-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYwZXqoghWSta05I8MbtcocE8QiSIn0RUJy0fKKB2enlJTj6xpU4HdJjYCgq2OPN uZWv7ZTV2YfZWtlEE2oAnA== 0000950123-03-012631.txt : 20031113 0000950123-03-012631.hdr.sgml : 20031113 20031113155425 ACCESSION NUMBER: 0000950123-03-012631 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREY GLOBAL GROUP INC CENTRAL INDEX KEY: 0000043952 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 130802840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07898 FILM NUMBER: 03998060 BUSINESS ADDRESS: STREET 1: 777 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125462000 MAIL ADDRESS: STREET 1: 777 THIRD AVE STREET 2: 777 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: GREY ADVERTISING INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 y91662e10vq.txt GREY GLOBAL GROUP INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-7898 GREY GLOBAL GROUP INC. (Exact name of registrant as specified in its charter) DELAWARE 13-0802840 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 777 THIRD AVENUE, 10017 NEW YORK, NEW YORK (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-546-2000 NOT APPLICABLE FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act) [X] Yes [ ] No As of October 31, 2003, the total number of shares outstanding of Registrant's Common Stock, par value $0.01 per share ("Common Stock"), was 1,096,941 and of Registrant's Limited Duration Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), was 206,887. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES INDEX
PAGE NO. -------- Financial Statements: Condensed Consolidated Balance Sheets..................... 2 Condensed Consolidated Statements of Operations........... 3 Condensed Consolidated Statements of Cash Flows........... 4 Notes to Condensed Consolidated Financial Statements...... 5 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Other Information........................................... 17 Signatures.................................................. 18 Index to Exhibits........................................... 19
1 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2003 2002(A) ------------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 231,627 $ 351,006 Marketable securities..................................... 522 1,733 Accounts receivable-net of allowance for doubtful accounts of $19,910 in 2003 and $16,352 in 2002.................. 1,070,466 1,030,665 Expenditures billable to clients.......................... 72,478 78,364 Other current assets...................................... 111,457 100,189 ---------- ---------- Total current assets........................................ 1,486,550 1,561,957 Investments in and advances to nonconsolidated affiliated companies................................................. 16,966 14,750 Fixed assets-at cost, less accumulated depreciation of $249,135 in 2003 and $214,260 in 2002..................... 134,768 139,941 Marketable securities....................................... 2,250 5,522 Goodwill.................................................... 284,042 243,499 Other assets-including loans to executive officers of $5,047 in 2003 and 2002.......................................... 113,008 108,170 ---------- ---------- Total assets................................................ $2,037,584 $2,073,839 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $1,238,295 $1,292,808 Notes payable to banks.................................... 60,788 67,046 Accrued expenses and other................................ 265,662 270,860 Income taxes payable...................................... 26,809 26,066 Preferred Stock subject to mandatory redemption........... 11,396 -- ---------- ---------- Total current liabilities................................... 1,602,950 1,656,780 Other liabilities, including deferred compensation of $59,552 in 2003 and $57,766 in 2002....................... 70,297 78,900 Long-term debt.............................................. 128,025 128,025 Minority interest........................................... 15,826 22,977 Redeemable Preferred Stock -- at redemption value; par value $0.01 per share; authorized 500,000 shares; issued and outstanding 30,000 shares in 2002......................... -- 9,652 Common stockholders' equity: Common Stock -- par value $0.01 per share; authorized 50,000,000 shares; issued 1,283,374 shares in 2003 and 1,265,905 shares in 2002................................ 13 13 Limited Duration Class B Common Stock -- par value $0.01 per share; authorized 10,000,000 shares; issued 233,994 shares in 2003 and 234,705 shares in 2002............... 2 2 Paid-in additional capital................................ 57,928 54,488 Retained earnings......................................... 198,200 188,956 Accumulated other comprehensive loss: Cumulative translation adjustment....................... 4,547 (22,743) Unrealized loss on marketable securities................ (386) (1,081) ---------- ---------- Total accumulated other comprehensive loss.................. 4,161 (23,824) ---------- ---------- Loans to officer used to purchase Common Stock and Limited Duration Class B Common Stock........................... (4,726) (4,726) ---------- ---------- 255,578 214,909 Less -- cost of 187,153 and 195,444 shares of Common Stock and 26,937 shares of Limited Duration Class B Common Stock held in treasury in 2003 and 2002................. 35,092 37,404 ---------- ---------- Total common stockholders' equity........................... 220,486 177,505 ---------- ---------- Total liabilities and common stockholders' equity........... $2,037,584 $2,073,839 ========== ==========
- --------------- (A) The condensed consolidated balance sheet has been derived from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements. 2 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) Commissions and fees......................... $ 324,486 $ 290,441 $ 942,075 $ 866,104 Expenses: Salaries and employee related expenses..... 210,672 192,037 623,533 575,191 Office and general expenses................ 98,348 89,995 278,910 262,637 ---------- ---------- ---------- ---------- 309,020 282,032 902,443 837,828 ---------- ---------- ---------- ---------- Operating income............................. 15,466 8,409 39,632 28,276 Interest expense........................... (3,947) (3,963) (11,317) (11,674) Interest income............................ 642 2,179 4,013 4,492 Other income -- net........................ 399 (612) 3,472 (77) ---------- ---------- ---------- ---------- Income of consolidated companies before taxes on income.................................. 12,560 6,013 35,800 21,017 Provision for taxes on income................ 6,405 3,151 17,793 10,278 ---------- ---------- ---------- ---------- Income of consolidated companies............. 6,155 2,862 18,007 10,739 Minority interest applicable to consolidated companies.................................. (1,577) (595) (4,029) (3,246) Equity in earnings of nonconsolidated affiliated companies....................... 6 488 421 1,246 ---------- ---------- ---------- ---------- Net income................................... $ 4,584 $ 2,755 $ 14,399 $ 8,739 ========== ========== ========== ========== Net income applicable to common shareholders: Net Income................................... $ 4,584 $ 2,755 $ 14,399 $ 8,739 Effect of dividend requirement and the change in redemption value of redeemable preferred stock...................................... -- (366) (1,278) (780) ---------- ---------- ---------- ---------- Net income applicable to common shareholders............................... $ 4,584 $ 2,389 $ 13,121 $ 7,959 ========== ========== ========== ========== Weighted average number of common shares outstanding Basic...................................... 1,284,261 1,244,686 1,273,596 1,246,740 Diluted.................................... 1,408,330 1,377,518 1,399,596 1,381,952 Earnings per common share Basic...................................... $ 3.57 $ 1.92 $ 10.30 $ 6.38 Diluted.................................... $ 3.28 $ 1.76 $ 9.45 $ 5.84 Dividends per common share................... $ 1.00 $ 1.00 $ 3.00 $ 3.00 ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. 3 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2003 2002 ------------ ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) OPERATING ACTIVITIES Net income.................................................. $ 14,399 $ 8,739 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation of fixed assets.............................. 32,271 29,849 Impairment of goodwill.................................... 430 -- Deferred compensation expense............................. 8,324 3,872 Restricted stock expense.................................. 1,786 1,935 Stock option expense...................................... 12 -- Equity in loss of non-consolidated affiliated companies, net of dividends received of $164 in 2003 and $448 in 2002................................................... (257) (798) Loss from the sale of marketable securities............... 83 348 Loss on the write-down of marketable securities........... 211 648 Loss on closure of a subsidiary........................... 2,200 -- Minority interest applicable to consolidated companies.... 4,029 3,246 Deferred income taxes..................................... 3,001 (1,713) Changes in operating assets and liabilities............... (141,689) (7,177) --------- -------- Net cash (used in) provided by operating activities......... (75,200) 38,949 INVESTING ACTIVITIES Purchases of fixed assets................................... (18,691) (20,292) Trust fund deposits......................................... (3,028) (2,562) (Increase) decrease in investments in and advances to nonconsolidated affiliated companies...................... (1,959) 630 Proceeds from the sale of marketable securities............. 4,534 3,224 Purchases of investment securities.......................... (731) (112) Increase in goodwill........................................ (17,430) (15,451) --------- -------- Net cash used in investing activities....................... (37,305) (34,563) FINANCING ACTIVITIES Repayments of short-term borrowings......................... (3,907) (19,821) Proceeds from revolving credit facility..................... 5,689 -- Repayment of revolving credit facility...................... (16,180) -- Cash dividends paid on common shares........................ (3,876) (3,813) Cash dividends paid on Redeemable Preferred Stock........... (120) (180) Net (payments for repurchase) proceeds from issuance of restricted stock.......................................... (81) 198 Proceeds from exercise of stock options..................... 2,610 1,169 --------- -------- Net cash used in financing activities....................... (15,865) (22,447) Effect of exchange rate changes on cash..................... 8,991 3,412 --------- -------- Decrease in cash and cash equivalents....................... (119,379) (14,650) Cash and cash equivalents at beginning of period............ 351,006 276,602 --------- -------- Cash and cash equivalents at end of period.................. $ 231,627 $261,952 ========= ========
See accompanying notes to condensed consolidated financial statements. 4 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. The Condensed Consolidated Financial Statements have been prepared by the Company without audit as permitted by the Securities and Exchange Commission. In accordance with generally accepted accounting principles for interim financial statements. The interim financial statements include all adjustments, which are of a normal recurring nature, that management considers necessary to fairly present he financial position and the results of operations for such periods. Reference should be made to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. 2. The financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 are unaudited. Certain of the Company's international operations are consolidated on an up to three month lag as permitted by accounting principles generally accepted in the United States. 3. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. 4. The provision for taxes on income results in an effective tax rate that is greater than the Federal statutory rate principally due to state and local income taxes, and an overall effective foreign tax rate in excess of the Federal statutory rate. 5. As of September 30, 2003 and December 31, 2002, the Company had outstanding 20,000 shares of Series I Preferred Stock, and 5,000 shares each of its Series II and Series III Preferred Stock, issued to the Chief Executive Officer of the Company. Each share of Preferred Stock is to be redeemed by the Company at a price equal to the book value per share attributable to one share of Common Stock and one share of Class B Common Stock (subject to certain adjustments) upon redemption, less a fixed discount established upon the issuance of the Preferred Stock. The holder of each class of Preferred Stock is entitled to receive cumulative preferential dividends at the annual rate of $.25 per share, and to participate in dividends on one share of the Common Stock and one share of the Class B Common Stock to the extent such dividends exceed the per share preferential dividend. The redemption date for the Series I, Series II and Series III Preferred Stock is fixed at April 7, 2004. Effective July 1, 2003, the Company's Preferred Stock has been classified as a liability on the Condensed Consolidated Balance Sheet. 6. The computation of basic earnings per common share is based on the weighted average number of common shares outstanding and, for diluted earnings per common share, includes adjustments for the effect, if any, of the assumed exercise of dilutive stock options, the shares issuable pursuant to the Company's Senior Management Incentive Plan and the assumed conversion of the Company's 8 1/2% Convertible Subordinated Debentures. For the purpose of computing basic earnings per common share through the period ending June 30, 2003, the Company's net income is decreased for dividends paid on the Company's Preferred Stock and increased or decreased, as the case may be, by changes in redemption value of the Company's Preferred Stock during the relevant period. For the quarter ended September 30, 2003 and beyond, the dividends paid on the Company's Preferred Stock and the increase or decrease in the redemption value of the Preferred Stock is recorded, respectively, as interest expense and, as such, there are no adjustments relating to Preferred Stock to reported net income for the purpose of computing basic earnings per common share. For the purpose of computing diluted earnings per common share, net income is also adjusted by the interest savings, net of tax, on the assumed conversion of the Company's 8 1/2% Convertible Subordinated Debentures. Additionally, in computing diluted earnings per common share, the average quarterly market price is used to determine the number of shares which would be assumed to be repurchased. The market price for a share of Class B Common Stock, which is not publicly traded, is deemed to be equal to the market price of a share of Common Stock, into which a share of Class B Common Stock may be converted at the option of the holder, as of the date such valuation is made. 5 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the amounts affecting net income used in computing earnings per common share ("EPS") and the weighted average number of shares of dilutive potential common stock:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- 2003 2002 2003 2002 ------------ ------------ ---------- ------------- BASIC EARNINGS PER COMMON SHARE WEIGHTED AVERAGE SHARES..................... 1,284,261 1,244,686 1,273,596 1,246,740 ---------- ---------- ---------- ---------- Net income.................................. $ 4,584 $ 2,755 $ 14,399 $ 8,739 Effect of dividend requirements and the change in redemption value of Redeemable Preferred Stock........................... -- (366) (1,278) (780) ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION............ $ 4,584 $ 2,389 $ 13,121 $ 7,959 ---------- ---------- ---------- ---------- PER SHARE AMOUNT............................ $ 3.57 $ 1.92 $ 10.30 $ 6.38 ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE Weighted average shares used in the Basic EPS calculation........................... 1,284,261 1,244,686 1,273,596 1,246,740 Net effect of dilutive stock options and stock incentive plans(2).................. 72,941 81,704 74,872 84,084 Assumed conversion of 8.5% convertible subordinated debentures................... 51,128 51,128 51,128 51,128 ---------- ---------- ---------- ---------- ADJUSTED WEIGHTED AVERAGE SHARES............ 1,408,330 1,377,518 1,399,596 1,381,952 ---------- ---------- ---------- ---------- Net earnings used in the Basic EPS calculation............................... $ 4,584 $ 2,389 $ 13,121 $ 7,959 8.5% convertible subordinated debentures interest net of income tax effect......... 36 36 107 107 ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION............ $ 4,620 $ 2,425 $ 13,228 $ 8,066 ---------- ---------- ---------- ---------- PER SHARE AMOUNT............................ $ 3.28 $ 1.76 $ 9.45 $ 5.84 ========== ========== ========== ==========
- --------------- (1) For the three months ended September 30, 2003, net income includes as interest expense the effect of dividend requirements and the increase in redemption value of Redeemable Preferred Stock. (2) Includes 14,877 and 17,938 shares expected to be issued pursuant to the Senior Management Incentive Plan for the purpose of computing EPS for the three and nine months ended September 30, 2003, respectively, and 20,211 shares expected to be issued pursuant to the Senior Management Incentive Plan for the purpose of computing EPS for the three months and nine months ended September 30, 2002, respectively. 7. During the third quarter of 2003 and 2002, total comprehensive income amounted to $13,358 and $8,339, respectively, and for the nine months ended September 30, 2003 and 2002 total comprehensive income was $42,385 and $18,158, respectively. The difference between net income and total comprehensive income is the result of the change in the translated value of the net assets of the Company's international operations, principally, due to the change in value of the United States dollar versus other currencies. 8. The Company is not engaged in more than one industry segment. The Company evaluates performance by geographic region based on income or loss before income taxes. Commissions and fees, operating income, and income (loss) of consolidated companies before taxes on income for the nine months 6 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ended September 30, 2003 and 2002, and related identifiable assets at September 30, 2003 and December 31, 2002 are summarized below according to geographic region:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------------------- NORTH AMERICA EUROPE OTHER CONSOLIDATED ------------------- ------------------- ----------------- ------------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- ------- ------- -------- -------- Commissions and fees............. $146,832 $142,119 $142,563 $121,280 $35,091 $27,042 $324,486 $290,441 -------- -------- -------- -------- ------- ------- -------- -------- Operating income (loss).......... 13,873 11,544 (2,374) (3,506) 3,967 371 15,466 8,409 -------- -------- -------- -------- ------- ------- -------- -------- Income (loss) of consolidated companies before taxes on income......................... 11,194 9,611 (2,539) (3,962) 3,905 364 12,560 6,013 -------- -------- -------- -------- ------- ------- -------- --------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------------- NORTH AMERICA EUROPE OTHER CONSOLIDATED ------------------- --------------------- ------------------- ----------------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- ---------- -------- -------- -------- ---------- ---------- Commissions and fees....... $419,312 $406,532 $ 425,543 $369,238 $ 97,220 $ 90,334 $ 942,075 $ 866,104 -------- -------- ---------- -------- -------- -------- ---------- ---------- Operating income (loss).... 31,262 24,605 4,489 3,727 3,881 (56) 39,632 28,276 -------- -------- ---------- -------- -------- -------- ---------- ---------- Income (loss) of consolidated companies before taxes on income... 25,571 20,111 6,562 1,518 3,667 (612) 35,800 21,017 -------- -------- ---------- -------- -------- -------- ---------- ---------- Identifiable assets........ $721,664 $866,713 $1,096,624 $991,769 $202,330 $200,607 2,020,618 2,059,089 -------- -------- ---------- -------- -------- -------- Investments in and advances to non-consolidated affiliated companies..... 16,966 14,750 ---------- ---------- Total assets............... $2,037,584 $2,073,839 ========== ==========
Commissions and fees from the United States amounted to, approximately, 94% of the North American total for the three and nine month periods in both 2003 and 2002. 9. In December 2002, the Financial Accounting Standard Board, issued Statement of Financial Accounting Standards No. 148 ("FAS 148"), Accounting for Stock-Based Compensation -- Transition and Disclosure which amends Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based Compensation. FAS 148 provides alternative methods of transition to FAS 123's fair value method of accounting for stock-based employee compensation and amends the disclosure provisions of FAS 123. The Company adopted FAS 123 effective January 1, 2003, using the prospective method and will expense stock options issued after January 1, 2003 using the fair value method as provided for in FAS 148. The Company has also adopted the disclosure requirements of FAS 148, for 2003. There were no options granted in the first or second quarter of 2003 and 626 options were granted in the third quarter 2003. Under FAS 123 the compensation expense for the three and nine months ended September 30, 2003 was $12. Pro forma information regarding net income and earnings per common share has been determined as if the Company had accounted for its employee stock options under the fair value method for all periods presented. The approximate fair value for these options was estimated at the date of grant using a Black- Scholes option valuation model with the following weighted average assumptions for the period ending September 30, 2002: risk-free interest rates of 4.96%; dividend yields of 0.60%; volatility factors of the expected market price of the Company's Common Stock of 0.30; and a weighted-average expected life for the options of 7.0 years for 2002. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in 7 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Management reviews, from time to time, whether there are more reliable option valuation models available for use and at some point may adopt an alternative valuation methodology. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
THREE MONTHS ENDED SEPTEMBER 30, --------------- 2003 2002 ------ ------ Net Income (as reported).................................... $4,584 $2,755 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 263 382 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (427) (626) ------ ------ Pro forma net income (loss)................................. $4,420 $2,511 Earnings per common share: Basic -- as reported...................................... $ 3.57 $ 1.92 Basic -- pro forma........................................ $ 3.44 $ 1.72 Diluted -- as reported.................................... $ 3.28 $ 1.76 Diluted -- pro forma...................................... $ 3.16 $ 1.58
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2003 2002 ------- ------- Net Income (as reported).................................... $14,399 $ 8,739 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 901 1,018 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (1,438) (1,750) ------- ------- Pro forma net income (loss)................................. $13,862 $ 8,007 Earnings per common share: Basic -- as reported...................................... $ 10.30 $ 6.38 Basic -- pro forma........................................ $ 9.89 $ 5.82 Diluted -- as reported.................................... $ 9.45 $ 5.84 Diluted -- pro forma...................................... $ 9.08 $ 5.33
10. The Company estimates that it will be required to make future payments to acquire additional shares of subsidiary companies or to complete earn-out agreements (collectively, "Agreements") pursuant to certain acquisition arrangements not reflected as liabilities on its consolidated balance sheet of approximately $38.1 million. Of such amount, 21% is estimated to be paid over the period from 2003 through 2005 and the remainder to be paid from 2006 and beyond. The foregoing information is estimated and the actual payments made will be dependent on future events primarily related to the attainment of earnings goals, specified operating margins and revenue targets or a combination thereof in respect of a number of subject companies. Other factors which must be considered in making the estimate include the fulfillment and amendment of certain contractual obligations by third parties, the movement of exchange rates, the timing of when the Company or other parties choose to exercise certain contractual rights and other variables. 8 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Many of the Agreements do not provide for maximum or minimum amounts payable. Therefore, there is no definitive range of the amounts payable in the future. The estimated amounts payable were computed using assumptions as to earnings bases, dividend rates, earnings growth rates and other factors deemed to be reasonable for the underlying situations. If the Company were to increase the earnings assumptions used in estimating the amounts payable uniformly by 10%, the estimated amounts payable would increase to $40.1 million; if the earnings assumptions were decreased uniformly by 10%, the estimated amounts payable would decrease to $36.1 million. 11. Since March 2001, the Company has been cooperating with a criminal investigation being conducted by U.S. Department of Justice Antitrust Division. The investigation relates to the Graphic Services Department ("Department") of the Company's New York Division of Grey Worldwide and several former vendors of the Department. In April 2003, Mr. Mitchell Mosallem, who served as director of the Department until December 31, 2001, pleaded guilty to a series of criminal charges alleging, among other things, that Mosallem and others (including other employees in the Department) conspired (1) to restrain trade by rigging bids and allocating contracts for certain graphic services performed for a client of the Company; (2) to charge clients of the Company in excess of amounts appropriately chargeable, including charges for cost overruns on unrelated work and the cost of certain entertainment or other goods or services provided to Mosallem and other Company employees; and (3) to obtain kickbacks from former vendors of the Department. In November 2002, two of Mosallem's codefendants -- a vendor known as The Color Wheel, Inc. and its principal owner, Haluk Ergulec -- pleaded guilty to various charges, including conspiracy to defraud the Company and its clients. The government also had previously indicated that it was examining whether there was Company responsibility in this matter. In connection with Mr. Ergulec's guilty plea, however, the government filed with the court a written plea agreement identifying the Company as a victim of Ergulec's offenses and requiring Ergulec to pay $1.1 million to the Company in restitution. In February 2002, the Company hired from outside the Company a new Director of the Department. In addition, Deloitte & Touche was retained on behalf of the Company and has conducted a comprehensive review of the Department. Based on their reviews, the Company has implemented improved policies and procedures with respect to the department and the Company in general. 12. The Company assesses the fair value and recoverability of intangible assets, primarily goodwill, in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets which was adopted January 1, 2002. When assessing impairment, the carrying value of the assets less non-debt liabilities is compared to the fair value of the business units holding the goodwill at the regional levels North America and Europe. (For the purposes of the calculation, Asian and Latin American goodwill of approximately $24.0 million are combined with the respective North American and European regions reflecting the fact that investments in the Asian and Latin American regions are principally needed to support multi-national clients in North America and Europe.) If goodwill is deemed to be impaired, the excess of carrying value of goodwill over fair value of net tangible and intangible assets is written-off. The Company completed its annual impairment test of goodwill as of March 31, 2003, and no impairment was identified. 13. A significant part of the Company's business involves the purchase of media time and space in many markets from various media suppliers. Consistent with industry practices, in a number of countries, the Company from time to time, directly or through a local media buying operation, is required to guarantee payment to the media suppliers in the form of performance bonds, letters of credit or other similar financial instruments which relate to liabilities shown in the Accounts Payable section of the Condensed Consolidated Balance Sheet. The utilization of these instruments may at times absorb some of the Company's credit capacity. In addition, from time to time, the Company may guarantee certain financial and other obligations of its consolidated subsidiaries, 9 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. The following data relates to the Company's investments in nonconsolidated subsidiaries that met the criteria for a significant subsidiary as set forth in Rule 1.02(w) of Regulation S-X either individually or in the aggregate. Summarized financial information based on audited and unaudited financial statements as of and for the twelve months ended December 31, 2002, 2001 and 2000 is as follows:
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 2002 --------------------------------------------------------------- AGGREGATE OF OTHER NONCONSOLIDATED AS-GREY OY SUBSIDIARIES ---------- ------------------ Current assets............... $21,344 $40,675 Non-current assets........... 5,564 6,969 Current liabilities.......... 5,108 34,079 Non-current liabilities...... -- 14,402 Commissions and fees......... 38,201 31,976 Net income (loss)............ 1,844 1,416
AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 2001 --------------------------------------------------------------- AGGREGATE OF OTHER NONCONSOLIDATED KPE INC. AS-GREY OY GCI RINGPRESS GMBH SUBSIDIARIES -------- ---------- ------------------ ------------------ Current assets............... $1,344 $25,646 $1,908 $38,856 Non-current assets........... 4,265 3,399 13 7,937 Current liabilities.......... 740 5,494 2,646 32,685 Non-current liabilities...... -- -- 65 3,524 Commissions and fees......... 9,640 36,317 799 32,687 Net income (loss)............ (9,478) 3,893 (277) 1,878
FOR THE PERIOD ENDED DECEMBER 31, 2000 --------------------------------------------------------------- AGGREGATE OF OTHER NONCONSOLIDATED KPE INC. AS-GREY OY GCI RINGPRESS GMBH SUBSIDIARIES -------- ---------- ------------------ ------------------ Commission and fees.......... $10,290 $41,823 $944 $39,232 Net income (loss)............ (947) 3,675 -- 2,612
KPE Inc., AS-Grey OY, GCI Ringpress and the aggregate of other of the Company's non-consolidated subsidiaries have been accounted for under the equity method. KPE Inc. an internet services provider was acquired in 2001 by a professional administrator to liquidate it on behalf of its creditors. The foregoing data for KPE Inc. is unaudited and comes from its internal statements which did not value assets or liabilities in such a manner as to reflect its liquidity or commercial difficulties. In 2001, the Company wrote off its entire investment in KPE Inc. and has no continuing liabilities or obligations. The Company has a minority interest in AS-Grey OY which has been, and continues to be, the Company's affiliate in Finland. GCI Ringpress GmbH is a small public relations subsidiary in Germany. Its financial statements were consolidated into the Company's financial statements beginning in 2002. 15. On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("FAS 150"). This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer, and have characteristics of both liabilities and equity. FAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments. Effective July 1, 2003, the Company's redeemable Preferred Stock has been classified as a liability. Additionally, the change in the redemption value of the Company's redeemable Preferred Stock and dividend payments to the preferred shareholder which were 10 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) previously recorded as changes in Retained Earnings will be prospectively recorded increases or decreases to interest expense. The adoption of FAS 150 will impact working capital and net income. The adoption of FAS 150 will not have an effect on EPS. The EPS calculation currently includes an adjustment to net income for the change in the redemption value of preferred stock, which will now be designated as interest expense eliminating the need for the adjustment. The income used in the calculation will be the same and not have an effect on EPS. 16. In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" an Interpretation of ARB No. 51 ("FIN 46"), which requires variable interest entities (often referred to as special purpose entities or SPEs) to be consolidated if certain criteria are met. FIN 46 is effective as of December 31, 2003 for variable interest entities that existed prior to February 1, 2003. Companies may adopt the provisions of FIN 46 effective July 1, 2003 for some or all of the variable interest entities in which it is the primary beneficiary or holds an interest. The Company has elected to adopt FIN 46 as of December 31, 2003 for its variable interest entities (i.e., equity investments and joint venture arrangements) that may require disclosure or consolidation pursuant to FIN 46. The Company currently does not believe the impact of adopting FIN 46 for such investment interests will have a material impact on its consolidated financial statements. 17. Other income-net increased by $3.9 million for the nine months ended September 30, 2003 primarily as the result of the gain on the sale of an operating unit in Germany of approximately $2.5 million. 18. In October 2003, a majority-owned subsidiary of the Company's Dutch operations was closed. The Company wrote off its investment, including goodwill, in this operation in the amount of $2.6 million in the third quarter upon the determination that the asset was impaired. The Company believes it has no continuing liability that would have a material impact on the financial statements. 19. On October 28, 2003, the Company sold $125 million principal amount of its 5.0% contingent convertible subordinated debentures, due 2033 ("Debentures"), to JP Morgan Securities Inc. ("Initial Purchaser") in a transaction exempt from the registration requirements of the Securities Act of 1933. On November 7, 2003, the Company sold an additional $25 million principal amount of Debentures pursuant to an overallotment option held by the Initial Purchaser. The total net proceeds of the offering, after expenses, is estimated to be $145 million. The Debentures are convertible in shares of the Common Stock at an initial conversion price of $961.20 per share provided that any one of several contingencies are met, including that the Common Stock trades above $1,153.44 for specified periods of time. The Company expects to use the proceeds for working capital and other general corporate purposes. 11 PART I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ITEM 2. RESULTS OF OPERATIONS THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002 Commissions and fees ("gross income") increased 11.7%, or $34.0 million, during the third quarter of 2003 when compared to the same period in 2002. Absent exchange rate fluctuations, gross income increased 2.1% in the three months ended September 30, 2003 versus to the same period in 2002. In the third quarters of 2003 and 2002, respectively, 45.3% and 48.9% of consolidated gross income was attributable to the North American operations and 54.7% and 51.1% to Non-North American ("international") operations. Of the increase in gross income for the quarter, $22.4 million was due to the weakening of the dollar against foreign, principally European, currencies. In the third quarter of 2003 gross income from operations in North America increased 3.3% versus the respective prior period primarily from increased business from existing clients. Gross income from international operations increased 19.8% (or 4.7% without the impact of exchange rate fluctuations) during the third quarter. On a constant currency basis, gross income in Asia and Latin America improved while Europe remained flat. Salaries and employee related expenses increased 9.7% in the third quarter of 2003 as compared to the same period in 2002. Most of the increase, 8.2%, was attributable to exchange rate movements, while the remainder is generally in line with the increase in gross income. Office and general expenses increased 9.3% in the third quarter of 2003 as compared to the third quarter of the prior year. Absent the impact of exchange rates, office and general expenses were up 0.3% reflecting, in part, an impairment charge of $2.6 million related to the closure of a majority-owned subsidiary of the Company's operations in The Netherlands. Inflation did not have a material effect on gross income or expenses during 2003 or 2002. Interest expense was $3.9 million in the third quarter in each of 2003 and 2002. Interest expense increased as the result of the change in accounting treatment for the increase in the redemption value of the Company's Preferred Stock, offset by lower interest expense on short-term borrowing under overdraft and revolving credit facilities. Interest income was $0.6 million in the third quarter of 2003 as compared to $2.2 million for the same period in 2002. The decrease is the result of lower invested cash balances and lower interest rates earned on such balances. Other income-net increased by $1.0 million during the third quarter principally reflecting the absence of write-downs of marketable securities in the third quarter of 2002. Minority interest applicable to consolidated companies increased by $982,000 and equity in earnings of nonconsolidated affiliated companies decreased by $482,000 during the third quarter of 2003 as compared to the respective prior period. The fluctuations were primarily due to changes in the level of profits of the Company's majority-owned companies and nonconsolidated affiliated companies. The effective tax rate was 51.0% for the third quarter of 2003 versus 52.4% in the same period in 2002. The decrease in the third quarter is due principally to the mix in the concentration of pre-tax income in jurisdictions with lower effective tax rates. Net income was $4.6 million in the third quarter of 2003 as compared to net income of $2.8 million in the respective prior period. Currency movements did not have a significant impact on net income for the third quarter of 2003. Currency movements had no effect on pretax profit given the low absolute level of net income. This was particularly true in the European region where currency movement was the strongest. 12 Basic and diluted earnings per common share for the third quarter of 2003 were $3.57 and $3.28, respectively. Basic and diluted earnings per common share for the third quarter of 2002 were $1.92 and $1.76, respectively. NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002 Gross income increased 8.8%, or $75.9 million, during the nine months ended September 30, 2003 when compared to the same period in 2002. Absent exchange rate movements, gross income increased 1.6% in the nine months ended September 30, 2003 when compared to the same period in 2002. Of the increase in gross income for the nine months ended September 30, 2003, $62.1 million was attributable to the weakening of the dollar against foreign, principally European, currencies. In the first nine months of 2003 gross income from operations in North America increased 3.1% versus the respective prior period primarily from increased business from existing clients. Gross income from international operations increased 13.8% (but only 0.8% on a constant currency basis) during the first nine months when compared to the same periods in 2002. During the nine months ended September 30, 2003 gross income from Europe was up 15.3% versus the same period in 2002 but, absent the impact of currency movements was down slightly (0.9%). Gross income in Latin America and Asia increased 7.6% and was not materially impacted by exchange rates. Salaries and employee related expenses increased 8.4% for the first nine months of 2003. Absent exchange rate movements, salary and employee related expenses increased 1.3% for the first nine months of 2003 and are generally in line with the increase in gross income. The increase in office and general expenses of 6.2% (a decrease of 1.7% absent exchange rate movement) for the nine months ended September 30, 2003 was less than the increase in gross income reflecting the absence of a $5.1 million expense recognized in the first three quarters of 2002 for professional fees and other expenses incurred in connection with the Company's cooperation with the government investigation mentioned below in the section of this report entitled "Legal Proceedings" despite an impairment charge of $2.6 million recorded in the third quarter of 2003 related to the closure of a majority-owned subsidiary of the Company's operations in The Netherlands. Inflation did not have a material effect on gross income or expenses during 2003 or 2002. Interest expense of $11.3 million was relatively constant compared to $11.7 million from the same period in 2002. Interest expense increased as the result of the change in accounting treatment for the increase in the redemption value of Preferred Stock, offset by lower interest expense on short-term borrowing under overdraft and revolving credit facilities. Interest income was $4.0 million for the nine months ended September 30, 2003 versus $4.5 million for the nine months ended September 30, 2002. The decrease is the result of lower invested cash balances and lower interest rates earned on such balances. Other income-net increased by $3.5 million for the first nine months of 2003 primarily as the result of the gain of approximately $2.5 million on the sale of a majority owned operating unit in Germany. Minority interest applicable to consolidated companies decreased by $783,000 and equity in earnings of nonconsolidated affiliated companies decreased by $825,000, during the nine months ended September 30, 2003 when compared to the same period in 2002. The fluctuations were primarily due to changes in the level of profits of the Company's majority-owned companies and nonconsolidated affiliated companies. Minority interest was also impacted by the acquisition of additional shares in the Company's media operation in the United Kingdom and the sale of a majority owned operating unit in Germany. The effective tax rate was 49.7% for the first nine months of 2003 versus 48.9% in the same period in 2002. The increase for the nine months ended September 30, 2003 is due principally to the mix in the concentration of pre-tax income in jurisdictions with higher effective tax rates. Net income was $14.4 million for the first nine months of 2003 as compared to net income of $8.7 million in the respective prior period. Currency movements did not have a significant impact on net income for the nine months ended September 30, 2003. 13 Currency movements had no effect on pretax profit given the low absolute level of net income. This was particularly true in the European region where currency movement was the strongest. Basic and diluted earnings per common share for the first nine months of 2003 were $10.30 and $9.45, respectively. Basic and diluted earnings per common share for the first nine months of 2002 were $6.38 and $5.84, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $119.4 million from $351.0 million at December 31, 2002 to $231.6 million at September 30, 2003. The working capital deficit increased to $116.5 million at September 30, 2003, versus a deficit of $94.8 million at December 31, 2002. The decrease in cash and cash equivalents is, primarily, attributable to the timing of collections of accounts receivable and billing of expenses to clients versus payments to trade vendors. The decrease in working capital since December 31, 2002 is primarily due to a liability recorded, at the end of the first quarter of 2003, for the purchase obligation of additional shares in the Company's media operation in the United Kingdom which was settled in the second quarter for approximately $10.0 million and the reclassification of the Preferred Stock, with a redemption value of $11.4 million, to current liabilities. Domestically, the Company had a short-term committed revolving credit facility in the amount of $110.0 million at both December 31, 2002 and September 30, 2003. This line of credit was not being utilized at September 30, 2003. There was $10.0 million outstanding under this credit facility at December 31, 2002. Additionally, this line of credit may be used to secure borrowings in international subsidiaries. Other lines of credit are available to the Company in foreign countries in connection with short-term borrowings and bank overdrafts used in the normal course of business. There was $60.1 million and $57.0 million outstanding at September 30, 2003 and December 31, 2002, respectively. The changes in the level of short-term borrowing and bank overdrafts are primarily due to the timing differences on payments to media and other vendors. A significant part of the Company's business involves the purchase of media time and space in many markets from various media suppliers. Consistent with industry practices, in a number of countries, the Company from time to time, directly or through a local media buying operation, is required to guarantee payment to the media suppliers in the form of performance bonds, letters of credit or other similar financial instruments which relate to liabilities shown in the Accounts Payable section of the Condensed Consolidated Balance Sheet. The utilization of these instruments may at times absorb some of the Company's credit capacity. In addition, from time to time, the Company may guarantee certain financial and other obligations of its consolidated subsidiaries. The Company estimates that it will be required to make future payments to acquire additional shares of subsidiary companies or to complete earn-out agreements (collectively, "Agreements") pursuant to certain acquisition arrangements not reflected as liabilities on its consolidated balance sheet of approximately $38.1 million. Of such amount, 21% is estimated to be paid over the period from 2003 through 2005 and the remainder to be paid from 2006 and beyond. The foregoing information is estimated and the actual payments made will be dependent on future events primarily related to the attainment of earnings goals, specified operating margins and revenue targets or a combination thereof in respect of a number of subject companies. Other factors which must be considered in making the estimate include the fulfillment and amendment of certain contractual obligations by third parties, the movement of exchange rates, the timing of when the Company or other parties choose to exercise certain contractual rights and other variables. Many of the Agreements do not provide for maximum or minimum amounts payable. As such, there is no definitive range of the amounts payable in the future. The estimated amounts payable were computed using assumptions as to earnings bases, dividend rates, earnings growth rates and other factors deemed to be reasonable for the underlying situations. If the Company were to increase the earnings assumptions used in estimating the amounts payable uniformly by 10%, the estimated amounts payable would increase to $40.1 million; if the earnings assumptions were decreased uniformly by 10%, the estimated amounts payable would decrease to $36.1 million. 14 Historically, funds from operations, bank and other borrowings have been sufficient to meet the Company's dividend, capital expenditure, acquisition and working capital needs. The Company expects that such sources will be sufficient to meet its near-term cash requirements in the future and will enable the Company to meet its longer-term obligations. The Company has two loans outstanding from the Prudential Insurance Company of America. A loan of $50.0 million was taken in November 2000, bears interest at the rate of 8.17% and is repayable in two equal annual installments, commencing in November 2006. The other loan of $75.0 million, originally taken in December 1997 and renegotiated in March 2003 bears interest at the rate of 7.41% and is repayable in three equal annual installments, commencing in December 2007. The loans and the availability of the Company's committed lines of credit contain certain covenants related to the Company's capital, debt load and cash flow. As of September 30, 2003 and December 31, 2002, the Company was in compliance with these covenants. On October 28, 2003, the Company sold $125 million principal amount of its 5.0% contingent convertible subordinated debentures, due 2033 ("Debentures"), to JP Morgan Securities Inc. ("Initial Purchaser") in a transaction exempt from the registration requirements of the Securities Act of 1933. On November 7, 2003, the Company sold an additional $25 million principal amount of Debentures pursuant to an overallotment option held by the Initial Purchaser. The total net proceeds of the offering, after expenses, is estimated to be $145 million. The Debenture are convertible in shares of the Common Stock at an initial conversion price of $961.20 per share provided that any one of several contingencies are met, including that the Common Stock trades above $1,153.44 for specified periods of time. The Company expects to use the proceeds for working capital and other general corporate purposes. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of financial condition and results from operations are based on the condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company's critical accounting policies include: REVENUE RECOGNITION Income derived from advertising placed with media is generally recognized based upon the publication or broadcast dates. Income resulting from expenditures billable to clients is generally recognized when the service is performed and billed. Media income and income resulting from expenditures billable to clients is clearly defined and determinable. Labor based income is recognized in the month of service as service is provided throughout the life of each contract. At the end of the reporting period, labor based contracts are examined to determine what was earned and collectable on such earned amounts for the purposes of recognizing revenue amounts appropriate for the period. Income from performance-based incentive fees is generally recorded at the end of a contract period when the amount to be received can be reasonably estimated. ACQUISITIONS AND IMPAIRMENT OF INTANGIBLES The Company, from time to time, makes acquisitions that complement its core capabilities and strategies, enhance its existing client service infrastructure and/or provide additional support for current clients. The price of the acquisitions may be in excess of the fair value of the net tangible assets acquired. The Company accounts for these acquisitions in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Normally, acquired client and employment relationships are short term in nature or cancelable at will, and an acquired entity will have a minimum of tangible assets over which to allocate purchase price. Therefore, a substantial portion of the purchase price is allocated to goodwill. 15 The Company assesses the fair value and recoverability of intangible assets, primarily goodwill, in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets which was adopted January 1, 2002. When assessing impairment, the carrying value of the assets less non-debt liabilities is compared to the fair value of the business units holding the goodwill at the regional levels North America and Europe. (For the purposes of the calculation, Asian and Latin American goodwill of approximately $24.0 million are combined with the respective North American and European regions reflecting the fact that investments in the Asian and Latin American regions are principally needed to support multi-national clients in North America and Europe.) If goodwill is deemed to be impaired, the excess of carrying value of goodwill over fair value of net tangible and intangible assets is written-off. The Company completed its annual impairment test of goodwill and intangible assets with indefinite lives as of March 31, 2003, and no impairment was identified. DEFERRED TAXES The Company recognizes deferred taxes based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The net deferred tax assets are reviewed regularly for recoverability and a valuation allowance is established, based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. At September 30, 2003 and December 31, 2002, the Company had $48.0 million and $51.0 million, respectively, of deferred tax assets net of a valuation reserve of $26.9 million, in both 2003 and 2002, which it believes to be appropriate. FIXED ASSETS Fixed assets fall into three main categories; furniture and fixtures, computer equipment and leasehold improvements. Depreciation of furniture and fixtures, and computer equipment is computed principally by the straight-line method over the useful life of the asset, normally five to ten years for furniture and fixtures, and three to five years for computer equipment. Amortization of leasehold improvements is provided for on a straight-line basis principally over the terms of the related leases but not in excess of the useful lives of the underlying assets. FORWARD LOOKING STATEMENTS In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), the Company may include Forward Looking Statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These Forward Looking Statements may include, among other things, plans, objectives, projections, anticipated future economic performance or assumptions and the like that are subject to risks and uncertainties. Actual results or outcomes may differ materially from those discussed in the Forward Looking Statements. Important factors which may cause actual results to differ include, but are not limited to, the following: the unanticipated loss of a material client or key personnel, delays or reductions in client budgets, shifts in industry rates of compensation, government compliance costs or litigation, unanticipated natural disasters, terrorist attacks, war, technological developments, creditworthiness of clients and suppliers, changes in the general economic conditions that affect exchange rates, changes in interest rates and/or consumer spending either in the United States or non-United States markets in which the Company operates, unanticipated expenses, client preferences which can be affected by competition, and/or changes in the competitive frame, and the ability to project risk factors which may vary. The forward looking statements speak only as of the date when made. The Company does not undertake to update such statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's results may be affected by currency exchange rate movements given the Company's extensive international operations. Generally, the foreign currency exchange risk is limited to net income of each operation because the Company's revenues and expenses, by country, are almost exclusively denominated in the local currency of each respective country with both revenue and expense items matched. 16 Occasionally, the Company enters into foreign currency contracts for known cash flows related to repatriation of earnings from its international subsidiaries or identified liabilities in foreign currencies. At September 30, 2003 and December 31, 2002, there were no foreign currency contracts open. The Company had no derivative contracts outstanding at September 30, 2003 and December 31, 2002, respectively. The Company has investments in private equity securities, corporate bonds and equity securities that may be subject to changes in general economic conditions and movements in interest rates. Excess funds are invested in short term liquid securities and money market funds. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Since March 2001, the Company has been cooperating with a criminal investigation being conducted by U.S. Department of Justice Antitrust Division. The investigation relates to the Graphic Services Department ("Department") of the Company's New York Division of Grey Worldwide and several former vendors of the Department. In April 2003, Mr. Mitchell Mosallem, who served as director of the Department until December 31, 2001, pleaded guilty to a series of criminal charges alleging, among other things, that Mosallem and others (including other employees in the Department) conspired (1) to restrain trade by rigging bids and allocating contracts for certain graphic services performed for a client of the Company; (2) to charge clients of the Company in excess of amounts appropriately chargeable, including charges for cost overruns on unrelated work and the cost of certain entertainment or other goods or services provided to Mosallem and other Company employees; and (3) to obtain kickbacks from former vendors of the Department. In November 2002, two of Mosallem's codefendants -- a vendor known as The Color Wheel, Inc. and its principal owner, Haluk Ergulec -- pleaded guilty to various charges, including conspiracy to defraud the Company and its clients. The government also had previously indicated that it was examining whether there was Company responsibility in this matter. In connection with Mr. Ergulec's guilty plea, however, the government filed with the court a written plea agreement identifying the Company as a victim of Ergulec's offenses and requiring Ergulec to pay $1.1 million to the Company in restitution. In February 2002, the Company hired from outside the Company a new Director of the Department. In addition, Deloitte & Touche was retained on behalf of the Company and has conducted a comprehensive review of the Department. Based on their reviews, the Company has implemented improved policies and procedures with respect to the department and to the Company in general. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Reference is made to the Index annexed hereto and made a part hereof. (b) Reports on Form 8-K: The Company filed a report, dated August 13, 2003, reporting Items 5, 9 and 12. "Other Events", "Regulation FD Disclosure" and "Disclosure of Results of Operations and Financial Conditions", respectively. The Company filed reports, dated October 21, 2003, October 23, 2003 and October 28, 2003, reporting Items 5 and 7, "Other Events" and "Financial Statements, Pro Forma Financial Information and Exhibits", respectively. The Company filed a report, dated October 22, 2003, reporting Items 7 and 9, "Financial Statements, Pro Forma Financial Information and Exhibits" and "Regulation FD Disclosure", respectively. 17 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREY GLOBAL GROUP INC. (Registrant) Dated: November 13, 2003 By: /s/ STEVEN G. FELSHER ------------------------------------ Steven G. Felsher, Vice Chairman Chief Financial Officer Secretary and Treasurer (Duly Authorized Officer) Dated: November 13, 2003 By: /s/ LESTER M. FEINTUCK ------------------------------------ Lester M. Feintuck, Senior Vice President Chief Financial Officer U.S. Controller (Chief Accounting Officer) 18 INDEX TO EXHIBITS
NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) TABLE OF ITEM 601 EXHIBITS DESCRIPTION OF EXHIBITS - ---------------------------- -------------------------------------------------- 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certificates of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
19 EX-31.1 3 y91662exv31w1.txt 302 CERTIFICATION: CEO EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward H. Meyer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grey Global Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ Edward. H. Meyer -------------------- Edward H. Meyer Chief Executive Officer EX-31.2 4 y91662exv31w2.txt 302 CERTIFICATION: CFO EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven G. Felsher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grey Global Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ Steven G. Felsher --------------------- Steven G. Felsher Chief Financial Officer EX-32 5 y91662exv32.txt SECTION 906 CERTIFICATION OF CEO & CFO Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Grey Global Group Inc. (the "Company") for the quarterly period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Edward H. Meyer, as Chief Executive Officer of the Company, and Steven G. Felsher, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge (1): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By:/s/ Edward H. Meyer ------------------------------- Name: Edward H. Meyer Title: Chief Executive Officer Date: November 13, 2003 By:/s/ Steven G. Felsher ------------------------------- Name: Steven G. Felsher Title: Chief Financial Officer Date: November 13, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----