-----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, Gs1NJ25uI7Lvt0y59PIhk+K8Sbwu5H1ufYVnD5T9yPVOcjliT9/EQW4utOBgINRX WTE2H71KOa2poc3clJ357A== 0000950123-04-013247.txt : 20041109 0000950123-04-013247.hdr.sgml : 20041109 20041109122756 ACCESSION NUMBER: 0000950123-04-013247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 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: 041128321 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 y68477e10vq.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 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 October 31, 2004, the total number of shares outstanding of Registrant's Common Stock, par value $0.01 per share ("Common Stock"), was 1,182,001 and of Registrant's Limited Duration Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), was 222,674. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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................................. 17 Other Information........................................... 32 Signatures.................................................. 34 Index to Exhibits........................................... 35
1 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2004 2003(A) ------------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 413,120 $ 510,446 Marketable securities..................................... 1,085 979 Accounts receivable-net of allowance for doubtful accounts of $22,026 in 2004 and $21,467 in 2003.................. 1,267,121 1,250,241 Expenditures billable to clients.......................... 132,631 77,503 Other current assets...................................... 108,352 106,710 ---------- ---------- Total current assets........................................ 1,922,309 1,945,879 Investments in and advances to nonconsolidated affiliated companies................................................. 15,904 16,899 Fixed assets-at cost, less accumulated depreciation of $250,384 in 2004 and $246,455 in 2003..................... 133,046 140,687 Marketable securities....................................... 901 1,580 Goodwill.................................................... 309,694 286,880 Other assets -- including loans to executive officers of $784 in 2004 and $5,047 in 2003........................... 161,961 133,537 ---------- ---------- Total assets................................................ $2,543,815 $2,525,462 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $1,466,930 $1,472,944 Notes payable to banks.................................... 56,873 70,455 Accrued expenses and other................................ 311,690 325,115 Income taxes payable...................................... 22,084 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................................... 1,857,577 1,901,794 Other liabilities, including deferred compensation of $68,309 in 2004 and $61,318 in 2003....................... 112,258 92,271 Term loans.................................................. 125,000 125,000 Contingent convertible subordinated debentures.............. 150,000 150,000 Minority interest........................................... 15,395 14,438 Common stockholders' equity: Common Stock -- par value $0.01 per share; authorized 50,000,000 shares; issued 1,307,869 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 230,747 shares in 2004 and 233,559 shares in 2003............... 2 2 Paid-in additional capital................................ 71,053 57,481 Retained earnings......................................... 234,819 211,573 Accumulated other comprehensive income: Cumulative translation adjustment....................... 18,357 7,042 Unrealized loss on marketable securities................ (49) -- ---------- ---------- Total accumulated other comprehensive income.............. 18,308 7,042 ---------- ---------- Loans to officer used to purchase Common Stock and Limited Duration Class B Common Stock........................... (4,726) (4,726) ---------- ---------- 319,469 271,385 Less -- cost of 138,289 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 September 30, 2004 and December 31, 2003, respectively......................... 35,884 29,426 ---------- ---------- Total common stockholders' equity........................... 283,585 241,959 ---------- ---------- Commitments and contingencies............................... -- -- ---------- ---------- Total liabilities and common stockholders' equity........... $2,543,815 $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 ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------- 2004 2003 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ------------ ------------ ----------- ----------- Revenue....................................... $ 358,025 $ 324,486 $1,065,909 $ 942,075 Expenses: Salaries and employee related expenses...... 236,904 210,672 699,197 623,533 Office and general expenses................. 96,590 98,348 295,988 278,910 ---------- ---------- ---------- ---------- 333,494 309,020 995,185 902,443 ---------- ---------- ---------- ---------- Operating income.............................. 24,531 15,466 70,724 39,632 Interest expense............................ (5,754) (3,947) (16,926) (11,317) Interest income............................. 4,160 642 8,028 4,013 Other income -- net......................... (1,027) 399 (1,192) 3,472 ---------- ---------- ---------- ---------- Income of consolidated companies before taxes on income................................... 21,910 12,560 60,634 35,800 Provision for taxes on income................. 10,652 6,405 30,014 17,793 ---------- ---------- ---------- ---------- Income of consolidated companies.............. 11,258 6,155 30,620 18,007 Minority interest applicable to consolidated companies................................... (1,191) (1,577) (3,990) (4,029) Equity in earnings of nonconsolidated affiliated companies........................ 254 5 762 421 ---------- ---------- ---------- ---------- Net income.................................... $ 10,321 $ 4,584 $ 27,392 $ 14,399 ========== ========== ========== ========== Net income applicable to common shareholders: Net Income.................................... $ 10,321 $ 4,584 $ 27,392 $ 14,399 Effect of dividend requirement and the change in redemption value of redeemable preferred stock....................................... -- -- -- (1,278) ---------- ---------- ---------- ---------- Net income applicable to common shareholders... $ 10,321 $ 4,584 $ 27,392 $ 13,121 ========== ========== ========== ========== Weighted average number of common shares outstanding Basic....................................... 1,375,916 1,284,261 1,366,452 1,273,596 Diluted..................................... 1,422,245 1,408,330 1,409,429 1,399,596 Earnings per common share Basic....................................... $ 7.50 $ 3.57 $ 20.05 $ 10.30 Diluted..................................... $ 7.26 $ 3.28 $ 19.44 $ 9.45 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 (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ----------- ----------- OPERATING ACTIVITIES Net income.................................................. $ 27,392 $ 14,399 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation of fixed assets.............................. 29,622 32,271 Impairment of goodwill.................................... -- 430 Deferred compensation..................................... 10,560 8,324 Amortization of restricted stock and stock options........ 2,212 1,798 Equity in earnings of non-consolidated affiliated companies, net of dividends received of $484 in 2004 and $122 in 2003....................................... (278) (257) Loss on the sale and write-down of investments and marketable securities.................................. 153 294 Loss on sale/closure of subsidiaries...................... 7,898 2,200 Minority interest applicable to consolidated companies.... 3,990 4,029 Deferred income taxes..................................... (1,242) 3,001 Changes in operating assets and liabilities............... (124,557) (141,689) --------- --------- Net cash used in operating activities....................... (44,250) (75,200) INVESTING ACTIVITIES Purchases of fixed assets................................... (18,927) (18,691) Trust fund deposits......................................... (2,428) (3,028) Decrease (increase) in investments in and advances to nonconsolidated affiliated companies...................... 734 (1,959) Proceeds from the sale of marketable securities............. -- 4,534 Purchases of investment securities.......................... -- (731) Proceeds from sale of subsidiaries.......................... 20,524 -- Purchase price of acquisitions, net of cash acquired........ (6,968) (17,430) --------- --------- Net cash used in investing activities....................... (7,065) (37,305) FINANCING ACTIVITIES Repayments of short-term borrowings......................... (14,695) (3,907) Proceeds from revolving credit facility..................... -- 5,689 Repayment of revolving credit facility...................... -- (16,180) Repayment of loan against life insurance policy............. (15,000) -- Redemption of Preferred Stock............................... (12,042) -- Cash dividends paid on common shares........................ (4,146) (3,876) Cash dividends paid on Redeemable Preferred Stock........... (60) (120) Purchase of treasury stock.................................. (8,332) -- Purchase of Restricted Stock-Net............................ (1) (81) Proceeds from exercise of stock options..................... 6,001 2,610 --------- --------- Net cash used in financing activities....................... (48,275) (15,865) Effect of exchange rate changes on cash..................... 2,264 8,991 --------- --------- Decrease in cash and cash equivalents....................... (97,326) (119,379) Cash and cash equivalents at beginning of period............ 510,446 351,006 --------- --------- Cash and cash equivalents at end of period.................. $ 413,120 $ 231,627 ========= =========
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 September 30, 2004 and for the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 current computation of diluted earnings per common share since the contingent conditions for conversion have not been met. In September 2004 the Emerging Issues Task Force ("Task Force") discussed Issue No. 04-8 "account issues related to certain features" and when the dilutive effect of contingently convertible debt instruments ("Co-Cos") should be included in diluted earnings per share. Co-Cos are generally convertible into common shares of the issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (market price trigger). The Task Force concluded that Co-Cos are not contingently issuable 5 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares and should be included in the diluted earnings per share calculation regardless of whether the market trigger price has been met. An amendment to Financial Accounting Standard No. 128 "Earnings per Share" ("FAS 128") is expected in December 2004, effective for periods ending after December 15, 2004 with restatements of all prior periods. The Company will reflect the changes to diluted earnings per share in its Form 10-K filing. 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 ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------- 2004 2003 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ------------ ------------ ----------- ----------- BASIC EARNINGS PER COMMON SHARE WEIGHTED AVERAGE NUMBER OF SHARES......... 1,375,916 1,284,261 1,366,452 1,273,596 ---------- ---------- ---------- ---------- Net income (1)............................ $ 10,321 $ 4,584 $ 27,392 $ 14,399 Effect of dividend requirements and the change in redemption value of redeemable preferred stock (1)............................... -- -- -- (1,278) ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION.......... $ 10,321 $ 4,584 $ 27,392 $ 13,121 ---------- ---------- ---------- ---------- PER SHARE AMOUNT.......................... $ 7.50 $ 3.57 $ 20.05 $ 10.30 ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE Weighted average number of shares used in the Basic EPS calculation................... 1,375,916 1,284,261 1,366,452 1,273,596 Net effect of dilutive stock options and stock incentive plans (2)..................... 46,632 72,941 42,977 74,872 Assumed conversion of 8.5% convertible subordinated debentures................. -- 51,128 -- 51,128 ---------- ---------- ---------- ---------- ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES... 1,422,245 1,408,330 1,409,429 1,399,596 ---------- ---------- ---------- ---------- Net earnings used in the Basic EPS calculation............................. $ 10,321 $ 4,584 $ 27,392 $ 13,121 8.5% convertible subordinated debentures interest, net of income tax effect...... -- 36 -- 107 ---------- ---------- ---------- ---------- NET EARNINGS USED IN COMPUTATION.......... $ 10,321 $ 4,620 $ 27,392 $ 13,228 ---------- ---------- ---------- ---------- PER SHARE AMOUNT.......................... $ 7.26 $ 3.28 $ 19.44 $ 9.45 ========== ========== ========== ==========
- --------------- (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 nine months ended September 30, 2004, respectively, and 14,877 and 17,938 shares expected to be issued pursuant to the Senior Management Incentive Plan for the three and nine months ended September 30, 2003, respectively. 7. During the third quarter of 2004 and 2003, total comprehensive income amounted to $11.2 million and $13.4 million, respectively, and for the nine months ended September 30, 2004 and 2003 total comprehensive 6 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) income was $38.7 million and $42.4 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. 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 nine months ended September 30, 2004 and 2003, and related identifiable assets at September 30, 2004 and December 31, 2003 are summarized below by geographic region:
FOR THE THREE MONTHS ENDED SEPTEMBER 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....................... $ 151,849 $ 146,832 $ 168,519 $ 142,563 $ 37,657 $ 35,091 $ 358,025 $ 324,486 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Operating income (loss)....... 9,763 13,873 11,109 (2,374) 3,659 3,967 24,531 15,466 Income (loss) of consolidated companies before taxes on income...................... 5,716 11,194 12,607 (2,539) 3,587 3,905 21,910 12,560 ---------- ---------- ---------- ---------- -------- -------- ---------- ----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------------------- ASIA/LATIN NORTH AMERICA EUROPE AMERICA CONSOLIDATED ----------------------- ----------------------- ------------------- ----------------------- 2004 2003 2004 2003 2004 2003 2004 2003 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Revenue...................... $ 449,203 $ 419,312 $ 506,494 $ 425,543 $110,212 $ 97,220 $1,065,909 $ 942,075 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Operating income............. 35,745 31,262 30,100 4,489 4,879 3,881 70,724 39,632 Income of consolidated companies before taxes on income..................... 23,971 25,571 32,128 6,562 4,535 3,667 60,634 35,800 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Identifiable assets.......... $1,060,732 $1,036,831 $1,233,439 $1,246,617 $233,741 $225,115 2,527,911 2,508,563 ========== ========== ========== ========== ======== ======== Investments in and advances to non-consolidated affiliated companies....... 15,904 16,899 ---------- ---------- Total assets................. $2,543,815 $2,525,462 ========== ==========
Revenue from the United States amounted to, approximately, 94.1% and 93.5% of the North American total for the three months ended September 30, 2004 and 2003, respectively, and for the nine months ended September 30, 2004 and 2003 amounted to approximately 93.5% 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 no options granted in the third quarter 2004 and 300 options granted in the third quarter of 2003. For the nine months ended September 30, there were 5,988 options granted in 2004 and 626 options granted in 2003. Under FAS 123 the compensation expense for the three and nine months ended September 30, 2004 was $260,000 and $292,000, respectively. 7 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 option valuation model with the following weighted average assumptions for 2003 and 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 SEPTEMBER 30, ------------------ 2004 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) -------- ------- Net Income (as reported).................................... $10,321 $4,584 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 148 263 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (283) (427) ------- ------ Pro forma net income........................................ $10,186 $4,420 Earnings per common share: Basic -- as reported...................................... $ 7.50 $ 3.57 Basic -- pro forma........................................ $ 7.40 $ 3.44 Diluted -- as reported.................................... $ 7.26 $ 3.28 Diluted -- pro forma...................................... $ 7.16 $ 3.16
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2004 2003 ------- ------- Net Income (as reported).................................... $27,392 $14,399 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... 1,456 901 (Less): Total stock-based employee compensation expense determined under fair value based method, net of related tax effects............................................... (1,861) (1,438) ------- ------- Pro forma net income........................................ $26,987 $13,862 Earnings per common share: Basic -- as reported...................................... $ 20.05 $ 10.30 Basic -- pro forma........................................ $ 19.75 $ 9.89 Diluted -- as reported.................................... $ 19.44 $ 9.45 Diluted -- pro forma...................................... $ 19.15 $ 9.08
8 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $47.2 million. Of such amount, 39% 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 $58.0 million; if the earnings assumptions were decreased uniformly by 10%, the estimated amounts payable would decrease to $36.5 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.
2004 2003 (IN THOUSANDS) -------- -------- Balance at beginning of year................................ $286,880 $243,499 Additions................................................... 12,201 18,558 Write-down.................................................. -- (867) Currency effect............................................. 10,613 25,690 -------- -------- Balance at end of year...................................... $309,694 $286,880 ======== ========
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 9 GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 of $12.0 million was paid in cash. On April 7, 2004, Mr. Meyer repaid in full $0.8 million of certain promissory notes issued to the Company by Mr. Meyer at the time the Preferred Stock was originally acquired. 18. On September 11, 2004, the Company agreed to merge into a wholly-owned subsidiary of WPP Group plc ("WPP") in a cash and stock transaction valued, as of the close of business on September 10, 2004, at approximately $1.5 billion. It is intended the Company will operate as an independent network within the WPP group of companies under the "Grey" name. Under the terms of the merger agreement, Grey stockholders have the right to elect either (or a combination of) $1,005 in cash or 21.746 American Depository Shares of WPP (valued at $1,005, based on the closing price of the WPP American Depository Shares on September 10, 2004) or the ordinary shares of WPP underlying its American Depository Shares. Stockholder elections are subject to proration that is designed to ensure that 50% of the consideration, valued as at September 10, 2004, paid by WPP, shall be in cash and half shall be in WPP securities. The American Depository Shares trade on the Nasdaq National Market and ordinary shares of WPP trade on the London Stock Exchange. The merger must be approved by the vote of at least two-thirds of the voting power of all Grey stockholders (with holders of Grey's Class B common shares entitled to ten votes per Class B common share) and by the vote of at least two-thirds of the total number of Grey outstanding common shares (with holders of Class B common shares having one vote per Class B common share). 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 with operations in North America, Europe, Latin America and Asia. The Company has operating business units in many communications disciplines including general advertising, public relations/public affairs, direct marketing, internet communications, healthcare marketing, brand strategy and design, and on-line and off-line media services. Frequently, our larger clients use a number of our business units. The advertising and marketing services industry has been more robust in 2004 than in recent years reflecting the modest upturn in the economy and increased client spending. The Company derives its revenue from the clients which assign the Company responsibility for creating advertising campaigns, effecting media placements, or undertaking marketing or other communication projects. To the extent that clients increased spending on such initiatives because of economic expansion or other factors, the Company's revenues generally increase. The Company also seeks to expand revenues by actively pursuing new business opportunities or opportunities to extend its relations with its current clients. On September 11, 2004, the Company agreed to merge into a wholly-owned subsidiary of WPP Group plc ("WPP") in a cash and stock transaction valued, as of the close of business on September 10, 2004, at approximately $1.5 billion. It is intended the Company will operate as an independent network within the WPP group of companies under the "Grey" name. Under the terms of the merger agreement, Grey stockholders have the right to elect either (or a combination of) $1,005 in cash or 21.746 American Depository Shares of WPP (valued at $1,005, based on the closing price of the WPP American Depository Shares on September 10, 2004) or the ordinary shares of WPP underlying its American Depository Shares. Stockholder elections are subject to proration that is designed to ensure that 50% of the consideration, valued as at September 10, 2004, paid by WPP, shall be in cash and half shall be in WPP securities. The American Depository Shares trade on the Nasdaq National Market and ordinary shares of WPP trade on the London Stock Exchange. The merger must be approved by the vote of at least two-thirds of the voting power of all Grey stockholders (with holders of Grey's Class B common shares entitled to ten votes per Class B common share) and by the vote of at least two-thirds of the total number of Grey outstanding common shares (with holders of Class B common shares having one vote per Class B common share). It is expected that the merger will be completed in January 2005. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission has adopted rules requiring public companies to include a report of management on the issuer's internal control over financial reporting in their Annual Report on Form 10-K that contains an assessment by management of the effectiveness of the internal control over financial reporting. In addition, the public accounting firm that audits the financial statements must attest to and report on management's assessment of the design and effectiveness of the internal control over financial reporting. The Company will be required to include an internal control assessment and attestation in its next Form 10-K to be filed in the first quarter of 2005. The Company has devoted significant resources to be in a position to evaluate its internal control. Management has adopted a detailed project work plan to assess the adequacy of the Company's internal control structure, remediate any control weaknesses that may be identified and validate through testing that controls are functioning as documented. Nonetheless, the previously announced pending merger with WPP has resulted in the diversion of some management resources from the ongoing effort to complete management's required assessment of internal controls during this critical period. Accordingly, while management 11 expects to complete its assessment of internal control over financial reporting, there can be no assurance that sufficient progress will be made to do so on a timely basis. Indeed, the Company's independent auditors, Ernst & Young LLP. ("Ernst & Young"), notified the Company's Audit Committee that it believes the Company faces a significant risk of not completing its internal control assessment on a timely basis, and that, even if assessment is completed, Ernst & Young may not have sufficient time to complete its assessment. Following receipt of this notice from Ernst & Young, the Company has directed additional resources be deployed to enable management to complete its assessment and have otherwise sought to take the actions that Ernst & Young advised the Company take promptly in order to address the risk of not completing the internal control assessment on a timely basis. If Ernst & Young cannot complete its work on a timely basis or if it interprets the Section 404 requirements or the related rules differently from the Company or if it is not satisfied with the Company's internal control over financial reporting or with the level at which it is documented, operated or reviewed, it may decline to attest to management's assessment or may issue a qualified report. Uncertainty in this area is exacerbated by the lack of specificity and varying interpretations of the new regulations and standards. If, as the Company expects, the merger with WPP is completed prior to the filing of the Company's next Annual Report on Form 10-K, then the Company will not file a Form 10-K for the 2004 fiscal year and it will not generate an internal control report for the 2004 fiscal year. Instead, as a subsidiary of WPP, the Company's financial information will be reported as part of the combined operations of WPP. WPP, which is a foreign private issuer, is not required to prepare an internal control report under the SEC's rules until after its 2005 fiscal year. In the third quarter of 2004, revenue was up 10.3%, income of consolidated companies before taxes ("pre-tax profit") improved by 74.4% and net income increased by 125.2%. For the nine months ended September 30, 2004, revenue was up 13.1%, pre-tax profit grew by 69.4% and net income increased by 90.2% over the same period in 2003. There were increases in revenues in all regions. All regions showed increased profitability except North America, which was negatively affected by the loss of $1.8 million recognized on the sale of APCO, a public relations/public affairs subsidiary of the Company, and in excess of $2.5 million of costs incurred in connection to the pending merger with WPP. Liquidity is strong with continued high cash and cash equivalents balances. THIRD QUARTER ENDED 2004 COMPARED TO THIRD QUARTER ENDED 2003 Revenue The following chart shows the breakdown of the Company's revenue in the third 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................ $151,849 42.4% $146,832 45.2% -------- ----- -------- ----- Non-North American operations ("international"): Europe.............................. 168,519 47.1% 142,563 43.9% Asia/Latin America.................. 37,657 10.5% 35,091 10.9% -------- ----- -------- ----- Total International operations........ 206,176 57.6% 177,654 54.8% -------- ----- -------- ----- Total Revenue.............................. $358,025 100.0% $324,486 100.0% -------- ----- -------- -----
International operations contributed a greater percentage of the Company's revenue in the third quarter of 2004 than the corresponding quarter in the previous year because, in part, of the continuing strengthening of 12 foreign, 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........................... 3.4% 3.2% 0.2% International operations: Europe........................................... 18.2% 9.3% 8.9% Asia/Latin America............................... 7.3% 5.8% 1.5% Total International operations...................... 16.1% 8.6% 7.5% Total Revenue......................................... 10.3% 6.2% 4.1%
Revenue increased 10.3%, or $33.5 million, during the third quarter of 2004 when compared to the same period in 2003. Revenue at the Company's international operations grew by $28.5 million, of which $13.2 million was due to the weakening of the dollar against selected foreign, principally European, currencies. In the third quarter of 2004, revenue in North America increased 3.4% versus the respective prior period primarily from increased business from existing clients. Expenses Salaries and employee related expenses increased 12.5% in the third quarter of 2004 as compared to the same period in 2003. Of the increase, 4.4% was attributable to exchange rate movements. Office and general expenses decreased 1.8% in the third quarter of 2004, as compared to the third quarter of the prior year. Costs incurred during the period relating to the merger (discussed in Note 18) approximated $2.5 million. The overall decrease in office and general expenses is the result of a general focus on operating margins and cost containment, especially in Europe. Absent the impact of exchange rates, office and general expenses declined by 5.9% 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............. $236,904 $210,672 12.5% Office and general expenses........................ 96,590 98,348 (1.8)% -------- -------- ---- Total expenses....................................... $333,494 $309,020 7.9% -------- -------- ----
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....................................... (5,754) (3,947) 45.8% Interest income........................................ 4,160 642 548.0% Other income/expense -- net............................ (1,027) 399 357.4%
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 cash balances attributable principally to the investment of the proceeds 13 received on the Convertible Debentures issuance and better operating performance. Other income/expense-net decreased primarily as the result of the loss on the sale of APCO of approximately $1.8 million. Pre-tax Profit The Company's pre-tax profit rose by $9.4 million (up 74.4%) from the third quarter of 2003. North American pre-tax profit decreased by 48.9% for the quarter ended September 30, 2004 as compared to the same period in 2003. Pre-tax profit was impacted by the loss on the sale of APCO of approximately $1.8 million and costs of $2.5 million relating to the pending merger with WPP. The pre-tax profit from the Company's European operations in the third quarter of 2004 showed strong growth and increased margins. This result was achieved despite continuing losses in the Company's Scandinavian operations ($2.0 million in the third quarter 2004 compared to a loss of $2.4 million in the corresponding quarter in 2003). The loss in Scandinavia in the third quarter of 2004 primarily related to the costs incurred in reducing expenses further at the region's parent organization and in certain other units. Comparisons to 2003 third quarter results are also affected by the absence of a $2.6 million reserve recorded in the third quarter last year in connection with the liquidation of a business in the Netherlands. Taxes The effective tax rate was 48.6% for the third quarter of 2004 versus 51.0% in the same period in 2003. The improvement in the tax rate was impacted by the increase in profitability in international operations. 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 $0.2 million during the third 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 $10.3 million in the third quarter of 2004 as compared to net income of $4.6 million in the respective prior period, an increase of 125.2%. Diluted earnings per share increased by 121.3% to $7.26 per share as against $3.28 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 in 2004. The Company's Preferred Stock was redeemed on April 7, 2004 and its value was fixed as of December 31, 2003. 14 NINE MONTHS 2004 COMPARED TO NINE MONTHS 2003 Revenue The following chart shows the breakdown of the Company's revenue for the nine months ended September 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.............. $ 449,203 42.1% $419,312 44.5% ---------- ----- -------- ----- International operations: Europe............................ 506,494 47.5% 425,543 45.2% Asia/Latin America................ 110,212 10.4% 97,220 10.3% ---------- ----- -------- ----- Total International operations...... 616,706 57.9% 522,763 55.9% ---------- ----- -------- ----- Total Revenue............................ $1,065,909 100.0% $942,075 100.0% ---------- ----- -------- -----
International operations contributed a greater percentage of the Company's revenue for the nine months ended September 30, 2004 than the first nine months of the previous year because of the strengthening of foreign, 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.............. 7.1% 6.6% 0.5% International operations: Europe.............................. 19.0% 6.0% 13.0% Asia/Latin America.................. 13.4% 9.1% 4.3% Total International operations......... 18.0% 6.6% 11.4% Total Revenue............................ 13.1% 6.6% 6.5%
Revenue increased 13.1%, or $123.8 million, for the nine months ended September 30, 2004 when compared to the same period in 2003. Revenue at the Company's international operations grew by $93.9 million, of which $59.6 million was due, in part, to the continued weakening of the dollar against selected foreign, principally European, currencies. For the nine months ended September 30, 2004, revenue in North America increased 7.1% versus the respective prior period primarily from increased business from existing clients. Expenses Salaries and employee related expenses increased 12.1% during the first nine months of 2004 as compared to the same period in 2003. Of the increase, 6.5% was attributable to exchange rate movements. The increase is generally in line with the increase in revenue. Office and general expenses increased 6.1% during the first nine months of 2004, as compared to same period in the prior year. Absent the impact of exchange rates, office and general expenses decreased 2.6%, reflecting the Company's continued focus on cost containment. 15
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) -------- -------- ---------- Expenses: Salaries and employee related expenses............. $699,197 $623,533 12.1% Office and general expenses........................ 295,988 278,910 6.1% -------- -------- ---- Total expenses....................................... $995,185 $902,443 10.3% -------- -------- ----
Inflation did not have a material effect on gross income or expenses during 2004 or 2003. Other Income/Expense Other Income/Expense for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 is set forth below:
PERCENTAGE 2004 2003 CHANGE (IN THOUSANDS, EXCEPT PERCENTAGE DATA) ------- ------- ---------- Interest expense....................................... (16,926) (11,317) 49.6% Interest income........................................ 8,028 4,013 100.0% Other income/expense -- net............................ (1,192) 3,472 134.3%
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 loss of $1.8 million on the sale of a subsidiary in the third quarter of 2004, coupled with a gain on the sale of a subsidiary in 2003 of $2.5 million resulted in the decrease in other income/expense -- net. Pre-tax Profit The Company's pre-tax profit rose by $24.8 million for the first nine months of 2004 as compared to the same period in 2003. Pre-tax profit in North America declined by 6.3%. Pre-tax profit was impacted by the loss on the sale of APCO of approximately $1.8 million and the costs incurred of $2.5 million relating to the merger discussed in Note 18. The pre-tax profit from the Company's European operations for the first nine months of 2004 more than doubled. This result was achieved despite a loss at the Company's Scandinavian operations of $16.6 million for the first nine months in 2004, as compared to a $9.8 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 nine months ended September 30, 2004 versus $1.3 million for the nine months ended September 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. Comparisons to 2003 results are also affected by the absence of a $2.6 million reserve recorded in the third quarter last year in connection with the liquidation of a business in the Netherlands. Due to improved international profitability and the general weakening of the United States dollar against foreign currencies, about $2.4 million of the pre-tax profit is attributable to exchange rate fluctuations. Taxes The effective tax rate is 49.5% for the nine months ended September 30, 2004 versus 49.7% in the same period in 2003. Minority Interest/Equity Accounting Minority interest applicable to consolidated companies remained relatively constant at $4.0 million and equity in earnings of nonconsolidated affiliated companies increased by $0.3 million during the third quarter of 16 2004 as compared to the respective prior period. 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 $27.4 million in the first nine months ended September 30, 2004 as compared to net income of $14.4 million in the respective prior period, an increase of 90.2%. Diluted earnings per share increased by 94.7% to $20.05 per share as against $10.30 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 $97.3 million from $510.4 million at December 31, 2003 to $413.1 million at September 30, 2004. Working capital increased to $64.7 at September 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 September 30, 2004 and December 31, 2003. This line of credit was renewed for 364 days on September 30, 2004, but 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 $56.9 million and $70.5 million outstanding at September 30, 2004 and December 31, 2003, respectively, under these 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 17 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 September 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 September 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 increased in the quarter ended September 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 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 18 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 In compliance with Emerging Issues Task Force ("EITF") pronouncement 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" and EITF 01-14 "Income Statement Characterization of Reimbursement Received for Out-of-Pocket Expense Incurred" the Company records revenue net of pass-through charges, including but not limited to the costs of media, television commercial production, direct mail, on-line advertisements, brochures and fees for talent used in commercials, incurred on behalf of clients. Revenue derived from advertising placed with media is generally recognized based upon the publication or broadcast dates. Internet advertising revenue is generally recognized when the compensation for such services is determinable usually in the month the advertising appears or the month following the placement of advertising. Commission revenue resulting from expenditures billable to clients is generally recognized when the service is performed and billed. Media revenue and revenue resulting from expenditures billable to clients is clearly defined and determinable. Labor based revenue 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 was collectable on such earned amounts for the purposes of recognizing revenue amounts appropriate for the period. Revenue from fixed fees contracts are recognized pro-rata over the life of the contract. Revenue from performance-based incentive fees is generally recorded at the end of a contract period or 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 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. 19 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 September 30, 2004 and December 31, 2003, the Company had $54.9 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 are affected by currency exchange rate fluctuations given the Company's extensive international operations. All international operations use the currency of the country in which it operates as its transactional and functional reporting currency except for the Company's subsidiary in Turkey where the economy is deemed to be hyper-inflationary and the United States Dollar is used as the functional currency and neither the results of nor the investment in this operation is material to the Company. The Company transacts business in over 50 currencies. The largest percentage of functional currencies used by the Company's to report revenues are transacted and reported in United States Dollars, Euros and Pound Sterling. Generally, the foreign currency exchange risk is limited to net income of 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. Therefore, the Company does not bear material foreign currency exposure. 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 September 30, 2004 and December 31, 2003 was not material. At September 30, 2004 and December 31, 2003, there were no foreign currency contracts open. The Company had no derivative contracts 20 outstanding at September 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. Since most of the Company's debt has fixed interest rates, the Company bears little exposure to movements in interest rates on its borrowings. The Company does, however, maintain sizable cash balances, which, as noted above, is invested in short-term investments; movements in interest rates, thus, can have an impact on interest income. 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. 21 PART II OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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......... Nine months ended 21,790 $660.99 - 0 - -- September 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 July 20, 2004, reporting Item 5, "Other Events". The Company filed a report on Form 8-K, dated September 13, 2004, reporting Item 1.01, "Entry into a Material Definitive Agreement", Item 8.01, "Other Events", and Item 9.01, "Financial Statements and Exhibits". The Company filed a report on Form 8-K, dated September 28, 2004, reporting Item 8.01, "Other Events" and Item 9.01, "Financial Statements and Exhibits". The Company filed a report on Form 8-K, dated October 5, 2004, reporting Item 1.01, "Entry into a Material Definitive Agreement". The Company filed a report on Form 8-K, dated October 15, 2004, reporting Item 1.01, "Entry into a Material Definitive Agreement" and Item 9.01, "Financial Statements and Exhibits". 22 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: November 9, 2004 By: /s/ LESTER M. FEINTUCK ------------------------------------ Lester M. Feintuck, Senior Vice President, Chief Financial Officer -- U.S., Controller (Chief Accounting Officer) Dated: November 9, 2004 23 INDEX TO EXHIBITS
NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF TABLE OF ITEM 601 EXHIBITS REGULATION S-K) DESCRIPTION OF EXHIBITS - -------------------- -------------------------- 3.01 Certificates of Correction dated August 19, 2004 to the Restated Certificate of Incorporation of Grey Global Group Inc. ("Grey") dated July 13, 2000. 10.01 Third Amendment dated September 17, 2004 to the Credit Agreement dated as of December 21, 2001 ("Credit Agreement") between Grey, HSBC Bank USA, Fleet National Bank and JP Morgan Chase Bank. 10.02 Extension Agreement dated as of September 30, 2004 among Grey, HSBC Bank USA, National Association, Fleet National Bank and JP Morgan Chase Bank in connection with the Credit Agreement. 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
24 EX-3.01 2 y68477exv3w01.txt CORRECTION TO RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.01 [DELAWARE LETTERHEAD] PAGE 1 I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF CORRECTION OF "GREY GLOBAL GROUP INC.", FILED IN THIS OFFICE ON THE NINETEENTH DAY OF AUGUST, A.D. 2004, AT 3:05 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ Harriet Smith Windsor --------------------------------------------- Harriet Smith Windsor, Secretary of State 0799878 8100 AUTHENTICATION: 3306523 040608559 DATE: 08-19-04 CERTIFICATE OF CORRECTION OF GREY GLOBAL GROUP INC. Grey Global Group Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Grey Global Group Inc. (formerly known as Grey Advertising Inc.)(the "Corporation"). 2. That a Certificate of Amendment to the Corporation's then existing Restated Certificate of Incorporation (the "2000 Certificate of Amendment") was filed with the Secretary of State of the State of Delaware on July 13, 2000 and that the 2000 Certificate of Amendment requires correction as permitted by Section 103(f) of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of the 2000 Certificate of Amendment to be corrected is as follows: On October 17, 1995, a Certificate of Amendment to the Corporation's then existing Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware in order to amend subparagraph B.III(D)(9) of Article Fourth thereof (the "1995 Certificate of Amendment"). Due to an inadvertent error, the first sentence of subparagraph B.III(D)(9) of Article Fourth of the 2000 Certificate of Amendment failed to include the revision made pursuant to the 1995 Certificate of Amendment. 4. The first sentence of subparagraph B.III(D)(9) of Article Fourth of the 2000 Certificate of Amendment is corrected to read as follows: "All outstanding shares of Class B Common Stock will automatically convert into shares of Common Stock on April 3, 2006." State of Delaware Secretary of State Division of Corporations Delivered 03:05 PM 08/19/2004 FILED 03:05 PM 08/19/2004 SRV 040608559 - 0799878 FILE IN WITNESS WHEREOF, the undersigned has caused this Certificate to be signed by its duly authorized officer, this 19th day of August, 2004. GREY GLOBAL GROUP INC. By: /s/ Steven G. Felsher ------------------------------------ Name: Steven G. Felsher Title: Vice Chairman, Chief Financial Officer, Secretary and Treasurer [DELAWARE LETTERHEAD] PAGE 1 I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF CORRECTION OF "GREY GLOBAL GROUP INC.", FILED IN THIS OFFICE ON THE NINETEENTH DAY OF AUGUST, A.D. 2004, AT 3:07 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ Harriet Smith Windsor --------------------------------------------- Harriet Smith Windsor, Secretary of State 0799878 8100 AUTHENTICATION: 3306524 040608563 DATE: 08-19-04 CERTIFICATE OF CORRECTION OF GREY GLOBAL GROUP INC. Grey Global Group Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Grey Global Group Inc. (formerly known as Grey Advertising Inc.)(the "Corporation"). 2. That a Restated Certificate of Incorporation (the "Restated Certificate") was filed with the Secretary of State of the State of Delaware on July 13, 2000 and that the Restated Certificate requires correction as permitted by Section 103(f) of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of the Restated Certificate to be corrected is as follows: On October 17, 1995, a Certificate of Amendment to the Corporation's then existing Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware in order to amend subparagraph B.III(D)(9) of the Article Fourth thereof (the "1995 Certificate of Amendment"). Due to an inadvertent error, the first sentence of subparagraph B.III(D)(9) of Article Fourth of the Restated Certificate failed to include the revision made pursuant to the 1995 Certificate of Amendment. 4. The first sentence of subparagraph B.III(D)(9) of Article Fourth of the Restated Certificate is corrected to read as follows: "All outstanding shares of Class B Common Stock will automatically convert into shares of Common Stock on April 3, 2006." State of Delaware Secretary of State Division of Corporations Delivered 03:07 PM 08/19/2004 FILED 03:07 PM 08/19/2004 SRV 040608563 - 0799878 FILE IN WITNESS WHEREOF, the undersigned has caused this Certificate to be signed by its duly authorized officer, this 19th day of August, 2004. GREY GLOBAL GROUP INC. By: /s/ Steven G. Felsher ------------------------------------ Name: Steven G. Felsher Title: Vice Chairman, Chief Financial Officer, Secretary and Treasurer EX-10.01 3 y68477exv10w01.txt THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 10.01 Execution Copy -------------- THIRD AMENDMENT, dated as of September 17, 2004 (this "Amendment"), to the Credit Agreement, dated as of December 21, 2001 (as amended pursuant to the First Amendment hereto, dated as of December 31, 2001, the Extension Agreement, dated as of December 20, 2002, the Second Amendment hereto, dated as of October 2, 2003 and this Amendment, and as the same may further be amended, supplemented or otherwise modified from time to time, the "Credit Agreement", among GREY GLOBAL GROUP INC., a Delaware corporation (the "Company"), the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto (the "Lenders"), HSBC BANK USA, as documentation agent (in such capacity, the "Documentation Agent"), FLEET NATIONAL BANK, as syndication agent (in such capacity, the "Syndication Agent"), and JPMORGAN CHASE BANK as administrative agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H : - - - - - - - - - - - WHEREAS, the Company, the Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent are parties to the Credit Agreement; WHEREAS, the Company has requested that the Lenders amend certain terms in the Credit Agreement in the manner provided for herein; and WHEREAS, the Administrative Agent and the Lenders are willing to agree to the requested amendment subject to certain limitations and conditions, as provided for herein; NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein as defined terms are so used as so defined. 2. Amendment to Section 6 (Negative Covenants). Section 6.5 of the Credit Agreement is hereby amended by deleting the "$10,000,000" figure in paragraph (d) and substituting in lieu thereof the words ", in the aggregate for any fiscal year of the Company, $25,000,000" 3. Representations and Warranties. On and as of the date hereof, the Company hereby confirms, reaffirms and restates the representations and warranties set forth in Section 3 of the Credit Agreement mutatis mutandis, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Company hereby confirms, reaffirms and restates such representations and warranties as of such earlier date. 4. Conditions to Effectiveness. This Amendment shall become effective as of the date first written above upon satisfaction of the following conditions: (i) the Administrative Agent shall have received counterparts of this Amendment duly executed by the Company and each of the Required Lenders and (ii) all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), in connection with this Amendment shall have been paid or reimbursed, as the case may be. 5. Continuing Effect; No Other Amendments or Consents. Except as expressly provided herein, all of the terms and provisions of the Credit Agreement are and shall remain in full force 2 and effect. The amendment provided for herein is limited to the specific sections of the Credit Agreement specified herein and shall not constitute a consent, waiver or amendment of, or an indication of the Administrative Agent's or the Lenders' willingness to consent to any action requiring consent under any other provisions of the Credit Agreement or the same section for any other date or time period. 6. Expenses. The Company agrees to pay and reimburse the Administrative Agent for all its reasonable costs and out-of-pocket expenses incurred in connection with the preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 7. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto (including by facsimile transmission), each of which counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument. 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. GREY GLOBAL GROUP INC. By: /s/ Lester M. Feintuck ------------------------------------ Name: Lester M. Feintuck Title: Senior Vice President By: /s/ Steven G. Felsher ------------------------------------ Name: Steven G. Felsher Title: Vice Chairman, CFO, Secretary & Treasurer JPMORGAN CHASE BANK, as Administrative Agent and as a Lender By: ------------------------------------ Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. GREY GLOBAL GROUP INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: JPMORGAN CHASE BANK, as Administrative Agent and as a Lender By: /s/ Rebecca Vogel ------------------------------------ Name: Rebecca Vogel Title: Vice President FLEET NATIONAL BANK, A BANK OF AMERICA COMPANY, as Syndication Agent and as a Lender and an Extending Lender By: /s/ Theodore W. [ILLEGIBLE] ------------------------------------- Name: Theodore W. [ILLEGIBLE] Title: Vice President HSBC BANK USA, NATIONAL ASSOCIATION, successor by merger to HSBC BANK USA, as Documentation Agent and as a Lender By: /s/ Johan Sorensson ------------------------------------- Name: Johan Sorensson Title: Senior Vice President NORTH FORK BANK, as a Lender By: /s/ Joseph Walsh ------------------------------------- Name: Joseph Walsh Title: SVP BARCLAYS BANK PLC, as a Lender By: /s/ Colin Fraser ------------------------------------- Name: COLIN FRASER Title: RELATIONSHIP DIRECTOR CITY NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, as a Lender and an Extending Lender By: /s/ Craig Kelley ------------------------------------- Name: Craig Kelley Title: Vice President Senior Relationship Manager EX-10.02 4 y68477exv10w02.txt EXTENSION AGREEMENT Exhibit 10.02 EXECUTION COPY -------------- EXTENSION AGREEMENT, dated as of September 30, 2004 (this "Agreement"), among GREY GLOBAL GROUP INC., a Delaware corporation (the "Company"), the Foreign Subsidiary Borrowers from time to time parties to the Credit Agreement (as defined below), the several banks and other financial institutions or entities which execute this Agreement (the "Extending Lenders"), HSBC BANK USA, NATIONAL ASSOCIATION, successor by merger to HSBC BANK USA, as documentation agent (in such capacity, the "Documentation Agent"), FLEET NATIONAL BANK, as syndication agent (in such capacity, the "Syndication Agent"), and JPMORGAN CHASE BANK, as administrative agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company, the Extending Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent are parties to the Credit Agreement dated as of December 21, 2001 (as amended pursuant to the First Amendment thereto, dated as of December 31, 2001, the Extension Agreement, dated as of December 20, 2002, and the Second Amendment thereto, dated as of October 2, 2003, and as the same may further be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, the Company has requested that the Termination Date be extended for a period of 364 days as set forth herein; NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. SECTION 2. Extension of Termination Date. Pursuant to Section 2.15 of the Credit Agreement, the Company hereby requests that the Lenders extend the Termination Date by a period of 364 days (in connection with such request, the Company and the Lenders hereby agree to waive any notice period requirement under Section 2.15). Each Lender which executes this Agreement as an Extending Lender hereby agrees to such extension in accordance with Section 2.15 of the Credit Agreement. SECTION 3. Conditions to Effectiveness of this Agreement. This Agreement shall become effective as of September 30, 2004 (the "Effective Date") if the following conditions precedent have been satisfied: (a) the Administrative Agent shall have received on or prior to the Effective Date counterparts of this Agreement duly executed and delivered by each of the Company, the Administrative Agent, each of the Extending Lenders and the Required Lenders; and (b) each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of the Effective Date as if made on and as of the Effective Date (other than representations and warranties that 2 specifically relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date). (c) no Default or Event of Default shall have occurred and be continuing as of the Effective Date. SECTION 4. Payment of Expenses. The Company agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with this Agreement, any other documents prepared in connection herewith, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 5. Miscellaneous. (a) Representations and Warranties. Except as expressly amended hereby, all of the representations, warranties, terms, covenants and conditions of the Loan Documents shall remain unamended and not waived and shall continue to be in full force in effect. (b) Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Company and the Administrative Agent. (c) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (d) Integration. This Agreement and the other Loan Documents represent the agreement of the Loan Parties and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lenders relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. (e) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written. GREY GLOBAL GROUP INC. By: /s/ Lester M. Feintuck ------------------------------------ Name: Lester M. Feintuck Title: Senior Vice President By: /s/ Steven G. Felsher ------------------------------------ Name: Steven G. Felsher Title: Vice Chairman, CFO, Secretary & Treasurer JPMORGAN CHASE BANK, as Administrative Agent and as a Lender By: ------------------------------------ Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. GREY GLOBAL GROUP INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: JPMORGAN CHASE BANK, as Administrative Agent and as a Lender and an Extending Lender By: /s/ Rebecca Vogel ------------------------------------ Name: Rebecca Vogel Title: Vice President FLEET NATIONAL BANK, A BANK OF AMERICA COMPANY, as Syndication Agent and as a Lender and an Extending Lender By: /s/ Theodore W. [ILLEGIBLE] ------------------------------------- Name: Theodore W. [ILLEGIBLE] Title: Vice President HSBC BANK USA, NATIONAL ASSOCIATION, successor by merger to HSBC BANK USA, as Documentation Agent and as a Lender and an Extending Lender By: /s/ Johan Sorensson ------------------------------------- Name: Johan Sorensson Title: Senior Vice President NORTH FORK BANK, as a Lender and an Extending Lender By: /s/ Joseph Walsh ------------------------------------- Name: Joseph Walsh Title: SVP BARCLAYS BANK PLC, as a Lender and an Extending Lender By: /s/ Colin Fraser ------------------------------------- Name: COLIN FRASER Title: RELATIONSHIP DIRECTOR CITY NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, as a Lender and an Extending Lender By: /s/ Craig Kelley ------------------------------------- Name: Craig Kelley Title: Vice President Senior Relationship Manager EX-31.1 5 y68477exv31w1.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. By: /s/ EDWARD H. MEYER ------------------------------------ Edward H. Meyer Chief Executive Officer Date: November 2, 2004 25 EX-31.2 6 y68477exv31w2.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. By: /s/ STEVEN G. FELSHER ------------------------------------ Steven G. Felsher Chief Financial Officer Date: November 2, 2004 26 EX-32 7 y68477exv32.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 September 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. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (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 2, 2004 By: /s/ STEVEN G. FELSHER ------------------------------------ Name: Steven G. Felsher Title: Chief Financial Officer Date: November 2, 2004 This certification accompanies the Report pursuant to sec. 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 sec. 18 of the Securities Exchange Act of 1934, as amended. 27 -----END PRIVACY-ENHANCED MESSAGE-----