-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KKccpId4UPmbQeQ3fyy2t7cNX/OoyE2sjt+plM790YOIlZhEll0M/1FqFZ+/+Plp nkCQaJwPHf/p49NaS0HVzw== 0000891092-03-003227.txt : 20031107 0000891092-03-003227.hdr.sgml : 20031107 20031107163707 ACCESSION NUMBER: 0000891092-03-003227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OMNICOM GROUP INC CENTRAL INDEX KEY: 0000029989 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 131514814 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10551 FILM NUMBER: 03985668 BUSINESS ADDRESS: STREET 1: 437 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124153700 MAIL ADDRESS: STREET 1: 437 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH GROUP INC DATE OF NAME CHANGE: 19861117 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH INTERNATIONAL INC DATE OF NAME CHANGE: 19850604 FORMER COMPANY: FORMER CONFORMED NAME: DOYLE DANE BERNBACH INC DATE OF NAME CHANGE: 19781226 10-Q 1 e16147_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q ---------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission File Number: 1-10551 OMNICOM GROUP INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-1514814 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 437 Madison Avenue, New York, New York 10022 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 415-3600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). YES _X_ NO ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 190,000,900 (as of October 31, 2003) OMNICOM GROUP INC. AND SUBSIDIAIRES INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets - September 30, 2003 and December 31, 2002.................... 1 Consolidated Condensed Statements of Income - Three Months and Nine Months Ended September 30, 2003 and 2002........... 2 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002............... 3 Notes to Consolidated Condensed Financial Statements.......... 4 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations.................................. 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21 Item 4. Controls and Procedures....................................... 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................. 23 Signatures.................................................... 24 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands)
(Unaudited) September 30, December 31, 2003 2002 ---- ---- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents .......................................... $ 563,890 $ 666,951 Short-term investments at market, which approximates cost .......... 23,822 28,930 Accounts receivable, less allowance for doubtful accounts of $71,374 and $75,575 .......................................... 4,034,880 3,966,550 Billable production orders in process, at cost ..................... 596,821 371,816 Prepaid expenses and other current assets .......................... 695,846 602,819 ----------- ----------- Total Current Assets .................................. 5,915,259 5,637,066 ----------- ----------- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less accumulated depreciation and amortization of $809,817 and $717,294 .............................................. 572,378 557,735 INVESTMENTS IN AFFILIATES ............................................... 145,374 137,303 GOODWILL ................................................................ 5,581,450 4,850,829 INTANGIBLES, net of accumulated amortization of $110,652 and $88,132 .... 88,696 97,730 DEFERRED TAX BENEFITS ................................................... 42,216 42,539 OTHER ASSETS ............................................................ 335,324 496,600 ----------- ----------- TOTAL ASSETS .......................................... $12,680,697 $11,819,802 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable ................................................... $ 4,468,728 $ 4,833,681 Advance billings ................................................... 707,374 648,577 Current portion of long-term debt .................................. 11,810 35,256 Bank loans ......................................................... 52,873 50,394 Accrued taxes and other liabilities ................................ 1,280,590 1,271,616 ----------- ----------- Total Current Liabilities ............................. 6,521,375 6,839,524 ----------- ----------- LONG-TERM DEBT .......................................................... 185,014 197,861 CONVERTIBLE NOTES ....................................................... 2,339,310 1,747,037 DEFERRED COMPENSATION AND OTHER LIABILITIES ............................. 328,525 293,638 MINORITY INTERESTS ...................................................... 189,056 172,815 SHAREHOLDERS' EQUITY: Common stock ....................................................... 29,790 29,790 Additional paid-in capital ......................................... 1,382,025 1,419,910 Retained earnings .................................................. 2,456,938 2,114,506 Unamortized restricted stock ....................................... (139,868) (136,357) Accumulated other comprehensive loss ............................... (10,089) (154,142) Treasury stock ..................................................... (601,379) (704,780) ----------- ----------- Total Shareholders' Equity ............................ 3,117,417 2,568,927 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $12,680,697 $11,819,802 =========== ===========
The accompanying notes to consolidated condensed financial statements are an integral part of these statements. 1 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Data) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- REVENUE ................................ $2,028,603 $1,768,459 $6,115,356 $5,417,454 OPERATING EXPENSES: Salary and service costs .......... 1,394,888 1,195,574 4,143,652 3,589,962 Office and general expenses ....... 399,304 361,494 1,177,293 1,056,752 ---------- ---------- ---------- ---------- 1,794,192 1,557,068 5,320,945 4,646,714 ---------- ---------- ---------- ---------- OPERATING PROFIT ....................... 234,411 211,391 794,411 770,740 NET INTEREST EXPENSE: Interest expense .................. 15,418 10,365 42,803 34,874 Interest income ................... (3,885) (4,801) (10,049) (12,045) ---------- ---------- ---------- ---------- 11,533 5,564 32,754 22,829 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ............. 222,878 205,827 761,657 747,911 INCOME TAXES ........................... 75,510 69,696 261,276 271,568 ---------- ---------- ---------- ---------- INCOME AFTER INCOME TAXES .............. 147,368 136,131 500,381 476,343 EQUITY IN AFFILIATES ................... 3,996 2,436 8,348 8,412 MINORITY INTERESTS ..................... (16,095) (12,463) (54,128) (42,770) ---------- ---------- ---------- ---------- NET INCOME ..................... $ 135,269 $ 126,104 $ 454,601 $ 441,985 ========== ========== ========== ========== NET INCOME PER COMMON SHARE: Basic .......................... $0.72 $0.68 $2.43 $2.37 Diluted ........................ $0.72 $0.68 $2.42 $2.36 DIVIDENDS DECLARED PER COMMON SHARE .... $0.20 $0.20 $0.60 $0.60
The accompanying notes to consolidated condensed financial statements are an integral part of these statements. 2 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income .................................................................... $ 454,601 $ 441,985 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation tangible assets ............................................. 92,050 89,965 Amortization of intangible assets ........................................ 22,819 15,441 Minority interests ....................................................... 54,128 42,770 Earnings of affiliates less than dividends received ...................... 1,440 4,174 Tax benefit on employee stock plans ...................................... 8,946 12,235 Provisions for losses on accounts receivable ............................. 6,349 7,634 Amortization of restricted shares ........................................ 38,087 45,378 Decrease in accounts receivable .......................................... 117,978 152,801 Increase in billable production orders in process ........................ (211,807) (136,566) Increase in prepaid expenses and other current assets .................... (73,739) (42,728) Decrease in other assets, net ............................................ 9,142 42,954 Net decrease in advance billings, accrued taxes and other liabilities .... (83,812) (535,135) Decrease in accounts payable ............................................. (551,309) (373,580) --------- ---------- Net cash used for operating activities ................................ (115,127) (232,672) --------- ---------- Cash flows from investing activities: Capital expenditures ..................................................... (95,576) (91,281) Payments for purchases of equity interests in subsidiaries and affiliates, net of cash acquired ...................................... (271,095) (342,523) Purchases of short-term investments ...................................... (4,196) (11,669) Proceeds from sale of short-term investments ............................. 11,656 24,276 --------- ---------- Net cash used in investing activities ................................. (359,211) (421,197) --------- ---------- Cash flows from financing activities: Decrease in short-term borrowings ........................................ (2,315) (100,764) Net proceeds from issuance of new convertibles and long-term debt ........ 602,074 1,190,456 Repayments of principal of long-term debt obligations .................... (67,165) (73,802) Dividends paid ........................................................... (111,812) (110,958) Purchase of treasury shares .............................................. (25,928) (368,819) Other, net ............................................................... (18,313) (1,622) --------- ---------- Net cash provided by financing activities ............................. 376,541 534,491 --------- ---------- Effect of exchange rate changes on cash and cash equivalents .................. (5,264) 4,876 --------- ---------- Net Decrease in cash and cash equivalents ............................. (103,061) (114,502) Cash and cash equivalents at beginning of period .............................. 666,951 472,151 --------- ---------- Cash and cash equivalents at end of period .................................... $ 563,890 $ 357,649 ========= ========== Supplemental disclosures: Income taxes paid ........................................................ $ 229,556 $ 280,513 Interest paid ............................................................ $ 53,712 $ 32,358
The accompanying notes to consolidated condensed financial statements are an integral part of these statements. 3 OMNICOM GROUP INC. AND SUBSIDIAIRES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. We have prepared the consolidated condensed interim financial statements included herein without audit pursuant to Securities and Exchange Commission rules. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to these rules. 2. The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Certain reclassifications have been made to the September 30, 2002 and December 31, 2002 reported amounts to conform them to the September 30, 2003 presentation. These statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2002. 3. Results of operations for interim periods are not necessarily indicative of annual results. 4. Basic earnings per share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the above, plus, if dilutive, common share equivalents which include outstanding options and restricted shares, some of which were not dilutive for the periods presented. No adjustments were made for our $2.3 billion aggregate principal amount of convertible notes because the conversion criteria have not been met. For purposes of computing diluted earnings per share, 1,821,000 and 786,000 common share equivalents were assumed to be outstanding for the three months ended September 30, 2003 and 2002, respectively, and 1,101,000 and 1,816,000 common share equivalents were assumed to be outstanding for the nine months ended September 30, 2003 and 2002, respectively. The assumed increase in net income related to the after tax compensation expense related to dividends on restricted shares was $281,000 and $252,000 for the three months ended September 30, 2003 and 2002, respectively and $843,000 and $757,000 for the nine months ended September 30, 2003 and 2002, respectively. The number of shares used in our EPS computations were: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Basic EPS Computation 187,499,000 185,865,000 187,076,000 186,107,000 Diluted EPS Computation 189,320,000 186,652,000 188,177,000 187,923,000 4 OMNICOM GROUP INC. AND SUBSIDIAIRES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 5. Total comprehensive income and its components were:
(in thousands of dollars) ------------------------- Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income for the period .............................. $135,269 $126,104 $454,601 $441,985 Foreign currency translation adjustment, net of income taxes of $7,119 and $3,275 and $77,567 and $48,107 for the three months and nine months ended September 30, 2003 and 2002, respectively ........................................... 13,222 (4,913) 144,053 72,160 -------- -------- -------- -------- Comprehensive income for the period .................... $148,491 $121,191 $598,654 $514,145 ======== ======== ======== ========
6. The following pronouncements were issued by the Financial Accounting Standards Board ("FASB") in 2002 with effective dates in 2003: Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146); Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB No. 123 (SFAS 148); Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity (SFAS 150). SFAS 146 requires costs associated with exit or disposal activities be recognized and measured initially at fair value only when the liability is incurred. SFAS 146 is effective for exit or disposal costs that are initiated after December 31, 2002. We adopted SFAS 146 effective January 1, 2003. The adoption did not have a significant impact on our consolidated results of operations or financial position. SFAS 148 was issued as an amendment to FASB No. 123, Accounting for Stock-Based Compensation, and provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation (in accordance with SFAS 123). We have applied the accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and we have made the annual pro forma disclosures of the effect of adopting the fair value method of accounting for employee stock options and similar instruments as required under SFAS 123 and SFAS 148. We have adopted the quarterly disclosure requirement as required under SFAS 148 as set forth in note 7 below. This disclosure requirement did not have an impact on our consolidated results of operations or financial position. The FASB recently indicated that they will issue a new accounting standard that will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. We will continue to monitor the progress of the FASB with regard to the issuance of this standard. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that 5 OMNICOM GROUP INC. AND SUBSIDIAIRES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). We adopted SFAS 150 effective July 1, 2003. The adoption did not have an impact on, or result in additional disclosure in, our September 30, 2003 consolidated results of operations or financial position. The following FASB Interpretations ("FINs") were issued in 2002 and 2003: FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34; and FIN 46, Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51. FIN 45 sets forth the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The application of FIN 45 did not have an impact on, or result in additional disclosure, in our September 30, 2003 consolidated results of operations or financial position. FIN 46 addresses the consolidation by business enterprises of variable interest entities, as defined in FIN 46 and is based on the concept that companies that control another entity through interests, other than voting interests, should consolidate the controlled entity. The consolidation requirements apply immediately to FIN 46 interests held in variable interest entities created after January 31, 2003. For interests held in variable interest entities that existed prior to February 1, 2003, implementation has been delayed to December 31, 2003. The application of FIN 46 did not have an impact on, or result in additional disclosure in, our September 30, 2003 consolidated results of operations or financial position. 7. The table below summarizes the quarterly pro forma effect of adopting the fair value method of accounting for employee stock options and similar instruments for the three months and nine months ended September 30, 2003 and 2002.
Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands of dollars, except per share amounts) --------------------------------------------------- Net income, as reported ............................... $135,269 $126,104 $454,601 $441,985 Net income, pro forma ................................. 124,729 110,508 419,861 385,104 Stock-based employee compensation cost, net of tax, as reported ........................... 9,483 7,900 26,608 24,074 Additional stock-based employee compensation cost, net of tax, pro forma ............................. 10,538 15,584 34,732 56,883 Basic net income per share, as reported ............... 0.72 0.68 2.43 2.37 Basic net income per share, pro forma ................. 0.67 0.59 2.24 2.07 Diluted net income per share, as reported ............. 0.72 0.68 2.42 2.36 Diluted net income per share, pro forma ............... 0.67 0.59 2.24 2.07
6 OMNICOM GROUP INC. AND SUBSIDIAIRES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 8. All of our wholly and partially owned businesses operate within the marketing and corporate communications services industry. These agencies are organized into strategic platforms, client centric networks, geographic regions and operating groups. Our businesses provide communications services to similar type clients on a global, pan-regional and national basis. We believe that the businesses have similar cost structures and are subject to the same general economic and competitive risks. Given these similarities, we aggregate their results into one reportable segment. A summary of our revenue and long-lived assets by geographic area as of September 30, 2003 and 2002 is set forth in the following table.
(in thousands of dollars) --------------------------------------------------------------------------- United Euro United Other States Denominated Kingdom International Total ------ ----------- ------- ------------- ----- Revenue 3 Months Ended September 30, 2003 $1,111,099 $ 411,551 $223,471 $282,482 $2,028,603 2002 991,446 346,455 205,336 225,222 1,768,459 Revenue 9 Months Ended September 30, 2003 $3,392,877 $1,245,782 $667,150 $809,547 $6,115,356 2002 3,131,124 1,026,621 583,512 676,197 5,417,454 Long-lived Assets at September 30, 2003 $ 308,119 $ 88,259 $ 86,030 $ 89,970 $ 572,378 2002 311,177 69,426 87,225 79,205 547,033
9. At September 30, 2003, we had unsecured committed credit lines of $52.9 million, which were fully drawn and are reflected as short-term bank loans. These unsecured loans were comprised of local borrowings and bank overdrafts of our international subsidiaries. In addition, we had unsecured committed revolving credit facilities of $1,875.0 million. There were no drawings under the revolving credit facilities and no commercial paper outstanding as of September 30, 2003. 10. In June 2003, we issued $600.0 million aggregate principal amount of Zero Coupon Zero Yield Convertible Notes due 2033. The notes are senior unsecured obligations that are convertible into 5.8 million common shares, implying a conversion price of $103.00 per common share, subject to normal anti-dilution adjustments. These notes are convertible at the specified ratio only upon the occurrence of certain events, including if our common shares trade above certain levels, if we effect extraordinary transactions or if our long-term debt ratings are downgraded from their current level to Ba1 or lower by Moody's Investors Services, Inc. ("Moody's") or BBB- or lower by Standard & Poor's Ratings Services ("S&P"). The occurrence of these events will not result in an adjustment of the number of shares issuable upon conversion. Holders of these notes have the right to put the notes back to us for, at our election, cash, stock or a combination of both on June 15, 2006, 2008, 2010, 2013, 2018, 2023 and on each June 15 annually thereafter through June 15, 2032 and we have a right to redeem the notes for cash beginning on June 15, 2010. There are no events that accelerate the noteholders' put rights. Beginning in June 2010, if the market 7 OMNICOM GROUP INC. AND SUBSIDIAIRES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 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 these notes 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. 11. On February 21, 2003, we paid $25.4 million to qualified noteholders of our Liquid Yield Option Notes due in 2031, equal to $30 per $1,000 principal amount of notes as an incentive to the holders not to exercise their put right. This payment is being amortized over the 12-month period ended February 2004. In addition, on February 7, 2003, we repurchased for cash, notes from holders who exercised their put right for $2.9 million, reducing the aggregate amount outstanding of the notes due 2031 to $847.0 million. 12. In June 2003, we acquired all of the common stock of AGENCY.COM from Seneca Investments LLC ("Seneca"). The transaction was effected by the redemption of our preferred stock in Seneca, including cumulative dividends, with a value of $181.0 million and the assumption of $15.8 million of liabilities. The redemption of the preferred stock was applied against our remaining carrying value in the preferred stock using the cost recovery method. The remaining shares of preferred stock are entitled to cumulative dividends at a rate of 8.5% compounded semiannually. Unpaid dividends accrue on a cumulative basis. No cash dividends have been paid by Seneca or accrued by the Company in 2003 and prior. Any future dividends will not be recognized until they are realized. Substantially all of the purchase price was allocated to goodwill. We are currently performing a valuation of the intangible assets of AGENCY.COM, and upon completion, some portion of the purchase price may be assigned to intangible assets other than goodwill. We do not believe that any amounts that may be allocated to other intangibles would have had a material impact on our September 30, 2003 interim results of operations and financial position had the allocation been completed. 13. On August 6, 2003, we paid $6.7 million to qualified noteholders of our Zero Coupon Zero Yield Convertible Notes due in 2032, equal to $7.50 per $1,000 principal amount of notes as an incentive to the holders not to exercise their put right. This payment is being amortized over the 12-month period ended August 2004. In addition, on August 1, 2003, we repurchased for cash, notes from holders who exercised their put right for $7.7 million, reducing the aggregate amount outstanding of the notes due 2032 to $892.3 million. For those holders who did not exercise their put right, the no call period on the notes was extended from July 31, 2007 to July 31, 2009. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations Third Quarter 2003 Compared to Third Quarter 2002 Revenue: Our third quarter of 2003 consolidated worldwide revenue increased 14.7% to $2,028.6 million from $1,768.5 million in the third quarter of 2002. The effect of acquisitions, net of disposals, increased worldwide revenue by $87.2 million in the third quarter of 2003. Internal/organic growth increased worldwide revenue by $92.7 million, and foreign exchange impacts increased worldwide revenue by $80.2 million. The components of the third quarter 2003 revenue growth in the U.S. ("domestic") and the remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International ----------------- ----------------- --------------- $ % $ % $ % -------- ---- -------- ---- ------ ---- Third Quarter ended September 30, 2002 ...... $1,768.5 -- $ 991.5 -- $777.0 -- Components of Revenue Changes: Foreign exchange impact ..................... 80.2 4.6% -- -- 80.2 10.4% Acquisitions ................................ 87.2 4.9% 53.5 5.4% 33.7 4.3% Organic ..................................... 92.7 5.2% 66.1 6.7% 26.6 3.4% -------- ---- -------- ---- ------ ---- Third Quarter ended September 30, 2003 ...... $2,028.6 14.7% $1,111.1 12.1% $917.5 18.1% ======== ==== ======== ==== ====== ====
The components and percentages are calculated as follows: o The foreign exchange impact component shown in the table is calculated by first converting the current period's local currency revenue using the average exchange rates from the equivalent prior period to arrive at a constant currency revenue (in this case $1,948.4 million for the Total column in the table). The foreign exchange impact equals the difference between the current period revenue in U.S. dollars and the current period revenue in constant currency (in this case $2,028.6 million less $1,948.4 million for the Total column in the table). o The acquisition component shown in the table is calculated by aggregating the applicable prior period revenue of the acquired businesses. Netted against this number is the revenue of any business included in the prior period reported revenue that was disposed of subsequent to the prior period. o The organic component shown in the table is calculated by subtracting both the foreign exchange and acquisition revenue components from total revenue growth. o The percentage change shown in the table of each component is calculated by dividing the individual component amount by the prior period revenue base of that component (in this case $1,768.5 million for the "Total" column in the table). 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) The components of revenue and revenue growth for the third quarter of 2003 compared to the third quarter of 2002, in our primary geographic markets are summarized below ($ in millions): $ Revenue % Growth --------- -------- United States.......... $1,111.1 12.1% Euro Markets........... 411.6 18.8% United Kingdom......... 223.5 8.8% Other.................. 282.4 25.4% -------- ---- Total.................. $2,028.6 14.7% ======== ==== As indicated, foreign exchange impacts increased our international revenue by $80.2 million during the quarter ended September 30, 2003. The most significant impacts resulted from the continued strength of the Euro and the British Pound against the U.S. dollar, as our operations in these markets represented approximately 70.0% of our international revenue. Several long-term trends continue to positively affect our business, including our clients increasingly expanding the focus of their brand strategies from national markets to the global market. Additionally, in an effort to gain greater efficiency and effectiveness from their marketing dollars, clients are increasingly requiring greater coordination of their traditional advertising and marketing activities and concentrating these activities with a smaller number of service providers. Driven by our clients' continuous demand for more effective and efficient branding activities, we strive to provide an extensive range of marketing and corporate communications services through various client centric networks that are organized to meet specific client objectives. These services include advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory advertising, entertainment marketing, environmental design, experiential marketing, field marketing, financial/corporate business to business advertising, graphic arts, healthcare communications, instore design, investor relations, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, real estate advertising and marketing, recruitment communications, reputation consulting, retail marketing and sports and event marketing. In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following four categories: traditional media advertising, customer relationship management referred to as CRM, public relations and specialty communications as summarized below. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued)
(Dollars in millions) ----------------------------------------------------------------------- Three Months Ended September 30, 2003 % of 2002 % of $ % Revenue Revenue Revenue Revenue Growth Growth ------- ------- ------- ------- ------ ------ Traditional media advertising $ 844.5 41.6% $ 749.4 42.4% $ 95.1 12.7% CRM 717.7 35.4% 599.0 33.9% 118.7 19.8% Public relations 232.1 11.4% 220.7 12.4% 11.4 5.2% Specialty communications 234.3 11.6% 199.4 11.3% 34.9 17.5% -------- -------- ------ $2,028.6 $1,768.5 $260.1 14.7% ======== ======== ====== =====
Operating Expenses: Our 2003 third quarter worldwide operating expenses increased $237.1 million, or 15.2%, to $1,794.2 million from $1,557.1 million in the third quarter of 2002. As a percentage of revenue, operating expenses increased marginally to 88.4% in the third quarter of this year, compared to 88.0% in the comparable period last year. Salary and service costs represent the largest part of operating expenses. As a percentage of operating expenses, they were 77.7% in the third quarter of 2003 and 76.8% in the third quarter of 2002. These costs are comprised of direct service costs and salary and related costs. Most of, or 84.1% of the $237.1 million increase in operating expenses this quarter resulted from increases in salary and service costs. This $199.3 million increase in salary and service costs was attributable to increased revenue levels, greater utilization of freelance labor, continued investment in new and key personnel, increased severance costs, as well as an increase in incentive compensation. As a result, salary and service costs as a percentage of revenues increased period-to-period from 67.6% in the third quarter of 2002 to 68.8% in the third quarter of 2003. The increased costs in salary and service costs have been partially offset by certain benefits achieved from our continuing efforts to align permanent staffing with current work levels on a location-by-location basis. Office and general expenses represented 22.3% and 23.2% of our operating expenses in the third quarter of 2003 and 2002, respectively. These costs are comprised of office and equipment rent, depreciation and amortization, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased in the third quarter of 2003 to 19.7% from 20.4%. This year-over-year decrease 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. 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. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) For the foregoing reasons, our operating margin decreased to 11.6% in the third quarter of 2003, from 12.0% in the third quarter of 2002. Net Interest Expense: Our net interest expense increased in the third quarter of 2003 to $11.5 million compared to $5.6 million in the same period in 2002. Our gross interest expense increased by $5.1 million to $15.4 million. This increase resulted from 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 due 2031 of $25.4 million and to noteholders due 2032 of $6.7 million are being amortized ratably over 12-month periods. This increase was partially offset by marginally lower short-term interest rates and cash management efforts during the quarter. The amortization of the February and August payments impacts interest expense by $22.9 million for the full-year 2003 compared to 2002. Income Taxes: Our consolidated effective income tax rate was 33.9% in the third quarter of 2003, which is similar to the rate in the third quarter of 2002. Earnings Per Share (EPS): For the foregoing reasons, our net income in the third quarter of 2003, increased 7.3% to $135.3 million. Diluted earnings per share increased 5.9% to $0.72 in the third quarter of 2003, as compared to $0.68 in the prior year period. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Nine Months 2003 Compared to Nine Months 2002 Revenue: Our consolidated worldwide revenue in the first nine months of 2003 increased 12.9% to $6,115.4 million from $5,417.5 million in 2002. The effect of acquisitions, net of disposals, increased worldwide revenue by $196.6 million. Internal/organic growth increased worldwide revenue by $187.5 million, and foreign exchange impacts increased worldwide revenue by $313.8 million. The components of total 2003 revenue growth in the U.S. ("domestic") and the remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International ----------------- ----------------- ----------------- $ % $ % $ % -------- ---- -------- --- -------- ---- Nine Months ended September 30, 2002.... $5,417.5 -- $3,131.1 -- $2,286.4 -- Components of Revenue Changes: Foreign exchange impact................. 313.8 5.8% -- -- 313.8 13.7% Acquisitions............................ 196.6 3.6% 119.0 3.8% 77.6 3.4% Organic................................. 187.5 3.5% 142.8 4.6% 44.7 2.0% -------- ---- -------- --- -------- ---- Nine Months ended September 30, 2003. $6,115.4 12.9% $3,392.9 8.4% $2,722.5 19.1% ======== ==== ======== === ======== ====
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 $5,801.6 million for the Total column in the table). The foreign exchange impact equals the difference between the current period revenue in U.S. dollars and the current period revenue in constant currency (in this case $6,115.4 million less $5,801.6 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 $5,417.5 million for the "Total" column in the table). 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) The components of revenue and revenue growth for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, in our primary geographic markets are summarized below ($ in millions): $ Revenue % Growth --------- -------- United States................... $3,392.9 8.4% Euro Markets.................... 1,245.8 21.3% United Kingdom.................. 667.2 14.3% Other........................... 809.5 19.7% ------- ---- Total........................... $6,115.4 12.9% ======== ==== As indicated, foreign exchange impacts increased our international revenue by $313.8 million during the nine months ended September 30, 2003. The most significant impacts resulted from the continued strength of the Euro and the British Pound against the U.S. dollar, as our operations in these markets represented approximately 70.0% of our international revenue. Several long-term trends continue to positively affect our business, including our clients increasingly expanding the focus of their brand strategies from national markets to the global market. Additionally, in an effort to gain greater efficiency and effectiveness from their marketing dollars, clients are increasingly requiring greater coordination of their traditional advertising and marketing activities and concentrating these activities with a smaller number of service providers. Driven by our clients' continuous demand for more effective and efficient branding activities, we strive to provide an extensive range of marketing and corporate communications services through various client centric networks that are organized to meet specific client objectives. These services include advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory advertising, entertainment marketing, environmental design, experiential marketing, field marketing, financial/corporate business to business advertising, graphic arts, healthcare communications, instore design, investor relations, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, real estate advertising and marketing, recruitment communications, reputation consulting, retail marketing and sports and event marketing. In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following four categories: traditional media advertising, customer relationship management referred to as CRM, public relations and specialty communications as summarized below. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued)
(Dollars in millions) ----------------------------------------------------------------------- Nine Months Ended September 30, 2003 % of 2002 % of $ % Revenue Revenue Revenue Revenue Growth Growth ------- ------- ------- ------- ------ ------ Traditional media advertising $2,648.4 43.3% $2,349.1 43.4% $299.3 12.7% CRM 2,042.2 33.4% 1,710.6 31.6% 331.6 19.4% Public relations 706.5 11.6% 694.0 12.8% 12.5 1.8% Specialty communications 718.3 11.7% 663.8 12.2% 54.5 8.2% -------- -------- ------ $6,115.4 $5,417.5 $697.9 12.9% ======== ======== ====== =====
Operating Expenses: During the first nine months of 2003 worldwide operating expenses increased $674.2 million, or 14.5%, to $5,320.9 million from $4,646.7 million in the first nine months of 2002. As a percentage of revenue, operating expenses were 87.0% in the first nine months of this year, compared to 85.8% in the comparable nine months last year. Salary and service costs represent the largest part of operating expenses. As a percentage of operating expenses, they were 77.9% in the first nine months of 2003 and 77.3% in the first nine months of 2002. These costs are comprised of direct service costs and salary and related costs. The majority, or 82.1% of the $674.2 million increase in operating expenses during the first nine months resulted from increases in salary and service costs. This $553.7 million increase in salary and service costs was attributable to increased revenue levels, greater utilization of freelance labor, continued investment in new and key personnel and increased severance costs. As a result, salary and service costs as a percentage of revenues increased period-to-period from 66.3% in the first nine months of 2002 to 67.8% in the first nine months of 2003. The increased costs in salary and service costs have been partially offset by certain benefits achieved from our continuing efforts to align permanent staffing with current work levels on a location-by-location basis. Office and general expenses represented 22.1% and 22.7% of our operating expenses in the first nine months of 2003 and 2002, respectively. These costs are comprised of office and equipment rent, depreciation and amortization, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased in the first nine months of 2003 to 19.3% from 19.5%. This year-over-year improvement in performance 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. 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. For the foregoing reasons, our operating margin decreased to 13.0% in the first nine months of 2003, from 14.2% in the first nine months of 2002. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Net Interest Expense: Our net interest expense increased in the first nine months of 2003 to $32.8 million compared to $22.8 million in the same period in 2002. Our gross interest expense increased by $42.8 million to $34.9 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. This increase was partially offset by marginally lower short-term interest rates and cash management efforts during the first nine months. The amortization of the February and August payments impacts interest expense by $22.9 million for the full-year 2003 compared to 2002. Income Taxes: Our consolidated effective income tax rate was 34.3% in the first nine months of 2003, which is slightly less than our full year rate for 2002 of 35.0%. This reduction reflects the realization of our ongoing focus on tax planning. Earnings Per Share (EPS): For the foregoing reasons, our net income in the first nine months of 2003, increased 2.9% to $454.6 million. Diluted earnings per share increased 2.5% to $2.42 in the first nine months of 2003, as compared to $2.36 in the prior year period. Critical Accounting Policies and New Accounting Pronouncements To assist in better understanding our financial statements and the related management's discussion and analysis of those results, readers are encouraged to consider our discussion of critical accounting policies in the MD&A section of our 2002 Form 10-K, as well as our consolidated financial statements and the related notes included in our 2002 Form 10-K for a more complete understanding of all of our accounting policies. There have been no material changes in them since then. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Contingent Acquisition Obligations Certain of our acquisitions are structured with additional contingent purchase price obligations. We utilize contingent purchase price structures in an effort to minimize the risk to us associated with potential future negative changes in the performance of the acquired entity. The amount of future contingent purchase price payments that we would be required to pay for prior acquisitions, assuming that the acquired businesses perform over the relevant future periods at their current profit levels, is approximately $324 million as of September 30, 2003. The ultimate amounts payable cannot be predicted with reasonable certainty because they are dependent upon future results and are subject to changes in foreign currency exchange rates. In accordance with GAAP, we have not recorded a liability for these items on our balance sheet since the definitive amount is not determinable or distributable. Actual results can differ from these estimates and the actual amounts that we pay are likely to be different from these estimates. Our obligations change from period to period as a result of payments made during the current period, changes in the previous estimate of the acquired entities' performance, changes in foreign currency exchange rates and other factors. These differences could be material. The contingent purchase price obligations as of September 30, 2003, calculated using the assumptions above, are as follows: ($ in millions) ------------------------------------------------------------------ Remainder There- 2003 2004 2005 2006 after Total ---- ---- ---- ---- ----- ----- $29 $114 $104 $41 $36 $324 In addition, owners of interests in certain of our subsidiaries or affiliates have the right in certain circumstances to require us to purchase additional ownership stakes in these subsidiaries or affiliates. Assuming that the subsidiaries and affiliates perform over the relevant periods at their current profit levels, the aggregate amount we could be required to pay in future periods is approximately $257 million, $119 million of which are currently exercisable. The ultimate amount payable in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised. The actual amounts that we pay are likely to be different from these estimates. These differences could be material. The obligations that exist for these agreements as of September 2003, calculated using the assumptions above, are as follows: ($ in millions) --------------------------------------- Currently Not Currently Exercisable Exercisable Total ----------- ----------- ----- Subsidiary agencies $111 $128 $239 Affiliated agencies 8 10 18 ---- ---- ---- Total $119 $138 $257 ==== ==== ==== If these rights were to be exercised, there would be an increase in our net income as a result of our increased ownership and the corresponding reduction in minority interest expense. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources Liquidity: We had cash and cash equivalents totaling $563.9 million and $667.0 million and short-term investments totaling $23.8 million and $28.9 million at September 30, 2003 and December 31, 2002, respectively. Consistent with our historical trends in the first nine months of the year, we had negative cash flow from operations of $115.1 million, as a result of a significant reduction in our year-end current liabilities, primarily due to tax payments, payments to vendors and to the media on behalf of clients. We funded these liabilities with cash on hand and by drawing down on available credit facilities. As discussed below, during June 2003 we issued $600.0 million of Zero Coupon Zero Yield Convertible Notes. The net proceeds of which were used to pay down our outstanding credit facilities prior to June 30, 2003. Capital Resources: We maintain two revolving credit facilities with two consortia of banks, a three-year revolving $835.0 million credit facility with a maturity date of November 14, 2005 and a $1,040.0 million 364-day revolving credit facility with a maturity date of November 13, 2003. We are also an active participant in the commercial paper market with a $1,500.0 million program. Each of our bank credit facilities provide credit support for issuances under this program. As of September 30, 2003, we had no borrowings outstanding under these credit facilities. The 364-day revolving credit facility includes a provision which allows us to convert all amounts outstanding at expiration of the facility into a one-year term loan. The consortium of banks under the 364-day credit facility consists of 20 banks for which Citibank N.A. acts as agent. Other significant lending institutions include JPMorgan Chase Bank, HSBC Bank USA, San Paolo IMI S.p.A., Barclays, Wachovia and Societe Generale. A similar consortium of 16 banks provides support under the three-year revolving credit facility for which Citibank N.A. acts as administrative agent and ABN AMRO Bank acts as syndication agent. Other significant lending institutions include HSBC Bank USA, JPMorgan Chase Bank, Wachovia and Societe Generale. These facilities provide us with the ability to classify up to $1,875.0 million of our borrowings due within one year as long-term debt, as it is our intention to keep the borrowings outstanding on a long-term basis. We have received written commitments from a consortia of banks to renew the 364-day revolving credit facility. The renewal will be effective November 13, 2003. The facility will be renewed under the same terms as the current facility, however, the amount of the facility has been increased to $1,200.0 million. We had short-term bank loans of $52.9 million and $50.4 million at September 30, 2003 and December 31, 2002, respectively, comprised of local borrowings and bank overdrafts of our international subsidiaries which are unsecured loans. At September 30, 2003, we had a total of $2,339.3 million aggregate principal amount of convertible notes outstanding, including $847.0 million Liquid Yield Option Convertible Notes due 2031, which were issued in February 2001, $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 due 2033, which were issued in June 2003. The holders of our 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Liquid Yield Option Convertible Notes due 2031 have the right to cause us to repurchase up to the entire aggregate face amount of the notes then outstanding for par value in February of each year. The holders of our Zero Coupon Zero Yield Convertible Notes due 2032 have the right to cause us to repurchase up to the entire aggregate face amount of the notes then outstanding for par value in August of each year. The holders of our Zero Coupon Zero Yield Convertible Notes 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 Convertible Notes due 2031, the Zero Coupon Zero Yield Convertible Notes due 2032 and the Zero Coupon Zero Yield 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 Convertible 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 S&P, and to Baa3 or lower by Moody's or, in the case of the Zero Coupon Zero Yield 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. On February 21, 2003, we paid $25.4 million to qualified noteholders of our Liquid Yield Option Notes due in 2031, equal to $30 per $1,000 principal amount of notes as an incentive to the holders not to exercise their put right. This payment is being amortized 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 due in 2032, equal to $7.50 per $1,000 principal amount of notes as an incentive to the holders not to exercise their put right. This payment is being amortized 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. At September 30, 2003, we had Euro-denominated bonds outstanding equal to (euro)152.4 million or $177.7 million. The bonds pay a fixed rate of 5.2% to maturity in June 2005. The bonds serve as a hedge of our investment in Euro-denominated net assets. While an increase in the value of the euro against the dollar will result in a greater liability for interest and principal, there will be a corresponding increase in the dollar value of our euro-denominated net assets. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) Our debt as of September 30, 2003 ($ in millions) was as follows: Debt: Bank loans (due in less than 1 year).................... $ 52.9 $835.0 Million Revolver - due November 14, 2005....... -- Commercial paper issued under 364-day Facility.......... -- 5.20% Euro notes - due June 24, 2005 ((euro)152.4).... 177.7 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.......... 19.1 -------- Total Debt.................................................. $2,589.0 ======== We believe that our operating cash flow combined with our available lines of credit and our access to the capital markets are sufficient to support our foreseeable cash requirements, including working capital, capital expenditures, dividends and acquisitions. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Our operations are subject to the risk of currency exchange rate fluctuations related to our international operations. While our agencies conduct business in more than 70 different currencies, our major non-U.S. currency markets are the European Monetary Union (EMU), the United Kingdom, Japan, Brazil and Canada. Our net income is subject to risk from the translation of the revenue and expenses of our foreign operations, which are generally denominated in the local currency. The effects of currency exchange rate fluctuations on our first nine months of operations were positive as discussed above. We do not hedge our exposure against the US dollar in the normal course of our business. We do, however, conduct global treasury operations to improve liquidity and manage third-party interest expense centrally. As an integral part of these operations, we enter into short-term forward foreign exchange contracts to hedge intercompany cash movements between subsidiaries operating in different currency markets. To the extent that our treasury centers require liquidity, they can access local currency lines of credit, our committed bank facilities or dollar-denominated commercial paper. A foreign treasury center borrowing U.S. dollar-denominated commercial paper will generally enter into a short-term exchange contract to hedge its position. Outside of major markets, our subsidiaries generally borrow funds directly in their local currency. In addition, we periodically enter into cross-currency interest rate swaps to hedge our net yen investments. Our Annual Report on Form 10-K for the year ended December 31, 2002 provides a more detailed discussion of the market risks affecting our operations. As of September 30, 2003, no material change had occurred in our market risks from the disclosure contained in that 10-K. Forward-Looking Statements "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" set forth in this report contain disclosures which are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "envisage," "plan" or "continue." These forward-looking statements are based upon our current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and anticipated actions and our future financial condition and results. The uncertainties and risks include, but are not limited to, changes in general economic conditions, competitive factors, client communication requirements, the hiring and retention of human resources and other factors. In addition, our international operations are subject to the risk of currency fluctuations, exchange controls and similar risks discussed above. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by us or on our behalf, and those differences could be material. 21 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, analyzed and reported within applicable time periods. During the 90-day period prior to the filing of this report, we conducted an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that they believe that our disclosure controls and procedures are effective to ensure recording, analysis and reporting of information required to be included in our SEC reports on a timely basis. There have been no significant changes in our internal controls or other factors that could be reasonably expected to significantly affect the effectiveness of these controls since that evaluation was completed. 22 PART II. OTHER INFORMATION Item 6. Exhibit and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer and President required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Executive Vice President and Chief Financial Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. 32.1 Certification of the Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act of 1934, as amended, and 18 U.S.C. ss. 1350. (b) Reports on Form 8-K On July 29, 2003, we filed a Current Report on Form 8-K to furnish under Item 9 (Regulation FD Disclosure) and Item 12, our press release announcing our operating results for the second quarter of 2003 and the text of materials used in the related call at which such results were discussed. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OMNICOM GROUP INC. November 7, 2003 /s/ Randall J. Weisenburger ----------------------------------- Randall J. Weisenburger Executive Vice President and Chief Financial Officer (on behalf of Omnicom Group Inc. and as Principal Financial Officer) 24 EX-31.1 3 e16147ex31_1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, John Wren, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2003 of Omnicom Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ John D. Wren ------------------------------------- John D. Wren Chief Executive Officer and President EX-31.2 4 e16147ex31_2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Randall J. Weisenburger, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2003 of Omnicom Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ Randall J. Weisenburger -------------------------------- Randall J. Weisenburger Executive Vice President and Chief Financial Officer EX-32.1 5 e16147ex32_1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of Omnicom Group Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of Omnicom certifies, that, to such officer's knowledge: o the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and o the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Omnicom as of the dates and for the periods expressed in the Report. Executed as of November 7, 2003. /s/ John D. Wren -------------------------------------------- Name: John D. Wren Title: Chief Executive Officer and President /s/ Randall J. Weisenburger -------------------------------------------- Name: Randall J. Weisenburger Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----