-----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, Rd4smpCtRRkTWDAteQypVQmicxWmefbBgEAhq5y/rj4Uqt3+qdZUwItQP5rpxqlM lYePzbBglj+91gwl2TBryw== 0000950123-99-002861.txt : 19990402 0000950123-99-002861.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950123-99-002861 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREY ADVERTISING INC /DE/ 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-K405 SEC ACT: SEC FILE NUMBER: 000-07898 FILM NUMBER: 99582301 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 10-K405 1 GREY ADVERTISING INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-7898 GREY ADVERTISING INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-0802840 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 777 Third Avenue, New York, New York 10017 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-546-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1 per share ------------------------------------ (Title of Class) 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. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes |X| No |_| 2 The aggregate market value of the voting stock held by non-affiliates of the registrant was $284,696,802 as at March 1, 1999. The registrant had 988,734 shares of its Common Stock, par value $1 per share, and 253,544 shares of its Limited Duration Class B Common Stock, par value $1 per share, outstanding as at March 1, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual proxy statement to be furnished in connection with the registrant's 1999 annual meeting of stockholders are incorporated by reference into Part III. 3 PART I. ITEM 1. Business. The Registrant ("Grey") and its subsidiaries (collectively with Grey, the "Company") have been engaged in the planning, creation, supervision and placing of advertising since the Company's formation in 1917. Grey was incorporated in New York in 1925 and changed its state of incorporation to Delaware in 1974. The Company's principal business activity consists of providing a full range of advertising and communications services to its clients. Most typically, this involves developing an advertising and/or marketing plan after study of a client's business, the distribution or utilization of the client's products or services and the use of various media (e.g., television, radio, newspapers, magazines, direct mail, outdoor billboards and the Internet) by which desired market performance can best be achieved. The Company then creates advertising, prepares media recommendations and places advertising in the media. The Company's business also involves it in allied areas such as marketing consultation, audio-visual production, co-marketing programs, direct marketing, interactive consulting and production, media research and buying, research, product publicity, public affairs, public relations and sales promotion. 3 4 The Company serves a diversified client roster in the apparel, automobile, beverage, chemical, communications, community service, computer, corporate, electrical appliance, entertainment, food product, home furnishing, houseware, healthcare, office product, packaged goods, publishing, restaurant, retailing, toy and other sectors. Advertising is a highly competitive business in which agencies of all sizes and other providers of creative or media services strive to attract new clients or additional assignments from existing clients. Competition for new business, however, is restricted from time to time because large agencies (such as the Company) may be precluded from providing advertising services to products or services that may be viewed as being competitive with those of an existing client. Generally, since advertising agencies charge clients substantially equivalent rates for their services, competitive efforts principally focus on the skills of the competing agencies. Published reports indicate that there are over 500 advertising agencies of all sizes in the United States. According to a report published in 1998 (Advertising Age, a trade publication), the Company was the 6th largest United States advertising agency in terms of worldwide gross income. A majority of Grey's domestic gross income is from clients that have been with the Company since 1994. The agreements between the Company and most of its clients are generally terminable by either the Company or the client upon mutually agreed notice, as is the custom in the industry. Clients may also modify advertising budgets at any time and for any reason, and because the agency's compensation in many cases is determined by reference to client expenditures, shifts in advertising budgets may result in increased or reduced levels of revenue for the Company. 4 5 During 1998, one client (The Procter & Gamble Company), which has been a client of the Company for more than forty years, represented more than 10% of the Company's consolidated income from commissions and fees. The loss of this client would be expected to have an adverse effect on the results of the Company. No other client represented more than 5% of the Company's total consolidated income from commissions and fees. The loss of any single client in past years has not had a long-term negative impact on the Company's financial condition or its competitive position. On December 31, 1998, the Company and its nonconsolidated affiliated companies employed approximately 10,700 persons, of whom seven are executive officers of Grey. As is generally the case in the advertising industry, the Company's business traditionally has been seasonal, with greater revenues generated in the second and fourth quarters of each year. This reflects, in large degree, the media placement patterns of the Company's clients. Advertising programs created by the Company and its nonconsolidated affiliated companies are placed principally in media distributed within the United States and internationally through its offices in the United States and more than 70 other countries. While the Company operates on a worldwide basis, for the purpose of presenting certain financial information in accordance with Generally Accepted Accounting Principles, its operations are deemed to be conducted in three geographic areas. Commissions and fees, operating profit and other relevant information by each such geographic area for the years ended December 31, 1998, 1997 and 1996, and related identifiable and total assets at December 31 of each of the years, are summarized in Note N of the Notes to Consolidated Financial Statements, which is incorporated herein by reference. 5 6 While the Company has no reason to believe that its foreign operations as a whole are presently jeopardized in any material respect, there are certain risks of operating which do not affect domestic operations but which may affect the Company's foreign operations from time to time. Such risks include the possibility of limitations on repatriation of capital or dividends, political instability, currency devaluation and restrictions on the percentage of permitted foreign ownership. 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, changes in the general economic conditions that affect interest rates and/or consumer spending both in the U.S. and the international markets in which the Company operates, unanticipated expenses, client preferences which can be affected by competition, the inability to implement upgrades for certain computer programs which are not year 2000 compliant and the ability to project risk factors which may vary. Certain of these factors are discussed in greater detail elsewhere herein. 6 7 Executive Officers of the Registrant as of March 1, 1999
Year First Became Executive Officers (a) Position Age Executive Officer - ---------------------- -------- --- ----------------- Robert L. Berenson President - Grey - US 59 1978 Lester M. Feintuck Senior Vice President Chief Financial Officer - US Controller 45 1998 Steven G. Felsher Exec. Vice President Finance - Worldwide, Secretary & Treasurer 49 1989 John A. Gerster Exec. Vice President 51 1983 Edward H. Meyer Chairman of the Board, President & Chief Executive Officer 72 1959 Stephen A. Novick Exec. Vice President 58 1984 O. John C. Shannon President - Grey Int'l. 62 1993
(a) All executive officers are elected annually by the Board of Directors of Grey. Each executive officer has been with Grey for a period greater than five years. There exists no family relationship between any of Grey's directors or executive officers and any other director or executive officer or person nominated or chosen to become a director or executive officer. 7 8 ITEM 2. Properties. Substantially all offices of the Company are located in leased premises. The Company's principal office is at 777 Third Avenue, New York, New York, where it occupies approximately 400,000 square feet of space. The Company's lease covering this space expires at the end of 2009. The Company also has leases covering other offices, including New York, Los Angeles, Amsterdam, Brussels, Buenos Aires, Copenhagen, Dusseldorf, Hong Kong, London, Madrid, Melbourne, Mexico City, Milan, Oslo, Paris, Sao Paolo, Stockholm, Sydney and Toronto. The Company considers all space leased by it to be adequate for the operation of its business and does not foresee any significant difficulty in meeting its space requirements. ITEM 3. Legal Proceedings. In the Company's judgment, it is not involved in any material pending legal proceedings other than ordinary routine litigation incidental to the business of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders. None 8 9 PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Common Stock is traded on The NASDAQ Stock Market's National Market and listed on the NASDAQ Stock Market under the symbol GREY. As of March 1, 1999, there were 495 holders of record of the Common Stock and 264 holders of record of the Limited Duration Class B Common Stock. The following table sets forth certain information about dividends paid, and the bid prices on the NASDAQ Stock Market during the periods indicated with respect to the Common Stock:
Bid Prices* Dollars per Share Dividends High Low Per Share ---- --- --------- 1997 First Quarter 278 253 $1.00 Second Quarter 322 250 1.00 Third Quarter 341 292 1.00 Fourth Quarter 360 328 1.00 1998 First Quarter 370 325 1.00 Second Quarter 455 360 1.00 Third Quarter 417 312 1.00 Fourth Quarter 369 262 1.00
* Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 9 10 ITEM 6. Selected Financial Data.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Commissions and fees ................. $ 935,181,000 $ 858,752,000 $ 765,498,000 $ 688,219,000 593,317,000 Expenses ............................. 882,524,000 793,832,000 706,965,000 637,979,000 552,022,000 Goodwill write-off (a) ............... 39,944,000 Income of consolidated companies before taxes on income ... 59,152,000 69,291,000 65,693,000 54,327,000 1,610,000 Provision for taxes on income ........ 29,856,000 33,719,000 31,612,000 26,966,000 21,621,000 Net income (loss) .................... 25,877,000 30,451,000 28,602,000 23,438,000 (21,378,000) Earnings (loss) per Common share (b) Basic ............................ 20.81 25.03 22.98 18.19 (18.45) Diluted .......................... 18.98 21.89 20.45 16.32 (18.45) Weighted average number of common shares outstanding Basic ............................ 1,220,767 1,180,146 1,185,841 1,195,314 1,220,529 Diluted .......................... 1,345,928 1,355,452 1,339,111 1,340,261 1,220,529 Working capital ...................... 3,464,000 50,526,000 3,843,000 9,582,000 33,735,000 Total assets ......................... 1,489,653,000 1,199,987,000 1,089,394,000 963,433,000 830,076,000 Long-term debt ....................... 78,025,000 78,025,000 33,025,000 33,025,000 33,025,000 Redeemable preferred stock at redemption value ................... 10,333,000 10,760,000 10,098,000 8,986,000 7,516,000 Common stockholders' equity .......... 173,389,000 162,306,000 147,922,000 127,663,000 108,705,000 Cash dividend per share of Common Stock and Limited Duration Class B Common Stock ....................... 4.00 4.00 3.8125 3.5625 3.3125
(a) In 1994, the Company recorded a charge of $39,944,000, on both a pre-tax and after-tax basis, for a non-cash write-off which related almost exclusively to write-offs of goodwill. (b) After giving effect to amounts attributable to redeemable preferred stock and for diluted earnings per common share (i) to the assumed exercise of dilutive stock options, (ii) to the assumed issuance of shares pursuant to the Company's Senior Management Incentive Plan and (iii) to the assumed conversion of 8 1/2% Convertible Subordinated Debentures. 10 11 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Income from commissions and fees ("gross income") increased 8.9% in 1998 and 12.2% in 1997 as compared to the respective prior years. Absent exchange rate fluctuations, gross income increased 11.7% in 1998 and 16.9% in 1997. In 1998, 1997 and 1996, respectively, 44.9%, 44.5% and 44.2% of consolidated gross income was attributable to domestic operations and 55.1%, 55.5% and 55.8%, respectively, to international operations. In 1998, gross income from domestic operations increased 9.7% versus 1997 and was up 12.9% in 1997 versus 1996. Gross income from international operations increased 8.2% (13.3% absent exchange rate fluctuations) in 1998 when compared to 1997 and 11.6% (20.0% absent exchange rate fluctuations) in 1997 when compared to 1996. The increases in gross income in both years primarily resulted from expanded activities from existing clients, and the continued growth, in some measure through acquisitions, of the Company's general agency and specialized communications operations. Salaries and employee-related expenses increased 13.2% in 1998 and 11.6% in 1997 as compared to the respective prior years. Office and general expenses increased 7.2% in 1998 and 13.6% in 1997 versus respective prior years. The 1998 increases reflect the general growth of the business and an increased investment in staffing to better serve our multinational clients and their businesses in developing markets. The 1997 increases in expenses are generally in line with the increases in gross income in that year. Inflation did not have a material effect on revenue or expenses in 1998, 1997 or 1996. 11 12 Other income increased in 1998 by $2,124,000 and decreased in 1997 by $2,789,000 as compared to the comparable prior periods. The 1998 increase was due primarily to increased interest income generated from higher average invested balances, inpart due to the proceeds from the long-term borrowing in December 1997. The 1997 decrease resulted primarily from the absence of a 1996 non-recurring, non-operating pre-tax income amount of approximately $4,000,000 related to gains on the sale of the Company's equity position in a nonconsolidated subsidiary and the liquidation of a non-marketable investment security. The effective tax rate increased to 50.5% in 1998 as compared to 48.7% in 1997. The tax rate in 1996 was 48.1%. The change in the effective tax rates in 1998 and 1997, as compared to their respective prior periods, was due to higher effective state and local tax rates and higher effective foreign tax rates, largely dependent upon where the Company generates profits. Minority interest decreased $2,602,000 in 1998 and increased $80,000 in 1997 as compared to the respective prior years. The changes in 1998 and in 1997 were primarily due to changes in the level of profits of majority-owned companies. Equity in earnings of nonconsolidated affiliated companies decreased $900,000 in 1998 and increased $438,000 in 1997 as compared to the respective prior years. These changes were due primarily to changes in the level of profits attributable to the nonconsolidated companies. The Company reported net income of $25,877,000 for 1998 as compared to $30,451,000 in 1997 and $28,602,000 in 1996. Diluted earnings per common share was $18.98 in 1998 as compared to $21.89 in 1997 and $20.45 in 1996. Net income for 1998 was off from 1997 by 15.0%, and absent non-recurring, non-operating pre-tax income recognized in 1996, 12 13 net income for 1997 was up 15.0% from 1996. Diluted earnings per common share was down 13.3% for 1998 while 1997 diluted earnings per common share was up 15.5% absent the 1996 non-recurring, non-operating pre-tax income. For purpose of computing basic earnings per common share, the Company's net income was adjusted by (i) dividends paid on the Company's preferred stock and (ii) by the change in redemption value of the Company's preferred stock. For the purpose of computing diluted earnings per common share, 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. The Company's 1998 results were adversely affected by software development-related losses in the Internet division of one of its international subsidiaries. In addition, the results were impacted by significant decreases in client expenditures in emerging markets. According to Advertising Age, the Company serves more multinational clients than any other global network. The Company has invested in these markets in support of its multinational clients and their businesses, and remains committed to the long-term growth potential of these developing markets. It is expected that the losses incurred in such Internet unit will be reduced significantly or eliminated altogether in 1999. Equally, the Company believes that the losses in the economically-troubled emerging markets will be less in 1999 than in 1998 but it does foresee its operations in those countries negatively impacting 1999 results. During 1998, the Company's principal advertising agency business lost a number of pieces of business, the impact of which will be felt mostly in 1999. The Company has not yet replaced the lost business and its absence will put pressure on the gross income, and resulting profitability, of the Company in 1999. The Company is committed to growing this revenue base and has done so in the past in the face of client losses. It has also reduced expenses at the operations which have suffered the gross income declines. At the same time, a number of 13 14 the Company's units, most notably in the healthcare, Internet services, public relations and media sectors, are growing rapidly. The Company will continue to seek to propel the global growth of these operations by continuing its investment program in their support. On balance, however, until the lost business is fully replaced, the Company will likely operate at lower profitability levels than in the recent past. The Company's results may be affected by currency exchange rate fluctuations given the Company's extensive non-United States operations. Generally, the foreign currency exchange risk is limited to net income because the Company's revenues and expenses, by country, are almost exclusively denominated in the local currency of each respective country with both revenue and expense items matched. The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Accordingly, computer equipment, software and other devices with embedded technology that are time-sensitive may not be able to distinguish between the year 1900 and the year 2000 and may encounter other difficulties as a result. This could result in system failures 14 15 or miscalculations causing a temporary disruption of the ordinary course of business. Grey and its operating subsidiaries have completed an assessment of their computer programs, those of its third party software vendors and those of mission critical business partners. The Company's assessment process included formal communications, via questionnaire, with third parties regarding their own Year 2000 status and testing of relevant equipment, systems and interfaces. Based on this assessment along with normal recurring upgrades and replacement of outdated systems, the Company has undertaken, or is in the process of undertaking, what it believes to be the appropriate steps to modify or replace hardware and software as necessary. These steps included an inventory of systems, both domestically and internationally, for Year 2000 compliance and a remediation strategy to ensure substantial completion of upgrades and replacement where necessary. Given the decentralized nature of the Company's information technology environment, software for financial and non-financial applications can vary from operation to operation and range from complete reliance on third party software to use of all in-house applications. Moreover, as a result of its decentralized environment, the Company's systems tend to be more limited in their effect and easier to correct. The remediation strategy, therefore, can be unique from operation to operation and includes a combination of conversions of all in-house systems and upgrades to Year 2000 compliant third party systems. The majority of operations, including all entities in the larger markets, are in various stages of implementation which should be completed by mid-year. The Company envisages final testing to be completed well in advance of year end and does not expect the Year 2000 issue to pose significant operational problems for its computer network. 15 16 The Company is also dependent in various ways, both domestically and internationally, on the Year 2000 readiness of broadcasters, governments, financial institutions, utilities, communications suppliers and building services, other infrastructure suppliers and other parties with whom it does business. The effects of failures in the systems utilized by these third party suppliers can not be estimated or anticipated. Given the reliance on third party information as it relates to compliance programs and the difficulty of determining potential errors on the part of external service suppliers, no assurance can be given that the Company's information systems or operations will not be affected by mistakes, if any, of third parties or third party failures to complete the Year 2000 projects on a timely basis. There can be no assurance that the systems of other companies on which the Company relies will be converted on a timely basis or that any such failure to convert by another company would not have an adverse effect on the Company's systems. However, with respect to operations under the Company's control, the Company does not expect, in light of its Year 2000 readiness efforts and the diversity of its suppliers and customers, that occurrences of Year 2000 failures will have a material adverse effect on the financial position or results of operations of the Company. Grey and its subsidiaries are utilizing both internal and external resources to reprogram, replace, implement and test the software modifications necessary for Year 2000 compliance. The cost of the project has been estimated to be approximately $4,000,000 and will not have a material effect on the Company. Costs include the purchase of third party software, hardware and related internal payroll costs associated with the information technology group. A substantial portion of these estimated costs relate to systems and applications that were previously planned and budgeted. The project is being funded through operating cash; costs specifically identified with the Year 2000 remediation are being expensed as incurred. Other hardware and purchased software costs have been capitalized. The cost and time of completion are based on management's best estimates which were derived utilizing numerous assumptions of future events, including the continued availability 16 17 of certain resources and other factors. Since there is no guarantee that these estimates will be achieved, actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the timely receipt and installation of upgrades from third party software vendors, compliance of third parties with whom the Company interacts and similar circumstances. The Company believes it has an effective program in place to resolve the Year 2000 issue. However, due to the magnitude and complexity of the problem it is difficult to identify all possible contingencies. The Company believes that a worst case scenario would involve its temporary inability to process media, collect payments or invoice customers at a significant number of its subsidiaries. In addition, disruptions in the economy generally resulting from Year 2000 issues could also affect the Company. The Company could, for example, be subject to litigation for computer system product failure, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Current contingency plans call for manual workarounds and staffing strategies that provide a prompt response time in the event of problems. The development of the Company's contingency plans is ongoing and will be amended as appropriate. LIQUIDITY AND CAPITAL RESOURCES The Company continues to be highly liquid by maintaining significant levels of cash, cash equivalents and investments in highly liquid marketable securities, most of which are money market funds and corporate bonds. Cash and cash equivalents were $153,816,000 and $150,553,000 at December 31, 1998 and 1997, respectively, and the Company's investment in 17 18 marketable securities was $85,957,000 and $72,741,000 at December 31, 1998 and 1997, respectively. The continued high level of liquidity reflects the Company's ongoing focus on its cash management process. Working capital decreased by $47,062,000 from $50,526,000 at December 31, 1997 to $3,464,000 at December 31, 1998. The decrease in working capital is largely attributable to an increased investment in majority-owned subsidiaries and an increase in short-term financing of the Company's international subsidiaries. Domestically, the Company maintains committed bank lines of credit totaling $51,000,000. These lines of credit were partially utilized during both 1998 and 1997 to secure obligations of selected foreign subsidiaries in the amounts of $18,700,000 and $3,000,000 at December 31, 1998 and 1997, respectively. 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. Amounts outstanding under such facilities at December 31, 1998 and 1997 were $52,211,000 and $19,455,000, respectively. The increase in borrowings is largely attributable to the short-term borrowings in Europe. Historically, funds from operations and short-term bank borrowings have been sufficient to meet the Company's dividend, capital expenditure and working capital needs. The Company expects that such sources will be sufficient to meet its short-term cash requirements in the future. While the Company has not utilized long-term borrowings to fund its operating needs, in 1997 it refinanced its borrowings with the Prudential Insurance Company of America. Pursuant to the refinancing, the Company repaid the 7.68% $30,000,000 loan it had taken down in early 1993 and, in turn, borrowed $75,000,000 in December 1997. The loan bears an interest at the rate of 6.94% and is repayable in three equal annual installments, commencing in December 2003. The Company does not 18 19 anticipate any material increased requirement for capital or other expenditures which will adversely affect its liquidity. The Company's business generally has been seasonal with greater gross income earned in the second and fourth quarters, particularly the fourth quarter. As a result, cash, accounts receivable, accounts payable and accrued expenses are typically higher on the Company's year-end balance sheet than at the end of any of the preceding three quarters. FASB STATEMENT 130 As of January 1, 1998, the Company adopted the Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. FAS 130 requires unrealized gains or losses on the Company's available for sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income (loss). Prior period financial statements have been reclassified to conform to the requirements of FAS 130. The adoption of this standard has no impact on the Company's net income or stockholders' equity. ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk Occasionally, the Company enters into foreign currency contracts for known cash flows related to repatriation of earnings from its international subsidiaries. The term of each such foreign currency contract entered into in 1998 was for less than three months. At December 31, 1998, there were no foreign currency contracts open. The Company did take advantage of an inverted yield curve in the United Kingdom and entered into an interest rate swap agreement as a hedge against rising interest rates by exchanging the cash flow on borrowings of 5,000,000 pounds sterling at a variable interest rate for the cash flow from a similar borrowing at a fixed interest rate of 5.67%. The Company had no other derivative contracts outstanding at December 31, 1998 and did not enter into any other derivative contracts during 1998. 19 20 ITEM 8. Financial Statements and Supplementary Data. The information required by this Item is presented in this report beginning on Page F-1. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III. ITEM 10. Directors and Executive Officers of the Registrant. Information with respect to the directors of the Company is incorporated herein by reference to the Company's proxy statement ("Proxy Statement") to be sent to its stockholders in connection with its 1999 Annual Meeting, under the caption "Election of Directors". Information with respect to the Company's executive officers is set forth in Part I of this report. ITEM 11. Executive Compensation. The information required by this Item is incorporated herein by reference to the Proxy Statement and will be included under the caption "Management Remuneration and Other Transactions". 20 21 ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference to the Proxy Statement and will be included under the captions "Election of Directors" and "Voting Securities". ITEM 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated herein by reference to the Proxy Statement and will be included under the captions "Election of Directors" and "Voting Securities". PART IV. ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) (2) The information required by this subsection of this Item is presented in the index to Financial Statements on Page F-1. (3) The information required by this subsection of this Item is provided in the Index of Exhibits at Page E-1 of this report. Such index provides a listing of exhibits filed with this report and those incorporated herein by reference. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GREY ADVERTISING INC. By: /s/ Edward H. Meyer ------------------------------------- Edward H. Meyer, Chairman, Chief Executive Officer & President Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the date indicated. /s/ Mark N. Kaplan Dated: March 31, 1999 - ------------------------------ Mark N. Kaplan, Director /s/ Edward H. Meyer Dated: March 31, 1999 - ------------------------------ Edward H. Meyer, Director; Principal Executive Officer /s/ O. John C. Shannon Dated: March 31, 1999 - ------------------------------ O. John C. Shannon, Director; President - Grey International /s/ Steven G. Felsher Dated: March 31, 1999 - ------------------------------ Steven G. Felsher, Principal Financial Officer /s/ Lester M. Feintuck Dated: March 31, 1999 - ------------------------------ Lester M. Feintuck, Principal Accounting Officer 23 Annual Report on Form 10-K Item 8, Item 14(a)(1) and (2) and Item 14(d) Financial Statements and Supplementary Data List of Financial Statements Year ended December 31, 1998 Grey Advertising Inc. New York, New York 24 Form 10-K-Item 8, Item 14(a)(1) and (2) Grey Advertising Inc. and Consolidated Subsidiary Companies Index to Financial Statements The following consolidated financial statements of Grey Advertising Inc. and consolidated subsidiary companies are included in Item 8: Report of Independent Auditors.......................................... F- 2 Consolidated Balance Sheets--December 31, 1998 and 1997................. F- 3 Consolidated Statements of Income--Years Ended December 31, 1998, 1997 and 1996...................................... F- 5 Consolidated Statements of Common Stockholders' Equity-- Years Ended December 31, 1998, 1997 and 1996.......................... F- 6 Consolidated Statements of Cash Flows-- Years Ended December 31, 1998, 1997 and 1996.......................... F- 9 Notes to Consolidated Financial Statements-- December 31, 1998..................................................... F- 11 All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. Summarized financial information and financial statements for nonconsolidated foreign investee companies accounted for by the equity method have been omitted because such companies, considered individually or in the aggregate, do not constitute a significant subsidiary. F-1 25 Report of Independent Auditors Board of Directors Grey Advertising Inc. We have audited the accompanying consolidated balance sheets of Grey Advertising Inc. and consolidated subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grey Advertising Inc. and consolidated subsidiary companies at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York February 18, 1999 F-2 26 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Balance Sheets
December 31 1998 1997 ---------------------------------- Assets Current assets: Cash and cash equivalents $ 153,816,000 $ 150,553,000 Marketable securities 55,130,000 15,401,000 Accounts receivable 797,474,000 647,524,000 Expenditures billable to clients 66,681,000 54,687,000 Other current assets 75,481,000 56,225,000 ---------------------------------- Total current assets 1,148,582,000 924,390,000 Investments in and advances to nonconsolidated affiliated companies 16,705,000 18,386,000 Fixed assets-net 113,084,000 88,006,000 Marketable securities 30,827,000 57,340,000 Goodwill-net of accumulated amortization of $31,466,000 in 1998 and $23,509,000 in 1997 116,499,000 59,851,000 Other assets-including loans to executive officers of $5,572,000 in 1998 and 1997 63,956,000 52,014,000 ---------------------------------- Total assets $1,489,653,000 $1,199,987,000 ==================================
See notes to consolidated financial statements. F-3 27 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Balance Sheets (continued)
December 31 1998 1997 ------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 865,427,000 $ 709,959,000 Notes payable to banks 70,911,000 22,455,000 Accrued expenses and other 184,497,000 122,269,000 Income taxes payable 24,283,000 19,181,000 ------------------------------------- Total current liabilities 1,145,118,000 873,864,000 Other liabilities-including deferred compensation of $41,871,000 in 1998 and $36,481,000 in 1997 68,676,000 61,723,000 Long-term debt 78,025,000 78,025,000 Minority interest 14,112,000 13,309,000 Redeemable preferred stock-at redemption value; par value $1 per share; authorized 500,000 shares; issued and outstanding 30,000 shares in 1998 and 32,000 shares in 1997 10,333,000 10,760,000 Common stockholders' equity: Common Stock-par value $1 per share; authorized 10,000,000 shares; issued 1,205,041 shares in 1998 and 1,124,324 shares in 1997 1,205,000 1,124,000 Limited Duration Class B Common Stock-par value $1 per share; authorized 2,000,000 shares; issued 282,765 shares in 1998 and 307,460 shares in 1997 283,000 308,000 Paid-in additional capital 38,832,000 44,349,000 Retained earnings 189,714,000 169,214,000 Accumulated other comprehensive loss: Cumulative translation adjustment (11,716,000) (9,422,000) Unrealized (loss) gain on marketable securities (1,307,000) 189,000 ------------------------------------- Total accumulated other comprehensive loss (13,023,000) (9,233,000) ------------------------------------- Loans to officer used to purchase Common Stock and Limited Duration Class B Common Stock (4,726,000) (4,726,000) ------------------------------------- 212,285,000 201,036,000 Less-cost of 222,950 and 222,098 shares of Common Stock and 26,762 and 26,762 shares of Limited Duration Class B Common Stock held in treasury at December 31, 1998 and 1997, respectively 38,896,000 38,730,000 ------------------------------------- Total common stockholders' equity 173,389,000 162,306,000 Retirement plans, leases and contingencies ------------------------------------- Total liabilities and stockholders' equity $ 1,489,653,000 $ 1,199,987,000 =====================================
See notes to consolidated financial statements. F-4 28 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Income
Year ended December 31 1998 1997 1996 ----------------------------------------------------- Commissions and fees $ 935,181,000 $ 858,752,000 $ 765,498,000 Expenses: Salaries and employee related expenses 599,681,000 529,863,000 474,686,000 Office and general expenses 282,843,000 263,969,000 232,279,000 ----------------------------------------------------- 882,524,000 793,832,000 706,965,000 ----------------------------------------------------- 52,657,000 64,920,000 58,533,000 Other income-net 6,495,000 4,371,000 7,160,000 ----------------------------------------------------- Income of consolidated companies before taxes on income 59,152,000 69,291,000 65,693,000 Provision for taxes on income 29,856,000 33,719,000 31,612,000 ----------------------------------------------------- Income of consolidated companies 29,296,000 35,572,000 34,081,000 Minority interest applicable to consolidated companies (4,141,000) (6,743,000) (6,663,000) Equity in earnings of nonconsolidated affiliated companies 722,000 1,622,000 1,184,000 ----------------------------------------------------- Net income $ 25,877,000 $ 30,451,000 $ 28,602,000 ===================================================== Earnings per Common Share: Basic $20.81 $25.03 $22.98 Diluted $18.98 $21.89 $20.45
See notes to consolidated financial statements. F-5 29 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Common Stockholders' Equity Years ended December 31, 1998, 1997 and 1996
Paid-In Common Additional Comprehensive Retained Stock Capital Income Earnings ----------------------------------------------------------- Balance at December 31, 1995 $1,432,000 $ 37,898,000 $122,345,000 Comprehensive income: Net income $ 28,602,000 28,602,000 Other comprehensive loss: Translation adjustment (2,085,000) Unrealized loss on marketable securities, net of reclassification adjustment for gains included in net income of $378,000 (1,420,000) --------------- Other comprehensive loss (3,505,000) --------------- Total comprehensive income $ 25,097,000 =============== Cash dividends-Common Shares $3.8125 per share (4,527,000) Cash dividends-Redeemable Preferred Stock-$7.625 per share (244,000) Common Shares acquired-at cost Dividends payable in common shares pursuant to the Senior Management Incentive Plan 275,000 (275,000) Increase in redemption value of Redeemable Preferred Stock (1,112,000) Restricted stock activity 43,000 Tax benefit from restricted stock 3,000 Common Shares issued upon exercise of stock options 250,000 Tax benefit from exercise of stock options 483,000 Senior Management Incentive Plan activity 3,862,000 ----------------------------------------------------------- Balance at December 31, 1996 1,432,000 42,814,000 144,789,000 ----------------------------------------------------------- Common Stock Accumulated Held in Treasury Other ---------------- Loans to Comprehensive Shares Amount Officers Income Total -------------------------------------------------------------------- Balance at December 31, 1995 239,599 $ (34,500,000) $(4,726,000) $ 5,214,000 $ 127,663,000 Comprehensive income: Net income 28,602,000 Other comprehensive loss: Translation adjustment Unrealized loss on marketable securities, net of reclassification adjustment for gains included in net income of $378,000 Other comprehensive loss (3,505,000) (3,505,000) Total comprehensive income Cash dividends-Common Shares $3.8125 per share (4,527,000) Cash dividends-Redeemable Preferred Stock-$7.625 per share (244,000) Common Shares acquired-at cost 20,818 (4,733,000) (4,733,000) Dividends payable in common shares pursuant to the Senior Management Incentive Plan Increase in redemption value of Redeemable Preferred Stock (1,112,000) Restricted stock activity (250) 14,000 57,000 Tax benefit from restricted stock 3,000 Common Shares issued upon exercise of stock options (10,598) 1,123,000 1,373,000 Tax benefit from exercise of stock options 483,000 Senior Management Incentive Plan activity 3,862,000 - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 249,569 (38,096,000) $(4,726,000) 1,709,000 147,922,000 - -----------------------------------------------------------------------------------------------------------------
F-6 30 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Common Stockholders' Equity Years ended December 31, 1998, 1997 and 1996 (continued)
Paid-In Common Additional Comprehensive Retained Stock Capital Income Earnings - ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $1,432,000 $42,814,000 $ 144,789,000 Comprehensive income: Net income $ 30,451,000 30,451,000 Other comprehensive loss: Translation adjustment (12,001,000) Unrealized gain on marketable securities, net of reclassification adjustment for gains included in net income of $215,000 1,059,000 ------------- Other comprehensive loss (10,942,000) ------------- Total comprehensive Income $ 19,509,000 ============= Cash dividends-Common Shares-$4.00 per (4,738,000) Cash dividends-Redeemable Preferred Stock-$8.00 per share (256,000) Common Shares acquired-at cost Dividends Payable in common shares pursuant to the Senior Management Incentive Plan (370,000) Increase in redemption value of Redeemable Preferred Stock (662,000) Restricted stock activity (143,000) Tax benefit from restricted stock 8,000 Common Shares issued upon exercise of stock options 52,000 Senior Management Incentive Plan activity 1,618,000 - ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 1,432,000 44,349,000 169,214,000 - ----------------------------------------------------------------------------------------------------------------
Common Stock Accumulated Held in Treasury Other ---------------- Loans to Comprehensive Shares Amount Officers Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 249,569 $ (38,096,000) $ (4,726,000) $ 1,709,000 $ 147,922,000 Comprehensive income: Net income 30,451,000 Other comprehensive loss: Translation adjustment Unrealized gain on marketable securities, net of reclassification adjustment for gains included in net income of $215,000 Other comprehensive loss (10,942,000) (10,942,000) Total comprehensive Income Cash dividends-Common Shares-$4.00 per (4,738,000) Cash dividends-Redeemable Preferred Stock-$8.00 per share (256,000) Common Shares acquired-at cost 3,007 (962,000) (962,000) Dividends Payable in common shares pursuant to the Senior Management Incentive Plan (370,000) Increase in redemption value of Redeemable Preferred Stock (662,000) Restricted stock activity (3,000) 309,000 166,000 Tax benefit from restricted stock 8,000 Common Shares issued upon exercise of stock options (716) 19,000 71,000 Senior Management Incentive Plan activity 1,618,000 - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 248,860 (38,730,000) (4,726,000) (9,233,000) 162,306,000 - -------------------------------------------------------------------------------------------------------------------------------
F-7 31 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Common Stockholders' Equity Years ended December 31, 1998, 1997 and 1996 (continued)
Paid-In Common Additional Comprehensive Retained Stock Capital Income Earnings -------------------------------------------------------------------- Balance at December 31, 1997 $1,432,000 $44,349,000 $169,214,000 Comprehensive income: Net income $ 25,877,000 25,877,000 Other comprehensive loss: Translation adjustment (2,294,000) Unrealized loss on marketable securities, net of reclassification adjustment for gains included in net income of $256,000 (1,496,000) ------------- Other comprehensive loss (3,790,000) ------------- Total comprehensive income $ 22,087,000 ============= Cash dividends-Common Shares-$4.00 per share (4,895,000) Cash dividends - Redeemable Preferred Stock $8.00 per share (244,000) Common Shares acquired-at cost Dividends payable in cash pursuant to the Senior Management Incentive Plan (14,000) Increase in redemption value of Redeemable Preferred Stock (224,000) Restricted stock activity 81,000 Tax benefit from restricted stock 8,000 Common Shares issued upon exercise of stock options 5,000 Senior Management Incentive Plan activity 56,000 (5,611,000) - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $1,488,000 $38,832,000 $189,714,000 - --------------------------------------------------------------------------------------------------------------------
Accumulated Common Stock Other Held in Treasury Loans to Comprehensive Shares Amount Officers Loss Total ----------------------------------------------------------------------- Balance at December 31, 1997 248,860 $(38,730,000) $(4,726,000) $(9,233,000) $162,306,000 Comprehensive income: Net income 25,877,000 Other comprehensive loss: Translation adjustment Unrealized loss on marketable securities, net of reclassification adjustment for gains included in net income of $256,000 Other comprehensive loss (3,790,000) (3,790,000) Total comprehensive income Cash dividends-Common Shares-$4.00 per share (4,895,000) Cash dividends - Redeemable Preferred Stock $8.00 per share (244,000) Common Shares acquired-at cost 427 (168,000) (168,000) Dividends payable in cash pursuant to the Senior Management Incentive Plan (14,000) Increase in redemption value of Redeemable Preferred Stock (224,000) Restricted stock activity 625 (21,000) 60,000 Tax benefit from restricted stock 8,000 Common Shares issued upon exercise of stock options (200) 23,000 28,000 Senior Management Incentive Plan activity (5,555,000) - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 249,712 $(38,896,000) $(4,726,000) $(13,023,000) $173,389,000 - -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-8 32 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Cash Flows
Year ended December 31 1998 1997 1996 ----------------------------------------------------- Operating activities Net income $ 25,877,000 $ 30,451,000 $ 28,602,000 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization of fixed assets 27,992,000 25,866,000 22,880,000 Amortization of intangibles 7,957,000 6,160,000 4,976,000 Deferred compensation 12,366,000 14,002,000 16,217,000 Equity in earnings of nonconsolidated affiliated companies, net of dividends received of $856,000 in 1998, $658,000 in 1997, and $441,000 in 1996 134,000 (964,000) (743,000) Gains from the sale of marketable securities (256,000) (215,000) (378,000) Gains from the sale of a nonconsolidated affiliated company and a non-marketable investment security (336,000) (384,000) (4,533,000) Minority interest applicable to consolidated companies 4,141,000 6,743,000 6,663,000 Amortization of restricted stock expense 84,000 140,000 33,000 Deferred income taxes (4,793,000) (7,366,000) (7,085,000) Changes in operating assets and liabilities: Increase in accounts receivable (106,600,000) (89,556,000) (103,252,000) Increase in expenditures billable to clients (9,644,000) (6,103,000) (7,229,000) Increase in other current assets (9,590,000) (5,314,000) (4,782,000) Increase in other assets (7,264,000) (652,000) (2,741,000) Increase in accounts payable 110,878,000 121,303,000 78,157,000 (Decrease) increase in accrued expenses and other (1,721,000) 14,473,000 8,611,000 Increase in income taxes payable 7,656,000 480,000 2,419,000 Increase (decrease) in other liabilities 35,000 1,380,000 (2,592,000) ----------------------------------------------------- Net cash provided by operating activities 56,916,000 110,444,000 35,223,000 Investing activities Purchases of fixed assets (47,068,000) (39,718,000) (27,896,000) Trust fund deposits (5,306,000) (2,974,000) (2,833,000) Increase in investments in and advances to non- consolidated affiliated companies (840,000) (1,142,000) (320,000) Purchases of marketable securities (41,088,000) (25,038,000) (129,491,000) Proceeds from the sales of marketable securities 26,684,000 49,613,000 101,012,000 Proceeds from the sale of a nonconsolidated affiliated company and a non-marketable investment security -- -- 8,568,000 Increase in intangibles, primarily goodwill (24,839,000) (19,912,000) (13,103,000) ----------------------------------------------------- Net cash used in investing activities (92,457,000) (39,171,000) (64,063,000)
F-9 33 Grey Advertising Inc. and Consolidated Subsidiary Companies Consolidated Statements of Cash Flows (continued)
Year ended December 31 1998 1997 1996 ----------------------------------------------------- Financing activities Net proceeds from (repayments of) short-term borrowings 45,694,000 (60,895,000) 18,180,000 Proceeds from term loan -- 75,000,000 -- Repayment of term loan -- (30,000,000) -- Common Shares acquired for treasury (168,000) (962,000) (4,733,000) Preferred Shares redeemed to treasury (651,000) -- -- Cash dividends paid on Common Shares (4,895,000) (4,738,000) (4,527,000) Cash dividends paid on Redeemable Preferred Stock (244,000) (256,000) (244,000) Net (payments for repurchase of) proceeds from issuance of Restricted Stock (18,000) 27,000 24,000 Proceeds from exercise of stock options 28,000 71,000 1,373,000 Borrowings under life insurance policies 510,000 450,000 464,000 ----------------------------------------------------- Net cash provided by (used in) financing activities 40,256,000 (21,303,000) 10,537,000 Effect of exchange rate changes on cash (1,452,000) (11,902,000) (3,525,000) ----------------------------------------------------- Increase (decrease) in cash and cash equivalents 3,263,000 38,068,000 (21,828,000) Cash and cash equivalents at beginning of year 150,553,000 112,485,000 134,313,000 ----------------------------------------------------- Cash and cash equivalents at end of year $ 153,816,000 $ 150,553,000 $ 112,485,000 =====================================================
See notes to consolidated financial statements. F-10 34 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements A. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Material intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Commissions and Fees and Accounts Receivable Income derived from advertising placed with media is generally recognized based upon the publication or broadcast dates. Income resulting from expenditures billable to clients is generally recognized when billed. Payroll costs are expensed as incurred. Accounts receivable include both the income recognized as well as the actual media and production costs which are paid for by the Company and rebilled to clients at the Company's cost. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturities of those instruments. Investments in and Advances to Nonconsolidated Affiliated Companies The Company generally carries its investments in nonconsolidated affiliated companies on the equity method. Certain investments which are not material in the aggregate are carried on the cost method. Fixed Assets Depreciation of furniture, fixtures and equipment is provided for over their estimated useful lives ranging from three to ten years and has been computed principally by the straight-line method. Amortization of leaseholds and leasehold improvements is provided for principally over the terms of the related leases, which are not in excess of the lives of the assets. F-11 35 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) A. Summary of Significant Accounting Policies (continued) Foreign Currency Translation Primarily all balance sheet accounts of the Company's foreign operations are translated at the exchange rate in effect at each year end and statement of income accounts are translated at the average exchange rates prevailing during the year. Resulting translation adjustments are made directly to other comprehensive income (loss). Foreign currency transaction gains and losses are reported in income. During 1998, 1997 and 1996, foreign currency transaction gains and losses were not material. Intangibles The excess of purchase price over underlying net equity of certain consolidated subsidiaries and nonconsolidated affiliated companies at the date of acquisition ("goodwill") is amortized by the straight-line method over periods of up to twenty years. The amounts of goodwill, net of accumulated amortization, associated with consolidated subsidiaries and nonconsolidated investments (included in Investments in and Advances to Nonconsolidated Affiliated Companies) were $116,499,000 and $3,394,000 in 1998, and $59,851,000 and $3,685,000 in 1997, respectively. Annually, the Company assesses the carrying value of its goodwill and the respective periods of amortization. As part of the evaluation, the Company considers a number of factors including actual operating results, the impact of gains and losses of major local clients, the impact of any loss of key local management staff and any changes in general economic conditions. The Company quantifies the recoverability of goodwill based on each agency's estimated future non-discounted cash flows over the applicable remaining amortization periods. This requires management to make certain specific assumptions with respect to future revenue and expense levels. When multiple investments are made in a single company, a weighted average amortization period is used. Charges to reflect permanent impairment are recorded to the extent that the unamortized book value of the goodwill exceeds the future cumulative discounted cash flows. Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides appropriate foreign withholding taxes on unremitted earnings of consolidated and nonconsolidated foreign companies. F-12 36 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) A. Summary of Significant Accounting Policies (continued) Marketable Securities The Company considers all its investments in marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, based on publicly quoted market prices, with unrealized gains and losses reported as other comprehensive income (loss). Stock-Based Compensation As permitted by Financial Accounting Standards Statement No. 123, Accounting for Stock-Based Compensation, the Company accounts for stock-based awards in accordance with APB Opinion No. 25, Accounting For Stock Issued to Employees. No compensation expense is recorded for options granted at fair market value at the date of grant. The excess of the fair market value of Restricted Stock over the cash consideration received is amortized, as compensation, over the period of restriction. The future obligation to issue stock, pursuant to the Company's Senior Management Incentive Plan, is included in Paid-In Additional Capital and results in periodic charges to compensation. Earnings Per Share The computation of basic earnings per common share is based on the weighted average number of common shares outstanding and for diluted earnings per common share includes adjustments for the effect of the assumed exercise of dilutive stock options, shares issuable pursuant to the Company's Senior Management Incentive Plan (see Note M(1)) and the assumed conversion of the 8 1/2% Convertible Subordinated Debentures. For the purpose of computing basic earnings per common share, the Company's net income is adjusted by dividends on the Preferred Stock and by the increase or decrease in redemption value of the Preferred Stock during the relevant period. For the purpose of computing diluted earnings per common share, net income is also adjusted by the interest savings, net of tax, on the assumed conversion of the Company's 8 1/2% convertible subordinated debentures. F-13 37 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) B. Foreign Operations The following financial data is applicable to consolidated foreign subsidiaries:
1998 1997 1996 ------------------------------------------------ Current assets $610,767,000 $489,242,000 $429,863,000 Current liabilities 621,164,000 480,514,000 452,220,000 Other assets - net of other liabilities 161,619,000 79,391,000 62,363,000 Net income 745,000 8,921,000 9,276,000
Consolidated retained earnings at December 31, 1998 includes equity in unremitted earnings of nonconsolidated foreign companies of approximately $9,712,000. C. Other Income - Net Details of other income - net are:
1998 1997 1996 -------------------------------------------------- Interest income $ 16,113,000 $ 13,826,000 $ 12,211,000 Interest expense (11,506,000) (11,095,000) (10,065,000) Gains from the sale of marketable securities and in 1996 a nonconsolidated affiliated company and a nonmarketable investment security 592,000 599,000 4,911,000 Dividends from affiliates 93,000 83,000 151,000 Other income (expense)-net 1,203,000 958,000 (48,000) -------------------------------------------------- $ 6,495,000 $ 4,371,000 $ 7,160,000 ==================================================
D. Fixed Assets Components of fixed assets-at cost are:
1998 1997 --------------------------------- Furniture, fixtures and equipment $ 180,657,000 $ 145,116,000 Leaseholds and leasehold improvements 69,961,000 59,333,000 --------------------------------- 250,618,000 204,449,000 Accumulated depreciation and amortization (137,534,000) (116,443,000) --------------------------------- $ 113,084,000 $ 88,006,000 =================================
F-14 38 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) E. Acquisitions and Related Costs In December 1998, pursuant to a cash tender offer, the common and preferred shareholders of TMBG Media Co. ("TMBG"), a United Kingdom company, agreed to be acquired by the Company. In January 1999, the Company distributed cash in the amount of $47,006,000 in exchange for 100% of TMBG's voting common stock and 90% of its preferred stock. The acquisition was funded out of operating cash and has been accounted for using the purchase method. Results of operations of TMBG for the period December 23, 1998 to December 31, 1998 were not material and thus were not included in the Consolidated Statement of Income for the year ended December 31, 1998. TMBG's net assets of $8,007,000, including $14,158,000 of cash, have been included in the Consolidated Balance Sheet at December 31, 1998. Additionally, the liability related to the tendered shares of TMBG has been included in Accrued Expenses and Other at December 31, 1998. The excess of purchase price over the underlying net equity of TMBG was recorded as goodwill and will be amortized in accordance with the Company's accounting policy. F. Marketable Securities The marketable securities, by type of investment, held by the Company at December 31, 1998 and 1997 are as follows:
1998 1997 ----------- ----------- Maturities of one year or less: Money market funds $55,130,000 $14,406,000 U.S. Treasury Securities -- 995,000 ----------- ----------- 55,130,000 15,401,000 ----------- ----------- Maturities greater than one year: Corporate bonds 30,827,000 23,408,000 U.S. Treasury Securities -- 32,310,000 Government National Mortgage Association Securities -- 1,622,000 ----------- ----------- 30,827,000 57,340,000 ----------- ----------- $85,957,000 $72,741,000 =========== ===========
At December 31, 1998, the Company had unrealized gains of $5,412,000 and unrealized losses of $6,719,000 related primarily to investments in both U.S. and non-U.S. dollar-denominated corporate bonds. At December 31, 1997, the Company had unrealized gains of $748,000 related primarily to investments in corporate bonds and unrealized losses of $559,000, principally related to the investments in U.S. treasury securities and money market funds. At December 31, 1998 and 1997, the Company's investments in marketable securities, classified as non-current, had an average maturity of approximately six and seven years, respectively. F-15 39 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) G. Credit Arrangements and Long-Term Debt The Company maintains committed lines of credit of $51,000,000 with various domestic banks and may draw against the lines on unsecured demand notes at rates below the applicable bank's prime interest rate. These lines of credit, which are renewable annually, were partially utilized during both 1998 and 1997 by selected foreign subsidiaries in the amount of $18,700,000 and $3,000,000 at the end of each respective year. The weighted average interest rate related to the debt associated with the committed lines of credit was 7.43% and 6.92% at December 31, 1998 and 1997, respectively. The Company had $52,211,000 and $19,455,000 outstanding under other uncommitted lines of credit at December 31, 1998 and 1997, respectively. The weighted average interest rate for the borrowings under the uncommitted lines of credit was 6.24% and 6.64% at December 31, 1998 and 1997, respectively. The carrying amount of the debt outstanding under both the committed and uncommitted lines of credit approximates fair value because of the short maturities of the underlying notes. Occasionally, the Company enters into foreign currency contracts for known cash flows related to the repatriation of earnings from its international subsidiaries. The terms of each foreign currency contract entered into in 1998 and 1997 were for less than three months. At December 31, 1998, there were no foreign currency contract transactions open. In December 1998, the Company did take advantage of an inverted yield curve in the United Kingdom and entered into a two year interest rate swap agreement as a hedge against rising interest rates by exchanging the cash flow on borrowings of 5,000,000 pounds sterling at a variable interest rate under the uncommitted lines of credit, for the cash flow from a similar borrowing at a fixed interest rate of 5.67%. The fair value of the swap agreement is not material. This estimate was determined using a discounted cash flow analysis using current interest rates for debt having similar terms and remaining maturities. Long-term debt at December 31, 1998 and 1997 is as follows:
1998 1997 ----------------------------------- Term loans $75,000,000 $75,000,000 Convertible debentures 3,025,000 3,025,000 ----------------------------------- Long-term debt $78,025,000 $78,025,000 ===================================
During 1997, the Company repaid the 7.68%, $30,000,000 loan it had taken down in 1993 from the Prudential Insurance Company ("Prudential") and, in turn, borrowed $75,000,000 in December 1997 at a fixed interest rate of 6.94% with principal repayable in equal installments of $25,000,000 in December 2003, 2004 and 2005. The terms of the loan agreement require, inter alia, that the Company meet certain cash flow requirements and limit its incurrence of additional indebtedness to certain specified amounts. At December 31, 1998 and 1997, the Company was in compliance with all of these covenants. The fair value of the Prudential debt is estimated to be $79,105,000 and $75,000,000 at December 31, 1998 and 1997, respectively. This estimate was determined using a discounted cash flow analysis using current interest rates for debt having similar terms and remaining maturities. F-16 40 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) G. Credit Arrangements and Long-Term Debt (continued) The remaining portion of long-term debt consists of 8 1/2% Convertible Subordinated Debentures, due December 31, 2003, which are currently convertible into 8.44 shares of Common Stock and an equal number of shares of Limited Duration Class B Common Stock ("Class B Common Stock"), subject to certain adjustments, for each $1,000 principal amount of such debentures. The debentures were issued in exchange for cash and a $3,000,000, 9% promissory note from the Chairman and Chief Executive Officer of the Company, payable on December 31, 2004 (included in Other Assets at December 31, 1998 and 1997). During each of the years 1998, 1997 and 1996, the Company paid to the officer interest of $257,000 pursuant to the terms of the debentures and the officer paid to the Company interest of $270,000 pursuant to the terms of the 9% promissory note. The scheduled repayment of long-term debt is as follows:
Years ending December 31 Amount -------------------------------------------------------- 2003 $28,025,000 2004 25,000,000 2005 25,000,000 ----------- $78,025,000 ===========
During 1998 and 1997, the Company borrowed against the cash surrender value of the life insurance policies that it owns on the life of its Chairman and Chief Executive Officer. The amounts borrowed at December 31, 1998 and 1997 are $18,184,000 and $16,428,000, respectively, with an interest rate of 7.30% in each year, and are carried as a reduction of the related cash surrender value that is included in Other Assets. Of the amounts borrowed in 1998 and 1997, the Company received $510,000 and $450,000 in cash, respectively, and $1,245,000 was used in each year to pay premiums on the underlying life insurance policies. For the years 1998, 1997 and 1996, the Company made interest payments of $11,673,000, $11,969,000 and $10,065,000, respectively. H. Redeemable Preferred Stock As of December 31, 1998, the Company had outstanding 20,000 shares of Series I Preferred Stock, 5,000 shares each of Series II and Series III Preferred Stock. In 1997, 2,000 shares of Series 1 Preferred Stock were outstanding which were redeemed in 1998. The holder of the Series I, Series II and Series III Preferred Stock is the Chairman and Chief Executive Office of the Company, and the Series 1 Preferred Stock was held by a former employee. The terms of each class of Preferred Stock, including the basic economic terms relating thereto, are essentially the same, except with respect to the redemption date of each series. The redemption date for the F-17 41 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) H. Redeemable Preferred Stock (continued) Series I, Series II and Series III Preferred Stock is fixed at April 7, 2004, unless redeemed earlier under circumstances described below. The terms of the Series I, Series II and Series III Preferred Stock also give the holder, his estate or legal representative, as the case may be, the option to require the Company to redeem his Preferred Stock for a period of 12 months following his (i) death, (ii) permanent disability or permanent mental disability, (iii) termination of full-time employment for good reason or (iv) termination of full-time employment by the Company without cause. Each share of Preferred Stock is to be redeemed by the Company at a price equal to the book value per share attributable to one share of Common Stock and one share of Class B Common Stock (subject to certain adjustments) upon redemption, less a fixed discount established upon the issuance of the Preferred Stock. The holder of each class of Preferred Stock is entitled to receive cumulative preferential dividends at the annual rate of $.25 per share, and to participate in dividends on one share of the Common Stock and one share of the Class B Common Stock to the extent such dividends exceed the per share preferential dividend. In connection with his ownership of the Series I, Series II and Series III Preferred Stock, the holder issued to the Company full recourse promissory notes totaling $763,000 (included in Other Assets at December 31, 1998 and 1997) with a maturity date of April 2004. The interest paid by the senior executive to the Company in 1998, 1997 and 1996 pursuant to the terms of these notes was approximately $69,000 in each year. In accordance with the terms of the respective Certificates of Designation and Terms of each Series of Preferred Stock ("Certificates"), the Board of Directors determined the change in redemption value would not reflect a 1994 write-off of goodwill but rather reflect amortization as if the Company had continued to write-off goodwill in accordance with historical amortization schedules. Following the distribution of Class B Common Stock, the holder of the Preferred Stock became entitled to eleven votes per share on all matters submitted to the vote of stockholders. The holder of the Series I Preferred Stock is entitled, as well, to vote as a single class to elect or remove one-quarter of the Board of Directors, to approve the merger or consolidation of the Company or the sale by it of all or substantially all of its assets, and to approve the authorization or issuance of any other class of Preferred Stock having equivalent voting rights. In the event of the liquidation of the Company, the holder of the Preferred Stock is entitled to a preferential liquidation distribution of $1.00 per share in addition to all accrued and unpaid preferential dividends. The total carrying value of the Preferred Stock (applicable to those shares outstanding at each respective year end) increased by $224,000, $662,000 and $1,112,000 in 1998, 1997 and 1996, respectively. The change in carrying value represents the change in aggregate redemption value F-18 42 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) H. Redeemable Preferred Stock (continued) during those periods. This change is referred to as "Additional Capital Applicable to Redeemable Preferred Stock" in the respective Certificates. I. Common Stock The Company has authorized and outstanding two classes of common stock, Common Stock and Class B Common Stock, each having a $1 par value per share. The Class B Common Stock has the same dividend and liquidation rights as the Common Stock, and a holder of each share of Class B Common Stock is entitled to ten votes on all matters submitted to stockholders. The shares of Class B Common Stock are restricted as to transferability and upon transfer, except to specified limited classes of transferees, will convert into shares of Common Stock which have one vote per share. The Class B Common Stock will automatically convert to Common Stock on April 3, 2006. J. Restricted Stock and Stock Option Plans The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") is the Company's active restricted stock and stock option plan. The Stock Incentive Plan replaced the Restricted Stock Plan, the Executive Growth Plan, the Incentive Stock Option Plan and the Nonqualified Stock Option Plan (collectively, the "Prior Plans"), and any shares available for granting of awards under the Prior Plans are no longer available for such awards. Options granted pursuant to the Prior Plans remain outstanding and in full force, and shares reserved thereunder remain so for such purposes. Stock Incentive Plan Under the Stock Incentive Plan, awards in the form of incentive or nonqualified stock options or restricted stock are available to be granted through June 2003 to officers and other key employees. A maximum of 250,000 shares of Common Stock are available for grant under the Stock Incentive Plan. Stock options cannot be granted at a price less than 100% of the fair market value of the shares on the date of grant. A committee of the Board of Directors ("Committee") determines the terms and conditions under which the awards may be granted, vest or are exercisable. Options must be exercised within ten years of the date of grant. Shares of restricted stock may be sold to participants at a purchase price determined by the Committee (which may be less than fair market value per share). Under the Prior Plans, nonqualified and incentive stock options were granted to employees eligible to receive options at prices not less than 100% of the fair market value of the shares on the date of grant. Options must be exercised within ten years of grant and for only specified limited periods beyond termination of employment. There were 1,000 shares reserved for issuance under the Prior Plans at December 31, 1998. F-19 43 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) J. Restricted Stock and Stock Option Plans (continued) Nonqualified Options Transactions involving nonqualified options under the Stock Incentive and Prior Plans were:
Number Weighted Average Of Shares Exercise Price ------------------------------ Outstanding, December 31, 1995 98,324 $ 149 Granted 47,100 229 Exercised (9,884) 130 Forfeited (66) 118 ------------------------------ Outstanding, December 31, 1996 135,474 178 Granted 8,450 260 Exercised -0- -0- Forfeited (1,500) 189 ------------------------------ Outstanding, December 31, 1997 142,424 183 Granted 45,400 333 Exercised (200) 141 Forfeited (8,675) 209 ------------------------------ Outstanding, December 31, 1998 178,949 220 ==============================
There were 76,750, 50,133, and 33,400 options exercisable at December 31, 1998, 1997 and 1996, respectively. The weighted average fair value of the options granted during 1998, 1997 and 1996 was $108, $101 and $77, respectively. The remaining weighted average contractual life of options outstanding as of December 31, 1998 and the weighted average exercise price for options exercisable at December 31, 1998 are as follows:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------ Range of Number of Weighted Average Weighted Number of Weighted Exercise Shares Remaining Average Shares Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------- ------------------------------ $131 1,000 1.2 years $131 666 $ 131 149-171 83,299 5.3 years 151 46,000 151 187-196 6,900 7.0 years 195 84 187 235 34,100 7.3 years 235 20,000 235 259-282 8,450 8.3 years 260 -0- -0- 268-393 45,200 7.1 years 333 10,000 333 -------------------------------------------------- ------------------------------ Total 178,949 76,750 ================================================== ==============================
F-20 44 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) J. Restricted Stock and Stock Options Plans (continued) Incentive Stock Options Transactions involving outstanding incentive stock options under the plans were:
Number of Shares of Weighted Average Common Stock Exercise Price ----------------------------------------- Outstanding and exercisable, December 31, 1995 1,430 $ 99 Exercised (714) 99 ----------------------------------------- Outstanding and exercisable, December 31, 1996 716 99 Exercised (716) 99 ----------------------------------------- Outstanding, December 31, 1997 -0- =========================================
Restricted Stock In 1998, 1,375 shares of Restricted Stock were issued at a price of $1.00 per share. In 1997, 3,000 shares of Restricted Stock were issued at prices between $1.00 and $93.50 per share. All stock is issued with restrictions as to transferability expiring after five years. No restrictions lapsed in 1998, 1997 or 1996. In 1998, 2,000 shares were forfeited and held in treasury. Compensation to employees under the Stock Incentive and Prior Plans of $671,000 in 1998, $756,000 in 1997 and $98,000 in 1996, representing the excess of the market value of restricted stock over any cash consideration received, is carried as a reduction of Paid-In Additional Capital and is charged to income ($166,000 in 1998, $140,000 in 1997 and $33,000 in 1996) over the related required period of service of the respective employees. In 1998, accumulated amortization of $82,000 was added back into income resulting from the forfeiture of Restricted Stock. Pro Forma Information Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options 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 the years 1998, 1997 and 1996, respectively; risk-free interest rates of 6.78%, 6.70% and 6.16%; dividend yields of 1.86%, 1.40% and 1.73%; volatility factors of the expected market price of the Company's Common Stock of .18, .19 and .17; and a weighted-average expected life for the options of 9.6, 10.0, and 10.0 years. F-21 45 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) J. Restricted Stock and Stock Options Plans (continued) Pro Forma Information (continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restriction 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. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1998 1997 1996 ------------------------------------------------------ Pro forma net income $ 24,450,000 $ 29,689,000 $ 27,861,000 Pro forma earnings per share: Basic $19.67 $24.41 $22.38 Diluted $17.95 $21.39 $19.87
The pro forma information for 1998, 1997 and 1996 is not necessarily indicative of future year calculations because options issued prior to 1995 have not been valued for purposes of the pro forma calculation. F-22 46 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) K. Computation of Earnings per Common Share The following table shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock.
For the Year Ended December 31 -------------------------------------------------- 1998 1997 1996 -------------------------------------------------- BASIC EARNINGS PER SHARE ------------------------ Weighted-average shares 1,220,767 1,180,146 1,185,841 -------------------------------------------------- Net Income $ 25,877,000 $ 30,451,000 $ 28,602,000 Effect of dividend requirements and the change in redemption value of redeemable preferred stock (468,000) (917,000) (1,356,000) -------------------------------------------------- Net earnings used in computation $ 25,409,000 $ 29,534,000 $ 27,246,000 -------------------------------------------------- Per share amount $20.81 $25.03 $22.98 ================================================== DILUTED EARNINGS PER SHARE -------------------------- Weighted-average shares used in Basic 1,220,767 1,180,146 1,185,841 Net effect of dilutive stock options and stock incentive plans (1) 74,121 124,289 102,378 Assumed conversion of 8.5% convertible subordinated debentures issued December 1983 51,040 51,017 50,892 -------------------------------------------------- Adjusted weighted-average shares 1,345,928 1,355,452 1,339,111 -------------------------------------------------- Net Income used in Basic $ 25,409,000 $ 29,534,000 $ 27,246,000 8.5% convertible subordinated debentures interest net of income tax effect 137,000 139,000 139,000 -------------------------------------------------- Net earnings used in computation $ 25,546,000 $ 29,673,000 $ 27,385,000 -------------------------------------------------- Per share amount $18.98 $21.89 $20.45 ==================================================
(1) Includes 31,481, 92,391, and 85,350 shares for 1998, 1997 and 1996, respectively, expected to be issued pursuant to the terms of the Senior Management Incentive Plan. F-23 47 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) L. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. At December 31, 1998 and 1997, the Company had deferred tax assets and deferred tax liabilities as follows:
Deferred Tax Assets (Liabilities) 1998 1997 ------------------------------- Deferred compensation $ 24,485,000 $ 27,966,000 Accrued expenses 3,649,000 3,315,000 Safe harbor lease and depreciation 749,000 (1,225,000) Foreign net operating losses 14,517,000 8,140,000 Tax on unremitted foreign earnings and other (1,477,000) (3,414,000) ------------------------------- 41,923,000 34,782,000 Valuation allowance (10,488,000) (8,140,000) ------------------------------- Net deferred tax assets $ 31,435,000 $ 26,642,000 =============================== Included in: Other current assets $ 10,914,000 $ 6,779,000 Other assets 20,521,000 19,863,000 ------------------------------- $ 31,435,000 $ 26,642,000 ===============================
The components of income of consolidated companies before taxes on income are as follows:
1998 1997 1996 --------------------------------------------- Domestic $44,600,000 $40,476,000 $36,553,000 Foreign 14,552,000 28,815,000 29,140,000 --------------------------------------------- $59,152,000 $69,291,000 $65,693,000 =============================================
Provisions (benefits) for Federal, foreign, state and local income taxes consisted of the following:
1998 1997 1996 -------------------------------- --------------------------------- ------------------------------- Current Deferred Current Deferred Current Deferred ----------------------------------------------------------------------------------------------------------- Federal $ 11,382,000 $ 1,526,000 $ 16,763,000 $ (3,989,000) $ 16,285,000 $ (3,890,000) Foreign 16,010,000 (6,886,000) 15,171,000 (1,204,000) 13,677,000 (280,000) State and local 7,257,000 567,000 9,151,000 (2,173,000) 8,735,000 (2,915,000) ----------------------------------------------------------------------------------------------------------- $ 34,649,000 $ (4,793,000) $ 41,085,000 $ (7,366,000) $ 38,697,000 $ (7,085,000) ===========================================================================================================
F-24 48 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) L. Income Taxes (continued) The effective tax rate varied from the statutory Federal income tax rate as follows:
1998 1997 1996 ------------------------------ Statutory Federal tax rate 35.0% 35.0% 35.0% State and local income taxes, net of Federal income tax benefits 8.6 6.6 5.8 Difference in foreign tax rates 6.8 4.7 4.3 Withholding tax on unremitted foreign earnings 0.1 0.9 0.6 Other--net 0.0 1.5 2.4 ------------------------------ 50.5% 48.7% 48.1% ==============================
During the years 1998, 1997 and 1996, the Company made income tax payments of $31,104,000, $39,689,000, and $36,513,000 respectively. The tax benefit resulting from the difference between compensation expense deducted for tax purposes and compensation expense charged to income for restricted stock and nonqualified stock options is recorded as an increase to Paid-In Additional Capital. At December 31, 1998, the Company had cumulative net operating losses attributable to foreign subsidiaries of approximately $44,000,000. The duration over which the tax benefits attributable to these losses may be realized varies on a country by country basis, but in no instance will any of the benefits expire before 2003. Since a portion of the benefits may fail to be realized, a valuation allowance has been reflected. M. Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases and Contingencies 1. The Company's Profit Sharing Plan is available to employees of Grey and qualifying subsidiaries meeting certain eligibility requirements. This plan provides for contributions by the Company at the discretion of the Board of Directors, subject to maximum limitations, as well as employee pre-tax contributions. The Company also maintains a noncontributory Employee Stock Ownership Plan covering eligible employees of the Company and qualifying subsidiaries, under which the Company may make contributions (in stock or cash) to an Employee Stock Ownership Trust (ESOT) in amounts each year as determined at the discretion of the Board of Directors. The Company made only cash contributions to the ESOT in 1998, 1997 and 1996. The Company and the ESOT have certain rights to purchase shares from participants whose employment has terminated. In addition to the two plans noted above, a number of subsidiaries maintain separate profit sharing and retirement arrangements. Furthermore, the Company also provides additional retirement and deferred compensation benefits to certain executive officers and employees. The Company maintains a Senior Management Incentive Plan ("Plan") in which deferred compensation is granted to senior executive or management employees deemed important to the continued success of the Company. The Plan operates as an ongoing series of individual five year plans. F-25 49 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) M. Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases and Contingencies (continued) The latest plan in the series commenced in 1998. Awards will vest to individuals achieving five years of participation in the current plan. Those participants who commence participation after 1998 will vest in their awards five years from the year of their initial participation. The amount recorded as an expense related to the Plan amounted to $7,600,000, $8,377,000 and $8,211,000 in 1998, 1997 and 1996, respectively. Approximately $2,295,000, $1,113,000 and $5,634,000 of plan expense incurred in 1998, 1997 and 1996, respectively, will be payable in Common Stock in accordance with the terms of the Plan. The awards payable in Common Stock were converted into an equivalent number of shares of Common Stock, based on the average of the market values on the last 15 business days of the calendar year. The 1998 Plan activity includes increases in Paid-in Additional Capital of $1,899,000 related to the future obligation to issue Common Stock and $3,648,000 related to the tax benefit resulting from the issuance of shares in settlement of the previous plan's awards offset by a decrease of $11,158,000 related to the repurchase of shares to satisfy statutory minimun tax withholding requirements. At December 31, 1998, approximately 14,000 shares are payable in Common Stock pursuant to the Plan of which approximately 3,000 shares were vested. In 1995, the Company and its Chairman and Chief Executive Officer entered into an agreement extending the term of his employment agreement with the Company through December 31, 2002. This agreement further provides for the deferral of certain compensation otherwise payable to the Chairman and Chief Executive pursuant to his employment agreement and the payment of such deferred compensation into a trust, commonly referred to as a rabbi trust, established with United States Trust Company of New York. The purpose of the trust arrangement is to ensure the Company's ability to deduct compensation paid to the Chairman and Chief Executive Officer without the application of Section 162(m) of the Internal Revenue Code ("Section"). The Section, under certain circumstances, denies a tax deduction to an employer for certain compensation expenses in excess of $1,000,000 per year paid by a publicly held corporation to certain of its executives. Amounts deferred and paid into the trust, as adjusted for the earnings and gains or losses on the trust assets, will be paid to the Chairman and Chief Executive Officer or to his estate, as the case may be, following the expiration of his employment agreement, or the termination of his employment by reason of death or disability. In 1998, the Company made payments to the rabbi trust which are to be used to fund a pension obligation to be payable to the Chairman and Chief Executive Officer over the eleven year period following the normal expiration of his current employment agreement ("pension period"). The initial pension deposit was for $1,040,000 with annual pension deposits of $360,000 ratably payable from 1998 through 2002, inclusive. The amount of the pension to be paid to the Chairman and Chief Executive Officer will depend on, and be limited to, the funds in the rabbi trust during the pension period. In addition, upon termination of his employment prior to the commencement of the pension period or upon his death, any undistributed funds in the rabbi trust would be paid to his estate, as the case may be, in satisfaction of any future obligations with respect to this pension. F-26 50 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) M. Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases and Contingencies (continued) At December 31, 1998 and 1997, the value of the trust was $15,706,000 and $10,400,000, respectively, and is included in Other Assets and the Company's related deferred compensation obligation for the same amount is included in Other Liabilities. Expenses related to the foregoing plans and benefits aggregated $32,266,000 in 1998, $33,230,000 in 1997 and $36,140,000 in 1996. 2. Pursuant to an employment agreement, dated January 1, 1994, an executive officer of the Company borrowed $600,000 from the Company. One-third of the principal amount of the loan was forgiven by the Company on December 31, 1996 and 1997, as the officer continued to be employed by the Company on those dates. In 1997 and 1996, the Company has included in each year $200,000 of compensation expense, representing the amount of loan forgiven each year. The forgiveness date for the remaining $200,000 loan balance is in 1999 and is to be forgiven contingent upon the officer's continued employment by the Company. As of December 31, 1998 and 1997, the remaining loan balance was $200,000 and is included in Other Assets. In addition, a second executive officer has outstanding loans with the Company totaling $825,000 as of December 31, 1998 and 1997 which are reflected in Other Assets. The first loan for $125,000 was made in 1995 and is forgivable on December 31, 1999 provided that the executive officer is employed by the Company on that date. During 1996, the Company made an additional loan to this executive officer for $700,000, $200,000 of which is forgivable by the Company assuming his continued employment through 2003 and $500,000 of which is forgivable by the Company assuming his continued employment through 2004. In connection with a 1992 exercise of the stock options, the Company received a cash payment of $67,000 and a note from the Chairman and Chief Executive Officer of the Company in the amount of $3,170,000, due in December 2001, bearing interest at the rate of 6.06%. In addition, and in accordance with the terms of the option agreement, the holder of the options issued to the Company a promissory note in the principal amount of $2,340,000 bearing interest at the rate of 6.06%, payable in December 2001, to settle his obligation to provide the Company with funds necessary to pay the required withholding taxes due upon the exercise of the options. A portion of the second note ($1,556,000) equal to the tax benefit received by the Company upon exercise and the full amount of the note for $3,170,000 are reflected in a separate component of stockholders' equity. The interest paid to the Company by the holder pursuant to the terms of the two notes issued in connection with the option exercise was $334,000 in 1998, 1997 and 1996. F-27 51 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) M. Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases and Contingencies (continued) 3. Rental expense amounted to approximately $44,364,000 in 1998, $41,239,000 in 1997 and $41,104,000 in 1996. Approximate minimum rental commitments, excluding escalations, under noncancellable operating leases are as follows: 1999 $ 43,809,000 2000 41,940,000 2001 39,822,000 2002 36,933,000 2003 32,503,000 Beyond 2003 124,030,000 ------------ $319,037,000 ============
4. The Company is not involved in any pending legal proceedings not covered by insurance or by adequate indemnification or which, if decided adversely, would have a material effect on the results of operations, liquidity or financial position of the Company. F-28 52 Grey Advertising Inc. and Consolidated Subsidiary Companies Notes to Consolidated Financial Statements (continued) N. Industry Segment and Related Information The Company is not engaged in more than one industry segment. The Company evaluates performance by geographic region based on profit or loss before income taxes. Commissions and fees are attributed to the geographic region that generates billings. Commissions and fees, operating profit, interest income/expense, and related identifiable assets at December 31, 1998, 1997 and 1996, are summarized below according to geographic region (000s omitted):
United States Europe ---------------------------------------- ---------------------------------------- 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------------- Commissions and fees $ 419,469 $ 382,288 $ 338,496 $ 415,685 $ 380,675 $ 370,888 ------------------------------------------------------------------------------------- Operating profit (loss) 38,501 32,570 26,174 27,509 30,534 30,279 Interest income (expense) - net 4,677 6,366 4,910 853 (2,501) (2,634) Other income (expense) 1,422 1,540 5,470 785 194 (765) ------------------------------------------------------------------------------------- Income of consolidated companies before taxes on income 44,600 40,476 36,554 29,147 28,227 26,880 ===================================================================================== Equity in earnings of nonconsolidated affiliated companies Identifiable assets 608,880 581,557 549,160 699,637 457,099 445,038 Investments in and advances to nonconsolidated affiliated Total assets Other Consolidated ---------------------------------------- ---------------------------------------- 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------------ Commissions and fees $ 100,027 $ 95,789 $ 56,114 $ 935,181 $ 858,752 $ 765,498 ------------------------------------------------------------------------------------ Operating profit (loss) (13,353) 1,816 2,080 $ 52,657 $ 64,920 $ 58,533 Interest income (expense) - net (923) (1,135) (130) 4,607 2,730 2,146 Other income (expense) (319) (93) 309 1,888 1,641 5,014 ------------------------------------------------------------------------------------ Income of consolidated companies before taxes on income (14,595) 588 2,259 59,152 69,291 65,693 ==================================================================================== Equity in earnings of nonconsolidated affiliated companies 722 1,622 1,184 ======================================== Identifiable assets 164,431 142,945 77,473 1,472,948 1,181,601 1,071,671 Investments in and advances to nonconsolidated affiliated 16,705 18,386 17,723 ---------------------------------------- Total assets $1,489,653 $1,199,987 $1,089,394 ========================================
Commissions and fees from one client amounted to 13.4%, 12.8% and 13.2% of the consolidated total in 1998, 1997 and 1996, respectively. F-29 53 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 3.01 Restated Certificate of Incorporation of Grey Advertising Inc. ("Grey"). (Incorporated herein by reference to Exhibit 3.01 to Grey's Current Report on Form 8-K, dated October 31, 1995, filed with the SEC pursuant to Section 13 of the 1934 Act.) 3.02 By-Laws of Grey as amended. (Incorporated herein by reference to Exhibit 3.02 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1988.) 4.01 Stockholder Exchange Agreement, dated as of April 7, 1994, by and between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 10(a) of Grey's Current Report on Form 8-K, dated April 7, 1994, filed with the SEC pursuant to Section 13 of the 1934 Act. 4.02 Purchase Agreement, dated as of December 10, 1983, between Grey and Edward H. Meyer relating to the sale to Mr. Meyer of Grey's 8 1/2% Convertib Debentures, of even date therewith ("Convertible Debenture"). (Incorporated herein by reference to Exhibit 3.08 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1983.) 4.03 Extension Agreement, dated as of November 19, 1991 between Grey and Edward H. Meyer relating to the extension of the maturity dates of the Convertible Debenture and related Promissory Note. (Incorporated herein by reference to Exhibit 3.07 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.) 4.04 Form of Convertible Debenture. (Incorporated herein by reference to Exhibit 3.09 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1983.) 4.05 Extension Agreements dated as of July 29, 1996 between Grey and Edward H. Meyer relating to the extension of the maturity dates of the Convertible Debenture and related Promissory Note. (Incorporated herein by reference to Exhibit 4.01 and 4.02 to Grey's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
E-1 54 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 9.01 Voting Trust Agreement, dated as of December 1, 1989, among the several Beneficiaries, Grey and Edward H. Meyer as Voting Trustee. (Incorporated herein by reference to Exhibit 9.03 to Grey's Annual report on Form 10-K for the fiscal year ended December 31, 1989.) 9.02 Amended and Restated Voting Trust Agreement, dated as of February 24, 1986, as amended and restated as of August 31, 1987 and again amended and restated as of March 21, 1994, among the several Beneficiaries where-under, Grey and Edward H. Meyer as Voting Trustee. (Incorporated herein by reference to Exhibit 9.04 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.) 10.01 * Employment Agreement, dated as of February 9, 1984, between Grey and Edward H. Meyer ("Meyer Employment Agreement"). (Incorporated herein by reference to Exhibit 10.01 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1983.) 10.02 * Amendments Two through Ten to Meyer Employment Agreement. (Incorporated herein by reference to Exhibit 10.02 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Exhibit 10.03 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Exhibit 1 to Grey's Current Report on Form 8-K, dated May 9, 1988, filed with the SEC pursuant to Section 13 of the 1934 Act, Exhibit 2 to Grey's Current Report on Form 8-K, dated May 9, 1988, filed with the SEC pursuant to Section 13 of the 1934 Act. Exhibit I to Grey's Current Report on Form 8-K, dated June 9, 1989, filed with the SEC pursuant to Section 13 of the 1934 Act, Exhibit 10.07 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Exhibit 10.03 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Exhibit 10.03 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and Exhibit 10.01 to Grey's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, respectively.)
E-2 55 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 10.03 * Deferred Compensation Trust Agreement dated March 22, 1995 ("Trust Agreement"), by and between Grey and United States Trust Company of New York. (Incorporated herein by reference to Exhibit 10.04 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) 10.04 * First and Second Amendments to Trust Agreement (Incorporated herein by reference to Exhibit 10.05 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and Exhibit 10.02 to Grey's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, respectively.) 10.05 * Employment Agreement, dated as of December 21, 1990, by and between Grey and Stephen A. Novick. (Incorporated herein by reference to exhibit 10.11 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.) 10.06 * Amendment to Employment Agreement, dated as of April 26, 1994, by and between Grey and Stephen A. Novick. (Incorporated herein by reference to Exhibit 10.07 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) 10.07 * Employment Agreement, dated as of December 1, 1992, by and between Grey and Robert L. Berenson. (Incorporated herein by reference to Exhibit 10.05 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.08 * Grey Advertising Inc. Book Value Preferred Stock Plan, as amended. (Incorporated herein by reference to Exhibit 4.1 to Grey's Current Report on Form 8-K, dated June 14, 1983, filed with the SEC pursuant to Section 13 of the 1934 Act.) 10.09 * Grey Advertising Inc. Amended and Restated Senior Executive Officer Pension Plan. (Incorporated herein by reference to Exhibit 10.08 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1984.)
E-3 56 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 10.10 * Grey Advertising Inc. Amended and Restated 1993 Senior Management Incentive Plan. (Incorporated herein by reference to Exhibit 10.01 to Grey's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 10.11 * Grey Advertising Inc. 1998 Senior Management Incentive Plan (Incorporated herein by reference to Exhibit A to Grey's 1998 Annual Meeting Proxy Statement) 10.12 * Promissory Notes I and II, dated as of December 29, 1992, from Edward H. Meyer to Grey, delivered pursuant to the Stock Option Agreement dated as of October 13, 1984 by and between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 10.16 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.13 * Stock Option Agreement, effective as of January 5, 1995, by and between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 13 to Amendment No. 8 to the Statement on Schedule 13D, dated as of March 10, 1995, filed by Edward H. Meyer.) 10.14 * Stock Option Agreement effective as of November 26, 1996, by and between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 15 to Amendment No. 10 to the Statement on Schedule 13D, dated as of February 11, 1997, filed by Edward H. Meyer.) 10.15 * Stock Option Agreement, effective as of January 23, 1998, by and between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 16 to Amendment No. 11 to the Statement on Schedule 13D, dated as of March 13, 1998, filed by Edward H. Meyer.) 10.16 Registration Rights Agreement, dated as of June 5, 1986, between Grey and Edward H. Meyer. (Incorporated herein by reference to Exhibit 12 to Amendment No. 8 to the Statement on Schedule 13D, dated as of March 10, 1995, filed by Edward H. Meyer.)
E-4 57 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 10.17 * Grey Advertising Inc. Incentive Stock Option Plan, as amended and restated as of April 3, 1986. (Incorporated herein by reference to Exhibit 4.04 to Grey's Registration Statement on Form S-8 filed with the SEC pursuant to Section 6(a) of the '33 Act.) 10.18 * Grey Advertising Inc. 1987 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.24 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1988.) 10.19 * Grey Advertising Inc. amended and restated 1994 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.02 to Grey's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 10.20 Note Agreement, dated as of December 23, 1997, by and between Grey and the Prudential Insurance Company of America. 10.21 * Bonuses - Grey has paid bonuses to certain of its executive officers (including those who are directors) and employees in prior years including 1993, and may do so in future years. Bonuses have been and may be in the form of cash, shares of stock or both although Grey presently does not have any plans to pay stock bonuses. Bonuses are not granted pursuant to any formal plan. 10.22 * Director's Fees - It is the policy of Grey to pay each of its non-employee directors a fee of $4,500 per fiscal quarter and a fee of $3,000 for each meeting of the Board of Directors attended. This policy is not embodied in any written document. 10.23 * Deferred Compensation Agreement, dated December 23, 1981, between Grey and Mark N. Kaplan, regarding deferral of payment of director's fees to which Mr. Kaplan may become entitled. (Incorporated herein by reference to Exhibit 10.18 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1982.)
E-5 58 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 10.24 * On March 23, 1978, Grey's Board of Directors, at a meeting thereof held on such date, approved an arrangement whereby Grey is required to accrue for Edward H. Meyer, the difference between the amount contributed by Grey on behalf of Mr. Meyer under the Profit Sharing Plan and Grey's Employee Stock Ownership Plan, and the amount which would have been contributed to such plans on his behalf had such plans not contained maximum annual limitations on contributions and credits, as required by the Employee Retirement Income Security Act of 1974. Such accrual is to be paid to Mr. Meyer as if it had been contributed to his account under the Profit Sharing Plan. Such arrangement is not embodied in any written document. 10.25 Lease, dated as of July 1, 1978, by and between Grey and William Kaufman and J. D. Weiler, regarding space at 777 Third Avenue, New York, New York ("Main Lease"). (Incorporated herein by reference to Exhibit 10.21 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1982.) 10.26 First through Seventeenth Amendments to Main Lease (Incorporated herein by reference to Exhibits 10.22, 10.23, 10.24, 10.25, 10.26, 10.27, 10.28 and 10.29 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1982, Exhibit 10.30 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1983, Exhibits 10.33 and 10.34 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, Exhibits 10.35 and 10.36 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Exhibit 10.36 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, and Exhibit 10.27 to Grey's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, respectively.) 10.27 Eighteenth Amendment to Main Lease dated as of October 1, 1998 21.01 Subsidiaries of Grey 23.01 Consent of Independent Auditors
E-6 59 INDEX TO EXHIBITS
Number Assigned to Exhibit (i.e. 601 of Regulation S-K) Description of Exhibits ---------------------------- ----------------------- 27.01 Financial Data Schedule *Management contract or compensatory plan or arrangement identified in compliance with Item 14(c) of the rules governing the preparation of this report. 10K-Exhibits
E-7 EX-10.27 2 EIGHTEENTH AMENDMENT TO MAIN LEASE 1 EIGHTEENTH AMENDMENT TO LEASE THIS EIGHTEENTH AMENDMENT TO LEASE (this "Eighteenth Amendment"), is made as of the 1st day of October, 1998, by and between SAGE REALTY CORPORATION, a New York corporation, having its principal office at 777 Third Avenue, New York, New York 10017, as Agent for the owner of the building hereinafter mentioned (Sage Realty Corporation, as Agent, with its successors and assigns acting in such capacity, being referred to herein as "Landlord"), and GREY ADVERTISING INC., a Delaware corporation, having its principal office at 777 Third Avenue, New York, New York 10017 (being referred to herein as "Tenant"). W I T N E S S E T H: WHEREAS, Melvyn Kaufman and J. D. Weiler (predecessor-in-interest to Landlord), as landlord, and Tenant, as tenant, entered into that certain Lease, made as of July 1, 1978 (the "Original Lease"), which was thereafter amended by various amendments, the last of which was a certain Seventeenth Amendment to Lease (the "Seventeenth Amendment"; and the Original Lease, as amended through and including the Seventeenth Amendment, being hereinafter collectively referred to as the "Lease"), dated February 3, 1998 (including for this purpose a certain Amendment to Schedule 1 of the Seventeenth Amendment to Lease, made as of the l4th day of May, 1998, by and between Landlord and Tenant), for space (the "Leased Premises") in the building known as 777 Third Avenue, New York, New York 10017 (the "Building"); and WHEREAS, the parties have agreed to amend the Lease to add certain spaces in the basement and in the loading dock area of the Building to the Leased Premises, all upon the terms and conditions herein set forth. A G R E E M E N T: NOW, THEREFORE, in consideration of the foregoing, Landlord, and Tenant agree as follows: 1. All capitalized terms used herein shall have the same meanings ascribed to them in the Lease, unless otherwise herein indicated, or unless the context hereof shall otherwise require. 2 -2- 2. The Lease is modified to reflect the addition to the Leased Premises as part of the Basement Space of the space in the loading dock area of the Building (the "Additional Loading Dock Area") effective as of June 15, 1998 (the "Additional Loading Dock Area Effective Date") as shown on the hatched area on Schedule "A" annexed hereto and made a part hereof on all relevant covenants, conditions and agreements of the Lease, as modified hereby, and on the following additional terms and conditions: (i) The Rentable Space Footage of the Additional Loading Dock Area for purposes of the Lease, as modified hereby, shall be deemed to be 65. (ii) During the period from the Additional Loading Dock Area Effective Date and continuing throughout the Term, the fixed minimum rent payable pursuant to Section 3.01 of the Lease solely for the Additional Loading Dock Area shall be at the annual rate of ONE THOUSAND ONE HUNDRED SEVENTY AND 00/100 DOLLARS ($1,170.00) and which fixed minimum rent amount shall on each anniversary of the date hereof commencing with the first such anniversary be increased by an amount equal to three percent (3%) of the fixed minimum rent payable for the preceding year, and shall be payable in equal monthly installments in advance on the first day of each month occurring during such period. (iii) The Additional Loading Dock Area may be used for storage only and/or as a part of Tenant's existing messenger center in accordance with the provisions of paragraph 4 of the Sixteenth Amendment of the Lease, made as of April 28, 1989, by and between Landlord and Tenant. (iv) The Additional Loading Dock Area was leased and delivered to Tenant "as is" in its then vacant condition or in the condition in which the same was upon removal by the preceding tenant or occupant, if any, as the case may be, and Landlord is not required to perform any work, furnish any materials or give Tenant any rent credit, rent abatement or work allowance or any sum of money in connection with the addition of such space. 3. Effective as of the "Additional Basement Space. Effective Date" (as hereinafter defined), the Lease is modified to add to the Leased Premises as part of the Basement Space the space in the basement area of the Building known as Unit B1 (the "Additional Basement Space") as shown on the hatched area on Schedule "B" annexed hereto and made a part hereof on all 3 -3- relevant covenants, conditions and agreements of the Lease, as modified hereby, and on the following additional terms and conditions: (i) The Rentable Square Footage of the Additional Basement Space for purposes of the Lease, as modified hereby, shall be deemed to be 252. (ii) During the period from the date hereof and continuing throughout the Term, the fixed minimum rent payable pursuant to Section 3.01 of the Lease solely for the Additional Basement Space shall be FOUR THOUSAND FIVE HUNDRED THIRTY-SIX AND 00/100 DOLLARS ($4,536.00), and which fixed minimum rent amount shall on each anniversary of the date hereof commencing with the first such anniversary be increased by an amount equal to three percent (3%) of the fixed minimum rent payable for the preceding year, and shall be payable in equal monthly installments in advance on the first day of each month occurring during such period. (iii) The Additional Basement Space shall be leased and delivered to Tenant "as-is" in the condition in which the same shall be upon removal by the preceding tenant or occupant, if any, and Landlord is not required to perform any work, furnish, any materials or give Tenant any rent credit, rent abatement or work allowance or any sum of money in connection with the addition of such space. 4. The effectiveness of this Amendment as it relates to the Additional Basement Space is subject to and expressly conditioned upon the effectiveness of that certain Partial Surrender and Termination of Lease being entered into by NHS National Health Services Inc. ("NHS") (the current tenant of the Additional Basement Space) and the surrender of such space to Landlord by NHS on or before October 1, 1998 (the date of the satisfaction of both such conditions being herein referred to as the "Additional Basement Space Effective Date"), and in the event that the same shall not become effective and have occurred, then this Eighteenth Amendment shall automatically be deemed null and void as to the Additional Basement Space only and Landlord and Tenant shall be relieved of any and all obligations hereunder relating thereto. 5. Each of Landlord and Tenant covenants, represents and warrants that it has had no dealings or communications with any broker or agent in connection with the consummation of this Agreement, other than SageGroupAssociates Inc. ("SGA"), and each party indemnifies the other from and against any and all cost, 4 -4- expense (including reasonable attorneys' fees) or liability for any compensation, commissions or charges claimed by any other broker or agent, claiming to have dealt with it with respect to this Agreement or the negotiation thereof. Landlord shall pay SGA the commission, if any, pursuant to a separate agreement. 6.This Eighteenth Amendment may not be changed, amended or modified in any manner other than by an agreement in writing specifically referring to this Eighteenth Amendment and executed by Landlord and Tenant. 7. The provisions of this Eighteenth Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 8. The provisions of this Eighteenth Amendment shall be construed in accordance with the laws of the State of New York. 9. Except as modified hereby, the Lease remains unmodified and in full force and effect. IN WITNESS WHEREOF, the undersigned have caused this Amendment to be executed as of the day and year first above written. LANDLORD: SAGE REALTY CORPORATION, as Agent (in its capacity as Landlord) By: /s/ Rob Kaufman ------------------------------------- Name: Rob Kaufman Title: Executive Vice President 10/22/98 TENANT: GREY ADVERTISING INC. By: /s/ [ILLEGIBLE] Name: Title: 5 SCHEDULE "A" (Plan Showing the Additional Loading Dock Area Follows this Page 6 [MAP OMITTED] 7 SCHEDULE "B" [Plan showing the Additional Basement Space Follows this Page 8 [MAP OMITTED] EX-21.01 3 SUBSIDIARIES 1 Grey Advertising Inc. and Consolidated Subsidiary Companies Exhibit 21.01 Subsidiaries of Grey (as of March 1, 1999) Name Jurisdiction of Organization - ---- ---------------------------- Alonso y Asociados S.A. Mexico AS Grey Oy Finland CR & Grey Advertising Pty. Ltd. Singapore CSS & Grey Cyprus Cenajans Grey Reklamcilik A.S. Turkey Creative Collaboration Grey S.A. Switzerland Crescendo Productions Inc. New York Dorland & Grey S.A. Belgium Dorland & Grey S.A. France Esfera Grey, S.A. Columbia Fischer-Grey, C.A. Venezuela FOVA Inc. Delaware GCG Norge A/S Norway GCG Scandinavia A/S Denmark GCI Group Inc. New York Great Productions Inc. Delaware Great Spot Films Ltd. Delaware Grey Advertising (Hong Kong) Ltd. Hong Kong Grey Advertising (NSW) Pty. Ltd. Australia Grey Advertising (New Zealand) Ltd. New Zealand Grey Advertising de Venezuela, C.A. Venezuela Grey Advertising (Victoria) Pty. Ltd. Australia -1- 2 Grey Advertising Inc. and Consolidated Subsidiary Companies Exhibit 21.01 Subsidiaries of Grey (as of March 1, 1999) Name Jurisdiction of Organization - ---- ---------------------------- Grey Advertising Inc. Maryland Grey Advertising Ltd. Canada Grey Argentina S.A. Argentina Grey Athens Advertising S.A. Greece Grey Australia Pty. Ltd. Australia Grey Austria GmbH Austria Grey Chile S.A. Chile Grey Communications Group A/S Denmark Grey Communications Group B.V. The Netherlands Grey Communications Group Ltd. United Kingdom Grey-Daiko Advertising, Inc. Japan Grey Denmark A/S Denmark Grey Diciembre S.A. Uruguay Grey Direct Inc. Delaware Grey Direct International GmbH Germany Grey Directory Marketing Inc. Delaware Grey Dusseldorf GmbH Co. Kommanditgesellschaft Germany Grey Entertainment Inc. New York Grey Espana S.A. Spain Grey GmbH Germany Grey Healthcare Group Inc. Delaware Grey Holding S.A. Belgium Grey Holding GmbH Germany Grey Holdings A.B. Sweden -2- 3 Grey Advertising Inc. and Consolidated Subsidiary Companies Exhibit 21.01 Subsidiaries of Grey (as of March 1, 1999) Name Jurisdiction of Organization - ---- ---------------------------- Grey Holdings Pty. Ltd. South Africa Grey IFC Inc. Delaware Grey India Inc. Delaware Grey Advertising (Malaysia) Sdn. Bhd. Malaysia Grey Media Connections Inc. New York Grey Mexico, S.A. de C.V. Mexico Grey Peru S.A. Peru Grey Strategic Marketing Inc. Delaware Grey Thailand Co. Ltd. Thailand Grey Ventures Inc. New York Greycom S.A.R.L. France Group Trace, S.A. Spain Hwa Wei & Grey Advertising Co. Ltd. Taiwan Mediacom Inc. Delaware MediaCom Holding AB Sweden Milano e Grey S.p.A. Italy National Research Foundation for Business Statistics, Inc. New York Preferred Professionals Inc. New York Rigel Ltd. Cayman Islands SEK & Grey Ltd. Finland -3- 4 Grey Advertising Inc. and Consolidated Subsidiary Companies Exhibit 21.01 Subsidiaries of Grey (as of March 1, 1999) Name Jurisdiction of Organization - ---- ---------------------------- The Tape Center Inc. Delaware Triple Seven Concepts Inc. Delaware Visual Communications Group Inc. New York Walther, Gesess, Grey AG Switzerland Winkler Advertising Inc. California West Indies & Grey Advertising Inc. Puerto Rico Z&G Grey Comunicacao Ltda. Brazil -4- EX-23.01 4 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.01 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-36599, 33-61233, 33-61231, 33-21352 and 2-98101) pertaining to the Stock Option and Incentive Plans of Grey Advertising Inc. of our report dated February 18, 1999 on the consolidated financial statements of Grey Advertising Inc. and consolidated subsidiary companies included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP New York, New York March 31, 1999 EX-27.01 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE AUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 OF GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1998 DEC-31-1998 153,816 55,130 797,474 0 0 1,148,582 250,618 137,534 1,489,653 1,145,118 78,025 10,333 0 1,488 171,901 1,489,653 935,181 935,181 0 0 882,524 0 11,506 59,152 29,856 25,877 0 0 0 25,877 20.81 18.98
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