As filed with the Securities and Exchange Commission on August 7, 1995
Registration No. 33-60167
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
------------------------
OMNICOM GROUP INC.
(Exact Name of Registrant as Specified in Charter)
New York 7311 13-1514814
(State or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Industrial Classification Ident. No.)
Code Number)
437 Madison Avenue
New York, New York 10022
(212) 415-3600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
BARRY J. WAGNER, ESQ.
Secretary
Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022
(212) 415-3600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
MICHAEL D. DITZIAN, ESQ. JAMES M. COTTER, ESQ.
Davis & Gilbert Simpson Thacher & Bartlett
1740 Broadway 425 Lexington Avenue
New York, New York 10019 New York, New York 10017
(212) 468-4800 (212) 455-2000
------------------------
Approximate date of commencement of proposed sale to public: From time to
time after this Registration Statement becomes effective and all other
conditions to the purchase of assets pursuant to the Acquisition Agreement
described in the enclosed Prospectus/ Information Statement have been satisfied
or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: [ ]
------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
OMNICOM GROUP INC.
Cross Reference Sheet Pursuant to Rule 404(a) of the Securities Act of 1933
and Item 501(b) of Regulation S-K, Showing the Location or Heading in the
Prospectus/Information Statement of the Information required by Part I of Form
S-4.
Location or Heading in
S-4 Item Number and Caption Prospectus/Information Statement
---------------------------- ----------------------------------
A. Information about the Transaction
Forepart of Registration Statement and Outside Front Cover Page of
Outside Front Cover Page of Prospectus Prospectus/Information Statement
Inside Front and Outside Back Cover Inside Front Cover Page of
Pages of Prospectus Prospectus/Information Statement;
Available Information
Risk Factors, Ratio of Earnings to Fixed Summary; Comparative Per Share
Charges and Other Information Data; Market Price Data
Terms of the Transaction The Transactions; The Acquisition
Agreement; The Advertising Stock
Sale Agreement; Proposed Amendment
of the Holdings Certificate; the
Plan of Liquidation; Federal
Income Tax Consequences of the
Sales of Assets and Dissolution
and Liquidation; Comparison of
Shareholder Rights; Description of
Omnicom Capital Stock
Pro Forma Financial Information *
Material Contacts with the Company Being The Transactions
Acquired
Additional Information Required for *
Reoffering by Persons and Parties Deemed
to Be Underwriters
Interests of Named Experts and Counsel *
Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
B. Information About the Registrant
Information with Respect to *
S-3 Registrants
Incorporation of Certain Information by *
Reference
Information with Respect to S-2 or S-3 *
Registrants
Incorporation of Certain Information by *
Reference
<PAGE>
Location or Heading in
S-4 Item Number and Caption Prospectus/Information Statement
---------------------------- ----------------------------------
Information with Respect to Registrants Market Price Data; Business
Other Than S-3 or S-2 Registrants Information Concerning Omnicom;
Selected Financial Data of
Omnicom; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations of Omnicom; Description
of Omnicom Capital Stock; Index to
Omnicom Financial Statements
C. Information about the Company
Being Acquired
Information with Respect to S-3 Companies *
Information with Respect to S-2 or S-3 *
Companies
Information with Respect to Companies Business Information Concerning
Other Than S-3 or S-2 Companies Holdings; Selected Financial Data
of Holdings; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations of Holdings;
Description of Holdings Capital
Stock; Index to Holdings Financial
Statements
D. Voting and Management Information
Information if Proxies, Consents or *
Authorizations are to be Solicited
Information if Proxies, Consents or The Special Meeting; The
Authorizations are not to be Solicited Transactions; Description of
or in an Exchange Offer Holdings Capital Stock
<PAGE>
[Letterhead]
CHIAT/DAY HOLDINGS, INC.
August 8, 1995
Dear Shareholder:
You are cordially invited to attend a special meeting of stockholders of
Chiat/Day Holdings, Inc., a Delaware corporation ("Holdings"), on Tuesday,
August 29, 1995, at 9:30 a.m. at 180 Maiden Lane, New York, New York 10038 (the
"Special Meeting") to consider and vote upon the following proposals
(collectively, the "Holdings Vote Matters"): (a) the sale by Holdings and
Chiat/Day inc. Advertising, a Delaware corporation and a wholly-owned subsidiary
of Holdings ("Advertising"), of their assets and businesses, (i) to TBWA
International Inc., a Delaware corporation ("TBWA"), in exchange for shares of
Common Stock of Omnicom Group Inc., a New York corporation ("Omnicom"), and
TBWA's assumption of liabilities pursuant to an Asset Purchase Agreement (the
"Acquisition Agreement") dated May 11, 1995 among Omnicom, TBWA, Holdings and
Advertising and (ii) pursuant to a certain stock purchase agreement dated as of
May 11, 1995 between Holdings and Adelaide Horton (the "Advertising Stock Sale
Agreement"); (b) following the Closing under the Acquisition Agreement, the
amendment of the Certificate of Incorporation of Holdings (the "Holdings
Certificate"), to change the corporate name of Holdings to CDH Corporation; (c)
the approval and adoption of a Plan of Liquidation pursuant to which Holdings
will, among other things, (i) dissolve, (ii) establish a liquidating trust
pursuant to a liquidating trust agreement, with Thomas Patty and David C. Wiener
as trustees for the benefit of its stockholders, and (iii) distribute to its
stockholders and/or the liquidating trust all its remaining assets; and (d) such
other matters as may come before the Special Meeting.
Holders of record of Class A Common Stock and Class B Common Stock of
Holdings at the close of business on August 1, 1995, will be entitled to vote at
the Special Meeting or any postponement or adjournment thereof.
The affirmative vote of the holders of a majority of the voting power
represented by the outstanding shares of Class A Common Stock and Class B Common
Stock (the "Holdings Common Stock"), voting together as a single class, is
necessary to approve the transactions contemplated by the Acquisition Agreement
and the Advertising Stock Sale Agreement, to approve the amendment to the
Holdings Certificate, and to approve and adopt the Plan of Liquidation.
Directors and executive officers of Holdings owning as of August 1, 1995
approximately 77.98% of the Holdings Common Stock in the aggregate have
expressed an intention to vote in favor of the transactions contemplated herein.
None of the Holdings Vote Matters shall become effective unless all of the
proposals are adopted by the requisite vote of the Holdings Stockholders.
The Holdings Board of Directors believes that the foregoing transactions
are fair to, and in the best interests of, Holdings and the Holdings
stockholders and recommends that the Holdings stockholders vote FOR the approval
of the transactions contemplated by the Acquisition Agreement and the
Advertising Stock Sale Agreement, FOR the approval of the amendment of the
Holdings Certificate, and FOR the approval of the Plan of Liquidation.
The attached Prospectus/Information Statement describes the proposed
transactions more fully. Please give this information careful attention.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
Very truly yours,
Jay Chiat
Chief Executive Officer
<PAGE>
CHIAT/DAY HOLDINGS, INC.
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------
To be Held on Tuesday, August 29, 1995
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
stockholders of Chiat/Day Holdings, Inc., a Delaware corporation ("Holdings"),
will be held on Tuesday, August 29, 1995, at 180 Maiden Lane, New York, New York
10038, commencing at 9:30 a.m., to consider and vote upon the following matters
described in the accompanying Prospectus/Information Statement:
1. To consider and vote upon the transfer by Holdings and Chiat/Day
inc. Advertising, a Delaware corporation and a wholly-owned subsidiary of
Holdings ("Advertising"), of their assets and businesses (i) to TBWA
International Inc., a Delaware corporation ("TBWA"), in exchange for shares
of Common Stock, par value $.50 per share, of Omnicom Group Inc., a New
York corporation ("Omnicom"), and TBWA's assumption of liabilities pursuant
to an Asset Purchase Agreement (the "Acquisition Agreement") dated May 11,
1995, among Omnicom, TBWA, Holdings and Advertising and (ii) pursuant to a
certain stock purchase agreement dated as of May 11, 1995 between Holdings
and Adelaide Horton.
2. To consider and vote upon an amendment to the Certificate of
Incorporation of Holdings (the "Holdings Certificate") to change the name
of Holdings, following the Closing under the Acquisition Agreement, to CDH
Corporation.
3. To consider and vote upon the approval and adoption of a plan of
complete liquidation (the "Plan of Liquidation") pursuant to which Holdings
would (i) dissolve, (ii) establish a liquidating trust (the "Liquidating
Trust") pursuant to a liquidating trust agreement, with Thomas Patty and
David C. Wiener as trustees, for the benefit of its stockholders, and (iii)
distribute to its stockholders and/or the Liquidating Trust all its
remaining assets. Approval of the Plan of Liquidation requires the
acceptance by the Holdings stockholders of such trustees as their
collective agent under the terms of the Liquidating Trust, with such
trustees (a) to receive on their behalf certain liquidating distributions
from Holdings, (b) to act as their agent in connection with the
administration of an escrow agreement established in connection with the
Acquisition Agreement and more fully described herein (the "Escrow
Agreement"), (c) to respond to the assertion of any and all claims for
indemnification by TBWA, or to assert claims on behalf of the stockholders,
pursuant to the terms of the Acquisition Agreement and the Escrow
Agreement, and (d) to complete the winding up of the affairs of Holdings
and payment of its liabilities not assumed by TBWA pursuant to the
Acquisition Agreement from the assets of the Liquidating Trust.
4. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of Class A Common Stock, par value $.01 per share
("Class A Common Stock"), and Class B Common Stock, par value $.01 per share
("Class B Common Stock"), of Holdings at the close of business on August 1, 1995
will be entitled to vote at the Special Meeting and any adjournment or
postponement thereof.
The affirmative vote of the holders of a majority of the voting power
represented by the outstanding shares of Class A Common Stock and Class B Common
Stock (the "Holdings Common Stock"), voting together as a single class, is
necessary to approve the transactions contemplated by the Acquisition Agreement
and the Advertising Stock Sale Agreement, to approve the amendment to the
Holdings Certificate, and to approve and adopt the Plan of Liquidation.
Directors and executive officers of Holdings owning as of August 1, 1995
approximately 77.98% of Holdings Common Stock in the aggregate have expressed a
present intention to vote in favor of the transactions contemplated herein.
None of such matters shall become effective unless all of the proposals are
adopted by the requisite vote of the Holdings Stockholders.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
By Order of the Holdings Board of Directors
-------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
DATED AUGUST 7, 1995
CHIAT/DAY HOLDINGS, INC.
INFORMATION STATEMENT
---------------
OMNICOM GROUP INC.
PROSPECTUS
---------------
This Prospectus/Information Statement is being furnished to holders of
Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and
holders of Class B Common Stock, par value $.01 per share ("Class B Common
Stock"), (collectively, "Holdings Common Stock") of Chiat/Day Holdings, Inc., a
Delaware corporation ("Holdings"), in connection with the special meeting of the
stockholders of Holdings to be held on August 29, 1995 at 180 Maiden Lane, New
York, New York 10038, commencing at 9:30 a.m., local time, and at any
adjournment or postponement thereof (the "Special Meeting"). The purpose of the
Special Meeting is to consider and vote upon the following proposals (a) the
sale by Holdings and Chiat/Day inc. Advertising, a Delaware corporation and a
wholly-owned subsidiary of Holdings ("Advertising") of their assets and
businesses (i) to TBWA International Inc., a Delaware corporation ("TBWA"), in
exchange for shares of voting Common Stock, par value $.50 per share, of its
ultimate parent Omnicom Group Inc., a New York corporation ("Omnicom") (such
shares of Common Stock, "Omnicom Common Stock") and TBWA's assumption of
liabilities pursuant to an Asset Purchase Agreement (the "Acquisition
Agreement") dated May 11, 1995, among Omnicom, TBWA, Holdings and Advertising
(the transactions contemplated by the Acquisition Agreement are herein called
the "Acquisition") and (ii) pursuant to a certain stock purchase agreement dated
as of May 11, 1995 between Holdings and Adelaide Horton (the "Advertising Stock
Sale Agreement" and the sale thereunder the "Advertising Stock Sale"), (b)
following the Closing under the Acquisition Agreement (the "Closing"), the
amendment of the Certificate of Incorporation of Holdings (the "Holdings
Certificate") to change the name of Holdings to CDH Corporation, and (c) the
approval and adoption of a plan of complete liquidation (the "Plan of
Liquidation") pursuant to which Holdings will (i) dissolve, (ii) establish a
liquidating trust (the "Liquidating Trust") pursuant to a liquidating trust
agreement (the "Liquidating Trust Agreement"), between Holdings and Thomas Patty
and David C. Wiener, as trustees (the "Liquidating Trustees"), for the benefit
of its stockholders, and (iii) distribute to its stockholders and/or the
Liquidating Trust all its remaining assets (the "Liquidation" and, together with
the Acquisition, the Advertising Stock Sale and the amendment to the Holdings
Certificate, the "Transactions").
The Acquisition Agreement provides a formula in which TBWA pays shares of
Omnicom Common Stock with an aggregate value (determined as more fully described
herein) of a base price which will be $25,180,563 if the Closing occurs on or
prior to August 31, 1995, or $25,930,880 if the Closing occurs between November
1, 1995 and December 31, 1995, plus an amount equal to $2,418 multiplied by the
number of days between the Closing and October 31, 1995 or December 31, 1995,
respectively. The aggregate acquisition price from the sale of assets to TBWA is
expected to be $25,328,061 if the Acquisition is consummated as expected on
August 31,1995, although it could range as high as $26,078,378 if consummated on
November 1, 1995.
The approval of the various proposals will require the affirmative vote of
the holders of a majority of the voting power represented by the outstanding
shares of Class A Common Stock and Class B Common Stock, voting together as a
single class. Directors and executive officers of Holdings owning as of August
1, 1995 approximately 77.98% of Holdings Common Stock in the aggregate have
expressed a present intention to vote in favor of the Transactions and
accordingly the Transactions can be approved by the affirmative vote of such
persons even if all other Holdings Stockholders vote against the proposals.
This Prospectus/Information Statement is also being furnished to holders of
Equity Appreciation Rights ("EARs") issued under the 1993 Equity Appreciation
Rights Plan of Holdings (the "EAR Plan") and of Equity Participation Units
("EPUs") issued under the 1988 Amended and Restated Equity Participation Plan of
Holdings (the "EPU Plan") (collectively, the "Rightsholders") who will receive
shares of Omnicom Common Stock as payment under such Plans subject to the same
terms and conditions as other stockholders of Holdings.
This Prospectus/Information Statement constitutes both an information
statement of Holdings with respect to the Special Meeting and a prospectus of
Omnicom with respect to up to 600,000 shares of Omnicom Common Stock, which may
be issued to Holdings and Advertising in connection with the Acquisition and
distributed to the holders of Holdings Common Stock and to the Rightsholders.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS/INFORMATION STATEMENT
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS/INFORMATION STATEMENT. 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 August 8, 1995.
---------------
<PAGE>
All information contained in this Prospectus/Information Statement relating
to Holdings and the Special Meeting (including, without limitation, financial
statements and other financial information regarding Holdings, background of and
Holdings' reasons for the Transactions, descriptions of the businesses,
properties, assets, and the liabilities of Holdings and Advertising, description
of the federal income tax consequences of the sale of assets and dissolution and
liquidation, and descriptions of the Liquidating Trust, the Plan of Liquidation,
and the Liquidating Trust Escrow Fund) have been supplied by Holdings and are
the sole responsibility of Holdings and Omnicom assumes no responsibility
therefor. All information contained in this Prospectus/Information Statement
relating to Omnicom (including, without limitation, financial information
regarding Omnicom, Omnicom's reasons for the Acquisition, and the description of
the business of Omnicom) has been supplied by Omnicom and is the sole
responsibility of Omnicom and Holdings assumes no responsibility therefor.
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, Holdings or any other
person. This Prospectus/Information Statement does not constitute an offer to
sell, or a solicitation of any offer to buy, any securities in any jurisdiction
to or from any person to whom it is not lawful to make any 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
Holdings since the date hereof or that the information contained herein is
correct as of any time subsequent to the date hereof.
---------------
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, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). 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 Northwest Atrium 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 Acquisition. 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 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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION ...................................................... 2
SUMMARY .................................................................... 5
COMPARATIVE PER SHARE DATA ................................................. 17
MARKET PRICE DATA .......................................................... 18
THE SPECIAL MEETING ........................................................ 19
Date, Time and Place of Special Meeting ................................ 19
Business to Be Transacted at the Special Meeting ....................... 19
Record Date, Voting Rights ............................................. 19
Voting Requirements .................................................... 19
Approval Under Holdings Certificate .................................... 19
Affiliate Ownership .................................................... 20
THE TRANSACTIONS ........................................................... 20
Background of and Holdings' Reasons for the Transactions; Recommendation
of the Holdings Board of Directors ................................... 20
Omnicom's Reasons for the Acquisition .................................. 21
Interests of Certain Persons in the Transactions ....................... 22
Accounting Treatment ................................................... 23
Regulatory Approvals ................................................... 23
Resale Restrictions .................................................... 24
Stock Exchange Listing ................................................. 24
No Dissenters' Rights .................................................. 24
THE ACQUISITION AGREEMENT .................................................. 25
The Acquisition ........................................................ 25
Other Terms and Conditions of the Acquisition Agreement ................ 29
THE ADVERTISING STOCK SALE AGREEMENT ....................................... 33
PROPOSED AMENDMENT OF THE HOLDINGS CERTIFICATE ............................. 33
THE PLAN OF LIQUIDATION .................................................... 34
General ................................................................ 34
Liquidating Distribution to Holdings Stockholders ...................... 34
Liquidating Distribution to Rightsholders .............................. 35
Fractional Shares ...................................................... 35
Operation of the Liquidating Trust ..................................... 35
The Liquidation Trust Escrow ........................................... 36
FEDERAL INCOME TAX CONSEQUENCES OF THE SALES OF ASSETS AND
DISSOLUTION AND LIQUIDATION ................................................ 37
Corporate Tax .......................................................... 37
Holder Tax ............................................................. 38
Withholding Taxes ...................................................... 40
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
BUSINESS INFORMATION CONCERNING OMNICOM .................................... 41
Description of Business ................................................ 41
Description of Property ................................................ 44
Legal Proceedings ...................................................... 45
SELECTED FINANCIAL DATA OF OMNICOM ......................................... 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF OMNICOM ........................................... 47
Results of Operations .................................................. 47
Capital Resources and Liquidity ........................................ 50
Recent Financial Data .................................................. 51
BUSINESS INFORMATION CONCERNING HOLDINGS ................................... 52
SELECTED FINANCIAL DATA OF HOLDINGS ........................................ 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HOLDINGS .......................................... 55
Results of Operations .................................................. 55
Liquidity and Capital Resources ........................................ 56
DESCRIPTION OF OMNICOM CAPITAL STOCK ....................................... 57
DESCRIPTION OF HOLDINGS CAPITAL STOCK ...................................... 58
COMPARISON OF SHAREHOLDER RIGHTS ........................................... 61
LEGAL MATTERS .............................................................. 67
EXPERTS .................................................................... 67
INDEX TO FINANCIAL STATEMENTS .............................................. 68
Omnicom Group Inc. and Subsidiaries .................................... F-1
Chiat/Day Holdings, Inc. and Subsidiaries .............................. F-22
</TABLE>
4
<PAGE>
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SUMMARY
(The following is a summary of certain information contained elsewhere in
this Prospectus/Information Statement and does not purport to be complete. This
summary is qualified in all respects by the remainder of this
Prospectus/Information Statement, which should be read in its entirety.)
The Companies
Omnicom Group Inc. .......... Omnicom, though 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; and offers 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 the trade journal, Advertising Age,
in 1994 Omnicom was ranked as the third largest
advertising agency group worldwide.
Omnicom operates three separate, independent
agency networks: the BBDO Worldwide Network, the
DDB Needham Worldwide Network and the TBWA
International Network. Omnicom also operates
independent agencies, Altschiller & Company and
Goodby, Silverstein & Partners, and certain
marketing service and specialty advertising
companies through Diversified Agency Services.
The principal executive offices of Omnicom are
located at 437 Madison Avenue, New York, New
York 10022, telephone number (212) 415-3600.
TBWA International Inc. ..... TBWA International Inc., is the holding company
for that portion of Omnicom's TBWA International
Network operating in the United States.
Chiat/Day Holdings, Inc. and
Chiat/Day inc. Advertising .. Holdings, primarily through its wholly owned
subsidiary Chiat/Day inc. Advertising, is
engaged in the business of planning and creating
advertising campaigns for clients, purchasing
various media spots (television, radio,
newspapers and magazines), and providing
marketing consultation, market research and
production services. In 1994, Holdings was the
16th largest advertising agency in the U.S.
according to statistics published in Advertising
Age.
The principal executive offices of Holdings are
located at 180 Maiden Lane, New York, New York
10038, telephone number (212) 804-1000.
The Special Meeting
Meeting Time, Date
and Place ................... The Special Meeting will be held at 9:30 am.,
local time, on Tuesday, August 29, 1995, at 180
Maiden Lane, New York, New York 10038, and at
any adjournment or postponement thereof.
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5
<PAGE>
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Record Date; Shares
Entitled To Vote ............ Holders of record of shares of Class A Common
Stock and Class B Common Stock of Holdings
(collectively, "Holdings Stockholders") at the
close of business on August 1, 1995 (the "Record
Date"), are entitled to notice of and to vote at
the Special Meeting. At such date there were
outstanding 13,527,269 shares of Class A Common
Stock, each of which will be entitled to one
vote at the Special Meeting, and 38,513,160
shares of Class B Common Stock, each of which
will be entitled to one vote at the Special
Meeting.
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 sale by
Holdings and Advertising of their assets
and businesses pursuant to (i) the
Acquisition Agreement, by and among
Omnicom, TBWA, Holdings and Advertising,
and (ii) the Advertising Stock Sale
Agreement between Holdings and Adelaide
Horton;
(b) a proposal to amend the Holdings
Certificate effective as of the Closing
under, and as defined in, the
Acquisition Agreement to change its
corporate name to CDH Corporation;
(c) the approval and adoption of the Plan of
Liquidation, including the dissolution
of Holdings, the creation of the
Liquidating Trust pursuant to the
Liquidating Trust Agreement and the
appointment of the Liquidating Trustees;
and
(d) such other proposals as may properly be
brought before the Special Meeting.
Votes Required .............. The approval of the various proposals by
Holdings Stockholders will require the
affirmative vote of the holders of a majority of
the voting power represented by the outstanding
shares of Class A Common Stock and of Class B
Common Stock, voting together as a single class.
Directors and executive officers of Holdings
owning as of August 1, 1995 approximately 77.98%
of the Holdings Common Stock in the aggregate
have expressed an intention to vote in favor of
the various proposals.
The Acquisition
The Acquisition ............. Pursuant to the Acquisition Agreement, TBWA will
acquire assets of Holdings and Advertising
relating to their advertising businesses (the
"Businesses") for consideration payable by the
issuance to Holdings and Advertising of shares
of Omnicom Common Stock for distribution to the
Holdings Stockholders and the Rightsholders, and
the assumption by TBWA of liabilities of
Holdings and Advertising relating to the
Businesses.
The shares of Omnicom Common Stock to be issued
to Holdings and Advertising shall be valued at
the "Market Value" (which shall be determined by
the average of the closing prices per share of
Omnicom Common Stock reported on the New York
Stock Exchange for the 20 consecutive trading
days ending three business days immediately
prior to the Closing Date under, and as
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6
<PAGE>
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defined in, the Acquisition Agreement). The
number of shares of Omnicom Common Stock to be
issued shall be calculated and applied as
follows:
(a) TBWA will pay Holdings shares of Omnicom
Common Stock having an aggregate Market
Value of (x) if the Closing is held on
or prior to October 31, 1995, (i)
$11,180,563 plus (ii) an amount equal to
$2,418 multiplied by the number of days
in the period commencing on the Closing
Date and ending on October 31, 1995, or
(y) if the Closing is held after October
31, 1995 and on or prior to December 31,
1995, (iii) $11,930,880 plus (iv) an
amount equal to $2,418 multiplied by the
number of days in the period commencing
on the Closing Date and ending on
December 31, 1995. Of this Omnicom
Common Stock, shares having such Market
Value as may be necessary to insure the
satisfaction of obligations of Holdings
and Advertising to the Rightsholders,
will be contributed to Advertising (the
"Contributed Stock").
(b) TBWA will pay Advertising shares of
Omnicom Common Stock having an aggregate
Market Value of $14,000,000.
It is anticipated that the Closing Date will
occur on August 31, 1995, which would result in
an aggregate purchase price of $25,328,061.
Nevertheless, the aggregate purchase price could
range from $26,078,378 to $25,930,880 if the
Closing is held between November 1, 1995 and
December 31, 1995.
Although the Closing of the Acquisition is
scheduled for August 31, 1995, it may be delayed
beyond such date if all conditions of the
Acquisition Agreement have not been satisfied or
waived by such date. If this occurs, the Closing
will be rescheduled to a date on or after
November 1, 1995. At the time this
Prospectus/Information Statement is being
mailed, Omnicom has no reason to believe that
the Closing Date will not be held on August 31,
1995, as scheduled. See "The Acquisition
Agreement--The Acquisition--Closing Date".
Since the number of shares of Omnicom Common
Stock which TBWA is required to deliver to
Holdings and Advertising under the Acquisition
Agreement is in part based upon the market value
of Omnicom Common Stock measured over a
specified period prior to Closing, the Holdings
Stockholders will not be able to determine the
number of shares of Omnicom Common Stock
deliverable to Holdings and Advertising pursuant
to the Acquisition Agreement at the time of the
Special Meeting.
On the date on which Omnicom publishes financial
results covering at least 30 days of combined
operations for Omnicom and the Businesses (the
"Distribution Date"), the shares of Omnicom
Common Stock paid to Holdings and to Advertising
will be distributed as follows:
(a) Ten percent of the Omnicom Common Stock
paid to Holdings (after deducting the
Contributed Stock) and to Advertising
(including ten percent of the
Contributed Stock) will be placed into
an escrow account (the "General Escrow
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7
<PAGE>
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Fund") under the terms of an escrow
agreement (the "Escrow Agreement") among
TBWA, Holdings, Advertising and The
Chase Manhattan Bank, N.A., as escrow
agent (the "Escrow Agent"), to provide
for payment of indemnification
obligations to Omnicom and TBWA arising
out of the Acquisition Agreement more
fully described under "Escrow Agreement
and Indemnification Obligations".
(b) Shares of Omnicom Common Stock having a
Market Value of $1,700,000, contributed
by Holdings and Advertising on a pro
rata basis, will be placed into an
additional escrow account (the "Special
Escrow Fund") under the Escrow Agreement
to provide for the payment of
indemnification obligations to Omnicom
and TBWA relating to an asset whose
collectibility could not reasonably be
assured at the signing of the
Acquisition Agreement (the "Indemnified
Receivable").
(c) Five percent of the Omnicom Common Stock
paid to Holdings (after deducting the
Contributed Stock) will be delivered to
the Liquidating Trust to fund the
payment and satisfaction of obligations
and liabilities of Holdings and
Advertising as shall not have been
assumed by TBWA under the Acquisition
Agreement; and five percent of the
Omnicom Common Stock paid to Advertising
(including five percent of the
Contributed Stock) will be delivered to
a separate escrow fund (the "Liquidating
Trust Escrow Fund") to fund (together on
a pro rata basis with the Holdings
Stockholders) the payment and
satisfaction of Liabilities of Holdings
and Advertising as shall not have been
assumed by TBWA under the Acquisition
Agreement.
(d) The remainder of the Omnicom Common
Stock held by Holdings will be delivered
to the holders of the Holdings Common
Stock pro rata in accordance with their
respective shareholdings; and the
remainder of the Omnicom Common Stock
held by Advertising will be delivered to
the Rightsholders pro rata in accordance
with their respective interests.
(e) After the distribution by Advertising to
the Rightsholders, Holdings shall
consummate the sale of the capital stock
of Advertising pursuant to the
Advertising Stock Sale Agreement.
See "The Acquisition Agreement--The
Acquisition-- Determination of Acquisition
Price", "--Renegotiation of Acquisition Price",
"--Payment of Obligations to Rightsholders" and
"--The Escrow Agreement"; "The Acquisition
Agreement--Other Terms and Conditions of the
Acquisition Agreement--Indemnification"; and
"The Advertising Stock Sale Agreement".
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8
<PAGE>
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Distribution Date ........... The distributions of the shares of Omnicom
Common Stock by Holdings and Advertising will
not occur until the "Distribution Date". The
Distribution Date will be the date of
publication by Omnicom of financial results
covering at least 30 days of combined operations
for Omnicom and the Businesses after the Closing
Date, provided that if the Closing occurs on or
prior to August 31, 1995, the Distribution Date
will be the earlier of the date of such
publication and October 30, 1995 (whether or not
such financial results are published). Assuming
the Closing occurs on or before August 31, 1995,
the earliest that such financial results would
be published is October 26, 1995. Holdings is
requiring that the shares of Omnicom Stock
received by Holdings and Advertising at the
Closing not be distributed until the
Distribution Date to any Holdings Stockholder or
Rightsholder who is deemed to be an "affiliate"
(as such term is understood under the Securities
Act) so that it may obtain the tax treatment
that it desires and is not distributing such
shares to the non-affiliate Holdings
Stockholders and Rightsholders at the time of
the Closing because it is administratively more
convenient have one distribution date. During
the period from the Closing Date through the
Distribution Date, Holdings Stockholders and
Rightsholders will bear the risk of fluctuations
in the market price of the Omnicom Common Stock.
Payment of Obligations
to Rightsholders ............ In 1993 and 1988, Holdings adopted the EAR Plan
and EPU Plan, respectively, and has issued
awards under such Plans. If the employment of a
participant is terminated for any reason, then
under the terms of the EAR Plan, such
participant shall have the right, but not the
obligation, to cause Holdings or Advertising to,
and under the EPU Plan Holdings or Advertising
shall, redeem vested units for cash in each case
at their book value as at the end of the most
recent fiscal quarter. At April 30, 1995, such
book value was less than zero. However, in the
event of a liquidation, with respect to their
priority, each EAR and EPU shall be deemed
equivalent in value to one share of Holdings
Common Stock and shall be treated in the same
manner as Holdings Common Stock.
Therefore, Rightsholders will receive shares of
Omnicom Common Stock as payment under such
Plans, subject to the same terms and conditions
as if they were Holdings Stockholders, including
without limitation the escrow and
indemnification provisions more fully described
herein.
Per Share and Per Right
Consideration ............... The total value of Omnicom Common Stock to be
paid by TBWA to Holdings and Advertising
pursuant to the Acquisition Agreement will be
dependent on when the Closing Date occurs (as
described above and as more fully described
under "The Acquisition Agreement--The
Acquisition--Determination of Acquisition
Price"). In order to make certain estimates
relating to the consideration to be paid to the
Holdings Stockholders and the Rightsholders
which are included in this
Prospectus/Information Statement, it has been
assumed that the Closing Date will occur on
August 31, 1995 and the Market Value of the
Omnicom Common Stock will be $563/8. Based on an
estimated total acquisition price of
$25,328,061, after deposits are made on behalf
of the Holdings Stockholders and Rightsholders
into the General Escrow Fund, the Special Escrow
Fund, the Liquidating Trust and the Liquidating
Trust Escrow Fund (as applicable), each holder
of Class A Common Stock, Class B Common Stock,
EPUs and EARs will be entitled to receive in a
liquidating distribution, per share of Holdings
Common Stock or per EPU or EAR, shares of
Omnicom Common Stock with a value (determined in
accordance with the terms of the Acquisition
Agreement) equal to $0.178. The remaining shares
of Omnicom Common Stock received by Holdings and
Advertising will be used to fund the Liquidating
Trust and the Liquidating Trust Escrow Fund,
which will be responsible for taxes and the
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9
<PAGE>
--------------------------------------------------------------------------------
expenses of winding up the affairs of Holdings,
as well as possible contingent liabilities, and
to fund the General Escrow Fund and the Special
Escrow Fund (individually sometimes referred to
as an "Escrow Fund" and collectively as the
"Escrow Funds"). Based upon current estimates of
taxes and expenses, if there were no claims for
indemnification or other contingent liabilities,
each Holdings Stockholder and Rightsholder would
be entitiled to receive upon the release of such
funds from the applicable trust and/or escrows
shares of Omnicom Common Stock with an aggregate
value (determined in accordance with the terms
of the Acquisition Agreement) equal to
approximately $0.037, for a total per share or
per unit value equal to approximately $0.215.
Since the amounts held in such escrows and such
trust are subject to claims in respect of
contingent liabilities, there can be no
assurances that amounts held therein will in
fact be distributed to Holdings Stockholders and
Rightholders.
See "The Plan of Liquidation--Liquidating
Distribution to Holdings Stockholders" and
"--Liquidating Distribution to Rightsholders".
Escrow Agreement and
Indemnification Obligations The obligation of Holdings to indemnify Omnicom
and TBWA against losses and damages may arise in
one of two ways: pursuant to the general
indemnification obligations under the
Acquisition Agreement, or as a result of
inaccurate or misleading information supplied by
Holdings for use in this Prospectus/Information
Statement.
The indemnification obligations of Holdings
under the Acquisition Agreement will be limited
to and satisfied solely from the Escrow Funds
under the Escrow Agreement (such that neither
Omnicom nor TBWA nor any of their affiliates
will have any recourse for the payment of any
losses or other damages of any kind against
Holdings or Advertising or their respective
affiliates or past, present or future directors,
officers or employees or the Holdings
Stockholders or Rightsholders, nor shall any of
such persons be personally liable for any such
losses or damages). The General Escrow Fund will
be separated into two sub-accounts: the
"Stockholders General Escrow Fund" and the
"Rightsholders General Escrow Fund".
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 TBWA and the Businesses following the
Closing Date or one year from the Closing Date
(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). The Special Escrow Fund will also be
separated into two sub-accounts: the
"Stockholders Special Escrow Fund" and the
"Rightsholders Special Escrow Fund".
Indemnification obligations to be satisfied out
of the Special Escrow Fund will terminate no
later than the second anniversary of the Closing
under the Acquisition Agreement (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). Following the
termination of the Escrow Agreement, shares then
remaining on deposit in the Stockholders General
and Special Escrow Funds and the Rightsholders
General and Special Escrow Funds, respectively,
will be distributed to the Liquidating Trust and
the Liquidating Trust Escrow Fund in each case
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10
<PAGE>
--------------------------------------------------------------------------------
to satisfy contingent liabilities of Holdings in
accordance with the Liquidating Trust Agreement
and the Liquidating Trust Escrow Agreement,
respectively. Each sub-account of an Escrow Fund
will satisfy its pro rata share of the
applicable category of losses based on the
number of shares of Omnicom Common Stock then on
deposit in such account. For purposes of
satisfying any claims, each share of Omnicom
Common Stock deposited in any Escrow Fund will
be valued at the Market Value, regardless of
actual fluctuations in the market value of the
Omnicom Common Stock after the Closing Date.
The indemnification obligations of Holdings
which may arise to the extent it furnishes
inaccurate or incomplete information for
inclusion in the Prospectus/Information
Statement are not limited to amounts on deposit
in the Escrow Funds nor to the limited periods
of survival.
Deposit and Pledge
Agreement ................... The applicable shares of Omnicom Common Stock
will be deposited into the Escrow Funds on the
Distribution Date. Prior to such time, the
applicable shares of Omnicom Common Stock will
be delivered by Holdings and Advertising to The
Chase Manhattan Bank, N.A., as deposit agent
(the "Deposit Agent"), pursuant to the terms of
a deposit and pledge agreement among Omnicom,
TBWA, Holdings, Advertising and the Deposit
Agent (the "Deposit and Pledge Agreement"), to
be held as security for the fulfillment of the
obligation of Holdings and Advertising to
deliver the said shares into such Escrow Funds.
Arrangements with Respect to
Holdings Preferred Stock .... On July 10, 1995, the Trustee of the Chiat/Day
Profit Sharing and 401(k) Plan (the "Profit
Sharing Plan"), the sole record owner of the
preferred stock, cumulative, $.01 par value per
share, of Holdings (the "Holdings Preferred
Stock"), pursuant to an Agreement dated as of
May 9, 1995 between Holdings and the Trustee of
the Profit Sharing Plan (the "Profit Sharing
Plan Purchase Agreement"), sold to Holdings for
a cash payment of $14,081,773.93 all the shares
of Holdings Preferred Stock it owned. Holdings
paid for such shares by obtaining a loan which
was guaranteed by Omnicom.
Other Terms and Conditions of the Acquisition Agreement
Financial Actions ........... Between the date of the Acquisition Agreement
and the Closing Date, certain financial
arrangements are required to occur: (i) TBWA
shall lend Holdings $55,000,000 and lend
Advertising $1,000,000 on reasonable commercial
terms and pursuant to financing documents
reasonably acceptable to the parties thereto and
in substantially the form of the Amended and
Restated Credit Agreement between Holdings and
Omnicom, among others, more fully described in
"The Transactions--Background of and Reasons for
the Transactions; Recommendations of the
Holdings Board of Directors" below, and the
documents ancillary thereto; (ii) Holdings shall
make a capital contribution of not less than
$55,000,000 to Advertising; and (iii)
Advertising shall repay in full all outstanding
principal, together with accrued interest, of
its 8.17% Junior Subordinated Installment Notes,
its 13.25% Junior Subordinated Notes, its 13.25%
Senior Subordinated Notes, and the notes issued
under the Amended and Restated Credit Agreement,
which principal and interest amounts would equal
approximately $53,600,000 in the aggregate at
August 31, 1995.
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11
<PAGE>
--------------------------------------------------------------------------------
Conditions to the
Acquisition ................. The obligations of Omnicom, TBWA, Holdings and
Advertising to consummate the Acquisition are
subject to the satisfaction of certain mutual
conditions, including, without limitation:
obtaining the requisite approval of the Holdings
Stockholders; the absence of any pending
litigation, proceeding, investigation or claim
by governmental authorities seeking to restrain
or invalidate the consummation of the
Acquisition; the Registration Statement having
been declared effective by the SEC and not
subject to a stop order or threatened stop order
and the Omnicom Common Stock being registered
thereunder having been approved for listing on
the New York Stock Exchange.
The obligations of Omnicom and TBWA to
consummate the Acquisition are also subject to
the satisfaction of certain additional
conditions including, without limitation: the
SEC not having objected to Omnicom's treatment
of the acquisition of the Businesses as a
pooling-of-interests for accounting purposes;
Advertising continuing to be the advertising
agency of record for certain key clients, or,
with respect to some of these clients,
Advertising having replaced a loss of any such
client with an account of similar size (measured
by revenues); the receipt by Holdings of letters
from Rightsholders who own in the aggregate at
least 83% of the outstanding EARs and EPUs on
the Closing Date, which group must include all
Rightsholders who are also Holdings
Stockholders, to the effect that they will not
raise any objection to the payment of their
outstanding awards being made in shares of
Omnicom Stock and their corresponding
participation in the indemnification obligations
of Holdings (each, a "Consent Letter"); the
execution of employment agreements with TBWA or
one of its affiliates by each of Robert
Kuperman, Thomas Patty, Adelaide Horton, Ira
Matathia, Steven Hancock and Robert Wolf, and
the execution of non-competition agreements by
each of such individuals; there not having been
a material and adverse change in the Businesses;
and if the Closing is on or after November 1,
1995, EBIT for the 1995 Fiscal Year is at least
$13,500,000).
The obligations of Holdings and Advertising to
effect the Acquisition are also subject to the
satisfaction of certain additional conditions
including, without limitation: TBWA or one of
its affiliates having entered into each of the
employment agreements described above; and TBWA
having assumed the employment agreement between
Holdings and Leland Clow and the employment and
consulting agreement between Holdings and Jay
Chiat (and TBWA having validly assigned Mr.
Chiat's contract to Omnicom); and, if the
Closing being after August 31, 1995, that the
Annualized Revenues of Holdings and its
subsidiaries for the 1995 Fiscal Year, shall not
be greater than $100,000,000 and EBIT of
Holdings and its subsidiaries for the 1995
Fiscal Year is not reasonably expected to exceed
$17,200,000.
See "The Acquisition Agreement--Other Terms and
Conditions of the Acquisition Agreement", "The
Acquisition Agreement --The Acquisition--
Renegotiation of Acquisition Price" and
"The Transactions--Interests of Certain
Persons in the Transactions -- Employment and
Consulting Agreements; Non-Competition
Agreements".
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12
<PAGE>
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Termination of the
Acquisition Agreement ....... The Acquisition Agreement may be terminated
under certain circumstances, notwithstanding
approval of the Acquisition by the Holdings
Stockholders, (i) by mutual consent of the
Boards of Directors of Omnicom, TBWA, Holdings
and Advertising or (ii) by either Omnicom and
TBWA or by Holdings and Advertising (a) if there
has been a breach of any representation,
warranty or covenant by the other party and such
breach is not cured within 30 days after notice
of such breach, unless such breach does not
materially adversely affect the business or
assets of the breaching party or the ability of
any or all parties, to consummate the
transactions contemplated by the Acquisition
Agreement, (b) if a final, nonappealable order
or judgment is issued enjoining the transactions
contemplated by the Acquisition Agreement, or
(c) if the Acquisition is not consummated by
December 31, 1995 or at any time after October
31, 1995 if the conditions to such parties'
obligation to close shall have become incapable
of being satisfied by December 31, 1995. See
"The Acquisition Agreement--Other Terms and
Conditions of the Acquisition Agreement".
Operation of the Businesses
After the Closing under the
Acquisition Agreement ...... After the Closing under the Acquisition
Agreement, the Businesses will be combined with
the TBWA International network of companies to
form a combined full service operating network
operating as one integrated unit. The integrated
unit will operate under the name "TBWA
Chiat/Day" in North America. See "The
Transactions--Interests of Certain Persons in
the Transactions."
The Amendment
Change of Holdings'
Corporate Name .............. The Holdings Certificate sets forth Holdings'
corporate name as "Chiat/Day Holdings Inc."
Following the Closing under the Acquisition
Agreement, TBWA will own all rights of Holdings
in and to the "Chiat/Day" name, and Holdings has
agreed that immediately following the Closing
thereunder it would change its corporate name to
a name not including the "Chiat/Day" designation
or any variation thereof. Under the proposed
amendment, Holdings name will be changed to "CDH
Corporation". See "Proposed Amendment of the
Holdings Certificate."
The Liquidation
Dissolution ................. Following the Closing under the Acquisition
Agreement, Holdings will be dissolved in
accordance with the procedures prescribed under
the Delaware General Corporation Law (the
"DGCL"). Upon dissolution, Holdings will
establish the Liquidating Trust, the trustees of
which will have the authority to wind up
Holdings' affairs.
Establishment and Operation
of Liquidating Trust ....... The Liquidating Trust will hold all of the
assets of Holdings remaining after the initial
distributions of Omnicom Common Stock described
above under "--The Acquisition" (these remaining
assets are expected to be nominal). Pursuant to
the terms of the Liquidating Trust Agreement
governing the operation of the Liquidating
Trust, each share of Holdings Common Stock,
regardless of class, shall have an equal
interest in the Liquidating Trust.
The Liquidating Trust will be funded, on behalf
of the Holdings Stockholders, with five percent
of the Omnicom Common Stock paid by TBWA to
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13
<PAGE>
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Holdings as part of the acquisition price under
the Acquisition Agreement (after deducting the
Contributed Stock). The Liquidating Trust may
also receive from time to time, on behalf of the
Holdings Stockholders, distributions of Omnicom
Common Stock pursuant to the terms of the Escrow
Agreement.
The Liquidating Trustees will distribute the
assets in the Liquidating Trust to the Holdings
Stockholders, pro rata in accordance with their
interests, as expeditiously as possible,
provided that adequate reserves shall be taken
for Trust Liabilities (as defined below),
expenses of the Liquidating Trustees (which
shall include ordinary and customary expenses)
and to make distributions to any missing
beneficiaries. Payments made from the
Liquidating Trust to satisfy such liabilities
will be reimbursed in part from the Liquidating
Trust Escrow Fund.
See "The Plan of Liquidation--General" and
"--Operation of the Liquidating Trust".
The Liquidating
Trust Escrow Fund ........... The Liquidating Trust Escrow Fund will be
funded, on behalf of the Rightsholders, with
five percent of the Omnicom Common Stock paid by
TBWA to Advertising as part of the acquisition
price under the Acquisition Agreement (including
five percent of the Contributed Stock). The
Liquidating Trust Escrow Fund may also receive
from time to time, on behalf of the
Rightsholders, distributions of Omnicom Common
Stock pursuant to the terms of the Escrow
Agreement.
The Liquidating Trust Escrow Fund will be used
to satisfy the Rightsholders' share of Trust
Liabilities.
Whenever the Liquidating Trustee makes a
distribution of trust property to the Holdings
Stockholders, a proportionate amount of the
Liquidating Trust Escrow Fund will be
distributed to the Rightsholders, pro rata in
accordance with their interests.
See "The Plan of Liquidation--The Liquidating
Trust Escrow".
Other Considerations
Recommendation of the Board
of Directors of Holdings ... The Board of Directors of Holdings, by unanimous
vote, approved each of the matters constituting
part of the Transactions, and recommends the
approval of each of such matters by the Holdings
Stockholders.
Interests of Certain Persons
in the Transactions ......... As of August 1, 1995, directors and executive
officers of Holdings owned of record an
aggregate of 77.98% of the outstanding shares of
Holdings Common Stock. Accordingly, the
Transactions can be approved without the
affirmative vote of any other Holdings
Stockholders. Each of such directors and
executive officers has expressed an intention to
vote the shares of Holdings Common Stock owned
by him or her in favor of the Transactions.
As of August 1, 1995, directors and executive
officers of Holdings owned of record an
aggregate of 84.44% of the outstanding awards
under the EAR and EPU Plans. Each of such
directors and executive officers have executed
and delivered to Holdings his or her Consent
Letter as described above.
For a description of certain interests of
certain directors and executive officers of
Holdings in the Transactions that are in
addition to the interests of Holdings
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14
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Stockholders generally, see "The
Transactions--Interests of Certain Persons in
the Transactions".
Accounting Treatment......... The Acquisition will be accounted for by Omnicom
as a pooling-of-interests. See "The
Transactions--Accounting Treatment".
Federal Income
Tax Consequences ............ The Acquisition will be a taxable transaction to
Holdings and Advertising; and the distributions
pursuant to the Plan of Liquidation will be a
taxable transaction to Holdings Stockholders and
Rightsholders. Holders of Class A Common Stock
and of Class B Common Stock issued in July, 1989
pursuant to a certain stock purchase agreement
between Holdings and certain management and
other investors ("Mojo B Common Stock") will
recognize gain or loss as a result of the
Transactions equal to the difference between the
sum of (i) the fair market value of all Omnicom
Common Stock received (whether distributed or
placed in the Liquidating Trust or the
Stockholders General or Special Escrow Funds)
plus (ii) the cash received in respect of any
fractional shares, and their adjusted basis in
the Class A Common Stock or Mojo B Common Stock.
Holders of Class B Common Stock other than the
Mojo B Common Stock will recognize compensation
income equal to the excess of the sum of (a) the
fair market value of the Omnicom Common Stock
received (whether distributed or placed in the
Liquidating Trust or the Stockholders General or
Special Escrow Funds) plus (b) the cash received
in respect of any fractional shares, over the
sum of (x) the amount paid for their Class B
Common Stock, and (y) the amount, if any, of
ordinary income which they have previously
recognized in respect of their Class B Common
Stock.
Each Holdings Stockholder's share of the income
(including dividends on the Omnicom Common
Stock), gain or loss realized by the Liquidating
Trust or the Stockholders General or Special
Escrow Funds will be recognized by such Holdings
Stockholder (whether or not distributed) in
computing his or her federal income tax.
Rightsholders will recognize compensation income
equal to the fair market value of the Omnicom
Common Stock received (whether distributed or
placed in the Liquidating Trust Escrow Fund or
the Rightsholders General or Special Escrow
Funds) plus the cash received in respect of any
fractional shares. Each Rightsholder's share of
the income (including dividends on the Omnicom
Common Stock), gain or loss realized by the
Liquidating Trust Escrow Fund or the
Rightsholders General or Special Escrow Funds
will be recognized by such Rightsholder (whether
or not distributed) in computing his or her
federal income tax.
See "Federal Income Tax Consequences of the
Sales of Assets and Dissolution and
Liquidation".
IT IS RECOMMENDED THAT EACH HOLDINGS STOCKHOLDER
AND RIGHTSHOLDER CAREFULLY REVIEW THE MATTERS
DISCUSSED UNDER THE CAPTION "FEDERAL INCOME TAX
CONSEQUENCES OF THE SALES OF ASSETS AND
DISSOLUTION AND LIQUIDATION" AND CONSULT HIS OR
HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC
TAX CONSEQUENCES OF THE TRANSACTIONS TO HIM OR
HER.
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Regulatory Approvals ........ Omnicom and Holdings 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 June 27, 1995 and June
28, 1995, respectively, and each was advised
that there was early termination of the
applicable waiting period on July 11, 1995. See
"The Transactions--Regulatory Approvals".
Resale Restrictions ......... Resales of Omnicom Common Stock by Holdings
Stockholders or Rightsholders who are deemed to
be "affiliates" (as such term is understood
under the Securities Act) of Holdings prior to
the Acquisition may be subject to certain
restrictions. See "The Transactions-- Resale
Restrictions".
No Dissenters' Rights Holders of Holdings Common Stock are not
entitled to dissenters' rights under the DGCL in
connection with the Transactions. See "The
Transactions--No Dissenters' Rights".
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<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are unaudited income from continuing operations, cash
dividends declared and book value per common share data of Omnicom and Holdings
on both historical and pro forma combined bases. Pro forma combined income from
continuing operations per share is calculated under the pooling-of-interests
accounting method and assumes that the Acquisition had occurred immediately
prior to the period being reported upon. Since Omnicom is on a calendar year for
financial reporting purposes, while Holdings' fiscal year ends on October 31,
the combined results for the three months ended March 31, 1995 and for each year
in the three years ended December 31, 1994, respectively, reflect Omnicom's
results for those periods and Holdings' results for the three months ended
January 31, 1995, and for each year in the three years ended October 31, 1994.
Pro forma combined cash dividends declared per share reflects Omnicom cash
dividends declared in the periods indicated. The per share equivalent pro forma
combined data has been calculated based upon the material assumptions that the
aggregate acquisition price will be $25,328,061, and the Market Value of the
Omnicom Common Stock will be $563/8. The information set forth below should be
read in conjunction with the respective audited and unaudited financial
statements of Omnicom and of Holdings included in this Prospectus/Information
Statement.
<TABLE>
<CAPTION>
As of March 31, 1995 As of December 31, 1994
--------------------- -----------------------
<S> <C> <C>
Book Value per Share:
Omnicom ........................................... $ 15.86 $ 14.96
Holdings .......................................... $ (1.62) $ (1.60)
Pro forma ......................................... $ 13.29 $ 12.45
Equivalent pro forma ............................. $ 0.05 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months ended ---------------------------------------------
March 31, 1995 1992 1993 1994
------------------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash Dividends Declared
per Share:
Omnicom .......................................... $ 0.31 $ 1.21 $ 1.24 $ 1.24
Holdings ......................................... -- -- -- --
Pro forma ........................................ $ 0.31 $ 1.21 $ 1.24 $ 1.24
Equivalent pro forma ............................. -- -- -- --
Net Income per Share:
Omnicom:
Primary ........................................ $ 0.68 $ 2.31 $ 2.79 $ 3.15
Fully Diluted .................................. $ 0.68 $ 2.20 $ 2.62 $ 3.07
Holdings:
Primary ........................................ $(0.03) $ 0.03 $(0.39) $ 0.11
Primary (including
EPUs and EARs) ............................... $(0.03) $ 0.02 $(0.39) $ 0.05
Pro forma:
Primary ........................................ $ 0.65 $ 2.35 $ 2.14 $ 3.23
Fully Diluted .................................. $ 0.65 $ 2.24 $ 2.09 $ 3.14
Equivalent Pro Forma:
Primary ........................................ -- $ 0.01 $ 0.01 $ 0.01
Fully diluted .................................. -- $ 0.01 $ 0.01 $ 0.01
</TABLE>
17
<PAGE>
MARKET PRICE DATA
There is no public market for Holdings Common Stock. Holdings has not
declared or paid any cash dividends on any shares of Holdings Common Stock in
the current fiscal year, or in any of the periods presented in "Selected
Financial Data of Holdings". In the event that the Acquisition is not
consummated, it is not expected that any cash dividends would be paid on any
shares of Holdings Common Stock in the foreseeable future.
Omnicom Common Stock is listed on the NYSE. 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 NYSE Composite Tape, in each case based
on published financial sources, and the dividends paid per share on the Omnicom
Common Stock for such periods.
Omnicom Common Stock
----------------------------
High Low Dividends
---- --- ---------
1993
First Quarter .............................. 47 1/2 38 3/8 .310
Second Quarter ............................. 47 1/4 38 1/4 .310
Third Quarter .............................. 46 1/4 37 .310
Fourth Quarter ............................. 46 1/2 41 1/2 .310
1994
First Quarter .............................. 49 7/8 43 3/4 .310
Second Quarter ............................. 49 1/2 44 7/8 .310
Third Quarter .............................. 51 1/2 48 .310
Fourth Quarter ............................. 53 3/4 49 .310
1995
First Quarter .............................. 56 7/8 50 .310
Second Quarter ............................. 62 53 7/8 .310
Third Quarter (through July 31, 1995) ...... 62 3/4 58 5/8
On May 10, 1995, the last full trading day prior to the execution and
delivery of the Acquisition Agreement, the closing price of Omnicom Common Stock
on the NYSE Composite Tape was $56 3/8 per share.
On July 31, 1995, the most recent practicable date prior to the printing of
this Prospectus/Information Statement, the closing price of Omnicom Common Stock
on the NYSE Composite Tape was $60 3/8 per share.
On July 31, 1995, the most recent practicable date prior to the printing of
this Prospectus/Information Statement, there were approximately 2,481 holders of
record of Omnicom Common Stock and no holders of record of Omnicom's Preferred
Stock, par value $1.00 per share. The Acquisition 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, and the ratio of total consolidated indebtedness to
total consolidated capitalization.
18
<PAGE>
THE SPECIAL MEETING
Date, Time and Place of Special Meeting
This Prospectus/Information Statement is being furnished to the holders of
Class A Common Stock and the holders of Class B Common Stock in connection with
the Special Meeting of Holdings Stockholders to be held on Tuesday, August 29,
1995, at the offices of Holdings, 180 Maiden Lane, New York, New York 10038, at
9:30 A.M., local time, and at any adjournment or postponement thereof.
This Prospectus/Information Statement is first being mailed to the Holdings
Stockholders on or about August 8, 1995.
Business to Be Transacted at the Special Meeting
At the Special Meeting, Holdings Stockholders will consider and vote upon
the following matters (collectively, the "Holdings Vote Matters"):
(i) a proposal to approve the sale by Holdings and Advertising of
their assets and businesses pursuant to (i) the Acquisition
Agreement and (ii) the Advertising Stock Sale Agreement;
(ii) a proposal to amend the Holdings Certificate effective as of the
Closing under the Acquisition Agreement to change its corporate
name to CDH Corporation;
(iii) the approval and adoption of the Plan of Liquidation, including
the dissolution of Holdings, the creation of the Liquidating
Trust pursuant to the Liquidating Trust Agreement and the
appointment of the Liquidating Trustees; and
(iv) such other proposals as may properly be brought before the
Special Meeting or any adjournment thereof.
None of the Holdings Vote Matters shall become effective unless all of the
proposals are adopted by the requisite vote of the Holdings Stockholders.
Each of the directors and executive officers of Holdings has expressed an
intention to vote in favor of the Transactions.
Record Date, Voting Rights
Only stockholders of record of Class A Common Stock and Class B Common
Stock at the close of business on August 1, 1995 will be entitled to vote at the
Special Meeting. On that date, there were issued and outstanding 13,527,269
shares of Class A Common Stock and 38,513,160 shares of Class B Common Stock.
Each share of each class of Holdings Common Stock is entitled to one vote per
share on the Holdings Vote Matters at the Special Meeting or any adjournment or
postponement thereof.
Voting Requirements
The presence of the holders of a majority of the voting power of all shares
of Class A Common Stock and Class B Common Stock entitled to vote outstanding on
the record date is necessary to constitute a quorum for the transaction of
business at the Special Meeting.
Under the DGCL and the Holdings Certificate, the affirmative vote of the
holders of the majority of the outstanding shares of Class A Common Stock and
Class B Common Stock, voting together as a class, will be required to approve
the Holdings Vote Matters. Abstentions have the effect of negative votes.
Approval Under Holdings Certificate
Under the Holdings Certificate, the approval of a majority of the holders
of Class A Common Stock, excluding certain shares that were originally issued to
Morgan Capital Corporation, is required for the sale of the assets pursuant to
the Acquisition Agreement as well as certain transactions provided for herein
with affiliated parties. See "The Transactions--Interests of Certain Persons in
the Transaction". The holders of a majority of such Class A Common Stock have
consented to such matters as provided in the Holdings Certificate and in the
manner provided for in Holdings' by-laws and Section 228 of the DGCL.
19
<PAGE>
Affiliate Ownership
As of the Record Date, directors and executive officers of Holdings owned
an aggregate of approximately 7,419,533 shares of Class A Common Stock and
33,159,475shares of Class B Common Stock, representing approximately 77.98% of
the aggregate outstanding shares of Holdings Common Stock. Accordingly the
Transactions can be approved by the affirmative vote of such persons even if all
other Holdings Stockholders vote against the proposals. These persons have
expressed an intention to vote in favor of the Transactions.
THE TRANSACTIONS
(The information contained in this Registration Statement of which this
Prospectus/Information Statement froms a part is qualified in its entirety by
reference to the complete texts of the Acquisition Agreement, the Advertising
Stock Sale Agreement, the Escrow Agreement, the Plan of Liquidation, the
Liquidating Trust Agreement and the Liquidating Trust Escrow Agreement, which
are filed as Exhibits thereto and are incorporated herein by reference.)
Background of and Holdings' Reasons for the Transactions;
Recommendation of the Holdings Board of Directors
Overview
After the Closing, the Businesses will be combined with the TBWA
International network of companies to form a combined advertising network
operating as one integrated unit. In furtherance of this, the members of the
TBWA International group operating under the TBWA name in North America will
change their corporate names to include the designation "TBWA Chiat/Day". See
"Interests of Certain Persons in the Transactions" for a description of the
positions within this integrated network that will be held by certain executive
officers of Holdings and its subsidiaries.
The terms of the Acquisition, including the terms of the Escrow Agreement,
are the result of arm's-length negotiation between representatives of Omnicom
and TBWA and representatives of Holdings and Advertising.
Background of the Transactions
In early 1993, Holdings commenced exploring strategic alternatives in order
to expand internationally and reduce the debt on its balance sheet. These
alternatives included possible strategic combinations with other advertising
agencies and groups, including Omnicom. Preliminary discussions were held with
parties other than Omnicom but such discussions did not lead to serious
negotiations. Holdings and Omnicom began informally discussing possible
combinations in 1993 shortly after Omnicom acquired TBWA, but at such time these
discussions did not advance to substantive negotiations and ceased. Since 1993,
however, TBWA and Holdings frequently consulted with respect to their joint
representation of Nissan.
In late 1994 and January 1995, Holdings was engaged in discussions with
potential lenders regarding the refinancing of its bank credit facility (the
"Bank Credit Agreement") which was to mature in May 1995 and $11 million of
Holding's 13.25% Senior Subordinated Notes which matured and were paid in full
on August 1, 1995. The terms proposed by prospective institutional lenders
included substantial penalties for early repayment and the equivalent of an
equity participation in Holdings in the event that it were sold while such
financing was outstanding. During the period Holdings was considering whether to
accept such terms of refinancing, discussions with Omnicom were renewed and
began to assume the characteristics of negotiations in January of 1995. Holdings
realized that to proceed with the proposed refinancing would create significant
obstacles to consummating any acquisition transaction. Instead, Omnicom agreed
to assume the liabilities of the banks under the Bank Credit Agreement and
extended the maturity until December 10, 1995 (as assumed and amended, the
"Amended and Restated Credit Agreement").
The negotiations with Omnicom concerning a possible combination with TBWA
and Holdings continued through January and on February 1, the parties reached
preliminary agreement in principle and a public announcement was made. The
negotiations continued through March and April 1995 and culminated on May 11,
1995 in the execution of the definitive Acquisition Agreement and related
documents following approval by the Board of Directors of each company.
20
<PAGE>
Holding's Reasons for the Transactions
The decision of the Board of Directors of Holdings to enter into the
Acquisition was largely influenced by the Board's assessment of the perceived
benefits of a strategic combination with TBWA in the United States and Europe as
well as the limited growth opportunities of an independent Holdings in light of
its highly leveraged balance sheet. The Board also took into consideration that
the shareholders of Holdings, including the Profit Sharing Plan, had been
holding for a significant period of time an illiquid investment in Holdings. The
Board of Directors believes that the Acquisition offers a fair price for the
assets of Holdings and Advertising, provides the Holdings Stockholders a liquid
investment and that the combination with TBWA contemplated by the Acquisition
provides an excellent strategic fit and the increased liquidity needed to
capitalize on growth opportunities for the combined organization.
The Holdings Board of Directors made its determination without the
assistance of a financial advisor and without a "fairness opinion". Instead, the
Holdings Board of Directors has relied upon its own experience and the knowledge
of its management in assessing the advantages and disadvantages of the
Transactions.
Recommendation of the Holdings Board of Directors
For the reasons set forth above, the Holdings Board of Directors believes
that the Transactions are fair to, and in the best interests of, Holdings and
the Holdings Stockholders and recommends that the Holdings Stockholders vote FOR
the approval of the sale of the assets and businesses of Holdings and
Advertising pursuant to the Acquisition Agreement and the Advertising Stock Sale
Agreement, FOR the approval of the amendment of the Holdings Certificate, and
FOR the approval of the Plan of Liquidation.
Omnicom's Reasons for the Acquisition
Omnicom's and TBWA's respective Board of Directors each believes that the
Acquisition represents an opportunity for TBWA to strengthen its position as a
major global advertising agency network without diminishing its overall
financial strength. TBWA's international strength is concentrated outside of the
United States, while Holdings and Advertising have a strong North American
presence; the Acquisition is therefore a natural geographic fit which will
expand TBWA's worldwide capabilities.
The fit is also strategic from a client servicing perspective. Advertising
is the advertising agency of record in the United States and Canada for the
Nissan and Infiniti divisions of the Nissan Motor Corp.; while TBWA handles the
Nissan business on a Pan European basis as well as the local business in 9
European countries. The Acquisition represents an opportunity to strengthen the
Nissan relationship by being in a position to service this client throughout the
world.
The Boards of Directors of Omnicom and TBWA believe that the corporate
cultures of the two networks will combine well, as both networks have
historically placed their major emphasis on creative output. The Boards of
Directors of TBWA and Omnicom also considered the potential synergies which
would result in lower costs as a result of the combining of the operations.
Omnicom has not retained an outside party to evaluate the proposed
Acquisition but has instead relied upon the knowledge of its management in
considering the financial aspects of the Acquisition.
In reaching its conclusion, the Board of Directors of Omnicom and TBWA
considered, among other things: (i) information concerning the financial
performance, condition, business operations and prospects of each of Holdings
and Advertising; and (ii) the proposed terms and structure of the Acquisition.
It is anticipated that the Acquisition will be non-dilutive to Omnicom's results
of operations. Accordingly, the Board of Directors of Omnicom has unanimously
approved the Acquisition Agreement and the transactions contemplated thereby.
21
<PAGE>
Interests of Certain Persons in the Transactions
(The following describes certain interests of the directors and executive
officers of Holdings in the Transactions that are in addition to the interests
of Holdings Stockholders generally.)
Employment and Consulting Agreements; Non-Competition Agreements
Pursuant to the Acquisition Agreement, the employment and consulting
agreement dated May 11, 1995 between Jay Chiat and Holdings will be assumed by
TBWA and then assigned to Omnicom. Upon the completion of the Acquisition, Mr.
Chiat will serve as a consultant under the employment and consulting agreement
and will serve as such until the seventh anniversary of the Closing Date, and
the agreement automatically extends until the earlier of the tenth anniversary
of the Closing Date or such earlier date on which Holdings no longer maintains
certain key client relationships. Mr. Chiat's compensation in Omnicom's opinion
is reasonable for the services he is to render and in any event is significantly
less than he was earning immediately prior to the Acquisition. Mr. Chiat will
not be provided with any employee benefits. In addition, pursuant to the terms
of the Acquisition Agreement, Mr. Chiat will enter into a non-competition
agreement with Omnicom which will have a term of 10 years commencing on the
Closing Date of the Acquisition. No additional consideration is being paid with
respect to such non-competition agreement.
Pursuant to the Acquisition Agreement, the employment agreement dated May
11, 1995 between Leland Clow and Holdings will be assumed by TBWA. Such
employment agreement extends to December 31, 1998 and provides for annual salary
compensation at the same levels as the predecessor employment agreement.
Following the consummation of the Acquisition, Mr. Clow's salary level will be
subject to increases in connection with the salary review procedures of TBWA and
Mr. Clow will participate in TBWA bonus plans. Benefits substantially equivalent
to those Mr. Clow was receiving under his predecessor employment agreement will
also be provided. In addition, pursuant to the terms of the Acquisition
Agreement, Mr. Clow will enter into a non-competition agreement with Omnicom
which will have a term commencing on the Closing Date of the Acquisition and
ending on the later of December 31, 1998 or two years after the termination of
Mr. Clow's employment. No additional consideration is being paid with respect to
such non-competition agreement.
Pursuant to the Acquisition Agreement, TBWA or one of its affiliates will
enter into employment agreements with Steve Hancock, the President/CEO of the
Toronto office of Advertising, and each of the following key executive officers
who are also directors of Holdings: Adelaide Horton; Robert Kuperman; Ira
Matathia; and Tom Patty. It is anticipated that the employment agreements will
have a term commencing on the Closing Date of the Acquisition and ending on
December 31, 1998 and provide for annual salary compensation and fringe benefits
substantially equivalent to those such persons were receiving immediately prior
to the Acquisition. Such persons will also be eligible to participate in TBWA
bonus plans. In addition, the Acquisition Agreement provides that Robert Wolf,
also a director of Holdings, will enter into an employment agreement with
Omnicom with a term ending on December 31, 1996. Mr. Wolf's employment agreement
provides for the same annual salary he was receiving immediately prior to the
Acquisition and benefits customarily provided by Omnicom to its employees.
Pursuant to the terms of the Acquisition Agreement, the executives and
directors listed in the first sentence of the immediately preceding paragraph
and Mr. Wolf will enter into non-competition agreements with Omnicom which will
have a term commencing on the closing date of the Acquisition and ending on the
later of December 31, 1998 or two years after termination of the applicable
party's employment. There is no additional consideration being paid in
connection with these non-competition agreements.
In connection with the Transactions, a 1987 deferred compensation
arrangement between Advertising and Robert Kuperman will be canceled by the
payment of the present value of the vested benefits thereunder. The liability
for such vested benefits has already been recorded on the books of Advertising.
The terms of the Acquisition Agreement permit Holdings and Advertising to
pay to their directors and employees bonuses accrued for fiscal year 1994, and
permit Advertising to accrue for bonuses for the 1995 Fiscal Year an amount up
to 10% of profit from normal advertising operations before all federal, state,
local and foreign income taxes and adjusted to exclude interest income and
interest expense, with such accrual to be reviewed and adjusted upward or
downward after completion of the 1995 Fiscal Year consistent with past practice
(provided that for the period from the Closing Date through October 31, 1995,
the accrual shall be based on the financial results of the Businesses as
conducted by TBWA). Holdings has established a bonus pool of approximately
22
<PAGE>
$2,500,000 with respect to fiscal year 1994, 40% of which will be allocated to
its senior officers, all of whom are directors. Bonuses with respect to Fiscal
Year 1995 have not yet been determined, but it is expected that all or a
substantial portion of such bonuses will be paid to the same individuals. In
addition, if such profits exceed budgeted amounts for the 1995 Fiscal Year,
additional bonus payments will be made.
Pursuant to the Acquisition Agreement, all other employees of Holdings or
Advertising (many of whom are stockholders of Holdings) will be offered
employment by TBWA or its affiliates on substantially equivalent terms as their
employment prior to the Acquisition.
Other Agreements
Prior to the Closing Date, Holdings will redeem its 8.17% Junior
Subordinated Installment Notes due 2005 and its 13.25% Junior Subordinated Notes
due 2005 (collectively, the "Junior Notes") at their face value plus accrued
interest to the date of redemption. Jay Chiat, a director of Holdings,
beneficially owns $3,522,000 in principal amount of the Junior Notes and will
receive $5,328,001 as a result of this redemption. The funds required to redeem
such notes shall be borrowed from TBWA; see "The Acquisition Agreement--Other
Terms and Conditions of the Acquisition Agreement--Financial Actions."
Pursuant to the Acquisition Agreement, certain works of art owned by Mr.
Chiat will be leased to TBWA on the same basis as the art is currently leased
for a nominal sum commencing on the consummation of the Acquisition. In
connection with such lease, TBWA will pay for the costs of insuring such works
of art against theft, loss and damage. The lease will be terminable upon one
month's notice by either party thereto.
Following the Distribution Date, Ms. Horton (together with any permitted
assignees) will purchase from Holdings for $250,000 in cash, all of the issued
and outstanding common stock of Advertising pursuant to the Advertising Stock
Sale Agreement. At the time of such purchase, the only asset which Advertising
will own will be its rights, through its ownership of all of the capital stock
of Chiat/Day Direct Marketing, Inc., under the litigation entitled Chiat/Day
Direct Marketing, Inc. f/k/a/ Perkins/Butler Direct Marketing Inc. v. National
Car Rental Systems, Inc., No. 93 Civ. 2717 (S.D.N.Y.)(the "National Car Suit").
Pursuant to the Advertising Stock Sale Agreement, Holdings has agreed to
indemnify Ms. Horton and Advertising for any losses incurred in respect of
liabilities of Advertising not assumed by TBWA under the Acquisition Agreement.
To the extent that Holdings were unable to fully indemnify Ms. Horton and
Advertising, any recovery from the National Car Suit received by Advertising
would be at risk. The Board of Directors of Holdings believes that the sale of
Advertising toMs. Horton is on terms no less favorable to Holdings than would
result from an arms-length negotiation conducted with unrelated parties. See
"The Advertising Stock Sale Agreement".
David C. Wiener and Company, P.C., of which David C. Wiener is a principal,
will receive fees for services rendered to Holdings and Advertising in
connection with the Acquisition in an aggregate amount estimated to be
approximately $350,000. Mr. Wiener is a member of the Board of Directors of
Holdings.
Prior to the consummation of the Acquisition, pursuant to the Profit
Sharing Plan Purchase Agreement the shares of Preferred Stock held in the Profit
Sharing Plan are being acquired by Holdings for $14,081,773.93 in cash. All of
the directors and senior executive officers of Holdings (together with
approximately 600 other employees), other than Mr. Wiener, are participants in
such plan.
See also "Description of Holdings Capital Stock" for a description of the
security ownership of management of Holdings.
Accounting Treatment
The Acquisition will be accounted for by Omnicom as a pooling-of-interests
for financial reporting purposes in accordance with generally accepted
accounting principles. Accordingly, upon consummation of the Acquisition, the
assets and liabilities of Holdings and Advertising will be included in the
consolidated balance sheet of Omnicom and its subsidiaries in the amounts which
were included in the books of Holdings immediately before the Acquisition,
subject to adjustments required to conform the accounting policies of Holdings
to those utilized by Omnicom, and such other adjustments as may be necessary to
comply with pooling-of-interests accounting rules and regulations.
Regulatory Approvals
Under the Hart-Scott-Rodino Act and the rules promulgated therewith by the
FTC, the Acquisition 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
23
<PAGE>
Holdings filed notification and report forms under the Hart-Scott-Rodino Act
with the FTC and the Antitrust Division on June 27, 1995 and June 28, 1995,
respectively. The required waiting period under the Hart-Scott-Rodino Act was
terminated early on July 11, 1995.
At any time before or after consummation of the Acquisition, 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 Acquisition or seeking divestiture of assets of Omnicom. At
any time before or after the Closing Date, 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
Acquisition 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 Holdings believe that
the Acquisition 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 Acquisition on antitrust grounds will not be made or that, if such a
challenge were made, Omnicom and Holdings would prevail or would not be required
to accept certain conditions, possibly including certain divestitures of assets
of Omnicom, in order to consummate the Acquisition.
Resale Restrictions
All shares of Omnicom Common Stock received by Holdings Stockholders and
Rightsholders as a result of the Acquisition 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 Holdings
prior to the Acquisition ("Holdings Affiliates") shall be subject to certain
restrictions, as more fully described below. Persons who may be deemed to be
affiliates of Holdings 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 Acquisition Agreement provides that Holdings
will furnish Omnicom with a list identifying all persons who may be considered
to be Holdings Affiliates, and gives Omnicom the right to review such list and
require changes. Holdings is required to use its best efforts to cause each of
the Holdings Affiliates to execute a written agreement to comply fully with the
restrictions described below.
Federal Securities Laws. Shares of Omnicom Common Stock received by
Holdings Affiliates may be resold by such Holdings 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
Acquisition, Holdings 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 the Businesses after the Closing Date (except that
this restriction will lapse no later than October 30, 1995 as long as the
Closing of the Acquisition has occurred on or prior to August 31, 1995). This
prohibition precludes the use of "hedging" techniques during this period.
Stock Exchange Listing
It is a condition to the Acquisition that the shares of Omnicom Common
Stock required to be issued in connection with the Acquisition 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.
No Dissenters' Rights
Holders of Holdings Common Stock are not entitled to any rights of
dissenting shareholders under Delaware law in connection with the Transactions.
24
<PAGE>
THE ACQUISITION AGREEMENT
(The following is a brief summary of the Acquisition Agreement and the
related Escrow Agreement. Copies of the Acquisition Agreement and the Escrow
Agreement are filed as Exhibits to the Registration Statement of which this
Prospectus/Information Statement forms a part and are incorporated herein by
reference. This summary is qualified in its entirety by reference to the
Acquisition Agreement and the Escrow Agreement.)
The Acquisition
General
Omnicom, TBWA, Holdings and Advertising entered into the Acquisition
Agreement on May 11, 1995. It provides for TBWA to acquire the assets of
Holdings and Advertising other than (a) their respective corporate seals and
minute books, (b) the issued and outstanding capital stock of Advertising and
Chiat/Day Direct Marketing, Inc. and any other subsidiary which is inactive, has
no assets or is in the process of liquidation, (c) the rights of Holdings
arising under the Advertising Stock Sale Agreement, other than the right to the
cash acquisition price thereunder to the extent reflected in the books and
records of Holdings, and (d) the rights of Advertising in and to the National
Car Suit (the value of which will be obtained by TBWA through the right to
receive the cash acquisition price receivable under the Advertising Stock Sale
Agreement), in exchange for the payment of the acquisition price as more fully
described below and the assumption by TBWA of liabilities of Holdings and
Advertising relating to the Businesses (certain non-operating liabilities of
Holdings and Advertising are not to be assumed by TBWA pursuant to the terms of
the Acquisition Agreement).
Determination of Acquisition Price
Subject to the potential adjustment described below in "The Acquisition
Agreement--The Acquisition--Renegotiation of Acquisition Price", the
consideration payable by TBWA for the Businesses will be determined as follows:
(a) TBWA will pay Holdings shares of Omnicom Common Stock having an
aggregate Market Value of (x) if the Closing is held on or prior to October
31, 1995, (i) $11,180,563 plus (ii) an amount equal to $2,418 multiplied by
the number of days in the period commencing on the Closing Date and ending
on October 31, 1995, or (y) if the Closing Date is held after October 31,
1995 and on or prior to December 31, 1995, (iii) $11,930,880 plus (iv) an
amount equal to $2,418 multiplied by the number of days in the period
commencing on the Closing Date and ending on December 31, 1995. Of this
Omnicom Common Stock, the Contributed Stock (being shares having such
Market Value as may be necessary to insure the satisfaction of obligations
of Holdings and Advertising to the Rightsholders) will be contributed to
Advertising for the benefit of the Rightsholders.
(b) TBWA will pay Advertising shares of Omnicom Common Stock having an
aggregate Market Value of $14,000,000.
The "Market Value" of the shares of Omnicom Common Stock will be determined
by the average of the closing prices per share of Omnicom Common Stock reported
on the New York Stock Exchange for the 20 consecutive trading days ending three
business days immediately prior to the Closing Date. Omnicom has agreed that it
will not, and will not permit TBWA or any of its other subsidiaries to, purchase
any Omnicom Common Stock (whether pursuant to open-market purchases or
otherwise) during the period during which the Market Value is calculated.
The shares of Omnicom Common Stock received as acquisition price will be
allocated on a pro rata basis to the Holdings Stockholders after allocating
sufficient shares to satisfy Holdings' and Advertising's obligations under the
EPU and EAR Plans. Accordingly, such shares of Omnicom Common Stock will be
distributed to the Holdings Stockholders and the Rightsholders as described in
"The Acquisition Agreement--The Acquisition --Payment of Obligations to
Rightsholders" and "The Plan of Liquidation--Liquidating Distributions to
Holdings Stockholders" and "--Liquidating Distributions to Rightsholders".
25
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Renegotiation of Acquisition Price
In the event that on the scheduled Closing Date the "Annualized Revenues"
of Holdings and its subsidiaries exceeds $100,000,000, and the EBIT of Holdings
for its 1995 Fiscal Year exceeds or is reasonably expected to exceed
$17,200,000, then Omnicom, TBWA, Holdings and Advertising have agreed that each
would negotiate in good faith whether or not there should be an upwards
adjustment to the acquisition price. If agreement is reached to so increase the
acquisition price, the Acquisition Agreement and related documents would be
amended to the extent necessary to reflect this adjustment. If the parties do
not agree on such an increase, Holdings would have the option to either
terminate the Acquisition Agreement or proceed with the Closing at the original
acquisition price.
"Annualized Revenues" has been defined in the Acquisition Agreement to mean
the commissions and fees of Holdings and its subsidiaries for the fiscal year
commencing November 1, 1994 and ending October 31, 1995 (forecasted, to the
extent necessary) from those clients that were such on October 31, 1994 and from
new clients won since November 1, 1994, annualized as if those clients had been
clients during the entire year. The calculation excludes commissions and fees
earned from clients lost since November 1, 1994 or expected to be lost in the
near future.
Holdings does not currently anticipate, based on its existing clients and
their specified budgets, that Annualized Revenues or EBIT will exceed the
renegotiation thresholds and accordingly, has waived such right to renegotiate
through August 31, 1995.
Closing Date
Although the Closing of the Acquisition is scheduled for August 31, 1995,
it may be delayed beyond such date if all conditions of the Acquisition
Agreement have not been satisfied or waived by such date. If this occurs, the
Closing will be rescheduled to a date on or after November 1, 1995. At the time
this Prospectus/Information Statement is being mailed, Omnicom has no reason to
believe that the Closing Date will not be held on August 31, 1995, as scheduled.
Since the number of shares of Omnicom Common Stock which TBWA is required
to deliver to Holdings and Advertising under the Acquisition Agreement is in
part based upon the market value of Omnicom Common Stock measured over a
specified period prior to Closing, the Holdings Stockholders will not be able to
determine the number of shares of Omnicom Common Stock deliverable to Holdings
and Advertising pursuant to the Acquisition Agreement at the time of the Special
Meeting.
Arrangements With Respect to Holdings Preferred Stock
On July 10, 1995 (the "Preferred Stock Purchase Date"), the Trustee of the
Profit Sharing Plan, the sole record owner of the Holdings Preferred Stock, sold
to Holdings for a cash payment of $14,081,773.93 (representing the aggregate
liquidation preference of such Holdings Preferred Stock) all the shares of
Holdings Preferred Stock it owned, pursuant to the terms of the Profit Sharing
Plan Purchase Agreement.
Certain financial arrangements were made in order to finance this purchase
of Holdings Preferred Stock. On the Preferred Stock Purchase Date, Omnicom
guaranteed a loan to Holdings in the principal amount of $15,100,000 (the
"Preferred Stock Purchase Loan"), the proceeds of which were applied by Holdings
to purchase the Holdings Preferred Stock pursuant to the Profit Sharing Plan
Purchase Agreement and to repay certain other indebtedness. On the day prior to
the Closing Date, TBWA shall lend Holdings an amount equal to the outstanding
balance of the Preferred Stock Purchase Loan (the "TBWA Loan"), the proceeds of
which will be applied by Holdings to repay the Preferred Stock Purchase Loan.
Holdings is in the process of obtaining all governmental approvals
(including approval by the Internal Revenue Service) and of taking all other
action necessary to terminate the Profit Sharing Plan effective on or about the
Closing Date under the Acquisition Agreement, even though such approvals may be
obtained and such action taken on or after the Closing Date. Amounts on deposit
in the Profit Sharing Plan will then be distributed to participants in
accordance with their respective interests in the Profit Sharing Plan.
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Payment of Obligations to Rightsholders
In 1993 and 1988, Holdings adopted the EAR Plan and EPU Plan, respectively,
and has issued awards under such Plans. If the employment of a participant is
terminated for any reason, then under the terms of the EAR Plan such participant
shall have the right, but not the obligation within ninety days of such
termination to cause Holdings or Advertising to, and under the EPU Plan Holdings
or Advertising shall, redeem vested units for cash in each case at the net book
value of the phantom shares which are the subject of the awards as at the end of
the most recent fiscal quarter. However, in the event of a liquidation, with
respect to their priority, each EAR and EPU shall be deemed equivalent in value
to one share of Holdings Common Stock and shall be treated in the same manner as
Holdings Common Stock.
Therefore, as is the case with Holdings Stockholders, obligations of
Holdings and Advertising to the Rightsholders will be settled by the
distribution to the Rightsholders of shares of Omnicom Common Stock. To ensure
that Advertising will be able to satisfy such obligations, Holdings shall
contribute to Advertising the Contributed Stock, if any is required to meet such
obligations.
This Prospectus/Information Statement is being furnished to Rightsholders
because the Rightsholders will receive shares of Omnicom Common Stock as payment
under such Plans, subject to the same terms and conditions as if they were
Holdings Stockholders. Accordingly, on the Distribution Date (a) shares of
Omnicom Common Stock paid to Advertising under the Acquisition Agreement
(including the Contributed Stock) will be subject to the indemnification
obligations of Holdings, such that (i) ten percent of such shares will be placed
in the General Escrow Fund under the Escrow Agreement and (ii) shares of Omnicom
Common Stock having an aggregate Market Value equal to the Rightsholders' pro
rata share of $1,700,000 will be placed in the Special Escrow Fund under the
Escrow Agreement, and (b) five percent of the shares of Omnicom Common Stock
paid to Advertising under the Acquisition Agreement (including the Contributed
Stock) will be transferred to the Liquidating Trust Escrow Fund to fund
(together on a pro rata basis with the Holdings Stockholders) the payment and
satisfaction of any obligations and liabilities of Holdings and Advertising as
shall not have been assumed by TBWA under the Acquisition Agreement. The
remainder of the shares of Omnicom Common Stock paid to Advertising under the
Acquisition Agreement (including the Contributed Stock) will be distributed to
the Rightsholders. See "The Plan of Liquidation--The Liquidating Trust Escrow".
It is a condition of Closing of the Acquisition Agreement that
Rightsholders that hold in the aggregate at least 83% of the outstanding EARs
and EPUs on the Closing Date, which group must include all Rightsholders that
are also Holdings Stockholders, shall have delivered to Holdings their written
Consent Letters to the effect that they will not raise any objection to this
treatment and consenting to the appointment of Holdings as their collective
agent in connection with the administration of the Escrow Agreement.
As of August 1, 1995, directors and executive officers of Holdings held an
aggregate of 84.44% of the outstanding awards under the EAR and EPU Plans as of
such date. Each of such directors and executive officers has executed and
delivered to Holdings his or her Consent Letter in respect of such awards.
Accordingly, the above described condition of Closing has been satisfied.
The Escrow Agreement
Holdings on behalf of itself and the Holdings Stockholders, and
Advertising, on behalf of itself and the Rightsholders shall establish, pursuant
to the Escrow Agreement, the General Escrow Fund by the deposit with the Escrow
Agent of certificates in negotiable form duly endorsed in blank representing
shares of Omnicom Common Stock equal to ten percent of the shares of Omnicom
Common Stock issued and delivered as part of the acquisition price. The General
Escrow Fund will be segregated into two funds: the Stockholders General Escrow
Fund and the Rightsholders General Escrow Fund, based on the respective number
of shares of Omnicom Common Stock contributed by Holdings and Advertising, and
each Fund will satisfy its pro rata share of any indemnification payment based
on the number of shares of Omnicom Common Stock then on deposit in such Fund.
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Holdings and Advertising will also establish, pursuant to the Escrow
Agreement, the Special Escrow Fund, by the deposit with the Escrow Agent of
shares of Omnicom Common Stock having an aggregate Market Value of $1,700,000,
of which approximately $750,000 will be contributed by Holdings, on behalf of
the Holdings Stockholders, and approximately $950,000 will be contributed by
Advertising, on behalf of the Rightsholders. The Special Escrow Fund will also
be segregated into two funds: the Stockholders Special Escrow Fund and the
Rightsholders Special Escrow Fund, each of which will satisfy its pro rata share
of any indemnification payment based on the number of shares of Omnicom Common
Stock on deposit in such Fund. (For a description of the indemnification
obligations of Holdings and the Holdings Stockholders and the Rightsholders to
Omnicom, see "The Acquisition Agreement--Other Terms and Conditions of the
Acquisition Agreement--Indemnification".)
Pursuant to the Escrow Agreement, Holdings, on behalf of itself and the
Holdings Stockholders, and Advertising, on behalf of itself and the
Rightsholders, shall grant to Omnicom a security interest in the Escrow Funds to
secure the performance of the indemnification obligations of Holdings under the
Acquisition Agreement and the performance of its obligations to Omnicom under
the Escrow Agreement.
Pursuant to the Escrow Agreement, Omnicom and Holdings have agreed to
indemnify and hold the Escrow Agent and its directors, officers and employees
harmless from and against any and all costs, charges, damages and attorney's
fees which the Escrow Agent in good faith may incur or suffer in connection with
or arising out of the Escrow Agreement. The fees and charges of the Escrow Agent
with respect to the Escrow Agreement shall be shared between Omnicom and
Holdings in accordance with the Escrow Agent's customary fees as charged from
time to time. The Escrow Agent may deduct any unpaid fees from the Escrow Funds
prior to the Escrow Agent's distributing any assets in connection with the
termination of the Escrow Funds.
The Liquidating Trustees shall replace Holdings as a party to the Escrow
Agreement following the creation and funding of the Liquidating Trust.
The Escrow Agreement shall automatically terminate if and when all the
shares of Omnicom Common Stock held in any 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 wherever there
shall be delivered to the Escrow Agent either (i) a certificate signed by
Omnicom and Holdings, or (ii) a certified copy of an arbitration award rendered
pursuant to the arbitration proceedings specified in the Escrow Agreement
determining, that an indemnification payment is due from the General Escrow
Funds to Omnicom, 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.
On the next business day following the earlier of (x) the first independent
audit report, if any, of TBWA and the Businesses following the Closing Date, or
(y) one year from the Closing Date, the Escrow Agent shall deliver to the
Liquidating Trust (on behalf of the Holdings Stockholders) the remaining shares
of Omnicom Common Stock then on deposit in the Stockholders General Escrow Fund,
and to the Liquidating Trust Escrow Fund (on behalf of the Rightsholders) the
remaining shares of Omnicom Common Stock then on deposit in the Rightsholders
General Escrow Fund; as reduced in each case by any amounts necessary to cover
outstanding claims for indemnification.
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 Holdings (or the Holdings Stockholders following the dissolution of
Holdings) and the Rightsholders, shall be paid directly to the Liquidating
Trustees (on behalf of the Holdings Stockholders) or the Liquidating Trust
Escrow Agent (on behalf of the Rightsholders), as the case may be, and shall not
constitute part of the General Escrow Fund.
Special Escrow Fund. The Escrow Agreement provides that whenever there
shall be delivered to the Escrow Agent either (i) a certificate signed by
Omnicom and Holdings, or (ii) a certified copy of a final nonappealable judgment
of an arbitration award rendered pursuant to the arbitration proceedings
specified in the Escrow Agreement determining, that a payment is due from the
Special Escrow Fund to Holdings or Omnicom, 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 such party the
number of shares of Omnicom Common Stock, valued at the original Market Value,
equal to the payment.
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Amounts will be due from the Special Escrow Fund when the collectibility of
the Indemnified Receivable becomes determined or, if earlier, on the second
anniversary of the Closing Date under the Acquisition Agreement. Therefore, at
such time, if any, as TBWA recovers the payments in respect of said asset
("Asset Proceeds"), it shall give notice to such effect to Holdings and to the
Escrow Agent, together with an accounting of the costs and expenses incurred in
connection with recovering any such payments at any time after the Execution
Date of the Acquisition Agreement ("Asset Costs"). TBWA shall be entitled to
receive payment from the Stockholders Special Escrow Fund and the Rightsholders
Special Escrow Fund, pro rata in accordance with the number of shares of Omnicom
Common Stock then on deposit in each such Fund, in the amount of the Asset
Costs; the Liquidating Trustees (on behalf of the Holdings Stockholders) and the
Liquidating Trust Escrow Agent (on behalf of the Rightsholders) shall be
entitled to receive payment from the Stockholders Special Escrow Fund and the
Rightsholders Special Escrow Fund, pro rata in accordance with the number of
shares of Omnicom Common Stock then on deposit in each such Fund, in an
aggregate amount equal to (i) the amount of the Asset Proceeds, less (ii) the
Asset Costs, less (iii) $250,000 if the final determination of the matter occurs
within one year from the Closing Date, or $300,000 if the matter is determined
thereafter; TBWA shall then be entitled to receive the balance, if any,
remaining in the Special Escrow Fund.
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 Holdings (or the Holdings Stockholders following the dissolution of
Holdings) and the Rightsholders, shall be paid directly to the Liquidating
Trustees (on behalf of the Holdings Stockholders) or the Liquidating Trust
Escrow Agent (on behalf of the Rightsholders), as the case may be, and shall not
constitute part of the Special Escrow Fund.
The Deposit and Pledge Agreement
Pursuant to the Deposit and Pledge Agreement, Holdings and Advertising will
deliver to the Deposit Agent all the shares of Omnicom Common Stock received by
them on the Closing Date.
On the Distribution Date, the Deposit Agent will make the distributions of
such shares of Omnicom Common Stock described under "Summary--The
Acquisition--The Acquisition" to the Liquidating Trust, the Liquidating Trust
Escrow Fund, the Holdings Stockholders and the Rightsholders.
On the Distribution Date, the Deposit Agent will also deposit the
applicable shares of Omnicom Common Stock into the Escrow Funds. Prior to such
time, the applicable shares of Omnicom Common Stock will be held by the Escrow
Agent as security for the fulfillment of the obligation of Holdings and
Advertising to deliver such shares into the Escrow Funds.
Employment Arrangements
The Acquisition Agreement provides that TBWA or one of the other companies
operating within the TBWA International network will offer employment to
substantially all employees of Holdings and its subsidiaries following the
Closing of the Acquisition; and that such personnel who accept such employment
will be employed on substantially equivalent terms and conditions as such
personnel were employed by Holdings or a subsidiary immediately prior to the
Closing Date. The Acquisition Agreement also provides for specific employment
arrangements with certain key executives; see "The Transactions--Interests of
Certain Persons in the Transactions".
Other Terms and Conditions of the Acquisition Agreement
Representations and Warranties
The Acquisition Agreement contains various customary representations and
warranties of Holdings and Advertising relating to, among other things: (a) the
organization and similar corporate matters of Holdings and each of the
subsidiaries; (b) the capital structure of Holdings and each of its
subsidiaries; (c) authorization, execution, delivery, performance and
enforceability of the Acquisition Agreement and related matters; (d) absence of
conflicts under charters or by-laws, required consents or approvals and
violations of any instruments or laws; (e) financial statements provided to
Omnicom by Holdings; (f) absence of certain material adverse events, changes or
effects; (f) certain accounting matters; (g) certain contracts, including, but
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not limited to, certain 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
Holdings 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; (p) the shareholder
votes required; (q) change in capital structure; and (r) trademarks, trade
names, assumed or fictitious names, copyrights, logos, service marks and
slogans.
The Acquisition Agreement also contains various customary representations
and warranties of Omnicom and TBWA relating to, among other things; (a)
organization and similar corporate matters of Omnicom and TBWA; (b)
authorization, execution and delivery of the Acquisition Agreement and related
matters; (c) absence of any conflicts under charters or by-laws, required
consents or approvals and no violations of any instruments or laws; (d) the
shares of Omnicom Common Stock to be issued in the transaction; (e) financial
statements provided to Holdings by Omnicom; (f) absence of certain adverse
events, changes or effects; and (g) litigation.
Certain Covenants
Pursuant to the Acquisition Agreement, Holdings has agreed that, during the
period from the date of the Acquisition Agreement until the Closing Date,
Holdings and each of its subsidiaries will, among other things: (a) obtain all
government approvals and other action necessary to terminate the Profit Sharing
Plan of Holdings; (b) not solicit, initiate or encourage any other offer or
inquiry concerning the acquisition of the Businesses; (c) give timely notice of
a meeting to its shareholders to approve the Acquisition, the amendment of the
Holdings Certificate and the Plan of Liquidation and recommend approval of the
transactions contemplated by the Acquisition Agreement; (d) inform Omnicom's
management as to the operation, management and business of the Businesses to be
acquired; (e) permit Omnicom and TBWA to make such reasonable investigation of
the assets, properties and businesses of Holdings and Advertising as they deem
necessary or advisable; and (f) except (i) as permitted by the Acquisition
Agreement and (ii) as otherwise consented to in writing by Omnicom (on behalf of
itself and TBWA), operate its businesses in the ordinary course and, to the
extent consistent with past practice, and use reasonable commercial efforts to
preserve existing business organization, existing business relationships, and
goodwill intact.
Pursuant to the Acquisition Agreement, Holdings and Advertising and Omnicom
and TBWA have covenanted with one another to take certain additional actions,
including without limitation; (a) Holdings and Omnicom each shall 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 Acquisition; (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; (c) to each use its reasonable efforts to consummate the
Acquisition and the other transactions contemplated by the Acquisition
Agreement; (d) to obtain all necessary sales tax exemptions and take all such
other action as may be necessary or advisable to cause the transfer of the
Assets to TBWA pursuant to the Acquisition not to be subject to sales tax; and
(e) to take the actions more fully described in "Financial Actions" below.
Financial Actions
Between the date of the Acquisition Agreement and the Closing Date, certain
financial arrangements are required to occur: (i) TBWA shall lend Holdings
$55,000,000 and lend Advertising $1,000,000 on reasonable commercial terms and
pursuant to financing documents reasonably acceptable to the parties thereto and
in substantially the form of the Amended and Restated Credit Agreement and the
documents ancillary thereto; (ii) Holdings shall make a capital contribution of
not less than $55,000,000 to Advertising; and (iii) Advertising shall repay in
full all outstanding principal, together with accrued interest, of the 8.17%
Junior Subordinated Installment Notes, the 13.25% Junior Subordinated Notes, the
13.25% Senior Subordinated Notes, and the notes issued under the Amended and
Restated Credit Agreement. Upon the payment in full of amounts outstanding under
the Amended and Restated Credit Agreement in accordance with clause (iii) and
prior to the Closing, Omnicom agrees to release or cause to be released (by,
among other things, filing UCC termination statements in all appropriate
jurisdictions) all liens and other security interests granted to secure the
obligations of Holdings and Advertising thereunder.
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Indemnification
The Acquisition Agreement provides that Holdings shall indemnify and hold
harmless, and shall reimburse TBWA and its affiliates, directors, officers, and
employees for all losses, claims, damages and liabilities (to the extent not
covered by insurance), and all fees, costs and expenses (including reasonable
attorneys' fees) related thereto (together referred to herein as "Loss" or
"Losses"), arising out of, based upon, or resulting from (i) the inaccuracy or
breach of any representation or warranty (other than that referred to in clause
(iv) below) of Holdings or Advertising or any covenant of Holdings or
Advertising contained in or made pursuant to the Acquisition Agreement, (ii) the
breach of or failure by Holdings or Advertising to perform or discharge its
obligations under the Acquisition Agreement or under the transactions
contemplated thereby, (iii) a claim or cause of action by a third party relating
to any liability of Holdings or Advertising not assumed by TBWA, or (iv) any
inaccuracy in or breach of a specified representation and warranty relating to
the Indemnified Receivable. Pursuant to the Acquisition Agreement, no Losses
arising out of a matter referred to in (i), (ii) or (iii) above shall be
reimbursed to TBWA until such time as all Losses arising out of a matter
referred to in (i) through (iii) above shall exceed $300,000, in which case
Holdings shall be liable for all Losses in excess of $300,000 (Losses arising
out of the matter referred to in clause (iv) above shall be reimbursable without
regard to the $300,000 "cushion"). Losses arising out of matters referred to in
clauses (i) through (iii) above shall be satisfied only out of the General
Escrow Fund and Losses arising out of the matter referred to in clause (iv)
above shall be satisfied only out of the Special Escrow Fund. The aggregate
indemnity obligation of Holdings as so determined shall be satisfied from the
Escrow Funds as provided in the Escrow Agreement, and neither Omnicom nor TBWA
nor any of their affiliates will have any recourse for the payment of any such
indemnity obligations against Holdings or Advertising (or the Holdings
Stockholders or Rightsholders), nor will any of such persons be personally
liable for any such indemnity obligations. See "The Acquisition Agreement--The
Acquisition--Escrows". Indemnity obligations shall be paid by returning to
Omnicom out of the relevant Escrow Fund the number of whole shares of Omnicom
Common Stock, valued at the original Market Value, equal to the Losses (subject
to the $300,000 "cushion," where applicable).
The obligation of Holdings to indemnify shall terminate and be of no
further force and effect on the earlier to occur of (x) the date of first
independent audit report, if any, of the consolidated financial results of TBWA
and the Businesses following the Closing Date, and (y) one year from the Closing
Date (the "Indemnity Period"). Upon the expiration of the Indemnity Period, all
such representations, warranties, covenants and agreements shall expire,
terminate, and be of no further force or effect, except that claims asserted in
writing against Holdings on or prior to such expiration shall survive until they
are decided and are final and binding upon TBWA and Holdings. However, in that
the collectibility of the Indemnified Receivable cannot reasonably be assured at
the present time, these limitations will not apply to the matter as to which
TBWA is entitled to be indemnified under that clause. Instead, this
indemnification obligation will terminate on the earlier of (i) the second
anniversary of the Closing Date, the date by which the parties expect such
collectibility to have been finally determined and (ii) the date on which such
collectibility shall in fact have been finally determined, provided that claims
asserted in writing prior to such expiration shall survive until they are final
and binding.
See "The Acquisition Agreement--The Acquisition--The Escrow
Agreement--General Escrow Fund" and "--Special Escrow Fund."
Pursuant to the Acquisition Agreement, Omnicom and Holdings have also
agreed to indemnify the other, including its directors, officers, agents,
"controlling persons" as defined by the Securities Act, and attorneys (and, with
respect to Holdings, the Holdings Stockholders and Rightsholders) against any
liability, damage, cost, loss, or expense arising out of any untrue statement of
a material fact furnished by it for inclusion in the Registration Statement, or
caused by any omission to furnish a material fact concerning it that is required
to be stated therein or that is necessary to make the statements furnished by it
not misleading. This indemnification obligation is separate from the
indemnification obligation of Holdings to TBWA discussed above, and is not
limited to amounts on deposit in the Escrow Funds under the Escrow Agreement,
nor to the limited periods of survival.
Conditions
In addition to approval of the Acquisition Agreement, the Advertising Stock
Sale Agreement, the amendment of the Holdings Certificate and the Plan of
Liquidation by Holdings Stockholders at the Special Meeting, and to the required
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regulatory approvals, the respective obligations of Omnicom, TBWA, Holdings and
Advertising to consummate the Acquisition 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 Acquisition Agreement; (ii) the performance by the parties of their
respective obligations under the Acquisition Agreement prior to the Closing
Date; (iii) the absence of any material adverse changes in the condition of the
businesses of Holdings or Advertising 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 Acquisition 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 Acquisition Agreement; (vii) the absence of any
action or proceeding by any governmental agency that might result in enjoining
the consummation of said transactions; and (viii) the consummation of the
transactions contemplated by the Profit Sharing Plan Purchase Agreement.
The obligations of Omnicom to effect the Acquisition are subject to
satisfaction of certain additional conditions including, without limitation: (i)
the SEC not having objected to Omnicom's treatment of the Acquisition as a
pooling-of-interests for accounting purposes; (ii) Advertising continuing to be
the advertising agency of record for certain key clients or, with respect to
some of these clients, Advertising's having replaced a loss of any such client
with an account of similar size (measured by revenues); (iii) the receipt by
Holdings of Consent Letters from Rightsholders holding in the aggregate at least
83% of the outstanding EARs and EPUs on the Closing Date, including all
Rightsholders who are also Holdings Stockholders; (iv) the execution of
employment agreements with TBWA or one of its affiliates by each of Robert
Kuperman, Thomas Patty, Adelaide Horton, Ira Matathia, Steven Hancock and Robert
Wolf and the execution and delivery of non-competition agreements by each of
such individuals; (v) there not having been a material and adverse change in the
Businesses; and (vi) TBWA having received reasonable assurances and financial
data that (a) if the Closing is on or prior to August 31, 1995, EBIT for the
nine months ended July 31, 1995 is at least $7,500,000 and EBIT for the 1995
Fiscal Year is reasonably expected to exceed $13,500,000; and (b) if the Closing
is on or after November 1, 1995, EBIT for the 1995 Fiscal Year is at least
$13,500,000. However, Omnicom has waived the conditions specified in clause (vi)
throught August 31, 1995.
The obligations of Holdings and Advertising to effect the Acquisition are
subject to the satisfaction of certain additional conditions including, without
limitation: (i) that Annualized Revenues of Holdings and its subsidiaries during
the 1995 Fiscal Year shall not be in excess of $100,000,000 and EBIT for the
1995 Fiscal Year shall not exceed (or shall not reasonably be expected to
exceed) $17,200,000; (ii) TBWA or one of its affiliates having entered into the
employment agreements described above; and (iii) TBWA having assumed the
existing employment agreement between Holdings and Leland Clow and the existing
employment and consulting agreement between Holdings and Jay Chiat (and TBWA
having validly assigned such contract to Omnicom). However, Holdings and
Advertising have waived the condition set forth in clause (i) through August 31,
1995. See "The Acquisition Agreement--The Acquisition--Renegotiation of
Acquisition Price" and "The Transactions--Interests of Certain Persons in the
Transactions".
Pursuant to the terms of the Acquisition Agreement, each of Omnicom and
Holdings is entitled to waive any of its conditions to consummation of the
Acquisition to the extent that any such condition is not satisfied in full by
the other party, other than conditions relating to the absence of any objection
by the SEC to Omnicom's treatment of the Acquisition as a pooling-of-interests
for accounting purposes and the approval of the Transactions by the Holdings
Stockholders.
Additional Agreements
Pursuant to the Acquisition Agreement, Omnicom, TBWA, Holdings and
Advertising have made certain additional agreements with respect to periods
following the Closing Date, including without limitation the following: (a) each
of Holdings and Advertising shall change its corporate name to a name not
including the "Chiat/Day" designation or any variation thereof and will cause
each inactive subsidiary which is not being acquired by TBWA under the
Acquisition Agreement to similarly change its corporate name; (b) TBWA shall
change its corporate name, and shall cause those members of the TBWA
international group operating under the TBWA name in North America to change
their corporate names, in each case to include the designation "TBWA Chiat/Day";
(c) Holdings shall provide Omnicom with copies of all appropriate tax returns
and certificates, all of which shall be made consistent with the allocation of
acquisition price agreed to between the parties; and (d) Holdings and
Advertising will, if requested by Omnicom, make certain tax elections under U.S.
and Canadian laws.
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Termination
The Acquisition Agreement may be terminated and the contemplated
Acquisition may be abandoned at any time prior to the Closing, whether before or
after approval by the Holdings Stockholders, (a) by mutual consent of the Boards
of Directors of Omnicom, TBWA, Holdings and Advertising; (b) by either Omnicom
and TBWA, on the one hand, or Holdings and Advertising, 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 Acquisition 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 Acquisition;
(c) by the Board of Directors of Omnicom, TBWA, Holdings or Advertising if a
final and nonappealable order, decree or judgment of any court or other
governmental authority is issued which would enjoin the Acquisition; or (d) by
either Omnicom and TBWA or Holdings and Advertising if the Closing Date shall
not have occurred prior to the close of business on December 31, 1995 or at any
time after October 31, 1995 if the conditions to such parties' obligation to
close shall have become incapable of being satisfied by December 31, 1995.
In the event of any termination of the Acquisition Agreement by either
Omnicom and TBWA or by Holdings and Advertising as provided above, the
Acquisition Agreement shall become void and there will be no liability or
obligation on the part of any party or its respective officers or directors
except that such termination does not preclude any action or claim for damages
to which any party is otherwise entitled as a result of a breach by the other
party.
Amendment
The Acquisition 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.
THE ADVERTISING STOCK SALE AGREEMENT
(A copy of the Advertising Stock Sale Agreement is filed as an Exhibit to
the Registration Statement of which this Prospectus/Information Statement forms
a part and is incorporated herein by reference. This summary of the Advertising
Stock Sale Agreement is qualified in its entirety by reference to such
agreement.)
Pursuant to the Advertising Stock Sale Agreement, as soon as practicable
after the Distribution Date, Adelaide Horton (together with any permitted
assignees) will purchase from Holdings all of the issued and outstanding common
stock of Advertising. At such time, the only asset which Advertising will own
will be its rights, through its ownership of all of the capital stock of
Chiat/Day Direct Marketing, Inc., under the National Car Suit. Pursuant to the
Advertising Stock Sale Agreement, Holdings has agreed to indemnify Ms. Horton
and Advertising for any losses incurred in respect of liabilities of Advertising
not assumed by TBWA under the Acquisition Agreement. To the extent that Holdings
were unable to fully indemnify Ms. Horton and Advertising, any recovery from the
National Car Suit received by Advertising would be at risk.
PROPOSED AMENDMENT OF THE HOLDINGS CERTIFICATE
The Holdings Certificate sets forth the corporate name of Holdings as
"Chiat/Day Holdings, Inc." Following the Closing under the Acquisition
Agreement, TBWA will own all rights in and to the "Chiat/Day" name, and Holdings
has agreed that immediately following the Closing thereunder it would change its
corporate name to a name not including the "Chiat/Day" designation or any
variation thereof. Under the proposed amendment Holdings' name will be changed
to "CDH Corporation". Pursuant to the Acquisition Agreement, Advertising will
also change its corporate name to a name not including the "Chiat/Day"
designation or any variation thereof, and each of Holdings and Advertising will
cause its inactive subsidiaries which are not being acquired by TBWA under the
Acquisition Agreement, to effect a similar change to its corporate name.
Advertising intends to change its name to "CDAD Corporation" . Approval by the
Holdings Stockholders of this amendment to the Holdings Certificate is a
condition of Omnicom's and TBWA's obligation to consummate the Acquisition under
the Acquisition Agreement.
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THE PLAN OF LIQUIDATION
(Copies of the Plan of Liquidation, the Liquidating Trust Agreement and the
Liquidating Trust Escrow Agreement are filed as Exhibits to the Registration
Statement of which this Prospectus/Information Statement forms a part and are
incorporated herein by reference. This summary of the Plan of Liquidation, the
Liquidating Trust Agreement and the Liquidating Trust Escrow Agreement is
qualified in its entirety by reference to such agreements.)
General
The Plan of Liquidation provides that, upon consummation of the Closing
under the Acquisition Agreement, Holdings will be dissolved pursuant to the
provisions of the DGCL. Following the procedures prescribed in the DGCL, the
Board of Directors of Holdings will file with the Secretary of State of the
State of Delaware a Certificate of Dissolution, thereby terminating the
corporate existence of Holdings. Thomas Patty and David Wiener, the Liquidating
Trustees of the Liquidating Trust established pursuant to the Liquidating Trust
Agreement will, however, function with authority to wind up Holdings' affairs,
pay, satisfy and discharge certain liabilities and obligations not assumed by
TBWA under the Acquisition Agreement, and distribute to the Holdings
Stockholders all of the remaining assets of Holdings.
The distribution of the shares of Omnicom Common Stock will not occur until
the Distribution Date. Assuming the Closing occurs on August 31, 1995, the
earliest that the Distribution Date would occur is October 26, 1995. During the
period from the Closing Date until the Distribution Date, Holdings Stockholders
and Rightsholders will bear the risk of fluctuations in the market price of the
Omnicom Common Stock.
The Liquidating Trust, after the Acquisition and the distributions to occur
on the Distribution Date, shall hold all the remaining assets of Holdings
(except to the extent Holdings distributes any such assets directly to Holdings
Stockholders), including the right to receive any assets remaining after the
termination of the Escrow Agreement. If any assets remain in the Liquidating
Trust after all claims, charges, liabilities and obligations of the Liquidating
Trust have been paid or discharged, the Liquidating Trustees will, as
expeditiously as is practicable, distribute such assets to the former holders of
Holdings Common Stock on a pro rata basis according to their interests.
All of the directors and officers of Holdings who are also Holdings
Stockholders have indicated that they intend to vote for the Plan of Liquidation
in their capacity as Holdings Stockholders. In order to effectuate the Plan of
Liquidation, Holdings will give notice to all known creditors, if any, after
giving effect to the assumption of liabilities by TBWA pursuant to the
Acquisition Agreement, and will pay or make adequate provision for any Trust
Liabilities. It is intended that the consummation of the transactions
contemplated by the Acquisition Agreement, followed by the distribution to the
Holdings Stockholders in complete liquidation of Holdings, will not give rise to
dissenter's rights in favor of Holdings Stockholders under Delaware law.
Liquidating Distribution to Holdings Stockholders
Pursuant to the Plan of Liquidation, on the Distribution Date, Holdings
Stockholders will receive a distribution of the shares of Omnicom Common Stock
paid by TBWA to Holdings as acquisition price under the Acquisition Agreement
(exclusive of the Contributed Stock), as reduced by (i) the five percent of such
shares which will be deposited by Holdings on the Distribution Date into the
Liquidating Trust on behalf of the Holdings Stockholders and (ii) the shares of
Omnicom Common Stock used to fund on the Distribution Date the Stockholders
General Escrow Fund and the Stockholders Special Escrow Fund under the Escrow
Agreement.
Based on an estimated total acquisition price of $25,328,061 (see "The
Acquisition Agreement--The Acquisition--Determination of Acquisition Price"),
each holder of Holdings Common Stock will be entitled to receive in such initial
distribution, per share of Holdings Common Stock, shares of Omnicom Common Stock
with a value (determined in accordance with the terms of the Acquisition
Agreement) equal to $0.178. The remaining shares of Omnicom Common Stock
received by Holdings will be used to fund the Liquidating Trust, which will be
responsible for the Holdings Stockholders' taxes and the expenses of winding up
the affairs of Holdings, as well as possible contingent liabilities, and to fund
the Stockholders General Escrow Fund and the Stockholders Special Escrow Fund.
Based upon current estimates of taxes and expenses, if there were no claims for
indemnification or other contingent liabilities, each Holdings Stockholder would
be entitled to receive upon the release of such funds from the Liquidating Trust
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and such escrows shares of Omnicom Common Stock with a value (determined in
accordance with the terms of the Acquisition Agreement) equal to approximately
$0.037, for a total per share value of approximately $0.215. Since the amounts
held in such escrows and such trust are subject to claims in respect of
contingent liabilities, there can be no assurances that amounts held therein
will in fact be distributed to the Holdings Stockholders.
Liquidating Distribution to Rightsholders
On the Distribution Date, the Rightsholders will also receive a
distribution of Omnicom Common Stock from Advertising. See "The Acquisition
Agreement--The Acquisition--Payment of Obligations to Rightsholders". The shares
of Omnicom Common Stock available for such distribution will be the shares of
Omnicom Common Stock paid by TBWA to Advertising as acquisition price under the
Acquisition Agreement (inclusive of the Contributed Stock), as reduced by (i)
the five percent of such shares which will be deposited by Advertising on the
Distribution Date into the Liquidating Trust Escrow Fund on behalf of the
Rightsholders and (ii) the shares of Omnicom Common Stock used to fund on the
Distribution Date the Rightsholders General Escrow Fund and the Rightsholders
Special Escrow Fund under the Escrow Agreement.
Based on an estimated total acquisition price of $25,328,061 (see "The
Acquisition Agreement--The Acquisition--Determination of Acquisition Price"),
each Rightsholder (whether an EPU holder or an EAR holder) will be entitled to
receive in such distribution, per EPU or EAR, shares of Omnicom Common Stock
with a value (determined in accordance with the terms of the Acquisition
Agreement) equal to $0.178. The remaining shares of Omnicom Common Stock
received by Advertising will be used to fund the Liquidating Trust Escrow Fund,
which will be responsible for the Rightsholders' share of taxes and the expenses
of winding up the affairs of Holdings, as well as possible contingent
liabilities, and to fund the Rightsholders General Escrow Fund and the
Rightsholders Special Escrow Fund. Based upon current estimates of taxes and
expenses, if there were no claims for indemnification or other contingent
liabilities, each Rightsholder would be entitled to receive, upon the release of
such funds from such escrows, shares of Omnicom Common Stock with an aggregate
value (determined in accordance with the terms of the Acquisition Agreement)
equal to approximately $0.037, for a total per unit value of approximately
$0.215. Since the amounts held in such escrows are subject to claims in respect
of contingent liabilities, there can be no assurances that amounts held therein
will in fact be distributed to the Rightsholders.
Fractional Shares
If any of the foregoing distributions does not result in a Holdings
Stockholder or Rightsholder being entitled to a whole number of shares of
Omnicom Common Stock, the Holdings Stockholder or Rightsholder will receive a
cash payment in lieu of any entitlement to a fractional share of Omnicom Common
Stock from the proceeds of a sale on the NYSE by Holdings or Advertising (as the
case may be) of a sufficient number of shares of Omnicom Common Stock to settle
the aggregate amount of fractional share distribution entitlements of all
similarly situated Holdings Stockholders and Rightsholders. As a result, no
fractional shares of Omnicom Common Stock will be distributed under the Plan of
Liquidation.
Operation of the Liquidating Trust
Following the dissolution of Holdings and the completion of the liquidating
distributions described above, each share of Holdings Common Stock, regardless
of class, shall have an equal interest in the Liquidating Trust. After such
time, the Liquidating Trustees will, on behalf of the Holdings Stockholders, (i)
receive any additional liquidating distributions from Holdings, (ii) act as the
agent of the Holdings Stockholders in connection with the administration of the
Escrow Agreement and the Liquidating Trust Escrow Agreement, (iii) respond to
the assertion of any and all claims of indemnification by TBWA pursuant to the
terms of the Acquisition Agreement and the Escrow Agreement, (iv) pursue any
claims which Holdings may have against the Special Escrow Fund and (v) complete
the winding up of the affairs of Holdings and the payment of certain liabilities
not assumed by TBWA under the Acquisition Agreement out of the assets of the
Liquidating Trust.
As described above under "--Liquidating Distribution to Holdings
Stockholders", five percent of the shares of Omnicom Common Stock received by
Holdings as part of the acquisition price under the Acquisition Agreement
(exclusive of the Contributed Stock) will be deposited in the Liquidating Trust,
on behalf of the Holdings Stockholders, for the satisfaction of the following
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liabilities (collectively, "Trust Liabilities") of Holdings (in each case other
than the liabilities assumed by TBWA pursuant to the Acquisition Agreement):
(i) all claims and obligations, including all contingent, conditional or
unmatured contractual claims, known to Holdings or the Liquidating Trustees,
(ii) any claim which is the subject of a pending action, suit or proceeding
against Holdings and (iii) claims which, based on facts known to Holdings or the
Liquidating Trustees, are likely to arise or become known to Holdings or the
Liquidating Trustees within ten years. The obligation of Holdings to indemnify
TBWA and Advertising for losses arising out of retained liabilities will
constitute a Trust Liability. See "The Advertising Stock Sale Agreement". In
addition, Trust Liabilities will include the costs and expenses payable by
Holdings in respect of (i) the Escrow Agent's fees under the Escrow Agreement,
(ii) maintaining insurance to cover indemnification obligations of Holdings
under the Holdings Certificate and the Liquidating Trust Agreement to its
directors, officers and agents (including the Liquidating Trustees) and (iii)
certain legal and other professional fees in connection with the liquidation,
the establishment of the trust, final tax returns and other post-Closing
transactions and matters. As described more fully below under "--The Liquidating
Trust Escrow", the Liquidating Trustees shall be reimbursed from the Liquidating
Trust Escrow Fund for the Rightsholders' share of any such Trust Liabilities.
The Liquidating Trust will also receive from time to time, on behalf of the
Holdings Stockholders, distributions of Omnicom Common Stock from the
Stockholders General Escrow Fund and the Stockholders Special Escrow Fund
maintained pursuant to the Escrow Agreement. See "The Acquisition Agreement--The
Acquisition--The Escrow Agreement". Pursuant to the Liquidating Trust Agreement,
the Liquidating Trustees will promptly sell any shares of Omnicom Common Stock
received by them and retain the net cash proceeds as the property (the "Trust
Property") of the Liquidating Trust.
Pursuant to the Liquidating Trust Agreement, the Liquidating Trustees shall
invest and reinvest the Trust Property and shall maintain any income earned on
such Trust Property ("Trust Income") separately from the Trust Property. The
Trust Income will include any cash and other taxable dividends paid to the
Liquidating Trustees, on behalf of the Holdings Stockholders, in respect of
Omnicom Common Stock on deposit in the Stockholders General Escrow Fund and the
Stockholders Special Escrow Fund. See "The Acquisition Agreement--The
Acquisition--The Escrow Agreement". All Trust Income will be distributed by the
Liquidating Trustees at the end of each fiscal quarter to the former Holdings
Stockholders, pro rata in accordance with their interests.
The Liquidating Trustees shall distribute Trust Property at least once
annually to the former Holdings Stockholders, pro rata in accordance with their
interests, provided that no distribution shall be made without satisfying or
adequately providing for (i) a reserve for all remaining Trust Liabilities, (ii)
a reserve for Trustee expenses and (iii) a reserve for payments owing to missing
beneficiaries.
The termination of the Liquidating Trust will occur on the later of (i)
three years and six months from the date the Liquidating Trust is established or
upon payment to the former Holdings Stockholders of all of the Trust Property
and Trust Income, whichever is earlier, and (ii) the date of termination of the
Escrow Agreement, provided that the Liquidating Trust shall continue for a
reasonable period for the limited purpose of discharging any remaining Trust
Liabilities.
The Liquidating Trust Escrow
As described above under "The Acquisition Agreement--The
Acquisition--Payment of Obligations to Rightsholders" five percent of the shares
of Omnicom Common Stock received by Advertising as part of the acquisition price
under the Acquisition Agreement (including five percent of the Contributed
Stock) will be deposited in the separate Liquidating Trust Escrow Fund created
by the escrow agreement (the "Liquidating Trust Escrow Agreement") among
Holdings (or, after the creation and fundig of the Liquidating Trust, the
Liquidating Trust), Advertising and David C. Wiener, as escrow agent (the
"Liquidating Trust Escrow Agent"), on behalf of the Rightsholders, for the
satisfaction of the Rightsholders' share of Trust Liabilities. The Liquidating
Trust Escrow Agent may also receive from time to time, on behalf of the
Rightsholders, distributions of Omnicom Common Stock from the Rightsholders
General Escrow Fund and the Rightsholders Special Escrow Fund maintained
pursuant to the Escrow Agreement. See "The Acquisition Agreement--The
Acquisition--The Escrow Agreement". Pursuant to the Liquidating Trust Escrow
Agreement, the Liquidating Trust Escrow Agent will promptly sell any shares of
Omnicom Common Stock received by it and retain the net cash proceeds in the
Liquidating Trust Escrow Fund.
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Pursuant to the Liquidating Trust Escrow Agreement, the Liquidating Trust
Escrow Agent shall invest and reinvest the funds on deposit in the Liquidating
Trust Escrow Fund (any income earned in respect of such funds, the "Liquidating
Trust Escrow Income"). The Liquidating Trust Escrow Income will include any cash
and other taxable dividends paid to the Liquidating Trust Escrow Agent, on
behalf of the Rightsholders, in respect of Omnicom Common Stock on deposit in
the Rightsholders General Escrow Fund and the Rightsholders Special Escrow Fund.
All Liquidating Trust Escrow Income will be distributed by the Liquidating Trust
Escrow Agent at the end of each fiscal quarter to the former Rightsholders, pro
rata in accordance with their interests.
The Liquidating Trust Escrow Agent will reimburse the Liquidating Trust
from the Liquidating Trust Escrow Fund, upon proper request made by the
Liquidating Trustees, for the Rightsholders' proportionate share of payments
made by the Liquidating Trust in respect of Trust Liabilities. Such
proportionate share shall be equal to (x) the total amount of the payment made
by the Liquidating Trustee multiplied by (y) a fraction, the numerator of which
equals the total amount of funds then on deposit in the Liquidating Trust Escrow
Fund and the denominator of which equals (1) the numerator plus (2) the amount
of Trust Property then on deposit in the Liquidating Trust.
Upon each distribution by the Liquidating Trustee of Trust Property to the
Stockholders pursuant to the Liquidating Trust Agreement, the Liquidating Trust
Escrow Agent shall distribute to the Rightsholders, pro rata in accordance with
their interests, the same percentage of the Liquidating Trust Escrow Fund as is
being distributed to the Holdings Stockholders from the Liquidating Trust.
The Liquidating Trust Escrow Agent will act as the agent of the
Rightsholders for purposes of the administration of the Liquidating Trust Escrow
Agreement. The Liquidating Trust Escrow Agent will also serve as a trustee of
the Liquidating Trust.
FEDERAL INCOME TAX CONSEQUENCES
OF THE SALES OF ASSETS
AND DISSOLUTION AND LIQUIDATION
The following discussion summarizes the U.S. income tax consequences
associated with the Transactions under the Internal Revenue Code of 1986, as
amended (the "Code"). The discussion summarizes the federal income tax
consequences that are material to the Holdings Stockholders and Rightsholders
(each, a "Holder") in general, but it does not describe all of the consequences
that might be relevant to a particular Holder in light of that Holder's own tax
situation. It is recommended that each Holder consult his or her own tax advisor
regarding the tax consequences of the Transactions in light of his or her own
tax situation. In particular, the following discussion may not be complete or
applicable in its entirety with respect to Holders who are not individuals, who
are dealers in securities, or who acquired their Holdings Common Stock through
employee stock option programs.
Corporate Tax
Holdings believes that although the asset sales by it and Advertising and
the Advertising Stock Sale are taxable transactions, they will not result in
significant federal income tax liability being incurred by Holdings. This
conclusion is based on a number of positions taken or to be taken by Holdings
which might be subject to IRS challenge. To the extent that the IRS were to
successfully challenge any of Holdings' positions, amounts held in the
Liquidating Trust and the Liquidating Trust Escrow Fund would be used to pay the
ensuing tax liability. Accordingly, no assurance can be given that any of the
portions held in the Liquidating Trust will be ultimately distributed to the
Holdings Stockholders or that funds held in the Liquidating Trust Escrow Fund
will be ultimately distributed to the Rightsholders. To the extent that funds
available from these sources were inadequate to satisfy amounts due to the IRS,
the IRS could seek payment from Holdings Stockholders to the extent of such
unsatisfied liability up to the amounts distributed to such Holdings
Stockholders.
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Holder Tax
The following summary applies only to Holders who are United States persons
for federal income tax purposes and except as specifically described below, does
not apply to Holders who are not U.S. persons.
Holders of Class A Common Stock and Mojo B Common Stock
For federal income tax purposes, holders of Class A Common Stock ("Class A
Stockholders") and Mojo B Common Stock ("Mojo B Stockholders") will recognize
gain or loss as a result of the Transactions equal to the difference between the
sum of (i) the fair market value of all of the Omnicom shares received (whether
distributed or placed in the Liquidating Trust or the Stockholders General or
Special Escrow Funds) plus (ii) the cash received in respect of any fractional
shares, and their adjusted basis in the Class A Common Stock or Mojo B Common
Stock. Class A Stockholders and Mojo B Stockholders who have held their shares
for over one year at the time of the transaction will be subject to tax at rates
up to the 28% maximum rate currently applicable to long-term capital gain. The
basis in the shares of Omnicom Common Stock received will be equal to their fair
market value on the Distribution Date and the holding period for the shares of
Omnicom Common Stock will commence on the date of the distribution. Provided
that the Liquidating Trust is classified as a trust for federal income tax
purposes (see discussion below), if amounts in the Liquidating Trust are
subsequently used to pay creditors (or payments are made to Omnicom out of the
Stockholders General or Special Escrow Funds), Class A Stockholders and Mojo B
Stockholders should be entitled to a capital loss in the year such payments are
made. If the amount of payments made to creditors that are allocable to a Class
A Stockholder or Mojo B Stockholder are in excess of $3,000 and the other
requirements of section 1341 of the Code are met, such shareholder should be
able to compute his or her federal income tax liability for the year such
payments are made under the provisions of section 1341 of the Code. Under
section 1341 of the Code, a shareholder's federal income tax liability would be
the lesser of the tax liabilities as computed under two alternative computation
methods. Under the first method, the shareholder would compute his or her tax
liability by taking a regular capital loss in the year that payments are made.
Under the second method, the shareholder would decrease his or her tax liability
in the year of payment by the amount of tax liability that was generated by the
prior inclusion. The tax return for the year of inclusion would not be reopened
under either computation method. No additional federal income tax consequences
will occur when amounts are distributed from the Liquidating Trust to a Class A
Stockholder or a Mojo B Stockholder.
With respect to a Class A Stockholder's or Mojo B Stockholder's shares of
Omnicom Common Stock that are placed in the Liquidating Trust or the
Stockholders General or Special Escrow Funds, in the event the shares are
disposed of by the Liquidating Trust or the Stockholders General or Special
Escrow Funds, any difference in the value of the shares of Omnicom Common Stock
between the date of distribution and the date disposed of by Liquidating Trust
or such Escrow Funds will be treated as long-term or short-term capital gain or
loss by such Holder, depending on the holding period. Such Holder's share of any
other income (including dividends paid on the Omnicom Common Stock), gain or
loss realized by the Liquidating Trust or the Stockholders General or Special
Escrow Funds will be recognized by such Holder (whether or not distributed) in
computing his or her federal income tax.
Holders of Class B Common Stock
Holders of Class B Common Stock (other than holders of Mojo B Common Stock)
("Class B Stockholders") will recognize compensation income on the date of
distribution of shares of Omnicom Common Stock pursuant to the Plan of
Liquidation, equal to the excess of the sum of (i) the then fair market value of
the shares of Omnicom Common Stock (including the value of any amount to be held
in the Liquidating Trust or the Stockholders General or Special Escrow Funds)
plus (ii) the cash received in respect of any fractional shares, over the sum of
(a) the amount they paid for their Class B Common Stock, and (b) the amount, if
any, of ordinary income which they have previously recognized in respect of
their Class B Common Stock. The Holder's holding period for his or her shares of
Omnicom Common Stock will commence on the date of distribution and the basis of
the shares of Omnicom Common Stock will be the fair market value on the date of
such distribution.
With respect to a Class B Stockholder's shares of Omnicom Common Stock that
are placed in the Liquidating Trust or the Stockholders General or Special
Escrow Funds, in the event the shares are disposed of by the Liquidating Trust
or such Escrow Funds, any difference in the value of the shares of Omnicom
Common Stock between the date of distribution and the date disposed of by the
Liquidating Trust or such Escrow Funds will be treated as long-term or
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short-term capital gain or loss by such Holder, depending on the holding period.
Such Holder's share of any other income (including dividends paid on the Omnicom
Common Stock), gains or losses realized by the Liquidating Trust or such Escrow
Funds will be recognized by such Holder in computing his or her federal income
taxes.
In addition, to the extent that any amount placed in the Liquidating Trust
or the Stockholders General or Special Escrow Funds is subsequently utilized to
discharge an obligation of Holdings, the affected Class B Stockholder should be
entitled to a federal income tax deduction, in the year of such expenditure,
equal to the amount of such expenditure previously included in the Class B
Stockholder's income. If the amount of the deduction exceeds $3,000, such
deduction may qualify for treatment under the provisions of Code section 1341,
previously described above. No additional federal income tax consequences will
occur when amounts are distributed from the Liquidating Trust to the Class B
Stockholder.
Tax on Holders of EPUs and EARs
Rightsholders will recognize compensation income equal to the sum of (i)
the fair market value of the shares of Omnicom Common Stock which they are
entitled to receive in the liquidation of Holdings, on the date such Omnicom
Common Stock is either distributed or made available to them, plus (ii) the cash
received in respect of any fractional shares. For this purpose, any Omnicom
Common Stock placed in the Liquidating Trust Escrow Fund or the Rightsholders
General or Special Escrow Funds on their behalf is treated as having been
distributed to them.
With respect to a Rightsholder's shares of Omnicom Common Stock that are
placed in the Liquidating Trust Escrow Fund or the Rightsholders General or
Special Escrow Funds, in the event the shares are disposed of while in the
Liquidating Trust Escrow Fund or the Rightsholders General or Special Escrow
Funds, any difference in the value of the Omnicom Common Stock between the date
of distribution and the date disposed of will be treated as long-term or
short-term capital gain or loss by the Rightsholder, depending on the holding
period. The Rightsholder's share of any other income (including dividends paid
on the Omnicom Common Stock), gains or losses realized by the Liquidating Trust
Escrow Fund or the Rightsholders General or Special Escrow Funds will be
recognized by the Rightsholder in computing his or her federal income tax.
In addition, to the extent that any amount placed in the Liquidating Trust
Escrow Fund or the Rightsholders General or Special Escrow Funds is subsequently
utilized to discharge an obligation of Holdings, the affected Rightsholder
should be entitled to a federal income tax deduction, in the year of such
expenditure, equal to the amount of such expenditure previously included in the
Rightsholder's income. If the amount of the deduction exceeds $3,000, such
deduction may qualify for treatment under the provisions of Code section 1341
previously discussed above. No additional federal income tax consequences will
occur when amounts are distributed from the Liquidating Trust Escrow Fund or the
Rightsholders General or Special Escrow Funds to the Rightsholder.
Certain Consequences to Non-U.S. Holders
A Holder who is not a U.S. person (a "Non-U.S. Holder") will generally not
be subject to United States federal income tax with respect to gain or ordinary
income recognized as a result of the transaction unless (i) the gain is
effectively connected with a trade or business of the Non-U.S Holder in the
United States (or, in the case of ordinary income, is from United States
sources; i.e., is payable as the result of services performed in the United
States) or (ii) in the case of a Non-U.S. Holder who is an individual and holds
Class A common stock or Mojo B Common Stock as a capital asset, such Holder is
present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are met. Assuming the Liquidating Trust and
Liquidating Trust Escrow Fund are each classified as a trust for federal income
tax purposes (see discussion below) dividends paid on the shares of Omnicom
Stock held in the Liquidating Trust and Liquidating Trust Escrow Fund and
dividends paid on Omnicom Common Stock held in the Rightsholders or Stockholders
General or Special Escrow Funds will be subject to withholding of United States
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are effectively connected
with the conduct of a trade or business of the Non-U.S. Holder in the United
States. Under the current United States- Australia income tax treaty, for
example, dividends are subject to withholding at a 15% rate. A Non-U.S. Holder
who wishes to claim the benefit of an applicable treaty rate may be required to
satisfy applicable certification and other requirements. Dividends that are
effectively connected with a trade or business in the United States are subject
to United States federal income tax on a net basis.
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Liquidating Trust and Liquidating Trust Escrow Fund
Holdings believes that the Liquidating Trust and the Liquidating Trust
Escrow Fund will each be treated as a grantor trust for federal income tax
purposes and not as an association taxable as a corporation. As such, items of
taxable income, deduction, gain and loss (including gain or loss on the sale of
shares of Omnicom Common Stock) would be passed through to the Holders and
reported by them on their tax return (whether or not distributed). However,
since the Liquidating Trust and the Liquidating Trust Escrow Fund will not meet
all of the IRS requirements to obtain a ruling as to grantor trust status, there
is a risk that the IRS could successfully assert that the Liquidating Trust or
the Liquidating Trust Escrow Fund should be taxed as a corporation. In that
event, the Liquidating Trust or the Liquidating Trust Escrow Fund would pay tax
on its income at the regular corporate rates of up to 35% and any distributions
to Holders would be taxed as dividends at ordinary income tax rates to the
extent of the earnings and profits of the Liquidating Trust or the Liquidating
Trust Escrow Fund.
Withholding Taxes
That portion of the Omnicom Common Stock (and any cash received in respect
of fractional shares) which is taxable to Holders as ordinary or compensation
income is subject to federal income tax withholding at the prescribed rate of
28%, as well as FICA and other applicable federal, state and local withholding.
Holdings expects that Holders will make arrangements with Holdings to satisfy
their tax obligations. A Holder who fails to satisfy this withholding
requirement could be subject to potential additional estimated tax payment
liability and to penalties if such liability is not satisfied. If any person
receiving shares of Omnicom Common Stock in respect of his employment with
Holdings does not pay the relevant taxes, the Liquidating Trust and the related
Liquidating Trust Escrow Fund would have liability for the amount of such tax.
THE TAX CONSEQUENCES OF THE SALES OF ASSETS, THE LIQUIDATION OF HOLDINGS
AND THE INCOME WITH RESPECT TO THE LIQUIDATING TRUST, LIQUIDATING TRUST ESCROW
FUND, AND ESCROW FUNDS MAY BE INFLUENCED BY THE IRS'S VIEWS OF FACTUAL
CIRCUMSTANCES SURROUNDING THE TRANSACTIONS PROVIDED FOR HEREIN. NO RULINGS OR
OPINIONS OF COUNSEL HAVE BEEN OBTAINED WITH RESPECT TO THESE MATTERS.
IT IS RECOMMENDED THAT EACH HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EXTENT OF ANY RELEVANT STATE, LOCAL OR
FOREIGN TAX LAWS.
40
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BUSINESS INFORMATION CONCERNING OMNICOM
Description of Business
General
Omnicom, through its wholly and partially owned companies (sometimes
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; and offers
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, Latin America, the Far East and Australia. In 1994 and 1993, 54% and 52%,
respectively, of Omnicom's billings came from its non-U.S. operations.
According to the unaudited industry-wide figures published in the trade
journal, Advertising Age, in 1994 the Omnicom Group was ranked as the third
largest advertising agency group worldwide.
Omnicom operates three separate, independent agency networks: the BBDO
Worldwide Network, the DDB Needham Worldwide Network and the TBWA International
Network. Omnicom also operates independent agencies, Altschiller & Company and
Goodby, Silverstein & Partners, and certain marketing service and specialty
advertising companies through Diversified Agency Services ("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 Omnicom's Marketing Services and Specialty Advertising division
whose agencies' mission is to provide customer driven marketing communications
coordinated to the client's benefit. The division offers marketing services
including sales promotion, public relations, direct and database marketing,
corporate and brand identity, graphic arts, merchandising/point-of-purchase
promotion; and specialty advertising including financial, healthcare 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 and San Francisco, California; Atlanta, Georgia;
Chicago, Illinois; Detroit, Michigan; and Minneapolis, Minnesota.
The BBDO Worldwide Network operates internationally through subsidiaries in
Austria, Belgium, Brazil, Canada, China, Croatia, 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, the Czech Republic, Egypt, El Salvador, Guatemala,
Honduras, Hungary, India, Israel, Lebanon, Kuwait, New Zealand, Norway, Panama,
the Philippines, Romania, Saudi Arabia, the Slovak Republic, Switzerland,
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,
Nicaragua, Pakistan and Uruguay.
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DDB Needham Worldwide Network
The DDB Needham Worldwide Network operates in the United States through
DDB Needham Worldwide 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, the Czech
Republic, Denmark, France, Germany, Greece, Hong Kong, Hungary, Italy, Japan,
Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal,
Singapore, the Slovak Republic, Spain, Sweden, Taiwan, Thailand and the United
Kingdom; and through affiliates located in Brazil, Costa Rica, Egypt, Estonia,
Finland, Germany, India, Korea, Malaysia, Switzerland and Thailand. The DDB
Needham Worldwide Network uses the services of associate agencies in Miami,
Florida and in Argentina, Bahrain, Belize, Bolivia, Chile, Colombia, Dominican
Republic, Ecuador, El Salvador, Guatemala, Honduras, Indonesia, Ireland, Israel,
Kuwait, Lebanon, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Romania,
Russia, Saudi Arabia, Slovenia, South Africa, Trinidad, Turkey, United Arab
Emirates, Uruguay and Venezuela. Griffin Bacal Inc. operates internationally
through subsidiaries in Canada and the United Kingdom and through a branch in
Mexico.
TBWA International Network
TBWA International B.V., a corporation organized under the laws of the
Netherlands, is the holding company for the TBWA International Network.
The TBWA International Network operates in the United States through TBWA
Advertising and Graf Bertel Buczek which are both headquartered in New York, New
York and through TBWA Wolfe Freeman Advertising, Inc. in St. Louis, Missouri.
The TBWA International Network operates internationally through
subsidiaries in Belgium, Denmark, France, Germany, Greece, Italy, the
Netherlands, South Africa, Spain and the United Kingdom; and through affiliates
located in Mexico, Portugal, South Africa, Sweden and Switzerland. 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.,
RC Communications, Inc., Merkley Newman Harty Inc., Lyons/Lavey/Nickel/Swift,
Inc. and Shain Colavito Pensabene Direct, Inc., in New York; Doremus & Company,
Gavin Anderson & Company Worldwide, Inc., Porter Novelli, Inc., Bernard Hodes
Advertising, Inc. and Rapp Collins Worldwide Inc., all in various cities and
headquartered in New York; Baxter, Gurian & Mazzei, Inc., in Beverly Hills,
California; Frank J. Corbett, Inc., in Chicago, Illinois; Thomas A. Schutz Co.,
Inc. in Morton Grove, Illinois; The GMR Group, in Fort Washington, Pennsylvania;
Optima Direct Inc., in Vienna, Virginia; Rainoldi, Kerzner & Radcliffe, Inc., in
San Francisco, California and Alcone Sims O'Brien, Inc., in Irvine, California
and Mahwah, New Jersey.
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 Ellis/KPR, Ltd., Premier Magazines Ltd., Product Plus
London 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 Australia, Belgium, Canada, France, Germany, Hong Kong, Ireland, Italy,
Japan, Korea, Mexico, South Africa and Spain.
Omnicom Group Inc.
As the parent company of BBDO Worldwide, DDB Needham Worldwide, TBWA
International, the DAS Group, Goodby, Silverstein & Partners and Altschiller &
Company, Omnicom, 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
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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. For example, Omnicom
participated in forming The Media Partnership, which consolidates certain media
buying activities in Europe in order to obtain cost savings for clients.
Clients
The clients of the Omnicom Group include major industrial, financial and
service industry companies as well as smaller, local clients. Among its clients
are Anheuser-Busch, Apple Computer, Chrysler Corporation, Delta Airlines,
Gillette, GTE, Henkel, McDonald's, PepsiCo., Visa U.S.A., Volkswagen and The Wm.
Wrigley Jr. Company.
The Omnicom Group's ten largest clients accounted for approximately 18% of
1994 billings. The majority of these have been clients for more than ten years.
The Omnicom Group's largest client accounted for less than 5% of 1994 billings.
Revenues
Commissions charged on media billings are the primary source 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 agency bills its client
for this amount plus the commission. Each agency 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 some 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 Group primarily charges fees for its 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 146 people on the
Omnicom Group's staff were employed in research during the year and the Omnicom
Group's domestic research expenditures approximated $20,395,000. 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
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,
Goodby, Silverstein & Partners and Altschiller & Company have enabled the
Omnicom Group to represent competing clients.
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BBDO Worldwide, DDB Needham Worldwide, TBWA International, the DAS Group,
Goodby, Silverstein & Partners and Altschiller & Company 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 Omnicom 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, 1994, the Omnicom Group,
excluding unconsolidated companies, employed approximately 16,100 persons, of
which approximately 6,700 were employed in the United States and approximately
9,400 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 the Omnicom Group's offices are located in leased
premises. Omnicom has continued a program to consolidate 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 25,000 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 162,000 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.
TBWA International occupies approximately 61,000 sq. ft. of space at 292
Madison Avenue, New York, New York under a lease expiring in the year 2005,
which includes options for additional growth of the agency.
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The Omnicom Group's other full-service offices in Atlanta, Beverly Hills,
Chicago, Dallas, Detroit, Irvine, Los Angeles, Mahwah, Minneapolis, Morton
Grove, New York, San Francisco, Seattle and St. Louis and service offices at
various other locations occupy approximately 1,798,000 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, Poland, 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.
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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 appearing elsewhere in this
Prospectus/Information Statement.
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Amounts)
------------------------------------------------------------------------------------
Three Months Ended
March 31, Year Ended December 31
-------------------- ---------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees ...................... $459,882 $376,538 $1,756,205 $1,516,475 $1,385,161 $1,236,158 $1,178,233
Income before
change in accounting
principles ............................. 24,142 18,920 108,134 85,345 65,498 57,052 52,009
Net income (loss) ......................... 24,142 (9,089) 80,125 85,345 69,298 57,052 52,009
Income per common
share before change in
accounting principles:
Primary ............................... 0.68 0.58 3.15 2.79 2.31 2.08 2.01
Fully diluted ......................... 0.68 0.58 3.07 2.62 2.20 2.01 1.94
Cumulative effect of
change in accounting
principles:
Primary ............................... -- (0.85) (0.81) -- 0.14 -- --
Fully diluted ......................... -- (0.85) (0.81) -- 0.11 -- --
Net income (loss) per
common share after
change in accounting
principles:
Primary ............................... 0.68 (0.27) 2.34 2.79 2.45 2.08 2.01
Fully diluted ......................... 0.68 (0.27) 2.34 2.62 2.31 2.01 1.94
Dividends declared per
common share ........................... 0.31 0.31 1.24 1.24 1.21 1.10 1.07
At end of period:
Total assets ............................ 2,961,570 2,301,860 2,852,204 2,289,863 1,951,950 1,885,894 1,748,529
Long-term obligations:
Long-term debt ........................ 403,882 403,827 187,338 278,312 235,129 245,189 278,960
Deferred compensation
and other liabilities ................ 76,577 81,713 95,973 56,933 51,919 31,355 25,365
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF OMNICOM
Results of Operations
First Quarter 1995 Compared to First Quarter 1994:
Consolidated worldwide revenues from commission and fee income increased 22
percent to $459,882,000 in the first quarter of 1995 from $376,538,000 in the
first quarter of 1994. Consolidated domestic revenues increased 14 percent to
$224,340,000 in 1995 from $196,942,000 in 1994. Consolidated international
revenues increased 31 percent to $235,542,000 in 1995 from $179,596,000 in 1994.
Absent the effect of the net acquisitions of subsidiary companies and movements
in foreign currency exchange rates, consolidated worldwide revenues increased 11
percent in the first quarter of 1995 as compared to the same period in 1994.
Operating expenses increased 22 percent in the first quarter of 1995 as
compared to the first quarter of 1994. Excluding the effect of the net
acquisition activity and movements in foreign currency exchange rates mentioned
above, operating expenses increased 12 percent over 1994 levels. This increase
reflects normal salary increases and growth in client service expenditures to
support the increased revenue base. Operating expenses as a percentage of
commissions and fees were 89.6 percent in the first quarter of 1995 and 89.9
percent in 1994.
Net interest expense is comparable with the first quarter of 1994.
Pretax profit margin was 9.0 percent in the first quarter of 1995 as
compared to 8.4 percent in the same period of 1994. Operating margin, which
excludes interest and dividend income and interest expense, was 10.4 percent in
the first quarter of 1995 as compared to 10.1 percent, in the same period in
1994.
The effective income tax rate was 40.0 percent in the first quarter of 1995
and 41.7 percent in the first quarter of 1994. The decrease reflects a lower
international effective tax rate primarily caused by fewer international
operating losses with no associated tax benefit and tax planning strategies
implemented in certain non-U.S. countries.
Equity in affiliate income is comparable with the first quarter of 1994.
The increase in minority interest expense is primarily due to greater earnings
by companies where minority interests exist; additional minority interests
resulting from acquisitions; and the acquisition of a majority interest in
several companies which were previously less than 50 percent owned.
Net income increased 28 percent to $24,142,000 in the first quarter of 1995
as compared to $18,920,000, before the cumulative effect of the adoption of SFAS
112, in the first quarter of 1994. Absent the effect of net acquisitions of
subsidiary companies and movements in foreign currency exchange rates, net
income increased 7 percent in the first quarter of 1995 as compared to the first
quarter of 1994.
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 this onetime non-cash charge was
$28,000.
Year Ended December 31, 1994 Compared to Years Ended December 31, 1993 and 1992
In 1994, domestic revenues from commissions and fees increased 11.4
percent. The effect of acquisitions, net of divestitures, accounted for a 1.4
percent increase. The remaining 10.0 percent increase was due to net new
business gains and higher spending from existing clients.
In 1993, domestic revenues from commissions and fees increased 9.0 percent.
The effect of acquisitions, net of divestitures, accounted for a 3.9 percent
increase. The remaining 5.1 percent increase was due to net new business gains
and higher spending from existing clients.
In 1992, domestic revenues increased 2 percent, primarily as a result of
net new business gains and higher spending from existing clients.
In 1994, international revenues increased 20.3 percent. The effect of
acquisitions, net of divestitures, accounted for an 8.7 percent increase in
international revenues. The weakening of the U.S. dollar increased international
revenues by 2.3 percent. The remaining 9.3 percent increase was due to net new
business gains and higher spending from existing clients.
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In 1993, international revenues increased 10.0 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 an 18.1 percent
increase in international revenues. The strengthening of the U.S. dollar against
several major international currencies relevant to the Omnicom's non-U.S.
operations decreased revenues by 11.7 percent. The increase in revenues, due to
net new business gains and higher spending from existing clients, was 3.6
percent.
In 1992, international revenues increased 25 percent, of which the effect
of the acquisition of McKim Baker Lovick BBDO in Canada and the purchase of
additional shares in several companies which were previously affiliates of
Omnicom accounted for 14 percent. The remaining increase was due to net new
business gains and higher spending from existing clients. Currency exchange
rates did not significantly impact the revenues for the year.
In 1994, worldwide operating expenses increased 15.2 percent. Acquisitions,
net of divestitures during the year, accounted for a 5.4 percent increase in
worldwide operating expenses. The weakening of the U.S dollar increased
worldwide operating expenses by 1.2 percent. The remaining increase was caused
by normal salary increases and growth in out-of-pocket expenditures to service
the increased revenue base. Net currency exchange gains did not significantly
impact operating expenses for the year.
In 1993, worldwide operating expenses increased 8.8 percent. Acquisitions,
net of divestitures during the year, accounted for an 11.7 percent increase in
worldwide operating expenses. The strengthening of the U.S. dollar against
several international currencies decreased worldwide operating expenses by 5.9
percent. The remaining increase was caused by normal salary increases and growth
in out-of-pocket expenditures to service the increased revenue base. Net
currency exchange gains did not significantly impact operating expenses for the
year.
In 1992, worldwide operating expenses increased 12.5 percent. Acquisitions,
net of divestitures during the year, accounted for 5.0 percent of the increase.
The special charge accounted for 0.5 percent of the increase. The remaining
increase was caused by normal salary increases and growth in out-of-pocket
expenditures to service the increased revenue base. Net currency exchange gains
did not significantly impact total operating expenses for the year.
Interest expense in 1994 decreased by $6.4 million. This decrease reflects
lower average borrowings and interest rates on borrowings, primarily due to the
conversion of Omnicom's 6.5% Convertible Subordinated Debentures in July 1994
and the full year effect of the conversion of Omnicom's 7% Convertible
Subordinated Debentures in October 1993. Interest and dividend income decreased
by $2.7 million in 1994. This decrease was primarily due to lower average funds
invested during the year and declining interest rates in certain countries.
Interest expense in 1993 was comparable to 1992. Interest and dividend
income decreased in 1993 by $2.2 million. This decrease was primarily due to
lower average amounts of cash and marketable securities invested during the year
and lower average interest rates on amounts invested.
Interest expense in 1992 was comparable to 1991. Interest and dividend
income decreased by $1.4 million in 1992. This decrease was primarily due to
lower average funds invested during the year and declining interest rates in
certain countries.
In 1994, the effective tax rate decreased to 40.9 percent. The decrease
reflects a lower international effective tax rate primarily caused by fewer
international operating losses with no associated tax benefit and tax planning
strategies implemented in certain non-U.S. countries.
In 1993, the effective tax rate decreased to 42.0 percent. This decrease
primarily reflects a lower international effective tax rate caused by fewer
international operating losses with no associated tax benefit, partially offset
by an increased domestic federal tax rate.
In 1992, the effective tax rate of 43.6 percent was comparable to the 1991
effective tax rate of 44 percent.
In 1994, consolidated net income before the change in accounting principle
increased by 26.7 percent. 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 11.7 percent in 1994 from 11.2 percent in 1993.
This increase was the result of greater growth in commission and fee revenue
than the growth in operating expenses. The increase in equity income was
primarily due to the acquisition of certain minority interests and improved net
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income at companies which are less than 50 percent owned. The increase in
minority interest expense was primarily due to greater earnings by companies
where minority interests exist and the additional minority interests resulting
from acquisitions. In 1994, the incremental impact of divestitures, net of
acquisitions, accounted for a 1.7 percent decrease in consolidated net income,
while the weakening of the U.S dollar against several international currencies
increased consolidated net income by 1.1 percent.
In 1993, consolidated net income increased 23.2 percent. This increase is
the result of revenue growth, margin improvement, an increase in equity income
and a decrease in minority interest expense. Operating margin increased to 11.2
percent in 1993 from 10.6 percent in 1992. This increase was the result of
greater 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 0.8 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 5.7 percent.
Consolidated net income increased 21 percent in 1992. This increase was the
result of revenue growth and margin improvement. Operating margin, after the
first quarter special charge discussed below, decreased to 10.6 percent in 1992
from 10.9 percent in 1991. This decrease was the result of the special charge
offset by greater growth in commissions and fees than the growth in operating
expenses. In 1992, the incremental impact of acquisitions, net of divestitures,
accounted for 6 percent of the increase in consolidated net income.
At December 31, 1994, accounts receivable increased by $238.4 million from
December 31, 1993. This increase was primarily due to acquisitions and an
increased volume of activity resulting from business growth.
At December 31, 1994, accounts payable increased by $367.7 million from
December 31, 1993. This increase was primarily due to acquisitions, an increased
volume of activity resulting from business growth, and differences in the dates
on which payments to media and other suppliers became due in 1994 compared to
1993.
At December 31, 1992, the translation, into U.S. dollars, of the assets and
liabilities of Omnicom's international subsidiaries decreased cumulative
translation adjustment by $70.9 million compared to December 31, 1991. This
decrease was primarily the result of a stronger U.S. dollar exchange rate for
certain international currencies at December 31, 1992 as compared to December
31, 1991.
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.
In 1992, Omnicom adopted two new accounting principles which had a net
favorable cumulative after tax effect of $3.8 million. At the same time, Omnicom
recorded a special charge to provide for future losses related to certain leased
property. The combination of the favorable impact of the adoption of the new
accounting principles and the after tax impact of the special charge had no
effect on 1992 consolidated net income.
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 exposure to changes in 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.
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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, 1994, Omnicom had forward exchange contracts outstanding
with an aggregate notional principal amount of $346 million, most of which were
denominated in Omnicom's major international market currencies. These contracts
effectively hedge certain of Omnicom's assets and liabilities 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.
Omnicom had no other derivative contracts outstanding at December 31, 1994.
At December 31, 1993, Omnicom had entered into various cross currency
interest rate swap transactions. The notional principal amount of these swap
transactions totaled $70.6 million comprising contracts denominated in German
Deutsche Marks, French Francs, Australian Dollars and Spanish Pesetas. The swaps
were principally used to reduce Omnicom's risk related to currency fluctuations
and to convert the effective interest rate on borrowings of certain
international subsidiaries from fixed rates to a lower floating U.S. interest
rate. In addition, Omnicom had one U.S. dollar interest rate swap outstanding at
December 31, 1993 with a notional principal amount of $50 million, for the
purpose of converting a portion of the floating U.S. interest rates mentioned
previously to fixed interest rates. These contracts were closed out during 1994
for a gain of $2.4 million which is being amortized into income over the
original term of the swap agreements.
The current economic conditions in Omnicom's major markets would indicate
varying growth rates in advertising expenditures in 1995. Omnicom anticipates
relatively favorable growth rates in its major international markets.
Capital Resources and Liquidity
Cash and cash equivalents at March 31, 1995 decreased to $168,391,000 from
$228,251,000 at December 31, 1994. This decline is due to the paydown of
year-end accrued liabilities and payments to media and other suppliers exceeding
collections from clients. Both events are normal recurring seasonal industry
patterns. The relationship between payables to the media and suppliers and
receivables from clients, at March 31, 1995, compares favorably to customary
industry practices.
Cash and cash equivalents increased $53 million during 1994 to $228 million
at December 31, 1994. Omnicom's positive net cash flow provided by operating
activities was enhanced by an improvement in the 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 was used to fund acquisitions, make
capital expenditures and repay debt obligations.
On June 1, 1994, Omnicom issued a Notice of Redemption for 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 $28.00 per
common share.
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, 1994, Omnicom had $370 million in
committed lines of credit, comprised of a $250 million revolving credit
agreement expiring on June 30, 1997 and $120 million in unsecured credit lines,
principally outside of the United States. Of the $370 million in committed
lines, $32 million were used at December 31, 1994. 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.
On January 4, 1995, an indirect wholly-owned subsidiary of Omnicom issued
Deutsche Mark 200 million Floating Rate Bonds (approximately $130 million), due
January 5, 2000. The bonds bear interest at a per annum rate equal to Deutsche
Mark three month LIBOR plus 0.65%.
Omnicom anticipates that the year end cash position, together with the
future cash flows from operations and funds available under existing credit
facilities and borrowings will be adequate to meet its long-term cash
requirements as presently contemplated.
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Recent Financial Data
On July 27, 1995, Omnicom announced that worldwide commission and fee
income increased 23 percent to $985,921,000 for the six months ended June 30,
1995 from $801,736,000 for the same period in 1994. Domestic commission and fee
income for the six months increased 15 percent to $467,930,000 compared to
$406,038,000 in 1994. International commission and fee income increased 31
percent to $517,991,000 in 1995 from $395,697,000 in 1994. Absent the effect of
the net acquisition activity of subsidiary companies and movements in
international currency exchange rates, worldwide commission and fee income would
have increased 13 percent.
Operating and interest expense increased 22 percent for the six months
ended June 30, 1995 as compared to the same period for 1994. Excluding the
effect of the net acquisition activity and movements in international currency
exchange rates mentioned above, operating and interest expense would have
increased 13 percent over 1994 levels. This increase reflects normal salary
increases and growth in client service expenditures to support the increased
revenue base.
Pretax profit margin for the first six months of 1995 was 11.7 percent as
compared to 11.2 percent in the same period in 1994.
The effective income tax rate of 40.2 percent for the first six months of
1995 is comparable to 41.2 percent in the first six months of 1994.
Both equity in affiliates and minority interests increased during the six
month period compared to 1994. The increase in equity in affiliates is
indicative of greater profits earned by companies in which Omnicom owns less
than a 50% equity interest. The increase in minority interests primarily
reflects greater earnings by Omnicom's majority-owned international subsidiaries
and the effect of acquisitions made subsequent to June 30, 1994.
Net income for the six months ended June 30, 1995 increased 26 percent to
$66,289,000 from $52,418,000, before a change in accounting principle, in 1994.
Absent the effect of net acquisitions and movements in international currency
exchange rates, net income would have increased 13 percent over 1994 levels.
Fully diluted earnings per share increased 19 percent to $1.81 per share in 1995
from $1.52 per share in the same period in 1994.
The following is selected unaudited financial data of Omnicom's operating
results for the six months ended June 30, 1995 and 1994:
(Dollars in Thousands
Except Per Share
Amounts)
(unaudited)
1995 1994
---- ----
Commission and fee income .............................. $ 985,921 $ 801,736
Operating and interest expense ......................... 870,234 711,917
Income before income taxes ............................. 115,687 89,819
Income taxes ........................................... 46,453 36,971
Income after income taxes .............................. 69,234 52,848
Equity in affiliates ................................... 8,354 5,952
Minority interests ..................................... (11,299) (6,382)
Net income before change in accounting principle ....... 66,289 52,418
Cumulative effect of change in accounting principle .... -- (28,009)
Net Income ............................................. $ 66,289 $ 24,409
Earnings per share:
Net income before change in accounting principle:
Primary ........................................... $ 1.84 $ 1.59
Fully diluted ..................................... $ 1.81 $ 1.52
Cumulative effect of change in accounting principle:
Primary ........................................... -- $ (0.85)
Fully diluted ..................................... -- $ (0.85)
Net Income:
Primary ........................................... $ 1.84 $ 0.74
Fully diluted ..................................... $ 1.81 $ 0.74
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BUSINESS INFORMATION CONCERNING HOLDINGS
General
The principal line of business of Holdings and its subsidiaries includes
planning and creating advertising campaigns for clients, purchasing various
media spots (television, radio, newspapers and magazines), and providing
marketing consultation, market research and production services. In 1994,
Holdings was the 16th largest advertising agency in the U.S. according to
statistics published in Advertising Age, a trade publication. Holdings operates
major offices in Venice, California, London, New York and Toronto, and a
regional network of offices in, Atlanta, Calgary, Chicago, Dallas, San
Francisco, Washington, D.C. and Jacksonville. The principal office of Chiat/Day
is located at 180 Maiden Lane, New York, New York 10038.
Sales and Marketing
Holdings believes that it has a reputation as an industry leader in terms
of the creativity and effectiveness of its campaigns. Holdings believes that its
reputation and the "Chiat/ Day" name are important generators of business.
Holdings has organized management teams to explore and pursue clients in
the major industry groups that it does not currently service. Holdings maintains
constant contact with industry sources for new business leads and presents five
to eight extensive business pitches per office per year.
Customers
Holdings serves a diversified and well-known client base in many
industries, including airlines, automobile, banking, cellular communications,
consumer electronics, entertainment, financial services, food products,
insurance, footwear, personal computers and soft drinks. Eight of Holdings' ten
largest clients representing 57% of 1994 gross income have been with Holdings
for more than five years.
Since 1988, Nissan Motor Company has been Holdings' largest client. In
1992, Nissan awarded its Infiniti account to Holdings without requiring
competitive bids. Nissan and Infiniti accounted for 48% of Holdings' gross
income in 1993 and 55% of Holdings' gross income in 1994. Holdings has no other
client which accounts for 10% or more of its gross income.
Like most advertising agencies, Holdings experiences a certain amount of
client turnover. Agreements between Holdings and its clients are generally
terminable by either Holdings or the client on 90 days notice. Turnover is
primarily generated by a change in the management of the client, an effort by
Holdings to pursue a client in the same category as an existing client, a client
merger or a change in the client's financial or strategic direction.
Competition
Agencies typically pitch new clients by presenting an ad campaign in
competition against other firms. The basis for the selection includes: relevance
of the campaign to the product strategy, creativity, market insights, the
agency's ability to provide the appropriate media exposure, past success and
personal chemistry. Holdings believes that agencies are rarely selected on the
basis of price. Typically, agencies are precluded from representing more than
one client in an industry for reasons of potential conflicts.
Services
Holdings' principal line of business includes planning and creating
advertising campaigns for clients; purchasing various media placements in local
television, network, cable, radio, newspapers, magazines and outdoor; and
providing marketing, market research and production services.
Holdings' four major offices (New York, Venice, Toronto and London) are
full service operations with a total workforce of approximately 600, committed
to Account Management, Account Planning, Creative, Media Planning and Buying,
and Production. The offices that form the regional network with a total
workforce of approximately 150 support the localized needs of Holdings' national
clients.
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Pricing and Billing
Holdings generates most of its revenue from fees and commissions for
production and placement in various media of agency generated advertising
campaigns. Most of Holdings' revenue is based on a combination of commissions
and fees with seven of the ten largest accounts on this system. This pricing
method provides a fixed minimum fee augmented by commissions based on the
client's media billings. This pricing method protects the agency from large
variations in its clients' media budgets.
Some clients are billed on a "cost plus mark-up" fee structure. Cost plus
mark-up billing entails billing the client a fixed monthly fee for the staffing
dedicated to the account plus an amount to cover overhead.
In addition, Holdings is sometimes paid a bonus by clients based on
predetermined performance criteria.
Billing and Accounting Practices
Revenue is recognized in the month in which the advertisement is run.
"Advance billings" in the current liability section of the balance sheet
represents costs and commissions which have been approved by and billed to
clients but for which related vendor invoices have not been received and income
has not been earned. "Expenditures billable to clients" in the current asset
portion of the balance sheet represents unbilled receivables. Both "Advance
billings" and "Expenditures billable to clients" are primarily the result of
timing differences between the receipt of invoices (media and production) and
the client billing cycle.
For media placement, Holdings obtains written approval of an estimate (the
"Estimate") from its clients before commitments are made to media vendors.
Clients are billed based on the approved Estimate.
Production of advertising spots follows a similar pattern, except that in
this case Holdings bills the client as costs are incurred. On average,
production costs charged to clients account for about 10% of all billing
activity. Spot (local television), newspaper, magazine and radio advertising
account for about 65% of billings. Network advertising represents the remaining
25% of billings.
Seasonality
Historically, Holdings' business has been seasonal, with increased billings
generated in the third and fourth quarters of each fiscal year. The seasonality
generally reflects the media placement patterns of Holdings' clients and is
similar to that experienced by other firms in the industry.
Personnel
On April 30, 1995, Holdings employed approximately 750 persons. In
addition, turnover at the senior management level has been very low. All of the
eight senior executives of Holdings have been with Holdings for at least eight
years, with an average tenure of over 13 years.
Since most employees are assigned to one specific account, Holdings can
respond quickly to account losses or acquisitions by hiring or reducing staff
accordingly.
None of Holdings' employees are represented by unions.
Legal Proceedings
Holdings is not involved in any material pending legal proceedings not
covered by insurance or by adequate indemnification, which, if decided adversely
to Holdings' interest, would have a material adverse effect on the financial
position of Holdings.
Properties
All of Holdings' offices are located in leased premises. Holding's
principal offices are in New York City and Venice. Holdings also leases offices
in Calgary, Chicago, Dallas, London, Toronto, San Francisco, Washington, D.C.
and Jacksonville.
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SELECTED FINANCIAL DATA OF HOLDINGS
The following table summarizes certain selected consolidated financial data
of Holdings 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 ended October
31, 1994 is derived from the financial statements audited by Coopers & Lybrand
LLP, independent public accountants. The financial data for the six-month
periods ended April 30, 1995 and 1994, are derived from unaudited financial
statements and, in the opinion of Holdings, reflect all adjustments, consisting
only of normal non-recurring adjustments, necessary for a fair statement of
results of operations for such periods. Operating results for the six months
ended April 30, 1995, are not necessarily indicative of the results that may be
achieved for the entire year ending October 31, 1995. See "Financial
Statements", the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Holdings".
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Amounts)
---------------------------------------------------------------------------
Six Months Ended
April 30, Year Ended October 31
-------------------- ------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Fee and commission
income ......................... $ 45,364 $ 42,926 $ 89,277 $100,267 $128,722 $115,470 $131,457
Operating expenses ................ 37,586 35,405 78,117 91,300 118,120 120,369 147,375
Restructuring expenses ............ -- -- -- 25,848 -- -- --
Income (loss) before income
tax provision .................. 6,335 6,262 7,573 (20,690) 4,186 (5,656) (16,642)
Net income (loss) ................. 4,748 4,937 5,971 (21,545) 3,407 (6,089) (17,389)
Earnings per share:
Net income (loss):
Primary ....................... 0.09 0.09 0.11 (0.39) 0.06 (0.10) (0.25)
Primary (including
EPUs and EARs) ............... 0.04 0.04 0.05 (0.39) 0.04 (0.10) (0.25)
Total assets ...................... 121,334 95,124 96,077 74,871 158,261 150,701 165,771
Long-term obligations:
Long-term debt .................. 10,881 26,891 10,448 20,697 71,423 70,398 92,598
Restructuring reserve liability 7,518 11,671 10,009 13,421 -- -- --
Other liabilities ............... 2,937 2,588 2,791 2,012 20,201 25,995 7,019
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HOLDINGS
Results of Operations
Fiscal year 1993 compared to fiscal year 1992 and fiscal year 1994 compared to
fiscal year 1993.
Fee and commission income decreased in fiscal years ended October 31, 1993
and 1994 by 22% and 11%, respectively, compared to the prior fiscal years. The
decrease in fiscal year 1993 was mainly attributable to the loss of the American
Express and Nutrasweet accounts and the sale of Holdings' Australian subsidiary
in February 1993. The fiscal year 1994 decrease was mainly attributable to loss
of the Reebok account.
Salaries and employee benefit expenses were reduced by 19% in fiscal year
1993 and 8% in fiscal year 1994, respectively, as compared to the prior fiscal
years. Due to the reduction in fee and commission income in fiscal years 1993
and 1994, staff reductions were made to reduce costs. Selling, general and
administrative expenses decreased in fiscal year 1993 by 14% from fiscal year
1992 due to the disposal of Holdings' Australian subsidiary in February 1993. In
fiscal year 1994, Holdings established a "virtual office" in its New York and
Venice offices by eliminating fixed office locations for personnel. Holdings and
Advertising employees carry portable phones and computers and are encouraged to
work where they feel most productive. Based on the implementation of the virtual
office, selling, general and administrative expenses were reduced in fiscal year
1994 by 29% compared to fiscal year 1993. This reduction was primarily due to
decreases in real estate and depreciation expense by 41% and 47%, respectively,
as a result of the restructuring charge recorded in 1993 described in the next
paragraph.
A one-time restructuring charge of $25,848,000 was recorded in fiscal year
1993. Effective November 1, 1993 Holdings entered into a new real estate
operating lease in New York that will enable it to significantly reduce its
future rental expense through a reduction in total amount of space leased.
Holdings remains as the primary lessee on its old New York lease through
December 31, 1997. It has currently sublet approximately 85% of the space
through the lease term and is actively seeking to sublet the remaining space.
$14,802,000 of the charge relates to the future cash rental obligations, net of
probable sublease income, and $3,252,000 relates to the writeoff of fixed assets
and leasehold improvements.
In fiscal 1993 Holdings entered into agreements to assign its lease,
effective January 1, 1994, for the 320 Hampton Drive facility to an unrelated
third party in order to consolidate operations into one facility at 340 Main
Street. All fixed assets and leasehold improvements related to such facility
were written off in 1993. Alterations to the 340 Main Street property were made
in order to facilitate the consolidation into one facility. $5,122,000 of the
restructuring charge related to the write-off of leasehold improvements and
fixed assets at both facilities as a result of the consolidation and $940,000
related to cash obligations incurred in connection with the lease assignment and
consolidation of space. The remaining balance of the restructuring charge of
$1,732,000 represents a reserve for future cash rental obligations in excess of
anticipated probable sublease income for other property leased in California.
In 1994 earnings increased by approximately $4,500,000 due to reductions in
rental and depreciation expense as a result of the restructuring reserve taken
in 1993. Cash flows decreased in 1994 primarily due to $5,800,000 of
expenditures incurred in connection with the alterations made to the 340 Main
Street facility. Future earnings and cash flows will increase by approximately
$4,500,000 and $2,000,000 per annum, respectively, due to reduced rental and
depreciation expense.
In October 1994, Venice Operating Corp. ("VOC"), a company owned by the
majority stockholder and certain members of the Board of Directors of Holdings,
sold its office facilities in Venice, California to an unrelated third party.
Effective October 14, 1994 the Holdings lease with VOC was terminated and it
entered into a new twenty year lease having six consecutive five-year renewal
options with the new owner of the building. Rent expense will be reduced by
approximately $1,000,000 per annum as a result of such new lease.
Holdings was assigned a $3,000,000 promissory note from VOC that it
received in connection with the sale of the building in satisfaction of the
return of the Holdings' security deposit and accrued interest thereon due from
VOC. As a result of the proposed transaction with Omnicom, the new owner of the
building and obligor of the note, ADS (CA) QRS, 11-34, has indicated that they
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<PAGE>
will pay the principal in full prior to December 31, 1995. VOC is presently an
inactive company and Holdings has had no business transactions with VOC
subsequent to the sale of the building.
On February 16,1993, (effective as of January 1, 1993), Holdings completed
the transfer of the stock of this subsidiary to Foote Cone & Belding ("FCB") for
no consideration. Concurrent with the transfer of shares to FCB, Holdings
exercised its option to acquire $10,350,000 of bank debt owed by such subsidiary
for $700 and agreed to accept from FCB, in full satisfaction of such debt,
$1,380,000 plus future contingent payments up to a maximum of $3,450,000. To
date, Holdings has received $1,093,000 from FCB in contingent payments. Holdings
recorded a gain of $3,504,000 on the disposition primarily as a result of the
recognition of the accumulated translation adjustment related to such operation.
FCB already had a presence in Australia and felt that the combination of the
operations could provide future value. The disposition was structured to reflect
the fact that the level of debt rendered the equity worthless. Accordingly, no
consideration was paid for the stock. Due to the uncertainty of the viability of
the operation, payments to Holdings were contingent upon future revenue
performance and the utilization of certain tax benefits by FCB. All contingent
payments by FCB are recorded when received. While the disposition reduced
overall revenues of Holdings, it increased Holdings' consolidated profitability
due to the elimination of the net operating losses the subsidiary was generating
as a result of poor operating performance and high interest costs due to its
large debt position. The reduction in consolidated debt improved Holdings'
overall financial position and cash flows.
The 73% decrease in other operating expenses in fiscal year 1993 compared
to fiscal year 1992 was due largely to the impact of a $3,200,000 charge in
fiscal year 1992 to reflect the settlement of certain litigation. An additional
90% reduction in other operating expenses was realized in fiscal year 1994
compared to fiscal year 1993 primarily due to $653,000 of revenue performance
payments received in connection with the sale of Holdings' Australian subsidiary
discussed above and due to increased deferred compensation expenses in fiscal
year 1993 of approximately $1,000,000.
Interest expense was reduced by 41% in fiscal year 1993 versus fiscal year
1992 due to reduced levels of debt. A 1% increase in interest expense in fiscal
1994 versus fiscal 1993 was due to an increase in dividends issued to the profit
sharing plan in 1994.
The income tax provision for fiscal year 1993 decreased 64% compared to
fiscal year 1992 due largely to the use in fiscal year 1993 of net operating
loss carry forwards previously generated. While the income tax provision
increased 87% in fiscal year 1994 compared to fiscal year 1993, the income tax
provision was less than what would have been provided under the statutory rate
due to the use of net operating loss carry forwards and a foreign tax credit
generated in fiscal year 1994. FASB 109 was adopted effective October 1, 1993
creating a deferred tax asset of $18,717,000. No benefit was recorded on the
financial statements, but the effect is described in the footnotes.
First half 1995 compared to first half 1994.
For the six month ended April 30, 1995, revenues increased 6% compared to
the corresponding period of the prior year as a result of new clients in
California and New York. At the same time, salary expense increased by 20% due
to salary increases effective May 1, 1994, the full effect of new hires in the
Toronto office and incremental staffing for new business wins occurring in 1995.
Selling, general and administrative expense decreased by 16% due to decreased
rent expense related to lower lease costs in New York and California as a result
of new leases entered into for both locations. Due to increased borrowings,
interest expense increased by 21% while interest income increased by 44%
resulting in a net interest expense increase of 15%. Income tax expense
increased as a result of an increase in the expected effective income tax rate
in 1995.
Liquidity and Capital Resources
Holdings' principal source of operating capital has been from operations,
Senior Debt of $20,000,000 under the Amended and Restated Credit Agreement and
Senior Subordinated Debt of $11,000,000 under the 13.25% Senior Subordinated
Notes. The Senior Debt is due and payable on December 10, 1995 and the Senior
Subordinated Debt became payable and was paid on August 1, 1995. Under the Bank
Credit Agreement, the Senior Debt was scheduled to mature in May 1995. However,
pursuant to the assignment to Omnicom of the Senior Debt in January 1995 under
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the Amended and Restated Credit Agreement, Omnicom agreed to extend the maturity
until December 10, 1995. In the event the Transactions are not consummated,
Holdings would be required to refinance its entire debt structure by December
10, 1995.
In late 1994 and January 1995, Holdings was engaged in discussions with
potential lenders regarding the refinancing of the Bank Credit Agreement and $11
million of Holdings' 13.25% Senior Subordinated Notes which matured and were
paid in full on August 1, 1995. The terms proposed by prospective institutional
lenders included substantial penalties for early repayment and the equivalent of
an equity participation in Holdings in the event that it were sold while such
financing was outstanding. During the period Holdings was considering whether to
accept such terms of refinancing, discussions with Omnicom were renewed and
began to assume the characteristics of negotiations in January of 1995. Holdings
realized that proceeding with the proposed refinancing would create significant
obstacles to consummating any acquisition transaction. Instead, as described
above, Omnicom agreed to assume the liabilities of the banks under the Bank
Credit Agreement and extended the maturity until December 10, 1995.
Based upon the discussions held with prospective lending institutions in
late 1994 and early 1995, management believes that the refinancing of Holdings'
outstanding debt obligations and/or additional equity financing would be
obtainable if necessary, although no assurances can be given. If the Acquisition
is not consummated, Holdings will resume discussions with potential
institutional lenders and/or equity investors. If such financing were obtained,
given Holdings' historical increases in cash and cash equivalents and its
ability to manage its negative working capital position, management believes
that Holdings would continue as a viable going concern.
Working capital decreased in fiscal year 1994 by 15.7% versus fiscal year
1993. As compared to April 30, 1994, working capital at April 30, 1995 increased
by 126.5% primarilydue to long term debt becoming current.
Holdings' working capital deficit increased to $64.9 million at October 31,
1994 from $56.1 million at October 31, 1993 primarily due to capital
expenditures of $5.8 million in 1994 to implement the real estate restructuring.
Capital expenditures of $999,000 were made in fiscal year 1993 and
$5,615,000 in fiscal year 1994. These expenditures included, among other things,
leasehold improvements and upgraded telephone and computer systems.
Holdings believes that its cash flows and funds available under existing
debt facilities will be adequate to meet its cash requirements through the
contemplated Closing Date of the Acquisition, but it is possible that additional
borrowings from Omnicom may be required.
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 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 on 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.
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Omnicom may issue Omnicom Preferred Stock in series having whatever rights
and preferences the Board of Directors may determine. One or more series of
Omnicom Preferred Stock may be made convertible into Omnicom Common Stock at
rates determined by the Board of Directors, and Omnicom Preferred Stock may be
given priority over the Omnicom Common Stock in payment of dividends, rights on
liquidation, voting and other rights. Omnicom has no current plans to issue any
Omnicom Preferred Stock. Omnicom Preferred Stock may be issued from time to time
upon authorization of the Omnicom Board of Directors without action of the
shareholders.
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 $54.88, subject
to adjustment in certain events.
Chemical Bank, 450 West 33rd Street, New York, New York 10001 is the
transfer agent and the registrar of the Omnicom Common Stock.
DESCRIPTION OF HOLDINGS CAPITAL STOCK
Holdings is a Delaware corporation incorporated on May 2, 1988. Holdings is
the sole stockholder of Advertising, a Delaware corporation incorporated on
March 15, 1985.
Holdings Common Stock
Holdings has two classes of Common Stock: Class A Common Stock, par value
$0.01 per share and Class B Common Stock, par value $0.01 per share.
Class A Common Stock: There are 75,000,000 shares of Class A Common Stock
authorized and there were 13,527,269 shares outstanding at August 1, 1995. The
holders of Class A Common Stock are entitled to receive dividends when and as
declared by the Holdings Board of Directors, but only after full cumulative
dividends on the Holdings Preferred Stock have been paid or declared in full and
sums set aside for the payment thereof. Class A Common Stock and Class B Common
Stock rank equal with respect to the payment of dividends. Pursuant to the
Holdings Certificate, holders of Class A Common Stock, excluding certain shares
originally issued to Morgan Capital Corporation, have additional voting rights
with respect to (i) certain transactions with affiliates, (ii) the creation of
certain employee benefit plans, (iii) changes to the Holdings Certificate or
By-laws which adversely affect the Class A Common Stock, (iv) certain sales or
issuances of stock, and (v) certain business combinations. In the event of
certain dilutive transactions other than in connection with a merger,
consolidation, reorganization, or any public offering of stock of Holdings or in
consideration of the acquisition of stock or assets of another entity, holders
of Class A Common Stock are entitled to receive additional shares to prevent
dilution. At August 1, 1995, there were 19 record holders of Class A Common
Stock. See "The Plan of Liquidation" herein for a description of the rights of
holders of Class A Common Stock in the event of a liquidation.
Class B Common Stock: There are 200,000,000 shares of Class B Common Stock
authorized and there were 38,513,160 shares outstanding at August 1, 1995. The
holders of Class B Common Stock are entitled to receive dividends when and as
declared by the Board of Directors, but only after full cumulative dividends on
the Holdings Preferred Stock have been paid or declared in full and sums set
aside for the payment thereof. Class A Common Stock and Class B Common Stock
rank equal with respect to the payment of dividends. Class B Common Stock has
the same voting rights as Class A Common Stock, except that certain shares of
Class A Common Stock have additional voting rights in some situations as
discussed above. At August 1, 1995, there were approximately 28 record holders
of Class B Common Stock. See "The Plan of Liquidation" herein for a description
of the rights of holders of Class B Common Stock in the event of a liquidation.
Shares of Class B Common Stock which have been issued pursuant to the 1988
Chiat/Day Holdings, Inc. Restricted Stock Purchase Plan (the "Holdings Stock
Purchase Plan") are subject to the restrictions contained therein. Any sale,
transfer or disposition of the shares must comply with the provisions of the
Holdings Stock Purchase Plan and of the related Stockholders' Agreements. (See
Note 5 to the Consolidated Financial Statements.)
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The following table reflects the beneficial ownership of directors,
executive officers and owners of more than 5% of the outstanding shares of each
of the Class A Common Stock, the Class B Common Stock (without taking into
account the outstanding EARs and EPUs), and all Holdings Common Stock, in each
case on a fully diluted basis at the close of business on August 1, 1995:
<TABLE>
<CAPTION>
Shares of Percent
Shares of Class A Shares of Class Holdings of Holdings
Name and Address Common Stock Percent of B Common Percent Common Common
of Beneficial Owner Owned Class Stock Owned(1) of Class Stock Stock
--------------------- ------------- -------- ------------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jay Chiat ........................... 6,794,533 50% 18,547,970 46% 25,342,503 47%
c/o Chiat/Day inc. Advertising
180 Maiden Lane
New York, NY 10038
Leland Clow ......................... 0 * 3,641,020 9% 3,641,020 7%
c/o Chiat/Day inc. Advertising
340 Main Street
Venice, CA 90291
Adelaide Horton ..................... 100,000 * 0 * 100,000 *
c/o Chiat/Day inc. Advertising
180 Maiden Lane
New York, NY 10038
Robert Kuperman ..................... 50,000 * 969,015 2% 1,019,015 2%
c/o Chiat/Day inc. Advertising
340 Main Street
Venice, CA 90291
Ira Matathia ........................ 0 * 375,000 * 375,000 *
c/o Chiat/Day inc. Advertising
180 Maiden Lane
New York, NY 10038
Tom Patty ........................... 100,000 * 1,282,045 3% 1,382,045 3%
c/o Chiat/Day inc. Advertising
340 Main Street
Venice, CA 90291
David C. Wiener ..................... 125,000 * 2,876,060 7% 3,001,060 6%
440 Sylvan Avenue
Englewood Cliffs
New Jersey, 07632
Robert Wolf ......................... 200,000 1% 3,376,060 8% 3,576,060 7%
c/o Chiat/Day inc. Advertising
340 Main Street
Venice, CA 90291
Mac & Co (2) ........................ 5,142,846 38% 382,500 * 5,525,346 11%
c/o Harvey Rabinowitz
Mellon Securities Trust Co.
120 Broadway,
New York, NY 10271
Directors and Officers as a Group 7,419,533 54.85% 33,159,475 86.10% 40,579,008 77.98%
</TABLE>
---------------
* represents holdings of less than 1%
(1) Jay Chiat also holds 5,396,715 EPUs and 26,945,903 EARs; Leland Clow also
holds 566,360 EPUs and 3,280,420 EARs; Adelaide Horton also holds 700,000
EPUs and 196,825 EARs; Robert Kuperman also holds 1,169,240 EPUs and
656,084 EARs; Ira Matathia also holds 1,125,000 EPUs and 131,217 EARs; Tom
Patty also holds 1,132,725 EPUs and 984,126 EARs; David C. Wiener also
holds 176,970 EPUs and 1,312,168 EARs; Robert Wolf also holds 1,176,970
EPUs and 1,968,252 EARs.
(2) Chesterfield Investments is the beneficial owner.
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<PAGE>
Following the Acquisition and the dissolution and liquidation of Holdings
described herein there will be no Class A Common Stock or Class B Common Stock
outstanding and none of the current directors and officers of Holdings will own
in excess of 1% of Omnicom Common Stock.
No dividends have been declared or paid on the Holdings Class A Common
Stock or Class B Common Stock in the current fiscal year, or in any of the
periods presented in "Selected Financial Data of Holdings". Pursuant to the
Amended and Restated Credit Agreement, Advertising is prohibited from paying
dividends other than dividends paid in shares.
There is no established trading market for Holdings Class A Common Stock or
Class B Common Stock.
Holdings Preferred Stock
There are 200,000 shares of Holdings Preferred Stock authorized. There were
140,817.7393 shares outstanding at April 30, 1995, all of which were owned by
the Profit Sharing Plan. All such shares were reacquired by Holdings on July 10,
1995 pursuant to the terms of the Profit Sharing Plan Purchase Agreement, for an
amount in cash of $14,081,773.93 (or $100 per share).
Holdings Preferred Stock provides for cumulative dividends payable in cash,
or at Holdings' option, in shares of Holdings Preferred Stock (valued at $100
per share) or a combination of cash and shares of Holdings Preferred Stock at a
rate equal to 9% per annum of the liquidation preference of all shares of
Holdings Preferred Stock outstanding, if such amount is paid entirely in cash,
or at a rate of 10% per annum of the liquidation preference if such amount is
paid entirely in additional shares of Holdings Preferred Stock, or at a blended
rate based upon the weighted average of (i) the number of shares of Holdings
Preferred Stock in respect of which dividends are paid in cash multiplied by 9%,
and (ii) the number of shares in respect of which dividends are paid in
additional shares of Holdings Preferred Stock multiplied by 10%. All dividends
on shares of Holdings Preferred Stock are payable, if, when and as declared by
the Board of Directors, annually in arrears on August 1, of each year. Dividends
in respect of shares of Holdings Preferred Stock had been declared annually
since issuance in July of each year and had been paid by the issuance of
additional shares of Holdings Preferred Stock. Any dividends in arrears on the
Holdings Preferred Stock accrue dividends at the rate of 9% per annum. The
holders of Holdings Preferred Stock are not entitled to vote on any corporate
matters, except as required by law. In the event of liquidation, the holders of
Holdings Preferred Stock are entitled to receive the amount of $100 in cash for
each outstanding share of Holdings Preferred Stock plus all declared and unpaid
dividends before any distribution to the holders of Class A Common Stock or
Class B Common Stock. If the assets available are insufficient for such a
payment, the holders of Holdings Preferred Stock shall share ratably in any
distribution. Subject to the prior payment of certain senior indebtedness of
Advertising, the Holdings Preferred Stock may be redeemed at Holdings' option on
and after July 31, 1996 at a price of $100 per share plus accrued but unpaid
dividends subject to certain restrictions provided in the Holdings Certificate.
Subject to the prior payment of certain senior indebtedness of Advertising, the
Holdings Preferred Stock may be redeemed at the holder's option on and after
July 31, 1996 at a price of $100 per share plus accrued but unpaid dividends
subject to certain restrictions provided in the Holdings Certificate.
Vote Required
The presence of the holders of a majority of the voting power of all shares
of Class A Common Stock and Class B Common Stock entitled to vote outstanding on
the record date is necessary to constitute a quorum at the Special Meeting.
Under the DGCL and the Holdings Certificate the affirmative vote of the holders
of the majority of the outstanding shares of Class A Common Stock and Class B
Common Stock voting together as a class, are required to approve each of the
sales pursuant to the Acquisition Agreement and Advertising Stock Sale
Agreement, the Plan of Liquidation and the Amendment to the Holdings
Certificate. Abstentions will have the effect of negative votes. Directors,
officers and affiliates of Holdings who hold in the aggregate more than a
majority of the outstanding Class A Common Stock and Class B Common Stock in the
aggregate have indicated their intention to vote in favor of each of the
Holdings Vote Matters. See "The Transactions--Interests of Certain Persons in
the Transactions." Accordingly, if such persons vote in favor of these the
Transactions, they may be approved even if all of the other Holdings
Stockholders vote against these proposals.
None of the Holdings Vote Matters shall become effective unless all of the
proposals are adopted by the requisite vote of the Holdings Stockholders.
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<PAGE>
Rights of Dissenting Holdings Stockholders
It is intended that the transactions described herein, including the sale
of the assets and the distribution to the Holdings Stockholders in liquidation
of Holdings, will not give rise to dissenters' rights in favor of Holdings
Stockholders under Delaware law.
Equity Appreciation Rights
Pursuant to the EAR Plan, Holdings has authorized 54,084,848 EARs each of
which is equivalent to one share of Class B Common Stock and has the same
priority as Class B Common Stock in the event of a liquidation. In the absence
of liquidation, the EARs are valued at their net book value, which was $0 at
April 30, 1995. At the close of business on August 1, 1995, there were
36,939,112 EARs outstanding. At the Closing Date, all of the outstanding EARs
will be vested.
Equity Participation Units
Pursuant to the EPU Plan, Holdings has authorized 50,000,000 EPUs, each of
which is equivalent to one share of Class B Common Stock and has the same
priority as Class B Common Stock in the event of a liquidation. In the absence
of liquidation, the EPUs are valued at their net book value, which was $0 at
April 30, 1995. At August 1, 1995 there were 22,198,890 EPUs outstanding. At the
Closing Date all of the EPUs will be vested.
COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the Acquisition and the subsequent dissolution of
Holdings and distribution of shares of Omnicom Common Stock to Holdings
Stockholders and Rightsholders, the stockholders of Holdings, a Delaware
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 Holdings
stockholders that will result from the application of New York law in lieu of
Delaware law and the differences between the Omnicom Certificate and the Omnicom
By-laws and the Holdings Certificate and the Holdings By-laws (the "Holdings
By-laws"), the following is a summary of material differences.
References to the "NYBCL" are to the New York Business Corporation Law,
while references to the "DGCL" are to the Delaware General Corporation Law.
Special Meetings of Stockholders
Under Delaware law, a special meeting of stockholders may be called only by
the board of directors or by such person as may be authorized by the certificate
of incorporation or by-laws. The Holdings By-laws provide that a special meeting
of stockholders may be called by the Board of Directors, the Chairman of the
Board or the President and shall be called by the Board upon the written request
of the holders of record of a majority of the outstanding shares entitled to
vote at the meeting requested to be called.
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.
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<PAGE>
Removal of Directors
Under Delaware law, unless otherwise provided in the certificate of
incorporation or the by-laws, shareholders may remove any director, with or
without cause, by the affirmative vote of the holders of a majority of the
shares then entitled to vote at an election of directors. The Holdings By-laws
provide that directors may be removed with or without cause by vote of the
stockholders.
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 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
Under Delaware law, unless otherwise provided in the certificate of
incorporation or the by-laws, the board of directors may fill any vacancy on the
board including vacancies resulting from an increase in the number of directors.
Under the Holdings By-laws, vacancies on the Board for any reason (including
vacancies resulting from an increase in the number of directors) except the
removal of directors by stockholders (which may only be filled by vote of the
stockholders) may be filled by vote of a majority of the directors then in
office. A director elected to fill a vacancy shall be elected to hold office for
the unexpired term of his predecessor.
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
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
Holdings' Board of Directors is not classified into classes.
Omnicom's Certificate of Incorporation provides that directors are to be
classified into three classes, which are to hold office in staggered three-year
terms.
Books and Records; Inspection
Under Delaware law, any person who is a shareholder of record has the right
to examine, for any purpose reasonably relating to his or her interest as a
shareholder, the minutes of a corporation and the right to receive upon request
certain financial statements of the corporation.
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 Certificate of Incorporation
Under Delaware law, an amendment to the certificate of incorporation
proposed by the board of directors requires an affirmative vote of a majority of
the outstanding stock entitled to vote thereon, and a majority of the
outstanding stock of each class entitled to vote as a class thereon. Whether or
not entitled by the charter, the holders of the outstanding shares of a class
are entitled to vote as a class on a charter amendment if the amendment would
62
<PAGE>
increase or decrease the aggregate number of authorized shares of such class or
adversely affect the powers, preferences or special rights of such class. In
addition, the Holdings Certificate specifically requires the approval of the
holders of a majority of the shares of Class A Common Stock (excluding those
shares originally issued to Morgan Capital Corporation) voting separately for
any amendment to the Holdings Certificate which adversely affects their rights.
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 vting 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
Under Delaware law, the by-laws of a corporation generally may be amended
or repealed by the affirmative vote of the holders of a majority of the shares
entitled to vote thereon. As permitted by the DGCL, the Holdings By-laws provide
that the Holdings By-laws may be made, altered or repealed by the Holdings
Board. Any By-law adopted by the Holdings Board may be amended or repealed by
the stockholders entitled to vote thereon. In addition, the Holdings Certificate
specifically requires the approval of the holders of a majority of the shares of
Class A Common Stock (excluding those shares originally issued to Morgan Capital
Corporation) voting separately for any amendment to the Holdings By-laws which
adversely affects their rights.
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
Delaware law permits the payment of dividends on capital stock, subject to
any restrictions contained in the certificate of incorporation, out of a
corporation's surplus (the excess of net assets over capital) or, in case there
is no surplus, out of net profits for the current and/or preceding fiscal year.
If the capital of the corporation is diminished to an amount less than the
aggregate amount of capital represented by the outstanding stock having a
preference on the distribution of assets, then dividends may not be declared and
paid out of such net profits until the deficiency in the amount of capital
represented by the shares having a preference on the distribution of assets
shall have been repaired. The Holdings Certificate provides that unless full
cumulative dividends on the Holdings Preferred Stock have been paid or declared
in full and sums set aside for their payment, no dividends may be paid or
declared on the Class A Common Stock or Class B Common Stock. The Amended and
Restated Credit Agreement prohibits the payment of dividends other than
dividends paid in shares.
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.
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<PAGE>
State Takeover Legislation
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date such person became an interested
stockholder, unless (i) prior to such date, the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder
is approved by the board of directors of the corporation, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the outstanding
voting stock of the corporation outstanding at the time the transaction
commenced, or (iii) on or after such date the business combination is approved
by the board of directors of the corporation and by the affirmative vote, not by
written consent, of at least 66 2/3% of the voting stock which is not owned by
the interested stockholder. A "business combination" includes mergers,
consolidations, asset transfers (including any sale, lease, exchange, mortgage,
pledge or other disposition of assets) and other transactions resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who (i) owns 15% or more of the outstanding voting stock of the
corporation or (ii) is an affiliate or associate of a corporation and was the
owner of 15% or more of the outstanding voting stock at any time within the past
three years.
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
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.
Section 203 of the DGCL does not apply to Holdings, as Holdings is not a
publicly held corporation as defined by the DGCL. Under the NYBCL, corporations
may opt to not be governed by the statute; Omnicom has not so elected.
Business Combinations
Generally, under the DGCL, the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote on the matter is required to
approve mergers, consolidations, and any sales, leases or exchanges of all or
substantially all of the assets of a corporation. The Holdings Certificate
requires in addition the approval of the holders of a majority of the shares of
Class A Common Stock (excluding the shares originally issued to Morgan Capital
Corporation) voting separately as a class for any such transactions. The
Holdings Certificate further provides that this requirement shall not prevent a
merger, consolidation or asset sale if the consideration received by Holdings,
its subsidiaries and holders of shares of Class A Common Stock consists solely
of cash or freely tradeable registered securities or a combination thereof.
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
Delaware law grants appraisal rights to any stockholder opposing a merger
or consolidation (except that it restricts the appraisal rights of shareholders
of the merging domestic corporation which is to be the surviving corporation by
eliminating appraisal rights for such shareholders if the merger did not require
for its approval the vote of the holders of the surviving corporation).
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<PAGE>
Accordingly, a dissenting shareholder is entitled to receive in cash the fair
value of his shares as determined by the Delaware Court of Chancery in the event
the merger or consolidation is consummated.
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
Section 145 of the DGCL generally provides that a corporation may, and in
certain circumstances, must, indemnify any person who is or was threatened with
any action, suit or proceeding by reason of the fact that he or she is or was a
director, officer, employee or agent of such corporation for expenses, judgments
or settlements actually and reasonably incurred by such person in connection
with suits and other legal action or proceedings if such person 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 and, with respect to any criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful.
The determination of whether a director, officer, employee or agent has met the
applicable standard of conduct is made (i) by a majority vote of a quorum of
directors not party to the action, suit or proceeding, or (ii) by an independent
legal counsel in a written opinion if a quorum of disinterested directors is
unobtainable or if the disinterested directors so direct or (iii) by the
shareholders. In the case of shareholder derivative suits, the corporation may
indemnify any person who is or was threatened with any action, suit or
proceeding by reason of the fact that he or she is or was a director, officer,
employee or agent if such person 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, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which the action was brought determined upon application that, in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. The DGCL also
permits a corporation to adopt procedures for advancing expenses to directors,
officers and others without the need for a case-by-case determination of
eligibility, so long as in the case of officers and directors they undertake to
repay the amounts advanced if it is ultimately determined that the officer or
director was not entitled to be indemnified. The aforementioned provisions
relating to indemnification and advancement of expenses are not exclusive and a
corporation may provide additional rights to those seeking indemnification or
advancement of expenses. The Holdings Certificate provides for indemnification
of directors, officers, employees and agents to the fullest extent authorized
under the DGCL. The Holdings Certificate also authorizes the advancement of
expenses relating to actions for which such persons may be indemnified.
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
65
<PAGE>
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
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
Holdings pursuant to the foregoing provisions, Omnicom and Holdings 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
Section 102 (b) (7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision that would eliminate a director's
monetary liability for breaches of his fiduciary duty in a lawsuit by or on
behalf of the corporation or in an action by stockholders of the corporation,
provided that such provision may not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The Holdings Certificate contains such a provision
providing for the limitation of liability of directors for monetary damages for
breach of fiduciary duty as a director to the fullest extent permitted by the
DGCL.
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.
66
<PAGE>
LEGAL MATTERS
The validity of the shares of Omnicom Common Stock to be issued in
connection with the Acquisition will be passed on by Davis & Gilbert, 1740
Broadway, New York, New York 10019, counsel to Omnicom.
EXPERTS
The consolidated financial statements and schedules of Omnicom and its
subsidiaries incorporated by reference 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, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated balance sheets as of October 31, 1994 and 1993, and the
consolidated statements of operations, stockholders deficit, and cash flows for
each of the three years in the period ended October 31, 1994 of Holdings
contained in this Prospectus/Information Statement and the Registration
Statement of which this Prospectus/Information Statement is a part have been
audited by Coopers & Lybrand LLP, independent certified public accountants, as
indicated in their report, which includes an explanatory paragraph concerning
Holding's ability to continue as a going concern, and are included herein in
reliance upon the authority of that firm as experts in accounting and auditing.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
OMNICOM GROUP INC. AND SUBSIDIARIES
<S> <C>
Report of Independent Public Accountants .......................................................... F-1
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1994 (audited) ....................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993 (audited) ............................ F-3
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended December 31, 1994 (audited) .................... F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1994 (audited) ................................................ F-5
Notes to Consolidated Financial Statements (audited) .............................................. F-6
Schedule VIII--Valuation and Qualifying Accounts for the three years
ended December 31, 1994 (audited) ............................................................. F-17
Consolidated Condensed Balance Sheets as of March 31, 1995,
December 31, 1994 and March 31, 1994 (unaudited) ............................................... F-18
Consolidated Condensed Statements of Income for the three
months ended March 31, 1995 and 1994 (unaudited) ............................................... F-19
Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1995 and 1994 (unaudited) ...................................................... F-20
Notes to Consolidated Condensed Financial Statements (unaudited) .................................. F-21
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants ................................................................. F-22
Consolidated Balance Sheets as of October 31, 1994 and 1993 (audited) ............................. F-23
Consolidated Statements of Operations for the years ended
October 31, 1994, 1993 and 1992 (audited) ...................................................... F-24
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended October 31, 1994, 1993 and 1992 (audited) .................................. F-25
Consolidated Statements of Cash Flows for the years ended
October 31, 1994, 1993 and 1992 (audited) ...................................................... F-26
Notes to Consolidated Financial Statements (audited) .............................................. F-27
Consolidated Condensed Balance Sheets as of April 30, 1995
and 1994 (unaudited) ........................................................................... F-37
Consolidated Condensed Statements of Operations for the six
months ended April 30, 1995 and 1994 (unaudited) ............................................... F-39
Consolidated Condensed Statements of Cash Flows for the six months
ended April 30, 1995 and 1994 (unaudited) ...................................................... F-40
Notes to Consolidated Condensed Financial Statements (unaudited) .................................. F-41
</TABLE>
68
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
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, 1994 and
1993, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1994. 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 financial position of Omnicom Group Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 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 methods of accounting for
postemployment benefits and certain investments in debt and equity securities.
Effective January 1, 1992, the Company changed its methods of accounting for
income taxes and postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on page S-1 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 20, 1995
F-1
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in Thousands
Except Per Share Data)
------------------------------------
1994 1993 1992
---- ---- ----
COMMISSIONS AND FEES ............... $ 1,756,205 $ 1,516,475 $ 1,385,161
OPERATING EXPENSES:
Salaries and Related Costs .... 1,009,069 879,808 798,189
Office and General Expenses ... 542,538 467,468 433,884
Special Charge ................ -- -- 6,714
----------- ----------- -----------
1,551,607 1,347,276 1,238,787
----------- ----------- -----------
OPERATING PROFIT ................... 204,598 169,199 146,374
NET INTEREST EXPENSE:
Interest and Dividend Income .. (11,928) (14,628) (16,810)
Interest Paid or Accrued ...... 34,770 41,203 40,888
----------- ----------- -----------
22,842 26,575 24,078
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND CHANGE IN ACCOUNTING
PRINCIPLES ...................... 181,756 142,624 122,296
INCOME TAXES ....................... 74,337 59,871 53,268
----------- ----------- -----------
INCOME AFTER INCOME TAXES AND BEFORE
CHANGE IN ACCOUNTING PRINCIPLES .. 107,419 82,753 69,028
EQUITY IN AFFILIATES ............... 18,322 13,180 9,598
MINORITY INTERESTS ................. (17,607) (10,588) (13,128)
----------- ----------- -----------
INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLES ............ 108,134 85,345 65,498
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES ............ (28,009) -- 3,800
----------- ----------- -----------
NET INCOME ......................... $ 80,125 $ 85,345 $ 69,298
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Income Before Change in
Accounting Principles:
Primary ...................... $ 3.15 $ 2.79 $ 2.31
Fully Diluted ................ $ 3.07 $ 2.62 $ 2.20
Cumulative Effect of Change
in Accounting Principles:
Primary ...................... $ (0.81) -- $ 0.14
Fully Diluted ................ $ (0.81) -- $ 0.11
Net Income:
Primary ...................... $ 2.34 $ 2.79 $ 2.45
Fully Diluted ................ $ 2.34 $ 2.62 $ 2.31
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-2
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(Dollars in Thousands)
-------------------------------
A S S E T S 1994 1993
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 228,251 $ 174,833
Investments available-for-sale, at market, which approximates cost ....................... 28,383 38,003
Accounts receivable, less allowance for doubtful accounts of
$19,278 and $17,298 (Schedule VIII) .................................................. 1,139,882 901,434
Billable production orders in process, at cost ........................................... 65,115 59,415
Prepaid expenses and other current assets ................................................ 140,304 100,791
----------- ------------
Total Current Assets ................................................................... 1,601,935 1,274,476
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less
accumulated depreciation and amortization of $221,491 and $188,868 ....................... 172,153 160,543
INVESTMENTS IN AFFILIATES .................................................................... 164,524 112,232
INTANGIBLES, less accumulated amortization of $133,572 and $93,105 ........................... 758,460 603,494
DEFERRED TAX BENEFITS ........................................................................ 21,104 18,522
DEFERRED CHARGES AND OTHER ASSETS ............................................................ 134,028 120,596
----------- ------------
$ 2,852,204 $ 2,289,863
=========== ===========
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 ......................................................................... $ 1,425,829 $ 1,058,095
Current portion of long-term debt ........................................................ 3,576 21,892
Bank loans ............................................................................... 8,939 26,155
Advance billings ......................................................................... 148,036 90,422
Other accrued taxes ...................................................................... 63,025 32,953
Other accrued liabilities ................................................................ 274,308 254,378
Accrued taxes on income .................................................................. 51,667 29,974
Dividends payable ........................................................................ 11,262 10,349
----------- ------------
Total Current Liabilities .............................................................. 1,986,642 1,524,218
----------- ------------
LONG-TERM DEBT ............................................................................... 187,338 278,312
DEFERRED COMPENSATION AND OTHER LIABILITIES .................................................. 95,973 56,933
MINORITY INTERESTS ........................................................................... 41,549 28,214
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, 75,000,000 shares authorized,
38,643,165 and 35,071,932 shares issued in 1994 and 1993, respectively ............... 19,322 17,536
Additional paid-in capital ............................................................... 356,199 252,408
Retained earnings ........................................................................ 325,321 287,416
Unamortized restricted stock ............................................................. (25,631) (21,807)
Cumulative translation adjustment ........................................................ (27,671) (65,257)
Treasury stock, at cost, 2,511,187 and 1,901,977 shares in 1994 and
1993, respectively ................................................................... (106,838) (68,110)
----------- ------------
Total Shareholders' Equity .......................................................... 540,702 402,186
----------- ------------
$ 2,852,204 $ 2,289,863
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
F-3
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Unamortized Cumulative Total
---------------------- Paid-in Retained Restricted Translation Treasury Shareholders'
Shares Par Value Capital Earnings Stock Adjustment Stock Equity
---------- --------- -------- --------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1991, as
previously reported........... 30,221,806 $15,111 $153,548 $219,181 $(10,977) $ 33,037 $(43,682) $366,218
Pooling of interests adjustment.. 159,720 80 91 (6,062) (5,891)
---------- ------- -------- -------- -------- --------- -------- --------
Balance January 1, 1992, as
restated...................... 30,381,526 15,191 153,639 213,119 (10,977) 33,037 (43,682) 360,327
Net income....................... 69,298 69,298
Dividends declared............... (33,628) (33,628)
Amortization of restricted shares 5,993 5,993
Shares issued under employee
stock plans................... 1,227 (10,323) 16,691 7,595
Shares issued for acquisitions... 150,168 75 220 295
Retirement of shares............. (143,101) (71) (3,416) 3,487 --
Cumulative translation adjustment (70,906) (70,906)
Repurchases of shares............ (30,082) (30,082)
---------- ------- -------- -------- -------- --------- -------- -------
Balance December 31, 1992, as
previously reported........... 30,388,593 15,195 155,086 245,373 (15,307) (37,869) (53,586) 308,892
Pooling of interests adjustment.. 1,349,260 674 124 (6,309) (1,834) (7,345)
---------- ------- -------- -------- -------- --------- -------- -------
Balance January 1, 1993, as
restated...................... 31,737,853 15,869 155,210 239,064 (15,307) (39,703) (53,586) 301,547
Net income....................... 85,345 85,345
Dividends declared............... (36,993) (36,993)
Amortization of restricted shares 7,096 7,096
Shares issued under employee
stock plans................... 5,709 (13,596) 15,413 7,526
Shares issued for acquisitions... 7,303 21,948 29,251
Conversion of 7% Debentures...... 3,334,079 1,667 84,186 85,853
Cumulative translation adjustment (25,554) (25,554)
Repurchases of shares............ (51,885) (51,885)
---------- ------- -------- -------- -------- --------- -------- -------
Balance December 31, 1993........ 35,071,932 17,536 252,408 287,416 (21,807) (65,257) (68,110) 402,186
Net income....................... 80,125 80,125
Dividends declared............... (42,220) (42,220)
Amortization of restricted shares 9,535 9,535
Shares issued under employee
stock plans................... 4,474 (13,359) 16,796 7,911
Shares issued for acquisitions... 1,103 11,932 13,035
Conversion of 6.5% Debentures.... 3,571,233 1,786 98,214 100,000
Cumulative translation adjustment 37,586 37,586
Repurchases of shares............ (67,456) (67,456)
---------- ------- -------- -------- -------- --------- -------- --------
Balance December 31, 1994........ 38,643,165 $19,322 $356,199 $325,321 $(25,631) $(27,671) $(106,838) $540,702
========== ======= ======== ======== ======== ======== ========= ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-4
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in Thousands)
---------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income ................................................................ $ 80,125 $ 85,345 $ 69,298
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of tangible assets ......................... 37,767 34,574 33,706
Amortization of intangible assets .......................................... 25,012 18,950 16,102
Minority interests ...................................................... 17,342 10,588 13,128
Earnings of affiliates in excess of dividends received ................... (10,484) (6,823) (3,765)
(Increase) decrease in deferred taxes .................................... (6,443) 2,197 (921)
Provisions for losses on accounts receivable ............................. 7,864 4,742 2,545
Amortization of restricted shares ........................................ 9,535 7,096 5,993
Increase in accounts receivable .......................................... (138,031) (35,416) (29,360)
Decrease (increase) in billable production .............................. 2,439 6,665 (8,318)
(Increase) decrease in other current assets .............................. (27,564) 19,949 (12,011)
Increase in accounts payable ............................................. 262,403 73,389 81,697
Increase (decrease) in other accrued liabilities ........................ 54,989 (3,498) 26,185
Increase (decrease) in accrued taxes on income ........................... 16,457 1,918 (3,830)
Other .................................................................... 7,814 (10,479) (8,753)
--------- --------- ---------
Net Cash Provided By Operating Activities .................................... 339,225 209,197 181,696
--------- --------- ---------
Cash Flows From Investing Activities:
Capital Expenditures ...................................................... (38,529) (33,646) (34,881)
Payments for purchases of equity interests in subsidiaries
and affiliates, net of cash acquired .................................... (150,660) (80,577) (59,651)
Proceeds from sales of equity interests in subsidiaries and
affiliates .............................................................. 499 558 1,840
Payments for purchases of investments available-for-sale
and other investments ................................................... (8,153) (49,733) (5,353)
Proceeds from sales of investments available-for-sale
and other investments ................................................... 24,149 17,396 30,504
--------- --------- ---------
Net Cash Used In Investing Activities ........................................ (172,694) (146,002) (67,541)
--------- --------- ---------
Cash Flows From Financing Activities:
Net repayments under lines of credit ...................................... (21,931) (14,167) (9,302)
Proceeds from issuances of debt obligations .................................. 33,293 147,283 7,836
Repayment of principal of debt obligations ................................... (28,832) (31,980) (41,371)
Share transactions under employee stock plans ................................ 7,911 7,526 7,594
Dividends and loans to minority stockholders ................................. (8,061) (8,033) (9,128)
Dividends paid ............................................................... (41,307) (35,470) (32,623)
Purchase of treasury shares .................................................. (67,456) (51,885) (30,082)
--------- --------- ---------
Net Cash (Used in) Provided by Financing Activities .......................... (126,383) 13,274 (107,076)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents ............................................................. 13,270 (14,095) (8,331)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ......................... 53,418 62,374 (1,252)
Cash and Cash Equivalents At Beginning of Period ............................. 174,833 112,459 113,711
--------- --------- ---------
Cash and Cash Equivalents At End of Period ................................... $ 228,251 $ 174,833 $ 112,459
========= ========= =========
Supplemental Disclosures:
Income taxes paid .......................................................... $ 66,480 $ 58,893 $ 58,292
========= ========= =========
Interest paid .............................................................. $ 26,972 $ 38,290 $ 32,729
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-5
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the 1994 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 $4.0 million, $5.0 million and $8.1 million are
included in 1994, 1993 and 1992 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,
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. For the year ended December 31, 1992, the 6.5%
and 7% Convertible Subordinated Debentures were assumed to be converted for the
full year. The number of shares used in the computations were as follows:
1994 1993 1992
---- ---- ----
Primary EPS computation ........... 34,369,200 30,607,900 28,320,400
Fully diluted EPS computation ..... 38,949,600 37,563,500 35,332,400
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.
F-6
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation of Furniture and Equipment and Amortization of Leasehold
Improvements. Depreciation charges are computed on a straight-line basis 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. Intangibles are
amortized on a straight-line basis over periods not exceeding 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 income of the subsidiary 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 short-term interest-bearing deposits and money market instruments
with 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)
1994 1993 1992
---- ---- ----
Fair value of non-cash assets acquired .. $ 265,865 $ 287,177 $ 173,974
Cash paid, net of cash acquired ......... (150,660) (80,577) (59,651)
Common shares issued .................... (13,035) (21,906) 5,596
--------- --------- ---------
Liabilities assumed ..................... $ 102,170 $ 184,694 $ 119,919
========= ========= =========
During 1994, the Company issued 3,571,233 shares of common stock upon
conversion of $100 million of its 6.5% Convertible Subordinated Debentures.
During 1993, the Company issued 3,334,079 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. 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.
2. Acquisitions
During 1994 the Company made several acquisitions within the advertising
industry whose aggregate cost, in cash or by issuance of the Company's common
stock, totaled $190.4 million for net assets, which included intangible assets
of $221.5 million. Due to the nature of the advertising industry, companies
acquired generally have minimal tangible assets. The majority of the purchase
price is paid for ongoing client relationships and other intangibles. Included
in both figures are contingent payments related to prior year acquisitions
totaling $32.2 million.
Pro forma combined results of operations of the Company as if the
acquisitions had occurred on January 1, 1993 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, 1994.
Certain acquisitions entered into in 1994 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.
F-7
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 1993, the Company completed its acquisition of a third agency
network, TBWA International B.V. The acquisition was accounted for as a pooling
of interests and, accordingly, the results of operations for TBWA International
B.V. have been included in these consolidated financial statements since January
1, 1993. Prior year consolidated financial statements were not restated as the
impact on such years was not material.
3. Bank Loans and Lines of Credit
Bank loans generally resulted from 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,
1994 and 1993 was 9.1% and 6.5%. At December 31, 1994 and 1993, the Company had
unsecured committed lines of credit aggregating $370 million and $359 million,
respectively. The unused portion of credit lines was $338 million and $332
million at December 31, 1994 and 1993, respectively. 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, 1993, the committed lines of credit included $200 million
under a two and one-half year revolving credit agreement. Due to the long term
nature of this credit agreement, borrowings under the agreement would be
classified as long-term debt. As of July 15, 1994, the $200 million revolving
credit agreement was replaced by a $250 million revolving credit agreement
expiring June 30, 1997. Borrowings under this credit agreement would also be
classified as long-term debt. There were no borrowings under these revolving
credit agreements at December 31, 1994 and 1993.
These revolving credit agreements include a facility for issuing commercial
paper backed by a bank letter of credit. During the years ended December 31,
1994, 1993 and 1992, the Company issued commercial paper with an average
original maturity of 33, 32 and 31 days, respectively. The Company had no
commercial paper borrowings outstanding as of December 31, 1994, 1993, and 1992.
The maximum outstanding during the year was $230 million, $194 million and $120
million, in 1994, 1993, and 1992, respectively. The gross amount of issuance and
redemption during the year was $1,587 million, $1,337 million and $1,012 million
in 1994, 1993 and 1992, respectively.
4. Employee Stock Plans
Under the terms of the Company's 1987 Stock Plan, as amended (the "1987
Plan"), 4,750,000 shares of common stock of the Company are reserved for
restricted stock awards and non-qualified stock options to key employees of the
Company.
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, 305,000, 285,000 and 242,500 non-qualified options
were granted in 1994, 1993 and 1992, respectively.
A summary of changes in outstanding options for the three years ended
December 31, 1994 is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Shares under option (at prices ranging
from $16.875 to $40.0625) --
Beginning of year .................... 1,072,400 998,000 1,043,900
Options granted (at prices ranging from
$35.0625 to $48.4375) ................. 305,000 285,000 242,500
Options exercised (at prices ranging
from $16.875 to $40.0625) ............. (183,400) (197,800) (274,200)
Options forfeited ........................ -- (12,800) (14,200)
--------- --------- ---------
Shares under option (at prices ranging
from $16.875 to $48.4375)-- End of year 1,194,000 1,072,400 998,000
========= ========= =========
Shares exercisable ....................... 633,750 562,650 443,400
Shares reserved .......................... 928,221 1,502,882 589,422
</TABLE>
F-8
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the 1987 Plan, 314,580 shares, 337,200 shares and 314,775 shares of
restricted stock of the Company were awarded in 1994, 1993 and 1992,
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.
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,
1994 is as follows:
Years Ended December 31,
---------------------------------------
1994 1993 1992
------- ------- -------
Beginning balance .............. 740,436 629,752 619,024
Amount granted ............... 314,580 337,200 314,775
Amount vested ................ (230,603) (201,712) (278,942)
Amount forfeited ............. (42,331) (24,804) (25,105)
------- ------- -------
Ending balance ................. 782,082 740,436 629,752
======= ======= =======
The charge to operations in connection with these restricted stock awards
for the years ended December 31, 1994, 1993 and 1992 amounted to $9.5 million,
$7.1 million and $6.0 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, 1994, 1993 and 1992, and for the years then ended is
presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
United
States International Consolidated
------- ------------- ------------
<S> <C> <C> <C>
1994
Commissions and Fees........................... $ 858,575 $ 897,630 $1,756,205
Operating Profit .............................. 108,482 96,116 204,598
Net Income .................................... 32,593 47,532 80,125
Identifiable Assets............................ 1,004,698 1,847,506 2,852,204
1993
Commissions and Fees........................... $ 770,611 $ 745,864 $1,516,475
Operating Profit .............................. 92,095 77,104 169,199
Net Income .................................... 40,814 44,531 85,345
Identifiable Assets............................ 827,032 1,462,831 2,289,863
1992
Commissions and Fees........................... $ 706,902 $ 678,259 $1,385,161
Operating Profit............................... 70,558 75,816 146,374
Net Income..................................... 33,223 36,075 69,298
Identifiable Assets............................ 675,508 1,276,442 1,951,950
</TABLE>
F-9
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investments in Affiliates
The Company has approximately 45 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, 1994, 1993, 1992, and for the years then ended:
(Dollars in Thousands)
1994 1993 1992
---- ---- ----
Current assets ................. $1,208,976 $ 308,741 $ 312,423
Non-current assets ............. 146,899 73,772 64,901
Current liabilities ............ 1,196,807 235,389 259,508
Non-current liabilities ........ 162,328 29,596 8,302
Minority interests ............. 9,699 1,149 1,110
Gross revenues ................. 568,171 290,814 288,416
Costs and expenses ............. 451,688 238,039 243,661
Net income ..................... 86,001 33,574 27,752
The increase in the summarized balance sheets and income statements of the
Company's unconsolidated affiliates in 1994 is due to the growth of the
Company's existing equity affiliates and the inclusion of Aegis Group plc, in
which the Company had acquired a minority interest. The Company's equity in the
net income of these affiliates amounted to $18.3 million, $13.2 million and $9.6
million for 1994, 1993 and 1992, respectively. The Company's equity in the net
tangible assets of these affiliated companies was approximately $65.8 million,
$58.1 million and $56.2 million at December 31, 1994, 1993 and 1992,
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
acquisition costs are being amortized on a straight-line basis over periods not
exceeding forty years.
7. Long-Term Debt
Long-term debt outstanding as of December 31, 1994 and 1993 consisted of
the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
1994 1993
-------- --------
<S> <C> <C>
4.5%/6.25% Step-Up Convertible Subordinated Debentures with a
scheduled maturity in 2000 ....................................... $143,750 $143,750
6.5% Convertible Subordinated Debentures with a scheduled maturity
in 2004 .......................................................... -- 100,000
Cross currency fixed to floating rate swaps, at floating LIBOR rates,
maturing at various dates through 1997 (Note 12) ................. -- 11,435
Sundry notes and loans payable to banks and others at rates from
6% to 25%, maturing at various dates through 2004 ............... 47,164 35,518
Loan Notes, at various rates with a scheduled maturity in 1994 ...... -- 9,501
-------- --------
190,914 300,204
Less current portion ................................................ 3,576 21,892
-------- --------
Total long-term debt .............................................. $187,338 $278,312
======== ========
</TABLE>
F-10
<PAGE>
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 $54.88 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 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 $28.00 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 $25.75 per common share.
In the third quarter of 1989, a wholly-owned subsidiary of the Company
issued interest bearing Loan Notes in connection with the acquisition of Boase
Massimi Pollitt plc. The Loan Notes were repaid on June 30, 1994 at their
nominal amount together with accrued interest.
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 and expires on 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 limitation on investments in and loans to affiliates and
unconsolidated subsidiaries. At December 31, 1994 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)
1995 ................................................. $ 3,576
1996 ................................................. 14,812
1997 ................................................. 2,043
1998 ................................................. 650
1999 ................................................. 460
On January 4, 1995, an indirect wholly-owned subsidiary of the Company
issued Deutsche Mark 200 million Floating Rate Bonds (approximately $130
million). The bonds are unsecured, unsubordinated obligations of the issuer and
are unconditionally and irrevocably guaranteed by the Company. The bonds bear
interest at a per annum 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. The proceeds of this issuance were used for
general corporate purposes, including the reduction of outstanding sundry notes
and loans payable to banks and other outstanding credit obligations.
F-11
<PAGE>
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)
1994 1993 1992
---- ---- ----
Income before income taxes:
Domestic ......................... $ 85,992 $ 65,571 $ 47,535
International .................... 95,764 77,053 74,761
--------- --------- ---------
Totals ........................ $ 181,756 $ 142,624 $ 122,296
========= ========= =========
Provision for taxes on income:
Current:
Federal ....................... $ 30,645 $ 16,428 $ 17,143
State and local ............... 8,445 6,531 6,215
International ................. 36,138 35,071 29,067
--------- --------- ---------
75,228 58,030 52,425
--------- --------- ---------
Deferred:
Federal ....................... (4,922) 2,979 (3,702)
State and local ............... (1,285) 139 (1,375)
International ................. 5,316 (1,277) 5,920
--------- --------- ---------
(891) 1,841 843
--------- --------- ---------
Totals ................. $ 74,337 $ 59,871 $ 53,268
========= ========= =========
The Company's effective income tax rate varied from the statutory federal
income tax rate as a result of the following factors:
1994 1993 1992
---- ---- ----
Statutory federal income tax rate .............. 35.0% 35.0% 34.0%
State and local taxes on income, net of
federal income tax benefit ................. 2.6 3.0 2.6
International subsidiaries' tax rate (less than)
in excess of federal statutory rate ....... (0.8) 0.1 1.3
Losses of international subsidiaries
without tax benefit ........................ -- 0.2 1.0
Non-deductible amortization of goodwill ........ 4.3 3.9 3.7
Other .......................................... (0.2) (0.2) 1.0
---- ---- ----
Effective rate ................................. 40.9% 42.0% 43.6%
==== ==== ====
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." 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, 1994 and
1993 of $56.6 million and $56.7 million, respectively.
The Company has recorded deferred tax liabilities as of December 31, 1994
and 1993 of $20.5 million and $29.3 million, respectively.
F-12
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax benefits (liabilities) as of December 31, 1994 and 1993
consisted of the amounts shown below (dollars in millions):
1994 1993
----- -----
Acquisition liabilities .......................... $12.1 $13.0
Lease reserves ................................... 2.0 5.0
Severance and compensation reserves .............. 22.7 8.7
Tax loss carryforwards ........................... 3.7 9.6
Foreign currency transactions .................... (1.6) 0.5
Tax benefit leases ............................... (0.8) (4.5)
Amortization and depreciation .................... (2.4) (7.2)
Deductible intangibles ........................... (3.6) (2.1)
Other, net ....................................... 4.0 4.4
----- -----
$36.1 $27.4
===== =====
Net current deferred tax benefits as of December 31, 1994 and 1993 were
$15.0 million and $8.9 million, respectively, and were included in prepaid
expenses and other current assets. Net non-current deferred tax benefits as of
December 31, 1994 and 1993 were $21.1 million and $18.5 million, respectively.
In 1993, legislation was enacted which increased the U.S. statutory tax
rate from 34% to 35%. The effect of statutory rate changes during 1994 and 1993
in federal, state, local and international jurisdictions was not material to net
income. There were no material valuation allowances recognized as of December
31, 1994 and 1993.
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 profit sharing 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. Profit sharing expense amounted to $34.7 million, $25.8 million and
$20.8 million in 1994, 1993 and 1992, respectively.
Some of the Company's international subsidiaries have pension plans. 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 $2.6 million, $2.4 million and $2.7 million
in 1994, 1993 and 1992, respectively.
Certain subsidiaries of the Company have an executive retirement program
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. Effective January 1, 1992, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 106 "Employers'
Accounting For Post Retirement Benefits Other Than Pensions" ("SFAS No. 106").
SFAS No. 106 requires that the expected cost of post retirement benefits be
charged to expense during the years that the eligible employees render service.
The expense related to these benefits was not material to the 1994, 1993 and
1992 consolidated results of operations.
10. Commitments
At December 31, 1994, 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 $138.0
million in 1994, $128.8 million in 1993 and $117.3 million in 1992 after
reduction by rents received from subleases of $10.2 million, $10.0 million and
F-13
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$14.1 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:
(Dollars in Thousands)
Gross Rent Sublease Income Net Rent
---------- --------------- --------
1995 .............................. $116,474 $ 10,080 $106,394
1996 .............................. 107,973 8,577 99,396
1997 .............................. 95,624 5,907 89,717
1998 .............................. 82,107 4,628 77,479
1999 .............................. 75,772 3,998 71,774
Thereafter ........................ 417,994 13,716 404,278
Where appropriate, management has established reserves for the difference
between the cost of leased premises that were vacated and anticipated sublease
income.
11. Fair Value of Financial Instruments
During 1994 the Company adopted Statement of Financial Accounting Standards
No. 119 "Disclosure about Derivative Financial Instruments and 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, 1994.
(Dollars in Thousands)
Carrying Fair
Amount Value
-------- --------
Cash, cash equivalents and investments available-for-sale $256,634 $256,634
Long-term investments .................................... 5,532 5,532
Long-term debt ........................................... 190,914 192,352
Financial Commitments:
Forward exchange contracts ............................ -- 123
Guarantees ............................................ -- 10,065
Letters of credit ..................................... -- 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 fair value of the
Company's remaining long-term debt was estimated based on the current rates
offered to the Company for debt with the same remaining maturities.
Financial commitments:
The estimated fair value of derivative positions are based upon quotations
received from independent, third party banks and represent the net amount
payable to terminate the position, taking into consideration market rates and
F-14
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
counterparty credit risk. The fair values 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 periodically utilizes derivative financial instruments 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 23, 1995. The Audit Committee has reconfirmed,
for the year 1995, the limitations originally established in 1993.
At December 31, 1994, the Company had no swap agreements outstanding.
At December 31, 1993, the Company had cross currency swap agreements and a
U.S. dollar interest rate swap agreement outstanding with commercial banks as
follows:
(Dollars in
thousands)
Aggregate
Notional Company Company
Amount Receives Pays
-------- -------- -------
Cross currency fixed to floating rate swaps ...... $70,600 8.97% 3.51%
U.S. dollar floating to fixed rate swap .......... $50,000 3.22% 4.99%
The cross currency swap agreements were comprised of contracts denominated in
German Deutsche Marks, French Francs, Australian Dollars and Spanish Pesetas.
These contracts effectively changed a portion of the Company's non-U.S. dollar
denominated debt to floating rate U.S. dollar denominated debt, which reduced
the Company's risk related to currency fluctuations and interest rates. The U.S.
dollar interest rate swap agreement converted a portion of the Company's
floating rate debt to a fixed rate. These agreements were closed out during 1994
for a gain of $2.4 million which is being amortized into income over the
original term of the swap agreements.
The Company enters into forward exchange contracts to hedge certain assets
and liabilities 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. The table below summarizes by major currency
the notional principal amounts of the Company's forward exchange contracts
outstanding at December 31, 1994. 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
-------- ------------ -------------
German Deutsche Mark ..................... $ 18,380 $ 82,509
French Franc ............................. 61,345 22,364
U.S. Dollar .............................. 32,146 12,220
Dutch Guilder ............................ 20,644 14,574
Spanish Peseta ........................... 12,653 17,831
Belgian Franc ............................ 10,429 6,469
Canadian Dollar .......................... 765 7,970
Hong Kong Dollar ......................... 4,021 4,017
Other .................................... 7,433 9,947
-------- --------
Total ................................ $167,816 $177,901
======== ========
F-15
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The derivative financial instruments existing at December 31, 1994 and 1993
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 risks. 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 and Special Charge
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS No. 112"). 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
$28.0 million.
Effective January 1, 1994, the Company also adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This Statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values for all investments in debt securities. In compliance with SFAS 115,
the Company classifies these investments as investments available-for-sale. At
December 31, 1994, 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, 1994.
Effective January 1, 1992, the Company adopted SFAS No. 106 and SFAS No.
109. The cumulative after tax effect of the adoption of these Statements
increased net income by $3.8 million, substantially all of which related to SFAS
No. 109. Due to the continued weakening of the commercial real estate market in
certain domestic and international locations and the reorganization of certain
operations, the Company provided a special charge of $6.7 million pretax for
losses related to future lease costs.
F-16
<PAGE>
Schedule VIII
OMNICOM GROUP INC. AND SUBSIDIARIES
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 1994
<TABLE>
<CAPTION>
====================================================================================================================================
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
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Valuation accounts deducted from
assets to which they apply--
allowance for doubtful accounts:
December 31, 1994 ...................... $17,298 $ 7,864 $ 6,489 $ (605) $19,278
December 31, 1993 ...................... 12,825 4,742 (686) 955 17,298
December 31, 1992 ...................... 15,634 2,545 4,092 1,262 12,825
</TABLE>
----------
(1) Net of acquisition date balances in allowance for doubtful accounts of
companies acquired of $1,330, $4,581, and $589 in 1994, 1993, and 1992,
respectively.
F-17
<PAGE>
<TABLE>
<CAPTION>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31, March 31,
1995 1994 1994
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 168,391 $ 228,251 $ 118,324
Investments available-for-sale, at market,
which approximates cost ...................................................... 19,609 28,383 18,620
Accounts receivable, less allowance for doubtful
accounts of $20,339, $19,278 and $19,392 ..................................... 1,182,052 1,139,882 918,615
Billable production orders in process ........................................... 119,623 65,115 70,776
Prepaid expenses and other current assets ....................................... 157,638 140,304 133,820
------------ ------------ ------------
Total current assets .......................................................... 1,647,313 1,601,935 1,260,155
Furniture, equipment and leasehold improvements, less
accumulated depreciation and amortization of $227,800,
$221,491 and $195,814 ............................................................ 175,400 172,153 163,614
Investments in affiliates .......................................................... 174,247 164,524 114,733
Intangibles, less amortization of $144,605, $133,572
and $99,339 ...................................................................... 793,999 758,460 626,024
Deferred tax benefits .............................................................. 29,046 21,104 17,334
Deferred charges and other assets .................................................. 141,565 134,028 120,000
------------ ------------ ------------
Total assets .................................................................. $ 2,961,570 $ 2,852,204 $ 2,301,860
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 1,220,581 $ 1,425,829 $ 926,830
Payable to banks ................................................................ 89,796 12,515 87,300
Other accrued liabilities ....................................................... 503,961 496,631 350,146
Accrued taxes on income ......................................................... 44,283 51,667 19,972
------------ ------------ ------------
Total current liabilities ..................................................... 1,858,621 1,986,642 1,384,248
Long term debt ..................................................................... 403,882 187,338 403,827
Deferred compensation and other liabilities ........................................ 76,577 95,973 81,713
Minority interests ................................................................. 49,371 41,549 31,399
Shareholders' equity:
Common stock .................................................................... 19,322 19,322 17,536
Additional paid-in capital ...................................................... 356,133 356,199 253,112
Retained earnings ............................................................... 338,436 325,321 268,255
Unamortized restricted stock .................................................... (23,233) (25,631) (19,806)
Cumulative translation adjustment ............................................... (10,762) (27,671) (50,731)
Treasury stock .................................................................. (106,777) (106,838) (67,693)
------------ ------------ ------------
Total shareholders' equity .................................................... 573,119 540,702 400,673
------------ ------------ ------------
Total liabilities and shareholders' equity .................................... $ 2,961,570 $ 2,852,204 $ 2,301,860
============ ============ ============
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
March 31,
-------------------------------
1995 1994
-------- --------
<S> <C> <C>
Revenues:
Commissions and fees ............................................................ $ 459,882 $ 376,538
Operating expenses:
Salaries and related costs ...................................................... 271,406 218,395
Office and general expenses ..................................................... 140,724 120,268
--------- ---------
412,130 338,663
--------- ---------
Operating profit ................................................................... 47,752 37,875
Net interest expense:
Interest and dividend income .................................................... (3,790) (2,437)
Interest paid or accrued ........................................................ 10,166 8,720
--------- ---------
6,376 6,283
--------- ---------
Income before income taxes and change in
accounting principle ............................................................ 41,376 31,592
Income taxes:
Federal ......................................................................... 6,985 6,898
State and local ................................................................. 1,709 1,778
International ................................................................... 7,861 4,487
--------- ---------
16,555 13,163
--------- ---------
Income after income taxes and before change
in accounting principle ......................................................... 24,821 18,429
Equity in affiliates ............................................................... 2,213 2,089
Minority interests ................................................................. (2,892) (1,598)
--------- ---------
Income before change in accounting
principle ....................................................................... 24,142 18,920
Cumulative effect of change in accounting
principle ....................................................................... -- (28,009)
--------- ---------
Net income (loss) .............................................................. $ 24,142 $ (9,089)
========= =========
Earnings per share
Income before change in accounting principle:
Primary ....................................................................... $ 0.68 $ 0.58
Fully diluted ................................................................. $ 0.68 $ 0.58
Cumulative effect of change in accounting principle:
Primary ....................................................................... -- $ (0.85)
Fully diluted ................................................................. -- $ (0.85)
Net income (loss):
Primary ....................................................................... $ 0.68 $ (0.27)
Fully diluted ................................................................. $ 0.68 $ (0.27)
Dividends declared per common share ................................................ $ 0.31 $ 0.31
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended
March 31,
--------------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................. $ 24,142 $ (9,089)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization of tangible assets ................................. 9,878 8,923
Amortization of intangible assets ................................................ 6,570 5,554
Minority interests ............................................................... 2,892 1,333
Earnings of affiliates in excess of dividends received ........................... (1,396) (439)
Increase in deferred tax benefits ................................................ (9,610) (8,111)
Provision for losses on accounts receivable ...................................... 992 1,062
Amortization of restricted stock ................................................. 2,367 1,873
Increase in accounts receivable .................................................. (6,349) (7,541)
Increase in billable production .................................................. (52,022) (10,768)
Increase in other current assets ................................................. (4,239) (22,004)
Decrease in accounts payable ..................................................... (249,290) (141,549)
Decrease in other accrued liabilities ............................................ (7,250) (41,069)
Decrease in accrued income taxes ................................................. (8,983) (10,431)
Other ............................................................................ (16,878) 28,302
--------- ---------
Net cash used in operating activities ............................................ (309,176) (203,954)
--------- ---------
Cash flows from investing activities:
Capital expenditures .............................................................. (8,843) (10,745)
Payments for purchases of equity interests in
subsidiaries and affiliates, net of cash acquired .............................. (32,881) (23,064)
Payments for purchases of investments
available-for-sale and other investments ....................................... (8,393) (8,210)
Proceeds from sales of investments available-for-
sale and other investments ..................................................... 17,972 27,689
--------- ---------
Net cash used in investing activities ............................................. (32,145) (14,330)
--------- ---------
Cash flows from financing activities:
Net borrowings under lines of credit .............................................. 75,609 41,364
Share transactions under employee stock plans ..................................... 26 2,149
Proceeds from issuance of debt obligations ........................................ 213,631 122,851
Dividends and loans to minority stockholders ...................................... (557) (128)
Dividends paid .................................................................... (11,133) (10,133)
Purchase of treasury shares ....................................................... -- (4,238)
--------- ---------
Net cash provided by financing activities ......................................... 277,576 151,865
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents .............................................................. 3,885 9,910
--------- ---------
Net decrease in cash and cash equivalents ............................................ (59,860) (56,509)
Cash and cash equivalents at beginning of period ..................................... 228,251 174,833
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 168,391 $ 118,324
========= =========
Supplemental Disclosures:
Income taxes paid ............................................................... $ 23,957 $ 14,063
========= =========
Interest paid ................................................................... $ 7,203 $ 5,969
========= =========
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements
</TABLE>
F-20
<PAGE>
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
2) These statements reflect all adjustments consisting of normal recurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the information contained therein. Certain reclassifications
have been made to the March 31, 1994 reported amounts to conform them with the
March 31, 1995 and December 31, 1994 presentation. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K.
3) Results of operations for the interim periods are not necessarily
indica- tive of annual results.
4) Primary earnings per share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period. 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. At March 31, 1995, the 4.5%/6.25% Step-Up Convertible Subordinated
Debentures were outstanding. At March 31, 1994, the 6.5% Convertible
Subordinated Debentures and the 4.5%/6.25% Step-Up Convertible Subordinated
Debentures were outstanding. The number of shares used in the computations of
primary and fully diluted earnings per share were as follows:
Three Months Ended March 31,
----------------------------
1995 1994
---------- ----------
Primary EPS computation .................... 35,726,600 32,796,600
Fully diluted EPS computation .............. 35,783,800 32,817,700
For purposes of computing fully diluted earnings per share on net income
and the cumulative effect of the change in accounting principle for the three
months ended March 31, 1995 and 1994, the Company's Convertible Subordinated
Debentures were not reflected in the computations as their inclusion would have
been anti-dilutive.
5) On January 4, 1995, an indirect wholly-owned subsidiary of the Company
issued Deutsche Mark 200 million Floating Rate Bonds (approximately $130 million
at the January 4, 1995 exchange rate). The bonds are unsecured, unsubordinated
obligations of the issuer and are unconditionally and irrevocably guaranteed by
the Company. The bonds bear interest at a per annum 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.
6) On June 1, 1994, the Company issued a Notice of Redemption for its $100
million 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 $28.00 per common share.
7) Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 112 "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"). The cumulative after tax effect of the
adoption of this Statement decreased net income by $28,009,000.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Chiat/Day Holdings, Inc.
We have audited the accompanying 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 each of the three years in the period ended October 31, 1994. 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 each of the
three years in the period ended October 31, 1994 in conformity with generally
accepted accounting principles.
The accompanying 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, except for Note 10
as to which the date is
June 7, 1995
F-22
<PAGE>
<TABLE>
<CAPTION>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1994 and 1993
ASSETS 1994 1993
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 5,831,000 $ 3,393,000
Receivables:
Client accounts receivable .............................................. 57,468,000 46,324,000
Expenditures billable to clients ........................................ 16,746,000 10,704,000
Notes and other receivables ............................................. 375,000 861,000
Income taxes receivable ................................................. 894,000 774,000
Notes receivable from employees ......................................... 1,158,000 852,000
Less--allowance for doubtful accounts ................................... (4,007,000) (2,218,000)
------------- -------------
72,634,000 57,297,000
Prepaid expenses and other ................................................ 736,000 1,292,000
------------- -------------
Total current assets .............................................. 79,201,000 61,982,000
------------- -------------
Fixed assets, at cost:
Furniture and fixtures .................................................... 3,211,000 1,134,000
Office equipment .......................................................... 4,760,000 4,913,000
Leasehold improvements .................................................... 9,227,000 6,578,000
Construction in progress .................................................. -- 250,000
------------- -------------
17,198,000 12,875,000
Less--accumulated depreciation and amortization ........................... (5,999,000) (5,375,000)
------------- -------------
11,199,000 7,500,000
------------- -------------
Other assets:
Notes receivable .......................................................... 3,201,000 281,000
Other ..................................................................... 2,476,000 5,108,000
------------- -------------
5,677,000 5,389,000
------------- -------------
$ 96,077,000 $ 74,871,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ......................................... $ 18,750,000 $ 64,000
Accounts payable and advanced billings .................................... 112,094,000 96,018,000
Other accrued liabilities ................................................. 12,139,000 13,397,000
Bank overdraft ............................................................ -- 8,625,000
Income tax payable ........................................................ 1,180,000 15,000
------------- -------------
Total current liabilities ......................................... 144,163,000 118,119,000
------------- -------------
Long-term debt, net of current portion ....................................... 10,448,000 20,697,000
Restructuring reserve liabilities ............................................ 10,009,000 13,421,000
Other non-current liabilities ................................................ 2,791,000 2,012,000
Redeemable preferred stock, cumulative, $.01 par value;
200,000 shares authorized; issued--140,718 in 1994 and 121,218 in 1993;
liquidation value of $14,071,700 at October 31, 1994 ...................... 13,769,000 11,668,000
Class B common stock subject to repurchase obligations; $.01 par value;
200,000,000 shares authorized; outstanding--39,993,465 in 1994
and 40,818,465 in 1993 (see Note 5) ....................................... 7,332,000 7,332,000
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 75,000,000 shares authorized;
issued--16,749,344 in 1994 and 1993 ..................................... 167,000 167,000
Additional paid-in capital ................................................ 20,567,000 20,567,000
Foreign currency translation adjustment ................................... (373,000) (496,000)
Accumulated deficit ....................................................... (108,522,000) (114,342,000)
------------- -------------
(88,161,000) (94,104,000)
Less--treasury stock at cost; 3,222,075 Class A common shares
in 1994 and 1993 .......................................................... (4,274,000) (4,274,000)
------------- -------------
Total stockholders' equity (deficit) .............................. (94,435,000) (98,378,000)
------------- -------------
$ 96,077,000 $ 74,871,000
============= =============
See notes to consolidated financial statements.
</TABLE>
F-23
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Fee and commission income ..................................... $ 89,277,000 $100,267,000 $128,722,000
Costs and expenses:
Salaries and employee benefits ............................. 50,976,000 55,458,000 68,824,000
Selling, general and administrative ........................ 27,000,000 37,921,000 44,074,000
Restructuring costs ........................................ -- 25,848,000 --
Gain on sale of foreign subsidiary ......................... -- (3,504,000) --
Other, net ................................................. 141,000 1,425,000 5,222,000
------------- ------------- -------------
78,117,000 117,148,000 118,120,000
Operating profit (loss) ............................ 11,160,000 (16,881,000) 10,602,000
Interest income (expense):
Interest expense ........................................... (4,678,000) (4,612,000) (7,814,000)
Interest income ............................................ 1,091,000 803,000 1,398,000
------------- ------------- -------------
(3,587,000) (3,809,000) (6,416,000)
Income (loss) before income tax provision and
extraordinary item ......................................... 7,573,000 (20,690,000) 4,186,000
Income tax provision .......................................... 1,602,000 855,000 2,361,000
------------- ------------- -------------
Income (loss) before extraordinary item .................... 5,971,000 (21,545,000) 1,825,000
Extraordinary item:
Utilization of loss carryforwards .......................... -- -- 1,582,000
------------- ------------- -------------
Net income (loss) .......................................... $ 5,971,000 ($ 21,545,000) $ 3,407,000
============= ============= =============
Earnings per share:
Net income (loss):
Primary ................................................... 0.11 (0.39) 0.06
Primary (including EPUs and EARs) ......................... 0.05 (0.39) 0.04
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
<TABLE>
<CAPTION>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended October 31, 1994, 1993 and 1992
Number Foreign
Of Shares Common Additional Currency
Common Stock Paid-In Treasury Translation
Stock Class A Capital Stock Adjustment
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1991
as previously reported ....................... 16,823,176 $ 168,000 $ 141,000 ($4,274,000) ($ 200,000)
Adjustment for accretion of preferred stock ..... -- -- -- -- --
---------- ----------- ----------- ---------- ----------
Balance October 31, 1991 as restated ............ 16,823,176 168,000 141,000 (4,274,000) (200,000)
Foreign currency translation
adjustment .................................... 3,966,000
Accretion of preferred stock ....................
Net income for the year ended October 31, 1992 ..
---------- ----------- ----------- ---------- ----------
Balance, October 31, 1992 ....................... 16,823,176 168,000 141,000 (4,274,000) 3,766,000
Repurchase of Common Stock - Class A ............ (73,832)
Retirement of Common Stock - Class A ............ (1,000) 1,000
Conversion of Junior Subordinated Notes ......... 20,425,000
Foreign currency translation adjustment ......... (4,262,000)
Accretion of preferred stock ....................
Net (loss) for the year ended October 31, 1993 ..
---------- ----------- ----------- ---------- ----------
Balance, October 31, 1993 ....................... 16,749,344 167,000 20,567,000 (4,274,000) (496,000)
Foreign currency translation adjustment ......... 123,000
Accretion of preferred stock ....................
Net income for the year ended October 31, 1994 ..
---------- ----------- ----------- ---------- ----------
Balance, October 31, 1994 ....................... 16,749,344 $ 167,000 $20,567,000 ($4,274,000) ($ 373,000)
========== =========== =========== ========== ==========
</TABLE>
Accumulated
Deficit Total
------------ ------------
Balance, October 31, 1991
as previously reported ...................... ($ 95,449,000) ($ 99,614,000)
Adjustment for accretion of preferred stock .... (453,000) (453,000)
------------ ------------
Balance October 31, 1991 as restated ........... (95,902,000) (100,067,000)
Foreign currency translation
adjustment ................................... 3,966,000
Accretion of preferred stock ................... (151,000) (151,000)
Net income for the year ended October 31, 1992.. 3,407,000 3,407,000
------------ ------------
Balance, October 31, 1992 ...................... (92,646,000) (92,845,000)
Repurchase of Common Stock - Class A ...........
Retirement of Common Stock - Class A ...........
Conversion of Junior Subordinated Notes ........ 20,425,000
Foreign currency translation adjustment ........ (4,262,000)
Accretion of preferred stock ................... (151,000) (151,000)
Net (loss) for the year ended October 31, 1993 . (21,545,000) (21,545,000)
------------ ------------
Balance, October 31, 1993 ...................... (114,342,000) (98,378,000)
Foreign currency translation adjustment ........ 123,000
Accretion of preferred stock ................... (151,000) (151,000)
Net income for the year ended October 31, 1994 . 5,971,000 5,971,000
------------ ------------
Balance, October 31, 1994 ...................... ($108,522,000) ($ 92,435,000)
============ ============
See notes to consolidated financial statements.
F-25
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 5,971,000 ($21,545,000) $ 3,407,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ........................................ 2,831,000 4,773,000 6,974,000
Gain on disposition of foreign subsidiary ............................ -- (3,504,000) --
Gain on sale of assets ............................................... -- -- (743,000)
Provision for losses on receivables .................................. 1,789,000 2,057,000 160,000
Amortization of discount on long-term debt ........................... 10,000 593,000 800,000
Increase in interest payable ......................................... 891,000 418,000 2,531,000
Contribution of preferred stock to profit sharing plan ............... 575,000 450,000 900,000
Preferred stock dividends issued to profit sharing plan .............. 1,375,000 1,127,000 929,000
Restructuring provision .............................................. -- 24,582,000 --
Change in assets and liabilities:
(Decrease) in cash from disposition of foreign subsidiary .......... -- (9,242,000) --
(Increase) decrease in receivables ................................. (17,126,000) 11,135,000 (32,999,000)
Decrease (increase) in prepaid expenses and other .................. 556,000 (176,000) 18,000
Increase (decrease) in accounts payable and
advanced billings ............................................... 16,076,000 (8,459,000) 23,741,000
(Decrease) increase in other accrued liabilities ................... (1,408,000) (3,916,000) 364,000
Increase (decrease) in income taxes payable ........................ 1,165,000 (545,000) (874,000)
(Decrease) in deferred income taxes payable ........................ -- (25,000) (1,777,000)
(Decrease) in other noncurrent liabilities ......................... (2,633,000) (683,000) (8,093,000)
------------ ------------ ------------
Total adjustments .............................................. 4,101,000 18,585,000 (8,069,000)
------------ ------------ ------------
Net cash provided (used) by operating activities ............... 10,072,000 (2,960,000) (4,662,000)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from disposition of foreign subsidiary ........................ -- 1,112,000 --
Purchases of fixed assets .............................................. (5,615,000) (999,000) (833,000)
Retirements of fixed assets ............................................ -- 117,000 1,644,000
(Increase) decrease notes receivables, other assets..................... (2,920,000) 1,588,000 1,367,000
Decrease (increase) in other assets .................................... 1,718,000 (65,000) 3,193,000
------------ ------------ ------------
Net cash (used) provided by investing activities ............... (6,817,000) 1,753,000 5,371,000
------------ ------------ ------------
Cash flows from financing activities:
(Decrease) increase in bank overdraft .................................. (8,625,000) 8,625,000 --
Debt borrowings ........................................................ 44,250,000 50,000,000 16,000,000
Debt repayments ........................................................ (36,565,000) (66,057,000) (24,027,000)
------------ ------------ ------------
Net cash (used) in financing activities ......................... (940,000) (7,432,000) (8,027,000)
------------ ------------ ------------
Effect of exchange rate changes on cash ................................... 123,000 354,000 3,966,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ...................... 2,438,000 (8,285,000) (3,352,000)
Cash and cash equivalents, beginning of year .............................. 3,393,000 11,678,000 15,030,000
------------ ------------ ------------
Cash and cash equivalents, end of year .................................... $ 5,831,000 $ 3,393,000 $ 11,678,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ............................................................. $ 2,475,000 $ 2,507,000 $ 3,452,000
============ ============ ============
Income taxes ......................................................... $ 279,000 $ 1,820,000 $ 1,341,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary Of Significant Accounting Policies:
Line Of Business:
Chiat/Day Holdings, Inc. (the "Company") is a holding company that
directly or indirectly owns 100% of the common stock of companies (including
Chiat/Day inc. Advertising ["Advertising"] and Venice Holdings Pty. Limited
["Mojo"]) that collectively are known as "Chiat/Day" (see Notes 2 and 8). The
Company's principal line of business includes planning and creating advertising
campaigns for clients, placing ads with various media (including television,
radio, newspaper and magazines), and providing marketing consultation, market
research and production services. Chiat/Day also provides public relations and
direct marketing services. The Company's clients operate in a broad range of
product industries throughout the world. Credit is extended to clients based on
an evaluation of each client's financial condition, and generally collateral is
not required. Credit losses, if any, have been generally provided for in the
financial statements and have been consistently within management's
expectations.
Basis Of Presentation:
The Company's consolidated financial statements have been presented on the
basis that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As discussed in Note 5, the Company's Senior Note and Senior
Subordinated Notes are due in 1995.
In February 1995 the Company reached an agreement in principal to sell the
assets and assign the liabilities of its businesses (see Note 10). If the sale
does not occur, the Company will have to pursue alternative financing
arrangements to meet its current debt obligations.
Based upon discussions held with prospective lending institutions in late
1994 and early 1995, management believes that the refinancing of the Company's
outstanding debt obligations and/or additional equity financing would be
obtainable if necessary, although no assurances can be given. If such financing
were obtained, given the Company's historical increases in cash and cash
equivalents and its ability to manage its negative working capital position,
management believes that the Company would continue as a viable going concern.
Principles Of Consolidation:
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Fees, Commissions and Costs:
The principal sources of advertising revenues are commissions and fees for
the production and placement of advertisements in television, radio and print
media. Revenue earned from television and radio media is recognized on the date
of broadcast. Revenue earned from advertising production is recognized as costs
are incurred. Generally, commission revenue earned from print media is
recognized on the space closing date (the date upon which the advertiser has
made a binding commitment to the publication to run an advertisement) of the
related publications.
Generally, revenue is billed and earned in accordance with contractual
provisions. For the Company's contract with its major client, Nissan Motor
Corporation ("Nissan"), commissions are billable on a sliding scale subject to a
maximum annual amount for 1994 and 1993 only. As of October 31, 1994 and 1993
under both contracts, the Company has recognized as revenue commissions earned
of 78% of the maximum allowable for the contract periods April 1, 1994 through
March 31, 1995 and April 1, 1993 through March 31, 1994.
Nissan accounted for 41%, 39% and 38% of total revenue in 1994, 1993 and
1992, respectively. Infiniti, a division of Nissan, accounted for 14% and 10% of
total revenues in 1994 and 1993, respectively.
Revenues from other sources, including public relations and direct
marketing, are primarily derived from fees for services rendered. Fee revenue
earned from these sources is recognized as services are rendered. Salaries and
other agency costs are generally expensed as incurred.
F-27
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary Of Significant Accounting Policies, Continued:
Fixed Assets:
Depreciation and amortization are provided over the estimated useful lives
of the assets using primarily the straight-line method for financial reporting
purposes and accelerated depreciation methods for tax reporting purposes.
Estimated useful lives of these assets are as follows:
Furniture and fixtures .......................... 5-10 years
Office equipment ................................ 5-10 years
Leasehold improvements .......................... Lease term
Gains and losses on sales and retirements are reflected in Other income
(expense). Improvements which increase the useful lives of fixed assets are
capitalized. Maintenance, repairs and minor replacements are expensed as
incurred.
Foreign Currency Translation:
The Company translates the financial statements of its foreign
subsidiaries in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 52. Assets and liabilities reported in the
consolidated balance sheets have been translated at the current rates of
exchange as of October 31, 1994 and 1993. Revenues and expenses reported in the
consolidated statements of operations have been translated using the average
exchange rates during 1994, 1993 and 1992. Resulting translation adjustments
have been excluded from the consolidated statements of operations and are
reported in a separate component of stockholders' equity (deficit).
Gains and losses resulting from foreign currency transactions are charged
to other income (expense) as incurred and were not material in 1994, 1993 or
1992.
Earnings Per Share:
Primary earnings per share is based upon weighted average number of shares
outstanding during each year. Primary earnings per share (including EPUs and
EARs) is provided for informational purposes only and does not intend to
represent the EPUs or EARs as common stock equivalents pursuant to the
provisions of APB No. 15. The number of shares used in the computations were as
follows:
1994 1993 1992
---- ---- ----
Primary ............................. 54,188,042 55,534,115 58,115,335
Primary (including EPUs and EARs) ... 114,536,044 55,534,115 83,443,980
For the purposes of computing earnings per share (including EPUs and EARs) for
the fiscal year ended October 31, 1993 the EPUs and EARs were not reflected in
the computation as their inclusion would have been anti-dilutive.
Income Taxes:
Effective November 1, 1993, the Company adopted the provisions of SFAS No.
109 which requires recognition of deferred tax assets and liabilities for
temporary differences and net operating loss (NOL) and tax credit carryforwards.
Under SFAS No. 109, deferred income taxes are established based on enacted tax
rates expected to be in effect when temporary differences are scheduled to
reverse and NOL and tax credit carryforwards are expected to be utilized. The
principle temporary differences relate to restructuring costs and employee
bonuses. Adoption of SFAS No. 109 did not have a material impact on the
Company's financial position or results of operations.
For years ended 1993 and 1992 the Company accounted for income taxes under
the requirements of APB Opinion No. 11.
Cash Flows:
The Company places its temporary cash investments in short-term financial
instruments and money market funds, which generally mature within 90 days. The
Company limits the amount of credit exposure to any one issuer.
For purposes of reporting cash flows, the Company considers amounts due
from banks (including certificates of deposit and repurchase agreements) and
commercial paper with maturities at date of purchase of three months or less to
be cash equivalents.
During 1993, the Company issued 37,463,981 Equity Appreciation Rights (see
Note 6) upon conversion of $20,425,000 of its Junior Notes (see Note 5).
F-28
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary Of Significant Accounting Policies, Continued:
Restatement:
In connection with the proposed acquisition by Omnicom (Note 10) the
accompanying financial statements have been restated in accordance with SEC
Regulation S-X. Accordingly, redeemable preferred stock (Note 5) is no longer
presented as part of stockholders' equity and its initial carrying value is
being increased to its redemption value by periodic accretions against
accumulated deficit.
Reclassifications
Certain reclassifications have been made to the 1993 and1992 reported
amounts to conform them to the current presentation.
2. Foreign Operations:
The Company's foreign divisions and subsidiaries are primarily engaged in
providing advertising and related services. On February 16, 1993 (effective
January 1, 1993), the Company completed the transfer of the stock of its foreign
subsidiary to FCB International, Inc. ("FCB") (see Note 8). The financial
results for 1993 and 1992 of this subsidiary are summarized in Note 8.
Combined condensed financial information for foreign divisions and
subsidiaries is as follows:
1994 1993 1992
----------- ----------- -----------
Total assets ............... $16,589,000 $12,926,000 $70,391,000
Total liabilities .......... 12,959,000 11,378,000 71,700,000
Fee and commission income .. 13,674,000 13,643,000 35,613,000
Operating profit (loss) .... 2,899,000 (725,000) 782,000
3. Income Taxes:
Income (loss) before income tax provision (benefit) and provision
(benefit) for taxes for the years ended October 31, 1994, 1993 and 1992
consisted of the following:
1994 1993 1992
------------- ----------- -----------
Income (loss) before income
tax provision:
Domestic .............. $4,460,000 ($23,576,000) $3,518,000
International ......... 3,113,000 2,886,000 668,000
---------- ----------- ----------
Totals ............ $7,573,000 ($20,690,000) $4,186,000
========== =========== ==========
Current Deferred Total
---------- ----------- ---------
Provision for taxes:
October 31, 1994:
Federal $ 35,000 -- $ 35,000
State and local 152,000 -- 152,000
Foreign 1,415,000 -- 1,415,000
----------- ----------- ----------
$ 1,602,000 -- $1,602,000
=========== =========== ==========
October 31, 1993:
Federal $ 542,000 -- $ 542,000
State and local 277,000 -- 277,000
Foreign 36,000 -- 36,000
---------- ----------- ----------
$ 855,000 -- $ 855,000
========== =========== ==========
October 31, 1992:
Federal $1,698,000 $ 25,000 $1,723,000
State and local 927,000 (333,000) 594,000
Foreign 44,000 -- 44,000
---------- ----------- -----------
$2,669,000 ($ 308,000) $2,361,000
========== ============ ===========
F-29
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Income Taxes, Continued:
The Company's effective income tax rate varied from the statutory federal
income tax rate as a result of the following factors:
1994 1993 1992
---- ---- ----
Statutory federal income tax rate ... 35.0% (34.0)% 34.0%
State and local taxes, net of
federal benefit .................. 1.3 0.9 9.4
Foreign taxes ....................... 18.7 0.2 1.0
Net operating loss .................. (4.8) -- --
Tax credits ......................... (11.0) -- --
Reversal of temporary differences ... (26.3) -- --
Preferred stock dividends ........... 6.4 1.9 7.6
Alternative minimum tax ............. 0.4 2.6 3.4
Unrealized benefit of net operating
loss ............................. -- 32.0 --
Extraordinary credit ................ -- -- (38.0)
Other ............................... 1.4 0.5 1.2
---- ---- ----
Effective rate ...................... 21.1% 4.1% 18.6%
==== ==== ====
The major components of the net deferred tax asset as of October 31, 1994
are as follows:
Deferred tax assets:
Accrued reserves ................................ $ 8,743,000
Deferred compensation ........................... 5,835,000
Tax loss/tax credit carryforwards ............... 1,219,000
Fixed assets and depreciation ................... 441,000
Rent ............................................ 329,000
Other ........................................... 2,150,000
------------
Total deferred tax assets ................... 18,717,000
Valuation allowance ............................. (18,717,000)
------------
Net deferred tax asset ...................... --
============
A full valuation allowance has been established at both November 1, 1993,
the date of adoption of SFAS No. 109 and October 31, 1994 as it is more likely
than not the deferred tax asset will not be realized. The change in the
valuation allowance of approximately $5.7 million in fiscal 1994 represents the
reduction in the deferred tax asset due to reversal of temporary differences in
the determination of the Company's current provision.
As of October 31, 1994, for income tax purposes, the Company had state and
foreign net operating loss carryforwards of approximately $3.1 million and $2.1
million, respectively, which will expire during the years 1995-2000. Also, the
Company had $344,000 of AMT credits which can be carried forward indefinitely.
U.S. tax rules impose limitations on the use of net operating losses and tax
credits following certain changes in ownership (See Note 10).
4. Related-Party Transactions:
In October 1991, the Company moved into new office facilities in Venice,
California which it leases from Venice Operating Corporation ("VOC"), a company
owned by the majority stockholder and certain members of the Board of Directors
of the Company. In October 1994, VOC sold its office facilities to an unrelated
third party. Effective October 17, 1994 the lease with VOC was terminated and
the Company entered into a new twenty year lease with six consecutive five-year
renewal options. The Company was assigned a $3,000,000 promissory note by VOC in
satisfaction of the return of the Company's security deposit and accrued
interest thereon due from VOC. The note bears interest at 10% per annum and all
interest payments are current. The note is secured by a right of offset against
F-30
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Related-Party Transactions, Continued
future lease payments. The principal will be paid to the Company when it
achieves certain financial targets or the property is sold, but no later than
October 17, 2014. The obligor of the promissory note is the new owner of the
Venice office facility, ADS(CA) QRS 11-34, Inc., a California corporation that
is managed by W.P. Carey & Co. in New York. W.P. Carey & Co. is a publicly
traded Real Estate Investment Trust. In 1994, 1993 and 1992 the Company paid
$2,474,000, $2,056,000 and $2,018,000, respectively, in rent to VOC.
The Company also has consulting, employment, non-compete and loan
agreements with certain members of the Board of Directors and officers.
5. Long-Term Debt, Redeemable Preferred Stock and Common
Stock Subject to Repurchase Obligations:
Long-term debt as of October 31, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Senior Note payable to banks.
Interest rates averaged 8.1% in 1994 and 7.5% in 1993 .................... $ 7,750,000 --
Senior Subordinated Notes due in 1995; various rates;
interest payable semiannually in arrears ................................. 11,000,000 11,000,000
8.17% Junior Subordinated Installment Note (less unamortized discount of
$304,000 and $305,000 at October 31, 1994 and 1993, respectively); due
July 31, 2005; interest compounded semiannually at an effective interest
rate of 8.65%; payment of interest and principal subject to certain
restrictions contained in the Senior Bank
Note and Senior Subordinated Notes ....................................... 5,249,000 5,247,000
13.25% Junior Subordinated Note; maturing July 31, 2005
(less unamortized discount of $90,000 and $98,000 at October 31, 1994 and
1993, respectively); interest compounded annually at an effective interest
rate of 8.45%; payment of interest and principal subject to certain
restrictions contained in the Senior Bank Note
and Senior Subordinated Notes ............................................ 1,400,000 1,391,000
Other notes payable, payments due in 1994; interest at 11.25% ............... -- 64,000
Accrued interest on Junior and Senior Subordinated Notes .................... 3,799,000 3,059,000
------------ ------------
29,198,000 20,761,000
Less--current portion ....................................................... (18,750,000) (64,000)
------------ ------------
$ 10,448,000 $ 20,697,000
============ ============
</TABLE>
Aggregate annual maturities of long-term obligations including accrued
interest on Junior and Senior Subordinated Notes are as follows:
Year Ending
October 31,
-----------
1995 ............................... $18,750,000
1996 ............................... --
1997 ............................... --
1998 ............................... --
1999 ............................... --
Thereafter ......................... $10,448,000
-----------
$29,198,000
===========
F-31
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt, Redeemable Preferred Stock and Common
Stock Subject to Repurchase Obligations, Continued:
On September 17, 1992 and June 30, 1993, Advertising amended and restated
its Credit Agreement for the Senior Bank Note wherein the banks originally
agreed to make loans up to an aggregate principal amount of $42,000,000, of
which an aggregate principal amount of $20,000,000 was available and outstanding
on September 17, 1992. In addition to amending certain terms of the Senior Bank
Note, the banks provided an additional $6,000,000 revolving credit facility. The
revolving credit facility was guaranteed by certain key executives and
stockholders of the Company. The 1993 amendment further modified the Credit
Agreement to extend the commitment reduction dates and change the financial
covenants. $4,200,000 of the revolving credit facility and the associated
guarantees expired on October 31, 1993. At October 31, 1994 and 1993, $7,750,000
and $16,000,000, respectively, of the Senior Bank Note was available; $7,750,000
was outstanding at October 31, 1994 and no borrowings were outstanding at
October 31, 1993. In addition, no amounts were outstanding under the revolving
credit facility as of October 31, 1994 and 1993.
In January 1995, the Senior Bank Note was assigned to Omnicom (see Note
10). As a result of this assignment, the available commitment was increased to
$20,000,000, and the term was extended to December 10, 1995. Interest is payable
monthly at prime plus 2%. Loans made under the Senior Bank Note are due and
payable on December 10, 1995. The Senior Bank Note is secured by substantially
all assets of Advertising and Holdings' common equity investment in Advertising.
The remaining $1,800,000 revolving credit facility and associated guarantees
expired in May 1995.
In 1992, certain terms of the Senior Subordinated Notes due in 1995
("Senior Notes") were amended. For $5 million of such Notes, the cash interest
rate was capped at 14.25% effective August 1, 1991. Interest that increases by
one quarter percent every six months from August 1, 1991 until the Senior Notes
have been registered under the Securities Act of 1993 will be capitalized and
paid on redemption, but no later than August 1995. The interest rate on $6
million of the Senior Notes has been fixed at 13.25% effective August 1, 1991.
In October 1993, the maturity dates of the Junior Subordinated Notes
("Junior Notes") were extended from July 31, 1995 to July 31, 2005 and
participants in the Junior Notes were offered the ability to exchange their
participation in the Junior Notes for participation in a new Equity Appreciation
Rights Plan (see Note 6). As a result of acceptances of this proposal, the
outstanding principal and accrued interest in the Junior Notes was reduced by
$20,425,000 at October 31, 1993 and resulted in an increase to paid-in-capital.
Borrowing arrangements contain restrictive covenants which require, among
other things, the maintenance of minimum cash flow and working capital
requirements, and certain limitations on capital expenditures and the payment of
dividends.
At October 31, 1994, the Company was not in compliance with its financial
covenants; however, the Company obtained waivers for all events of
noncompliance. The Company is currently in compliance with all financial
covenants.
Redeemable Preferred Stock:
The Preferred Stock has no voting rights and does not participate in
Common Stock dividends. The Preferred Stock is entitled to cumulative dividends
equal to 9% of the liquidation preference of shares held by the Plan if such
amount is paid in cash, or 10% of the liquidation preference if such amount is
paid in shares of Preferred Stock, or any combination thereof. In addition, the
trustees of the Plan have the right to compel the redemption of Preferred Stock
held by the Plan in an aggregate amount not to exceed $500,000 per year. In the
event the Preferred Stock is not redeemed within 180 days from the date
surrendered, then such surrendered shares shall be entitled to dividends at the
rate of 14% per annum. In 1994, 1993 and 1992, stock dividends equal to 13,750,
11,272 and 9,290 shares of Preferred Stock, respectively, were issued to the
Plan.
In the event of liquidation or sale of substantially all of the assets of
the Company, holders of the Preferred Stock will be entitled to receive, before
any distribution to holders of Common Stock, $100 per share plus any accrued but
unpaid dividends. The Preferred Stock may be redeemed, subject to applicable
law, at the end of eight years at the option of the Company or the holders of
such Preferred Stock, provided that the Senior Bank Note and Senior Subordinated
F-32
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt, Redeemable Preferred Stock and Common
Stock Subject to Repurchase Obligations, Continued:
Notes have been paid in full, and, at any time at the option of the holder, to
the extent the shares sought to be redeemed are allocated for the benefit of a
Plan participant who is entitled to a distribution of his account balance in
such Plan. The purchase price for redemption would be equal to the liquidation
preference plus any unpaid dividends. The sale of such Preferred Stock to third
parties will be subject to the right of first refusal by the Company.
Class B Common Stock Subject to Repurchase Obligations:
Restricted Stock Plan: In August 1988, the Board of Directors of the
Company approved a restricted stock purchase plan for which 100,000,000 shares
of Class B Common Stock were reserved. These shares are offered for sale to
certain key employees and others selected by the Board of Directors at a
purchase price to be determined from time to time by the Company. The shares of
stock purchased under the plan vest over a five-year period of employment
beginning from the date of purchase. The plan provides that upon termination of
employment, vested shares may be sold back to or purchased by the Company at
book value at date of sale. Non-vested shares may be sold back to or purchased
by the Company at the lower of the original purchase price or book value at date
of sale. At October 31, 1994, 59,809,695 shares remain unissued.
Mojo Class B Common Stock: Pursuant to a Stock Purchase Agreement entered
into in April 1989, the holders of 7,538,160 shares of Class B Common Stock
(approximately one-third of which are held by current officers and directors of
the Company) had the right to require the Company to purchase such shares at the
fair market value thereof. Although none of the holders exercised such right
prior to its expiration, pursuant to the Stock Purchase Agreement the Company
could be deemed to have exercised in January 1995 a right to acquire such shares
at fair market value as of October 31, 1994 (as determined by an independent
appraiser). Any obligation of the Company to repurchase the shares is
subordinated to the payment in full of the Company's obligations under the
Senior Subordinated Notes (provided that if payment is deferred due to
subordination, interest will accrue on the repurchase price at the prime rate
until paid). Accordingly, the Company is not currently obligated to repurchase
such shares due to the subordination provisions. In addition, the terms of the
Senior Bank Note prohibit the repurchase of Common Stock by the Company.
Although no appraisal has been obtained for the purpose of any such repurchase,
management of the Company believes that the value of the relevant Class B Common
Stock at October 31, 1994 should approximate the value being paid with respect
to Class B Common Stock in the Omnicom transactions. (See Note 10.)
With the consent of the lenders under the Senior Bank Note, 765,000
shares of Mojo Class B Common Stock were repurchased by the Company for
approximately $348,000 and was recorded as a reduction of paid- in capital.
Equity Participation Plan:
Under an equity participation plan approved by the Board of Directors of
the Company in August 1988, the Company may grant up to 50,000,000 equity
participation units to eligible participants. All full-time employees of the
Company are eligible to be selected as participants in the equity participation
plan. Each equity participation unit is equivalent in value to one share of
Class B Common Stock and is treated in the same manner as Class B Common Stock
with respect to its priority in the event of a liquidation.
Equity participation units awarded under the plan vest over a five-year
period of employment beginning from the date of award. Participants are
entitled, upon the redemption of equity participation units, to receive payment
in cash determined by multiplying the number of vested equity participation
units by the increase, if any, between the book value per unit (as defined in
the plan) as of the date of grant (which is determined to be zero when the book
value is negative) and the book value per unit as of the valuation date
immediately preceding the date of redemption. As of October 31, 1994, there were
26,591,110 equity participation units available for award. In conjunction with
the transaction described in Note 8, 2,970,000 equity participation units were
relinquished to the Company.
F-33
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long-Term Debt, Redeemable Preferred Stock and Common
Stock Subject to Repurchase Obligations, Continued:
Equity Appreciation Rights Plan:
Under an equity appreciation rights plan approved by the Board of
Directors of the Company in October 1993, the Company may grant up to 54,084,848
equity appreciation rights to eligible participants. Only Junior Note
participants (as defined in the plan) are eligible to be awarded equity
appreciation rights under the plan. Each equity appreciation right is equivalent
in value to one share of Class B Common Stock and is treated in the same manner
as Class B Common Stock with respect to its priority in the event of a
liquidation.
Equity appreciation rights awarded under the plan are 41.27% vested in
each participant on the date of award except for certain participants that are
100% vested on the date of award. Participants not 100% vested at the date of
award become fully vested 21 months from October 31, 1993 based upon conditions
stated in the plan. Upon redemption of the equity appreciation rights,
participants are entitled to receive payment in cash determined by multiplying
the number of equity appreciation rights by the increase, if any, between the
book value per unit (as defined in the plan and determined to be zero when the
book value is negative) as of October 31, 1993 and the book value per unit as of
the valuation date immediately preceding the date of redemption. As of October
31, 1994, there were 36,939,112 equity appreciation rights outstanding.
6. Stockholders' Equity:
Common Stock:
The Class A and Class B Common Stock are alike in all respects except that
the Class A Common Stock has certain registration and preferential rights,
including the right to receive additional shares, and to approve certain
transactions. Holders of Class A Common Stock also are entitled to receive, in
consideration for and upon payment of an amount equal to the par value thereof,
additional shares of Class A Common Stock in the event that additional shares of
Class B Common Stock or equity participation units are issued or granted in
connection with dilutive transactions as defined in the Company's restated
certificate of incorporation, Class B Common Stock is also subject to certain
repurchase obligations (see Note 5). In addition, the Chiat/Day Profit Sharing
and 401(k) Plan (the "Plan") (see Note 7) is entitled to receive, for no
consideration, additional Class B Common Stock in the event of certain issuances
of Common Stock to the majority stockholder. At October 31, 1994, 13,434
additional shares of Class A Common Stock are entitled to be received by current
Class A stockholders due to anti-dilution provisions.
In addition, during 1993, the Company repurchased 73,832 shares of Class A
Common Stock from non-management investors for $0.01 per share. These
repurchases were pursuant to the Management Stock Purchase Agreement entered
into in July 1989. This agreement provides for the repurchase of Class A Common
Stock, originally purchased by non-management investors, in the event EPUs held
by management are forfeited or redeemed under the equity participation plan. The
repurchase price under the agreement is the greater of par value ($0.01) or the
increase in both value per share from the date of issuance to the date such EPUs
are forfeited or redeemed.
7. Employee Benefit Plans:
Effective November 1, 1990, the Chiat/Day inc. Advertising Employees'
Profit Sharing and Pre-Tax Savings Investment Plan (the "401(k) Plan") was
merged into the Chiat/Day Holdings, Inc. Employee Profit Sharing Plan (the
"Profit Sharing Plan"), formerly known as the Chiat/Day inc. Advertising
Employee Stock Ownership Plan ("ESOP"), to form the Chiat/Day Profit Sharing and
401(k) Plan (the "Plan"), a defined contribution plan.
The Company contributed cash of $250,000 in 1994 and preferred stock with
a liquidation value of $275,000 for the fiscal year ended October 31, 1994. In
February 1994 and 1993 the Company made stock contributions of $781,000 related
to its 1993 obligation. The Company contributed cash of $315,000 and preferred
F-34
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Employee Benefit Plans, Continued:
stock with a liquidation value of $450,000 for the obligation related to the
fiscal year ended October 31, 1992. The Company has certain future fixed minimum
contributions of $525,000, in stock and cash, to the Plan for fiscal years
ending October 31, 1995 to October 31, 2000.
8. Disposition Of Foreign Subsidiary:
On February 16, 1993 (effective January 1, 1993), the Company completed
the transfer of the stock of its foreign subsidiary to FCB for no consideration.
Concurrent with the transfer of shares to FCB, the Company exercised its option
to acquire $10,350,000 of debt owed to the bank by the foreign subsidiary for
$700 and agreed to accept from FCB, in full satisfaction of such debt,
$1,380,000 plus future contingent payments up to a maximum of $3,450,000. In
1994, the Company received $653,000 from FCB in contingent payments. 2,970,000
Equity Participation Units were relinquished in accordance with the provisions
of the plan.
The contingent payments are based upon the revenue performance of the
foreign subsidiary under FCB's ownership and upon the ability of FCB to utilize
Australian tax loss carryforwards, all as specified in the debt restructuring
deed between the Company and FCB. Under the debt restructuring deed, all
contingent revenue and tax loss carryforward payments are scheduled to be made
by February 26, 1996. All contingent payments made by FCB are recorded as income
by the Company when received.
The Company recorded a gain of $3,504,000 in fiscal 1993 on the
disposition of the foreign subsidiary primarily as a result of the recognition
of the accumulated translation adjustment related to such operation.
The financial results as of and for the two months ended December 31, 1992
and the year ended October 31, 1992 are summarized as follows:
1993 1992
------------ ------------
Fee and commission income .................. $ 3,069,000 $ 22,708,000
Operating (loss) ........................... (644,000) (2,400)
Net loss ................................... (637,000) (12,000)
Current assets ............................. 17,951,000 22,211,000
Total assets ............................... 53,341,000 58,418,000
Current liabilities ........................ 19,268,000 23,880,000
Long-term debt ............................. 31,656,000 32,578,000
Total liabilities .......................... 51,585,000 57,198,000
Total stockholders' equity ................. 1,756,000 1,220,000
9. Commitments And Contingencies:
Litigation:
The Company is involved in legal actions arising in the normal course of
business. After taking into consideration legal counsel's evaluation of such
actions, management is of the opinion that their outcome will not have a
material effect on the Company's consolidated financial position or results of
operations.
On October 26, 1992 and November 20, 1992, the Company settled two
lawsuits which were filed in 1990 related to real estate matters. The aggregate
cost of such settlements was $6,246,000. In 1992, the Company recognized an
incremental charge of $3,200,000 related to these lawsuits. Adequate provision
for the balance of the settlements was made in prior years.
F-35
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Commitments And Contingencies, Continued:
Leases:
A one-time restructuring charge of $25,848,000 was recorded in fiscal 1993
relating to costs associated with certain real estate operating leases.
Effective November 1, 1993 the Company entered into a new real estate operating
lease in New York that will enable it to significantly reduce its future rental
expense through a reduction in total amount of space leased. The Company remains
as the primary lessee on its old New York lease through December 31, 1997. It
has currently sublet approximately 85% of the space through the lease term and
is actively seeking to sublet the remaining space. $14,802,000 of the charge
relates to the future cash rental obligations, net of probable anticipated
sublease income, and $3,252,000 relates to the write-off of fixed assets and
leasehold improvements.
In fiscal 1993 the Company entered into agreements to assign its lease,
effective January 1, 1994, for the 320 Hampton Drive facility to an unrelated
third party in order to consolidate operations into one facility at 340 Main
Street. All fixed assets and leasehold improvements related to such facility
were written off in 1993. Alterations to the 340 Main Street property were made
in order to facilitate the consolidation into one facility. $5,122,000 of the
restructuring charge related to the write-off of leasehold improvements and
fixed assets at both facilities as a result of the consolidation and $940,000
related to cash obligations incurred in connection with the lease assignment and
moving and related costs incurred in connection with the consolidation into one
location. The remaining balance of the restructuring charge of $1,732,000
represents a reserve for future cash rental obligations in excess of anticipated
probable sublease income for other property leased in California.
The Company leases facilities and equipment under various operating lease
agreements expiring at various dates through the year 2015. Certain leases
require payment of expenses under escalation clauses. The aggregate future
minimum base rents under terms of noncancellable operating leases, reduced by
rent to be received from existing noncancellable subleases, are as follows:
Years ending October 31, Gross rent Sublease Income Total
------------------------ ---------- --------------- -----
1995 ........................ $ 7,523,000 $ 1,646,000 $ 5,877,000
1996 ........................ 6,798,000 1,698,000 5,100,000
1997 ........................ 7,230,000 1,573,000 5,657,000
1998 ........................ 4,405,000 258,000 4,147,000
1999 ........................ 3,825,000 -- 3,825,000
1999 and thereafter ......... 44,173,000 -- 44,173,000
----------- ----------- -----------
$73,954,000 $ 5,175,000 $68,779,000
Rental expense for leases was $5,580,000, $9,422,000 and $9,140,000
(excluding rental expense related to the Company's foreign subsidiary disposed
of in 1993) for the years ended October 31, 1994, 1993 and 1992, respectively.
10. Subsequent Event:
On May 11, 1995, the Company signed an agreement whereby TBWA
International Inc., a wholly-owned subsidiary of Omnicom Group Inc. ("Omnicom"),
will acquire the assets of the Company's businesses and assume substantially all
of its liabilities in exchange for Omnicom common stock. The sale is conditional
on the registration of the Omnicom common stock on Form S-4, clearance by the
appropriate governmental agencies, approval by a majority of the Company's
stockholders and certain other conditions. The sale is anticipated to close by
August 1995.
F-36
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
April 30, April 30,
1995 1994
------------- -------------
Current assets:
Cash and cash equivalents ............... $ 40,335,000 $ 27,005,000
Receivables:
Client accounts receivable .............. 50,533,000 42,081,000
Expenditures billable to clients ........ 14,314,000 9,765,000
Income tax receivable ................... -- --
Notes and other receivables ............. 449,000 422,000
Notes receivable from employees ......... 1,454,000 1,165,000
Less: allowance for doubtful accounts ... (3,386,000) (2,857,000)
------------- -------------
63,364,000 50,576,000
Prepaid expenses and other ................. 1,485,000 1,696,000
------------- -------------
Total current assets .............. 105,184,000 79,277,000
------------- -------------
Fixed assets, at cost:
Furniture and fixtures .................. 3,276,000 1,232,000
Office equipment ........................ 5,011,000 3,923,000
Leasehold improvements .................. 9,246,000 6,595,000
Construction in progress ................ -- 3,988,000
------------- -------------
17,533,000 15,738,000
Less: accumulated depreciation
and amortization ..................... (6,912,000) (4,969,000)
------------- -------------
10,621,000 10,769,000
------------- -------------
Other assets:
Notes receivable ......................... 166,000 166,000
Other .................................... 5,363,000 4,912,000
------------- -------------
5,529,000 5,078,000
------------- -------------
$ 121,334,000 $ 95,124,000
============= =============
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
F-37
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
April 30, April 30,
1995 1994
------------- -------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt ................................................... $ 30,992,000 $ 6,314,000
Accounts payable and advanced billings .............................................. 122,084,000 111,194,000
Other accrued liabilities ........................................................... 13,493,000 10,296,000
------------- -------------
Total current liabilities .................................................... 166,569,000 127,804,000
------------- -------------
Long-term debt, net of current portion ................................................ 10,881,000 26,891,000
Restructuring reserve liability ....................................................... 7,518,000 11,671,000
Other non-current liabilities ......................................................... 2,937,000 2,588,000
Redeemable preferred stock, cumulative, $.01 par value;
200,000 shares authorized; issued--140,818 in 1995 and
121,218 in 1994; liquidation value of $14,081,800 in 1995 ........................ 13,854,000 12,340,000
Class B common stock subject to repurchase obligations,
$.01 par value; 200,000,000 shares authorized;
outstanding--39,993,465 in 1994 and 40,818,465 in 1993 (see Note 5) .............. 7,332,000 7,332,000
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 75,000,000 shares
authorized; issued--16,749,344 in 1995
and 1994 ........................................................................ 167,000 167,000
Additional paid-in capital ....................................................... 20,567,000 20,567,000
Foreign currency translation adjustment .......................................... (368,000) (480,000)
Accumulated deficit .............................................................. (103,849,000) (109,482,000)
------------- -------------
(83,483,000) (89,228,000)
Less: treasury stock at cost; 3,222,075 Class A Common
shares in 1995 and 1994 ....................................................... (4,274,000) (4,274,000)
------------- -------------
Total stockholders' equity (deficit) .................................... (87,757,000) (93,502,000)
------------- -------------
$ 121,334,000 $ 95,124,000
============= =============
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
F-38
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Six months ended April 30,
-----------------------------
1995 1994
------------ ------------
Fee and commission income .................... $ 45,364,000 $ 42,926,000
Costs and expenses:
Salaries and employee benefits ............ 25,852,000 21,512,000
Selling, general and administrative ....... 11,734,000 13,893,000
------------ ------------
37,586,000 35,405,000
Operating profit .......................... 7,778,000 7,521,000
Interest income (expense):
Interest expense .......................... (1,953,000) (1,613,000)
Interest income ........................... 510,000 354,000
------------ ------------
(1,443,000) (1,259,000)
------------ ------------
Income before income tax provision .... 6,335,000 6,262,000
Income tax provision ......................... (1,587,000) (1,325,000)
------------ ------------
Net income ............................ $ 4,748,000 $ 4,937,000
============ ============
Earnings per share:
Net income (loss):
Primary ............................... .09 .09
Primary (including EPUs and EARs) ..... .04 .04
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
F-39
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended April 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Increase in Cash and Cash Equivalents:
Cash flows from operating activities:
Net income ............................................ $ 4,748,000 $ 4,937,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,485,000 1,093,000
Provision for losses on receivables ................... -- 639,000
Amortization of discount on long-term debt ............ 5,000 4,000
(Decrease) increase in interest payable ............... (98,000) 441,000
Decrease in income tax receivable ..................... 894,000 --
Preferred stock dividends issued to profit sharing plan 10,000 20,000
Change in assets and liabilities
Decrease in receivables ............................. 8,376,000 6,085,000
(Increase) in prepaid expenses and other ............ (749,000) (405,000)
Increase in accounts payable and advanced billings .. 9,992,000 6,551,000
(Decrease) increase in income tax payable ........... (652,000) 164,000
Increase (decrease) in other accrued liabilities .... 1,346,000 (2,709,000)
(Decrease) in other noncurrent liabilities .......... (2,344,000) (1,174,000)
------------ ------------
Total adjustments ................................... 18,265,000 10,709,000
------------ ------------
Net cash provided by operating activities ........... 23,013,000 15,646,000
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets, net of retirements ....... (380,000) (3,923,000)
Decrease in notes receivable ........................ -- 115,000
(Increase) in other assets .......................... (381,000) (243,000)
------------ ------------
Net cash used in investing activities ............. (761,000) (4,051,000)
------------ ------------
Cash flows from financing activities:
Debt borrowings ..................................... 12,250,000 12,000,000
------------ ------------
Net cash provided by financing activities ......... 12,250,000 12,000,000
Effect of exchange rate changes on cash ............... 2,000 17,000
------------ ------------
Net increase in cash and cash equivalents ............. 34,504,000 23,612,000
Cash and cash equivalents at beginning of period ...... 5,831,000 3,393,000
------------ ------------
Cash and cash equivalents at end of period ............ $ 40,335,000 $ 27,005,000
============ ============
Supplemental disclosures:
Interest ............................................ $ 1,510,000 $ 1,154,900
============ ============
Income taxes ........................................ $ 1,175,545 $ 229,500
============ ============
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
F-40
<PAGE>
CHIAT/DAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) The consolidated condensed interim financial statements included herein
have been prepared by Holdings, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although Holdings believes that
the disclosures are adequate to make the information presented not misleading.
2) These statements reflect all adjustments consisting of normal recurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in Holdings' latest
fiscal report.
3) Results of operations for the interim periods are not necessarily
indicative of annual results.
4) Primary earnings per share is based upon the weighted average number of
shares outstanding during each year. Primary earnings per share (including EPUs
and EARs) is provided for informational purposes only and does not intend to
represent the EPUs or EARs as common stock equivalents pursuant to the
provisions of APB No. 15. The number of shares used in the computations were as
follows:
Six months ended April 30,
1995 1994
---- ----
Primary ......................................... 53,520,734 54,345,734
Primary (including EPUs and EARs) ............... 112,558,776 116,423,605
F-41
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation contains a provision limiting
the liability of directors (except for approving statutorily prohibited
dividends, share repurchases or redemptions, distributions of assets on
dissolution or loans to directors) to acts or omissions in bad faith, involving
intentional misconduct or a knowing violation of the law, or resulting in
personal gain to which the director was not legally entitled. The Registrant's
By-Laws provide that an officer or director will be indemnified against any
costs or liabilities, including attorneys fees and amounts paid in settlement
with the consent of the registrant in connection with any claim, action or
proceeding to the fullest extent permitted by the New York Business Corporation
Law.
Section 722(a) of the New York Business Corporation Law provides that a
corporation may indemnify any officer or director, made or threatened to be
made, a party to an action other than one by or in the right of the corporation,
including an action by or in the right of any other corporation or other
enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, because he was a director or officer
of the corporation, or served such other corporation or other enterprise in any
capacity, against judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees actually and necessarily incurred as a
result of such action, or any appeal therein, if such director or officer acted,
in good faith, for a purpose which he reasonably believed to be in, or in the
case of service for any other corporation or other enterprise, not opposed to,
the best interests of the corporation and, in criminal actions, in addition, had
no reasonable cause to believe that his conduct was unlawful.
Section 722(c) of the New York Business Corporation Law provides that a
corporation may indemnify any officer or director made, or threatened to be
made, a party to an action by or in the right of the corporation by reason of
the fact that he is or was a director of the corporation, or is or was serving
at the request of the corporation as a director of officer of any other
corporation of any type or kind, or other enterprise, against amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred by him in connection with the defense or settlement of such
action, or in connection with an appeal therein, if such director or officer
acted, in good faith, for a purpose which he reasonably believed to be in, or,
in the case of service for another corporation or other enterprise, not opposed
to, the best interests of the corporation. The corporation may not, however,
indemnify any officer or director pursuant to Section 722(c) in respect of (1) a
threatened action, or a pending action which is settled or otherwise disposed
of, or (2) any claim, issue or matter as to which such person shall have 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 in its discretion, that the person is fairly
and reasonably entitled to indemnity for such portion of the settlement and
expenses as the court deems proper.
Section 723 of the New York Business Corporation Law provides that an
officer or director who has been successful on the merits or otherwise in the
defense of a civil or criminal action of the character set forth in Section 722
is entitled to indemnification as permitted in such section. Section 724 of the
New York Business Corporation Law permits a court to award the indemnification
required by Section 722.
The Registrant has entered into agreements with its directors to indemnify
them for liabilities or costs arising out of any alleged or actual breach of
duty, neglect, errors or omissions while serving as a director. The Registrant
also maintains and pays premiums for directors' and officers' liability
insurance policies.
Item 21. Exhibits and Financial Statement Schedules.
(a) See Exhibit Index
(b) See the financial statement schedule included in this Registration
Statement.
II-1
<PAGE>
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) under
the Securities Act, the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(b) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 under the Securities Act, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such requests, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of the responding to the request.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 Registration Statement No. 33-60167 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on August 3, 1995.
OMNICOM GROUP INC.
Registrant
By: /s/ BRUCE CRAWFORD
--------------------
Bruce Crawford
President and Chief
Executive Officer
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ BRUCE CRAWFORD
-------------------------------------------------- President and Chief August 3, 1995
(Bruce Crawford) Executive Officer and Director
/S/ FRED J. MEYER
-------------------------------------------------- Chief Financial Officer August 3, 1995
(Fred J. Meyer) and Director
/S/ DALE A. ADAMS
-------------------------------------------------- Controller (Principal August 3, 1995
(Dale A. Adams) Accounting Officer)
-------------------------------------------------- Director
(Bernard Brochand)
/S/ LEONARD S. COLEMAN JR.*
-------------------------------------------------- Director August 3, 1995
(Leonard S. Coleman, Jr.)
/S/ ROBERT J. CALLANDER*
-------------------------------------------------- Director August 3, 1995
(Robert J. Callander)
/S/ JAMES A. CANNON*
-------------------------------------------------- Director August 3, 1995
(James A. Cannon)
/S/ PETER I. JONES*
-------------------------------------------------- Director August 3, 1995
(Peter I. Jones)
/S/ JOHN R. PURCELL*
-------------------------------------------------- Director August 3, 1995
(John R. Purcell)
/S/ KEITH L. REINHARD*
-------------------------------------------------- Director August 3, 1995
(Keith L. Reinhard)
/S/ ALLEN ROSENSHINE*
-------------------------------------------------- Director August 3, 1995
(Allen Rosenshine)
/S/ GARY L. ROUBOS*
-------------------------------------------------- Director August 3, 1995
(Gary L. Roubos)
-------------------------------------------------- Director
(Quentin I. Smith, Jr.)
/S/ ROBIN B. SMITH*
-------------------------------------------------- Director August 3, 1995
(Robin B. Smith)
/S/ JOHN D. WREN*
-------------------------------------------------- Director August 3, 1995
(John D. Wren)
/S/ WILLIAM G. TRAGOS*
-------------------------------------------------- Director August 3, 1995
(William G. Tragos)
/S/ EGON P.S. ZEHNDER*
-------------------------------------------------- Director August 3, 1995
(Egon P.S. Zehnder)
</TABLE>
-------------------------
* By Barry J. Wagner, as Attorney-in-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Of Exhibit Page
<S> <C> <C>
2.1* Asset Purchase Agreement dated May 11, 1995, among Chiat/Day Holdings, Inc.,
Chiat/Day inc. Advertising, Omnicom Group Inc. and TBWA International Inc.
2.2* Plan of Liquidation of Chiat/Day Holdings, Inc.
2.3* Form of Escrow Agreement by and between Chiat/Day inc. Advertising, Chiat/Day
Holdings, Inc., TBWA International and The Chase Manhattan Bank, N.A.,
as Escrow Agent
2.4* Form of Liquidating Trust Agreement by and between Chiat/Day Holdings, Inc., on
behalf of its stockholders, and Thomas Patty and David C. Wiener, as Trustees
2.5* Form of Deposit and Pledge Agreement among Chiat/Day inc. Advertising Chiat/Day
Holdings, Inc., Omnicom Group Inc., TBWA International and The Chase Manhattan
Bank, as Deposit Agent
2.6* Stock Purchase Agreement dated May 11, 1995 between Chiat/Day Holdings, Inc.
and Adelaide Horton (a/k/a the Advertising Stock Sale Agreement)
2.7* Profit Sharing Plan Purchase Agreement dated as of May 9, 1995 between Chiat/Day
Holdings, Inc. and Michael Kooper, as Trustee
2.8* Form of Liquidating Trust Escrow Agreement among Holdings, Advertising and
David C. Wiener, as Escrow Agent
5.1* Opinion of Davis & Gilbert as to the legality of the Omnicom Common Stock
registered hereunder
23.1 Consent of Arthur Andersen LLP as to financial statements of Omnicom
Group Inc.
23.2 Consent of Coopers & Lybrand LLP as to financial statements of
Chiat/Day Holdings, Inc.
23.3* Consent of Davis & Gilbert (included in Exhibit 5.1)
24* Powers of Attorney (included on signature page)
</TABLE>
-----------
* Previously filed
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated February 20,
1995 included in Omnicom Group Inc.'s Form 10-K for the year ended December 31,
1994 and to all references to our Firm included in this registration statement.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, New York
August 3, 1995
EXHIBIT 23.2
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Prospectus/Information Statement and
the Registration Statement of which this Prospectus/Information Statement is a
part on Form S-4 Amendment No. 2 (File No. 33-60167) of our report, which
includes an explanatory paragraph concerning the Company's ability to continue
as a going concern dated April 7, 1995, except for Note 10 as to which the date
is June 7, 1995, on our audit of the consolidated financial statements of
Chiat/Day Holdings, Inc. We also consent to the reference to our firm under the
caption "Experts".
/S/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Sherman Oaks, California
August 3, 1995
