-----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, V/Cqduzbqcdo5Y9Uht/D5UK2PAI/kbzOFQ2xFNXxGVKBsaTW2S4RiebBO6VP4VBt 3Z9yThVO3QfDwAE6qcJ6mw== 0000891092-96-000075.txt : 19960510 0000891092-96-000075.hdr.sgml : 19960510 ACCESSION NUMBER: 0000891092-96-000075 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960509 SROS: NYSE 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01619 FILM NUMBER: 96558266 BUSINESS ADDRESS: STREET 1: 437 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124153600 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 424B3 1 FINAL PROSPECTUS KETCHUM COMMUNICATIONS HOLDINGS, INC. SIX PPG PLACE PITTSBURGH, PENNSYLVANIA 15222-5488 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held On May 30, 1996 To The Shareholders of Ketchum Communications Holdings, Inc.: A Special Meeting of the Shareholders of Ketchum Communications Holdings, Inc., a Pennsylvania corporation ("Ketchum"), will be held on May 30, 1996, at 5:00 p.m. (local time), at the offices of Ketchum, Six PPG Place, Pittsburgh, Pennsylvania 15222, to consider and vote upon the following matters described in the accompanying Prospectus/Information Statement: 1. To consider and act upon the approval of an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which a wholly-owned subsidiary of Omnicom Group Inc., a New York corporation ("Omnicom"), will be merged with and into Ketchum, such that the surviving corporation of such merger shall be a wholly-owned subsidiary of Omnicom and each outstanding share of capital stock of Ketchum will be converted into the right to receive a certain amount of common stock of Omnicom, all as more fully described in the accompanying Prospectus/Information Statement; and 2. To consider and act upon the approval of an Escrow Agreement (the "Escrow Agreement") to be entered into in connection with the Merger Agreement and the appointment of Paul H. Alvarez as Ketchum Shareholder Representative, and Edward L. Graf as alternate, to act as the collective agent of the holders of Ketchum common stock under the terms of the Escrow Agreement, all as more fully described in the accompanying Prospectus Information Statement; and 3. To consider and act upon any other business which may properly come before the Special Meeting or any adjournment thereof. Only holders of record as of the close of business on April 15, 1996 of common stock, stated value $0.005 per share, of Ketchum ("Ketchum Common Stock") and of Series A Preferred Stock, $100 par value, of Ketchum ("Ketchum Preferred Stock") are entitled to notice of and to vote at the Special Meeting. The affirmative votes of the holders of a majority of the Ketchum Common Stock, voting as a class, and of the holders of all of the Ketchum Preferred Stock, voting as a class, are required to approve the Merger Agreement and the transactions contemplated thereby. The affirmative vote of the holders of a majority of the voting power represented by the outstanding shares of Ketchum Common Stock and Ketchum Preferred Stock, voting together as a single class, is necessary to approve the Escrow Agreement and the appointment of the Ketchum Shareholder Representative. None of the proposals shall become effective unless all of the proposals are adopted by the requisite vote of the shareholders of Ketchum. The Board of Directors of Ketchum believes that the foregoing transactions are fair to, and in the best interests of, Ketchum and the shareholders of Ketchum, and recommends that the shareholders of Ketchum vote FOR the approval of the Merger Agreement and FOR the approval of the Escrow Agreement and the appointment of the Ketchum Shareholder Representative. Shareholders who dissent from the Merger in accordance with the Pennsylvania Business Corporation Law, a copy of which appears as Annex 1 to the attached Prospectus/Information Statement, shall have the right to seek appraisal of their capital stock of Ketchum. As of April 15, 1996, directors and executive officers of Ketchum as a group owning approximately 56.70% of Ketchum Common Stock, have expressed an intention to vote in favor of the transactions contemplated herein; and the Trustee of the Ketchum 401(k) Profit Sharing Plan, as the sole holder of Ketchum Preferred Stock, has expressed an intention to vote in favor of the transactions contemplated herein. Accordingly, the proposals can be approved without the affirmative vote of any other shareholder of Ketchum. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. By Order of The Ketchum Board of Directors PAUL H. ALVAREZ Chairman, Chief Executive Officer, and President Dated: May 8, 1996 KETCHUM COMMUNICATIONS HOLDINGS, INC. INFORMATION STATEMENT ------------- OMNICOM GROUP INC. PROSPECTUS ------------- This Prospectus/Information Statement is being furnished to holders of common stock, stated value $0.005 per share, of Ketchum Communications Holdings, Inc., a Pennsylvania corporation ("Ketchum"), in connection with the special meeting of shareholders of Ketchum to be held at Six PPG Place, Pittsburgh, Pennsylvania 15222, on May 30, 1996 commencing at 5:00 p.m. (local time), and at any adjournment thereof (the "Special Meeting"). The purpose of the Special Meeting is to consider and vote upon proposals (a) to adopt an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "Merger") of KCI Acquisition Inc. ("OmniSub"), a Pennsylvania corporation and wholly-owned subsidiary of Omnicom Group Inc., a New York corporation ("Omnicom"), with and into Ketchum, and (b) to adopt an Escrow Agreement (the "Escrow Agreement") pursuant to the Merger Agreement, and to appoint Paul H. Alvarez as representative, and Edward L. Graf as alternate, to act as the collective agent of the holders of Ketchum Common Stock under the terms of the Escrow Agreement (the "Ketchum Shareholder Representative"). This Prospectus/Information Statement constitutes both an information statement of Ketchum with respect to the Special Meeting and a prospectus of Omnicom with respect to up to 1,500,000 shares of common stock, par value $0.50 per share, of Omnicom ("Omnicom Common Stock"), to be issued in connection with the Merger. Omnicom has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission covering the shares of Omnicom Common Stock to be issued in connection with the Merger. This Prospectus/Information Statement constitutes the Prospectus of Omnicom filed as a part of such Registration Statement. THE SECURITIES OF OMNICOM TO BE OFFERED IN CONNECTION WITH THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ---------------- The Date of this Prospectus/Information Statement is May 8, 1996 ---------------- No person has been authorized to give any information or to make any representation other than those contained in this Prospectus/Information Statement in connection with the Special Meeting or the offering of securities made hereby and, if given or made, such information or representation must not be relied upon as having been authorized by Omnicom, Ketchum or any other person. This Prospectus/Information Statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, in any jurisdiction to or from any person to whom it is not lawful to make such offer or solicitation. Neither the delivery of this Prospectus/Information Statement, nor any distribution of securities made hereunder, shall, under any circumstances, create an implication that there has been no change in the affairs of Omnicom or Ketchum since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. ---------------- This Prospectus/Information Statement contains certain forward-looking statements with respect to the operations and business of Omnicom and Ketchum. Said forward-looking statements are subject to risks and uncertainties (including, without limitation, the effect of general economic conditions) that may cause actual results to differ materially from those contemplated by such forward-looking statements. ---------------- AVAILABLE INFORMATION Omnicom is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "SEC") under File No. 1-10551. The reports, proxy statements and other information filed by Omnicom with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC at 7 World Trade Center, 13th Floor, New York, New York 10048-1102 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also can be obtained from the Public Reference Section of the SEC, Washington, D.C. 20549 at prescribed rates. In addition, material filed by Omnicom can be inspected at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York 10005, on which the Omnicom Common Stock is listed. Omnicom has filed with the SEC a Registration Statement on Form S-4 (together with all amendments, exhibits, annexes and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Omnicom Common Stock to be issued pursuant to the Merger. This Prospectus/Information Statement does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the SEC. Such additional information may be obtained from the SEC's principal office in Washington, D.C. Statements contained in this Prospectus/Information Statement as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 2 TABLE OF CONTENTS
SUMMARY .................................................................................................... 4 The Companies ........................................................................................ 4 The Special Meeting .................................................................................. 4 Description of Certain Terms of the Merger Agreement ................................................. 6 Other Considerations ................................................................................. 8 The Escrow Agreement and the Ketchum Shareholder Representative ...................................... 10 COMPARATIVE PER SHARE DATA ................................................................................. 12 MARKET PRICE DATA .......................................................................................... 13 THE SPECIAL MEETING ........................................................................................ 14 Date, Time and Place of Special Meeting .............................................................. 14 Business to be Transacted at the Special Meeting ..................................................... 14 Record Date; Voting Rights ........................................................................... 14 Voting Requirements .................................................................................. 14 Management Ownership ................................................................................. 15 THE MERGER AGREEMENT AND THE MERGER ........................................................................ 15 Background of and Ketchum's Reasons for the Merger; Recommendation of the Ketchum Board of Directors ....................................................................... 15 Omnicom's Reasons for the Merger ..................................................................... 19 Interests of Ketchum's Management in the Merger ...................................................... 20 Procedure for Distributing Shares of Omnicom Common Stock to Ketchum Shareholders .................... 20 The Merger Agreement ................................................................................. 21 Other Considerations ................................................................................. 24 THE ESCROW AGREEMENT AND THE KETCHUM SHAREHOLDER REPRESENTATIVE ............................................ 28 BUSINESS INFORMATION CONCERNING OMNICOM .................................................................... 31 Description of Business .............................................................................. 31 Description of Property .............................................................................. 34 Legal Proceedings .................................................................................... 35 SELECTED FINANCIAL DATA OF OMNICOM ......................................................................... 36 MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OMNICOM ........... 37 Results of Operations ................................................................................ 37 Capital Resources and Liquidity ...................................................................... 39 BUSINESS INFORMATION CONCERNING KETCHUM .................................................................... 41 Description of Business .............................................................................. 41 Executive Officers and Directors, Principal Shareholders ............................................. 42 SELECTED FINANCIAL DATA OF KETCHUM ......................................................................... 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KETCHUM ........... 45 Results of Operations ................................................................................ 45 Capital Resources and Liquidity ...................................................................... 48 DESCRIPTION OF OMNICOM CAPITAL STOCK ....................................................................... 50 DESCRIPTION OF KETCHUM CAPITAL STOCK ....................................................................... 50 COMPARISON OF SHAREHOLDER RIGHTS ........................................................................... 51 LEGAL MATTERS .............................................................................................. 57 EXPERTS .................................................................................................... 58 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ............................................ F-1 Omnicom Group Inc. and Subsidiaries .................................................................. F-2 Ketchum Communications Holdings, Inc. and Subsidiaries ............................................... F-21 Schedules to Consolidated Financial Statements of Omnicom Group Inc. ................................. S-1
3 - -------------------------------------------------------------------------------- SUMMARY The following is a brief summary of certain information contained in this Prospectus/Information Statement. This summary is not intended to be complete and is qualified in its entirety by reference to the more detailed information contained in or incorporated by reference in this Prospectus/Information Statement. The Companies Omnicom Group Inc. ............. Omnicom, through its wholly and partially owned companies (hereinafter collectively referred to as the "Omnicom Group"), operates advertising agencies which plan, create, produce and place advertising in various media such as television, radio, newspapers and magazines. The Omnicom Group offers its clients such additional services as marketing consultation, consumer market research, design and production of merchandising and sales promotion programs and materials, direct mail advertising, corporate identification and public relations. According to the unaudited industry-wide figures published in 1996 in the trade journal, Advertising Age, Omnicom is ranked as the second largest advertising agency group worldwide. The Omnicom Group operates as three separate, independent agency networks: the BBDO Worldwide Network, the DDB Needham Worldwide Network and the TBWA International Network. The Omnicom Group also operates Goodby, Silverstein & Partners as an independent agency, and certain marketing service and specialty advertising companies through Omnicom's Diversified Agency Services division. The principal executive offices of Omnicom are located at 437 Madison Avenue, New York, New York 10022, telephone number (212) 415-3600. KCI Acquisition Inc. ........... OmniSub was formed by Omnicom to effect the proposed Merger with Ketchum and has not engaged in any active business. Ketchum Communications Holdings, Inc. ................. Ketchum, through its subsidiaries, is a full service communications company, which was founded in 1923. Ketchum offers a full range of communication services including public relations, consumer advertising, direct response, directory advertising and other related activities. The principal executive offices of Ketchum are located at Six PPG Place, Pittsburgh, Pennsylvania 15222, telephone number (412) 456-3500. The Special Meeting Date, Time and Place of Special Meeting ............. The Special Meeting will be held on May 30, 1996 at 5:00 p.m. (local time), at Six PPG Place, Pittsburgh, Pennsylvania 15222. Record Date; Shares Entitled To Vote ............... Holders of record at the close of business on April 15, 1996 (the "Record Date") of shares of common stock, stated value $0.005 per share, of Ketchum ("Ketchum Common Stock"), and of shares of Series A Preferred Stock, par value $100 per share, of Ketchum - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- ("Ketchum Preferred Stock"), are entitled to notice of and to vote at the Special Meeting. At such date there were outstanding 358,818 shares of Ketchum Common Stock and 6,282 shares of Ketchum Preferred Stock. Ketchum Common Stock and Ketchum Preferred Stock are collectively referred to herein as "Ketchum Stock." Holders of shares of Ketchum Common Stock are referred to herein as "Ketchum Common Shareholders"; holders of Ketchum Preferred Stock are referred to herein as "Ketchum Preferred Shareholders"; and Ketchum Common Shareholders and Ketchum Preferred Shareholders are collectively referred to herein as "Ketchum Shareholders". Purpose of the Special Meeting ................ The purpose of the Special Meeting is to consider and vote upon the following matters: (a) a proposal to approve the Merger Agreement and the transactions contemplated thereby, including without limitation the Merger of OmniSub with and into Ketchum pursuant to the Merger Agreement, such that Ketchum will be the surviving corporation of such Merger and will become a wholly-owned subsidiary of Omnicom, and each share of Ketchum Stock will be converted into the right to receive shares of Omnicom Common Stock, as more fully described herein. (b) a proposal to approve the Escrow Agreement and the transactions contemplated thereby, and to appoint Paul H. Alvarez as the Ketchum Shareholder Representative, and Edward L. Graf as alternate, to act on behalf of the Ketchum Common Shareholders under the terms of the Escrow Agreement; and (c) such other proposals as may properly be brought before the Special Meeting. None of these matters will become effective unless all of the proposals are adopted by the requisite votes of the Ketchum Shareholders. Vote Required .................. Pursuant to Pennsylvania law, the approval of the Merger Agreement and the transactions contemplated thereby will require the affirmative votes of the holders of a majority of the Ketchum Common Stock, voting as a class, and of the holders of a majority of the Ketchum Preferred Stock, voting as a class; and the approval of the Escrow Agreement and the appointment of the Ketchum Shareholder Representative, or any other proposals as may properly be brought before the Special Meeting, will require the affirmative vote of the holders of a majority of the voting power represented by the outstanding shares of Ketchum Common Stock and Ketchum Preferred Stock, voting together as a single class. However, the Merger Agreement imposes, as an additional condition to the vote required, that the Trustee of the Ketchum 401(k) Profit Sharing Plan (the "Ketchum Profit Sharing Plan") shall have voted all the shares of Ketchum Stock owned by the Ketchum Profit Sharing Plan in favor of the Merger. As of the Record Date, directors and executive officers of Ketchum owned an aggregate of 203,458 shares of Ketchum Common - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Stock, representing 56.70% of the outstanding Ketchum Common Stock as of such date; and the Ketchum Profit Sharing Plan owned of record an aggregate of 6,282 shares of Ketchum Preferred Stock, representing 100% of the outstanding Ketchum Preferred Stock as of such date. Each of such individuals and the Trustee of the Ketchum Profit Sharing Plan has expressed an intention to vote in favor of the various proposals. Accordingly, the proposals can be approved without the affirmative vote of any other Ketchum Shareholders. Description of Certain Terms of the Merger Agreement The Proposed Merger ............ Subject to the approval of the Ketchum Shareholders of the Merger Agreement, OmniSub will be merged with and into Ketchum. As a result of the Merger, the business of Ketchum will be operated as a wholly-owned subsidiary of Omnicom. Conversion of Ketchum Stock .......................... If the Merger is consummated, each share of Ketchum Common Stock will be converted into shares of Omnicom Common Stock, based upon the "Common Stock Conversion Price" of $125.24 and the "Market Value" of the Omnicom Common Stock. If the Merger is consummated, each share of Ketchum Preferred Stock will be converted into shares of Omnicom Common Stock, based upon the "Preferred Stock Conversion Price" of $1,000 and the "Market Value" of the Omnicom Common Stock. See "The Merger Agreement and the Merger-- the Merger Agreement -- Conversion Prices". The total number of shares of Omnicom Common Stock to be issued to the Ketchum Shareholders based upon such Conversion Prices will be dependent on the "Market Value" of the Omnicom Common Stock, which will be determined by the average of the closing prices per share of the Omnicom Common Stock on the New York Stock Exchange during the 20 consecutive trading days ending three business days immediately prior to the date of the Special Meeting. Accordingly, although the actual conversion exchange rates cannot be calculated as of the date of this Registration Statement, they will be known and communicated to the Ketchum Shareholders on May 28, 1996. At the start of business on such date, an electronic message will be sent to each Ketchum Shareholder at his or her office within Ketchum, and a message will be left on his or her voice mail so that the information may be accessed from outside of the office. In addition, Daniel Madia, Executive Vice President of Ketchum, will be available to answer telephone inquiries from the Ketchum Shareholders concerning the exchange ratio information. Mr. Madia can be reached at (412) 456-3508; collect telephone calls will be accepted. In order to make certain estimates in this Prospectus/Information Statement relating to the consideration to be paid to the Ketchum Shareholders, it has been assumed that at the Effective Time of the Merger, the Market Value of the Omnicom Common Stock will be $41 (which was the closing price per share of Omnicom Common Stock on the New York Stock Exchange on the last full trading day prior to the execution and delivery of the Merger Agreement). Based upon this assumption, each share of Ketchum Common Stock would be - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- converted into the right to receive 3.05 shares of Omnicom Common Stock, and each share of Ketchum Preferred Stock would be converted into the right to receive 24.39 shares of Omnicom Common Stock. The closing of the Merger Agreement (the "Closing") has been scheduled for May 31, 1996, the day after the date of the Special Meeting; however, this Closing may be delayed beyond May 31, 1996 if all conditions of the Merger have not been satisfied or waived by such date. There will be no adjustment to the Conversion Prices if this occurs, notwithstanding that the actual value of the Omnicom Common Stock could fluctuate between the date of the Special Meeting and the date of the Closing. At the time this Prospectus/Information Statement is being mailed to the Ketchum Shareholders, Omnicom has no reason to believe that the date of the Closing will not be May 31, 1996 as scheduled. Indemnification Obligations and Escrow Agreement ........... Pursuant to the Merger Agreement, the Ketchum Common Shareholders are required to indemnify Omnicom and its affiliates against certain losses and damages arising under the Merger Agreement. Losses and damages may arise as a result of (i) the inaccuracy or breach of any representation or warranty or covenant of Ketchum contained in the Merger Agreement, or the breach of or failure by Ketchum to perform or discharge any of its obligations under the Merger Agreement, or (ii) any costs incurred by Ketchum in connection with the reorganization of the media buying operations of its subsidiary, Ketchum Communications, Inc. ("KCI"). Holders of Ketchum Preferred Stock are not required to provide any indemnification under the Merger Agreement. With certain exceptions, indemnification obligations arising under clause (i) of this paragraph arise only to the extent that such losses and damages exceed $100,000. To satisfy the indemnification obligations arising under clause (i) of the preceding paragraph, shares of Omnicom Common Stock having an aggregate Market Value of $4,400,0000 shall be placed into an escrow account (the "General Escrow Fund") under the terms of the Escrow Agreement among Omnicom, Ketchum, the Ketchum Shareholder Representative and The Chase Manhattan Bank, N.A., as escrow agent (the "Escrow Agent"). To satisfy the indemnification obligations arising under clause (ii) of the preceding paragraph, shares of Omnicom Common Stock, having an aggregate Market Value of $2,500,000 will be placed into an additional escrow account (the "Special Escrow Fund") under the Escrow Agreement. Each of the Ketchum Common Shareholders shall be depositing his pro rata share of the General Escrow Fund or Special Escrow Fund based on the number of shares of Omnicom Common Stock received in the Merger. Of the $125.24 Common Stock Conversion Price payable in respect of each share of Ketchum Common Stock, Omnicom Common Stock having an aggregate Market Value of $12.26 would be deposited in the General Escrow Fund, and - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- Omnicom Common Stock having an aggregate Market Value of $6.97 would be deposited in the Special Escrow Fund. Based upon the assumed Market Value of $41, this would result in 0.30 shares of Omnicom Common Stock per share of Ketchum Common Stock being deposited in the General Escrow Fund, and 0.17 shares of Omnicom Common Stock per share of Ketchum Common Stock being deposited in the Special Escrow Fund. Since the amounts held in such Escrow Funds are subject to claims in respect of contingent liabilities, there can be no assurance that amounts held therein will in fact be distributed to the Ketchum Common Shareholders. The indemnification obligations of the Ketchum Common Shareholders will be limited to and satisfied solely from, the General Escrow Fund and Special Escrow Fund under the Escrow Agreement (such that neither Omnicom nor any of its affiliates will have any recourse for the payment of any losses or other damages arising out of the transactions contemplated by the Merger Agreement against any Ketchum Shareholder nor shall any Ketchum Shareholder be personally liable for any such losses or damages). Indemnification obligations to be satisfied out of the General Escrow Fund will terminate on the earlier of the first independent audit report, if any, of the surviving corporation following the Effective Time of the Merger or one year from the Effective Time (except that claims asserted in writing on or prior to such date will survive until they are decided and are final and binding on the parties). Indemnification obligations to be satisfied out of the Special Escrow Fund will terminate on December 31, 1996, being the latest date by which it will be determined whether or not costs have been incurred in connection with the reorganization of KCI's media buying operations (except that claims asserted in writing on or prior to such date will survive until they are decided and are final and binding on the parties). See "The Merger Agreement and the Merger--The Merger Agreement--Indemnification Obligations" and "The Escrow Agreement and the Ketchum Shareholder Representative". Conditions to the Merger ....... Consummation of the Merger is contingent upon satisfaction of certain conditions, including without limitation, the SEC's not having objected to Omnicom's treatment of the Merger as a pooling-of-interests for accounting purposes, the Registration Statement having been declared effective by the SEC and not subject to a stop order, or threatened stop order; the Omnicom Common Stock being registered thereunder having been approved for listing on the New York Stock Exchange; holders of fewer than 3% of the outstanding shares of Ketchum Common Stock having elected dissenters rights, as described more fully herein; all governmental and regulatory consents and approvals having been obtained, and no court or governmental authority having taken any action to prohibit or enjoin the Merger; and other conditions usual and customary in similar business transactions. All conditions to the Merger other than those specifically listed here can be waived by one of the parties to the Merger. In the event that a condition of the Merger is not satisfied, the Merger may be abandoned even if prior thereto the Merger has been approved - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- by the Ketchum Shareholders. See "The Merger Agreement and the Merger--Other Considerations--Rights of Dissenting Ketchum Shareholders." Other Considerations Recommendation of the Ketchum Board of Directors ..... The Board of Directors of Ketchum believes that the Merger is fair to and in the best interests of, Ketchum and the Ketchum Shareholders, from the point of view of Ketchum's long-term strategic objectives, the terms of the Merger Agreement, and Ketchum's alternatives to the Merger, all of which are more fully discussed under "The Merger Agreement and the Merger--Background of the Ketchum's Reasons for the Merger; Recommendation of the Ketchum Board of Directors." Accordingly, the Board of Directors of Ketchum has unanimously approved the Merger Agreement and the transactions contemplated thereby and recommends its approval by the Ketchum Shareholders. Interests of Certain Persons in the Merger .................. As of the Record Date, directors and executive officers of Ketchum owned of record an aggregate of approximately 56.70% of the outstanding shares of Ketchum Common Stock, and the Ketchum Profit Sharing Plan owned 100% of the outstanding shares of Ketchum Preferred Stock. Each of such directors and executive officers, and the Trustee of the Ketchum Profit Sharing Plan, has expressed an intention to vote his or her shares of Ketchum Stock in favor of the various proposals. Accordingly, these proposals can be approved without the affirmative vote of any other Ketchum Shareholder. For a description of certain interests of certain directors and executive officers of Ketchum in the Merger that are in addition to the interests of Ketchum Shareholders generally, see "The Merger Agreement and the Merger--Interests of Ketchum's Management in the Merger". Certain Federal Income Tax Consequences ........ The Merger is intended to be a tax free reorganization within the meaning of Section 368(a) of the United States Internal Revenue Code of 1986, as amended (the "Code"). In general, the Ketchum Shareholders will not recognize gain or loss as a result of the exchange of Ketchum Stock for Omnicom Common Stock as a result of the Merger. However, receipt of cash in lieu of fractional shares or in connection with appraisal rights as a dissenting shareholder may give rise to taxable income. See "The Merger Agreement and the Merger--Other Considerations--Federal Income Tax Consequences." Ketchum Shareholders should consult their tax advisors regarding the tax consequences of the Merger to them in their particular circumstances. Accounting Treatment ........... The Merger will be accounted for by Omnicom as a pooling-of-interests for financial reporting purposes in accordance with generally accepted accounting principles. See "The Merger Agreement and the Merger--Other Considerations--Accounting Treatment". Regulatory Approvals ........... Omnicom and Ketchum each filed notification and report forms under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "Hart-Scott-Rodino Act") with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Justice Department (the "Antitrust Division") on - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- March 13, 1996, and each was advised that the applicable waiting period expired on April 13, 1996. See "The Merger Agreement and the Merger--Other Considerations--Regulatory Approvals". Resales of Omnicom Common Stock ................... Resales of Omnicom Common Stock by Ketchum Shareholders who are deemed to be "affiliates" (as such term is understood under the Securities Act) of Ketchum prior to the Merger may be subject to certain restrictions. See "The Merger Agreement and the Merger--Other Considerations--Resales of Omnicom Common Stock". Dissenters' Rights ............. Holders of Ketchum Stock who dissent from the Merger in accordance with Pennsylvania law are entitled to appraisal rights. See "The Merger Agreement and the Merger--Other Considerations--Rights of Dissenting Ketchum Shareholders". The Escrow Agreement and the Ketchum Shareholder Representative The Escrow Agreement ........... As described above under "Description of Certain Terms of the Merger-- Indemnification Obligations", indemnification obligations arising out of the Merger Agreement will be satisfied from shares of Omnicom Common Stock placed into the General and Special Escrow Funds established under the Escrow Agreement. The General Escrow Fund will consist of shares of Omnicom Common Stock having an aggregate Market Value of $4,400,000; the Special Escrow Fund will consist of shares of Omnicom Common Stock having an aggregate Market Value of $2,500,000. Each of the Ketchum Common Shareholders will be depositing his pro rata share of the General Escrow Fund or Special Escrow Fund determined by multiplying the aggregate number of shares of Omnicom Common Stock by a fraction, the numerator of which is the number of shares of Omnicom Common Stock issuable to such individual in the Merger and the denominator of which is the total number of shares of Omnicom Common Stock issuable to all Ketchum Common Shareholders, rounded up to the nearest whole share. Of the $125.24 Common Stock Conversion Price payable in respect of each share of Ketchum Common Stock, Omnicom Common Stock having an aggregate Market Value of $12.26 would be deposited in the General Escrow Fund, and Omnicom Common Stock having an aggregate Market Value of $6.97 would be deposited in the Special Escrow Fund. Since the amounts held in such Escrow Funds are subject to claims in respect of contingent liabilities, there can be no assurance that amounts held therein will in fact be distributed to the Ketchum Common Shareholders. For purposes of satisfying any claims, each share of Omnicom Common Stock deposited in either Escrow Fund will be valued at the Market Value, regardless of actual fluctuations in the market value of the Omnicom Common Stock after the date of the Closing of the Merger Agreement. See "The Escrow Agreement and the Ketchum Shareholder Representative -- The Escrow Agreement". - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- Appointment of the Ketchum Shareholder Representative ................. It is a condition to Closing under the Merger Agreement that the Ketchum Shareholders appoint the Ketchum Shareholder Representative to act as their collective agent in connection with the Escrow Agreement, including one or more alternative individuals to act as the Ketchum Shareholder Representative in the event that the designated Representative shall have died, resigned, or otherwise become incapable or unwilling to act as Representative. Appointment of the Ketchum Shareholder Representative shall include the specific authorization for such Representative to (i) execute and deliver the Escrow Agreement and any documents incident or ancillary thereto, including without limitation any amendments, cancellations, extensions or waivers in respect thereof; (ii) respond to and make determinations in respect of the assertion of any and all claims for indemnification by Omnicom, and to assert claims on behalf of the Ketchum Shareholders, pursuant to the terms of the Escrow Agreement and the terms of the Merger Agreement pertaining thereto; (iii) execute and deliver any stock powers which may be required to be executed by any Ketchum Shareholder in order to permit the delivery to Omnicom of any shares of Omnicom Common Stock to be delivered to it pursuant to the Escrow Agreement; and (iv) take all such other actions as may be necessary or desirable to carry out his responsibilities as collective agent of the Ketchum Shareholders in respect of the Escrow Agreement. The Ketchum Shareholder Representative shall not be liable for any mistake of fact or error of judgment or for any acts or omissions unless caused by his gross negligence or willful misconduct. In addition, the current directors of Ketchum and the holders of more than 5% of the Ketchum Common Stock have executed a Contribution Agreement pursuant to which they have agreed to indemnify the Ketchum Shareholder Representative against all losses and expenses which may be incurred by him as a result of any dispute arising from the performance of his duties under the Escrow Agreement, unless such dispute is the result of his gross negligence or actions taken in bad faith. The proposal before the Ketchum Shareholders is that Paul H. Alvarez be appointed as Ketchum Shareholder Representative, with Edward L. Graf appointed as alternate. See "The Escrow Agreement and the Ketchum Shareholder Representative -- Appointment of the Ketchum Shareholder Representative." Recommendation of the Ketchum Board of Directors ..... The Board of Directors of Ketchum recommends that the Ketchum Shareholders approve the Escrow Agreement and the appointment of Paul H. Alvarez as the Ketchum Shareholder Representative, and Edward L. Graf as alternate. - -------------------------------------------------------------------------------- 11 COMPARATIVE PER SHARE DATA Set forth below are unaudited book value, cash dividends declared and net income (loss) per common share data of Omnicom and Ketchum on both historical and pro forma combined bases, which information has been adjusted to give retroactive effect to the two-for-one stock split in the form of a 100% stock dividend paid to holders of record of Omnicom Common Stock on December 15, 1995. Pro forma combined cash dividends declared per common share reflects Omnicom and Ketchum cash dividends declared in the periods indicated. Pro forma net income (loss) per common share is calculated under the pooling-of-interests accounting method and assumes that the Merger had occurred immediately prior to the period being reported upon. The pro forma combined data has been calculated based upon the material assumption that the Market Value of the Omnicom Common Stock will be $41. The information set forth below should be read in conjunction with the respective audited financial statements of Omnicom and of Ketchum included in this Prospectus/Information Statement. As of December 31, 1995 ----------------------- Book Value per Common Share: Omnicom ...................................... $7.39 Ketchum ...................................... (1.42) Pro forma .................................... 7.36 Equivalent pro forma ......................... 22.48 Year Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Cash Dividends Declared per Common Share: Omnicom ...................................... $0.66 $0.62 $0.62 Ketchum ...................................... 1.00 1.00 1.00 Pro forma .................................... 0.65 0.62 0.62 Equivalent pro forma ......................... 1.99 1.89 1.89 Net Income (Loss) per Common Share: Omnicom Primary ................................... 1.89 1.58 1.03 Fully diluted ............................. 1.85 1.54 1.01 Ketchum Primary ................................... (21.82) 3.67 (10.55) Fully diluted ............................. (21.82) 3.67 (10.55) Pro forma Primary ................................... 1.75 1.57 0.91 Fully diluted ............................. 1.72 1.53 0.91 Equivalent pro forma Primary ................................... 5.35 4.80 2.78 Fully diluted ............................. 5.25 4.67 2.78 Note: Equivalent pro forma per share information has been calculated using an exchange ratio of 3.054746 shares of Omnicom Common Stock for each share of Ketchum Common Stock. 12 MARKET PRICE DATA There is no public market for Ketchum Common Stock or Ketchum Preferred Stock. For each calendar quarter during 1993, 1994 and 1995, Ketchum has paid a dividend on the Ketchum Common Stock in the amount of $.25 per share, and during the fourth calendar quarter of 1993 and for each calendar quarter during 1994 and 1995 Ketchum has paid a dividend on the Ketchum Preferred Stock in the amount of $22.50 per share. Omnicom Common Stock is listed on the New York Stock Exchange. The table below sets forth, for the calendar quarters indicated, the reported high and low sale prices of Omnicom Common Stock as reported on the New York Stock Exchange Composite Tape, in each case based on published financial sources, and the dividends paid per share on the Omnicom Common Stock for such periods. This information has been adjusted to reflect the two for one stock split in the form of a 100% stock dividend payable to holders of record of Omnicom Common Stock on December 15, 1995. Omnicom Common Stock ----------------------------------------- Dividends Paid Per Share of High Low Common Stock ----- ----- --------------- 1993 First Quarter ................... 23 3/4 19 3/16 $.155 Second Quarter ................. 23 5/8 19 1/8 .155 Third Quarter .................. 23 1/8 18 1/2 .155 Fourth Quarter ................. 23 1/4 20 3/4 .155 1994 First Quarter .................. 24 15/16 21 7/8 .155 Second Quarter ................. 24 3/4 22 7/16 .155 Third Quarter .................. 25 3/4 24 .155 Fourth Quarter ................. 26 7/8 24 1/2 .155 1995 First Quarter .................. 28 7/16 25 .155 Second Quarter ................. 30 13/16 27 1/16 .155 Third Quarter .................. 33 29 5/16 .175 Fourth Quarter ................. 37 1/4 31 3/16 .175 1996 First Quarter .................. 45 35 1/2 .175 Second Quarter ................. 46 7/8 40 5/8 - ------------ On March 6, 1996, the last full trading day prior to the execution and delivery of the Merger Agreement, the closing price of Omnicom Common Stock on the New York Stock Exchange Composite Tape was $41 per share. On May 7, 1996, the most recent practicable date prior to the printing of this Prospectus/Information Statement, the closing price of Omnicom Common Stock on the New York Stock Exchange Composite Tape was $40 1/4 per share. On April 30, 1996, the most recent practicable date prior to the printing of this Prospectus/Information Statement, there were approximately 3,344 holders of record of Omnicom Common Stock and no holders of record of Omnicom's Preferred Stock, par value $1.00 per share. The Merger will not affect the amount and will not materially affect the percentage holdings of (i) any person known to Omnicom to be the beneficial owner of more than five percent of Omnicom Common Stock, (ii) any director of Omnicom, or (iii) all directors and officers of Omnicom as a group. Omnicom is not aware of any restrictions on its present or future ability to pay dividends. However, in connection with certain borrowing facilities entered into by Omnicom and its subsidiaries (see Note 7 of the Notes to Consolidated Financial Statements of Omnicom Group Inc.), Omnicom is subject to certain restrictions on its current ratio, the ratio of net cash flow to consolidated indebtedness, the ratio of total consolidated indebtedness to total consolidated capitalization and on its ability to make investments in and loans to affiliates and unconsolidated subsidiaries. 13 THE SPECIAL MEETING Date, Time and Place of Special Meeting This Prospectus/Information Statement is being furnished to the holders of Ketchum Common Stock and Ketchum Preferred Stock in connection with the Special Meeting of Ketchum Shareholders to be held on May 30, 1996 at 5:00 p.m. (local time), at Six PPG Place, Pittsburgh, Pennsylvania 15222. This Prospectus/Information Statement is first being mailed to the Ketchum Shareholders on or about May 9, 1996. Business to be Transacted at the Special Meeting At the Special Meeting, Ketchum Shareholders will consider and vote upon the following matters (collectively the "Ketchum Vote Matters"): 1. A proposal to approve the Merger Agreement and the transactions contemplated thereby, including without limitation the Merger of OmniSub with and into Ketchum pursuant to the Merger Agreement such that the surviving corporation of such Merger shall be a wholly-owned subsidiary of Omnicom, and each share of Ketchum Stock shall be converted into the right to receive shares of Omnicom Common Stock, as more fully described herein; 2. A proposal to approve the Escrow Agreement and the transactions contemplated thereby, and to appoint Paul H. Alvarez as Ketchum Shareholder Representative and Edward L. Graf as alternate, to act on behalf of the Ketchum Common Shareholders under the terms of the Escrow Agreement; and 3. Such other proposals as may properly come before the Special Meeting or any adjournment thereof. None of the proposals shall become effective unless all of the proposals are adopted by the requisite vote of the Ketchum Shareholders. Record Date; Voting Rights Only shareholders of record of Ketchum Common Stock and Ketchum Preferred Stock as at the close of business on April 15, 1996 will be entitled to vote at the Special Meeting. On that Record Date there were issued and outstanding 358,818 shares of Ketchum Common Stock and 6,282 shares of Ketchum Preferred Stock. Each share of Ketchum Stock is entitled to one vote per share on the Ketchum Vote Matters at the Special Meeting or any adjournment thereof whether such vote is cast as part of a vote of the Ketchum Common Stock or Ketchum Preferred Stock voting separately as a class, or as part of a collective vote of all Ketchum Stock. Voting Requirements The presence of the holders of a majority of the voting power of all shares of Ketchum Common Stock and of the holders of a majority of the voting power of all shares of Ketchum Preferred Stock, in each case entitled to vote on the Record Date, is necessary to constitute a quorum for the transaction of business at the Special Meeting. Under the Pennsylvania Business Corporation Law of 1988 (the "PABCL") and the Ketchum Articles of Incorporation (the "Ketchum Articles"), the approval of the Merger Agreement and the transactions contemplated thereby will require the affirmative votes of the holders of a majority of the Ketchum Common Stock, voting as a class, and of the holders of a majority of the Ketchum Preferred Stock, voting as a class. The approval of the Escrow Agreement and the appointment of the Ketchum Shareholder Representative, or the approval of any other proposals as may properly be brought before the Special Meeting, will require the affirmative vote of the holders of a majority of the voting power represented by the outstanding shares of Ketchum Common Stock and Ketchum Preferred Stock, voting together as a single class. Abstentions have the effect of negative votes. Notwithstanding the provisions of Pennsylvania law, the Merger Agreement requires as a condition of the Closing of the Merger Agreement that all of the shares of Ketchum Stock held by the Ketchum Profit Sharing Plan shall have been voted in favor of the Merger. 14 Management Ownership As of the Record Date, directors and executive officers of Ketchum as a group owned an aggregate of 203,458 shares of Ketchum Common Stock, representing 56.70% of the outstanding shares of Ketchum Common Stock; and the Ketchum Profit Sharing Plan owned an aggregate of 6,282 shares of Ketchum Preferred Stock, representing 100% of the outstanding shares of Ketchum Preferred Stock. Each of these persons and the Trustee of the Ketchum Profit Sharing Plan has expressed an intention to vote in favor of the transactions contemplated herein. Accordingly, the Ketchum Vote Matters can be approved by the affirmative vote of such persons even if all other Ketchum Shareholders vote against the proposals. No proxies are being solicited in connection with the Special Meeting. THE MERGER AGREEMENT AND THE MERGER (The information contained in this Registration Statement of which this Prospectus/Information Statement forms a part is qualified in its entirety by reference to the complete text of the Merger Agreement, which is filed as an Exhibit thereto and is incorporated herein by reference.) Background of and Ketchum's Reasons for the Merger; Recommendation of the Ketchum Board of Directors Overview After the Merger is effective, Ketchum will continue as a separate subsidiary of Omnicom and continue to conduct its business through three primary operating divisions, Ketchum Public Relations, Ketchum Advertising and Ketchum Directory Advertising. It is anticipated that the senior management of these significant operating divisions of Ketchum will continue to serve as officers of such operating divisions. Paul H. Alvarez, the Chairman, Chief Executive Officer and President of Ketchum, will become employed by Omnicom as Vice Chairman of its Diversified Agency Services division and will remain an officer and director of Ketchum. See "The Merger Agreement and the Merger -- Interests of Ketchum Management in the Merger" for a description of proposed employment and non-competition agreements between Ketchum and certain officers of Ketchum, to be entered into upon the Closing of the Merger Agreement. The initial Board of Directors of Ketchum immediately following the Effective Time of the Merger will be composed of three directors: Paul H. Alvarez, Peter I. Jones (who is currently the President of Omnicom's Diversified Agency Services division), and Barry J. Wagner (who is currently the Secretary of Omnicom). The terms of the Merger Agreement, including the terms of the Escrow Agreement, are the result of arm's-length negotiations between representatives of Omnicom and representatives of Ketchum. Background of the Merger In 1992, Ketchum's Board of Directors (sometimes referred to as the "Ketchum Board") began a process of strategic planning for the corporation and also had each of its divisions engage in similar planning. The divisions included the largest two, Advertising and Public Relations, as well as Directory Advertising and two smaller operations. From an overall corporate standpoint, Ketchum recognized three major challenges: (i) first, to make its advertising division competitive for mid-size and larger clients; this required a substantial international network and a strong presence in selected cities; (ii) second, to ensure the availability of capital to allow Ketchum to purchase the shares of retiring shareholders and to allow for normal capital replacement as well as for growth and expansion; and (iii) third, the Ketchum Board determined that the communication opportunities afforded in what has been called "interactive" communications represented an excellent opportunity for all of the divisions of Ketchum. As a result of this analysis, Ketchum first formed an interactive unit to serve as a resource to all of the divisions and to serve clients directly as well. Next, the Executive Committee of the Ketchum Board (sometimes referred to as the "Ketchum Executive Committee") reviewed several capital raising alternatives, including an initial public offering, obtaining an individual or institutional equity partner (not from the advertising or public relations industries) and making use of an employee stock ownership plan ("ESOP"), to provide continuing capital. For a time, the Ketchum Executive Committee pursued the ESOP alternative. In the spring of 1995 Ketchum received an unsolicited expression of interest from a major advertising agency to acquire Ketchum. Senior financial officers of 15 Ketchum and such agency met on March 10, 1995 to review Ketchum's financial information, and then held a meeting on April 11, 1995 among the senior officers of such agency and Ketchum. The agency proposed to acquire only certain Ketchum operating units, and its proposal did not assume Ketchum's long-term debt and employee stock loans. The proposal was a taxable transaction at the Ketchum level, with additional taxes accruing upon any distributions to the Ketchum Shareholders. This proposal would have caused Ketchum to incur restructuring costs, and would have exposed Ketchum to business risks regarding clients that might not find the smaller Ketchum attractive. Ketchum informed the agency that the proposal was unacceptable; however, the Ketchum Executive Committee determined to consider other acquisition opportunities. Ketchum retained AdMedia Corporate Advisors, Inc. ("AdMedia") in September 1995 to assist Ketchum in identifying acceptable purchasers of Ketchum and, to the extent requested, to advise Ketchum in structuring and negotiating a transaction. Ketchum's agreement with AdMedia contains usual confidentiality, indemnification and other terms and conditions, and provides for a retainer of $10,000 per month from September through November 1995, with the retainer increasing to $15,000 per month in December 1995 and for each month thereafter. The agreement also provides for a transaction fee based on the purchase price received in any transaction, plus reimbursement of out-of-pocket costs. The fee in respect of the Merger will be $1,200,000, provided that any retainer fees paid after March 1996 will be credited against this transaction fee. In September 1995 Ketchum was again approached by the advertising agency that made the spring 1995 proposal, and negotiations commenced, with Ketchum being assisted by AdMedia. Several meetings between the financial officers and senior executive officers of the companies were held, and an exchange of information occurred. AdMedia initiated discussions with Omnicom in September 1995, in connection with which it delivered to Omnicom financial and other information for Omnicom's review. On September 28, 1995 a meeting was held among John D. Wren, President of Omnicom, Paul H. Alvarez, Chairman and Chief Executive Officer of Ketchum, Edward L. Graf, Chief Financial Officer of Ketchum, and Abe Jones of AdMedia. The parties discussed the general business of Ketchum and agreed to hold further discussions. On October 23 and 24, 1995, Ketchum's Executive Committee and Board met to discuss the other agency's proposal and Omnicom's expression of interest. Prior to the meeting, AdMedia had reported that none of the other agencies it had contacted had expressed interest in exploring a transaction. The Ketchum Board encouraged the Ketchum senior officers to continue discussions with the other agency and with Omnicom. On November 30, 1995, John D. Wren and Dale A. Adams, Controller of Omnicom, met with Abe Jones and Bob Huntington of AdMedia to discuss details of a potential offer. Michael D. Ditzian of Davis & Gilbert, Omnicom's outside counsel, was also present at this meeting. The primary focus of the meeting was a detailed review of Ketchum's 1996 forecast as compared to 1995 and 1994 results for each of Ketchum's major operating divisions. As a result of the discussions held at such meeting, Omnicom delivered to Abe Jones on the following day a written outline of a proposed transaction, conditioned upon the availability of pooling of interests accounting treatment and the results of Omnicom's due diligence investigation of Ketchum's business and operations, financial condition and pending and threatened litigation. The proposal involved a tax free merger, and included a general escrow fund of up to 10% of the purchase price payable to the Ketchum Common Shareholders to cover the accuracy of representations and warranties, a special escrow of $10 million to protect against the potential loss of a significant client, and unspecified further special escrows based upon the results of Omnicom's due diligence investigation. The purchase price would be determined and paid as follows: the Ketchum Common Shareholders would be paid an amount in Omnicom Common Stock (registered under the Securities Act on Form S-4) equal to $60 million less the unrecorded contractual obligations to former Ketchum shareholders under the change of control provisions contained in their shareholder agreements, the amounts payable to the Ketchum Preferred Shareholder for the Ketchum Preferred Stock, and certain transaction costs to be incurred and paid by Ketchum. The Ketchum Preferred Stock would be purchased for its liquidation preference in cash. On December 4, 1995, the other agency submitted a revised proposal to Ketchum, consisting of a tax free stock transaction using unregistered stock, with escrows to secure Ketchum's financial statement representations and warranties. The revised proposal continued to have as a condition the acquisition of less than all of Ketchum's operating units and a contingent valuation formula, which the Ketchum Board had previously found to be unacceptable. 16 On December 12, 1995, a meeting was held among senior management of Ketchum and Omnicom and their representatives. Dale A. Adams was present on Omnicom's behalf; Edward L. Graf and Michael Kaczmarski, Controller of Ketchum, were present on Ketchum's behalf. Also in attendance were Abe Jones, Bob Huntington and Michael D. Ditzian. The primary focus of the meeting was a detailed review of Ketchum's October 31, 1995 financial statements and operational matters relating thereto; real property obligations; and pending litigation. After the review, a recess was called to allow Omnicom executives to meet internally. When the meeting resumed and in response to Ketchum's objections to the escrow provisions contained in Omnicom's written proposal, Omnicom agreed that the escrow provisions would be open for additional negotiation and Omnicom's positions thereon would be determined by the results of its due diligence investigation. On December 13, 1995, Ketchum met with senior officers of the other agency to discuss that agency's proposal and the Ketchum Board's objections. On December 19, 1995, another meeting was held, which was attended by John D. Wren, Dale A. Adams, Abe Jones, Bob Huntington and Michael D. Ditzian. Due to the inclement weather conditions Ketchum's senior management could not attend the meeting but Paul H. Alvarez, Edward L. Graf and others were available by telephone to answer questions and to consult with Messrs. Jones and Huntington. The discussions focused on the amount and time periods of the escrow funds, and whether or not either party would be entitled to a fee if the other party were to terminate discussions prior to the execution of an agreement. Although the amount of the special escrow was not changed at such meeting, the time period in which this escrow fund would be released was modified. It was also decided that notwithstanding a tentative agreement that the general escrow fund would be $2.4 million and continue for a one year period, it was acknowledged that the final determinations with respect to the details of the general escrow fund and any other special escrows relating to other contingencies could not be made until Omnicom completed its due diligence investigation, including a meeting with Ketchum's largest client, a review by Omnicom's counsel of Ketchum's various contracts and litigation matters, and completion of Arthur Andersen's review of Ketchum's accounting records. At the meeting, it was determined that neither party would be entitled to a break-up fee; that the "cushion" for breaches of representations and warranties would be $100,000; and that Ketchum would be entitled to continue to pay its normal dividends and make normal annual profit sharing and bonus payments. On January 4, 1996, Ketchum held a Board Meeting at which the Ketchum Board discussed the two proposals. The Ketchum Board determined that the Omnicom offer was the more favorable of the two offers, based on a number of factors, including the compatibility with Ketchum's long-term strategic objectives, the complementary nature of the businesses, the fairness of the consideration, and the fact that the shares to be received would be freely transferable by the Ketchum Shareholders, other than those Ketchum Shareholders who are deemed to be "affiliates" of Ketchum or Omnicom under the Securities Act (see "The Merger Agreement and the Merger -- Other Considerations -- Resale of Omnicom Common Stock"). Accordingly, the Ketchum Board approved in principle the Merger and related transactions, and determined to discontinue discussions with the other agency. The Ketchum Board's decision was then conveyed to John D. Wren. A press release announcing the proposed Merger was issued by Omnicom on January 10, 1996. During the month of January 1996, meetings were held at various times between representatives of Omnicom and representatives of Ketchum to discuss operational matters and due diligence issues. This included meetings on January 26, 29 and 30, 1996 attended by John D. Wren, Peter I. Jones, President of Omnicom's Diversified Agency Services division, and Paul H. Alvarez and Edward L. Graf of Ketchum. On January 18, 1996, Omnicom's auditors, Arthur Andersen, began their formal due diligence review. A first draft of the Merger Agreement was sent to Ketchum's legal advisors on January 24, 1996. The results of Arthur Andersen's due diligence were first reviewed with Omnicom at a meeting on February 26, 1996. On February 14, 1996, legal counsels for Omnicom and Ketchum met to discuss Ketchum's comments on the Merger Agreement, including modifications to representations and warranties, actions that Ketchum would be permitted to take prior to closing, the terms of employment and non-competition agreements to be given to certain key executives, and modifications to provisions of the escrow arrangements. Revised drafts were then circulated on February 15, 1996. On March 6, 1996, John D. Wren, Peter I. Jones and Dale A. Adams of Omnicom met with Abe Jones to discuss and agree upon the final terms of the proposed transaction. At various times during such meeting, Abe Jones conferred by telephone with Paul H. Alvarez and Edward L. Graf of Ketchum. As a result of 17 Omnicom's due diligence investigation, including the results of its meeting with Ketchum's largest client and discussions with Ketchum personnel servicing such client, Omnicom proposed to fix the purchase price payable to the Ketchum Common Shareholders at $44.94 million, eliminate the special escrow relating to the significant client, establish a new special escrow of $2.5 million to cover the contingencies relating to the reorganization of Ketchum's media buying operations, and set the level of the general escrow fund at $4.4 million. It was also finalized at this meeting that the holder of the Ketchum Preferred Stock would receive shares of Omnicom Common Stock in the transaction in lieu of cash. After discussing the revised proposal by telephone with Paul H. Alvarez and Edward L. Graf, at the conclusion of the meeting, Abe Jones indicated Ketchum's approval of the foregoing. On March 6, 1996, Deloitte & Touche LLP issued their audit report on Ketchum's financial statements as at and for the fiscal year ended December 31, 1995; and on March 7, 1996 the Merger Agreement was executed and delivered among the parties. On April 11, 1996 the Ketchum Board met in Pittsburgh and ratified and approved the actions of the executive officers of Ketchum in connection with the Merger. The Ketchum Board established the close of business on April 15, 1996 as the record date to determine shareholders authorized to vote at the Special Meeting, and established the date of the Special Meeting on May 30, 1996 at 5:00 p.m. (local time) at the offices of Ketchum in Pittsburgh. Prior to taking such actions, at such meeting, Deloitte & Touche, LLP, the tax advisor to Ketchum, presented a summary of the tax consequences of the Merger to the Ketchum Shareholders, and legal counsel to Ketchum presented a summary of the legal structure of the Merger. An analysis of the historical market price and dividend record of Omnicom Common Stock was also presented. Ketchum's Reasons for the Merger The Ketchum Board of Directors has determined that the Merger Agreement and the Merger are advisable and in the best interests of Ketchum and the Ketchum Shareholders and has approved the Merger Agreement and Merger. In reaching the determination that the Merger Agreement is in the best interests of Ketchum and the Ketchum Shareholders, the Ketchum Board consulted with Ketchum management and with AdMedia. The Ketchum Board considered a number of factors, including, without limitation, the following: (i) Long-Term Strategic Objectives. The Ketchum Board believed that the Merger would fulfill Ketchum's major long-term strategic objectives by making its advertising division competitive for mid-size and larger clients through Omnicom's substantial international network, and by ensuring the availability of capital for a variety of purposes, including growth and expansion. (ii) Complementary Business Operating Units. Ketchum Advertising's affiliation with a substantially larger agency, such as Omnicom, would afford it access to Omnicom's international service facilities, clients, and financial and managerial resources. Ketchum's Public Relations Division would be able to work within Omnicom, with access to Omnicom's financial resources and clients, as well as Omnicom's extensive international service facilities. Ketchum Directory Advertising would benefit from the opportunity to service Omnicom clients. (iii)Fairness of the Consideration. The establishment of a purchase price carrying a substantial premium over both the ($1.42) book value of the Ketchum Common Stock as at December 31, 1995 (see "Comparative Per Share Data") and the $60.01 formula price of the Ketchum Common Stock as at December 31, 1995 as computed for the purpose of the share repurchase obligation with respect to the Ketchum Common Stock contained in the shareholder agreements (see Note 8 of the Notes to Consolidated Financial Statements of Ketchum included in this Prospectus/Information Statement), and the opportunity for the holders of the Ketchum Preferred Stock to receive the liquidation preference on their shares, together with the provision for Ketchum's obligations with respect to contingent liabilities related primarily to "change of control" premiums to former shareholders and pending litigation. (iv) Unsatisfactory Alternatives. The proposal by Omnicom was deemed to be more favorable than the offer of the other agency, since it provided for more value to the Ketchum Shareholders without the risk of a contingent valuation formula, was for all of Ketchum's operating units, resulted in a better business fit among the Ketchum and Omnicom operating units, had a better business culture fit with Ketchum's 18 managers, and provided a structure which avoided the expense to Ketchum of restructuring its remaining operations. Ketchum management also noted that the efforts of AdMedia and Ketchum management had not identified any other acquisition candidates, principally due to the insufficient size of potential purchasers or identified client conflicts that would make a combination unlikely or impracticable. (v) Financial Condition of Ketchum. Information relating to Ketchum's financial condition, results of operations, capital levels and management's best estimates of Ketchum's prospects. (vi) Terms of the Merger Agreement. The terms and conditions of the Merger Agreement, including (a) the condition that the Merger will be a tax-free reorganization for federal tax purposes to the Ketchum Shareholders and (b) the conversion of the Ketchum Shareholders' shares of Ketchum Stock for Omnicom Common Stock, provide the Ketchum Shareholders with liquidity in their investment at a fair value, without resulting in a taxable event for Ketchum Shareholders. (vii)Value and Liquidity of Omnicom Common Stock. Omnicom Common Stock is traded on the New York Stock Exchange; Ketchum Shareholders would obtain a liquid security in exchange for their illiquid investment in Ketchum. Recommendation of the Ketchum Board of Directors The decision of the Ketchum Board to approve and recommend the Merger Agreement and the Merger was based on a number of factors, including the Ketchum Board's knowledge of the business, operations, properties, assets and earnings of Ketchum and its assessment of Ketchum's long-term prospects; the opportunity for Ketchum to achieve long-term strategic and financial benefits by consummating the Merger, including the condition that the Merger will be a tax-free reorganization for federal income tax purposes to the Ketchum Shareholders; the opportunity for the holders of the Ketchum Preferred Stock to receive the liquidation preference on such shares; the market prices at which the shares of Omnicom Common Stock have traded during the past year; the fact that Omnicom Common Stock is traded on the New York Stock Exchange and, thus, is a liquid investment whereas Ketchum Stock has no trading activity; and the fact that the Ketchum Common Shareholders would receive a substantial premium over the ($1.42) book value of the Ketchum Common Stock as of December 31, 1995 (see "Comparative Per Share Data"), and the $60.01 formula price of the Ketchum Common Stock as at December 31, 1995, as computed for the purpose of the share repurchase obligation with respect to the Ketchum Common Stock contained in the shareholder agreements (see Note 8 of the Notes to Consolidated Financial Statements of Ketchum included in this Prospectus/Information Statement). The Ketchum Board did not attach a relative weight to the factors it considered in reaching its decision, but, considering all factors herein discussed, determined that the Merger Agreement and the Merger are fair to and in the best interests of Ketchum and the Ketchum Shareholders. For the reasons set forth above, the Ketchum Board believes that the Merger is fair to, and in the best interests of, Ketchum and the Ketchum Shareholders and recommends that the Ketchum Shareholders vote FOR the approval of the Merger Agreement and the transactions contemplated thereby. Omnicom's Reasons for the Merger Omnicom's Board of Directors believes that the Merger represents an opportunity to strengthen the reach of its Diversified Agency Services division through the acquisition of a full-service marketing communication services company with particular strengths in public relations, consumer advertising, directory advertising and other related activities. Omnicom has not retained an outside party to evaluate the proposed Merger but has instead relied upon the knowledge of its management in considering the financial aspects of the Merger. In reaching its conclusion, the Omnicom Board of Directors considered, among other things, (i) information concerning the financial performance, condition, business operations and prospects of Ketchum; and (ii) the proposed terms and structure of the Merger. Although net income per share of Omnicom Common Stock on a pro forma basis is lower than Omnicom's historical net income per common share, it is anticipated, based upon Ketchum's anticipated net income for 1996, that the Merger will be non-dilutive to Omnicom's results of operations for 1996 and future years. Accordingly, Omnicom's Board of Directors has unanimously approved the Merger and the transactions contemplated thereby. 19 Interests of Ketchum's Management in the Merger (The following describes certain interests of the directors and executive officers of Ketchum in the Merger that are in addition to the interests of Ketchum Shareholders generally.) Pursuant to the Merger Agreement, Omnicom will enter into an employment agreement with Paul H. Alvarez, the Chairman, Chief Executive Officer and President of Ketchum and one of its directors, pursuant to which Mr. Alvarez would be employed as the Vice Chairman of the Diversified Agency Services division of Omnicom. In addition, pursuant to the Merger Agreement, KCI will enter into employment agreements with each of the following executive officers of Ketchum: David R. Drobis, John C. Joseph, Raymond L. Kotcher, Dianne Snedaker, Lorraine Thelian, Lawrence R. Werner and Edward L. Graf. It is anticipated that, except as indicated below, the new employment agreements will have a term commencing at the Effective Time and ending three years thereafter (subject to an "evergreen" provision terminable on one year's notice by Ketchum and six months' notice by the executive), and provide for annual salary compensation and fringe benefits substantially the same as such persons were receiving immediately prior to the Merger. The employment agreement for Mr. Graf will have a term commencing at the Effective Time and ending one year thereafter (subject to the same "evergreen" provision terminable on 30 days notice). In the event Mr. Graf's employment is terminated by Ketchum other than for cause, Mr. Graf will be entitled to receive one year's severance pay. In addition, on March 2, 1996 the existing employment agreement between KCI and J. Craig Mathiesen, a director and key executive of Ketchum, was extended from its March 2, 1996 expiration date for a period up to two years. In addition, pursuant to the terms of the Merger Agreement, each of the executives who is entering into an employment agreement as described above, including Mr. Mathiesen, will also enter into a non-competition agreement with Omnicom and Ketchum. Robert C. Feldman and James V. Ficco, who are directors of Ketchum, will also enter into a non-competition agreement with Omnicom and Ketchum. There is no additional consideration being paid in connection with these non-competition agreements. Finally, the current directors of Ketchum and the holders of more than 5% of the Ketchum Common Stock have executed a Contribution Agreement pursuant to which they have agreed to indemnify the Ketchum Shareholder Representative against all losses and expenses which may be incurred by him as a result of any dispute arising from the performance of his duties under the Escrow Agreement, unless such dispute is the result of his gross negligence or actions taken in bad faith. See "The Escrow Agreement and the Ketchum Shareholder Representative--Appointment of the Ketchum Shareholder Representative". Procedure for Distributing Shares of Omnicom Common Stock to Ketchum Shareholders A transmittal form will be furnished to Ketchum Shareholders prior to the Effective Time of the Merger for use in transmitting their certificates evidencing their shares of Ketchum Stock to Omnicom to exchange them for certificates evidencing the Omnicom Common Stock to which they are entitled as a result of the Merger. The instructions on the form of transmittal must be complied with by each surrendering shareholder. On or as soon as practicable after the Closing of the Merger Agreement, each Ketchum Shareholder shall receive by first-class mail in accordance with the instructions of such Ketchum Shareholder as set forth in his or her transmittal form, a certificate or certificates representing the next lower number of whole shares of Omnicom Common Stock into which the shares of Ketchum Stock represented by the certificate or certificates of Ketchum Common Stock or Ketchum Preferred Stock so surrendered shall have been converted pursuant to the Merger and, in addition, cash in lieu of a fractional share that such Ketchum Shareholder is entitled to receive, subject in the case of the Ketchum Common Stock to the provisions of the Escrow Agreement described below. Each Ketchum Common Shareholder will also receive a receipt indicating the number of shares of Omnicom Common Stock being held in the General Escrow Fund and Special Escrow Fund in the name of such Ketchum Shareholder. Dividends and other distributions which may be payable by Omnicom to holders of record of Omnicom Common Stock as of a date on or after the date of the Closing of the Merger Agreement and which are paid prior to the delivery of Omnicom Common Stock to Ketchum Shareholders entitled thereto, will be paid to such former Ketchum Shareholders at the same time the Omnicom Common Stock is transferred to them upon surrender of certificates representing their shares of Ketchum Stock. Such former shareholders will not be entitled to interest or earnings on such dividends or other distributions pending receipt. 20 The Merger Agreement The Merger Under the terms of the Merger Agreement, at the Effective Time of the Merger, OmniSub will be merged with and into Ketchum, whose separate corporate existence will continue as a wholly-owned subsidiary of Omnicom. Conversion Prices Under the terms of the Merger Agreement, at the Effective Time, each outstanding share of Ketchum Stock will be converted into shares of Omnicom Common Stock based upon the Conversion Prices described below and the Market Value of the Omnicom Common Stock. No fractional shares of Omnicom Common Stock will be issued but in lieu thereof each holder of shares of Ketchum Stock who would otherwise have been entitled to a fraction of a share of Omnicom Common Stock will be paid the cash value of such fraction of a share based upon the Market Value thereof. The "Common Stock Conversion Price" will result in an amount per share of Ketchum Common Stock equal to $125.24; the "Preferred Stock Conversion Price" will result in an amount per share of Ketchum Preferred Stock equal to its liquidation preference of $1,000. These dollar amounts will then be converted into a number of shares of Omnicom Common Stock based upon the average of the closing prices per share of the Omnicom Common Stock on the New York Stock Exchange during the 20 consecutive trading days ending three business days immediately prior to the date of the Special Meeting. Accordingly, although the actual conversion exchange rates cannot be calculated as of the date of this Registration Statement, they will be known and communicated to the Ketchum Shareholders on May 28, 1996. At the start of business on such date, an electronic message will be sent to each Ketchum Shareholder at his or her office within Ketchum, and a message will be left on his or her voice mail so that the information may be accessed from outside of the office. In addition, Daniel Madia, Executive Vice President of Ketchum, will be available to answer telephone inquiries from the Ketchum Shareholders concerning the exchange ratio information. Mr. Madia can be reached at (412) 456-3508; collect telephone calls will be accepted. Based upon the assumption as set forth in the Summary under "Description of Certain Terms of the Merger Agreement -- Conversion of Ketchum Stock" that the Market Value will be $41, this would equate to 3.05 shares of Omnicom Common Stock for each share of Ketchum Common Stock. Each share of Ketchum Preferred Stock would be converted into the right to receive 24.39 shares of Omnicom Common Stock. The Closing of the Merger Agreement has been scheduled for May 31, 1996, the day after the date of the Special Meeting. However, the Closing of the Merger Agreement may be delayed beyond May 31, 1996 if all conditions of the Merger have not been satisfied or waived by such date; there will be no adjustment to the Conversion Prices if this occurs, notwithstanding that the actual value of the Omnicom Common Stock could fluctuate between the date of the Special Meeting and the date of the Closing of the Merger Agreement. At the time this Prospectus/Information Statement is being mailed to the Ketchum Shareholders, Omnicom has no reason to believe that the Closing of the Merger Agreement will not be held on May 31, 1996 as scheduled. Indemnification Obligations Under the Merger Agreement, the Ketchum Common Shareholders are required to indemnify, defend and hold harmless Omnicom and OmniSub, and their affiliates, directors, officers and for (i) liabilities, obligations, losses, penalties, claims, actions, judgments or causes of action, assessments, costs or expenses (including, without limitation, reasonable attorneys' fees and disbursements) as a consequence of or in connection with any inaccuracy or breach of any representation, warranty or covenant of Ketchum contained in or made pursuant to the Merger Agreement, but only to the extent, with certain exceptions, that such losses exceed $100,000 and (ii) any expenses being incurred by Ketchum in connection with the reorganization of the media buying operations of KCI. Holders of Ketchum Preferred Stock are not required to provide any indemnification under the Merger Agreement. To satisfy these indemnification obligations, the Ketchum Common Shareholders will deposit shares of Omnicom Common Stock into the General Escrow Fund and the Special Escrow Fund under the Escrow Agreement. The General Escrow Fund will contain shares of Omnicom Common Stock having an aggregate Market 21 Value of $4,400,000 and will be used to satisfy the indemnification obligations described under clause (i) of the preceding paragraph; the Special Escrow Fund will contain shares of Omnicom Common Stock having an aggregate Market Value of $2,500,000 and will be used to satisfy the indemnification obligations described under clause (ii) of the preceding paragraph. Indemnification obligations arising under clause (i) may be satisfied only from the General Escrow Fund, and those arising under clause (ii) may be satisfied only from the Special Escrow Fund. Each Ketchum Common Shareholder will be depositing his pro rata share of the General Escrow Fund or Special Escrow Fund (rounded up to the nearest whole share). Accordingly, of the shares of Omnicom Common Stock issuable in respect of each share of Ketchum Common Stock, shares of Omnicom Common Stock having an aggregate Market Value of $12.26 will be deposited into the General Escrow Fund and shares of Omnicom Common Stock having an aggregate Market Value of $6.97 will be deposited into the Special Escrow Fund. The indemnification obligations of the Ketchum Common Shareholders, will be limited to and satisfied solely from, the General Escrow Fund and Special Escrow Fund under the Escrow Agreement (such that neither Omnicom nor any of its affiliates will have any recourse for the payment of any losses or other damages arising out of the transactions contemplated by the Merger Agreement against any Ketchum Shareholder, nor shall any Ketchum Shareholder be personally liable for any such losses or damages). Indemnification obligations to be satisfied out of the General Escrow Fund will terminate on the earlier of the first independent audit report, if any, of the surviving corporation following the Effective Time of the Merger or one year from the Effective Time (except that claims asserted in writing on or prior to such date will survive until they are decided and are final and binding on the parties). Indemnification obligations to be satisfied out of the Special Escrow Fund will terminate on December 31, 1996, being the latest date by which it will be determined whether or not costs have been incurred in connection with the reorganization of the media buying operations (except that claims asserted in writing on or prior to such date will survive until they are decided and are final binding on the parties). Representations and Warranties The Merger Agreement contains various customary representations and warranties of Ketchum relating to, among other things: (a) the organization and similar corporate matters of Ketchum and each of the subsidiaries; (b) the capital structure of Ketchum and each of its subsidiaries; (c) authorization, execution, delivery, performance and enforceability of the Merger Agreement and related matters; (d) absence of conflicts under charters or by-laws, required consents or approvals and no violations of any agreements or laws; (e) financial statements provided to Omnicom by Ketchum; (f) absence of certain material adverse events, changes or effects; (g) certain contracts, including, but not limited to, certain real and personal property leases and employment, consulting and benefit matters; (h) litigation; (i) certain tax matters; (j) undisclosed liabilities; (k) insurance; (l) compliance with law and licenses, authorizations and permits held by Ketchum necessary to conduct its business; (m) client relations; (n) employment relations; (o) retirement and other employee plans and matters relating to the Employee Retirement Income Security Act of 1974, as amended; and (p) trademarks, trade names, assumed or fictitious names, copyrights, logos, service marks and slogans. The Merger Agreement also contains various customary representations and warranties of Omnicom relating to, among other things: (a) organization and similar corporate matters of Omnicom and OmniSub; (b) authorization, execution and delivery of the Merger Agreement and related matters; (c) absence of any conflicts under charters or by-laws, required consents or approvals and no violations of any agreements or laws; (d) the shares of Omnicom Common Stock to be issued in the transaction; (e) financial statements provided to Ketchum by Omnicom; (f) absence of certain adverse events, changes or effects; and (g) litigation. Certain Covenants Pursuant to the Merger Agreement, Ketchum has agreed that, during the period from the execution of the Merger Agreement until the Closing of the Merger Agreement, Ketchum and each of its subsidiaries will, among other things: (a) not solicit, initiate or encourage any other offer or inquiry concerning the acquisition of Ketchum; (b) give timely notice of a meeting to its shareholders to approve the Merger Agreement and the Escrow Agreement and to appoint the Ketchum Shareholder Representative; (c) inform Omnicom's management as to the operation, management and business of Ketchum; (d) permit Omnicom to make such 22 reasonable investigation of the assets, properties and businesses of Ketchum as they deem necessary or advisable; and (e) except (i) as permitted by the Merger Agreement and (ii) as otherwise consented to in writing by Omnicom, operate its businesses in the ordinary course and, to the extent consistent with past practice, use reasonable commercial efforts to preserve the existing business organization, existing business relationships, and goodwill intact. Pursuant to the Merger Agreement, Omnicom has agreed to cause Ketchum to maintain in effect for three years (or a lesser period of time, in certain events) the current policies of directors' and officers' liability insurance and fiduciary liability insurance maintained by Ketchum, or to substitute therefor policies containing substantially the same coverage. Pursuant to the Merger Agreement, Ketchum and Omnicom have covenanted with one another to take certain additional actions, including without limitation: (a) to each take all corporate and other action, make all filings with courts or governmental authorities and use its reasonable efforts to obtain in writing all approvals and consents required to be taken, made or obtained by it in order to effectuate the Merger; (b) to prepare this Prospectus/Information Statement and the Registration Statement of which it is a part, with each party representing and warranting to the other as to the accuracy of the information supplied by it for inclusion herein; and (c) to each use its reasonable efforts to consummate the Merger and the other transactions contemplated by the Merger Agreement. Certain Conditions to the Merger In addition to approval of the Merger Agreement, the Merger and the Escrow Agreement and the appointment of the Ketchum Shareholder Representative by the Ketchum Shareholders at the Special Meeting, and to the required regulatory approvals, the respective obligations of Omnicom, OmniSub and Ketchum to consummate the Merger are subject to the satisfaction of certain conditions, including without limitation: (i) the accuracy in all material respects of the representations and warranties made by the parties in the Merger Agreement; (ii) the performance by the parties of their respective obligations under the Merger Agreement prior to the Closing; (iii) the absence of any material adverse changes in the condition of the businesses of Ketchum on the one hand or Omnicom on the other hand; (iv) the effectiveness of the Registration Statement under the Securities Act with respect to the shares of Omnicom Common Stock to be issued pursuant to the Merger Agreement and the approval of the listing of such Omnicom Common Stock on the New York Stock Exchange; (v) the execution and delivery of the Escrow Agreement; (vi) the absence of any action or proceeding enjoining the transactions contemplated by the Merger Agreement; and (vii) the absence of any action or proceeding by any governmental agency that might result in enjoining the consummation of said transactions. The obligations of Omnicom and OmniSub to effect the Merger are subject to satisfaction of certain additional conditions including, without limitation: (i) the SEC's not having objected to Omnicom's treatment of the Merger as a pooling-of-interests for accounting purposes; (ii) the execution and delivery of employment agreements with key executives of Ketchum and the execution and delivery of non-competition agreements by each of such individuals; (iii) there not having been a material and adverse change in the business and affairs of Ketchum; and (iv) holders of fewer than 3% of the outstanding shares of Ketchum Common Stock having elected dissenters' rights, and the Trustee of the Ketchum Profit Sharing Plan having voted all the shares of Ketchum Stock in favor of the Ketchum Vote Matters. The obligations of Ketchum to effect the Merger are subject to the satisfaction of certain additional conditions including, without limitation, Omnicom or Ketchum, as the case may be, having entered into the employment agreements described above. See "The Merger Agreement and the Merger--Interests of Ketchum Management in the Merger." Pursuant to the terms of the Merger Agreement, all of such conditions to the Merger can be waived by one of the parties to the Merger, other than (i) the SEC's not having objected to Omnicom's treatment of the Merger as a pooling-of-interests for accounting purposes, (ii) the Registration Statement having been declared effective by the SEC and not subject to a stop order or threatened stop order; (iii) the Omnicom Common Stock having been approved for listing on the New York Stock Exchange; (iv) holders of fewer than 3% of the outstanding shares of Ketchum Common Stock having elected dissenters rights, as described more fully herein; and (v) all governmental and regulatory consents and approvals having been obtained, with no court or governmental authority having taken any action to prohibit or enjoin the Merger. 23 Closing Date The Closing has been scheduled for May 31, 1996, assuming that all conditions to closing the Merger Agreement have been satisfied or waived by such date. At the time this Prospectus/Information Statement is being mailed to the Ketchum Shareholders, Omnicom has no reason to believe that the Closing will not take place on May 31, 1996 as scheduled. Termination The Merger Agreement may be terminated and the contemplated Merger may be abandoned at any time prior to the Closing, whether before or after approval by the Ketchum Shareholders, (a) by mutual consent of the Boards of Directors of Omnicom, OmniSub and Ketchum; (b) by either Omnicom and OmniSub, on the one hand, or Ketchum, on the other hand, if there has been a breach of any representation, warranty or covenant on the part of the other party set forth in the Merger Agreement which breach has not been cured within 30 days following receipt by the breaching party of notice of such breach, unless the breach of any such representation, warranty, or covenant does not materially adversely affect the business or assets of the breaching party or the ability of either party or parties to consummate the Merger; (c) by the Board of Directors of Omnicom, OmniSub or Ketchum if a final and nonappealable order, decree or judgment of any court or other governmental authority is issued which would enjoin the Merger; or (d) by either Omnicom and OmniSub or Ketchum if the Closing shall not have occurred prior to the close of business on December 31, 1996 or if the conditions to such parties' obligation to close shall have become incapable of being satisfied by December 31, 1996. Amendment The Merger Agreement and the exhibits and schedules thereto may be amended, supplemented or qualified by the parties only by an agreement in writing signed by all parties with due authorization. Other Considerations Federal Income Tax Consequences (The following is a summary of all federal income tax consequences of the Merger that are material to the Ketchum Shareholders. It is based upon certain representations and assumptions as set forth in the opinion of Deloitte & Touche LLP filed as an Exhibit to this Registration Statement of which this Prospectus/Information Statement is a part. No opinion has been expressed as to the state, local or foreign tax consequences. In addition, the following is general in nature and does not take into account the particular tax circumstances of any individual Ketchum Shareholder. It is recommended that each Ketchum Shareholder consult his own tax advisors as to the specific consequences of the proposed Merger for such individual, including the application and effect of state, local and foreign laws.) The Merger has been structured to qualify as a "tax-free" reorganization within the meaning of the Code. Deloitte & Touche LLP, Ketchum's tax advisor in the Merger, has rendered its opinion as to the federal income tax consequences of the Merger. The opinion of Deloitte & Touche LLP is based upon the Code, regulations now in effect thereunder, current administrative rulings and practice, and judicial authority, all of which are subject to change. Unlike a ruling from the Internal Revenue Service, the opinion of Deloitte & Touche LLP is not binding upon the Internal Revenue Service and there can be no assurance, and none is hereby given, that the Internal Revenue Service will not take a position contrary to one or more of the positions reflected therein or that the opinion will be upheld by the courts if challenged by the Internal Revenue Service. In the opinion of Deloitte & Touche LLP, which opinion is based upon various representations and subject to various assumptions and qualifications, the following federal income tax consequences, among others, will result from the Merger. 1. The Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. 2. No gain or loss will be recognized by Ketchum Shareholders upon the exchange of their Ketchum Stock (including fractional share interests they might otherwise be entitled to receive) solely for Omnicom Common Stock. 24 3. The holding period of the Omnicom Common Stock will include the holding period for the Ketchum Stock surrendered in exchange therefor, provided the Ketchum Stock was held as a capital asset on the date of exchange. 4. The aggregate basis of the Omnicom Common Stock received by a Ketchum Shareholder (including any fractional share interest such Shareholder might otherwise receive) will be the same as the aggregate basis of the Ketchum Stock surrendered in exchange therefor. 5. The payment of cash in lieu of fractional shares will be treated as if the fractional shares were distributed as part of the exchange and then redeemed by Omnicom. Any Ketchum Shareholder who receives cash in lieu of a fractional share interest in Omnicom Common Stock will recognize gain or loss measured by the difference between cash received in respect of such fractional share and the portion of the basis of Ketchum Stock allocable thereto. Similarly, a Ketchum Shareholder who dissents from the Merger and receives the "fair value" of his shares of Ketchum Stock in accordance with the PABCL (see "Rights of Dissenting Ketchum Shareholders" below) will recognize gain or loss measured by the difference between the cash received and the basis of the Ketchum Stock. No ruling from the Internal Revenue Service will be sought on any of the foregoing federal tax consequences of the Merger. A copy of the opinion of Deloitte & Touche LLP has been filed as an Exhibit to the Registration Statement of which this Prospectus/Information Statement is a part and is incorporated herein by reference. Accounting Treatment Ketchum and Omnicom expect the Merger to be accounted for as a pooling-of-interests for financial reporting purposes in accordance with generally accepted accounting principles. Under pooling of interest accounting upon consummation of the Merger, the assets and liabilities of Ketchum would be included in the consolidated balance sheet of Omnicom and its subsidiaries in the amounts which were included in the books of Ketchum immediately before the Merger after conforming certain accounting policies and procedures to those currently used by Omnicom. Regulatory Approvals Under the Hart-Scott-Rodino Act and the rules promulgated therewith by the FTC, the Merger may not be consummated until notifications have been given and certain information has been furnished to the FTC and the Antitrust Division and specified waiting period requirements have been satisfied. Omnicom and Ketchum each filed notification and report forms under the Hart-Scott-Rodino Act with the FTC and the Antitrust Division on March 13, 1996. The required waiting period under the Hart-Scott-Rodino Act expired on April 13, 1996. At any time before or after consummation of the Merger, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger or seeking divestiture of assets of Omnicom. At any time before or after the Closing, and notwithstanding that the Hart-Scott-Rodino Act waiting period has expired, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of assets of Omnicom. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. Based on information available to them, Omnicom and Ketchum believe that the Merger can be effected in compliance with Federal and state antitrust laws. However, there can be no assurance that a challenge to the consummation of the Merger on antitrust grounds will not be made or that, if such a challenge were made, Omnicom and Ketchum would prevail or would not be required to accept certain conditions, possibly including certain divestitures of assets of Omnicom, in order to consummate the Merger. Resales of Omnicom Common Stock All shares of Omnicom Common Stock received by Ketchum Shareholders as a result of the Merger will be freely transferable, except that shares of Omnicom Common Stock received by persons who are deemed to be "affiliates" (as such term is understood under the Securities Act) of Ketchum prior to the Merger ("Ketchum 25 Affiliates") shall be subject to certain restrictions, as more fully described below. Persons who may be deemed to be affiliates of Ketchum or Omnicom generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. The Merger Agreement provides that Ketchum will furnish Omnicom with a list identifying all persons who may be considered to be Ketchum Affiliates, and gives Omnicom the right to review such list and require changes. The agreed-upon Ketchum Affiliates are as follows: Paul H. Alvarez, David R. Drobis, Edward L. Graf, Robert C. Feldman, James V. Ficco, John C. Joseph, Raymond L. Kotcher, J. Craig Mathiesen, Dianne Snedaker, Lorraine Thelian, and Lawrence R. Werner. Ketchum is required to use its best efforts to cause each of the Ketchum Affiliates to execute a written agreement to comply fully with the restrictions described below, and the receipt of such written agreements from each Ketchum Affiliate is a condition to Omnicom's obligation to consummate the Merger. Federal Securities Laws. Shares of Omnicom Common Stock received by Ketchum Affiliates may be resold by such Ketchum Affiliates only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act or as otherwise permitted under the Securities Act. Pooling-of-Interests Rules. In order to satisfy a condition of the pooling-of-interests rules as the accounting treatment to be accorded the Merger, Ketchum Affiliates may not sell, assign, transfer, convey, encumber or dispose of, directly or indirectly, or otherwise reduce their risk relative to, any shares of Omnicom Common Stock until the publication by Omnicom of its financial results covering a period of at least thirty days of combined operations of Omnicom and Ketchum after the Closing. This prohibition precludes the use of "hedging" techniques during this period. Stock Exchange Listing It is a condition to the Merger that the shares of Omnicom Common Stock required to be issued in connection with the Merger be authorized for listing on the NYSE, subject to official notice of issuance. An application has been filed for listing such Omnicom Common Stock on the NYSE. Rights of Dissenting Ketchum Shareholders If the Merger is consummated, under Section 1930 of the PABCL, holders of shares of Ketchum Stock with respect to which appraisal rights are perfected and not withdrawn or lost, will be entitled to have the "fair value" of their shares of Ketchum Stock at the Effective Time (exclusive of any element of value arising from the accomplishment or expectation of the Merger) judicially determined and paid to them in cash by complying with the provisions of Subchapter D of Chapter 15 of the PABCL ("Subchapter D"). The following is a brief summary of Subchapter D which sets forth the procedures for dissenting from the Merger and demanding statutory appraisal rights. This summary is qualified in its entirety by reference to Subchapter D, a copy of the text of which is attached hereto as Annex I. Ketchum Shareholders of record who desire to exercise their appraisal rights must satisfy all of the conditions set forth in Section 1930 of the PABCL and in Subchapter D, which conditions include the following requirements. A written notice of intention to demand "fair value" for shares of Ketchum Stock must be delivered to the Secretary of Ketchum before the taking of the vote on the Merger Agreement. This written demand must be in addition to and separate from any proxy or vote abstaining from or against the Merger Agreement. Neither voting against, abstaining from voting, nor failing to vote on the Merger Agreement will constitute a notice of intention to demand fair value within the meaning of Subchapter D. Any Ketchum Shareholder seeking appraisal rights must hold the shares of Ketchum Stock for which appraisal is sought on the date of the making of the demand, continuously hold such shares through the Effective Time, and otherwise comply with the provisions of Subchapter D. Ketchum Shareholders electing to exercise their appraisal rights under Subchapter D need not vote against the Merger in order to perfect such appraisal rights; abstentions are acceptable. However, dissenting Ketchum Shareholders must not vote for approval and adoption of the Merger Agreement nor consent thereto in writing. Voting in favor of the Merger Agreement, or delivering a proxy in connection with the Special Meeting (unless the proxy votes against, or expressly abstains from the vote on, the Merger Agreement), will constitute a waiver of a Ketchum Shareholder's right of appraisal and will nullify any written demand for appraisal submitted by the shareholder. 26 The notice of intention to demand fair value should specify the Ketchum Shareholder's name and mailing address, the number of shares of Ketchum Stock owned, and that the Ketchum Shareholder is thereby demanding appraisal of his or her shares of Ketchum Stock. If the Merger is approved by Ketchum Shareholders, Ketchum shall give notice to all Ketchum Shareholders who have delivered a notice of intention to demand payment of the fair value of their shares of Ketchum Stock and have otherwise complied with Subchapter D. The notice to be delivered by Ketchum shall, among other things, state where and when the dissenting Ketchum Shareholder should deliver (a) a demand for payment, and (b) the certificates representing the dissenting shareholder's shares of Ketchum Stock. After the dissenting Ketchum Shareholder has received the notice from Ketchum described in the preceding paragraph, the dissenting shareholder must both make written demand for payment and deliver the certificates representing the Ketchum Shareholders' Ketchum Stock in accordance with the instructions set forth in the notice. Promptly after consummation of the Merger and after timely receipt of a proper demand of payment and of the share certificates representing the dissenting shareholder's shares of Ketchum Stock, Ketchum shall remit to dissenters the amount that it estimates to be the fair value of the shares, or shall give written notice that no remittance shall be made; such remittance or notice shall be accompanied, among other things, by the balance sheet and income statement of Ketchum and its subsidiaries as at December 31, 1995, together with Ketchum's latest available interim financial statements. If the dissenter believes that the amount stated or remitted is less than the fair value of his shares of Ketchum Stock, he may send to Ketchum his own estimate of the fair value, which shall be deemed a demand for payment of the amount or the deficiency. If such a demand is not made within 30 days after the remittance or notice by Ketchum, the dissenter shall be entitled to no more than the amount stated in the notice or remitted to him by Ketchum. Within 60 days after the later of the Effective Time, the receipt of all demands for payment, or timely receipt of any estimates by dissenting shareholders of the fair value of their shares, Ketchum may file in court an application for relief requesting a determination by the court of the fair value of the shares; if Ketchum does not file an application, the dissenting shareholder may file an application in Ketchum's name, subject to the time restrictions set forth in Subchapter D. The cost of the appraisal proceeding may be determined by the court and assessed against the parties as the court deems equitable under the circumstances; costs would be assessed against dissenting shareholders whom the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. Any Ketchum Shareholder who has duly demanded appraisal in compliance with Subchapter D will not be entitled to vote for any purpose the shares of Ketchum Stock subject to such demand or to receive payment of dividends or other distributions on such shares, except for dividends or other distributions payable to shareholders of record at a date prior to the Effective Time. In view of the complexity of these provisions of the PABCL, Ketchum Shareholders who are considering dissenting from the approval and adoption of the Merger Agreement and exercising their rights under Subchapter D should consult their legal advisors. 27 THE ESCROW AGREEMENT AND THE KETCHUM SHAREHOLDER REPRESENTATIVE The Escrow Agreement (The information contained in this Registration Statement of which this Prospectus/Information Statement performs a part is qualified in its entirety by reference to the complete text of the Escrow Agreement which is filed as an Exhibit thereto and is incorporated herein by reference.) As described above under "The Merger Agreement and the Merger--the Merger Agreement--Indemnification Obligations", in order to satisfy indemnification obligations under the Merger Agreement, the Ketchum Shareholders will deposit shares of Omnicom Common Stock into the General Escrow Fund and the Special Escrow Fund under the Escrow Agreement. The General Escrow Fund will contain shares of Omnicom Common Stock having an aggregate Market Value of $4,400,000 and the Special Escrow Fund will contain shares of Omnicom Common Stock having an aggregate Market Value of $2,500,000. Each of the Ketchum Common Shareholders shall be depositing his or her pro rata share of the General Escrow Fund or Special Escrow Fund (rounded up to the nearest whole share) determined by multiplying the aggregate number of shares of Omnicom Common Stock required to be deposited into such Escrow Fund by a fraction, the numerator of which is the number of shares of Omnicom Common Stock issuable to such individual in the Merger and the denominator of which is the total number of shares of Omnicom Common Stock issuable to all such individuals required to provide indemnification. Of the $125.24 Common Stock Conversion Price payable in respect of each share of Ketchum Common Stock, Omnicom Common Stock having an aggregate Market Value of $12.26 would be deposited in the General Escrow Fund, and Omnicom Common Stock having an aggregate Market Value of $6.97 would be deposited in the Special Escrow Fund. Based upon the assumed Market Value of $41, this would result in 0.30 shares of Omnicom Common Stock per share of Ketchum Common Stock being deposited in the General Escrow Fund, and 0.17 shares of Omnicom Common Stock per share of Ketchum Common Stock being deposited in the Special Escrow Fund. Since the amounts held in the Escrow Funds are subject to claims in respect of liabilities, there can be no assurance that amounts held therein will in fact be distributed to the Ketchum Common Shareholders. If none of the amounts held therein are in fact distributed to the Ketchum Common Shareholders, then the actual Common Stock Conversion Price will have been only $106.01, equivalent to 2.59 shares of Omnicom Common Stock based on the assumed Market Value. For purposes of satisfying any claims, each share of Omnicom Common Stock deposited in either Escrow Fund will be valued at the Market Value, regardless of actual fluctuations of the market value of the Omnicom Common Stock after the Closing of the Merger Agreement. Pursuant to the Escrow Agreement, the Ketchum Shareholder Representative, on behalf of the Ketchum Common Shareholders, shall grant to Omnicom a security interest in the Escrow Funds to secure the performance of the indemnification obligations of the Ketchum Common Shareholders under the Merger Agreement and the performance of their obligations to Omnicom under the Escrow Agreement. The Escrow Agreement shall automatically terminate if and when all the shares of Omnicom Common Stock held in either Escrow Fund shall have been distributed by the Escrow Agent in accordance with the terms of the Escrow Agreement. General Escrow Fund. The Escrow Agreement provides that, upon determination that an indemnification payment is due to Omnicom from the General Escrow Fund, the Escrow Agent shall, to the extent that the shares of Omnicom Common Stock then on deposit in the General Escrow Fund shall be sufficient for the purpose, deliver to Omnicom the number of shares of Omnicom Common Stock, valued at the original Market Value, equal to the indemnification payment. The Ketchum Shareholder Representative shall have the right to dispute any such claim by Omnicom and require arbitration of the items in dispute. On the next business day following the earlier of (x) the first independent audit report, if any, of Ketchum following the Closing or (y) one year from the Closing, the Escrow Agent shall deliver to the Ketchum Common Shareholders the remaining shares of Omnicom Common Stock then on deposit in the General Escrow Fund, as reduced by any amounts necessary to cover outstanding claims, including claims then in dispute. 28 All dividends, interest and other amounts received with respect to shares of Omnicom Common Stock held in the General Escrow Fund shall be income for tax purposes to the Ketchum Common Shareholders, shall be paid directly to the Ketchum Common Shareholders, and shall not constitute part of the General Escrow Fund. Each Ketchum Common Shareholder shall be entitled to exercise all voting rights with respect to the shares of Omnicom Common Stock deposited by such Ketchum Shareholder in the General Escrow Fund. Special Escrow Fund. The Escrow Agreement provided that, upon determination that an indemnification payment is due to Omnicom from the Special Escrow Fund, the Escrow Agent shall, to the extent that the shares of Omnicom Common Stock then on deposit in the Special Escrow Fund shall be sufficient for the purpose, deliver to Omnicom the number of shares of Omnicom Common Stock, valued at the original Market Value, equal to the indemnification payment. The Ketchum Shareholder Representative shall have the right to dispute any such claim by Omnicom and require arbitration of the items in dispute. The Special Escrow Fund has been established to secure Omnicom with respect to Ketchum's representation that no costs will be incurred as a result of its current evaluation of whether to reorganize its media buying operations. The Special Escrow Fund assumes that the media buying operations will be downsized and centralized, resulting in costs associated with severance, excess leased office space and asset write-offs. However, until a formal reorganization plan is adopted and implemented, it is not possible to make a determination of the costs, if any, of the reorganization. Ketchum currently believes that the costs of the reorganization will not be material. Claims arising from the reorganization of the media buying operations will be determined based on actual costs incurred in accordance with generally accepted accounting principles. The parties have agreed that December 31, 1996 will be the latest date by which it will be determined whether any costs, related to severance, excess leased office space and asset write-offs, have been incurred in connection with any reorganization of the Ketchum media buying operations. Accordingly, on the next business day following December 31, 1996, the Escrow Agent shall deliver to the Ketchum Common Shareholders the remaining shares then on deposit in the Special Escrow Fund as reduced by any amounts necessary to cover outstanding claims, including claims then in dispute. All dividends, interest and other amounts received with respect to shares of Omnicom Common Stock held in the Special Escrow Fund shall be income for tax purposes to the Ketchum Common Shareholders, shall be paid directly to the Ketchum Common Shareholders and shall not constitute part of the Special Escrow Fund. Each Ketchum Common Shareholder shall be entitled to exercise all voting rights with respect to the shares of Omnicom Common Stock deposited by such Ketchum Shareholder in the Special Escrow Fund. Appointment of the Ketchum Shareholder Representative It is a condition to Closing under the Merger Agreement that the Ketchum Shareholders appoint the Ketchum Shareholder Representative to act as their collective agent in connection with the Escrow Agreement, including one or more alternative individuals to act as the Ketchum Shareholder Representative in the event that the designated Representative shall have died, resigned, or otherwise become incapable or unwilling to act as Representative. Appointment of the Ketchum Shareholder Representative shall include the specific authorization for such Representative to (i) execute and deliver the Escrow Agreement at the Effective Time of the Merger and any documents incident or ancillary thereto, including without limitation any amendments, cancellations, extensions or waivers in respect thereof; (ii) respond to and make determinations in respect of the assertion of any and all claims for indemnification by Omnicom, and to assert claims on behalf of the Ketchum Common Shareholders, pursuant to the terms of the Escrow Agreement and the terms of the Merger Agreement pertaining thereto; (iii) execute and deliver any stock powers which may be required to be executed by any Ketchum Common Shareholder, in order to permit the delivery to Omnicom of any shares of Omnicom Common Stock to be delivered to it pursuant to the Escrow Agreement; and (iv) take all such other actions as may be necessary or desirable to carry out his responsibilities as collective agent of the Ketchum Shareholders in respect of the Escrow Agreement. The terms of the appointment of the Ketchum Shareholder Representative shall be that he shall not be liable for any mistake of fact or error of judgment or for any acts or omissions unless caused by his gross negligence or willful misconduct; this term will be confirmed by each Ketchum Shareholder in the 29 transmittal form furnished by him to Omnicom as described under "The Merger Agreement and the Merger--Procedure for Distributing Shares of Omnicom Common Stock to Ketchum Shareholders". In addition, the current directors of Ketchum and the holders of more than 5% of the shares of Ketchum Common Stock have executed a Contribution Agreement pursuant to which they have agreed to indemnify the Ketchum Shareholder Representative against all losses and expenses which may be incurred by him as a result of any dispute arising from the performance of his duties under the Escrow Agreement, unless such dispute is the result of his gross negligence or action taken in bad faith. Finally, the appointment of the Ketchum Shareholder Representative shall also include the consent of the Ketchum Shareholders to the procedure to be followed in the event the Ketchum Shareholder Representative and any alternative shall be unable or unwilling to serve or continue to serve as such. Pursuant to such a procedure, a new Ketchum Shareholder Representative shall be chosen by majority vote of those persons who were members of Ketchum Board of Directors immediately prior to the Effective Time of the Merger, any of whom shall be entitled to call a meeting for such a purpose. The proposal before the Ketchum Shareholders is that Paul H. Alvarez be appointed as Ketchum Shareholder Representative, with Edward L. Graf appointed as alternate. Messrs. Alvarez and Graf are directors and executive officers of Ketchum and Ketchum Shareholders. See "The Merger Agreement and the Merger -- Interests of Ketchum's Management in the Merger" and "Business Information Concerning Ketchum -- Executive Officers and Directors, Principal Shareholders" for more detailed descriptions of these interests. Recommendation of the Ketchum Board of Directors The Ketchum Board of Directors believes that the adoption of the Escrow Agreement is in the best interests of the Ketchum Shareholders and recommends that the Ketchum Shareholders vote FOR the approval of the Escrow Agreement and the transactions contemplated thereby, and FOR the appointment of Paul H. Alvarez as Ketchum Shareholder Representative, with Edward L. Graf as alternate. 30 BUSINESS INFORMATION CONCERNING OMNICOM Description of Business Omnicom Group Inc., through its wholly and partially-owned companies (hereinafter collectively referred to as the "Omnicom Group"), operates advertising agencies which plan, create, produce and place advertising in various media such as television, radio, newspaper and magazines. The Omnicom Group offers its clients such additional services as marketing consultation, consumer market research, design and production of merchandising and sales promotion programs and materials, direct mail advertising, corporate identification, and public relations. The Omnicom Group offers these services to clients worldwide on a local, national, pan-regional or global basis. Operations cover the major regions of North America, the United Kingdom, Continental Europe, the Middle East, Africa, Latin America, the Far East and Australia. In 1995 and 1994, 53% and 51%, respectively, of the Omnicom Group's billings came from its non-U.S. operations. According to the unaudited industry-wide figures published in 1996 by the trade journal Advertising Age, Omnicom Group Inc. was ranked as the second largest advertising agency group worldwide. The Omnicom Group operates as three separate, independent agency networks: The BBDO Worldwide Network, the DDB Needham Worldwide Network and the TBWA International Network. The Omnicom Group also operates an independent agency, Goodby, Silverstein & Partners, and certain marketing service and specialty advertising companies through its Diversified Agency Services division ("DAS"). BBDO Worldwide, DDB Needham Worldwide and TBWA International, by themselves and through their respective subsidiaries and affiliates, independently operate advertising agency networks worldwide. Their primary business is to create marketing communications for their clients' goods and services across the total spectrum of advertising and promotion media. Each of the agency networks has its own clients and competes with each other in the same markets. The BBDO Worldwide, DDB Needham Worldwide and TBWA International agencies typically assign to each client a group of advertising specialists which may include account managers, copywriters, art directors and research, media and production personnel. The account manager works with the client to establish an overall advertising strategy for the client based on an analysis of the client's products or services and its market. The group then creates and arranges for the production of the advertising and/or promotion and purchases time, space or access in the relevant media in accordance with the client's budget. DAS is the Omnicom Group's Marketing Services and Specialty Advertising Division. The DAS mission is to provide the best customer driven marketing communications coordinated for the clients' benefit. Marketing services include promotion, public relations, public affairs, direct/database marketing, branding consultancy, graphic arts, sports marketing and merchandising/point-of-purchase; and specialty advertising includes financial, healthcare, hispanic and recruitment advertising. BBDO Worldwide Network The BBDO Worldwide Network operates in the United States through BBDO Worldwide which is headquartered in New York and has full-service offices in New York, New York; Los Angeles, California; Miami, Florida; Atlanta, Georgia; Chicago, Illinois; Detroit, Michigan; and Minneapolis, Minnesota. The BBDO Worldwide Network operates internationally through subsidiaries in Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Greece, Hong Kong, Italy, Malaysia, Mexico, the Netherlands, Peru, Poland, Portugal, Puerto Rico, Russia, Singapore, Spain, Sweden, Taiwan, Thailand and the United Kingdom; and through affiliates located in Argentina, Australia, Chile, Costa Rica, Croatia, the Czech Republic, Egypt, El Salvador, Guatemala, Honduras, Hungary, India, Israel, Kuwait, Lebanon, New Zealand, Nicaragua, Norway, Panama, the Philippines, Romania, Saudi Arabia, the Slovak Republic, Turkey, the United Kingdom, United Arab Emirates and Venezuela; and through a joint venture in Japan. The BBDO Worldwide Network uses the services of associate agencies in Colombia, Dominican Republic, Ecuador, Indonesia, Korea, Pakistan and Uruguay. 31 DDB Needham Worldwide Network The DDB Needham Worldwide Network operates in the United States through The DDB Needham Worldwide Communications Group, which is headquartered in New York and has full-service offices in New York, New York; Los Angeles, California; Dallas, Texas; Chicago, Illinois; and Seattle, Washington; and through Griffin Bacal Inc. which is headquartered in New York. The DDB Needham Worldwide Network operates internationally through subsidiaries in Australia, Austria, Belgium, Bulgaria, Canada, China, Colombia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, Singapore, the Slovak Republic, Spain, Sweden, Taiwan, Thailand and the United Kingdom; and through affiliates located in Brazil, Chile, Costa Rica, Egypt, El Salvador, Germany, Guatemala, Honduras, India, Korea, Malaysia, Panama, Switzerland, Turkey and Venezuela. The DDB Needham Worldwide Network uses the services of associate agencies in Miami, Florida and in Argentina, Bahrain, Belize, Bolivia, Dominican Republic, Ecuador, Indonesia, Ireland, Israel, Kuwait, Lebanon, Nicaragua, Paraguay, Peru, Puerto Rico, Russia, Saudi Arabia, Slovenia, South Africa, Trinidad, United Arab Emirates and Uruguay. Griffin Bacal Inc. operates internationally through subsidiaries in Canada and the United Kingdom and through a branch in Mexico. TBWA International Network The TBWA International Network operates in North America through TBWA Chiat/Day which is headquartered in New York and has full-service offices in New York, New York; Los Angeles, California; and St. Louis, Missouri, through Graf Bertel Buczek in New York, New York and through TBWA Chiat/Day Canada in Toronto, Canada. The TBWA International Network also operates in North America through its affiliate, TBWA Chiat/Day Mexico. The TBWA International Network operates internationally through subsidiaries in Australia, Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Portugal, South Africa, Spain and the United Kingdom; and through affiliates located in Argentina, Chile, Russia, South Africa, Sweden, Switzerland and Zimbabwe. The TBWA International Network uses the services of associate agencies in Austria, the Czech Republic, Hungary, India, Japan, the Middle East, the Netherlands, Norway, Poland, and Turkey. Diversified Agency Services DAS agencies headquartered in the United States include: Harrison Star Wiener & Beitler, Inc., Interbrand Schechter Inc., Kallir, Philips, Ross, Inc., Lyons/Lavey/Nickel/Swift, Inc., Merkley Newman Harty, Inc., RC Communications, Inc., The Rodd Group and Shain Colavito Pensabene Direct, Inc. in New York; Bernard Hodes Advertising, Inc., Doremus & Company, Gavin Anderson & Company Worldwide, Inc., Porter/Novelli, Inc. and Rapp Collins Worldwide Inc., all in various cities and headquartered in New York; Alcone Marketing Group in Irvine, California and Mahwah, New Jersey; Baxter, Gurian & Mazzei, Inc., in Beverly Hills, California; Corbett HealthConnect Inc., in Chicago, Illinois; Millsport in Stamford, Connecticut; Optima Direct Inc., in Vienna, Virginia; Ross Roy Communications, Inc., headquartered in Bloomfield Hills, Michigan; The GMR Group, Inc., in Fort Washington, Pennsylvania; Thomas A. Schutz Co., Inc. in Morton Grove, Illinois; and Rainoldi, Kerzner & Radcliffe, Inc., in San Francisco, California. DAS operates in the United Kingdom through subsidiaries which include Colour Solutions Ltd., Countrywide Communications Group Ltd., CPM International Ltd., European Political Consultancy Group Ltd., Granby Marketing Services Ltd., Interbrand (UK) Ltd., MacMillan Davies Advertising, Ltd., MacMillan Davies Consultants, Ltd., Paling Walters Targis Ltd., Premier Magazines Ltd., Product Plus International Ltd., Specialist Publications (UK) Ltd., The Anvil Consultancy Ltd. and WWAV Rapp Collins Group, Ltd. In addition, DAS operates internationally with subsidiaries and affiliates in Argentina, Australia, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, France, Germany, Hong Kong, Ireland, Italy, Japan, Korea, Mexico, Singapore, South Africa and Spain. 32 Omnicom Group Inc. As the parent company of BBDO Worldwide, DDB Needham Worldwide, TBWA International, the DAS Group and Goodby, Silverstein & Partners, the Company, through its wholly-owned subsidiary Omnicom Management Inc., provides a common financial and administrative base for the operating groups. Omnicom oversees the operations of each group through regular meetings with their respective top-level management. Omnicom sets operational goals for each of the groups and evaluates performance through the review of monthly operational and financial reports. Omnicom provides its groups with centralized services designed to coordinate financial reporting and controls, real estate planning and to focus corporate development objectives. Omnicom develops consolidated services for its agencies and their clients. Clients The clients of the Omnicom Group include major industrial, financial and service industry companies as well as smaller, local clients. Among its largest clients are Anheuser-Busch, Chrysler Corporation, Gillette, GTE, Hasbro, Henkel, McDonald's, Nissan, PepsiCo., Seagrams, Visa and Volkswagen. The Omnicom Group's ten largest clients accounted for approximately 21% of 1995 commissions and fees. The majority of these have been clients for more than ten years. The Omnicom Group's largest client accounted for less than 6% of 1995 commissions and fees. Revenues Commissions charged on media billings represent a significant proportion of revenues for the Omnicom Group. Commission rates are not uniform and are negotiated with the client. In accordance with industry practice, the media source typically bills the agency for the time or space purchased and the Omnicom Group bills its client for this amount plus the commission. The Omnicom Group typically requires that payment for media charges be received from the client before the agency makes payments to the media. In some instances a member of the Omnicom Group, like other advertising agencies, is at risk in the event that its client is unable to pay the media. The Omnicom Group's advertising networks also generate revenues in arranging for the production of advertisements and commercials. Although, as a general matter, the Omnicom Group does not itself produce the advertisements and commercials, the Omnicom Group's creative and production staff directs and supervises the production company. The agency bills the client for production costs plus a commission. In some circumstances, certain production work is done by the Omnicom Group's personnel. In many cases, fees are generated in lieu of commissions. Several different fee arrangements are used depending on client and individual agency needs. In general, fee charges relate to the cost of providing services plus a markup. The DAS companies primarily charge fees for their various specialty services, which vary in type and scale, depending upon the service rendered and the client's requirements. Advertising agency revenues are dependent upon the marketing requirements of clients and tend to be highest in the second and fourth quarters of the fiscal year. Other Information For additional information concerning the contribution of international operations to commissions and fees and net income see Note 5 of the Notes to Consolidated Financial Statements. The Omnicom Group is continuously developing new methods of improving its research capabilities, to analyze specific client requirements and to assess the impact of advertising. In the United States, approximately 193 people on the Omnicom Group's staff were employed in research during the year and the Omnicom Group's domestic research expenditures approximated $27,095,000. Substantially all such expenses were incurred in connection with contemporaneous servicing of clients. The advertising business is highly competitive and accounts may shift agencies with comparative ease, usually on 90 days' notice. Clients may also reduce advertising budgets at any time for any reason. An agency's ability to compete for new clients is affected in some instances by the policy, which many advertisers follow, of not permitting their agencies to represent competitive accounts in the same market. As a result, increasing size may limit an agency's 33 potential for securing certain new clients. In the vast majority of cases, however, the separate, independent identities of BBDO Worldwide, DDB Needham Worldwide, TBWA International, the independent agencies within the DAS Group and Goodby, Silverstein & Partners have enabled the Omnicom Group to represent competing clients. BBDO Worldwide, DDB Needham Worldwide, TBWA International, the DAS Group and Goodby, Silverstein & Partners have sought, and as part of the Omnicom Group's operating segments will seek, new business by showing potential clients examples of advertising campaigns produced and by explaining the variety of related services offered. The Omnicom Group competes in the United States and internationally with a multitude of full service and special service agencies. In addition to the usual risks of the advertising agency business, international operations are subject to the risk of currency exchange fluctuations, exchange control restrictions and to actions of governmental authorities. Employees The business success of the Omnicom Group is, and will continue to be, highly dependent upon the skills and creativity of its creative, research, media and account personnel and their relationships with clients. Omnicom believes its operating groups have established reputations for creativity and marketing expertise which attract, retain and stimulate talented personnel. There is substantial competition among advertising agencies for talented personnel and all agencies are vulnerable to adverse consequences from the loss of key individuals. Employees are generally not under employment contracts and are free to move to competitors of the Omnicom Group. Omnicom believes that its compensation arrangements for its key employees, which include stock options, restricted stock and retirement plans, are highly competitive with those of other advertising agencies. As of December 31, 1995, the Omnicom Group, excluding unconsolidated companies, employed approximately 19,400 persons, of which approximately 8,500 were employed in the United States and approximately 10,900 were employed in its international offices. Government Regulation The advertising business is subject to government regulation, both within and outside the United States. In the United States, federal, state and local governments and their agencies and various consumer groups have directly or indirectly affected or attempted to affect the scope, content and manner of presentation of advertising. The continued activity by government and by consumer groups regarding advertising may cause further change in domestic advertising practices in the coming years. While Omnicom is unable to estimate the effect of these developments on its U.S. business, management believes the total volume of advertising in general media in the United States will not be materially reduced due to future legislation or regulation, even though the form, content, and manner of presentation of advertising may be modified. In addition, Omnicom will continue to ensure that its management and operating personnel are aware of and are responsive to the possible implications of such developments. Description of Property Substantially all of Omnicom's offices are located in leased premises. Omnicom actively manages its obligations and, where appropriate, consolidates its leased premises. Management has obtained subleases for most of the premises vacated. Where appropriate, management has established reserves for the difference between the cost of the leased premises that were vacated and anticipated sublease income. Domestic Omnicom's corporate office occupies approximately 27,000 sq. ft. of space at 437 Madison Avenue, New York, New York under a lease expiring in the year 2010. BBDO Worldwide occupies approximately 285,000 sq. ft. of space at 1285 Avenue of the Americas, New York, New York under a lease expiring in the year 2012, which includes options for additional growth of the agency. DDB Needham Worldwide occupies approximately 170,000 sq. ft. of space at 437 Madison Avenue, New York, New York under leases expiring in the year 2010, which include options for additional growth of the agency. 34 TBWA Chiat/Day occupies approximately 58,000 sq. ft. of space at 180 Maiden Lane, New York, New York under a lease expiring in the year 2016, which includes options for additional growth of the agency. Offices in Atlanta, Beverly Hills, Chicago, Dallas, Detroit, Irvine, Los Angeles, Mahwah, Minneapolis, Morton Grove, New York, San Francisco, Seattle and St. Louis and at various other locations occupy approximately 2,309,000 sq. ft. of space under leases with varying expiration dates. International Omnicom's international subsidiaries in Australia, Austria, Belgium, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Portugal, Puerto Rico, Singapore, the Slovak Republic, South Africa, Spain, Sweden, Taiwan, Thailand and the United Kingdom occupy premises under leases with various expiration dates. Legal Proceedings Omnicom has no material pending legal proceedings, other than ordinary routine litigation incidental to its business. 35 SELECTED FINANCIAL DATA OF OMNICOM The following table summarizes certain selected consolidated financial data of Omnicom and its subsidiaries and is qualified in its entirety by the more detailed financial information and notes thereto incorporated by reference into this Prospectus/Information Statement. This information has been adjusted to reflect the two-for-one stock split in the form of a 100% stock dividend payable to holders of Omnicom Common Stock on December 15, 1995.
(Dollars in Thousands Except Per Share Amounts) ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- For the year: Commissions and fees ............... $2,257,536 $1,907,795 $1,688,960 $1,600,326 $1,435,977 Income before change in accounting principles ........... 139,955 111,495 65,568 59,650 48,457 Net income ......................... 139,955 83,486 65,568 56,250 48,457 Earnings per common share before changes in accounting principles: Primary ......................... 1.89 1.58 1.03 1.01 0.84 Fully diluted ................... 1.85 1.54 1.01 0.86 0.84 Cumulative effect of changes in accounting principles: Primary ......................... -- (0.40) -- (0.06) -- Fully diluted ................... -- (0.40) -- (0.06) -- Earnings per common share after changes in accounting principles: Primary ......................... 1.89 1.18 1.03 0.95 0.84 Fully diluted ................... 1.85 1.18 1.01 0.81 0.84 Dividends declared per common share ............................ 0.66 0.62 0.62 0.60 0.55 At year end: Total assets ....................... 3,527,677 3,040,211 2,465,408 2,266,733 2,196,969 Long-term obligations: Long-term debt ................... 290,379 199,487 301,044 324,133 335,220 Deferred compensation and other liabilities .............. 122,623 150,291 113,197 102,814 82,948
36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OMNICOM Results of Operations In 1995, domestic revenues from commissions and fees increased 12.8 percent. The effect of acquisitions, net of divestitures, accounted for a 1.5 percent increase. The remaining 11.3 percent increase was due to net new business gains and higher spending from existing clients. In 1994, domestic revenues from commissions and fees increased 7.0 percent. The effect of acquisitions, net of divestitures, accounted for a 1.2 percent increase. The remaining 5.8 percent increase was due to net new business gains and higher spending from existing clients. In 1993, domestic revenues from commissions and fees increased 5.3 percent. The effect of acquisitions, net of divestitures, accounted for a 3.2 percent increase. The remaining 2.1 percent increase was due to net new business gains and higher spending from existing clients. In 1995, international revenues increased 24.3 percent. The effect of acquisitions, net of divestitures, accounted for a 5.9 percent increase in international revenues. The weakening of the U.S. dollar increased international revenues by 6.7 percent. The remaining 11.7 percent increase was due to net new business gains and higher spending from existing clients. In 1994, international revenues increased 20.2 percent. The effect of acquisitions, net of divestitures, accounted for an 8.5 percent increase in international revenues. The weakening of the U.S. dollar increased international revenues by 2.3 percent. The remaining 9.4 percent increase was due to net new business gains and higher spending from existing clients. In 1993, international revenues increased 5.9 percent. The effect of the acquisition of TBWA International B.V. and several marketing services companies in the United Kingdom, net of divestitures, accounted for a 14.0 percent increase in international revenues. The strengthening of the U.S. dollar against several major international currencies relevant to the Company's non-U.S. operations decreased revenues by 11.1 percent. The increase in revenues due to net new business gains and higher spending from existing clients was 3.0 percent. In 1995, worldwide operating expenses increased 17.4 percent. Acquisitions, net of divestitures during the year, accounted for a 3.9 percent increase in worldwide operating expenses. The weakening of the U.S dollar increased worldwide operating expenses by 3.2 percent. The remaining 10.3 percent increase was caused by normal salary increases and growth in out-of-pocket expenditures to service the increased revenue base. Net foreign exchange gains did not significantly impact operating expenses for the year. In 1994, worldwide operating expenses increased 10.2 percent. Acquisitions, net of divestitures during the year, accounted for a 4.8 percent increase in worldwide operating expenses. The weakening of the U.S dollar increased worldwide operating expenses by 1.1 percent. The remaining 4.3 percent increase was caused by normal salary increases and growth in out-of-pocket expenditures to service the increased revenue base, partially offset by the elimination of the special charge recorded in 1993. Net foreign exchange gains did not significantly impact operating expenses for the year. In 1993, worldwide operating expenses increased 5.8 percent. During the year, the Company recorded a special charge of $22.7 million associated with the restructuring of certain real estate operating leases, including the write-off of fixed assets abandoned in conjunction with lease terminations. The special charge accounted for a 1.6 percent increase in operating expenses. Acquisitions, net of divestitures during the year, accounted for an 8.5 percent increase in worldwide operating expenses. The strengthening of the U.S. dollar against several international currencies decreased worldwide operating expenses by 5.0 percent. The remaining increase was caused by normal salary increases and growth in out-of-pocket expenditures to service the increased revenue base. Net foreign exchange gains did not significantly impact operating expenses for the year. Interest expense in 1995 increased $2.8 million, reflecting higher average borrowings during the year. Interest and dividend income increased in 1995 by $1.7 million. This increase was attributable to higher average amounts of cash and marketable securities invested during the year. 37 Interest expense in 1994 decreased by $6.6 million. This decrease reflects lower average interest rates on borrowings, primarily due to the conversion of the Company's 7% Convertible Subordinated Debentures in October 1993 and the conversion of the Company's 6.5% Convertible Subordinated Debentures in July 1994. Interest and dividend income decreased by $2.2 million in 1994. This decrease was primarily due to lower average funds available for investment during the year and declining interest rates in certain countries. Interest expense in 1993 decreased by $4.3 million, reflecting lower average borrowings during the year. Interest and dividend income decreased in 1993 by $3.1 million. This decrease was primarily due to lower average amounts of cash and marketable securities invested during the year. In 1995, the effective tax rate decreased to 40.1 percent. The decrease reflects a reduction in the effect of nondeductible goodwill amortization and a decrease in the effective rate of state and local taxes. In 1994, the effective tax rate decreased to 41.2 percent. The decrease reflects a reduction in losses of domestic and international subsidiaries without tax benefit, a reduction in the effective rate of state and local taxes and a reduction in the effect of nondeductible goodwill amortization, offset by the elimination of nontaxable proceeds from life insurance policies. In 1993, the effective tax rate increased to 48.1 percent. The increase reflects increased losses of domestic subsidiaries without tax benefit and an increase in the domestic federal tax rate, partially offset by nontaxable proceeds from life insurance policies and a lower international effective tax rate. In 1995, consolidated net income increased 25.5 percent compared to 1994 consolidated net income before the adoption of SFAS 112. This increase was the result of revenue growth, margin improvement, and an increase in equity income, partially offset by an increase in minority interest expense. Operating margin, which excludes net interest expense, increased to 12.0 percent in 1995 from 11.3 percent in 1994 as a result of greater growth in commission and fee revenue than the growth in operating expenses. The increase in equity income was primarily due to increased earnings of the Company's existing equity affiliates. The increase in minority interest expense was caused by higher earnings from companies in which minority interests exist. In 1995, the impact of divestitures, net of acquisitions, resulted in a 4.4 percent decrease in consolidated net income, while the weakening of the U.S. dollar against several international currencies increased consolidated net income by 3.4 percent. In 1994, consolidated net income before the adoption of SFAS 112 increased by 70.0 percent. This increase was the result of revenue growth, margin improvement, an increase in equity income and a reduction in the effective tax rate. Operating margin, which excludes net interest expense, increased to 11.3 percent in 1994 from 9.1 percent in 1993 as a result of greater growth in commission and fee revenue than the growth in operating expenses. The increase in equity income was primarily due to earnings from new equity affiliates and was also due to improved net income at companies which are less than 50 percent owned. In 1994, the impact of divestitures, net of acquisitions, resulted in a 2.3 percent decrease in consolidated net income, while the weakening of the U.S. dollar against several international currencies increased consolidated net income by 1.4 percent. In 1993, consolidated net income increased 9.9 percent compared to 1992 net income before changes in accounting principles. This increase was the result of revenue growth, margin improvement, an increase in equity income and a decrease in minority interest expense. Operating margin decreased to 9.1 percent in 1993 from 9.3 percent in 1992 as a result of lesser growth in commission and fee revenue than the growth in operating expenses. The increase in equity income was the result of improved net income at companies which are less than 50 percent owned. The decrease in minority interest expense was primarily due to the acquisition of certain minority interests in 1993 and lower earnings by companies in which minority interests exist. In 1993, the incremental impact of acquisitions, net of divestitures, accounted for 1.0 percent of the increase in consolidated net income, while the strengthening of the U.S. dollar against several international currencies decreased consolidated net income by 6.6 percent. At December 31, 1995, accounts receivable net of allowances for doubtful accounts, increased by $290.7 million from December 31, 1994. At December 31, 1995, accounts payable and other accrued liabilities increased by $222.9 million and $89.3 million, respectively, from December 31, 1994. These increases were primarily due to an increased volume of activity resulting from business growth and acquisitions during the year and, in the case of accounts payable, differences in the dates on which payments to media and other suppliers became due in 1995 compared to 1994. 38 Effective January 1, 1994, Omnicom adopted the provisions of Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits". The cumulative after tax effect of the adoption of this statement decreased net income by $28.0 million. Omnicom's international operations are subject to the risk of currency exchange rate fluctuations. This risk is generally limited to the net income of the operations as the revenues and expenses of the operations are generally denominated in the same currency. When economically beneficial to do so, Omnicom or its international operations enter into hedging transactions to minimize the risk of adverse currency exchange rate fluctuations on the net income of the operation. Omnicom's major international markets are the United Kingdom, France, Germany, the Netherlands, Spain, Italy, and Canada. Omnicom's operations are also subject to the risk of interest rate fluctuations. As part of managing Omnicom's exposures to currency exchange and market interest rates, Omnicom periodically enters into derivative financial instruments with major well known banks acting as principal counterparty. In order to minimize counterparty risk, Omnicom only enters into derivative contracts with major well known banks that have credit ratings equal to or better than Omnicom's. Additionally, these contracts contain provisions for net settlement. As such, the contracts settle based on the spread between the currency rates and interest rates contained in the contracts and the current market rates. This minimizes the risk of an insolvent counterparty being unable to pay Omnicom and, at the same time, having the creditors of the counterparty demanding the notional principal amount from Omnicom. Omnicom's derivative activities are limited in volume and confined to risk management activities related to Omnicom's worldwide operations. A reporting system is in place which evaluates the impact on Omnicom's earnings resulting from changes in interest rates, currency exchange rates and other relevant market risks. This system is structured to enable senior management to initiate prompt remedial action, if appropriate. At December 31, 1995 and 1994, Omnicom had forward exchange contracts outstanding with an aggregate notional principal amount of $325 million and $346 million, respectively, most of which were denominated in the Company's major international market currencies. These contracts predominantly hedge certain of Omnicom's intercompany receivables and payables which are recorded in a currency different from that in which they will settle. The terms of these contracts are generally three months or less. At December 31, 1995, Omnicom had executed interest rate swap contracts with banks which will become effective during 1996. These contracts consist of; a $75 million notional principal amount U.S. dollar fixed to floating rate swap relating to a portion of Omnicom's intercompany interest cash flows; and a Deutsche Mark 76.6 million notional principal amount (approximately $53.3 million at the December 31, 1995 exchange rate) floating to fixed rate swap and a $10 million notional principal amount U.S. dollar floating to fixed rate swap, both of which will convert a portion of Omnicom's floating rate debt to a fixed rate. At December 31, 1995 and 1994, Omnicom had no other derivative contracts outstanding. Omnicom anticipates relatively favorable growth rates in its domestic and international markets. Capital Resources and Liquidity Cash and cash equivalents increased $72.2 million during 1995 to $314.0 million at December 31, 1995. Omnicom's positive net cash flow provided by operating activities was maintained, in part, by a continued favorable relationship between the collection of accounts receivable and the payment of obligations to media and other suppliers. After annual cash outlays for dividends paid to shareholders and minority interests and the repurchase of Omnicom's common stock for employee programs, the balance of the cash flow, together with the proceeds from issuance of debt obligations, was used to fund acquisitions, make capital expenditures, repay debt obligations and invest in marketable securities. On January 4, 1995, an indirect wholly-owned subsidiary of Omnicom issued Deutsche Mark 200 million Floating Rate Bonds due January 5, 2000. The bonds bear interest at a per annum rate equal to Deutsche Mark three month LIBOR plus 0.65%. On June 1, 1994, Omnicom issued a Notice of Redemption for the outstanding $100 million of its 6.5% Convertible Subordinated Debentures due 2004. Prior to the July 27,1994 redemption date, debenture holders elected to convert all of their outstanding debentures into common stock of Omnicom at a conversion price of $14.00 per common share. 39 Omnicom maintains relationships with a number of banks worldwide, which have extended unsecured committed lines of credit in amounts sufficient to meet Omnicom's cash needs. At December 31, 1995, Omnicom had $374 million in committed lines of credit, comprised of a $250 million, three year revolving credit agreement and $124 million in unsecured credit lines, principally outside of the United States. Of the $374 million in committed lines, $18 million were used at December 31, 1995. Management believes the aggregate lines of credit available to Omnicom are adequate to support its short-term cash requirements for dividends, capital expenditures and maintenance of working capital. Omnicom anticipates that the year end cash position, together with the future cash flows from operations and funds available under existing credit facilities will be adequate to meet its long-term cash requirements as presently contemplated. On March 1, 1996, Omnicom issued Deutsche Mark 100 million Floating Rate Bonds (approximately $68 million). The bonds are unsecured, unsubordinated obligations of the Company and bear interest at a per annum rate equal to Deutsche Mark three month LIBOR plus 0.375%. The bonds will mature on March 1, 1999 and will be repaid at par. The proceeds of this issuance will be used for general corporate purposes, including the reduction of outstanding commercial paper debt. 40 BUSINESS INFORMATION CONCERNING KETCHUM Description of Business General Ketchum, through its subsidiaries, is a full service communications company. Ketchum is the successor corporation of KM&G International Inc., which, in turn, was the successor corporation to Ketchum McLeod & Grove, Inc., a Pennsylvania corporation incorporated in 1923. Ketchum operates as a holding company and owns directly or indirectly four subsidiary companies, Ketchum Communications, Inc., Ketchum Communications (Delaware), Inc., Ketchum International, Inc. and Ketchum New York Advertising Holdings, Inc. Ketchum offers a full range of communications services including the creation of effective advertising in various media, such as direct response, yellow pages, newspapers, magazines, outdoor, transit, radio and television, and in public relations activities. More specifically, the business conducted by Ketchum's subsidiaries, affiliates and divisions is as follows: Ketchum Communications, Inc. KCI operates in various locations throughout the United States under various trade names and performs a variety of services to its clients. It operates through the following divisions and units: Advertising Division. Ketchum's Advertising Division is a full service agency which works with major advertisers in diverse fields, including consumer products and services, business-to-business marketing, and corporate advertising. Public Relations Division. Ketchum's Public Relations Division conducts a broad range of communications activities for a variety of organizations. It provides assistance in promoting, marketing, publicity, investor relations, government relations, social involvement, and corporate, community and employee relations. Directory Advertising Division. Ketchum's Directory Advertising Division specializes in the design and placement of advertising in Yellow Pages directories utilizing an extensive state-of-the-art computer system. Ketchum Directory Advertising provides up-to-date consumer and industrial information concerning the users of over 6,000 different directories published annually. Public Affairs Division. Ketchum's Public Affairs Division specializes in communications surrounding public policy issues. Health Care Division. Ketchum's Health Care Division, Ketchum BRH&M, is a full service health care communications agency based in New York City. Interactive Media Unit. Ketchum's Interactive Media Unit specializes in finding new media applications for its clients and the agency. Ketchum Communications (Delaware), Inc. Ketchum Communications (Delaware), Inc. is a non-operating company which invests the excess cash of the Ketchum U.S. subsidiaries. Ketchum International, Inc. Ketchum International, Inc., a non-operating wholly-owned subsidiary of Ketchum Communications (Delaware), Inc., provides, through its subsidiaries, equity investments and affiliates, an integrated, worldwide system of advertising and public relations agencies to meet the marketing needs of clients selling products or services outside of the United States, in a national, multi-national or international arena. Ketchum International, Inc. is comprised of a network of fifteen agencies in ten different countries and is supported by 49 affiliate agencies in 34 countries throughout the world. Ketchum New York Advertising Holdings, Inc. Ketchum New York Advertising Holdings, Inc. is a non-operating company which owns an interest in a New York partnership, Jerry & Ketchum. Jerry & Ketchum is an advertising agency, located in New York, which works with advertisers in diverse fields, including consumer products and services, business-to-business marketing, and corporate advertising. 41 Clients Ketchum's ten largest clients in 1995 accounted for approximately 41.12% of income from commissions and fees. American Honda Motor Company was the largest client comprising 18% of commissions and fees. The second through tenth largest clients individually comprised from 6% to 1% of commissions and fees. For the purposes of the foregoing percentages, a foreign subsidiary of a domestic client (or vice versa) is deemed to be a separate client where such subsidiary has a right to select, and has selected, Ketchum's subsidiary abroad as its advertising agency as a matter of independent choice. The major clients of Ketchum's subsidiaries appear in various promotional materials. Foreign subsidiaries and affiliates accounted for approximately 6.71% of the worldwide total of income from commissions and fees of Ketchum in 1995. Employees; Offices Ketchum is a privately-owned company with over 1,000 employees, 240 of which work at its Pittsburgh, Pennsylvania headquarters. The principal office of Ketchum and one of its significant operating offices is located at Six PPG Place, Pittsburgh, Pennsylvania, and contains approximately 77,000 square feet of floor space. Ketchum's subsidiaries and affiliates lease additional office space in New York (New York), Los Angeles and San Francisco (California), Greenwich (Connecticut), Coral Gables (Florida), Chicago (Illinois), Atlanta (Georgia), Louisville (Kentucky), Washington (D.C.), Kansas City (Kansas), Dallas (Texas), as well as various foreign locations. Executive Officers and Directors, Principal Shareholders The Ketchum Profit Sharing Plan is the sole record holder of the Ketchum Preferred Stock. The following table is furnished with respect to the directors of Ketchum, and the directors and executive officers of Ketchum as a group, in each case as of April 15, 1996. There are no family relationships between any of the directors or executive officers. The table also shows the name and address of each person known by Ketchum to be the beneficial owner of more than 5% of Ketchum Common Stock as of April 15, 1996.
Shares of Ketchum Common Stock Percent of Name and Address Position with Ketchum Owned Class - ---------------- ------------------- ------------ -------- Directors and Executive Officers: Edward L. Graf Director, 51,900 14.46% 6933 Church St. Vice Chairman, Pittsburgh, PA 15202 Chief Financial Officer, Secretary, Executive Committee Member J. Craig Mathiesen Director, 31,400 8.75% 6162 South Ramirez Canyon President, Ketchum Malibu, CA 90265 Advertising/Los Angeles, Executive Committee Member Paul H. Alvarez Director, Chairman of the 27,400 7.64% 112 Hickory Hill Road Board, Chief Executive Officer, Pittsburgh, PA 15238 Executive Committee Member Dianne Snedaker Director, 20,000 5.57% 66 Hanken Drive President, Ketchum Kentfield, CA 94904 Advertising/San Francisco David R. Drobis Director, Vice Chairman, 17,800 4.96% 47 Delafield Island Rd. Public Relations, Executive Darien, CT 06820 Committee Member James V. Ficco Director, President, 10,335 2.88% 311 Scarlet Cir. Ketchum Advertising/ Wexford, PA 15090 Pittsburgh
42
Shares of Ketchum Common Stock Percent of Name and Address Position with Ketchum Owned Class - ---------------- ------------------- ------------ -------- Raymond L. Kotcher Director, President, Public 12,400 3.46% 335 West Pine Street Relations Long Beach, NY 11561 Lawrence R. Werner Director, Executive Vice 8,800 2.45% Gateway Tower Apartments President, Public Relations/ Pittsburgh, PA 15222 Pittsburgh Lorraine Thelian Director, Executive Vice 6,664 1.86% 9516 Neuse Way President, Public Relations/ Great Falls, VA 22066 Washington, D.C. Robert C. Feldman Director, Executive Vice 3,750 1.05% 465 West End Avenue President, Public Relations New York, NY 10024 John C. Joseph Director, President, 3,700 1.03% 825 Lyndhurst Court Ketchum Directory Advertising Naperville, IL 60563 Executive Officers and Directors as a Group (14 persons) 203,458 56.70% Principal Shareholders: James K. Larkin Executive Vice President, 25,000 6.70% 21 Via Barcelona Ketchum Advertising U.S.A. Moraga, CA 95466 Ketchum Communications -- 29,761 8.29% Holdings, Inc. 401(k) Profit Sharing Plan Six PPG Place Pittsburgh, PA 15222-5406
Ketchum pays, on an annual basis, a director's fee of $25,000 in the form of cash which is applied to a purchase of Ketchum Common Stock. This fee is paid, and the stock purchase is made, on a quarterly basis. This director's fee will be discontinued after the Effective Time of the Merger. 43 SELECTED FINANCIAL DATA OF KETCHUM The following table summarizes certain selected financial data of Ketchum and is qualified in its entirety by the more detailed financial information and notes thereto appearing elsewhere in this Prospectus/Information Statement. The financial data as of and for each of the five years in the period ended December 31, 1995 is derived from the audited financial statements. The financial data as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 is derived from the financial statements included herein audited by Deloitte & Touche LLP, independent public accountants. See "Financial Statements of Ketchum", the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Ketchum".
1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (Dollars in Thousands Except Per Share Amounts) Statement of Operations Data: For the year ended December 31: Commissions and fees .............. $127,388 $124,061 $129,510 $119,819 $116,476 Income (loss) from continuing operations (1) ................ (7,540) 2,092 (5,535) 2,795 2,316 Net income (loss) (2) ............. (7,540) 2,092 (5,535) 2,795 1,540 Income (loss) from continuing operations per common share ................... (21.82) 3.67 (10.55) 4.22 3.22 Net income (loss) per common share .......................... (21.82) 3.67 (10.55) 4.22 2.14 Dividends declared per common share ................... 1.00 1.00 1.00 1.00 1.00 Balance Sheet Data: At December 31: Total assets ...................... 127,622 124,766 123,929 137,378 127,503 Long-term debt (3) ................ 3,804 15,640 14,653 14,906 14,530 Redeemable Preferred Stock ........ 8,035 4,991 2,471 -- --
- --------------- (1) 1993 results of operations include the impact of restructuring charges. See audited financial statements for further information. (2) 1991 net income includes loss from discontinued operations. (3) Excluding $11,571 of debt classified as current due to covenant violations at December 31, 1995. 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF KETCHUM Results of Operations Performance in 1995 compared to 1994 Revenues from commissions and fees for 1995 increased to $127.4 from $124.1 million in 1994. The increase was primarily attributable to a significant increase in commissions and fees from the Public Relations Division which was partially offset by a decrease in the commissions and fees from the Advertising Division, due primarily to the impact of closing certain offices in 1994 and 1995. Operating loss was $6.9 million in 1995 compared with operating income of $6.6 million in 1994. The $13.5 million change consists of $16.8 million increase in total operating expense partially offset by the $3.3 million increase in commissions and fees. With respect to the increase in operating expenses, $7.5 million results from increases in compensation and employee benefits and general agency expense which are discussed below. Further, $9.3 million results from the increase in other expense and includes a charge of approximately $5.0 million related to settled and pending litigation matters, the most significant of which was an approximate $4.0 million charge for a judgment against Ketchum related to a prior acquisition in the United Kingdom. This case was a contract dispute between the majority owners and Ketchum relative to the exercise of a put option requiring Ketchum to purchase the majority stake as well as a dispute relating to certain dividends declared and paid prior to the put without Ketchum's consent. Judgment was rendered against Ketchum on February 21, 1996 for approximately $3.5 million. Additionally, Ketchum was subsequently ordered to pay $0.5 million for a cost contribution to the plaintiffs' legal costs. The remaining $1.0 million of the litigation charge primarily relates to two cases where judgments have been rendered against Ketchum and loss is considered probable, although appeals are pending. An additional reserve of $0.5 million was recorded in 1995, in addition to $0.2 million previously accrued, for the first case, a case in which Ketchum was a minority shareholder of a Parisian advertising agency which went bankrupt and where Ketchum may be required to contribute to the full amount of the shortfall in net assets. The potential range of loss in this case is between $0.7 million and $1.2 million. A charge of $0.3 million was recorded for the second case which is related to Ketchum holding over in certain New York office space for one month. In management's opinion, Ketchum's exposure for unrecorded losses of all litigation matters is insignificant. Other operating expenses in 1995 also included charges resulting from management's periodic analysis of the recoverability of the carrying value of the excess of cost over the fair value of net assets acquired. Management wrote down approximately $2.8 million of the carrying value at December 31, 1995. Management's analysis was based on undiscounted cash flows of expected future performance of the related operations. Expected future cash flows were based upon internal projections considering past trends, general business economic conditions and discussions with key management personnel. To the extent that the cash flows did not support the carrying value of the excess of cost over the fair value of net assets acquired, write downs were recorded. The $2.8 million write down relates principally to two domestic operations which have incurred significant losses since 1992. $1.1 million of the charge relates to Ketchum's Public Relations Division and $1.4 million relates to its Health Care Division. Prior to 1995, management believed that these operations could be turned around. More specifically, after continued unsteady 1993 results in the Public Relations operation, management made a determined effort to turn the operations around. This effort showed improved results in 1994 and led management to believe that this operation could return to profitability. Additionally, it was management's belief that the Health Care operation in 1993 and 1994 was simply suffering from the effects of proposed health care reform as no clients were lost but spending was significantly reduced and that it would soon turn around after health care reform was settled. These assessments were developed during internal management business meetings as well as internal budget planning meetings. However, poor 1995 results of operations and projected losses led management to conclude that write downs should be made in 1995. Additionally, other operating expenses in 1995 included $1.1 million for the write off of notes receivable from equity investees, primarily from an investee which has incurred significant losses since its formation and which continues to have significant cash flow 45 shortfalls. Finally, other operating expenses included $0.7 million for equity in the net loss of equity investees. This represented an increase of $0.4 million from 1994, primarily related to increased losses of the same investees discussed above. Partially offsetting the factors negatively impacting operations in 1995 was decreased interest expense and an increase in other income. Interest expense in 1994 included a $0.4 million charge related to the refinancing of Ketchum's primary debt instrument, a 9% unsecured senior note due August 1, 2004, with principal payable in equal annual installments beginning August 1, 1998 through August 1, 2004 and interest payable semi-annually. The increase in other income in 1995 is primarily due to a $0.4 million dollar gain on the sale of the Chicago office. Ketchum's net loss in 1995 was $7.5 million compared to net income of $2.1 million in 1994. The income tax benefit in 1995 of approximately $0.2 million was less than that calculated using the U.S. federal statutory rate. Ketchum's effective income tax rate was negatively impacted principally by the effects of certain nondeductible expenses and an increased valuation allowance for deferred tax assets. The discussion of results of operations of the operating divisions which follows excludes the impact of other operating expenses discussed above. Commissions and fees for the Advertising Division were $58.1 million in 1995 compared to $61.4 million in 1994 and operating income for the corresponding periods was $1.0 million and $5.4 million, respectively. The decrease in commissions and fees was comprised of $3.5 million from the loss of two clients, as well as lost commissions and fees of $2.2 million and $2.4 million, respectively, as a result of the closing of offices in New York and Philadelphia in 1994, and offices in Chicago and Singapore in 1995. The decreases were partially offset by the growth of existing businesses of $4.8 million. Operating income in 1995 was negatively impacted by the loss of the two clients, which resulted in employee severance costs, increased business development costs and a self promotion project. The loss of one of the two clients in the fourth quarter of 1995 is expected to reduce commissions and fees in 1996 by $4.4 million; however it is expected that operating income will decrease by only $0.3 million as related costs have also been reduced. The increases in business development costs and the self promotion project were aimed at generating new business and creating general market awareness for the Advertising Division in the very competitive advertising industry. Costs associated with closing the Singapore office also further reduced operating income. Operating income in 1995 was favorably impacted by savings associated with the closings of the New York, Philadelphia and Chicago offices which had previously incurred operating losses. Commissions and fees for the Public Relations Division increased to $52.8 million in 1995 from $45.0 million in 1994 while operating income for the corresponding periods increased to $3.1 million from $2.9 million, respectively. The increase in commissions and fees was due to the growth of existing businesses, including net new business gains and higher net spending from existing clients. The operating profit percentage decreased to 5.9% in 1995 from 6.4% in 1994. Operating income was negatively impacted by increased legal costs associated with a lawsuit related to a previous acquisition in the United Kingdom, the results of which is discussed above in other operating expense. Commissions and fees of the other divisions (primarily Directory Advertising and Health Care) were $16.5 million in 1995 compared to $17.7 million in 1994 and operating losses were $1.4 million in both 1995 and 1994. The decrease in commissions and fees was attributable to a decrease in the Health Care Division and the closing of Ketchum Sales Promotions, an operating division which comprised less than 1% of consolidated commissions and fees, due to continued operating losses in 1995. The impact of closing this division was immaterial with respect to consolidated results of operations. Reduced operating losses in the Health Care Division were offset by increased losses associated with increased activity of the Interactive Media Unit which was formed in 1994 for the purpose of serving existing and new clients in the emerging interactive technology market, primarily associated with the Internet. The improvement in the Health Care Division in 1995 reflected a recovery from very poor 1994 results. The 1994 results were adversely impacted by an industry wide trend of reduced advertising expenditures by pharmaceutical companies as a result of public scrutiny of these companies' spending practices. Directory Advertising operating income was comparable in 1995 and 1994. 46 Performance in 1994 compared to 1993 Commissions and fees for 1994 decreased to $124.1 million from $129.5 million in 1993. The decrease was primarily attributable to the impact of lost commissions and fees due to restructuring which occurred in the last quarter of 1993 and involved the closing of certain offices during 1994. Decreases in commissions and fees in the other divisions, also contributed to the overall decrease. Partially offsetting these decreases was an increase in the Public Relations Division's commissions and fees. Operating income in 1994 was $6.6 million compared to an operating loss of $5.1 million in 1993. The $11.7 million change is comprised of a $17.1 million decrease in total operating expenses partially offset by the $5.4 million decrease in commissions and fees. With respect to the decrease in operating expenses, $6.6 million of the decrease represents decreases in compensation and employee benefits and general agency expense related to the closure of offices as discussed below. Results of operations in 1993 were negatively impacted by charges of $8.8 million related to restructuring. The restructuring was the result of a Board of Directors decision, made in 1993, to sell the operations in Philadelphia (both public relations and advertising); close the New York advertising operation or partner it with another agency in New York; and to conditionally continue the Chicago advertising and New York sales promotions operations. All of these operations were related to acquisitions made by Ketchum to obtain a presence in a city for the first time or to increase Ketchum's presence which formerly had been insignificant. The reasons for the decision to restructure were primarily related to poor results of these operations for a number of years, but more specifically the magnitude of losses in 1993. As a result of this restructuring, a write down of $6.0 million of the excess cost over the fair value of net assets acquired was recorded. Additionally there was a $1.9 million lease abandonment charge recorded in connection with vacating the Philadelphia office space upon the sale of the operations as well as $0.4 million in severance pay covering 53 people in the Philadelphia and New York advertising operations, all of which was paid during 1994. Philadelphia operations were sold during the first quarter of 1994 and New York Advertising, through Ketchum New York Advertising Holdings, Inc., was partnered with Jerry Inc. to form Jerry & Ketchum during the second quarter of 1994. Chicago Advertising was ultimately sold in 1995 and New York sales promotion was closed during 1995. The final portion of the $8.8 million restructuring charge was a $0.5 million write-off of the net book value of computer equipment no longer in use. All significant aspects of the restructuring had been completed during 1995. The effect of these 1993 restructuring charges was to increase operating income by $1.1 million in 1994, primarily through the reduction of amortization expense relating to the write down of the excess cost over fair value of net assets recorded as well as rent expense reductions due to the lease abandonment charge. In 1993, operating expenses were negatively impacted by $2.0 million, which included a charge of $0.9 million related to the write-off of a note receivable from an equity investee in France. The note was determined to be uncollectible as a result of the investee's poor financial condition and negative cash flows in recent years. $0.7 million of the $2.0 million impact represented the write down of the equity investment in the same French operation, which management believed to be necessary, based on past results of operations and projections of future results. The remaining $0.4 million primarily represented the write-off of excess of cost over the fair value of net assets acquired of an inactive operation in the Netherlands that was determined to no longer be useful for the purpose it was originally intended. Improved results of the Public Relations Division and reduced losses of the offices which were closed in the restructuring contributed to improved results of operations in 1994. Net income in 1994 was $2.1 million compared with a net loss of $5.5 million in 1993. Partially offsetting the factors affecting operating income was an increased effective tax rate due to additional contingency reserves of approximately $ 0.7 million recorded for probable specific federal and state exposures in open tax years. The discussion of results of operations of the operating divisions which follows excludes the impact of other operating expense and restructuring charges which were discussed above. Commissions and fees for the Advertising Division were $61.4 million in 1994 compared with $65.4 million in 1993. Operating income for the corresponding periods was $5.4 million and $2.6 million, respectively. The decrease in commissions and fees was attributable to lost commissions and fees associated with closing the Philadelphia and New York offices. This impact was partially offset by an increase in commissions and fees attributable to expanded business in the Advertising Division's production units which allowed the division to better serve existing clients and to capture revenues that had gone outside the 47 agency. This expansion included new technology which allowed the division to do typesetting internally. Operating income increased primarily due to reduced losses related to offices which were closed. Commissions and fees of the Public Relations Division increased to $45.0 million in 1994 from $41.9 million in 1993 while operating income increased to $2.9 million from $2.7 million. The increase in commissions and fees was primarily due to strong demand for services in the United States, both from existing clients and new clients. Commissions and fees related to an additional investment in an agency in France also contributed to the increase. The increase in operating income was a result of the factors that contributed to the commissions and fees increase. The operating profit percentage was approximately 6.4% for both 1994 and 1993. Commissions and fees for the other divisions were $17.7 million in 1994 compared to $22.2 million in 1993. Operating loss was $1.4 million in 1994 and operating income was $0.4 million in 1993. The decrease in commissions and fees was due to the impact of lost commissions and fees in both the Directory Advertising and Health Care Divisions. The decrease in Directory Advertising was primarily related to the loss of a significant client. The decrease in the Health Care Division was due to an industry wide trend of reduced advertising expenditures by pharmaceutical companies as a result of public scrutiny of these companies' spending practices. Operating income was negatively impacted by lost revenues and costs associated with a severe decline in business in the Health Care Division. Directory Advertising operating income was comparable in 1994 and 1993. Impact of Inflation Ketchum's financial statements are prepared on a historical cost basis which does not completely account for the effects of inflation. The impact of inflation on the Ketchum's results was not significant in 1995, 1994 and 1993 due to the low inflation rates in those years. Accounting Standard In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". This standard is effective for years beginning after December 15, 1995. The general requirements of SFAS No.121 apply to non-current assets and require impairment to be considered whenever evidence suggests that future cash flows will not result in an amount at least equal to the carrying value of the asset. Ketchum has not adopted SFAS No. 121 at December 31, 1995. Management of Ketchum does not believe the adoption of this standard will have a material effect on financial condition or results of operations. Capital Resources and Liquidity Cash and cash equivalents increased to $2.9 million from $2.5 million in 1994. Ketchum's primary source of cash and cash equivalents has historically been from operations. Cash flow from operations was $8.1 million, $6.0 million and $7.8 million in 1995, 1994 and 1993, respectively. Cash and cash equivalents have been utilized to fund investing activities, primarily capital expenditures and additional investments in affiliates and acquisitions. Cash flow used in investing activities totaled $3.5 million, $7.4 million and $6.3 million in 1995, 1994 and 1993, respectively. Ketchum also had available $7.0 million of capacity, net of a $1 million reserve against guarantees, on its revolving credit agreement at December 31, 1995. However, as a result of additional net borrowings subsequent to December 31, 1995, Ketchum had approximately $4.6 million of borrowings outstanding as of May 3, 1996. Ketchum was also in violation of certain covenants of this revolving credit agreement as of May 3, 1996. At December 31, 1995, Ketchum was also in violation of certain covenants pertaining to its senior notes. As a result of the senior note covenant violations, on April 30, 1996 the noteholders declared the entire principal amount of the senior notes plus accrued interest and a penalty, due and payable on May 3, 1996. The aggregate amount of such notes, accrued interest and penalty of $13.0 million, was paid principally from proceeds of a bank credit facility entered into on May 1, 1996, borrowings under which are guaranteed by Omnicom. The classification of the principal amount of the senior notes and $4.0 million due as a result of a judgement against Ketchum related to a previous acquisition in the United Kingdom, are factors contributing to a working capital deficiency at December 31, 1995. 48 The report of Ketchum's independent auditors includes an explanatory paragraph expressing substantial doubt regarding Ketchum's ability to continue as a going concern. Note 2 to Ketchum's financial statements describes the conditions that give rise to the going concern uncertainty and certain actions taken by Ketchum in response thereto. In addition, Ketchum has entered into an agreement to merge with a subsidiary of Omnicom in a transaction expected to be consummated on or about May 31, 1996. Management believes that the financial strength of Omnicom, pending closing of the deal, the reasonable probability related to refinancing long-term debt, the relief of the repurchasing obligation of shares of Ketchum Common Stock as a result of the Merger and increased future profitability resulting from recent restructuring and impairment charges, will address Ketchum's current and long-term liquidity needs. Cash and cash equivalents have been generated by Ketchum from the sale of common stock to employees including payments received on related notes. Ketchum also has agreements to repurchase Ketchum Common Stock and has utilized cash and cash equivalents to repurchase shares and to pay related notes. Under Ketchum's shareholder agreements, the Ketchum Common Stock is both sold and repurchased by Ketchum at a price determined by a formula based primarily upon book value, adjusted for certain items determined by the Board of Directors. The Common Stock of Ketchum is owned by the employees and Ketchum is obligated to repurchase its common stock from the holders upon termination of employment. The total repurchase obligation is recorded based upon the formula price and number of shares outstanding at each balance sheet date. At Ketchum's option these repurchases are paid either by cash in a lump sum or over a three to five year period. In 1994 and 1993 Ketchum issued 20,000 shares of Ketchum Preferred Stock to generate additional cash and cash equivalents. The Ketchum Preferred Stock is held only by the Ketchum Profit Sharing Plan. Ketchum has paid cash dividends on common and preferred shares of approximately $0.6 million in each of 1995, 1994 and 1993. In order to provide sufficient cash flow from operating activities it is the policy of Ketchum to bill in advance of payments due for services it provides as often as possible in order that cash receipts can closely match payment requirements. All general advertising broadcast media and substantially all general advertising print media costs are invoiced in the month in which the commercial airs or the ad is inserted. Directory advertising costs are all billed any where from 0 to 4 months in advance of when a directory is issued. Production costs are generally billed in advance under the installment method based on estimated costs of the work to be performed. Management of Ketchum believes that due to the renewed efforts of cost cutting and cost containment used in developing the 1996 plan, which projects increased profits, sufficient taxable income will be generated in 1996 to realize the net deferred tax asset recorded at December 31, 1995. The cost cutting and cost containment measures in the 1996 plan consist primarily of certain 1995 expenses that will not recur related to the previously discussed self promotion project and litigation matters in addition to maintaining current staffing levels at corporate headquarters. Management believes the 1996 plan and the assumptions underlying it are reasonable and believes it is more likely than not that the deferred tax asset will be realized. 49 DESCRIPTION OF OMNICOM CAPITAL STOCK Each share of Omnicom Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of shareholders. All shares of Omnicom Common Stock have equal rights and are entitled to such dividends as may be declared by the Omnicom Board of Directors out of funds legally available therefor and to share ratably upon liquidation in the assets available for distribution to stockholders. Omnicom is not aware of any restrictions on its present or future ability to pay dividends. However, in connection with certain borrowing facilities entered into by Omnicom and its subsidiaries, Omnicom is subject to certain restrictions on current ratio, ratio of total consolidated indebtedness to total consolidated capitalization, ratio of net cash flow to consolidated indebtedness, and limitation of investments in and loans to affiliates and unconsolidated subsidiaries. The Omnicom Common Stock is not subject to call or assessment, has no preemptive conversion or cumulative voting rights and is not subject to redemption. Omnicom's shareholders elect a classified board of directors, and may not remove a director except by an affirmative two-thirds vote of all outstanding shares. A two-thirds vote is also required for Omnicom's shareholders to amend Omnicom's by-laws or certain provisions of its charter documents, and to change the number of directors comprising the full board. Omnicom may issue preferred stock in series having whatever rights and preferences the Omnicom Board of Directors may determine. One or more series of preferred stock may be made convertible into Omnicom Common Stock at rates determined by the Board of Directors, and preferred stock may be given priority over the Omnicom Common Stock in payment of dividends, rights on liquidation, voting and other rights. Preferred stock may be issued from time to time upon authorization of the Omnicom Board of Directors without action of the shareholders, Omnicom has no current plans to issue any preferred stock. Omnicom currently has outstanding $143,750,000 of 4.5%/6.25% Step-Up Convertible Subordinated Debentures with a scheduled maturity in 2000, which are convertible into Omnicom Common Stock at a conversion price of $27.44, subject to adjustment in certain events. Chemical Mellon Shareholder Services, 450 West 33rd Street, New York, New York 10001 is the transfer agent and the registrar of the Omnicom Common Stock. DESCRIPTION OF KETCHUM CAPITAL STOCK Ketchum is a privately-owned company and there is no established public trading market for its capital stock. Ketchum's authorized capital is 2,000,000 shares of common stock, stated value of $0.005 per share and 50,000 shares of preferred stock, par value $100 per share. As of April 15, 1996, there were 358,818 shares of Ketchum Common Stock issued and outstanding and 1,005,182 shares of Ketchum Common Stock held in treasury; and 6,282 shares of Series A Preferred Stock issued and outstanding and no shares of Series A Preferred Stock held in treasury. Under provisions of the Ketchum Articles, only (a) employees of Ketchum or an entity owned by Ketchum, or in which Ketchum, directly or indirectly, has an interest, (b) non-employees approved by the Ketchum Executive Committee, and (c) a trust(s) established as a part of a qualified retirement plan maintained by Ketchum, are entitled to become shareholders of Ketchum. No more than 10% of Ketchum's issued and outstanding capital stock can be owned by non-employees and employees of entities which are less than 100% owned by Ketchum or a corporation owned directly or indirectly by Ketchum. Shares of stock held by employees of Ketchum are subject to the terms of shareholder agreements, which restrict the sale, transfer, pledge, hypothecation or other disposition of shares. Pursuant to the shareholder agreements, transfers of shares are prohibited except to Ketchum or to other employees upon Ketchum's approval. An employee, or his estate, is obligated to sell his shares to Ketchum upon termination of employment, death or bankruptcy. Those shares are repurchased by Ketchum at a price to be determined in accordance with the terms of the shareholder agreement. This determination is based primarily upon book value, as adjusted by the Ketchum Board of Directors. Common Stock All outstanding shares of Ketchum Common Stock are fully paid and nonassessable. The holders of Ketchum Common Stock are entitled to one vote for each share held of record and on all matters voted by the Ketchum Shareholders. There are no cumulative voting rights for the election of directors. 50 There are no redemption, sinking fund, conversion or preemptive rights with respect to shares of Ketchum Common Stock. All shares of Ketchum Common Stock have equal rights and preferences. In the event of the liquidation of Ketchum, each outstanding share is entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known preferences (including the Ketchum Preferred Stock), debts and liabilities of Ketchum. Dividends are payable only when and if declared by the Board of Directors of Ketchum out of funds legally available therefor and are necessarily dependent upon earnings, the general financial status of the company and various other factors. A small cash dividend was historically paid with respect to the shares of Ketchum Common Stock so as to preserve corporate funds for growth and to increase the potential for long-term capital gain treatment. The regular Ketchum Common Stock dividend has been paid in four equal quarterly installments. In 1994 and 1995, a $1.00 dividend was paid with respect to the Ketchum Common Stock. A special Ketchum Common Stock dividend is paid only if actual financial performance is substantially above projected performance, and only if Ketchum's capital requirements do not require retention of the cash. No special Ketchum Common Stock dividend has been declared in the past five years. Preferred Stock Ketchum has designated 20,000 shares of Series A Preferred Stock, par value $100 per share, as a series of its authorized preferred stock; this is the only preferred stock outstanding and is referred to in this document as the "Ketchum Preferred Stock". The Ketchum Preferred Stock has a dividend, if and when declared by the Ketchum Board of Directors, of $90 per annum per share, payable in quarterly payments of $22.50 on March 15, June 15, September 15, and December 15 of each year. Such dividends are senior to dividends on Ketchum Common Stock, and are cumulative and accrue on a day-to-day basis whether or not earned from and after the date of issuance or the date to which dividends have been paid. Accrued but unpaid dividends do not bear interest. The quarterly dividends on the Ketchum Preferred Stock as described above were paid by Ketchum as required for each quarter of 1994 and 1995. Late dividends (those paid on the 30th or following date after the dividend payment date) accrue at the rate of $100 per annum for a period of 90 days following such dividend payment date, and $90 per annum thereafter. The Ketchum Preferred Stock has a liquidation preference over the holders of Ketchum Common Stock of $1,000, plus all accrued but unpaid dividends, per share of Ketchum Preferred Stock. Except for such liquidation preference, the holders of Ketchum Preferred Stock are not entitled to any distribution in the event of the liquidation, dissolution or winding up of Ketchum. If the assets of Ketchum are not sufficient to pay such liquidation preference, the holders of Ketchum Preferred Stock share ratably in any such distribution in accordance with the amount that would have been paid if such liquidation preference were paid in full. After the liquidation preference is paid in full, all remaining assets are to be distributed to the holders of the Ketchum Common Stock. Ketchum may redeem the Ketchum Preferred Stock at any time after January 1, 2003 at the option of the Ketchum Board of Directors, in whole or in part, at a redemption price of $1,045 per share of Ketchum Preferred Stock plus accrued and unpaid dividends to the redemption date. Each share of Ketchum Preferred Stock has one vote, which shall vote together with the Ketchum Common Stock on all matters submitted to the Ketchum Shareholders, except for matters, such as the Merger, as to which the PABCL provides for a special class vote. COMPARISON OF SHAREHOLDER RIGHTS Upon consummation of the Merger, the shareholders of Ketchum, a Pennsylvania corporation, will become shareholders of Omnicom, a New York corporation, and their rights as such will be governed by New York law, as well as the Omnicom Certificate of Incorporation (the "Omnicom Certificate") and By-laws (the "Omnicom By-laws") as amended from time to time in accordance with New York law. While it is not practical to describe all changes in the rights of Ketchum Shareholders that will result from the application of New York law in lieu of Pennsylvania law and the differences between the Omnicom Certificate and the Omnicom By-laws and the Ketchum Articles and the Ketchum By-laws (the "Ketchum By-Laws"), the following is a summary of material differences. 51 References to the "NYBCL" are to the New York Business Corporation Law, while references to the "PABCL" are to the Pennsylvania Business Corporation Law. Special Meetings of Shareholders The PABCL provides that a special meeting of the shareholders may be called at any time by the board of directors, by such other officers and persons as may be provided in the by-laws of the corporation, or by shareholders entitled to cast at least 20% of the votes which all shareholders are entitled to cast at such a meeting. The Ketchum By-laws provide that a special meeting of shareholders may be called at any time by the Chairman of the Board, the President, any Vice Chairman of the Board, the Secretary, the Board of Directors or the holders of not less than ten percent of all outstanding shares entitled to vote at the special meeting. Under the Ketchum By-laws, if the Secretary of Ketchum fails to schedule a special meeting of the shareholders after such a meeting had been requested by a person or persons entitled to do so, the person or persons making the request for a special meeting may schedule the meeting. Under New York law, a special meeting of shareholders may be called by the board of directors and by such person or persons as may be authorized to do so in the certificate of incorporation or by-laws. In addition, if an annual shareholder meeting has not been held for a certain period of time and a sufficient number of directors were not elected to conduct the business of the corporation, the board shall call a special meeting for the election of directors. If the board fails to do so, or sufficient directors are not elected within a certain period, holders of 10% of the shares entitled to vote in an election of directors may call a special meeting for such an election. The Omnicom By-laws provide that a special meeting of shareholders may be called, for any purpose or purposes, by the Board of Directors or by the President, or by the Secretary upon the request of a majority of the Board of Directors. Removal of Directors Under Pennsylvania law, the entire board of directors, a class of the board of directors or any individual director may be removed without cause by a vote of the shareholders entitled to vote for the election of directors. Further, the board of directors may be removed at any time, with or without cause, on the unanimous vote or consent of the shareholders. The Ketchum By-laws are otherwise silent as to the removal of directors. Under New York law, (i) shareholders may remove any director for cause, and the certificate or provision of a by-law adopted by the shareholders may give the board such right; (ii) if the certificate or the by-laws so provide, shareholders may remove directors without cause; and (iii) an action to remove a director for cause may be brought by the attorney-general or by the holders of ten percent of the outstanding shares, whether or not such Shares are entitled to vote. Neither the Omnicom Certificate nor the Omnicom By-Laws permit the removal of directors other than for cause. Vacancies On The Board Pennsylvania law provides that vacancies on the board of directors, including vacancies resulting from an increase in the number of members of the board of directors, may be filled by a majority vote of the remaining members of the board of directors, even if the remaining members constitute less than a quorum. The PABCL also states that the person selected to fill the vacancy on the board of directors then serves the balance of the unexpired term on the board. The Ketchum By-laws provide that a vacancy on the Board of Directors shall be filled by a majority vote of the remaining directors, even if they comprise less than a quorum. Under the Ketchum By-laws, the newly elected director then serves until the next annual meeting of the shareholders and until a successor is elected and qualified or until the newly elected director's earlier death, resignation or removal. Under New York law, newly created directorships resulting from an increase in the number of directors and vacancies occurring in the board for any reason except the removal of directors without cause, may be filled by vote of the board. However, the certificate of incorporation or by-laws may provide that such newly created directorships or vacancies are to be filled by vote of the shareholders. Unless the certificate of incorporation or the specific provision of a by-law adopted by the shareholders provide that the board may fill vacancies occurring in the board by reason of the removal of directors without cause, such vacancies may be filled only by vote of the shareholders. A director 52 elected to fill a vacancy, unless elected by the shareholders, will hold office until the next meeting of shareholders at which the election of directors is in the regular order of business and until his or her successor has been elected and qualified. The Omnicom By-laws provide that any vacancy in the Omnicom Board may be filled by a majority vote of the remaining directors or by the shareholders. Classification of the Board of Directors The Ketchum By-laws do not provide for the classification of the Board of Directors. The Omnicom Certificate provides that directors are to be classified into three classes, which are to hold office in staggered three-year terms. Inspection of the Books and Records Under Pennsylvania law, a shareholder has the right to examine, during normal business hours, the share register, the books and records of account of the corporation, the records of proceedings of the incorporators, shareholders and directors, and to make copies and extracts therefrom, if the shareholder makes a written, verified demand to inspect. The shareholder's written demand must state a purpose for the inspection that is reasonably related to the shareholder's status as a shareholder. If the inspection is to be made by an attorney or agent of the shareholder, the demand must be accompanied by a verified power of attorney authorizing the attorney or agent to act on behalf of the shareholder. If the corporation or an officer or agent of the corporation has refused to permit the inspection or does not reply to the demand within five business days after the demand was made, the shareholder may apply to the court of common pleas to enforce the right of inspection, and the court of common pleas will determine if the inspection is being made for a proper purpose. Other than specifically enumerating the shareholders' rights to receive annual financial statements, the Ketchum By-laws do not otherwise refer to the rights of shareholders to inspect the corporate books and records. Under New York law, only shareholders of record for at least six months and any person or the authorized agent of any person or persons holding at least five percent of any class of the outstanding shares have the right to examine the minutes of a corporation and the right to receive upon request certain financial statements of the corporation. Under the federal securities laws, shareholders of Omnicom receive financial information substantially more extensive than that required under New York law. Amendments of the Articles of Incorporation/Certificate of Incorporation Pennsylvania law states that amendments to the articles of incorporation shall be proposed by resolution of the board of directors or by petition of shareholders entitled to cast at least ten percent of the shares entitled to vote. The board of directors must provide a summary or copy of the proposed amendment and information regarding dissenters' rights, if applicable, to the shareholders. Except in limited cases, amendments to the articles of incorporation must be approved by a majority of shares entitled to vote and by a majority of any class or series of shares that is entitled to vote on the proposed amendment as a class or series. Certain amendments to the articles of incorporation that would adversely affect a series or class or which would alter the preferences of a series or class also must be approved by a majority vote of that series or class. The Ketchum By-laws do not otherwise provide for amendments to the Articles of Incorporation. Under New York law, an amendment or change of the certificate of incorporation may be authorized by vote of the Board, followed by vote of the holders of a majority of all outstanding shares entitled to vote thereon. Certain categories of amendments which adversely affect the rights of any holders of shares of a class or series of stock require the affirmative vote of the holders of a majority of all outstanding shares of such class or series, voting separately. The Omnicom Certificate requires the affirmative vote of 66 2/3% of the voting power of all outstanding shares of voting stock of Omnicom in order to amend or repeal the provisions of the Omnicom Certificate setting the number of directors constituting the entire Board of Directors and dividing the directors into classes, and absolving directors from personal liability pursuant to Section 719 of the NYBCL. Amendments to By-Laws Pennsylvania law provides that the shareholders have the power to amend or repeal the by-laws of the corporation. However, the power to amend or repeal the by-laws can be expressly vested by the by-laws in the board of directors, subject to the power of the shareholders to change such action by the board. The Ketchum By-laws provide that the By-laws may be amended or altered by a majority 53 vote of the members of the Board of Directors at any regular or special meeting, subject to the power of the shareholders to change such action by the Board of Directors. Under Pennsylvania law, the board of directors lacks the power to amend by-laws relating to a variety of subjects that can be amended only by the shareholders, including provisions governing the powers of the board of directors, limiting the personal liability of members of the board of directors, classification of the board of directors, removal of directors and quorums and certain other matters relating to shareholder meetings. Under New York law, except as otherwise provided in the certificate of incorporation, by-laws may be amended, repealed or adopted by the holders of shares entitled to vote in the election of any director. When so provided in the certificate of incorporation or a by-law adopted by the shareholders, by-laws may also be amended, repealed or adopted by the board by such vote as may be therein specified, which may be greater than the vote otherwise prescribed by law, but any by-law adopted by the board may be amended or repealed by the shareholders entitled to vote thereon. Under the terms of the Omnicom Certificate and Omnicom By-laws, Omnicom By-laws may be amended, repealed or adopted only by the affirmative vote of at least 66 2/3% of the total voting power of all outstanding shares of voting stock of Omnicom. Dividends and Distributions Under Pennsylvania law and unless the by-laws state otherwise, the board of directors is empowered to authorize distributions to or for the benefit of its shareholders. The PABCL prohibits a distribution if, after it is made (i) the corporation would be unable to pay its debts as they become due in the ordinary course of business or (ii) the total assets of the corporation would be less than the sum of (A) its total liabilities and (B) the amount that would be needed, if the corporation were to be dissolved at the time as of which the distribution is measured, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the distribution. Under New York law, dividends may be declared or paid and other distributions may be made out of surplus only, so that the net assets of the corporation remaining after such declaration, payment or distribution must at least equal the amount of its stated capital. When any dividend is paid or any other distribution is made from sources other than earned surplus, a written notice must accompany such payment or distribution as provided by the NYBCL. A corporation may declare and pay dividends or make other distributions except when currently the corporation is insolvent or would thereby be made insolvent, or when the declaration, payment or distribution would be contrary to any restrictions contained in the corporation's certificate of incorporation. State Takeover Legislation In certain instances, Pennsylvania's takeover legislation restricts the ability of a person or entity to acquire control of a Pennsylvania corporation through a business combination, such as a merger, consolidation or share exchange, or through the acquisition of shares constituting at least twenty percent of the votes that can be cast in the election of directors of the corporation. The takeover provisions of the PABCL apply, however, only to registered corporations, which are defined as (i) those corporations which have registered securities under the Exchange Act, (ii) those corporations that have reporting requirements under the Exchange Act by virtue of a registration filed under the Securities Act, (iii) certain corporations that have registered as a management company under the Investment Company Act of 1940 or (iv) a Pennsylvania corporation all of whose shares are owned, either directly or indirectly, by a domestic or foreign registered corporation. Because Ketchum has no reporting or registration requirements, is not a registered management company and is not owned, either directly or indirectly, by a domestic or foreign registered corporation, the Pennsylvania takeover legislation is inapplicable to Ketchum. The NYBCL prohibits any business combination (defined to include a variety of transactions, including mergers, consolidations, sales or dispositions of assets, issuances of stock, liquidations, reclassifications and the receipt of certain benefits from the corporation, including loans or guarantees) with, involving or proposed by any interested shareholder (defined generally as any person who, (i) directly or indirectly, beneficially owns 20% or more of the outstanding voting stock of a resident domestic New York corporation or (ii) is an affiliate or associate of such resident domestic corporation and at any time 54 within the past five years was a beneficial owner of 20% or more of such stock) for a period of five years after the date on which the interested shareholder became such. After such five-year period a business combination between a resident domestic New York corporation and such interested shareholder is prohibited unless either certain "fair price" provisions are complied with or the business combination is approved by a majority of the outstanding voting stock not beneficially owned by such interested shareholder or its affiliates or associates. The NYBCL exempts from its prohibitions any business combination with an interested shareholder if such business combination, or the purchase of stock by the interested shareholder that caused such shareholder to become such, is approved by the board of directors of the resident domestic New York corporation prior to the date on which the interested shareholder becomes such. Under the NYBCL, corporations may opt to not be governed by the statute; Omnicom has not so elected. Business Combinations Under the PABCL, the affirmative vote of the holders of a majority of the outstanding shares entitled to vote on the matter is required to approve mergers or consolidations, and certain sales, leases, exchanges and other distributions of all or substantially all of the property and assets of a corporation. In addition, if any class or series of shares is entitled to vote on the merger or consolidation as a class, a majority of the votes cast in each class is necessary to approve the merger or consolidation. Under the NYBCL, the affirmative vote of the holders of two-thirds of all outstanding shares of stock of a New York corporation entitled to vote thereon is required to approve mergers and consolidations, and for sales, leases, exchanges or other dispositions of all or substantially all the assets of a corporation, if not made in the usual or regular course of the business actually conducted by such corporation. Rights of Dissenting Shareholders Under Pennsylvania law, a shareholder can dissent from, and receive payment of the fair value of his or her shares in the event of, certain mergers, consolidations, share exchanges, asset transfers and corporate divisions. Further, a corporation may, in its by-laws or by resolution of the board of directors, provide for dissenters' rights that are more expansive than those granted by the PABCL. Neither the Ketchum By-laws nor any board resolutions provide for any such expanded dissenters' rights. A shareholder who wishes to dissent from a corporate action and to receive the fair value of his or her shares must (i) make a written demand therefor prior to the shareholder vote on the action, (ii) retain ownership of the shares through the effective date of the proposed action and (iii) refrain from voting his or her shares in approval of the action. The shareholder then must make a demand for payment and deposit his or her share certificates with the corporation within the time period allotted by the corporation. If the shareholder fails to make a timely demand for payment or fails to deposit stock certificates with the corporation in accordance with instructions by the corporation, the shareholder loses his or her right to receive payment for the fair value of his or her share under Pennsylvania law. Shareholders of a New York corporation have the right to dissent not only in the context of a merger or consolidation, but also in the event of certain amendments or changes to the certificate of incorporation adversely affecting their shares, certain sales, exchanges or other dispositions of all or substantially all of the corporation's assets and certain share exchanges. Indemnification of Directors, Officers and Employees Absent contrary provisions in the corporation's by-laws, Pennsylvania law provides that a corporation has the power to, and in some cases must, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or proceeding, including a derivative action, by reason of the fact that the person is, was or functions as a director, officer, employee or agent of the corporation. Such indemnification, against reasonable expenses, attorneys' fees, judgments, fines and amounts paid in settlements, is permitted only if the person to be indemnified acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation or, in the case of a criminal proceeding, if he or she had no reasonable cause to believe that his or her conduct was unlawful. A determination that the officer, director, employee or agent has met the required standard of conduct, and that indemnification therefore is proper, must be made (i) by a majority vote of a quorum comprised of disinterested directors, 55 (ii) in writing by independent legal counsel if a quorum of disinterested directors cannot be achieved or, if a quorum of disinterested directors exists, a majority of such quorum votes to seek a written determination by independent legal counsel or (iii) by the shareholders. In the case of a derivative action, the PABCL bars indemnification when the representative has been adjudged liable unless and to the extent the court of common pleas or other court determines that indemnity is proper. A corporation may advance expenses incurred by a director, officer, employee or agent in defending an action or proceeding in the event the director, officer, employee or agent has provided to the corporation an undertaking to repay the advanced expenses if it is later determined that he or she was not entitled to indemnification. The PABCL also provides that a corporation must indemnify a director, officer, employee or agent from expenses incurred in defense of any action or proceeding described above when the director, officer, employee or agent has been successful on the merits or otherwise. The statutory indemnification rights are not exclusive and can be expanded by the corporation's by-laws, by agreement or by vote of the shareholders or disinterested directors. Such expanded indemnification rights will be unavailable, however, if a court of common pleas finds that the act or failure to act giving rise to the purported right of indemnification constituted willful misconduct or recklessness. Finally, unless the by-laws of the corporation provide otherwise, a corporation may purchase insurance on behalf of any officer, director, employee or agent. The Ketchum By-laws provide that indemnification shall be made to a director or officer to the fullest extent permitted by law for expenses and other costs incurred in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether or not such suit was derivative in nature. In addition, the Ketchum By-laws provide that an officer or director may be entitled to indemnification in connection with a proceeding he or she initiated only if such proceeding was authorized by the Ketchum Board of Directors. Under Section 722 of the NYBCL, a corporation may indemnify any person made, or threatened to be made, a party to any action or proceeding, except for shareholder derivative suits, by reason of the fact that he or she was a director or officer of the corporation, provided such director or officer acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation and, in criminal proceedings, in addition, had no reasonable cause to believe his or her conduct was unlawful. In the case of shareholder derivative suits, the corporation may indemnify any person by reason of the fact that he or she was a director or officer of the corporation if he or she acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation, except that no indemnification may be made in respect of (i) a threatened action, or a pending action which is settled or otherwise disposed of, or (ii) any claim, issue or matter as to which such person has been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. The indemnification described above under the NYBCL is not exclusive of other indemnification rights to which a director or officer may be entitled, whether contained in the certificate of incorporation or by-laws, or, when authorized by (i) such certificate of incorporation or by-laws, (ii) a resolution of shareholders, (iii) a resolution of directors, or (iv) an agreement providing for such indemnification, provided that no indemnification may be made to or on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled. Any person who has been successful on the merits or otherwise in the defense of a civil or criminal action or proceeding will be entitled to indemnification. Except as provided in the preceding sentence, unless ordered by a court pursuant to the NYBCL, any indemnification under the NYBCL pursuant to the above paragraphs may be made only if authorized in the specific case and after a finding that the director or officer met the requisite standard of conduct (i) by the disinterested directors if a quorum is available, or (ii) in the event a quorum of disinterested directors is not available or so directs by either (A) the board upon the written opinion of independent legal counsel, or (B) by the shareholders. The Omnicom By-laws provide that Omnicom shall provide indemnification to its directors and officers in respect of claims, actions, suits or proceedings based upon, arising from, relating to or by reason of the fact that any such 56 director or officer serves or served in such capacity with Omnicom or at the request of Omnicom in any capacity with any other enterprise, and permits Omnicom to indemnify others and to advance expenses to the fullest extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Omnicom or Ketchum pursuant to the foregoing provisions, Omnicom and Ketchum have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Limitation of Personal Liability of Directors Under Pennsylvania law, a by-law adopted by the shareholders may provide that, except in the case of responsibility or liability under a criminal statute or liability for payment of local, state or federal taxes, a director shall not be personally liable for monetary damages for any action taken unless the director has breached or failed to perform his or her fiduciary duties and the breach or failure to perform constituted self dealing, willful misconduct or recklessness. The Ketchum By-laws provide that a director shall not be personally liable for monetary damages for any action taken or the failure to take any action unless the director breached his or her fiduciary duties and such breach constituted self-dealing, willful misconduct or recklessness. In addition, the Ketchum By-laws provide that such limitations on the personal liability of directors does not extend to liability under a criminal statute or for the liability for payment of taxes under local, state or federal law. Section 402(b) of the NYBCL provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of directors to the corporation or its shareholders for damages for any breach of duty in such capacity. However, no such provision can eliminate or limit (i) the liability of any director if a judgment or other final adjudication adverse to such director establishes that such director's acts or omissions were in bad faith, or involved intentional misconduct or a knowing violation of law, or that the director personally gained in fact a financial profit or other advantage to which such director was not legally entitled or that the director's acts violated certain provisions of the NYBCL or (ii) the liability of any director for any act or omission prior to the adoption of such a provision in the certificate of incorporation. The Omnicom Certificate provides that no director shall be personally liable to Omnicom or any of its shareholders for damages for any breach of duty as a director, except for liability resulting from a judgment or other final adjudication adverse to the director (i) for acts or omissions in bad faith or which involve intentional misconduct or a knowing violation of the law, (ii) for any transaction from which the director derived a financial profit or other advantage to which the director was not legally entitled, or (iii) under Section 719 of the NYBCL, which Section establishes liability of directors of a corporation to that corporation in the event that they approve statutorily prohibited dividends, share repurchases, share redemptions, distributions of assets on dissolution or loans to directors. LEGAL MATTERS The legality of the issuance of the Omnicom Common Stock to be issued in the Merger will be passed upon by Davis & Gilbert, 1740 Broadway, New York, New York 10019, counsel to Omnicom. 57 EXPERTS The consolidated financial statements and schedule of Omnicom and its subsidiaries contained in this Prospectus/Information Statement and the Registration Statement of which this Prospectus/Information Statement is a part have been audited by Arthur Andersen LLP, independent public accountants (whose opinion, insofar as it relates to the financial statements of Chiat/Day Holdings, Inc. and Ross Roy Communications, Inc. prior to 1995, is based solely upon the respective reports of Coopers & Lybrand L.L.P. and Deloitte & Touche L.L.P., other independent public accountants), as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm, and of Coopers & Lybrand LLP and Deloitte & Touche LLP with respect to their reports on the financial statements of Chiat/Day Holdings, Inc. and Ross Roy Communications, Inc. prior to 1995, as experts in giving said reports. The consolidated financial statements of Ketchum contained in this Prospectus/Information Statement and the Registration Statement of which this Prospectus/Information Statement is a part have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report with respect thereto, and are included herein in reliance upon the authority of such firm as experts in accounting and auditing. In addition, the description of the federal income tax consequences of the Merger provided by Deloitte & Touche LLP and based on their opinion with respect thereto attached as an exhibit to this Registration Statement, is included in this Prospectus/Information Statement upon the authority of said firm as experts in said matter. 58 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ---- OMNICOM GROUP INC. AND SUBSIDIARIES Report of Independent Public Accountants.................................. F-2 Report of Independent Public Accountants with regard to the Consolidated Financial Statements of Chiat/Day Holdings, Inc. ........ F-3 Report of Independent Public Accountants with regard to the Consolidated Financial Statements of Ross Roy Communications, Inc. ... F-4 Consolidated Statements of Income for the three years ended December 31, 1995................................................. F-5 Consolidated Balance Sheets at December 31, 1995 and 1994................. F-6 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1995................................................. F-7 Consolidated Statements of Cash Flows for the three years ended December 31, 1995................................................. F-8 Notes to Consolidated Financial Statements................................ F-9 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES Independent Auditors' Report ........................................... F-21 Consolidated Balance Sheets as of December 31, 1995 and 1994 ........... F-22 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 ..................................... F-23 Consolidated Statements of Redeemable Preferred and Common Stock and Accumulated Deficit for the years ended December 31, 1995, 1994 and 1993 ......... F-24 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 ..................................... F-25 Notes to Consolidated Financial Statements ............................. F-26 SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS OF OMNICOM GROUP INC. Schedule II--Valuation and Qualifying Accounts (for the three years ended December 31, 1995) ................................. S-1 F-1 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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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. Prior to 1995, we did not audit the financial statements of Chiat/Day Holdings, Inc. and Ross Roy Communications, Inc., companies acquired during 1995 in two transactions accounted for as poolings of interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of Omnicom Group Inc. and account for total assets of 6% at December 31, 1994 and total revenues of 7% and 11% for the years ended December 31, 1994 and 1993, respectively, of the consolidated totals, after restatement to reflect certain adjustments. The financial statements of Chiat/Day Holdings, Inc. and Ross Roy Communications, Inc. prior to those adjustments were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely upon the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 13 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for postemployment benefits. 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-3 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, based on our audits and the reports of other auditors, 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 20, 1996 (except for Note 14 as to which the date is March 1, 1996) F-2 INDEPENDENT ACCOUNTANTS' REPORT To the Shareholders and Board of Directors Chiat/Day Holdings, Inc. We have audited the consolidated balance sheets of Chiat/Day Holdings, Inc. and Subsidiaries as of October 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended (not included herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial position of Chiat/Day Holdings, Inc. and Subsidiaries as of October 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company's debt under its Senior Note and Senior Subordinated Note totaling $18,750,000 is due in 1995, which combined with its working capital and stockholders' deficits at October 31, 1994, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans as to this matter are discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND LLP Sherman Oaks, California April 7, 1995 F-3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Ross Roy Communications, Inc. We have audited the consolidated balance sheets of Ross Roy Communications, Inc. (formerly known as Ross Roy Group, Inc.) as of December 31, 1994, and the related consolidated statements of operations, common stock subject to repurchase obligations and accumulated deficit and cash flows for each of the two years in the period ended December 31, 1994 (not presented separately herein). These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Detroit, Michigan March 9, 1995 F-4 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, (Dollars in Thousands Except Per Share Data) ------------------------------------ 1995 1994 1993 ---- ---- ---- COMMISSIONS AND FEES............................. $2,257,536 $1,907,795 $1,688,960 OPERATING EXPENSES: Salaries and Related Costs.................. 1,305,087 1,102,944 988,566 Office and General Expenses................. 681,544 588,747 524,435 Special Charge.............................. -- -- 22,714 --------- --------- --------- 1,986,631 1,691,691 1,535,715 --------- --------- --------- OPERATING PROFIT................................. 270,905 216,104 153,245 NET INTEREST EXPENSE: Interest and Dividend Income................ (15,019) (13,295) (15,538) Interest Paid or Accrued.................... 43,271 40,485 47,105 --------- --------- --------- 28,252 27,190 31,567 --------- --------- --------- INCOME BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE................................... 242,653 188,914 121,678 INCOME TAXES..................................... 97,386 77,927 58,485 --------- --------- --------- INCOME AFTER INCOME TAXES AND BEFORE CHANGE IN ACCOUNTING PRINCIPLE................. 145,267 110,987 63,193 EQUITY IN AFFILIATES............................. 20,828 18,322 13,180 MINORITY INTERESTS............................... (26,140) (17,814) (10,805) --------- --------- --------- INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE........................... 139,955 111,495 65,568 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................... -- (28,009) -- --------- --------- --------- NET INCOME....................................... $ 139,955 $ 83,486 $ 65,568 ========= ========= ========= NET INCOME PER COMMON SHARE: Income Before Change in Accounting Principle: Primary.................................. $ 1.89 $ 1.58 $ 1.03 Fully Diluted............................ $ 1.85 $ 1.54 $ 1.01 Cumulative Effect of Change in Accounting Principle: Primary.................................. $ -- $ (0.40) $ -- Fully Diluted............................ $ -- $ (0.40) $ -- Net Income: Primary.................................. $ 1.89 $ 1.18 $ 1.03 Fully Diluted............................ $ 1.85 $ 1.18 $ 1.01
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS A S S E T S
December 31, (Dollars in Thousands) --------------------------- 1995 1994 ---- ---- CURRENT ASSETS: Cash and cash equivalents.................................................... $ 313,999 $ 241,797 Investments available-for-sale, at market, which approximates cost........... 21,474 28,425 Accounts receivable, less allowance for doubtful accounts of $23,352 and $23,528 (Schedule II)........................................ 1,503,212 1,212,501 Billable production orders in process, at cost............................... 106,115 82,357 Prepaid expenses and other current assets.................................... 161,235 148,958 ---------- ---------- Total Current Assets......................................................... 2,106,035 1,714,038 FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less accumulated depreciation and amortization of $259,664 and $238,468........... 200,473 192,450 INVESTMENTS IN AFFILIATES ...................................................... 200,216 164,524 INTANGIBLES, less accumulated amortization of $157,863 and $133,848.............. 832,698 758,973 DEFERRED TAX BENEFITS............................................................ 70,242 65,064 DEFERRED CHARGES AND OTHER ASSETS ............................................... 118,013 145,162 ---------- ---------- $3,527,677 $3,040,211 ========== ========== 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............................................................. $1,734,500 $1,511,610 Current portion of long-term debt............................................ 2,934 23,537 Bank loans .................................................................. 18,097 10,640 Advance billings............................................................. 245,516 215,181 Accrued taxes on income...................................................... 41,756 52,989 Other accrued taxes.......................................................... 66,167 63,238 Other accrued liabilities.................................................... 380,407 291,072 Dividends payable............................................................ 13,067 11,262 ---------- ---------- Total Current Liabilities.................................................... 2,502,444 2,179,529 ---------- ---------- LONG-TERM DEBT ................................................................. 290,379 199,487 DEFERRED COMPENSATION AND OTHER LIABILITIES ..................................... 122,623 150,291 MINORITY INTERESTS .............................................................. 60,724 42,738 COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value, 7,500,000 shares authorized, none issued................................................................... -- -- Common stock, $.50 par value, 150,000,000 shares authorized, 79,842,976 and 79,262,232 shares issued in 1995 and 1994, respectively... 39,921 39,631 Additional paid-in capital................................................... 390,984 381,770 Retained earnings............................................................ 299,704 207,488 Unamortized restricted stock................................................. (30,739) (25,631) Cumulative translation adjustment............................................ (26,641) (28,254) Treasury stock, at cost, 5,184,814 and 5,022,374 shares in 1995 and 1994, respectively....................................................... (121,722) (106,838) ---------- ---------- Total Shareholders' Equity............................................... 551,507 468,166 ---------- ---------- $3,527,677 $3,040,211 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-6 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1995 (Dollars in Thousands) Common Stock --------------------- Additional Unamortized Cumulative Total Paid-in Retained Restricted Translation Treasury Shareholders' Shares Par Value Capital Earnings Stock Adjustment Stock Equity --------- --------- -------- -------- ----------- ----------- -------- ------------ Balance December 31, 1992......... 63,546,510 $31,773 $172,474 $143,955 $(15,307) $(38,200) $(53,586) $241,109 Pooling of interests adjustment related to acquisition of TBWA International............ 2,698,520 1,349 (551) (6,309) (1,834) (7,345) ---------- ------ ------- ------- ------- ------- -------- ------- Balance January 1, 1993, as restated................... 66,245,030 33,122 171,923 137,646 (15,307) (40,034) (53,586) 233,764 Net income....................... 65,568 65,568 Dividends declared............... (36,992) (36,992) Amortization of restricted shares ............ 7,096 7,096 Share transactions under employee stock plans.......... (627,754) (314) 19,542 (13,596) 15,413 21,045 Shares issued for acquisitions 7,303 21,948 29,251 Conversion of 7% Debentures...... 6,668,158 3,334 82,519 85,853 Cumulative translation adjustment ................... (25,780) (25,780) Repurchases of shares............ (51,885) (51,885) ---------- ------ ------- ------- ------- ------- -------- ------- Balance December 31, 1993........ 72,285,434 36,142 281,287 166,222 (21,807) (65,814) (68,110) 327,920 Net income....................... 83,486 83,486 Dividends declared............... (42,220) (42,220) Amortization of restricted shares ....................... 9,535 9,535 Share transactions under employee stock plans................... (165,668) (83) 2,952 (13,359) 16,796 6,306 Shares issued for acquisitions 1,103 11,932 13,035 Conversion of 6.5% Debentures.... 7,142,466 3,572 96,428 100,000 Cumulative translation adjustment ................... 37,560 37,560 Repurchases of shares............ (67,456) (67,456) ---------- ------ ------- ------- ------- ------- -------- ------- Balance December 31, 1994........ 79,262,232 39,631 381,770 207,488 (25,631) (28,254) (106,838) 468,166 Net income....................... 139,955 139,955 Dividends declared............... (47,739) (47,739) Amortization of restricted shares 10,713 10,713 Share transactions under employee stock plans................... 580,744 290 8,205 (15,821) 17,111 9,785 Shares issued for acquisitions .. 1,009 2,659 3,668 Cumulative translation adjustment ................... 1,613 1,613 Repurchases of shares............ (34,654) (34,654) ---------- ------- -------- -------- -------- -------- --------- -------- Balance December 31, 1995........ 79,842,976 $39,921 $390,984 $299,704 $(30,739) $(26,641) $(121,722) $551,507 ========== ======= ======== ======== ======== ======== ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 OMNICOM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (Dollars in Thousands) ----------------------------------- 1995 1994 1993 --------- --------- --------- Cash Flows From Operating Activities: Net income.......................................................... $139,955 $ 83,486 $ 65,568 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of tangible assets.................. 45,879 41,308 40,092 Amortization of intangible assets................................. 28,250 25,046 19,034 Minority interests................................................ 26,140 17,549 10,805 Earnings of affiliates in excess of dividends received............ (5,682) (10,484) (6,823) Decrease (increase) in deferred taxes............................. 2,400 (3,272) (669) Provisions for losses on accounts receivable...................... 6,024 9,788 7,690 Amortization of restricted shares................................. 10,713 9,535 7,096 Increase in accounts receivable................................... (259,560) (139,194) (16,481) (Increase) decrease in billable production........................ (22,442) (4,735) 6,129 (Increase) decrease in other current assets....................... (7,040) (27,166) 20,000 Increase in accounts payable...................................... 180,850 258,371 61,105 Increase (decrease) in other accrued liabilities.................. 107,087 77,476 (18,769) (Decrease) increase in accrued taxes on income.................... (12,808) 17,752 1,187 Other............................................................. (13,177) 4,703 18,066 -------- --------- --------- Net Cash Provided By Operating Activities ............................ 226,589 360,163 214,030 -------- --------- --------- Cash Flows From Investing Activities: Capital expenditures................................................. (49,568) (43,983) (33,646) Purchases of equity interests in subsidiaries and affiliates, net of cash acquired............................. (118,784) (150,660) (80,577) Sales of equity interests in subsidiaries and affiliates....................................................... 15,278 499 558 Purchases of investments available-for-sale and other investments................................................. (14,200) (8,154) (49,733) Sales of investments available-for-sale and other investments................................................ 21,496 24,165 17,396 -------- --------- --------- Net Cash Used In Investing Activities ................................. (145,778) (178,133) (146,002) -------- --------- --------- Cash Flows From Financing Activities: Net borrowings (repayments) under lines of credit................... 6,883 (25,033) (14,167) Proceeds from issuances of debt obligations......................... 135,162 36,161 149,593 Repayment of principal of debt obligations.......................... (67,718) (35,815) (49,664) Share transactions under employee stock plans....................... 5,681 7,911 7,526 Dividends and loans to minority stockholders........................ (15,498) (8,062) (8,033) Dividends paid...................................................... (45,935) (41,307) (35,470) Purchases of treasury shares....................................... (34,654) (67,456) (51,885) -------- --------- --------- Net Cash Used in Financing Activities ................................ (16,079) (133,601) (2,100) -------- --------- --------- Effect of exchange rate changes on cash and cash equivalents....................................................... 7,470 13,244 (14,199) -------- --------- --------- Net Increase in Cash and Cash Equivalents ............................. 72,202 61,673 51,729 Cash and Cash Equivalents At Beginning of Period ...................... 241,797 180,124 128,395 -------- --------- --------- Cash and Cash Equivalents At End of Period ............................ $313,999 $ 241,797 $ 180,124 ======== ========= ========= Supplemental Disclosures: Income taxes paid.................................................... $109,241 $ 46,034 $ 50,995 ======== ========= ========= Interest paid........................................................ $ 36,482 $ 37,895 $ 41,432 ======== ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-8 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business. Omnicom Group Inc., through its wholly and partially-owned companies, operates advertising agencies which plan, create, produce and place advertising in various media such as television, radio, newspaper and magazines. Additional services such as marketing consultation, consumer market research, design and production of merchandising and sales promotion programs and materials, direct mail advertising, corporate identification, and public relations are offered to clients. These services are offered to clients worldwide on a local, national, pan-regional or global basis. Recognition of Commission and Fee Revenue. Substantially all revenues are derived from commissions for placement of advertisements in various media and from fees for manpower and for production of advertisements. Revenue is generally recognized when billed. Billings are generally rendered upon presentation date for media, when manpower is used, when costs are incurred for radio and television production and when print production is completed. Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Omnicom Group Inc. and its domestic and international subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. Restatements and Reclassifications. During 1995, the Company completed certain acquisitions which were accounted for under the pooling of interests method of accounting, as discussed in Note 2. Accordingly, the Company's consolidated financial statements and notes to consolidated financial statements have been restated to include the results of these companies for all periods presented. On December 15, 1995, the Company completed a two-for-one stock split in the form of a 100% stock dividend; as such all prior year balances have been restated to give retroactive effect to the split. In addition, certain prior year amounts have been reclassified to conform with the 1995 presentation. Billable Production. Billable production orders in process consist principally of costs incurred in producing advertisements and marketing communications for clients. Such amounts are generally billed to clients when costs are incurred for radio and television production and when print production is completed. Treasury Stock. The Company accounts 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 generally accounted for as additional paid-in capital. Foreign Currency Translation. The Company's financial statements were prepared in accordance with the requirements of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Under this method, net transaction gains of $.4 million, $4.0 million and $4.4 million are included in 1995, 1994 and 1993 net income, respectively. Earnings Per Common Share. Primary earnings per share is based upon the weighted average number of common shares and common share equivalents outstanding during each year. Fully diluted earnings per share is based on the above and if dilutive, adjusted for the assumed conversion of the Company's Convertible Subordinated Debentures and the assumed increase in net income for the after tax interest cost of these debentures. For the year ended December 31, 1995 the 4.5%/6.25% Step-Up Convertible Subordinated Debentures were assumed to be converted for the full year. For the year ended December 31, 1994 the 4.5%/6.25% Step-Up Convertible Subordinated Debentures were assumed to be converted for the full year; and the 6.5% Convertible Subordinated Debentures were assumed to be converted through July 27, 1994, when they were converted into common stock. For the year ended December 31, 1993, the 6.5% Convertible Subordinated Debentures were assumed to be converted for the full year; the 7% Convertible Subordinated Debentures were assumed to be converted through October 8, 1993 when they were converted into common stock; and the 4.5%/6.25% Step-Up Convertible Subordinated Debentures were assumed to be converted from their September 1, 1993 issuance date. The number of shares used in the computations were as follows: 1995 1994 1993 ---- ---- ---- Primary EPS computation .......... 74,375,300 70,764,800 63,827,900 Fully diluted EPS computation .... 79,913,100 79,925,700 77,739,200 F-9 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For purposes of computing fully diluted earnings per share on net income and the cumulative effect of the change in accounting principle, for the year ended December 31, 1994, the Company's Convertible Subordinated Debentures were not reflected in the computations as their inclusion would have been anti-dilutive. Severance 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 employees not to compete and to render consulting services in the post employment period. Such payments, which are determined, subject to certain conditions and limitations, by earnings in subsequent periods, are expensed in such periods. Depreciation of Furniture and Equipment and Amortization of Leasehold Improvements. Depreciation charges are computed on a straight-line basis or declining balance method over the estimated useful lives of furniture and equipment, up to 10 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the related lease or the useful life of these assets. Intangibles. Intangibles represent acquisition costs in excess of the fair value of tangible net assets of purchased subsidiaries. The intangible values associated with the Company's business consist predominantly of two types; the value of the worldwide agency networks, and the value of ongoing client relationships. The Company's worldwide agency networks have been operating for an average of over sixty years and intangibles associated with enhancing network value are intended to enhance the long term value of the networks. Client relationships in the advertising industry are typically long term in nature and the Company's largest clients have on average been clients for approximately thirty years. As such, intangibles are amortized on a straight-line basis principally over a period of forty years. Each year, the intangibles are written off if and to the extent they are determined to be impaired. Intangibles are considered to be impaired if the future anticipated undiscounted cash flows arising from the use of the intangibles is less than the net unamortized cost of the intangibles. Deferred Taxes. Deferred tax liabilities and tax benefits relate to the recognition of certain revenues and expenses in different years for financial statement and tax purposes. Cash Flows. The Company's cash equivalents are primarily comprised of investments in overnight interest-bearing deposits and money market instruments with original maturity dates of three months or less. The following supplemental schedule summarizes the fair value of assets acquired, cash paid, common shares issued and the liabilities assumed in conjunction with the acquisition of equity interests in subsidiaries and affiliates, for each of the three years ended December 31:
(Dollars in thousands) 1995 1994 1993 ---- ---- ---- Fair value of non-cash assets acquired ... $129,425 $265,865 $287,177 Cash paid, net of cash acquired .......... (118,784) (150,660) (80,577) Common shares issued ..................... (3,668) (13,035) (21,906) ------- -------- -------- Liabilities assumed ...................... $ 6,973 $102,170 $184,694 ======= ======== ========
During 1994, the Company issued 7,142,466 shares of common stock upon conversion of $100 million of its 6.5% Convertible Subordinated Debentures. During 1993, the Company issued 6,668,158 shares of common stock upon conversion of $85.9 million of its 7% Convertible Subordinated Debentures. Concentration of Credit Risk The Company provides advertising and marketing services to a wide range of clients who operate in many industry sectors around the world. The Company grants credit to all qualified clients, but does not believe it is exposed to any undue concentration of credit risk to any significant degree. Derivative Financial Instruments. Derivative financial instruments consist principally of forward exchange contracts and interest rate swaps. In order for derivative financial instruments to qualify for hedge accounting the following criteria must be met: (a) the hedging instrument must be designated as a hedge; (b) the hedged exposure must be specifically identifiable and expose the Company F-10 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to risk; and (c) 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. The majority of the Company's derivative activity relates to forward exchange contracts. The Company executes these contracts in the same currency as the hedged exposure, whereby 100% correlation is achieved. Gains and losses on derivative financial instruments which are hedges of existing assets or liabilities are included in the carrying amount of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Interest received and/or paid arising from swap agreements which qualify as hedges are recognized in income when the interest is receivable or payable. Derivative financial instruments which do not qualify as hedges are revalued to the current market rate and any gains or losses are recorded in 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS In August 1995, the Company completed the acquisitions of Ross Roy Communications and Chiat/Day Holdings. Both transactions were accounted for under the pooling of interests method of accounting. Accordingly, the Company's financial statements have been restated to include the results of Ross Roy Communications and Chiat/Day Holdings for all periods presented. A total of 2,556,646 shares were issued in connection with these acquisitions. In May 1993, the Company completed its acquisition of a third agency network, TBWA International. The acquisition was accounted for as a pooling of interests and, accordingly, the results of operations for TBWA International have been included in these consolidated financial statements since January 1, 1993. During 1995 the Company made several other acquisitions within the advertising industry whose aggregate cost, in cash or by issuance of the Company's common stock, totaled $125.2 million for net assets, which included intangible assets of $108.7 million. Due to the nature of the advertising industry, companies acquired generally have minimal tangible net assets. The majority of the purchase price is paid for ongoing client relationships and to enhance the Company's worldwide agency networks and marketing service companies. Included in both figures are contingent payments related to prior year acquisitions totaling $45.0 million. Pro forma combined results of operations of the Company as if these acquisitions had occurred on January 1, 1994 do not materially differ from the reported amounts in the consolidated statements of income for each of the two years in the period ended December 31, 1995. Certain acquisitions entered into in 1995 and prior years require payments in future years if certain results are achieved. Formulas for these contingent future payments differ from acquisition to acquisition. Contingent future payments are not expected to be material to the Company's results of operations or financial position. 3. BANK LOANS AND LINES OF CREDIT Bank loans primarily comprised bank overdrafts of international subsidiaries which are treated as loans pursuant to bank agreements. The weighted average interest rate on the borrowings outstanding as of December 31, 1995 and 1994 was 6.5% and 9.0%, respectively. At December 31, 1995 and 1994, the Company had unsecured committed lines of credit aggregating $374 million and $390 million, respectively. The unused portion of credit lines was $356 million at both December 31, 1995 and 1994. The lines of credit are generally extended at the banks' lending rates to their most credit worthy borrowers. Material compensating balances are not required within the terms of these credit agreements. At December 31, 1995 and 1994, the committed lines of credit included $250 million under a three year revolving credit agreement expiring June 30, 1997. Due to the long term nature of this credit agreement, borrowings under the agreement would be classified as long-term debt. There were no borrowings under the revolving credit agreement at December 31, 1995 and 1994. F-11 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The revolving credit agreement includes a facility for issuing commercial paper backed by a bank letter of credit. During the years ended December 31, 1995, 1994 and 1993, the Company issued commercial paper with an average original maturity of 31, 33 and 32 days, respectively. The Company had no commercial paper borrowings outstanding as of December 31, 1995, 1994, and 1993. The maximum outstanding during the year was $210 million, $230 million and $194 million, in 1995, 1994, and 1993, respectively. The gross amount of issuance and redemption during the year was $1,211 million, $1,587 million and $1,337 million in 1995, 1994 and 1993, respectively. 4. EMPLOYEE STOCK PLANS Under the terms of the Company's 1987 Stock Plan, as amended (the "1987 Plan"), 13,100,000 shares of common stock of the Company have been reserved for restricted stock awards and non-qualified stock options to key employees of the Company. The remaining number of such reserved shares was 4,083,000 at December 31, 1995. Under the terms of the 1987 Plan, the option price may not be less than 100% of the market value of the stock at the date of the 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 1987 Plan, 830,000, 610,000 and 570,000 non-qualified options were granted in 1995, 1994 and 1993, respectively. A summary of changes in outstanding options for the three years ended December 31, 1995 is as follows:
Years Ended December 31, ------------------------------------------- 1995 1994 1993 ---- ---- ---- Shares under option (at prices ranging from $8.4375 to $24.2188) -- Beginning of year................................. 2,388,000 2,144,800 1,996,000 Options granted (at prices ranging from $25.875 to $32.4063).............................. 830,000 610,000 570,000 Options exercised (at prices ranging from $8.4375 to $24.2188)......................... (255,600) (366,800) (395,600) Options forfeited.................................... -- -- (25,600) --------- --------- --------- Shares under option (at prices ranging from $8.4375 to $32.4063)-- End of year........... 2,962,400 2,388,000 2,144,800 ========= ========= ========= Shares exercisable................................... 1,507,400 1,267,500 1,125,300
Under the 1987 Plan, 612,168 shares, 629,160 shares and 674,400 shares of restricted stock of the Company were awarded in 1995, 1994 and 1993, respectively. All restricted shares granted under the 1987 Plan 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 sale is charged to shareholders' equity and then amortized to expense over the period of restriction. Under the 1987 Plan, the restricted shares become transferable to the employee in 20% annual increments provided the employee remains in the employ of the Company. F-12 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restricted shares may not be sold, transferred, pledged or otherwise encumbered until the restrictions lapse. Under most circumstances, the employee must resell the shares to the Company at par value if the employee ceases employment prior to the end of the period of restriction. A summary of changes in outstanding shares of restricted stock for the three years ended December 31, 1995 is as follows: Years Ended December 31, --------------------------------------- 1995 1994 1993 ---- ---- ---- Beginning balance............... 1,564,164 1,480,872 1,259,504 Amount granted................ 612,168 629,160 674,400 Amount vested................. (490,422) (461,206) (403,424) Amount forfeited.............. (38,910) (84,662) (49,608) --------- --------- --------- Ending balance.................. 1,647,000 1,564,164 1,480,872 ========= ========= ========= The charge to operations in connection with these restricted stock awards for the years ended December 31, 1995, 1994 and 1993 amounted to $10.7 million, $9.5 million and $7.1 million, respectively. 5. SEGMENT REPORTING The Company operates advertising agencies and offers its clients additional marketing services and specialty advertising through its wholly-owned and partially-owned businesses. A summary of the Company's operations by geographic area as of December 31, 1995, 1994 and 1993, and for the years then ended is presented below:
(Dollars in Thousands) ------------------------------------------- United States International Consolidated ------ ------------- ------------ 1995 Commissions and Fees.......... $1,117,226 $1,140,310 $ 2,257,536 Operating Profit ............. 139,927 130,978 270,905 Net Income ................... 69,906 70,049 139,955 Identifiable Assets........... 1,316,521 2,211,156 3,527,677 1994 Commissions and Fees.......... $ 990,774 $ 917,021 $ 1,907,795 Operating Profit ............. 125,762 90,342 216,104 Net Income ................... 41,381 42,105 83,486 Identifiable Assets........... 1,169,966 1,870,245 3,040,211 1993 Commissions and Fees.......... $ 925,988 $ 762,972 $ 1,688,960 Operating Profit.............. 82,873 70,372 153,245 Net Income.................... 25,259 40,309 65,568 Identifiable Assets........... 930,089 1,484,652 2,414,741
F-13 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENTS IN AFFILIATES The Company has in excess of 60 unconsolidated affiliates accounted for under the equity method. The equity method is used when the Company has an ownership of less than 50% and exercises significant influence over the operating and financial policies of the affiliate. The following table summarizes the balance sheets and income statements of the Company's unconsolidated affiliates, primarily in Europe, Australia and Asia, as of December 31, 1995, 1994, 1993, and for the years then ended: (Dollars in Thousands) 1995 1994 1993 ---- ---- ---- Current assets.............. $1,399,700 $1,208,976 $308,741 Non-current assets.......... 147,093 146,899 73,772 Current liabilities......... 1,400,349 1,196,807 235,389 Non-current liabilities..... 149,781 162,328 29,596 Minority interests.......... 8,015 9,699 1,149 Gross revenues.............. 702,639 568,171 290,814 Costs and expenses.......... 582,850 451,688 238,039 Net income.................. 79,262 86,001 33,574 The increase in the summarized balance sheets and income statements of the Company's unconsolidated affiliates in 1995 and 1994 is due to the inclusion of new equity affiliates and the growth of the Company's existing equity affiliates. The Company's equity in the net income of these affiliates amounted to $20.8 million, $18.3 million and $13.2 million for 1995, 1994 and 1993, respectively. The Company's equity in the net tangible assets of these affiliated companies was approximately $76.7 million, $65.8 million and $58.1 million at December 31, 1995, 1994 and 1993, respectively. Included in the Company's investments in affiliates is the excess of acquisition costs over the fair value of tangible net assets acquired. These excess acquisition costs are being amortized on a straight-line basis principally over a period of forty years. 7. LONG-TERM DEBT Long-term debt outstanding as of December 31, 1995 and 1994 consisted of the following:
(Dollars in Thousands) 1995 1994 ---- ---- 4.5%/6.25% Step-Up Convertible Subordinated Debentures with a scheduled maturity in 2000..................................... $143,750 $143,750 Deutsche Mark 200 million Floating Rate Bonds, with a scheduled maturity in 2000, interest at DM three month LIBOR plus 0.65%.... 139,220 -- Sundry notes and loans payable to banks and others at rates from 6% to 25%, maturing at various dates through 2004............... 10,343 79,274 -------- -------- 293,313 223,024 Less current portion................................................ 2,934 23,537 -------- -------- Total long-term debt.............................................. $290,379 $199,487 ======== ========
F-14 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During the third quarter of 1993, the Company issued $143,750,000 of 4.5%/6.25% Step-Up Convertible Subordinated Debentures with a scheduled maturity in 2000. The average annual interest rate through the year 2000 is 5.42%. The debentures are convertible into common stock of the Company at a conversion price of $27.44 per share subject to adjustment in certain events. The debentures are not redeemable prior to September 1, 1996. Thereafter, the Company may redeem the debentures initially at 102.984% and at decreasing prices thereafter to 100% at maturity, in each case together with accrued interest. The debentures also may be repaid at the option of the holder at anytime prior to September 1, 2000 if there is a Fundamental Change, as defined in the debenture agreement, at the repayment prices set forth in the debenture agreement, subject to adjustment, together with accrued interest. On January 4, 1995, an indirect wholly-owned subsidiary of the Company issued Deutsche Mark 200 million Floating Rate Bonds. The bonds are unsecured, unsubordinated obligations of the issuer and are unconditionally and irrevocably guaranteed by the Company. The bonds bear interest at a rate equal to Deutsche Mark three month LIBOR plus 0.65% and may be redeemed at the option of the issuer on January 5, 1997 or any interest payment date thereafter at their principal amount plus any accrued but unpaid interest. Unless redeemed earlier, the bonds will mature on January 5, 2000 and will be repaid at par. On June 1, 1994, the Company issued a Notice of Redemption for its 6.5% Convertible Subordinated Debentures with a scheduled maturity in 2004. Prior to the July 27, 1994 redemption date, debenture holders elected to convert all of their outstanding debentures into common stock of the Company at a conversion price of $14.00 per common share. On August 9, 1993, the Company issued a Notice of Redemption for its 7% Convertible Subordinated Debentures with a scheduled maturity in 2013. Prior to the October 1993 redemption date, debenture holders elected to convert all of their outstanding debentures into common stock of the Company at a conversion price of $12.875 per common share. On July 15, 1994, the Company amended and restated the revolving credit agreement originally entered into in 1988. This $250 million revolving credit agreement is with a consortium of banks expiring June 30, 1997. This credit agreement includes a facility for issuing commercial paper backed by a bank letter of credit. The agreement contains certain financial covenants regarding current ratio, ratio of total consolidated indebtedness to total consolidated capitalization, ratio of net cash flow to consolidated indebtedness, and limitations on investments in and loans to affiliates and unconsolidated subsidiaries. At December 31, 1995 the Company was in compliance with all of these covenants. Aggregate maturities of long-term debt in the next five years are as follows: (Dollars in Thousands) 1996............................................. $2,934 1997............................................. 2,939 1998............................................. 1,418 1999............................................. 478 2000............................................. 283,269 F-15 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) ---------------------------------- 1995 1994 1993 ---- ---- ---- Income before income taxes: Domestic..................... $107,536 $90,064 $ 43,577 International................ 135,117 98,850 78,101 -------- -------- -------- Totals.................... $242,653 $188,914 $121,678 ======== ======== ======== Provision for taxes on income: Current: Federal................... $ 29,143 $ 31,500 $ 15,495 State and local........... 9,837 8,708 8,054 International............. 57,463 38,855 35,407 -------- -------- -------- 96,443 79,063 58,956 -------- -------- -------- Deferred: Federal................... 2,089 (5,167) 667 State and local........... (1,481) (1,285) 139 International............. 335 5,316 (1,277) -------- -------- -------- 943 (1,136) (471) -------- -------- -------- Totals............... $ 97,386 $ 77,927 $ 58,485 ======== ======== ======== The Company's effective income tax rate varied from the statutory federal income tax rate as a result of the following factors:
1995 1994 1993 ---- ---- ---- Statutory federal income tax rate....................... 35.0% 35.0% 35.0% State and local taxes on income, net of federal income tax benefit........................... 2.2 2.6 4.6 International subsidiaries' tax rates in excess of federal statutory rate................. 0.1 0.2 0.1 Non-deductible amortization of goodwill................. 3.4 4.1 4.6 Losses of domestic subsidiaries without tax benefit..... -- -- 6.6 Nontaxable proceeds from life insurance policies........ -- -- (2.6) Other................................................... (0.6) (0.7) (0.2) ---- ---- ---- Effective rate.......................................... 40.1% 41.2% 48.1% ==== ==== ====
Deferred income taxes are provided for the temporary difference between the financial reporting basis and tax basis of the Company's assets and liabilities. Deferred tax benefits result principally from recording certain expenses in the financial statements which are not currently deductible for tax purposes. Deferred tax liabilities result principally from expenses which are currently deductible for tax purposes, but have not yet been expensed in the financial statements. The Company has recorded deferred tax benefits as of December 31, 1995 and 1994 of $125.1 million and $111.1 million, respectively, related principally to tax deductible intangibles, leasehold amortization, restricted stock amortization, severance and compensation, leases and accrued expenses. The Company has recorded deferred tax liabilities as of December 31, 1995 and 1994 of $33.2 million and $27.9 million, respectively, related principally to furniture and equipment depreciation and tax lease recognition. F-16 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred tax benefits (liabilities) as of December 31, 1995 and 1994 consisted of the amounts shown below (dollars in millions): 1995 1994 ---- ---- Deductible intangibles..................... $37.9 $31.5 Acquisition liabilities.................... 16.1 12.1 Lease reserves............................. 8.3 3.0 Severance and compensation reserves........ 28.8 24.7 Tax loss carryforwards..................... 6.0 7.8 Amortization and depreciation.............. (2.3) (3.3) Other, net................................. (2.9) 7.4 ----- ----- $91.9 $83.2 ===== ===== Net current deferred tax benefits as of December 31, 1995 and 1994 were $21.7 million and $18.1 million, respectively, and were included in prepaid expenses and other current assets. Net non-current deferred tax benefits as of December 31, 1995 and 1994 were $70.2 million and $65.1 million, respectively. In 1993, legislation was enacted which increased the U.S. statutory tax rate from 34% to 35%. The effect of this rate change and other statutory rate changes in various state, local and international jurisdictions was not material to net income. 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 The Company's 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 been in amounts up to 15% (the maximum amount deductible for federal income tax purposes) of total eligible compensation of participating employees. Expense associated with these plans amounted to $41.7 million, $36.6 million and $26.8 million in 1995, 1994 and 1993, respectively. The Company's pension plans are primarily international. These plans are not required to report to governmental agencies pursuant to the Employee Retirement Income Security Act of 1974 (ERISA). Substantially all of these plans are funded by fixed premium payments to insurance companies who undertake legal obligations to provide specific benefits to the individuals covered. Pension expense amounted to $4.4 million, $0.8 million and $1.1 million in 1995, 1994 and 1993, respectively. Certain subsidiaries of the Company have executive retirement programs under which benefits will be paid to participants or their beneficiaries over 15 years from age 65 or death. In addition, other subsidiaries have individual deferred compensation arrangements with certain executives which provide for payments over varying terms upon retirement, cessation of employment or death. Some of the Company's domestic subsidiaries provide life insurance and medical benefits for retired employees. Eligibility requirements vary by subsidiary, but generally include attainment of a specified combined age plus years of service factor. The expense related to these benefits was not material to the 1995, 1994 and 1993 consolidated results of operations. 10. COMMITMENTS AND CONTINGENT LIABILITIES At December 31, 1995, the Company was committed under operating leases, principally for office space. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent expense was $169.1 million in 1995, $152.6 million in 1994 and $149.7 million in 1993 after reduction by rents received from subleases of $11.1 million, $10.2 million and $10.0 million, respectively. Future minimum base rents under terms of noncancellable operating leases, reduced by rents to be received from existing noncancellable subleases, are as follows: F-17 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) Gross Rent Sublease Income Net Rent ---------- --------------- -------- 1996......................... 146,491 10,969 135,522 1997......................... 130,992 8,462 122,530 1998......................... 108,904 5,862 103,042 1999......................... 94,412 4,800 89,612 2000......................... 88,575 3,627 84,948 Thereafter................... 503,788 9,458 494,330 Where appropriate, management has established reserves for the difference between the cost of leased premises that were vacated and anticipated sublease income. The Company is involved in various routine legal proceedings incident to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings and unasserted claims in the aggregate will not have a material adverse effect on its results of operations, consolidated financial position or liquidity. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994.
1995 1994 ----------------------- ------------------------ (Dollars in Thousands) (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash, cash equivalents and investments available-for-sale.... $335,473 $335,473 $270,222 $270,222 Long-term investments............... 7,520 7,520 5,597 5,597 Long-term debt...................... 293,313 346,860 223,024 224,461 Financial Commitments: Interest rate swaps............... -- 378 -- -- Forward exchange contracts........ -- 251 -- 123 Guarantees........................ -- 7,688 -- 0,065 Letters of credit................... -- 1,996 -- 19,879
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: Cash equivalents and investments available-for-sale: Cash equivalents and investments available-for-sale consist principally of investments in short-term, interest bearing instruments and are carried at fair market value, which approximates cost. Long-term investments: Included in deferred charges and other assets are long-term investments carried at cost, which approximates estimated fair value. Long-term debt: The fair value of the Company's convertible subordinated debenture issue was determined by reference to quotations available in markets where that issue is traded. These quotations primarily reflect the conversion value of the debentures into the Company's common stock. These debentures are redeemable by the Company, at prices explained in Note 7, which are less than the quoted market prices used in determining the fair value. The majority of the Company's remaining long-term debt is primarily floating rate debt and consequently the carrying amount approximates fair value. Financial Commitments: The estimated fair value of derivative positions are based upon quotations received from independent, third party banks and represent the net amount F-18 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) payable to terminate the position, taking into consideration market rates and counterparty credit risk. The fair value of guarantees, principally related to affiliated companies, and letters of credit were based upon the face value of the underlying instruments. 12. FINANCIAL INSTRUMENTS AND MARKET RISK The Company utilizes derivative financial instruments predominantly to reduce certain market risks to which the Company is exposed. These market risks primarily consist of the impact of changes in currency exchange rates on assets and liabilities of non-U.S. operations and the impact of changes in interest rates on debt. The Company's derivative activities are limited in volume and confined to risk management activities. Senior management at the Company actively participate in the quantification, monitoring and control of all significant risks. A reporting system is in place which evaluates the impact on the Company's earnings resulting from changes in interest rates, currency exchange rates and other relevant market risks. This system is structured to enable senior management to initiate prompt remedial action, if appropriate. Adequate segregation of duties exists with regard to the execution, recording and monitoring of derivative activities. Additionally, senior management reports periodically to the Audit Committee of the Board of Directors concerning derivative activities. Since 1993, the Audit Committee has established limitations on derivative activities. These limitations have been reviewed annually, most recently on March 21, 1996. The Audit Committee has reconfirmed, for the year 1996, the limitations originally established in 1993. At December 31, 1995 the following swap agreements were outstanding:
Maturity Aggregate Company Company Date Notional Amount Receives Pays ------------ ------------------ --------------- --------- (Amounts in thousands) U.S. dollar fixed to floating rate swap..... January 1997 $75,000 8.27% U.S. Prime Deutsche Mark ("DM") floating to fixed rate swap.......................... January 1997 DM 76,640 3 mo. DM LIBOR 3.79% U.S. dollar floating to fixed rate swap..... October 2006 $10,000 6 mo. US LIBOR 6.51%
The $75 million swap relates to a portion of the Company's intercompany interest cash flows. The DM 76.6 million (approximately $53.3 million at the December 31, 1995 exchange rate) and the $10 million swap agreements convert a portion of the Company's floating rate debt to a fixed rate. There were no swap agreements outstanding at December 31, 1994. The Company enters into forward exchange contracts predominantly to hedge intercompany receivables and payables which are recorded in a currency different from that in which they will settle. Gains and losses on these positions are deferred and included in the basis of the transaction upon settlement. The terms of these contracts are generally three months or less. At December 31, 1995, the aggregate amount of intercompany receivables and payables subject to this hedge program was $306 million. The table below summarizes by major currency the notional principal amounts of the Company's forward exchange contracts outstanding at December 31, 1995. 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. (Dollars in thousands) Notional Principal Amount ---------------------------- Currency Company Buys Company Sells -------- ------------ ------------- French Franc............................. $75,472 $43,283 U.S. Dollar.............................. 6,228 43,770 German Mark.............................. 3,394 39,063 Hong Kong Dollar......................... 2,246 30,583 Australian Dollar........................ 11,247 -- Spanish Peseta........................... 4,632 9,902 Belgium Franc............................ 9,583 81 Dutch Guilder............................ 8,463 3,292 Greek Drachma............................ -- 5,120 Other.................................... 12,549 16,367 -------- -------- Total............................. $133,814 $191,461 ======== ======== F-19 OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The derivative financial instruments existing at December 31, 1995 and 1994 were entered into for the purpose of hedging certain specific currency and interest rate risks. As a result of these financial instruments, the Company reduced financial risk in exchange for foregoing any gain (reward) which might have occurred if the markets moved favorably. In using derivative financial instruments, management exchanged the risks of the financial markets for counterparty risk. In order to minimize counterparty risk the Company only enters into contracts with major well known banks that have credit ratings equal to or better than the Company's. Additionally, these contracts contain provisions for net settlement. As such, the contracts settle based on the spread between the currency rates and interest rates contained in the contracts and the current market rates. This minimizes the risk of an insolvent counterparty being unable to pay the Company the notional principal amount owed to the Company and, at the same time, having the creditors of the counterparty demanding the notional principal amount from the Company. 13. ADOPTION OF NEW ACCOUNTING PRINCIPLES The Company intends to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" in 1996. The Company does not anticipate that the effect of such adoption will be material to the carrying value of such assets. The Company intends to adopt SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. As permitted by SFAS No. 123, the Company intends to continue to apply the accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and to make annual pro forma disclosures of the effect of adopting the fair value based method of accounting for employee stock options and similar instruments. Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement (referred to in this statement as "postemployment benefits"). Those benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. The cumulative after tax effect of the adoption of SFAS No. 112 resulted in a reduction to net income of $28 million. Effective January 1, 1994, the Company also adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. In compliance with SFAS No. 115, the Company classifies these investments as investments available-for-sale. At December 31, 1995, the Company's investments consisted principally of time deposits with financial institutions. These investments, with scheduled maturities of less than one year, are valued at estimated fair value, which approximates cost. These investments are generally redeemed at face value upon maturity and, as such, gains or losses on disposition are immaterial. There are no material unrealized holding gains or losses as of December 31, 1995. 14. SUBSEQUENT EVENT On March 1, 1996, the Company issued Deutsche Mark 100 million Floating Rate Bonds (approximately $68 million). The bonds are unsecured, unsubordinated obligations of the Company and bear interest at a per annum rate equal to Deutsche Mark three month LIBOR plus 0.375%. The bonds will mature on March 1, 1999 and will be repaid at par. The proceeds of this issuance will be used for general corporate purposes, including the reduction of outstanding commercial paper debt. F-20 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Ketchum Communications Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Ketchum Communications Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, redeemable preferred and common stock and accumulated deficit, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Ketchum Communications Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As indicated in the accompanying consolidated financial statements, the Company incurred a net loss for the year ended December 31, 1995 and has an accumulated deficit. Additionally, as discussed in Note 2, the Company was not in compliance with certain financial covenants pertaining to its senior notes at December 31, 1995, and as a result, the holder had the right to declare the entire principal amount of the senior notes plus accrued interest and a penalty due and payable immediately. Further, as described in Note 14, the Company lost a judgement, requiring it to pay approximately $4,000,000 and, as described in Note 6, as a result of borrowings subsequent to December 31, 1995, the Company had approximately $80,000 of available borrowing capacity at March 6, 1996 and is in violation of certain covenants under its revolving credit agreement. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. As discussed in Note 6 to the consolidated financial statements, subsequent to the original issuance of the Company's 1995 consolidated financial statements, the Company's senior notes plus accrued interest and a penalty were declared due and payable by the holder of the senior notes, and the Company paid such amounts with the proceeds of borrowings, under a new credit facility, which are guaranteed by Omnicom Group Inc. Deloitte & Touche LLP Pittsburgh, Pennsylvania March 6, 1996, except Notes 2 and 6 as to which the date is May 3, 1996 F-21 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994
1995 1994 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 2,878,839 $ 2,492,123 Investments--at market value................................. 1,552,702 1,241,992 Accounts receivable, net of allowance for doubtful accounts of $617,000 and $180,000 in 1995 and 1994, respectively............................. 63,539,028 58,999,876 Billable production in process, net of allowance for unrealizable amounts of $144,000 in 1995 .............. 28,753,299 26,298,872 Prepaid expenses and other assets............................ 1,598,783 1,993,652 Deferred income taxes........................................ 1,704,824 -- ------------ ------------ Total current assets ..................................... 100,027,475 91,026,515 ------------ ------------ Property and equipment--at cost: Leasehold improvements ..................................... 8,758,872 10,845,410 Furniture and equipment .................................... 24,149,017 25,859,995 ------------ ------------ 32,907,889 36,705,405 Less accumulated depreciation and amortization ............. 21,533,577 21,779,347 ------------ ------------ Net property and equipment ............................... 11,374,312 14,926,058 Excess of cost over fair value of net assets acquired, less accumulated amortization of $3,829,466 and $3,531,636 in 1995 and 1994, respectively ................. 9,339,536 12,565,338 Other assets ................................................. 6,881,065 6,247,993 ------------ ------------ Total assets ........................................... $127,622,388 $124,765,904 ============ ============ LIABILITIES AND ACCUMULATED DEFICIT Current liabilities: Debt classified as current, due to covenant violations...... $ 11,571,429 $ -- Notes payable--short-term .................................. 1,769,582 1,816,117 Current maturities of long-term debt ....................... 2,755,304 2,954,418 Accounts payable ........................................... 67,927,190 60,195,861 Client deposits ............................................ 12,796,597 10,849,559 Other accrued expenses ..................................... 11,058,237 5,700,498 Accrued employee benefit plan contributions ................ 1,544,871 2,075,796 Accrued income taxes ....................................... 2,500,782 554,727 ------------ ------------ Total current liabilities ................................ 111,923,992 84,146,976 ------------ ------------ Long-term debt ............................................... 3,804,056 15,639,922 Deferred income taxes ........................................ 556,133 2,390,109 Other liabilities............................................. 3,795,148 4,208,091 Redeemable cumulative preferred stock, voting, $100 par, $1,000 redemption value; authorized 50,000 shares: Series A, 20,000 shares authorized, outstanding 8,035 and 4,990.5 shares in 1995 and 1994, respectively --at redemption value .................................. 8,035,000 4,990,500 Common stock subject to repurchase obligations: Common stock, no par value (stated value $.005); authorized 2,000,000 shares; issued 1,364,000 shares, outstanding 347,125 and 460,412 shares in 1995 and 1994, respectively.................................... 6,820 6,820 Repurchase obligations in excess of stated value ........... 20,824,151 25,817,689 Notes receivable for common stock .......................... (3,373,721) (3,823,379) ------------ ------------ Common stock subject to repurchase obligations--net....... 17,457,250 22,001,130 ------------ ------------ Accumulated deficit: Retained deficit ........................................... (18,154,220) (8,282,950) Cumulative translation adjustment .......................... 205,029 161,427 Unrealized loss on investments ............................. -- (489,301) ------------ ------------ Total accumulated deficit................................. (17,949,191) (8,610,824) ------------ ------------ Total liabilities and accumulated deficit................. $127,622,388 $124,765,904 ============ ============
The accompanying notes to financial statements are an integral part of these statements F-22 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ----------- ----------- ----------- Commissions and fees.............................. $127,387,710 $124,060,534 $129,510,331 ----------- ----------- ----------- Operating expenses: Compensation and employee benefits.............. 75,245,914 73,826,994 76,229,397 General agency expense.......................... 49,476,176 43,355,612 47,597,260 Other expense................................... 9,562,184 252,834 1,958,932 Restructuring charges........................... -- -- 8,778,572 ----------- ----------- ----------- Total operating expenses...................... 134,284,274 117,435,440 134,564,161 ----------- ----------- ----------- Operating (loss) income........................... (6,896,564) 6,625,094 (5,053,830) Interest expense.................................. 2,029,160 2,667,644 2,435,243 Other income, net................................. (1,203,632) (714,094) (685,503) ----------- ----------- ----------- (Loss) income before income taxes................. (7,722,092) 4,671,544 (6,803,570) Income tax (benefit) expense...................... (182,331) 2,579,241 (1,269,052) ----------- ----------- ----------- Net (loss) income................................. $(7,539,761) $ 2,092,303 $(5,534,518) =========== =========== =========== Net (loss) income applicable to common stock...... $(8,144,944) $ 1,724,529 $(5,590,550) =========== =========== =========== Net (loss) income per common share................ $ (21.82) $ 3.67 $ (10.55) =========== =========== =========== Weighted average number of shares outstanding..... 373,342 470,100 529,983 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements F-23 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED AND COMMON STOCK AND ACCUMULATED DEFICIT Years ended December 31, 1995, 1994 and 1993
Redeemable Preferred Stock ---------------------------- Shares Outstanding Amount ----------- ---------- Balance, January 1, 1993 ..................... -- $ -- Net loss ................................... -- -- Dividends on common stock .................. -- -- Dividends on preferred stock ............... -- -- Purchase of common shares .................. -- -- Sale of common shares ...................... -- -- Net increase in obligations due to increase in repurchase price ............. -- -- Payments received on notes receivable for common stock .............. -- -- Sale of preferred shares ................... 2,500.5 2,500,500 Purchase of preferred shares ............... (30.0) (30,000) Translation adjustment ..................... -- -- Unrealized market value adjustment ......... -- -- --------- ----------- Balance, December 31, 1993 ................... 2,470.5 2,470,500 Net income ................................. -- -- Dividends on common stock .................. -- -- Dividends on preferred stock ............... 229.0 229,000 Purchase of common shares .................. -- -- Sale of common shares ...................... -- -- Net increase in obligations due to increase in repurchase price ............. -- -- Payments received on notes receivable for common stock .............. -- -- Sale of preferred shares ................... 2,366.0 2,366,000 Purchase of preferred shares ............... (75.0) (75,000) Translation adjustment ..................... -- -- Unrealized market value adjustment ......... -- -- --------- ----------- Balance, December 31, 1994 ................... 4,990.5 4,990,500 Net loss ................................... -- -- Dividends on common stock .................. -- -- Dividends on preferred stock ............... 378.0 378,000 Purchase of common shares .................. -- -- Sale of common shares ...................... -- -- Net increase in obligations due to increase in repurchase price ............. -- -- Payments received on notes receivable for common stock .............. -- -- Translation adjustment ....................... -- -- Sale of preferred shares ..................... 3,265.5 3,265,500 Purchase of preferred shares ................. (599.0) (599,000) Write-down of investment ..................... -- -- --------- ----------- Balance, December 31, 1995 ................... 8,035.0 $ 8,035,000 ========= =========== Common Stock Subject to Repurchase Obligations ------------------------------------------------------------------------- Stated Repurchase Notes Common Value of Obligations Receivable Shares Common In Excess of for Common Outstanding Stock Stated Value Stock Total ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1993 ........... 617,614 $ 6,820 $ 31,472,966 $ (5,519,459) $ 25,960,327 Net loss ......................... -- -- -- -- -- Dividends on common stock ........ -- -- -- -- -- Dividends on preferred stock ..... -- -- -- -- -- Purchase of common shares ........ (147,496) -- (7,625,094) -- (7,625,094) Sale of common shares ............ 19,210 -- 965,879 (898,001) 67,878 Net increase in obligations due to increase in repurchase price ... -- -- 1,387,837 -- 1,387,837 Payments received on notes receivable for common stock .... -- -- -- 1,717,905 1,717,905 Sale of preferred shares ......... -- -- -- -- -- Purchase of preferred shares ..... -- -- -- -- -- Translation adjustment ........... -- -- -- -- -- Unrealized market value adjustment -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1993 ......... 489,328 6,820 26,201,588 (4,699,555) 21,508,853 Net income ....................... -- -- -- -- -- Dividends on common stock ........ -- -- -- -- -- Dividends on preferred stock ..... -- -- -- -- -- Purchase of common shares ........ (57,600) -- (2,995,227) -- (2,995,227) Sale of common shares ............ 28,684 -- 1,466,825 (494,854) 971,971 Net increase in obligations due to increase in repurchase price ... -- -- 1,144,503 -- 1,144,503 Payments received on notes receivable for common stock .... -- -- -- 1,371,030 1,371,030 Sale of preferred shares ......... -- -- -- -- -- Purchase of preferred shares ..... -- -- -- -- -- Translation adjustment ........... -- -- -- -- -- Unrealized market value adjustment -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1994 ......... 460,412 6,820 25,817,689 (3,823,379) 22,001,130 Net loss ......................... -- -- -- -- -- Dividends on common stock ........ -- -- -- -- -- Dividends on preferred stock ..... -- -- -- -- -- Purchase of common shares ........ (140,103) -- (7,798,915) -- (7,798,915) Sale of common shares ............ 26,816 -- 1,446,618 (1,222,297) 224,321 Net increase in obligations due to increase in repurchase price ... -- -- 1,358,759 -- 1,358,759 Payments received on notes receivable for common stock .... -- -- -- 1,671,955 1,671,955 Translation adjustment ............. -- -- -- -- -- Sale of preferred shares ........... -- -- -- -- -- Purchase of preferred shares ....... -- -- -- -- -- Write-down of investment ........... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 ......... 347,125 $ 6,820 $ 20,824,151 $ (3,373,721) $ 17,457,250 ============ ============ ============ ============ ============ Accumulated Deficit -------------------------------------------------------------------------------------------- Retained Deficit --------------------------------------------- Increase in Cumulative Unrealized Retained Repurchase Retained Translation Loss on Earnings Obligations Deficit Adjustment Investments Total ------------ ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1993 ........... $ 39,974,427 $(40,888,951) $ (914,524) $ 174,906 $ (387,500) $ (1,127,118) Net loss ......................... (5,534,518) -- (5,534,518) -- -- (5,534,518) Dividends on common stock ........ (509,107) -- (509,107) -- -- (509,107) Dividends on preferred stock ..... (56,032) -- (56,032) -- -- (56,032) Purchase of common shares ........ -- -- -- -- -- -- Sale of common shares ............ -- -- -- -- -- -- Net increase in obligations due to increase in repurchase price ... -- (1,387,837) (1,387,837) -- -- (1,387,837) Payments received on notes receivable for common stock .... -- -- -- -- -- -- Sale of preferred shares ......... -- -- -- -- -- -- Purchase of preferred shares ..... -- -- -- -- -- -- Translation adjustment ........... -- -- -- 113,051 -- 113,051 Unrealized market value adjustment -- -- -- -- (84,309) (84,309) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1993 ......... 33,874,770 (42,276,788) (8,402,018) 287,957 (471,809) (8,585,870) Net income ....................... 2,092,303 -- 2,092,303 -- -- 2,092,303 Dividends on common stock ........ (460,958) -- (460,958) -- -- (460,958) Dividends on preferred stock ..... (367,774) -- (367,774) -- -- (367,774) Purchase of common shares ........ -- -- -- -- -- -- Sale of common shares ............ -- -- -- -- -- -- Net increase in obligations due to increase in repurchase price ... -- (1,144,503) (1,144,503) -- -- (1,144,503) Payments received on notes receivable for common stock .... -- -- -- -- -- -- Sale of preferred shares ......... -- -- -- -- -- -- Purchase of preferred shares ..... -- -- -- -- -- -- Translation adjustment ........... -- -- -- (126,530) -- (126,530) Unrealized market value adjustment -- -- -- -- (17,492) (17,492) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1994 ......... 35,138,341 (43,421,291) (8,282,950) 161,427 (489,301) (8,610,824) Net loss ......................... (7,539,761) -- (7,539,761) -- -- (7,539,761) Dividends on common stock ........ (367,567) -- (367,567) -- -- (367,567) Dividends on preferred stock ..... (605,183) -- (605,183) -- -- (605,183) Purchase of common shares ........ -- -- -- -- -- -- Sale of common shares ............ -- -- -- -- -- -- Net increase in obligations due to increase in repurchase price ... -- (1,358,759) (1,358,759) -- -- (1,358,759) Payments received on notes receivable for common stock .... -- -- -- -- -- -- Translation adjustment ............. -- -- -- 43,602 -- 43,602 Sale of preferred shares ........... -- -- -- -- -- -- Purchase of preferred shares ....... -- -- -- -- -- -- Write-down of investment ........... -- -- -- -- 489,301 489,301 ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 ......... $ 26,625,830 $(44,780,050) $(18,154,220) $ 205,029 $ -- $(17,949,191) ============ ============ ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements F-24 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 -------------- -------------- -------------- Cash Flow from Operating Activities: Net (loss) income............................................. $ (7,539,761) $2,092,303 $(5,534,518) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization............................... 5,350,692 6,089,247 6,312,604 Loss on disposal of property and equipment.................. 450,001 -- 14,487 Write-off of excess of cost over fair value of net assets acquired and investments in equity investees........ 2,759,426 -- 1,054,541 Provision for bad debts..................................... 581,000 (145,322) 41,455 Gain on sale of investments................................. -- (43,452) -- Restructuring charges....................................... -- -- 8,778,572 Write-off of notes receivable from equity investees......... 1,118,051 -- 893,870 Write-down of marketable equity security.................... 504,301 -- -- Gain on sale of office...................................... (400,000) -- -- Deferred taxes.............................................. (3,538,800) 680,241 (3,010,452) Other-net................................................... 142,884 (1,105,017) (699,015) Changes in operating assets and liabilities: Accounts receivable........................................ (4,976,152) (2,088,640) 4,684,478 Billable production in process............................. (2,598,427) 1,695,205 (3,936,725) Prepaid expenses and other assets.......................... 394,869 203,743 461,702 Accounts payable........................................... 7,731,329 (4,619,593) 803,253 Client deposits............................................ 1,947,038 2,152,275 (316,678) Other accrued expenses..................................... 4,801,240 491,135 554,458 Accrued employee benefit plan contributions................ (530,925) 35,334 (1,730,091) Accrued income taxes....................................... 1,946,055 554,727 (602,564) ----------- ----------- ----------- Net cash provided by operating activities.................. 8,142,821 5,992,186 7,769,377 ----------- ----------- ----------- Cash Flow from Investing Activities: Additions to property and equipment........................... (854,027) (4,580,550) (2,547,129) Payments for acquisitions and equity investments.............. (1,560,904) (2,388,427) (3,234,524) Dividends received from equity investees...................... -- 120,064 473,646 Purchase of investments....................................... (831,727) (1,186,352) (229,902) Sale of investments........................................... 505,977 589,612 105,438 Proceeds from sale of office.................................. 400,000 -- -- Advances to equity investees.................................. (1,118,051) -- (893,870) ----------- ----------- ----------- Net cash used in investing activities....................... (3,458,732) (7,445,653) (6,326,341) ----------- ----------- ----------- Cash Flow from Financing Activities: Proceeds from long-term borrowings............................ -- 3,000,000 1,519,202 Repayments of long-term debt.................................. (2,822,012) (4,340,857) (5,473,142) Cash dividends paid........................................... (594,750) (599,732) (565,137) Repurchases of preferred stock................................ (599,000) (75,000) (30,000) Proceeds from sales of preferred stock........................ 3,265,500 2,366,000 2,500,500 Purchases of common stock..................................... (5,486,989) (1,872,273) (4,117,596) Payments received on notes receivable for common stock........ 1,671,955 1,371,030 1,717,905 Proceeds from sale of common stock............................ 224,321 971,971 67,878 ----------- ----------- ----------- Net cash (used in) provided by operations................... (4,340,975) 821,139 (4,380,390) ----------- ----------- ----------- Effect of Currency Exchange Rates on Cash and Cash Equivalents.. 43,602 (126,530) 113,051 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............ 386,716 (758,858) (2,824,303) Cash and Cash Equivalents at Beginning of Year.................. 2,492,123 3,250,981 6,075,284 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year........................ $ 2,878,839 $ 2,492,123 $ 3,250,981 =========== =========== ===========
Supplemental schedule of noncash investing and financing activities: The Company incurred liabilities of $770,499 for acquisitions and equity investments during 1995. The Company issued preferred stock of $378,000 and $229,000 for payment of dividends on preferred stock during 1995 and 1994, respectively. The Company received notes of $1,222,296, $494,854 and $898,001 for the issuance of common stock during 1995, 1994 and 1993, respectively. The Company issued notes payable of $2,311,926, $1,122,954 and $3,507,498 for the repurchase of common stock during 1995, 1994 and 1993, respectively. The Company entered into capital lease obligations for property and equipment of $557,272 and $271,054 in 1994 and 1993, respectively. The accompanying notes to financial statements are an integral part of these statements F-25 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1995, 1994 and 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation -- The consolidated financial statements include the accounts of Ketchum Communications Holdings, Inc. ("Ketchum" or the "Company") and subsidiaries, U.S. and non-U.S., for which ownership exceeds 50% of the voting stock. Investments in companies ranging from 20% to 50% of the voting stock are carried at equity, and a proportionate share of the earnings or losses of such equity investees is included in the statements of operations. Transactions between Ketchum and its subsidiaries are eliminated in consolidation. b. Use of Estimates in the Preparation of Financial Statements -- 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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. c. Cash Equivalents -- The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. d. Revenue Recognition -- Revenue is derived from commissions and fees for production and placement of advertising, public relations, sales promotion, research and other services. Depending upon the nature of the service, revenue is recognized in the month in which advertisements appear, when services are rendered or when costs are incurred. e. Billable Production in Process -- Billable production in process includes outside services and materials plus commissions and fees, where applicable, and the value of internal time incurred and are stated at the lower of accumulated charges or estimated realizable amounts. f. Depreciation and Amortization of Property and Equipment -- Furniture and equipment are depreciated on the straight-line basis over their estimated useful lives which range from five to ten years. Leasehold improvements are amortized on the straight-line basis over the shorter of the lives of the related leases or the estimated useful lives of the improvements, which range from three to twenty years. Included in property and equipment are leased assets at December 31, 1995 and 1994 of $1,136,800 and $2,470,700, respectively. Leased assets are amortized on the straight-line basis over the lives of the related leases which range from three to five years. Accumulated amortization at December 31, 1995 and 1994 was $495,700 and $916,400, respectively. g. Excess of cost over fair value of net assets acquired -- Excess of cost over fair value of net assets acquired consists of goodwill. Goodwill is accounted for in accordance with Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets." The Company's policy is to periodically evaluate the carrying value of the excess of the cost over the fair value of net assets of businesses acquired based on estimated future results of operations and cash flows of the related subsidiaries. The excess of cost over fair value of net assets of businesses acquired is amortized on the straight-line method over the expected periods of future benefit, which range from five to twenty years. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This statement is effective for years beginning after December 15, 1995. The general requirements of SFAS No. 121 apply to non-current assets and require impairment to be considered whenever evidence suggests that future cash flows will not at least equal the carrying value of the asset. Goodwill not associated with long-lived assets or identifiable intangibles is excluded from the scope of SFAS No. 121 and is accounted for in accordance with APB Opinion No. 17. Ketchum has not adopted SFAS No. 121 at December 31, 1995. Management does not believe the adoption of this standard will have a material impact on the Company's financial condition or the results of its operations. F-26 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) h. Income Taxes -- Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The Company had previously recorded income taxes in accordance with SFAS No. 96, "Accounting for Income Taxes." Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax reporting bases of assets and liabilities. The cumulative effect of this 1993 change in accounting principle was insignificant. The change had no effect upon 1993 results of operations. i. Foreign Currency Translation -- The Company translates foreign currency assets and liabilities using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the year. Translation adjustments are deferred as a separate component in accumulated deficit. j. Net (Loss) Income Per Common Share -- Net (loss) income per common share is based on net (loss) income after dividends on preferred stock and the weighted average number of common shares outstanding during the year. The Company does not have common stock equivalents. k. Investments -- Effective January 1, 1994 the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" to account for its investments. This statement expands the use of fair value accounting for certain investments while retaining the amortized cost method for investments in certain debt securities based on a company's intent and ability to hold the investments to maturity. The adoption of this standard had no effect upon 1994 results of operations. The Company's investments consist primarily of certificates of deposit and marketable equity securities. The marketable equity securities are classified based on SFAS No. 115 as "available-for-sale" and are stated at market value. At December 31, 1995 the carrying value of all investments approximates their market value. The aggregate carrying value and market value of marketable equity securities at December 31, 1994 was $504,301 and $15,000, respectively. Unrealized holding losses of $489,301 net of deferred taxes, including a 100% tax asset valuation allowance of $201,380, was included in the accumulated deficit section of the consolidated balance sheet at December 31, 1994. The market value of other investments at December 31, 1994 approximated cost. During 1995 the Company recorded an approximately $500,000 write-down for a certain marketable equity security as it was determined this investment was permanently impaired due to what the Company considers to be a permanent decline in market value and no readily available market for sale. l. Financial Instruments -- The Company's financial instrument portfolio, excluding investments, consists primarily of cash and cash equivalents and short- and long-term debt instruments. The most significant instrument, long-term debt, had a carrying value which approximated the fair market value. The fair market value was determined based upon a present value technique of estimating future cash flows using a discount rate commensurate with the risks involved. The fair values of the other instruments approximated carrying value. 2. GOING CONCERN The Company incurred a net loss for the year ended December 31, 1995 and has an accumulated deficit. In addition, the Company was not in compliance with certain covenants pertaining to its long-term senior notes at December 31, 1995 and the noteholders had the right to declare the entire principal amount of such notes plus accrued interest, and a penalty due and payable immediately (see Note 6). Further, as described in Note 14, in February 1996, a judgement was entered against the Company, requiring it to pay approximately $4,000,000 currently and as described in Note 6, as a result of net borrowings, subsequent to December 31, 1995, the Company had approximately $80,000 of available borrowing capacity at March 6, 1996 and is in violation of certain covenants under its revolving credit agreement. As a result of these factors, substantial doubt exists about the Company's ability to continue as a going concern. The financial statements have been prepared assuming the Company will continue as a going concern and do not contain any adjustments that might result from this uncertainty. F-27 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In response to these conditions the Company's management initiated discussions with its principal lender and contacted another lender regarding the possibility of obtaining financing. As discussed in Note 15, the Company has negotiated a merger with a subsidiary of Omnicom Group Inc. ("Omnicom"). Management believes that the financial strength of Omnicom, pending the closing of the merger, the reasonable probability related to refinancing its long-term senior notes, the relief of the repurchasing obligation of shares of the Company's common stock as a result of the merger and increased future profitability resulting from recent restructuring and impairment charges would address the Company's current and long-term liquidity needs. See Notes 6 and 15 for certain events which have occurred subsequent to the original issuance of the Company's 1995 consolidated financial statements. 3. NATURE OF OPERATIONS Ketchum is an agency comprised of four autonomous operating divisions, advertising, public relations, directory advertising and health care. Advertising and public relations are the largest divisions as measured by commissions and fees. Ketchum's primary operations are based in the United States. International operations comprised 7%, 6% and 5% of total commissions and fees for the years ended December 31, 1995, 1994 and 1993, respectively. International assets were approximately 8% and 6% of total assets at December 31, 1995 and 1994, respectively. Approximately 18% of total commissions and fees was attributable to one major client for each of the years ended December 31, 1995, 1994 and 1993. A portion of the business for this major client, representing approximately 3% of total commissions and fees on an annualized basis for the year ended December 31, 1995, was lost in the fourth quarter of 1995. 4. IMPAIRMENT OF EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED As a result of management's periodic analysis of the recoverability of the carrying value of the excess of cost over the fair value of net assets acquired, management wrote down the carrying value at December 31, 1995 in the amount of $2,759,426. Management's analysis was based on undiscounted cash flows of expected future performance of the related operations. Expected future cash flows were based upon internal projections considering past trends, general business economic conditions and discussions with key management personnel. To the extent that the cash flows did not support the carrying value of the excess of cost over the fair value of net assets acquired, write downs were recorded. The $2.8 million write down relates principally to two domestic operations which have incurred significant losses since 1992. $1.1 million of the charge relates to the Company's Public Relations Division and $1.4 million relates to its Health Care Division. Prior to 1995, management believed that these operations could be turned around. More specifically, after continued unsteady 1993 results in the Public Relations operation, management made a determined effort to turn the operations around. This effort showed improved results in 1994 and led management to believe that this operation could return to profitability. Additionally, it was management's belief that the Health Care operation in 1993 and 1994 was simply suffering from the effects of proposed health care reform as no clients were lost but spending was significantly reduced and that it would turn around after health care reform was settled. These assessments were developed during internal management business meetings as well as internal divisional budget planning meetings. However, poor 1995 results of operations and projected losses led management to conclude that write downs should be made in 1995. There was no impairment loss in 1994. A similar analysis at December 31, 1993 resulted in an impairment loss of $340,076. 5. OTHER ASSETS Other assets include approximately $4,111,000 and $3,774,000 of investments in equity investees at December 31, 1995 and 1994, respectively. Approximately $3,182,000 and $2,985,000 of the recorded cost at December 31, 1995 and 1994, respectively, represents cost in excess of the equity in the underlying net assets of these investees. The excess of cost over equity in net assets is being amortized on a straight-line basis over periods ranging from ten to fifteen F-28 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) years. The Company's share of net loss in equity investees, which is included in other expense in the consolidated statements of operations, was approximately $723,273 and $252,834 for the years ended December 31, 1995 and 1994, respectively. The Company's share of net loss in equity investees for 1993 was insignificant. Notes receivable from certain equity investees have been written off in 1995 and 1993 (see Note 14). The Company did not receive dividends from equity investees in 1995. The Company received dividends of approximately $120,000 and $474,000 in 1994 and 1993, respectively. 6. FINANCING ARRANGEMENTS Long-term debt consists of the following: December 31, ------------------------- 1995 1994 ---------- ----------- 9% unsecured senior notes due August 1, 2004, principal payable in equal annual installments of $1,653,061 beginning August 1, 1998 through August 1, 2004, interest payable semi-annually (see below) ....................... $11,571,429 $11,571,429 Unsecured promissory notes, with interest rates ranging from approximately 7% to 10%, issued under the Company's common stock repurchase agreement, due through January 1, 2000 (see Note 8) .................... 5,749,433 5,660,682 Capital lease obligations, with interest rates ranging from 6% to 15%, net of imputed interest ................................ 610,488 1,034,458 Other .............................................. 199,439 327,771 ----------- ----------- 18,130,789 18,594,340 Less: Debt classified as current, due to covenant violations ...................................... 11,571,429 -- Currently scheduled maturities .................. 2,755,304 2,954,418 ----------- ----------- $ 3,804,056 $15,639,922 =========== =========== Foreign subsidiaries have outstanding short-term notes payable of $1,769,582 and $1,816,117 with a weighted average interest rate of 9.4% and 9.9% at December 31, 1995 and 1994, respectively. The Company has an $8,000,000 revolving credit agreement which expires on September 30, 1996, at which time any outstanding balance is due and payable. Of this amount, approximately $1,000,000 is reserved against guarantees for foreign credit facilities. In connection with the agreement, the Company is required to pay a .5% commitment fee on any unused portion. No amounts were outstanding under the revolving credit agreement at December 31, 1995 and under a similar agreement at December 31, 1994. As a result of borrowings subsequent to December 31, 1995, the Company had approximately $80,000 of available borrowing capacity at March 6, 1996 and is in violation of certain covenants under the revolving credit agreement. On August 9, 1994, the Company repaid certain existing senior debt and obtained additional financing, via the issuance and sale by the Company of its 9% unsecured senior notes. The unsecured senior notes required compliance with certain financial and other covenants. The Company was not in compliance with certain of these covenants at December 31, 1995, specifically requirements related to the Company's current ratio, debt to capitalization ratio, calculated consolidated net worth, fixed charge coverage ratio and interest coverage ratio. Other violations included exceeding the limitations on other minority investments, other investments and permitted debt of subsidiaries. As a result of these covenant violations, the holder of the senior notes had the right to declare the outstanding principal amount of the notes due and payable immediately and, accordingly, the senior notes of $11,571,429 were classified as current in the consolidated balance sheet at December 31, 1995. Pursuant to the F-29 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) terms of the senior notes, a penalty would be due upon such declaration. In management's opinion at March 6, 1996, it was reasonably possible, but not probable, that the holder would call the notes and assess the penalty; accordingly, no provision was made in the 1995 consolidated financial statements for any penalty that might ultimately be assessed. On April 30, 1996, the holder declared the outstanding principal amount of the senior notes plus accrued interest and the penalty due and payable on May 3, 1996. On May 3, 1996, the Company paid the $11,571,429 outstanding on the senior notes, together with interest of $266,143 and the penalty of $1,195,454, utilizing principally borrowings of $13,000,000 under the new credit facility described in the next paragraph. On May 1, 1996, the Company entered into a credit facility with a bank which expires on August 31, 1996 to borrow up to $13,000,000. Interest is payable on borrowings under the facility at the prime rate. Borrowings under the facility are due at three-month intervals from the date thereof. The credit facility is guaranteed by Omnicom for which a fee at the annual rate 3/4 of 1% of the outstanding amount of the facility is payable by the Company to Omnicom. At December 31, 1995 scheduled maturities of long-term debt together with amounts classified as current due to covenant violations are as follows: Year Ending December 31, ----------------------- 1996 .......................................... $14,326,733 1997 .......................................... 1,854,448 1998 .......................................... 1,140,079 1999 .......................................... 431,895 2000 .......................................... 340,622 Thereafter .................................... 37,012 ------------ $ 18,130,789 ============ Interest paid was approximately $1,963,000, $2,796,000 and $2,455,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company is a guarantor of approximately $1,557,000 in credit facilities available to equity investees in France, Canada and New York. Approximately $882,000 has been drawn on these facilities as of December 31, 1995. The credit facilities bear interest at rates ranging from 8.5% to 10.5%. 7. REDEEMABLE PREFERRED STOCK In November 1993, the Company authorized 50,000 shares of preferred stock. The first series, Series A, was authorized at 5,000 shares of cumulative preferred stock with a par value of $100 per share. In December 1994, the Company authorized an additional 15,000 shares of the Series A preferred stock. The Company's profit sharing and 401(k) plan is the only holder of the preferred stock. The Series A cumulative preferred stock dividend is $90 per annum per share, payable quarterly when declared by the Board of Directors. The Company repurchases preferred stock from the profit sharing and 401(k) plan when participants in the plan elect to purchase an investment option other than preferred stock, and when participants terminate employment with the Company and leave the plan. The preferred stock is sold and repurchased at $1,000 per share, the price established by an agreement between the Company and the profit sharing and 401(k) plan. The Company may redeem the preferred stock at any time after January 1, 2003, at the option of the Board of Directors, at a price of $1,045 per share plus all accrued and unpaid dividends. The stock has a liquidation preference over holders of common stock of $1,000 per share plus all accrued and unpaid dividends. F-30 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. COMMON STOCK SUBJECT TO REPURCHASE OBLIGATIONS Under the Company's shareholder agreements, the common stock of the Company is both sold and repurchased by the Company at a price determined by a formula based primarily upon book value, adjusted for certain items determined by the Board of Directors. The adjustment from book value in determining the formula price is primarily related to the restructuring charges recorded by the Company in 1993 (see Note 13). These charges have been added back to book value and are being amortized over 15 years for purposes of determining the formula price. Other adjustments are insignificant. At December 31, 1995, 1994 and 1993, the formula prices were $60.01, $56.09 and $53.56 per share, respectively. The common stock of the Company is owned by the employees and the Company is obligated to repurchase its common stock from the holders upon termination of employment. The total repurchase obligation is recorded on the consolidated balance sheets based on the formula price and number of outstanding shares at each balance sheet date. Changes in the repurchase obligation resulting from changes in the number of shares outstanding or formula price of the shares are accounted for by a charge or credit to equity (accumulated deficit) in the period that such change occurs. As shares are repurchased, the repurchase obligation is accordingly reduced by the number of shares repurchased multiplied by the formula price which was utilized to determine the obligation in the period the shares were repurchased. A substantial number of employees finance all or part of the stock purchases with recourse notes issued to the Company. The notes, which are collateralized by the stock, bear interest at market rates and are payable over five to twenty years. The Company has an agreement with a bank whereby an employee may borrow funds from the bank to purchase stock, and the borrowings are guaranteed by the Company. These guaranteed borrowings approximated $1,869,000 at December 31, 1995. At the Company's option, amounts payable upon repurchase of common shares are paid either by cash in a lump sum or over three to five years (see Note 6). 9. INCOME TAXES (Loss) income before income taxes and income tax (benefit) expense are as follows: Year Ended December 31, ------------------------------------------ 1995 1994 1993 ------------ -------------- ------------- (Loss) income before income taxes Domestic ....................... $(8,887,926) $4,170,272 $(6,327,745) International .................. 1,165,834 501,272 (475,825) ------------ ---------- ----------- Total ....................... $(7,722,092) $4,671,544 $(6,803,570) =========== ========== =========== Income tax (benefit) expense Current: U.S.-federal ................... $ 1,797,911 $1,556,900 $ 1,384,100 State .......................... 1,191,425 200,400 205,000 International .................. 367,133 141,700 152,300 ------------ ---------- ----------- Total current ............... 3,356,469 1,899,000 1,741,400 ------------ ---------- ----------- Deferred: U.S.-federal ................... (3,326,472) 639,427 (2,829,824) State .......................... (212,328) 40,814 (180,628) ------------ ---------- ----------- Total deferred .............. (3,538,800) 680,241 (3,010,452) ------------ ---------- ----------- Total income tax (benefit) expense ........... $ (182,331) $2,579,241 $(1,269,052) ============ ========== =========== F-31 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income tax expense applicable to consolidated income differs from income tax expense calculated by using the U.S. federal statutory income tax rate for the following reasons: Year Ended December 31, ------------------------------------------ 1995 1994 1993 ----------- ---------- ----------- Income tax (benefit) expense at U.S. federal statutory rate .... $(2,621,858) $1,588,325 $(2,313,213) Nondeductible expenses .............. 811,882 144,991 792,377 State and local taxes, net of U.S. federal tax benefit ....... 50,106 66,264 147,708 International taxes ................. (15,904) (22,931) (308,959) Change in valuation allowance ....... 644,346 33,611 567,950 Write-off of prior year tax asset ... 505,864 -- -- Reserve for income tax contingencies ..................... 483,772 716,585 (125,600) Other ............................... (40,539) 52,396 (29,315) ----------- ---------- ----------- Income tax (benefit) expense ........ $ (182,331) $2,579,241 $(1,269,052) =========== ========== =========== Temporary differences and carryforwards which give rise to net deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows: Year Ended December 31, ------------------------------- 1995 1994 ------------- ------------- Deferred income tax assets: Deferred compensation ................. $ 231,495 $ 277,406 Lease abandonment ..................... 456,957 555,104 Litigation accrual .................... 1,848,800 -- Impairment write-down ................. 185,345 -- Amortization .......................... -- 27,714 Allowances for doubtful accounts ...... 1,049,852 402,242 Other ................................. 22,184 5,060 ------------- ------------- 3,794,633 1,267,526 Valuation allowance ................... (1,245,908) (601,562) ------------- ------------- 2,548,725 665,964 ------------- ------------- Deferred income tax liabilities: Depreciation .......................... (1,347,381) (3,056,073) Amortization .......................... (52,653) -- ------------- ------------- (1,400,034) (3,056,073) ------------- ------------- Deferred tax asset (liability), net ... $ 1,148,691 $( 2,390,109) ============= ============= The Company has established a valuation allowance for deferred income tax assets primarily for losses recognized for book purposes, which when realizable for tax purposes will be capital losses. As the generation of capital gains to offset these capital losses is not certain, a valuation allowance is needed. Based on the Company's history of taxable income and profit projections for 1996, management believes it is more likely than not that the Company will realize the benefit of the remaining net deferred tax assets. F-32 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) No domestic income taxes have been provided on approximately $1,595,000 and $719,000 of unremitted earnings of foreign subsidiaries at December 31, 1995 and 1994, respectively, since such earnings have been or are intended to be permanently reinvested. It is not practicable to determine the deferred income tax liability for these earnings. Income taxes paid were approximately $1,177,000, $1,708,000 and $2,473,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 10. EMPLOYEE BENEFIT PLANS During 1995 the Company combined its profit sharing and 401(k) plans into a single plan. The Company contribution to the 401(k) portion of the plan has been increased from $0.33 to $0.50 for every dollar of employee contributions. The Company will match up to 4% of the employee's base salary. The Company also contributes, at the direction of the Board of Directors, a minimum of 20% of pre-tax consolidated income. Plan expense for 1995 was $2,213,000. The Company previously maintained a profit sharing plan for salaried employees who had completed six months of service without incurring a one-year interruption in employment. The plan provided for contributions, at the discretion of the Board of Directors, at a minimum of 20% of pre-tax consolidated income. Contributions paid to the profit sharing plan were allocated among participants on the basis of eligible compensation paid. Profit sharing expense was $1,250,000 and $1,100,000 in 1994 and 1993, respectively. The Company previously also maintained a salary reduction profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allowed employees to defer compensation through contributions to the plan. At the discretion of the Board of Directors, the Company contributed $0.33 for every dollar of employee contributions up to a maximum of 2% of the employee's base salary. Plan expense was $610,000 and $565,000 in 1994 and 1993, respectively. 11. LEASE COMMITMENTS The Company has operating leases for its office facilities and certain equipment, which require minimum monthly rental payments and a pro-rata share of common operating expenses for office rentals. Operating lease expense was as follows: Year Ended December 31, ------------------------------------------ 1995 1994 1993 ------------ ------------ ------------ Minimum lease expense .............. $ 9,467,600 $ 9,932,200 $ 10,530,100 Common operating lease expenses .... 1,297,700 1,578,200 2,517,900 ------------ ------------ ------------ $ 10,765,300 $ 11,510,400 $ 13,048,000 ============ ============ ============ Future minimum lease payments for all noncancelable office and equipment leases in effect at December 31, 1995 are as follows: Year Ending December 31, Rentals ------------------------ ------------ 1996 ..................................... $ 8,659,000 1997 ..................................... 7,369,000 1998 ..................................... 4,779,000 1999 ..................................... 3,160,000 2000 ..................................... 1,849,000 Thereafter ............................... 2,229,000 F-33 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS AND CONTINGENCIES Ketchum is the subject of, or party to, a number of lawsuits and claims. Included in other accrued expenses is $4,961,434 and $200,000 for outstanding and settled litigation matters at December 31, 1995 and 1994, respectively (see Note 14). In the opinion of management, any ultimate liabilities arising from these contingencies, to the extent not provided for, will not have a material effect on the Company's financial position or results of operations. Under the terms of prior agency acquisition and investment agreements, additional payments may be required, contingent upon future revenues and earnings of these agencies. Any additional payments are recorded as increases in the excess of cost over the fair value of net assets acquired at the time in which such payments are determined. Additional payments on prior year acquisitions made in 1995 and 1994 approximated $342,000 and $1,708,000, respectively. In the event the Company is sold, the Company is obligated, under the terms of agreements with certain parties who have sold shares of the Company's common stock to the Company within the past five years, to pay such parties an amount based upon the difference between the Company's formula price per share at the month end preceding the sale and the price received for shares in a sale of the Company. The Company estimates that the potential settlement with parties who may have claims because they sold shares within the previous five years would approximate $5 million in the event the merger with Omnicom is consummated (see Note 15). In 1995, management made a decision to reorganize its media buying operations. A detailed plan has yet to be developed; however management believes that any expenses to be incurred in connection with the reorganization will not have a material effect on the Company's financial condition or the results of its operations. 13. RESTRUCTURING CHARGES In 1993, the Company developed a formal plan to significantly reduce the Company's cost structure. The restructuring plan involved the sale or close-down of four operations. A provision for the restructuring charges of $8,778,572 was recorded in 1993 and consists primarily of the write-offs of approximately $6,000,000 of the excess of cost over the fair value of net assets acquired related to certain business acquisitions and approximately $1,900,000 in lease abandonment charges in connection with vacating the leased space of one of the closed operations. At December 31, 1995, approximately $821,000 remains in other liabilities related to a lease abandonment which is expected to be paid out over a two year period. 14. OTHER EXPENSE Other expense is comprised of the following:
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ------------ -------- ----------- Litigation matters (see below) ................................... $ 4,961,434 $ -- $ -- Write-down of the excess of cost over the fair value of net assets acquired ............................................... 2,759,426 -- 340,076 Write-off of notes receivable from equity investees .............. 1,118,051 -- 893,870 Write-off of equity investment ................................... -- -- 714,465 Equity in net loss of equity investees ........................... 723,273 252,834 10,521 ----------- --------- ----------- $ 9,562,184 $ 252,834 $ 1,958,932 =========== ========= ===========
F-34 KETCHUM COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Included in litigation matters in 1995 is a $4.0 million charge for a judgment against Ketchum related to a prior acquisition in the United Kingdom. This case was a contract dispute between the majority owners and Ketchum relative to the exercise of a put option requiring Ketchum to purchase the majority stake as well as a dispute relating to certain dividends declared and paid prior to the put without Ketchum's consent. Judgment was rendered against Ketchum on February 21, 1996 for approximately $3.5 million. Additionally, Ketchum was subsequently ordered to pay $0.5 million for a cost contribution to the plaintiffs' legal costs. The remaining $1.0 million of the litigation charge primarily relates to two cases where judgments have been rendered against Ketchum and loss is considered probable, although appeals are pending. An additional reserve of $0.5 million was recorded in 1995, in addition to $0.2 million previously accrued, for the first case, a case in which Ketchum was a minority shareholder of a Parisian advertising agency which went bankrupt and where Ketchum may be required to contribute to the full amount of the shortfall in net assets. The potential range of loss in this case is between $0.7 million and $1.2 million. A charge of $0.3 million was recorded for the second case which is related to Ketchum holding over in certain New York office space for one month. These amounts are included in accrued expenses (see Note 12). In management's opinion Ketchum's exposure for unrecorded losses of all litigation matters is insignificant. The write-off of notes receivable from equity investees and the equity in net loss of equity investees arises primarily from an investee which has incurred significant losses since its formation and which continues to have significant cash short falls. 15. SUBSEQUENT EVENT In March 1996, Ketchum negotiated a merger with Omnicom under which Omnicom is to acquire all of the outstanding common and preferred stock of Ketchum in exchange for common shares of Omnicom based upon the market value of Omnicom common shares and the "Common Stock Conversion Price" of the common and preferred stock of Ketchum at the merger date, as defined in the merger agreement. The merger is subject to shareholder and regulatory approvals, and is expected to close on or about May 31, 1996. As indicated in Note 6, on April 30, 1996, the holder of the senior notes declared the outstanding principal amount plus accrued interest and a penalty due and payable on May 3, 1996. On May 3, 1996, the Company paid such amounts, aggregating approximately $13 million, utilizing principally borrowings under the new credit facility described in Note 6. The Company continues to be out of compliance with respect to certain covenants of its revolving credit agreement as of May 3, 1996. On that date, the Company's outstanding borrowings under the agreement were approximately $4.6 million, after giving effect to a borrowing in March 1996 of approximately $3.5 million to satisfy a portion of the judgement referred to in Note 14. F-35 Schedule II OMNICOM GROUP INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 1995 (Dollars in Thousands)
=================================================================================================================== Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------- Additions Deductions ---------- ----------------------------- Balance at Charged Removal of Balance Beginning to Costs Uncollectible Translation at End of Description of Period and Expenses Receivables(1) Adjustments Period - ------------------------------------------------------------------------------------------------------------------- Valuation accounts deducted from assets to which they apply-- allowance for doubtful accounts(2): December 31, 1995....................... $23,528 $6,024 $6,964 $(764) $23,352 December 31, 1994....................... 19,986 9,788 6,852 (606) 23,528 December 31, 1993....................... 12,842 7,690 (409) 955 19,986
- -------------- (1) Net of acquisition date balances in allowance for doubtful accounts of companies acquired of $463, $1,330, and $4,581 in 1995, 1994, and 1993, respectively. (2) During 1995, the Company completed certain acquisitions which were accounted for under the pooling of interests method of accounting. Information in the schedule includes balances for these companies for all periods presented. S-1 ANNEX I PENNSYLVANIA BUSINESS CORPORATION LAW Subchapter D. Dissenters Rights 1571 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.-- Except as otherwise provided in subsection (b), any shareholder of a business corporation shall have the right to dissent from, and to obtain payment of the fair value of his shares in the event of, any corporate action, or to otherwise obtain fair value for his shares, where this part expressly provides that a shareholder shall have the rights and remedies provided in this subchapter. See: Section 1906(c) (relating to dissenters rights upon special treatment). Section 1930 (relating to dissenters rights). Section 1931(d) (relating to dissenters rights in share exchanges). Section 1932(c) (relating to dissenters rights in asset transfers). Section 1952(d) (relating to dissenters rights in division). Section 1962(c) (relating to dissenters rights in conversion). Section 2104(b) (relating to procedure). Section 2324 (relating to corporation option where a restriction on transfer of a security is held invalid). Section 2325(b) (relating to minimum vote requirement). Section 2704(c) (relating to dissenters rights upon election). Section 2705(d) (relating to dissenters rights upon renewal of election). Section 2907(a) (relating to proceedings to terminate breach of qualifying conditions). Section 7104(b)(3) (relating to procedure). (b) Exceptions.--(1) Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares that, at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either: (i) listed on a national securities exchange; or (ii) held of record by more than 2,000 shareholders; shall not have the right to obtain payment of the fair value of any such shares under this subchapter. (2) Paragraph (1) shall not apply to and dissenters rights shall be available without regard to the exception provided in that paragraph in the case of: (i) Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and money in lieu of fractional shares. (ii) Shares of any preferred or special class unless the articles, the plan or the terms of the transaction entitle all shareholders of the class to vote thereon and require for the adoption of the plan or the effectuation of the transaction the affirmative vote of a majority of the votes cast by all shareholders of the class. (iii) Shares entitled to dissenters rights under section 1906(c) (relating to dissenters rights upon special treatment). (3) The shareholders of a corporation that acquires by purchase, lease, exchange or other disposition all or substantially all of the shares, property or assets of another corporation by the issuance of shares obligations or otherwise, with or without assuming the liabilities of the other corporation and A-1 with or without the intervention of another corporation or other person, shall not be entitled to the rights and remedies of dissenting shareholders provided in this subchapter regardless of the fact, if it be the case, that the acquisition was accomplished by the issuance of voting shares of the corporation to be outstanding immediately after the acquisition sufficient to elect a majority or more of the directors of the corporation. (c) Grant of optional dissenters rights.--The bylaws or a resolution of the board of directors may direct that all or a part of the shareholders shall have dissenters rights in connection with any corporate action or other transaction that would otherwise not entitle such shareholder to dissenters rights. (d) Notice of dissenters rights.--Unless otherwise provided by statute, if a proposed corporate action that would give rise to dissenters rights under this subpart is submitted to a vote at a meeting of shareholders, there shall be included in or enclosed with the notice of meeting: (1) A statement of the proposed action and a statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the terms of this subchapter; and (2) A copy of this subchapter. (e) Other statutes.--The procedures of this subchapter shall also be applicable to any transaction described in any statute other than this part that makes reference to this subchapter for the purpose of granting dissenters rights. (f) Certain provisions of articles ineffective.--This subchapter may not be relaxed by any provision of the articles. (g) Cross references.--See sections 1105 (relating to restriction on equitable relief), 1904 (relating to de facto transaction doctrine abolished) and 2512 (relating to dissenters rights procedure). (Last amended by Act 198, L. '90, eff. 12-19-90.) 1572 DEFINITIONS. The following words and phrases when used in this subchapter shall have the meanings given to them in this section unless the context clearly indicates otherwise: "Corporation." The issuer of the shares held or owned by the dissenter before the corporate action or the successor by merger, consolidation, division conversion or otherwise of that issuer. A plan of division may designate which of the resulting corporations is the successor corporation for the purposes of this subchapter. The successor corporation in a division shall have sole responsibility for payments to dissenters and other liabilities under this subchapter except as otherwise provided in the plan of division. "Dissenter." A shareholder or beneficial owner who is entitled to and does assert dissenters rights under this subchapter and who has performed every act required up to the time involved for the assertion of those rights. "Fair value." The fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects taking into account all relevant factors, but excluding any appreciation or depreciation in anticipation of the corporate action. "Interest." Interest from the effective date of the corporate action until the date of payment at such rate as is fair and equitable under all the circumstances, taking into account all relevant factors including the average rate currently paid by the corporation on its principal bank loans. (Last amended by Act 198, L. '90, eff. 12-19-90.) 1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.--(a) Record holders of shares.--A record holder of shares of a business corporation may assert dissenters rights as to fewer than all of the shares registered in his name only if he dissents with respect to all the shares of the same class or series beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents. In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders. (b) Beneficial owners of shares.--A beneficial owner of shares of a business corporation who is not the record holder may assert dissenters rights with respect to shares held on his behalf and shall be treated as a dissenting shareholder under the terms of this subchapter if he submits to the corporation not later than the time of the assertion of dissenters rights a written consent A-2 of the record holder. A beneficial owner may not dissent with respect to some but less than all shares of the same class or series owned by the owner, whether or not the shares so owned by him are registered in his name. (Last amended by Act 169, L. '92, eff. 2-16-93.) 1574 NOTICE OF INTENTION TO DISSENT.--If the proposed corporate action is submitted to a vote at a meeting of shareholders of a business corporation, any person who wishes to dissent and obtain payment of the fair value of his shares must file with the corporation, prior to the vote, a written notice of intention to demand that he be paid the fair value for his shares if the proposed action is effectuated, must effect no change in the beneficial ownership of his shares from the date of such filing continuously through the effective date of the proposed action and must refrain from voting his shares in approval of such action. A dissenter who fails in any respect shall not acquire any right to payment of the fair value of his shares under this subchapter. Neither a proxy nor a vote against the proposed corporate action shall constitute the written notice required by this section. 1575 NOTICE TO DEMAND PAYMENT. --(a) General rule.--If the proposed corporate action is approved by the required vote at a meeting of shareholders of a business corporation, the corporation shall mail a further notice to all dissenters who gave due notice of intention to demand payment of the fair value of their shares and who refrained from voting in favor of the proposed action. If the proposed corporate action is to be taken without a vote of shareholders, the corporation shall send to all shareholders who are entitled to dissent and demand payment of the fair value of their shares a notice of the adoption of the plan or other corporate action. In either case, the notice shall: (1) State where and when a demand for payment must be sent and certificates for certificated shares must be deposited in order to obtain payment. (2) Inform holders of uncertificated shares to what extent transfer of shares will be restricted from the time that demand for payment is received. (3) Supply a form for demanding payment that includes a request for certification of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired beneficial ownership of the shares. (4) Be accompanied by a copy of this subchapter. (5) Time for receipt of demand for payment.--The time set for receipt of the demand and deposit of certificated shares shall be not less than 30 days from the mailing of the notice. 1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC. --(a) Effect of failure of shareholder to act.--A shareholder who fails to timely demand payment, or fails (in the case of certificated shares) to timely deposit certificates, as required by a notice pursuant to section 1575 (relating to notice to demand payment) shall not have any right under this subchapter to receive payment of the fair value of his shares. (b) Restriction on uncertificated shares.--If the shares are not represented by certificates, the business corporation may restrict their transfer from the time of receipt of demand for payment until effectuation of the proposed corporate action or the release of restrictions under the terms of section 1577(B) (relating to failure to effectuate corporate action). (c) Rights retained by shareholder.--The dissenter shall retain all other rights of a shareholder until those rights are modified by effectuation of the proposed corporate action. (Last amended by Act 198, L. '90, eff. 12-19-90.) 1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES. --(a) Failure to effectuate corporate action.--Within 60 days after the date set for demanding payment and depositing certificates, if the business corporation has not effectuated the proposed corporate action, it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. A-3 (b) Renewal of notice to demand payment.--When uncertificated shares have been released from transfer restrictions and deposited certificates have been returned, the corporation may at any later time send a new notice conforming to the requirements of section 1575 (relating to notice to demand payment), with like effect. (c) Payment of fair value of shares.--Promptly after effectuation of the proposed corporate action, or upon timely receipt of demand for payment if the corporate action has already been effectuated, the corporation shall either remit to dissenters who have made demand and (if their shares are certificated) have deposited their certificates the amount that the corporation estimates to be the fair value of the shares, or give written notice that no remittance under this section will be made. The remittance or notice shall be accompanied by: (1) The closing balance sheet and statement of income of the issuer of the shares held or owned by the dissenter for a fiscal year ending not more than 16 months before the date of remittance or notice together with the latest available interim financial statements. (2) A statement of the corporation's estimate of the fair value of the shares. (3) A notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of this subchapter. (d) Failure to make payment.--If the corporation does not remit the amount of its estimate of the fair value of the shares as provided by subsection (c), it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. The corporation may make a notation on any such certificate or on the records of the corporation relating to any such uncertificated shares that such demand has been made. If shares with respect to which notation has been so made shall be transferred, each new certificate issued therefor or the records relating to any transferred uncertificated shares shall bear a similar notation, together with the name of the original dissenting holder or owner of such shares. A transferee of such shares shall not acquire by such transfer any rights in the corporation other than those that the original dissenters had after making demand for payment of their fair value. (Last amended by Act 198, L. '90, eff. 12-19-90.) 1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES. --(a) General rule.--If the business corporation gives notice of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares as permitted by section l577(c) (relating to payment of fair value of shares) and the dissenter believes that the amount stated or remitted is less than the fair value of his shares, he may send to the corporation his own estimate of the fair value of the shares, which shall be deemed a demand for payment of the amount or the deficiency. (b) Effect of failure to file estimate.--Where the dissenter does not file his own estimate under subsection (a) within 30 days after the mailing by the corporation of its remittance or notice, the dissenter shall be entitled to no more than the amount stated in the notice or remitted to him by the corporation. (Last amended by Act 198, L, '90, eff. 12-19-90.) 1579 VALUATION PROCEEDINGS GENERALLY.--(a) General rule.--Within 60 days after the latest of: (1) Effectuation of the proposed corporate action; (2) Timely receipt of any demands for payment under section 1575 (relating to notice to demand payment); or (3) Timely receipt of any estimates pursuant to section 1578 (relating to estimate by dissenter of fair value of shares); If any demands for payment remain unsettled, the business corporation may file in court an application for relief requesting that the fair value of the shares be determined by the court. (b) Mandatory joinder of dissenters.--All dissenters, wherever residing, whose demands have not been settled shall be made parties to the proceeding as in an action against their shares. A copy of the application shall be served on each such dissenter. If a dissenter is a nonresident, the copy may be served on him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction and interstate and international procedure). A-4 (c) Jurisdiction of the court.--The jurisdiction of the court shall be plenary and exclusive. The court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value. The appraiser shall have such power and authority as may be specified in the order of appointment or in any amendment thereof. (d) Measure of recovery.--Each dissenter who is made a party shall be entitled to recover the amount by which the fair value of his shares is found to exceed the amount, if any, previously remitted, plus interest. (e) Effect of corporation's failure to file application.--If the corporation fails to file an application as provided in subsection (a), any dissenter who made a demand and who has not already settled his claim against the corporation may do so in the name of the corporation at any time within 30 days after the expiration of the 60-day period. If a dissenter does not file an application within the 30-day period, each dissenter entitled to file an application shall, be paid the corporation's estimate of the fair value of the shares and no more, and may bring an action to recover any amount not previously remitted. 1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.--(a) General rule.--The costs and expenses of any proceeding under section 1579 (relating to valuation proceedings generally), including the reasonable compensation and expenses of the appraiser appointed by the court, shall be determined by the court and assessed against the business corporation except that any part of the costs and expenses may be apportioned and assessed as the court deems appropriate against all or some of the dissenters who are parties and whose action in demanding supplemental payment under section 1578 (relating to estimate by dissenter of fair value of shares) the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. (b) Assessment of counsel fees and expert fees where lack of good faith appears.-- Fees and expenses of counsel and of experts for the respective parties may be assessed as the court deems appropriate against the corporation and in favor of any or all dissenters if the corporation failed to comply substantially with the requirements of this subchapter and may be assessed against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights provided by this subchapter. (c) Award of fees for benefits to other dissenters.--If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and should not be assessed against the corporation, it may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. A-5 -----END PRIVACY-ENHANCED MESSAGE-----