no new awards may be granted under
Omnicom's LTSV Plan. Therefore, as of December 31, 2003, no options were
available for future grants under the LTSV Plan.
F-17
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Options included under all prior incentive compensation plans, all of
which were approved by our shareholders, for the past three years are:
2003 2002 2001
------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Shares under option,
beginning of year .................... 19,157,495 $69.83 17,743,823 $66.30 9,547,138 $57.50
Options granted under:
1998 Plan ............................ -- -- 2,289,607 91.82 3,542,500 81.10
LTSV Plan ............................ -- -- -- -- 5,732,725 66.84
Equity Incentive Plan ................ 617,500 47.85 28,149 60.39 -- --
Options exercised ..................... (899,943) 38.89 (634,917) 44.56 (1,058,540) 39.83
Options forfeited ..................... (197,957) 67.43 (269,167) 81.69 (20,000) 42.69
----------- ------ ----------- ------ ----------- ------
Shares under option, end of year ...... 18,677,095 $70.62 19,157,495 $69.83 17,743,823 $66.30
=========== ====== =========== ====== =========== ======
Options exercisable at year-end ....... 10,972,492 9,413,333 5,456,848
=========== =========== ===========
The following table summarizes the information above about options
outstanding and options exercisable at December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted Average Weighted Average
Range of Exercise Options Remaining Weighted Average Options
Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------- ----------- ---------------- ---------------- ----------- ----------------
$12.11 to 26.27 120,361 1 year 12.15 120,361 12.15
12.94 340,000 1-2 years 12.94 340,000 12.94
19.72 360,000 2-3 years 19.72 360,000 19.72
24.28 390,000 3-4 years 24.28 390,000 24.28
39.75 to 66.40 818,997 4-5 years 43.74 818,997 43.74
44.62 to 91.22 2,786,855 5-6 years 77.20 2,767,149 77.32
47.74 to 84.00 2,870,500 6-7 years 71.91 2,253,000 78.51
62.35 to 87.16 8,808,575 7-8 years 72.53 3,261,229 74.14
85.84 to 93.55 2,181,807 8-9 years 91.85 661,756 91.78
---------- ----------
18,677,095 10,972,492
========== ==========
Pro Forma. As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation", we are applying the accounting provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and are making 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; 2003: $9.87; 2002: $28.01 and 2001:
$21.45. 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):
2003 2002 2001
---- ---- ----
Expected option lives........ 3.5 years 5 years 5 years
Risk free interest rate...... 2.1% 2.4% - 4.7% 4.0% - 4.9%
Expected volatility.......... 29.00% 28.20% - 35.30% 28.58% - 30.79%
Dividend yield............... 1.7% 0.9% - 1.3% 0.9% - 1.4%
F-18
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2003, 2002 and 2001,
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
----------------------------------
2003 2002 2001
--------- --------- ---------
Net income, as reported .................. $ 675,883 $ 643,459 $ 503,142
Net income, pro forma .................... 630,906 570,452 455,702
Stock-based employee compensation cost,
net of tax, as reported ................ 36,161 32,692 26,604
Additional stock-based employee
compensation cost, net of tax, pro forma 44,977 73,007 47,440
Basic net income per share, as reported .. 3.61 3.46 2.75
Basic net income per share, pro forma .... 3.37 3.07 2.49
Diluted net income per share, as reported 3.59 3.44 2.70
Diluted net income per share, pro forma .. 3.37 3.07 2.47
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized, or 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, 2003 were as follows:
2003 2002 2001
---------- ---------- ----------
Restricted shares at beginning of year 2,070,844 2,227,022 2,493,505
Number granted ..................... 1,093,128 769,964 649,915
Number vested ...................... (708,719) (806,626) (830,822)
Number forfeited ................... (85,905) (119,516) (85,576)
---------- ---------- ----------
Restricted shares at end of year ..... 2,369,348 2,070,844 2,227,022
========== ========== ==========
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.
Restricted shares may not be sold, transferred, pledged or otherwise
encumbered until the forfeiture 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, 2003, 2002 and 2001 amounted to $60.3 million,
$54.5 million and $47.1 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 2003,
2002 and 2001, employees purchased 315,566 shares, 349,181 shares and 323,269
shares, respectively, all of which were treasury shares, for which $18.1
million, $22.5 million and $23.7 million, respectively, was paid to us. For this
plan, 1,637,405 shares remain reserved at December 31, 2003.
F-19
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes
Income before income taxes and the provision for taxes on income consisted
of the amounts shown below:
Years Ended December 31,
(Dollars in Thousands)
---------------------------------------
2003 2002 2001
----------- ----------- ---------
Income before income taxes:
Domestic .......................... $ 702,196 $ 700,209 $ 588,322
International ..................... 419,653 373,414 307,063
----------- ----------- ---------
Total ........................... $ 1,121,849 $ 1,073,623 $ 895,385
=========== =========== =========
Provision for taxes on income:
Current:
Federal ......................... $ 143,280 $ 154,567 $ 155,414
State and local ................. 14,386 35,104 32,214
International ................... 139,422 136,854 123,770
----------- ----------- ---------
Total Current ................... 297,088 326,525 311,398
=========== =========== =========
Deferred:
Federal ........................... 91,913 58,985 39,643
State and local ................... 2,610 4,262 7,178
International ..................... (10,684) (14,135) (6,091)
----------- ----------- ---------
Total Deferred .................... 83,839 49,112 40,730
----------- ----------- ---------
Total ............................. $ 380,927 $ 375,637 $ 352,128
=========== =========== =========
Our effective income tax rate varied from the statutory federal income tax
rate as a result of the following factors:
2003 2002 2001
------ ------ ------
Statutory federal income tax rate ............. 35.0% 35.0% 35.0%
Non-deductible amortization of goodwill ....... -- -- 2.9
State and local taxes on income,
net of federal income tax benefit ........... 1.0 2.4 2.8
International subsidiaries' tax rate
differentials ............................... (1.8) (0.9) (0.2)
Other ......................................... (0.2) (1.5) (1.2)
------ ------ ------
Effective rate ................................ 34.0% 35.0% 39.3%
====== ====== ======
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 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.
F-20
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax assets and liabilities as of December 31, 2003 and 2002
consisted of the amounts shown below (dollars in thousands):
2003 2002
--------- ---------
Deferred tax assets:
Compensation and severance ......................... $ 119,833 $ 115,748
Basis differences arising from acquisitions ........ 71,250 67,738
Basis differences from short term assets
and liabilities .................................. 25,328 40,852
Tax loss carryforwards ............................. 76,858 54,446
Other .............................................. -- 8,876
--------- ---------
Total deferred tax assets ............................ 293,269 287,660
Valuation allowance ................................ (44,336) (42,334)
--------- ---------
Total deferred tax assets net of valuation allowance . $ 248,933 $ 245,326
========= =========
Deferred tax liabilities:
Unrealized gain on investments and capital
transactions of affiliates ....................... 39,615 40,556
Basis differences arising from tangible
and deductible intangible assets ................. 42,370 14,077
Financial instruments .............................. 109,862 69,643
Other .............................................. 12,257 --
--------- ---------
Total deferred tax liabilities ....................... $ 204,104 $ 124,276
========= =========
Net current deferred tax assets as of December 31, 2003 and 2002 were
$104.8 million and $78.5 million, respectively, and were included in prepaid
expenses and other current assets. At December 31, 2003, we had non-current
deferred tax assets of $144.1 million and long-term deferred tax liabilities of
$204.1 million and at December 31, 2002, we had non-current deferred tax assets
of $166.8 million and long-term deferred tax liabilities of $124.3 million. We
have concluded that it is more likely than not that we will be able to realize
our 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 2003 were $65.3 million, in 2002 were $63.8 million and in 2001
were $69.2 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 2003 was $7.3
million, in 2002 was $12.4 million and in 2001 was $14.9 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
F-21
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2003,
2002 and 2001 consolidated results of operations or financial 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, 2003, 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, 2003, 2002 and
2001 was reported as follows:
(Dollars in Thousands)
2003 2002 2001
--------- --------- ---------
Office Rent .................... $ 352,840 $ 326,815 $ 313,449
Third Party Sublease ........... (17,339) (15,534) (8,046)
--------- --------- ---------
Total Office Rent .............. 335,501 311,281 305,403
Equipment Rent ................. 152,431 152,146 147,338
--------- --------- ---------
Total Rent ..................... $ 487,932 $ 463,427 $ 452,741
========= ========= =========
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
-------- -------- --------
2004 ....................... $458,002 $(22,117) $435,885
2005 ....................... 380,595 (17,870) 362,725
2006 ....................... 303,026 (14,653) 288,373
2007 ....................... 241,144 (9,797) 231,347
2008 ....................... 197,439 (6,520) 190,919
Thereafter ................. 965,136 (15,873) 949,263
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, 2003 and 2002. Amounts in parentheses
represent liabilities.
2003 2002
------------------------------- ---------------------------
(Dollars in Thousands) (Dollars in Thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash, cash equivalents and
short-term investments ........................... $ 1,548,935 $ 1,548,935 $ 695,881 $ 695,881
Other investments .................................. 27,112 27,112 224,478 224,478
Long-term debt and convertible notes ............... (2,536,601) (2,582,253) (1,947,814) (1,953,251)
Financial Commitments
Cross-currency interest rate swaps ............... (44,765) (44,765) (27,556) (27,556)
Forward foreign exchange contracts ............... (1,019) (1,019) (3,747) (3,747)
Guarantees ....................................... -- (925) -- (8,449)
Letters of credit ................................ -- -- -- (2,854)
F-22
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 represented $181.0 million of the balance at December 31,
2002 and zero at December 31, 2003. 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 do not qualify for hedge accounting 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.
Our derivative activities are confined to risk management activities
related to our international operations. We enter into short-term forward
foreign exchange contracts which hedge our intercompany cash movements between
subsidiaries operating in different currency markets from that of our treasury
centers from which they borrow or invest. In the limited number of instances
where operating expenses and revenues are not denominated in the same currency,
amounts are promptly settled or hedged in the foreign currency market with
forward contracts. 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 90 days or less. At December 31, 2003 and 2002, the aggregate amount
of intercompany receivables and payables subject to this hedge program was
$1,251.0 million and $791.7 million, respectively. The table below summarizes by
major currency the notional principal amounts of the Company's
F-23
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
forward foreign exchange contracts outstanding at December 31, 2003 and 2002.
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.
At December 31, 2003 and 2002, we had Japanese Yen 19.1 billion 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.
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.
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, 2003 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.
(Dollars in Thousands)
Notional Principal Amount
----------------------------------------------------
2003 2002
----------------------- -----------------------
Company Company Company Company
Buys Sells Buys Sells
-------- -------- -------- --------
U.S. Dollar............. $ 41,223 $103,870 $ 32,058 $ 43,575
British Pound........... 460,079 160,811 271,074 92,970
Euro.................... 8,078 273,500 3,941 160,657
Japanese Yen............ 74,671 -- 20,734 3,346
Other................... 41,205 87,581 66,369 96,988
-------- -------- -------- --------
Total................... $625,256 $625,762 $394,176 $397,536
======== ======== ======== ========
The foreign currency and Yen swap contracts existing during the years
ended December 31, 2003 and 2002 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, 2002 and
2003, 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
F-24
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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); Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB No. 123 (SFAS 148); and Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity (SFAS 150).
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 a subsequent impairment test by the end of the second
quarter of 2003 and concluded that there was no impairment at either date. The
results of the impairment testing did not impact 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)
2001
------------------------------
as adjusted as reported
Operating Profit ......................... $1,062,974 $968,184
Income before Income Taxes ............... 990,175 895,385
Equity in Affiliates ..................... 15,444 12,667
Minority Interest ........................ (54,266) (52,782)
Diluted EPS .............................. $ 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 adopted SFAS 146 effective January 1, 2003. The
adoption did not 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. Also
under SFAS 148, we adopted quarterly pro forma disclosures during 2003. This
disclosure requirement did not have
F-25
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 some circumstances). We adopted
the standard in the third quarter of 2003, as modified by FSP 150-3. The
adoption did not have an impact on, or result in additional disclosure in, our
December 31, 2003 consolidated results of operations or financial position. We
will continue to closely monitor developments in the area of accounting for
certain capital investments with characteristics of both liabilities and equity.
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 December 31, 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 FASB subsequently issued FIN 46R in December 2003 which
modified certain provisions of FIN 46. The effective date of FIN 46R applies to
the first reporting period after March 15, 2004. The application of FIN 46 as
originally issued and as revised by the issuance of FIN 46R are not expected to
have an impact on, or result in additional disclosure in 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
Beginning on June 13, 2002, several proposed class actions were filed
against us and certain senior executives in the United States District Court for
the Southern District of New York. The actions have since been consolidated
under the caption In re Omnicom Group Inc. Securities Litigation, No. 02-CV4483
(RCC) on behalf of a proposed class of purchasers of our common stock between
February 20, 2001 and June 11, 2002. The consolidated complaint alleges among
other things that our public filings and other public statements during that
period contained false and misleading statements or omitted to state material
information relating to (1) our calculation of the organic growth component of
period-to-period revenue growth, (2) our valuation of certain internet
investments, made by our Communicade Group, which we contributed to Seneca
Investments LLC in 2001, and (3) the existence and amount of certain contingent
future obligations in respect of acquisitions. The complaint seeks an
unspecified amount of compensatory damages plus costs and attorneys' fees.
Defendants have moved to dismiss the complaint. The court has not yet decided
the motion.
F-26
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the proceedings described above, a shareholder derivative
action was filed in New York State Court 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 Event
We plan to adopt the fair value method of accounting for stock-based
compensation during the first quarter of 2004 utilizing the modified prospective
method and the restatement approach. We expect the effect will be to reduce net
income and earnings per share in future periods. The impact on our net income
and earnings per share for prior periods will be consistent with the pro forma
disclosures included in note 7 to our financial statements.
F-27
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, 2003 and 2002,
in thousands of dollars except for per share amounts.
Quarter
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
Revenue
2003 ................... $1,937,245 $2,149,508 $2,028,603 $2,506,047
2002 ................... 1,732,426 1,916,569 1,768,459 2,118,845
Income Before Income Taxes
2003 ................... 215,086 323,693 222,878 360,192
2002 ................... 217,536 324,548 205,827 325,712
Income Taxes
2003 ................... 75,211 110,555 75,510 119,651
2002 ................... 79,858 122,014 69,696 104,069
Income After Income Taxes
2003 ................... 139,875 213,138 147,368 240,541
2002 ................... 137,678 202,534 136,131 221,643
Equity in Earnings
of Affiliates
2003 ................... 2,486 1,865 3,996 6,757
2002 ................... 2,522 3,454 2,436 5,399
Minority Interests
2003 ................... (13,777) (24,256) (16,095) (26,015)
2002 ................... (11,634) (18,673) (12,463) (25,568)
Net Income
2003 ................... 128,584 190,747 135,269 221,283
2002 ................... 128,566 187,315 126,104 201,474
Basic Net Income Per Share
2003 ................... 0.69 1.02 0.72 1.18
2002 ................... 0.69 1.01 0.68 1.08
Diluted Net Income Per Share
2003 ................... 0.69 1.02 0.72 1.17
2002 ................... 0.68 1.00 0.68 1.08
F-28
Schedule II
OMNICOM GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 2003
(Dollars in Thousands)
================================================================================================================
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Translation
Balance at Charged Removal of Adjustments Balance
Beginning to Costs Uncollectable (increase) at End of
Description of Period and Expenses Receivables (1) decrease Period
- ----------------------------------------------------------------------------------------------------------------
Valuation accounts deducted from
Assets to which they apply --
Allowance for doubtful accounts:
December 31, 2003........................ $75,575 $12,941 $24,637 $(5,778) $69,657
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
- ----------
(1) Net of acquisition date balances in allowance for doubtful accounts of
companies acquired of $0.6 million, $2.0 million and $3.1 million in 2003,
2002 and 2001, respectively.
S-1