-----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, L1oIdYU8+trpgNbE01DTYRKOi4Ep4NAk01ciHPi2PKSj71wXnNsHFeZ0A2tPRZTz 6S+9DGGBxcZBb21r875A0w== 0000950123-04-009447.txt : 20040809 0000950123-04-009447.hdr.sgml : 20040809 20040809151847 ACCESSION NUMBER: 0000950123-04-009447 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 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: 04961077 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 y99915qe10vq.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 JUNE 30, 2004 [ ] 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 (IRS Employer of 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 Securities Exchange Act of 1934) [X] Yes [ ] No As of July 31, 2004, the total number of shares outstanding of Registrant's Common Stock, par value $0.01 per share ("Common Stock"), was 1,159,665 and of Registrant's Limited Duration Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), was 231,065. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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................................. 11 Other Information........................................... 20 Signatures.................................................. 21 Index to Exhibits........................................... 22
1 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2004 2003(A) ---------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 492,771 $ 510,446 Marketable securities..................................... 1,105 979 Accounts receivable-net of allowance for doubtful accounts of $23,066 in 2004 and $21,467 in 2003.................. 1,278,063 1,250,241 Expenditures billable to clients.......................... 126,370 77,503 Other current assets...................................... 108,784 106,710 ---------- ---------- Total current assets........................................ 2,007,093 1,945,879 Investments in and advances to nonconsolidated affiliated companies................................................. 16,018 16,899 Fixed assets-at cost, less accumulated depreciation of $256,925 in 2004 and $246,455 in 2003..................... 140,406 140,687 Marketable securities....................................... 1,265 1,580 Goodwill.................................................... 302,048 286,880 Other assets-including loans to executive officers of $784 in 2004 and $5,047 in 2003................................ 159,071 133,537 ---------- ---------- Total assets................................................ $2,625,901 $2,525,462 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $1,566,107 $1,472,944 Notes payable to banks.................................... 45,925 70,455 Accrued expenses and other................................ 330,884 325,115 Income taxes payable...................................... 18,400 21,238 Redeemable preferred stock-at redemption value; par value $0.01 per share; authorized 500,000 shares; issued and outstanding 30,000 shares in 2003....................... -- 12,042 ---------- ---------- Total current liabilities................................... 1,961,316 1,901,794 Other liabilities, including deferred compensation of $68,309 in 2004 and $61,318 in 2003....................... 108,643 92,271 Term loans.................................................. 125,000 125,000 Contingent convertible subordinated debentures.............. 150,000 150,000 Minority interest........................................... 13,949 14,438 Common stockholders' equity: Common Stock- par value $0.01 per share; authorized 50,000,000 shares; issued 1,295,223 shares in 2004 and 1,284,493 shares in 2003................................ 13 13 Limited Duration Class B Common Stock-par value $0.01 per share; authorized 10,000,000 shares; issued 232,491 shares in 2004 and 233,559 shares in 2003............... 2 2 Paid-in additional capital................................ 64,345 57,481 Retained earnings......................................... 225,890 211,573 Accumulated other comprehensive income: Cumulative translation adjustment....................... 17,434 7,042 ---------- ---------- Total accumulated other comprehensive income.............. 17,434 7,042 ---------- ---------- Loans to officer used to purchase Common Stock and Limited Duration Class B Common Stock........................... (4,726) (4,726) ---------- ---------- 302,958 271,385 Less -- cost of 141,189 and 161,389 shares of Common Stock and 1,373 and 1,373 shares of Limited Duration Class B Common Stock held in treasury at June 30, 2004 and December 31, 2003, respectively......................... 35,965 29,426 ---------- ---------- Total common stockholders' equity........................... 266,993 241,959 ---------- ---------- Commitments and contingencies............................... -- -- ---------- ---------- Total liabilities and common stockholders' equity........... $2,625,901 $2,525,462 ========== ==========
- --------------- (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 (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ---------- ---------- ---------- ---------- Revenue....................................... $ 364,014 $ 319,946 $ 707,884 $ 617,589 Expenses: Salaries and employee related expenses...... 239,397 217,692 462,293 412,861 Office and general expenses................. 97,438 92,468 199,398 180,562 ---------- ---------- ---------- ---------- 336,835 310,160 661,691 593,423 ---------- ---------- ---------- ---------- Operating income.............................. 27,179 9,786 46,193 24,166 Interest expense............................ (5,519) (3,324) (11,172) (7,370) Interest income............................. 1,739 2,657 3,868 3,371 Other income -- net......................... (642) 3,028 (165) 3,073 ---------- ---------- ---------- ---------- Income of consolidated companies before taxes on income................................... 22,757 12,147 38,724 23,240 Provision for taxes on income................. 11,219 6,174 19,362 11,388 ---------- ---------- ---------- ---------- Income of consolidated companies.............. 11,538 5,973 19,362 11,852 Minority interest applicable to consolidated companies................................... (1,025) (1,455) (2,799) (2,452) Equity in earnings of nonconsolidated affiliated companies........................ 254 226 508 415 ---------- ---------- ---------- ---------- Net income.................................... $ 10,767 $ 4,744 $ 17,071 $ 9,815 ========== ========== ========== ========== Net income applicable to common shareholders: Net Income.................................... $ 10,767 $ 4,744 $ 17,071 $ 9,815 Effect of dividend requirement and the change in redemption value of redeemable preferred stock....................................... -- (505) -- (1,278) ---------- ---------- ---------- ---------- Net income applicable to common shareholders... $ 10,767 $ 4,239 $ 17,071 $ 8,537 ========== ========== ========== ========== Weighted average number of common shares outstanding Basic....................................... 1,364,288 1,274,154 1,361,629 1,268,177 Diluted..................................... 1,412,599 1,394,287 1,408,229 1,391,623 Earnings per common share Basic....................................... $ 7.89 $ 3.33 $ 12.54 $ 6.73 Diluted..................................... $ 7.62 $ 3.07 $ 12.12 $ 6.19 Dividends per common share.................... $ 1.00 $ 1.00 $ 2.00 $ 2.00 ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. 3 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ------------------- 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) -------- -------- OPERATING ACTIVITIES Net income.................................................. $ 17,071 $ 9,815 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation of fixed assets.............................. 19,990 20,154 Deferred compensation..................................... 7,491 8,256 Amortization of restricted stock and stock options........ 1,121 1,202 Stock option expense...................................... 33 -- Equity in earnings of non-consolidated affiliated companies, net of dividends received of $192 in 2004 and $122 in 2003....................................... (316) (210) Loss on the sale and write-down of investments and marketable securities.................................. 131 119 Minority interest applicable to consolidated companies.... 2,799 2,452 Deferred income taxes..................................... 11,128 2,002 Changes in operating assets and liabilities............... 647 (148,019) -------- -------- Net cash (used in) provided by operating activities......... 60,095 (104,229) INVESTING ACTIVITIES Purchases of fixed assets................................... (16,588) (11,024) Trust fund deposits......................................... (1,708) (2,004) Decrease (increase) in investments in and advances to nonconsolidated affiliated companies...................... 1,197 (874) Proceeds from the sale of marketable securities............. -- 4,534 Purchases of investment securities.......................... -- (154) Purchase price of acquisitions, net of cash acquired........ (2,250) (13,215) -------- -------- Net cash used in investing activities....................... (19,349) (22,737) FINANCING ACTIVITIES Repayments of short-term borrowings......................... (25,950) (2,101) Proceeds from revolving credit facility..................... -- 5,689 Repayment of revolving credit facility...................... -- (7,902) Repayment of loan against life insurance policy............. (15,000) -- Redemption of Preferred Stock............................... (12,042) -- Cash dividends paid on common shares........................ (2,754) (2,575) Cash dividends paid on Redeemable Preferred Stock........... (60) (120) Purchase of treasury stock.................................. (8,332) -- Proceeds from exercise of stock options..................... 2,448 2,118 -------- -------- Net cash used in financing activities....................... (61,690) (4,891) Effect of exchange rate changes on cash..................... 3,269 5,332 -------- -------- Decrease in cash and cash equivalents....................... (17,675) (126,525) Cash and cash equivalents at beginning of period............ 510,446 351,006 -------- -------- Cash and cash equivalents at end of period.................. $492,771 $224,481 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 in the United States for interim financial statements. The interim financial statements include all adjustments, which are of a normal recurring nature, that management considers necessary to present fairly the 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, 2003 filed with the Securities and Exchange Commission. 2. The financial statements as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 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. Material intercompany balances and transactions have been eliminated in consolidation. 3. The results of operations for the three and six months ended June 30, 2004 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 December 31, 2003, 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 (collectively, "Preferred Stock"). All of these shares were redeemed for cash in accordance with their terms on April 7, 2004 for the value of the shares shown on the balance sheet ($12.0 million) as at December 31, 2003. The holder of the Preferred Stock was the Chairman and Chief Executive Officer of the Company. Each share of Preferred Stock was 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) as at the year end prior to redemption, less a fixed discount established upon the issuance of the Preferred Stock. The holder of the Preferred Stock had been 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. 6. The computation of basic earnings per common share for the three and six months ended June 30, 2004 is based on net income and the weighted average number of common shares outstanding and, for diluted earnings per common share, includes adjustments for the effect of the assumed exercise of dilutive stock options and the effect of certain share grants pursuant to the Company's stock incentive plans. For the purpose of computing basic earnings per common share for the three and six months ended June 30, 2003, the Company's net income was reduced by the increase in the redemption value of the Company's Preferred Stock, which was redeemed in accordance with its terms after December 31, 2003, the date at which the Preferred Stock was valued. For the purpose of computing diluted earnings per common share for periods in 2003, net income was also adjusted by the interest savings, net of tax, on the assumed conversion of the Company's 8 1/2% Convertible Subordinated Debentures, which were converted on December 31, 2003. Shares issuable upon conversion of the Company's 5% Contingent Convertible Subordinated Debentures are excluded from the computation of diluted earnings per common share since the contingent conditions for conversion have not been met. 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 dilutive potential common shares:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 2004 2003 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ---------- ---------- ---------- ---------- BASIC EARNINGS PER COMMON SHARE WEIGHTED AVERAGE NUMBER OF SHARES......... 1,364,288 1,274,154 1,361,629 1,268,177 ---------- ---------- ---------- ---------- Net income (1)............................ $ 10,767 $ 4,744 $ 17,071 $ 9,815 Effect of dividend requirements and the change in redemption value of redeemable preferred stock................................... -- (505) -- (1,278) ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION.......... $ 10,767 $ 4,239 $ 17,071 $ 8,537 ---------- ---------- ---------- ---------- PER SHARE AMOUNT.......................... $ 7.89 $ 3.33 $ 12.54 $ 6.73 ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE Weighted average number of shares used in the Basic EPS calculation................... 1,364,288 1,274,154 1,361,629 1,268,177 Net effect of dilutive stock options and stock incentive plans (2)..................... 48,311 69,005 46,600 72,318 Assumed conversion of 8.5% convertible subordinated debentures -- 51,128 -- 51,128 ---------- ---------- ---------- ---------- ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES... 1,412,599 1,394,287 1,408,229 1,391,623 ---------- ---------- ---------- ---------- Net earnings used in the Basic EPS calculation............................. $ 10,767 $ 4,239 $ 17,071 $ 8,537 8.5% convertible subordinated debentures interest, net of income tax effect...... -- 36 -- 72 ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION.......... $ 10,767 $ 4,275 $ 17,071 $ 8,609 ---------- ---------- ---------- ---------- PER SHARE AMOUNT.......................... $ 7.62 $ 3.07 $ 12,12 $ 6.19 ========== ========== ========== ==========
- --------------- (1) Dividends paid on the Preferred Stock prior to redemption in 2004 have been treated as interest expense. (2) Includes 4,941 shares expected to be issued pursuant to the Senior Management Incentive Plan for the three and six months ended June 30, 2004, respectively, and 14,877 and 19,468 shares expected to be issued pursuant to the Senior Management Incentive Plan for the three and six months ended June 30, 2003, respectively. 7. During the second quarter of 2004 and 2003, total comprehensive income amounted to $7.9 million and $13.4 million, respectively, and for the six months ended June 30, 2004 and 2003 total comprehensive income was $27.5 million and $29.0 million, 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. 6 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Revenue, operating income (loss) and income (loss) of consolidated companies before taxes on income for the three and six months ended June 30, 2004 and 2003, and related identifiable assets at June 30, 2004 and December 31, 2003 are summarized below by geographic region:
FOR THE THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------------------------- ASIA/LATIN NORTH AMERICA EUROPE AMERICA CONSOLIDATED ----------------------- ----------------------- ------------------- ----------------------- 2004 2003 2004 2003 2004 2003 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- PER SHARE DATA) Revenue....................... $ 153,899 $ 142,001 $ 171,153 $ 145,234 $ 38,962 $ 32,711 $ 364,014 $ 319,946 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Operating income.............. 16,080 8,660 9,215 820 1,885 306 27,180 9,786 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Income of consolidated companies before taxes on income...................... 11,458 7,349 9,587 4,575 1,712 223 22,757 12,147 ---------- ---------- ---------- ---------- -------- -------- ---------- ----------
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------------------------- ASIA/LATIN NORTH AMERICA EUROPE AMERICA CONSOLIDATED ----------------------- ----------------------- ------------------- ----------------------- 2004 2003 2004 2003 2004 2003 2004 2003 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Revenue...................... $ 297,354 $ 272,480 $ 337,975 $ 282,980 $ 72,555 $ 62,129 $ 707,884 $ 617,589 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Operating income (loss)...... 25,982 17,389 18,991 6,863 1,221 (86) 46,194 24,166 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Income (loss) of consolidated companies before taxes on income..................... 18,255 14,377 19,521 9,101 948 (238) 38,724 23,240 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Identifiable assets.......... $1,068,504 $1,036,831 $1,324,372 $1,246,617 $217,007 $225,115 2,609,883 2,508,563 ========== ========== ========== ========== ======== ======== Investments in and advances to non-consolidated affiliated companies....... 16,018 16,899 ---------- ---------- Total assets................. $2,625,901 $2,525,462 ========== ==========
Revenue from the United States amounted to, approximately, 93.4% and 93.5% of the North American total for the three months ended June 30, 2004 and 2003, respectively, and for the six months ended June 30, 2004 and 2003 amounted to approximately 93.2% and 93.8%, respectively. 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 expenses stock options issued after January 1, 2003 using the fair value method as provided for in FAS 148. There were 4,488 options granted in the second quarter 2004 and 1,500 options granted in the first quarter of 2004. There were 326 options granted in the second quarter of 2003 and no options were granted in the first quarter 2003. Under FAS 123 the compensation expense for the three and six months ended June 30, 2004 was $16,000 and $32,000, respectively. Pro forma information regarding net income and earnings per common share has been determined as if the Company had accounted for employee stock options issued prior to January 1, 2003 under the fair value method. The approximate fair value for these options was estimated at the date of grant using a Black-Scholes 7 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) option valuation model with the following weighted average assumptions for the period ending June 30, 2004: 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. 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 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 vesting period of the options. The Company's pro forma information follows:
THREE MONTHS ENDED JUNE 30, ------------------ 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) -------- ------- Net Income (as reported).................................... $10,767 $4,744 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 1,299 311 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (1,434) (498) ------- ------ Pro forma net income........................................ $10,632 $4,557 Earnings per common share: Basic -- as reported...................................... $ 7.89 $ 3.33 Basic -- pro forma........................................ $ 7.89 $ 3.19 Diluted -- as reported.................................... $ 7.62 $ 3.07 Diluted -- pro forma...................................... $ 7.62 $ 2.94
SIX MONTHS ENDED JUNE 30, ---------------- 2004 2003 ------- ------ Net Income (as reported).................................... $17,071 $9,815 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 1,307 638 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (1,577) (1,013) ------- ------ Pro forma net income........................................ $16,801 $9,440 Earnings per common share: Basic -- as reported...................................... $ 12.54 $ 6.73 Basic -- pro forma........................................ $ 12.41 $ 6.45 Diluted -- as reported.................................... $ 12.12 $ 6.19 Diluted -- pro forma...................................... $ 11.76 $ 5.93
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 8 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $58.8 million. Of such amount, 52% is estimated to be paid over the period from 2004 through 2007 and the remainder to be paid from 2008 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. 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 $69.2 million; if the earnings assumptions were decreased uniformly by 10%, the estimated amounts payable would decrease to $48.4 million. 11. The Company assesses annually 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. As part of the annual evaluation, the fair value of the business units, on the regional levels of North America and Europe, is compared to the carrying value of those business units. For the purposes of the analysis, Asian and Latin American business units 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 impairment is indicated, the excess of the carrying value of the goodwill over fair value of the business units is written off. The Company completed its annual impairment test of goodwill and intangible assets with indefinite lives as of March 31, 2004, and no impairment was identified nor were there impairment indicators subsequent to March 31, 2004. 12. 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 or other obligations of its consolidated subsidiaries. 13. 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 had been classified as a liability. Additionally, thereafter the change in the redemption value of the Company's redeemable Preferred Stock and dividend payments to the preferred shareholder which previously had been recorded as changes in Retained Earnings were recorded as increases in interest expense. The adoption of FAS 150 did not have an effect on EPS. The Company redeemed the Preferred Stock on April 7, 2004. 14. 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 was effective as of January 31, 2003 for variable interest entities created after that date and other variable interest 9 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) entities in the first quarter of 2004. The adoption of FIN 46 did not have any impact on the Company's consolidated financial statements. 15. On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief Executive Officer, exercised non-qualified stock options (the "Options") to purchase 40,000 shares of Common Stock at an aggregate exercise price of $5.94 million (or $148.50 per share). The Options, which had been issued in 1995 pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), were set to expire on January 5, 2004. In accordance with the terms of the Plan, Mr. Meyer elected to pay the exercise price through delivery to the Company of 8,774 shares, based on the $677 per share closing price on January 5, 2004. Mr. Meyer also delivered to the Company 12,316 shares of Common Stock in satisfaction of tax withholding obligations, based on the $676.51 per share price as determined in accordance with applicable tax regulations. 16. The Company recognized a $6.1 million loss on the sale of a subsidiary at its Scandinavian operation in the first quarter of 2004. The Company believes it has no continuing liability that will have a material impact on the financial statements. 17. On April 7, 2004, the Company redeemed, in accordance with their terms, all of the outstanding shares of the Preferred Stock. The Preferred Stock, which was originally issued over 20 years ago pursuant to the Company's Book Value Preferred Stock Plan, was owned by Mr. Edward H. Meyer, the Company's Chairman and Chief Executive Officer. The redemption price paid of $12.0 million was paid in cash. On April 7, 2004, Mr. Meyer repaid in full $0.8 million of certain promissory notes provided to the Company by Mr. Meyer at the time the Preferred Stock was originally acquired. 10 PART I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ITEM 2. RESULTS OF OPERATIONS Overview The Company ranks among the largest global communications companies in the world, operating business units in many communications disciplines. These disciplines include general advertising, public relation/public affairs, direct marketing, internet communications, healthcare marketing, brand strategy and design, and on-line and off-line media services. Frequently, our clients use a number of our business units. In the second quarter of 2004, revenue was up 13.8%, income of consolidated companies before taxes ("pre-tax profit") improved by 87.3% and net income was better by 127.0%. For the six months ended June 30, 2004, revenue grew by 14.6%, pre-tax profit grew by 66.6% and net income increased by 73.9% over the same period in 2003. There were increases in revenues and profitability in all regions. Liquidity is strong with continued high cash and cash equivalents balances. SECOND QUARTER ENDED 2004 COMPARED TO SECOND QUARTER ENDED 2003 Revenue The following chart shows the breakdown of the Company's revenue in the second quarter of 2004 and 2003 by region:
2004 2003 --------------------- --------------------- PERCENTAGE PERCENTAGE AMOUNT OF TOTAL AMOUNT OF TOTAL (IN THOUSANDS, EXCEPT PERCENTAGE DATA) -------- ---------- -------- ---------- Revenue from: North American operations................ $153,899 42.3% $142,000 44.4% -------- ----- -------- ----- Non-North American operations ("international"): Europe.............................. 171,153 47.0% 145,234 45.4% Asia/Latin America.................. 38,962 10.7% 32,711 10.2% -------- ----- -------- ----- Total International operations........ 210,115 57.7% 177,945 55.6% -------- ----- -------- ----- Total Revenue.............................. $364,014 100.0% $319,945 100.0% -------- ----- -------- -----
International operations contributed a greater percentage of the Company's revenue in the second quarter of 2004 than the corresponding quarter in the previous year because of the strengthening of foreign, 11 particularly European, currencies against the United States dollar; the impact of exchange rate movements is summarized in the following chart:
2004 VS. 2003 --------------------------------- NON-EXCHANGE EXCHANGE TOTAL RATE IMPACTED RATE GROWTH GROWTH IMPACT ------ ------------- -------- Revenue from: North American operations........................... 8.4% 8.1% 0.3% International operations: Europe........................................... 17.8% 3.6% 14.2% Asia/Latin America............................... 19.1% 15.4% 3.7% Total International operations...................... 18.1% 5.8% 12.3% Total Revenue......................................... 13.8% 6.8% 7.0%
Revenue increased 13.8%, or $44.1 million, during the second quarter of 2004 when compared to the same period in 2003. Revenue at the Company's international operations grew by $32.1 million, of which $21.9 million was due to the weakening of the dollar against selected foreign, principally European, currencies. In the second quarter of 2004, revenue in North America increased 8.4% versus the respective prior period primarily from increased business from existing clients. Expenses Salaries and employee related expenses increased 10.0% in the second quarter of 2004 as compared to the same period in 2003. Of the increase, 7.0% was attributable to exchange rate movements. Office and general expenses increased 5.4% in the second quarter of 2004, as compared to the second quarter of the prior year. Absent the impact of exchange rates, office and general expenses declined by 1.9% because of the Company's continued focus on cost containment.
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) -------- ------- ---------- Expenses: Salaries and employee related expenses.............. $239,397 217,692 10.0% Office and general expenses......................... 97,438 92,468 5.4% -------- ------- ---- Total expenses........................................ $336,835 310,160 8.6% -------- ------- ----
Inflation did not have a material effect on revenue or expenses during 2004 or 2003. Other Income/Expense Other Income/Expense for 2004 compared to 2003 is set forth below:
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) ------ ------ ---------- Interest expense....................................... (5,519) (3,324) 66.0% Interest income........................................ 1,739 2,657 (34.6)% Other income/expense -- net............................ (642) 3,028 (121.2)%
Interest expense increased because of the impact of the issuance in the fourth quarter of 2003 of the Company's 5% Contingent Convertible Subordinated Debentures ("Convertible Debentures"). Interest income decreased despite higher cash balances because of generally lower returns on invested cash. The decrease in other income/expense -- net reflects the absence of a $2.5 million gain on the sale of a majority owned operating unit in Germany in the second quarter of 2003. 12 Pre-tax Profit The Company's pre-tax profit rose by $10.6 million (up 87.3%) from the second quarter of 2003. North American pre-tax profit increased by 56.0% for the quarter ended June 30, 2004 as compared to the same period in 2003 as a result of the continued revenue growth and emphasis on cost containment. The pre-tax profit from the Company's European operations in the second quarter of 2004 showed strong growth and increased margins. This result was achieved despite continuing losses in the Company's Scandinavian operations ($4.6 million in the second quarter 2004 compared to a loss of $4.7 million in the corresponding quarter in 2003). The loss in Scandinavia in the second quarter of 2004 primarily related to the costs incurred in reducing expenses further at the region's parent organization and in certain other units. Taxes The effective tax rate was 49.3% for the second quarter of 2004 versus 50.8% in the same period in 2003. The improvement in the tax rate was impacted by the increase in profitability. Minority Interest/Equity Accounting Minority interest applicable to consolidated companies decreased by $0.4 million and equity in earnings of nonconsolidated affiliated companies increased by $28,000 during the second quarter of 2004 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 and nonconsolidated affiliated companies. Net Income/EPS Net income was $10.8 million in the second quarter of 2004 as compared to net income of $4.7 million in the respective prior period, an increase of 127.0%. Diluted earnings per share increased by 148.2% to $7.62 per share as against $3.07 per share. Diluted earnings per share increased at a greater percentage rate than the increase in net income because increases in the value of the Preferred Stock reduced the earnings used for the determination of earnings per share calculations in 2003; the Preferred Stock was redeemed in April 2004 and there was no such reduction in earnings used for the determination of earnings per share calculations after April 2004. The Company's Preferred Stock was redeemed on April 7, 2004 and its value was fixed as of December 31, 2003. SIX MONTHS 2004 COMPARED TO SIX MONTHS 2003 Revenue The following chart shows the breakdown of the Company's revenue for the six months ended June 30, 2004 and 2003 by area:
2004 2003 ------------------------------ ------------------------------ PERCENTAGE PERCENTAGE AMOUNT OF TOTAL AMOUNT OF TOTAL (IN THOUSANDS, EXCEPT PERCENTAGE DATA) -------- ------------------- -------- ------------------- Revenue from: North American operations....... $297,354 42.0% $272,480 44.1% -------- ----- -------- ----- International operations: Europe..................... 337,975 47.8% 282,980 45.8% Asia/Latin America......... 72,555 10.2% 62,129 10.1% -------- ----- -------- ----- Total International operations.. 410,529 58.0% 345,109 55.9% -------- ----- -------- ----- Total Revenue..................... $707,884 100.0% $617,589 100.0% -------- ----- -------- -----
International operations contributed a greater percentage of the Company's revenue for the six months ended June 30, 2004 than the first six months of the previous year because of the strengthening of foreign, 13 particularly European, currencies against the United States dollar; the impact of exchange rate movements is summarized in the following chart:
2004 VS. 2003 --------------------------------- NON-EXCHANGE EXCHANGE TOTAL RATE IMPACTED RATE GROWTH GROWTH IMPACT ------ ------------- -------- Revenue from: North American operations........................... 9.1% 8.5% 0.6% International operations: Europe........................................... 19.4% 4.3% 15.1% Asia/Latin America............................... 16.8% 10.9% 5.9% Total International operations...................... 19.0% 5.5% 13.5% Total Revenue......................................... 14.6% 6.8% 7.8%
Revenue increased 14.6%, or $90.3 million, for the six months ended June 30, 2004 when compared to the same period in 2003. Revenue at the Company's international operations grew by $65.4 million, of which $46.4 million was due to the weakening of the dollar against selected foreign, principally European, currencies. For the six months ended June 30, 2004, revenue in North America increased 9.1% versus the respective prior period primarily from increased business from existing clients. Expenses Salaries and employee related expenses increased 12.0% during the first six months of 2004 as compared to the same period in 2003. Of the increase, 7.6% was attributable to exchange rate movements. The increase is generally in line with the increase in revenue. Office and general expenses increased 10.4% during the first six months of 2004, as compared to same period in the prior year. Absent the impact of exchange rates, office and general expenses increased 8.7%. The increases in expenses are generally in line with the increase in revenue.
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) -------- ------- ---------- Expenses: Salaries and employee related expenses.............. $462,293 412,861 12.0% Office and general expenses......................... 199,398 180,562 10.4% -------- ------- ---- Total expenses........................................ $661,691 593,423 11.5% -------- ------- ----
Inflation did not have a material effect on gross income or expenses during 2004 or 2003. Other Income/Expense Other Income/Expense for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 is set forth below:
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) ------- ------ ---------- Interest expense...................................... (11,172) (7,370) 51.6% Interest income....................................... 3,868 3,371 14.7% Other income/expense -- net........................... (165) 3,073 (105.4%)
Interest expense increased because of the impact of the issuance in the fourth quarter of 2003 of the Company's 5% Contingent Convertible Subordinated Debentures ("Convertible Debentures"). Interest income increased because of higher invested cash balances. The decrease in other income/expense -- net 14 reflects the absence of a $2.5 million gain on the sale of a majority owned operating unit in Germany in the second quarter of 2003. Pre-tax Profit The Company's pre-tax profit rose by $15.5 million for the first six months of 2004 as compared to the same period in 2003. Pre-tax profit in North America improved by 27.0%. The pre-tax profit from the Company's European operations for the first six months of 2004 more than doubled. This result was achieved despite a loss at the Company's Scandinavian operations of $13.5 million (absent exchange rate movements of $10.9 million) for the first six months in 2004, as compared to a $7.4 million pre-tax loss incurred in the corresponding period in 2003. The loss included $6.1 million recognized in the first quarter of 2004 on the sale of a subsidiary of the Scandinavian operations. This subsidiary, and another Scandinavian operation which was sold and for which a loss was taken in 2003, had period losses of $1.1 million for the six months ended June 30, 2004 versus $1.3 million for the six months ended June 30, 2003; the Company anticipates incurring no further losses from these business units. The pre-tax loss incurred in Scandinavia also reflects the costs of extensive steps the Company has taken to remediate its operations there. Taxes The effective tax rate is 50.0% for the six months ended June 30, 2004 versus 49.0% in the same period in 2003. The increase is due principally to losses incurred in Scandinavia for which no tax benefit is recorded. Minority Interest/Equity Accounting Minority interest applicable to consolidated companies increased by $0.3 million and equity in earnings of nonconsolidated affiliated companies increased by $93,000 during the second quarter of 2004 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 and nonconsolidated affiliated companies. Net Income/EPS Net income was $17.1 million in the first six months ended June 30, 2004 as compared to net income of $9.8 million in the respective prior period, an increase of 73.9%. Diluted earnings per share increased by 95.8% to $12.12 per share as against $6.19 per share. Diluted earnings per share increased at a greater percentage rate than the increase in net income because increases in the value of the Preferred Stock reduced the earnings used for the determination of earnings per share calculations in 2003; the Preferred Stock was redeemed in April 2004 and there was no such reduction in earnings used for the determination of earnings per share calculations after April 2004. The Company's Preferred Stock was redeemed on April 7, 2004 and its value was fixed as of December 31, 2003. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $17.7 million from $510.4 million at December 31, 2003 to $492.8 million at June 30, 2004. Working capital increased to $45.8 at June 30, 2004, versus $44.1 million at December 31, 2003. The changes in cash and cash equivalents and the elements of working capital are, primarily, attributable to the timing of collections of accounts receivable and billing of expenses to clients versus payments to trade vendors. The Company had available $110.0 million under an annual revolving credit facility from a syndicate of JP Morgan Chase Bank, HSBC Bank USA, Barclays Bank PLC, Bank of America, North Fork Bank and City National Bank at June 30, 2004 and December 31, 2003. This line of credit was not utilized during the quarter. A portion of the line can be borrowed in certain foreign currencies and used by the Company's international operations. 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 $45.9 million and $70.5 million outstanding at June 30, 2004 and December 31, 2003, respectively, under these 15 facilities. 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. 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 cash requirements. The Company has two loans outstanding from the Prudential Insurance Company of America. The first loan of $75.0 million from December 1997 bore interest at the rate of 6.94% and was originally repayable in three equal annual installments, commencing in December 2003. This loan was renegotiated in March 2003, with a fixed interest rate of 7.41%, and principal repayments of $25.0 million in March, 2007, 2008 and 2009, respectively. The second loan of $50.0 million was drawn in November 2000, bears interest at the rate of 8.17% and is repayable in two equal annual installments, commencing in November 2006. In October 2003, the Company sold $150 million principal amount of its 5.0% Contingent Convertible Subordinated Debentures, due 2033 ("Debentures"). 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 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 June 30, 2004 and December 31, 2003, the Company was in compliance with these covenants. On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief Executive Officer, exercised non-qualified stock options (the "Options") to purchase 40,000 shares of Common Stock at an aggregate exercise price of $5.94 million (or $148.50 per share). The Options, which had been issued in 1995 pursuant to the Company's 1994 Stock Incentive Plan ("Plan"), were set to expire on January 5, 2004. In accordance with the terms of the Plan, Mr. Meyer elected to pay the exercise price through delivery to the Company of 8,774 shares, based on the $677 per share closing price on January 5, 2004. Mr. Meyer also delivered to the Company 12,316 shares of Common Stock in satisfaction of tax withholding obligations, based on the $676.51 per share price as determined in accordance with applicable tax regulations. SUMMARY OF SIGNIFICANT CONTRACTUAL OBLIGATIONS As at June 30, 2004, there have been no material changes, except for media commitments which can fluctuate by material amounts in the ordinary course of business, as compared to the contractual obligations identified at December 31, 2003. Media commitments decreased significantly in the quarter ended June 30, 2004 as compared to December 31, 2003 as a result of the seasonality of media purchasing patterns and related billings in the normal course of business. The Company makes commitments when it purchases media time and space from various media suppliers on behalf of its clients. The liability for the media is generally recorded on the Company's balance sheet when the client is billed, usually in the month that the underlying advertising appears. As part of the general practice in the industry, the Company frequently is required to reserve, or commit to purchase, media time and space with the media suppliers well before a commercial is aired or a publication reaches the market. The duration of these commitments vary depending on the type of media purchased and the terms of the particular purchase. The duration of any commitment may be as short as a few days or as long as a year. These commitments are only entered into following the specific authorization of clients who, in turn, commit to 16 reimburse the Company. In practice, clients fulfill their commitments to the Company enabling it, in turn, to fulfill its commitments. There are, however, instances where a client may seek to alter its commitments to purchase media. It is general industry practice that media suppliers seek to accommodate the client's wishes, in part, because the media suppliers wish to maintain good, on-going relations with important clients, such as the Company represents, and large buyers of media like the Company. The Company guards against loss in respect of its media commitments in various ways. The Company considers the credit-worthiness of its clients and sets relevant terms of business appropriately, and may purchase credit insurance in certain instances. In certain markets, the Company is also protected in respect of its commitments if a client does not fulfill its underlying obligations by the rule of sequential liability, which generally provides that a buyer of media is not required to pay a media supplier unless such buyer has been paid by its client. At December 31, 2003, the amount of Company's media commitments not recorded on its balance sheet was $1,048.7 million, of which $357.0 million was, as of that date, cancelable by the terms of those commitments. 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. The Company assesses the fair value and recoverability of intangible assets, almost exclusively goodwill, in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. When assessing potential impairment of goodwill, the fair value of all business units at the regional levels of North America and Europe is compared to the carrying value of those business units. For the purposes of the analysis, Asian and Latin American business units are combined with the respective North American and European regions reflecting the fact that investments in the Asian and Latin American regions 17 are principally needed to support multi-national clients serviced in North America and Europe. If impairment is indicated, the excess of the carrying value of the goodwill over fair value of the business units is written-off. The Company completed its annual impairment test of goodwill and intangible assets with indefinite lives as of March 31, 2004, and no impairment was identified, nor were there any impairment indicators subsequent to March 31, 2004. 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. SALARIES AND EMPLOYEE RELATED EXPENSES The Company records salaries and employee related expenses as a period cost when incurred. Salary expense is generally recorded in the period that the salary is paid. Discretionary bonuses are estimated and accrued as short-term liabilities each period. Bonuses are paid shortly after year end. Stock and other incentive plans and contractual bonuses are clearly identifiable and determinable, and are generally accrued when earned by the employee. 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 June 30, 2004 and December 31, 2003, the Company had $54.5 million and $53.7 million, respectively, of deferred tax assets net of a valuation reserve of $28.1 million, in 2004 and $25.4 million in 2003, which it believes to be appropriate. 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 fluctuations given the Company's extensive international operations. Generally, the foreign currency exchange risk is limited to net income of 18 each operation because the Company's revenue and expenses by country are almost exclusively denominated in the local currency of each respective country with both revenue and expense items matched. 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. The term of each such foreign currency contract entered into in 2004 and 2003 was for less than three months and the amount open at June 30, 2004 and December 31, 2003 was not material. At June 30, 2004 and December 31, 2003, there were no foreign currency contracts open. The Company had no derivative contracts outstanding at June 30, 2004 or December 31, 2003, 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 fluctuations in interest rates. Excess funds are generally 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. 19 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES ISSUER PURCHASES OF EQUITY SECURITIES
(C)TOTAL NUMBER OF (D)MAXIMUM NUMBER SHARES (OR UNITS) (OR APPROXIMATE DOLLAR (B)AVERAGE PURCHASED AS PART VALUE) OF SHARES (OR (A)TOTAL NUMBER OF PRICE PAID OF PUBLICLY UNITS) THAT MAY YET BE SHARES (OR UNITS) PER SHARE ANNOUNCED PLANS OR PURCHASED UNDER THE SECURITY PERIOD PURCHASED (OR UNIT) PROGRAMS PLANS OR PROGRAMS - -------- -------------- ------------------ ---------- ------------------ ---------------------- Common Stock......... Period ended 21,790 $660.99 - 0 - -- June 30, 2004 Total................ 21,790(1) $660.99 - 0 - --
- --------------- (1) On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief Executive Officer, exercised non-qualified stock options (the "Options") to purchase 40,000 shares of Common Stock at an aggregate exercise price of $5,940,000 (or $148.50 per share). The Options, which had been issued in 1995 pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), were set to expire on January 5, 2004. In accordance with the terms of the Plan, Mr. Meyer elected to pay the exercise price through delivery to the Company of 8,774 shares, based on the $677 per share closing price on January 5, 2004. Mr. Meyer also delivered to the Company 12,316 shares of Common Stock in satisfaction of tax withholding obligations, based on the $676.51 per share price as determined in accordance with applicable tax regulations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The information required by this subsection of this Item is provided in the Index to Exhibits of this report. Such index provides a listing of exhibits filed with this report and those incorporated herein by reference. (b) Reports on Form 8-K. The Company filed a report on Form 8-K, dated April 9, 2004, reporting Item 5, "Other Events". The Company filed a report on Form 8-K, dated April 19, 2004, reporting Item 5, "Other Events". The Company filed a report on Form 8-K, dated May 10, 2004, reporting Item 5, "Other Events". The Company filed a report on Form 8-K, dated May 18, 2004, reporting Item 5, "Other Events". The Company filed a report on Form 8-K, dated July 20, 2004, reporting Item 5, "Other Events". 20 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) By: /s/ STEVEN G. FELSHER ------------------------------------ Steven G. Felsher, Vice Chairman, Chief Financial Officer, Secretary and Treasurer (Duly Authorized Officer) Dated: August 9, 2004 By: /s/ LESTER M. FEINTUCK ------------------------------------ Lester M. Feintuck, Senior Vice President, Chief Financial Officer -- U.S., Controller (Chief Accounting Officer) Dated: August 9, 2004 21 INDEX TO EXHIBITS
NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF TABLE OF ITEM 601 EXHIBITS REGULATION S-K) DESCRIPTION OF EXHIBITS - -------------------- -------------------------- 10.01 Employment Agreement dated as of June 8, 2004, by and between Grey Global Group Inc. and Lester Feintuck. 10.02 Employment Agreement dated as of June 8, 2004, by and between Grey Global Group Inc. and Neil I. Kreisberg. 31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes -Oxley Act of 2002 32.0 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
22 EX-10.01 2 y99915qexv10w01.txt EMPLOYMENT AGREEMENT EXHIBIT 10.01 [GREY GLOBAL GROUP LETTERHEAD] June 8, 2004 Mr. Lester Feintuck 57 Cliffside Lane Bedford Corners, New York 10549 Dear Lester: This letter will confirm your continued employment with Grey. The letter is effective for the two-year period following the date hereof, and expires at the end of that period. 1. During that time, you will continue to have the same title, responsibilities and salary you currently have, together with continued eligibility to receive bonuses and other benefits as Grey may offer, and you will devote your full-time attention to your responsibilities as an executive of Grey. 2. If your employment is terminated by Grey for any reason other than Cause (see attached Rider), death or disability, Grey will pay you your salary for the rest of the two-year period covered by this letter, and you will immediately vest in, and be paid, all amounts previously allocated to you under Grey's 2003 Senior Management Incentive Plan. 3. If your employment with Grey terminates for any reason, for a six-month period after the termination you will not, directly or indirectly, hire or solicit for hire, on behalf of yourself or any third party, any Grey employee (other than a clerical or secretarial employee), nor will you interfere with any relationship that Grey has with, or solicit any business from, any client of Grey for which you were directly or indirectly responsible, or with respect to which you performed any work, during your last year of employment with Grey. 4. You will continue to be bound by the policies and practices adopted by Grey from time to time. 5. This agreement is binding on any successor to Grey. 6. This agreement is governed by the laws of the State of New York. Kindly acknowledge your agreement with the foregoing by signing a duplicate copy of this letter in the space indicated below. Sincerely /s/ Ed Meyer Ed Meyer Agreement Acknowledged By: /s/ Lester Feintuck ------------------- Lester Feintuck Rider "Cause" shall mean: 1. your willful misconduct involving dishonesty, fraud or deceit; 2. your failure, after written warning and 15 days to cure, substantially to perform your duties; 3. your indictment for any act constituting a felony under the laws of the United States or any state thereof. EX-10.02 3 y99915qexv10w02.txt EMPLOYMENT AGREEMENT EXHIBIT 10.02 [GREY GLOBAL GROUP LETTERHEAD] June 8, 2004 Mr. Neil I. Kreisberg 14 Wampus Lake Drive Armonk, New York 10404 Dear Neil: This letter will confirm your continued employment with Grey. The letter is effective for the two-year period following the date hereof, and expires at the end of that period. 1. During that time, you will continue to have the same title, responsibilities and salary you currently have, together with continued eligibility to receive bonuses and other benefits as Grey may offer, and you will devote your full-time attention to your responsibilities as an executive of Grey. 2. If your employment is terminated by Grey for any reason other than Cause (see attached Rider), death or disability, Grey will pay you your salary for the rest of the two-year period covered by this letter, and you will immediately vest in, and be paid, all amounts previously allocated to you under Grey's 2003 Senior Management Incentive Plan. 3. If your employment with Grey terminates for any reason, for a six-month period after the termination you will not, directly or indirectly, hire or solicit for hire, on behalf of yourself or any third party, any Grey employee (other than a clerical or secretarial employee), nor will you interfere with any relationship that Grey has with, or solicit any business from, any client of Grey for which you were directly or indirectly responsible, or with respect to which you performed any work, during your last year of employment with Grey. 4. You will continue to be bound by the policies and practices adopted by Grey from time to time. 5. This agreement is binding on any successor to Grey. 6. This agreement is governed by the laws of the State of New York. Kindly acknowledge your agreement with the foregoing by signing a duplicate copy of this letter in the space indicated below. Sincerely, /s/ Ed Meyer Ed Meyer Agreement Acknowledged By: /s/ Neil I. Kreisberg ------------------------------- Neil I. Kreisberg Rider "Cause" shall mean: 1. your willful misconduct involving dishonesty, fraud or deceit; 2. your failure, after written warning and 15 days to cure, substantially to perform your duties; 3. your indictment for any act constituting a felony under the laws of the United States or any state thereof. EX-31.1 4 y99915qexv31w1.txt CERTIFICATION 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: ________________ By: /s/ Edward H. Meyer --------------------------- Edward H. Meyer Chief Executive Officer 31 EX-31.2 5 y99915qexv31w2.txt CERTIFICATION 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: ________________ By: /s/ Steven G. Felsher ----------------------------- Steven G. Felsher Chief Financial Officer 32 EX-32.0 6 y99915qexv32w0.txt CERTIFICATION EXHIBIT 32.0 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 June 30, 2004 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 knowledge1: (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: August 9, 2004 By: /s/ Steven G. Felsher -------------------------- Name: Steven G. Felsher Title: Chief Financial Officer Date: August 9, 2004 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. - ---------------------------- 33 -----END PRIVACY-ENHANCED MESSAGE-----