-----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, HUjle6cQnJKCpheDJfGuHzXrYB085eqRoZzb/rXSYuqYIsHX8aEsFvoHv1EY6HaN wqbHSHn/7466rEdBK6IrIA== 0000950123-99-010201.txt : 19991117 0000950123-99-010201.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-07898 FILM NUMBER: 99752318 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-Q 1 GREY ADVERTISING INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1999 [ ] 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, 212-546-2000 including area code: ------------ NOT APPLICABLE -------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of October 31, 1999, the total number of shares outstanding of Registrant's Common Stock, par value $1 per share ("Common Stock"), was 1,011,864 and of Registrant's Limited Duration Class B Common Stock, par value $1 per share ("Class B Common Stock"), was 235,425. 2 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES INDEX
PAGE NO. -------- Financial Statements: Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Other Information 16 Signatures 17 Index to Exhibits 18
2 3 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 (UNAUDITED) (A) --------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 147,735,000 $ 153,816,000 Marketable securities 15,267,000 55,130,000 Accounts receivable 846,967,000 797,474,000 Expenditures billable to clients 59,335,000 66,681,000 Other current assets 87,484,000 75,481,000 --------------------------------------------------- Total current assets 1,156,788,000 1,148,582,000 Investments in and advances to nonconsolidated affiliated companies 19,737,000 16,705,000 Fixed assets-at cost, less accumulated depreciation of $151,246,000 in 1999 and $137,534,000 in 1998 121,855,000 113,084,000 Marketable securities 24,261,000 30,827,000 Goodwill-net of accumulated amortization of $39,727,000 in 1999 and $31,466,000 in 1998 135,332,000 116,499,000 Other assets - including loans to executive officers of $5,372,000 in 1999 and $5,572,000 in 1998 72,663,000 63,956,000 --------------------------------------------------- Total assets $ 1,530,636,000 $ 1,489,653,000 ===================================================
See accompanying notes to condensed consolidated financial statements. (A) The condensed consolidated balance sheet has been derived from the audited financial statements at that date. 3 4 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 (UNAUDITED) (A) ------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 976,645,000 $ 865,427,000 Notes payable to banks 81,999,000 70,911,000 Accrued expenses and other 116,143,000 184,497,000 Income taxes payable 30,508,000 24,283,000 --------------------------------------------- Total current liabilities 1,205,295,000 1,145,118,000 Other liabilities, including deferred compensation of $42,499,000 in 1999 and $41,871,000 in 1998 64,851,000 68,676,000 Long-term debt 78,025,000 78,025,000 Minority interest 11,404,000 14,112,000 Redeemable preferred stock - at redemption value; par value $1 per share; authorized 500,000 shares; issued and outstanding 30,000 shares in 1999 and 1998 9,576,000 10,333,000 Common stockholders' equity: Common Stock - par value $1 per share; authorized 10,000,000 shares; issued 1,227,307 in 1999 and 1,205,041 in 1998 1,227,000 1,205,000 Limited Duration Class B Common Stock - par value $1 per share; authorized 2,000,000 shares; issued 262,451 shares in 1999 and 282,765 shares in 1998 262,000 283,000 Paid-in additional capital 38,164,000 38,832,000 Retained earnings 184,661,000 189,714,000 Accumulated other comprehensive loss: Cumulative translation adjustment (16,718,000) (11,716,000) Unrealized loss on marketable securities (2,668,000) (1,307,000) --------------------------------------------- Total accumulated other comprehensive loss (19,386,000) (13,023,000) --------------------------------------------- Loans to officer used to purchase Common Stock and Limited Duration Class B Common Stock (4,726,000) (4,726,000) --------------------------------------------- Less - cost of 215,562 and 222,950 shares of Common Stock 200,202,000 212,285,000 and 26,899 and 26,762 shares of Limited Duration Class B Common Stock held in treasury in 1999 and 1998, respectively 38,717,000 38,896,000 --------------------------------------------- Total common stockholders' equity 161,485,000 173,389,000 --------------------------------------------- Total liabilities and stockholders' equity $ 1,530,636,000 $ 1,489,653,000 =============================================
See accompanying notes to condensed consolidated financial statements. (A) The condensed consolidated balance sheet has been derived from the audited financial statements at that date. 4 5 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------------------------------------------------------------------------------- Commissions and fees $262,048,000 $234,105,000 $ 750,908,000 $ 683,090,000 Expenses: Salaries and employee related expenses 171,099,000 152,106,000 499,179,000 434,111,000 Office and general expenses 81,661,000 71,184,000 238,913,000 207,617,000 -------------------------------------------------------------------------------- 252,760,000 223,290,000 738,092,000 641,728,000 -------------------------------------------------------------------------------- 9,288,000 10,815,000 12,816,000 41,362,000 Other income - net 778,000 2,720,000 2,086,000 4,851,000 -------------------------------------------------------------------------------- Income of consolidated companies before taxes on income 10,066,000 13,535,000 14,902,000 46,213,000 Provision for taxes on income 5,254,000 6,689,000 14,254,000 23,524,000 -------------------------------------------------------------------------------- Income of consolidated companies 4,812,000 6,846,000 648,000 22,689,000 Minority interest applicable to consolidated companies (1,262,000) (1,088,000) (3,693,000) (4,599,000) Equity in earnings of nonconsolidated affiliated companies 1,081,000 272,000 1,154,000 1,290,000 -------------------------------------------------------------------------------- Net income (loss) $ 4,631,000 $ 6,030,000 $ (1,891,000) $ 19,380,000 ================================================================================ Weighted average number of common shares outstanding Basic 1,237,281 1,233,571 1,238,225 1,216,456 Diluted 1,337,006 1,339,736 1,238,225 1,349,600 Earnings (loss) per common share Basic $3.68 $4.86 $(1.06) $15.86 Diluted $3.43 $4.50 $(1.06) $14.37 Dividends per common share $1.00 $1.00 $3.00 $3.00 ================================================================================
See accompanying notes to condensed consolidated financial statements. 5 6 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---------------------------------------------------- OPERATING ACTIVITIES Net (loss) income $ (1,891,000) $ 19,380,000 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization of fixed assets 23,835,000 20,634,000 Amortization of intangibles 8,274,000 5,678,000 Deferred compensation 2,714,000 9,204,000 Equity in earnings of nonconsolidated affiliated companies, net of dividends received of $630,000 in 1999 and $665,000 in 1998 (524,000) (625,000) Gains from the sale of marketable securities 25,000 (259,000) Minority interest applicable to consolidated companies 3,693,000 4,599,000 Restricted stock expense 401,000 22,000 Deferred income taxes 878,000 1,960,000 Changes in operating assets and liabilities: Increase in accounts receivable (78,340,000) (32,276,000) Decrease (increase) in expenditures billable to clients 2,046,000 (2,954,000) (Increase) decrease in other current assets (15,923,000) 10,000 Increase in other assets (19,621,000) (1,498,000) Increase in accounts payable 141,917,000 8,357,000 Decrease in accrued expenses and other (60,504,000) (3,344,000) Increase (decrease) in income taxes payable 8,695,000 (440,000) Decrease in other liabilities (8,478,000) (2,729,000) ---------------------------------------------------- Net cash provided by operating activities 7,197,000 25,719,000 INVESTING ACTIVITIES Purchases of fixed assets (38,016,000) (33,062,000) Trust fund deposits (2,866,000) (4,065,000) (Increase) decrease in investments in and advances to nonconsolidated affiliated companies (2,508,000) (1,253,000) Purchases of marketable securities (1,689,000) (29,883,000) Proceeds from the sale of marketable securities 46,762,000 20,497,000 Increase in intangibles, primarily goodwill (27,107,000) (18,382,000) ---------------------------------------------------- Net cash used in investing activities (25,424,000) (66,148,000)
6 7 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---------------------------------- FINANCING ACTIVITIES Net proceeds from short-term borrowings 17,547,000 32,302,000 Common shares acquired for treasury (1,007,000) (163,000) Redemption of preferred stock -- (651,000) Cash dividends paid on common shares (3,739,000) (3,657,000) Cash dividends paid on redeemable preferred stock (180,000) (184,000) Issuance (repurchase) of restricted stock 16,000 (18,000) Proceeds from exercise of stock options 751,000 -- ------------------------------------ Net cash provided by financing activities 13,388,000 27,629,000 Effect of exchange rate changes on cash (1,242,000) (4,914,000) ----------------------------------- Decrease in cash and cash equivalents (6,081,000) (17,714,000) Cash and cash equivalents at beginning of period 153,816,000 150,553,000 ----------------------------------- Cash and cash equivalents at end of period $ 147,735,000 $ 132,839,000 ===================================
See accompanying notes to condensed consolidated financial statements. 7 8 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. As permitted by the Securities and Exchange Commission, the accompanying unaudited Consolidated Financial Statements and Notes thereto have been condensed and, therefore, do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange Commission. 2. The financial statements as of September 30, 1999 and for the three and nine months ended September 30, 1999 and 1998 are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 3. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 4. The provision for taxes on income results in an effective tax rate that is greater than the Federal statutory rate principally due to the non-recognition of tax benefits of certain international net operating losses incurred in the period; state and local income taxes; and effective individual foreign country tax rates in excess of the Federal statutory rate. 5. As of September 30, 1999 and December 31, 1998, the Company had outstanding 20,000 shares of Series I Preferred Stock, and 5,000 shares each of its Series II and Series III Preferred Stock. The holder of these shares is the Chairman and Chief Executive Officer of the Company. Each share of preferred stock is to be redeemed by the Company at a price equal to the book value per share attributable to one share of Common Stock and one share of Class B Common Stock (subject to certain adjustments) upon redemption, less a fixed discount established upon the issuance of the preferred stock. The holder of each class of preferred stock is entitled to receive cumulative preferential dividends at the annual rate of $.25 per share, and to participate in dividends on one share of the Common Stock and one share of the Class B Common Stock to the extent such dividends exceed the per share preferential dividend. The redemption date for the Series I, Series II and Series III Preferred Stock is fixed at April 7, 2004. The terms of the Series I, Series II and Series III Preferred Stock also give the holder, his estate or his legal representative, as the case may be, the option to require the Company to redeem the 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. In connection with his ownership of the preferred stock, the holder issued to the Company full recourse promissory notes (which are included in Other Assets in the accompanying condensed consolidated balance sheets). 6. The computation of basic earnings per common share is based on the weighted average number of common shares outstanding and, for diluted earnings per common share, is adjusted for the dilutive effect, if any, of the assumed exercise of dilutive stock options, shares issuable pursuant to the Company's Senior Management Incentive Plan and the assumed conversion of 8 9 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the Company's 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 paid on the Company's preferred stock and by the change in redemption value of the Company's preferred stock during the 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. Additionally, in computing diluted earnings per common share, the average quarterly market price is used to determine the number of shares which would be assumed to be repurchased. The market price for a share of Class B Common Stock, which is not publicly traded, is deemed to be equal to the market price of a share of Common Stock, into which a share of Class B Common Stock may be converted at the option of the holder, as of the date such valuation is made. The following table shows the amounts used in computing earnings per common share ("EPS") and the weighted average number of shares of dilutive potential common stock:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------------------------- 1999 1998 1999 1998 ------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER ------------------------- COMMON SHARE ------------ WEIGHTED AVERAGE SHARES 1,237,281 1,233,571 1,238,225 1,216,456 ------------------------------------------------------------------------- Net income (loss) $ 4,631,000 $ 6,030,000 $ (1,891,000) $ 19,380,000 Effect of dividend requirements and the change in redemption value of redeemable preferred stock (84,000) (34,000) 577,000 (85,000) ------------------------------------------------------------------------- NET EARNINGS (LOSS) USED IN COMPUTATION $ 4,547,000 $ 5,996,000 $ (1,314,000) $ 19,295,000 ------------------------------------------------------------------------- PER SHARE AMOUNT $3.68 $4.86 $(1.06) $15.86 ========================================================================= DILUTED EARNINGS (LOSS) PER --------------------------- COMMON SHARE ------------ Weighted average shares used in the Basic EPS calculation 1,237,281 1,233,571 1,238,225 1,216,456 Net effect of dilutive stock options and stock incentive plans (2) 48,597 55,125 (1) - 82,104 Assumed conversion of 8.5% convertible subordinated debentures 51,128 51,040 (1) - 51,040 ------------------------------------------------------------------------- ADJUSTED WEIGHTED AVERAGE SHARES 1,337,006 1,339,736 1,238,225 1,349,600 ------------------------------------------------------------------------- Net earnings (loss) used in the Basic EPS calculation $ 4,547,000 $ 5,996,000 $ (1,314,000) $ 19,295,000 8.5% convertible subordinated debentures interest net of income tax effect 34,000 34,000 (1) - 103,000 ------------------------------------------------------------------------- NET EARNINGS (LOSS) USED IN COMPUTATION $ 4,581,000 $ 6,030,000 $ (1,314,000) $ 19,398,000 ------------------------------------------------------------------------- PER SHARE AMOUNT $3.43 $4.50 $(1.06) $14.37 =========================================================================
(1) For the nine months ended September 30, 1999, the assumed exercise of stock options, issuances under stock incentive plans and the assumed conversion of the 8-1/2% Convertible Subordinated Debentures each had an anti-dilutive effect. As such, these items have been excluded from the diluted EPS calculation for the period. (2) Due to their anti-dilutive effect, shares issued pursuant to the Senior Management Incentive Plan for the nine months ended September 30, 1999 were not included in the calculation. For the three months ended September 30, 1999, 11,030 shares were included. For the three and nine months ended September 30, 1998, 12,072 shares and 38,038 shares, respectively, were included. 9 10 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. 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 the billings. Commissions and fees, operating profit (loss), and income (loss) of consolidated companies before taxes on income for the three and nine months ended September 30, 1999 and 1998, and related identifiable assets at September 30, 1999 and December 31, 1998 are summarized below according to geographic region (000s omitted):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------- UNITED STATES EUROPE OTHER CONSOLIDATED --------------- --------------- ---------------- ---------------- 1999 1998 1999 1998 1999 1998 1999 1998 Commissions and fees $120,163 $106,186 $107,278 $104,271 $ 34,607 $ 23,648 $262,048 $234,105 -------- -------- -------- -------- -------- -------- -------- -------- Operating profit (loss) 6,641 8,300 1,642 2,646 1,005 (131) 9,288 10,815 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) of consolidated companies before taxes on income 7,651 10,352 1,729 3,262 686 (79) 10,066 13,535 -------- -------- -------- -------- -------- -------- -------- -------- Total assets
FOR NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------------------------------------- UNITED STATES EUROPE OTHER CONSOLIDATED ---------------------- -------------------- ---------------------- ------------------------- 1999 1998 1999 1998 1999 1998 1999 1998 Commissions and fees $ 325,531 $ 312,518 $341,912 $ 304,334 $ 83,465 $ 66,238 $ 750,908 $ 683,090 --------- --------- -------- --------- -------- -------- ---------- ---------- Operating profit (loss) 13,187 27,614 7,438 19,162 (7,809) (5,414) 12,816 41,362 --------- --------- -------- --------- -------- -------- ---------- ---------- Income (loss) of consolidated companies before taxes on income 16,354 32,355 7,447 19,550 (8,899) (5,692) 14,902 46,213 --------- --------- -------- --------- -------- -------- ---------- ---------- Identifiable assets 650,464 608,882 646,628 699,636 213,807 164,430 1,510,899 1,472,948 --------- --------- -------- --------- -------- -------- Investments in and advances to nonconsolidated affiliated companies 19,737 16,705 ---------- ---------- Total assets $1,530,636 $1,489,653 ========== ==========
10 11 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. During the third quarter of 1999 and 1998, total comprehensive income amounted to $2,683,000 and $2,135,000, respectively, and for the nine months ended September 30, 1999 and 1998 total comprehensive loss was $8,254,000 and total comprehensive income was $13,463,000, respectively. The difference between net income (loss) and total comprehensive income (loss) is the result of the change in the translated value of the net assets of the Company's international operations due to the strengthening of the United States dollar and changes in values of certain marketable securities. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS Income from commissions and fees ("gross income") increased 11.9% during the third quarter of 1999 and 9.9% during the nine months ended September 30, 1999 when compared to the same periods in 1998. Absent exchange rate fluctuations, gross income increased 14.7% in the three months ended September 30, 1999 and 11.1% in the nine months ended September 30, 1999 when compared to the same periods in 1998. In the third quarters of 1999 and 1998, respectively, 45.9% and 45.4% of consolidated gross income was attributable to domestic operations and 54.1% and 54.6% to international operations. In the third quarter of 1999 and the first nine months of 1999, respectively, gross income from domestic operations increased 13.2% and increased 4.2% versus the respective prior periods, while gross income from international operations increased 10.9%, (15.9% absent exchange rate fluctuations) for the third quarter of 1999 and 14.8% (17.0% absent exchange rate fluctuations) for the first nine months of 1999 when compared to the same periods in 1998. The increase in gross income in both years primarily resulted from the continued growth of the Company's media operations and expanded presence in the high growth specialties of interactive marketing, healthcare and public relations as well as the contribution of acquisitions made in 1998 and early 1999. Salaries and employee related expenses increased 12.5% in the third quarter of 1999 and 15.0% for the first nine months of 1999 when compared to the respective prior periods. Office and general expenses increased 14.7% and 15.1% for the three and nine months ended September 30, 1999, respectively, versus the comparable prior periods. These expenses increased at a greater rate than the increase in gross income in order to assist the Company in replacing business which had been lost in 1998 but not yet fully replaced; to building the Company's new technology business and other growth practices; and to enhance and expand it's capabilities generally which are designed to have a long-term positive impact on the Company's financial health. The Company has secured significant new business which is reflected in the third quarter results and in improved operating margins when compared to earlier periods in the year. Inflation did not have a material effect on revenue or expenses during 1999 or 1998. Minority interest applicable to consolidated companies increased by $174,000 in the third quarter of 1999 and decreased by $906,000 for the first nine months of 1999 as compared to the respective prior periods. The fluctuations in minority interest are primarily due to the levels of profits of majority-owned companies. Equity in earnings of nonconsolidated affiliated companies increased by $809,000 in the third quarter of 1999 and decreased by $136,000 for the first nine months of 1999 as compared to the respective prior periods. The fluctuations are primarily due to changes in the level of profits of nonconsolidated affiliated companies. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The effective tax rate for the nine months ended September 30, 1999 is considerably in excess of the comparable prior periods. The provision for taxes on income approximated consolidated pretax income for the nine months ended September 30, 1999, primarily because the Company determined it could not recognize, currently, the future tax benefits attributable to net operating losses at certain international subsidiaries. For the three months ended September 30, 1999, the Company's tax rate returned approximately to historical levels. Net income in the third quarter of 1999 was $4,631,000 and the net loss for the nine months ended September 30, 1999 was $1,891,000 as compared to net income of $6,030,000 and net income of $19,380,000 in the respective prior periods. Basic earnings per common share for the third quarter of 1999 was $3.68 and diluted earnings per common share for the same period was $3.43 as compared to earnings per common share of $4.86 and $4.50, respectively, in the comparable quarter in 1998. For the nine months ended September 30, 1999, both basic and diluted loss per common share were $1.06 as compared to earnings per common share of $15.86 and $14.37, respectively, for the same periods in 1998. The decrease in net income is attributable principally to reduced gross income at the Company's general advertising agency operations resulting from the loss of certain business in 1998 which has yet to be fully replaced and the continuing weakness in selected international markets without a corresponding reduction of expenses for the reasons discussed plus the increase in the Company's effective tax rate. The decrease for the nine months ended September 30, 1999, however, has been mitigated by the impact of new business won this year that is being reflected in the upturn in gross income. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased by $51,971,000 to a deficit of $48,507,000 at September 30, 1999, versus $3,464,000 at December 31, 1998. Cash and cash equivalents decreased by $6,081,000 from $153,816,000 to $147,735,000 at September 30, 1999. The change in cash and cash equivalents is largely attributable to the timing of collections of accounts receivable and billing of expenses to clients versus payments to trade vendors. Marketable securities decreased by $46,429,000, which was primarily due to their liquidation for the payment made for the acquisition of TMBG Media Co. Domestically, the Company has committed lines of credit totaling $51,000,000. These lines of credit were partially utilized during the nine months ended September 30, 1999 and 1998 to secure obligations of selected foreign subsidiaries. There was $17,660,000 and $18,700,000 outstanding under these credit lines as of September 30, 1999 and December 31, 1998, 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. There was $64,339,000 and $52,211,000 outstanding at September 30, 1999 and December 31, 1998, respectively. 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 READINESS DISCLOSURE 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 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 and have undertaken what they believe to be the appropriate steps to modify or replace hardware and software as necessary. The remediation strategy 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 the final stages of conversion upgrade and testing. 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. 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 and 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. 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 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. 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. 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. As such, 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. 15 16 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Reference is made to the Index annexed hereto and made a part hereof. (b)Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended September 30, 1999. 16 17 GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GREY ADVERTISING INC. (REGISTRANT) DATE: November 15, 1999 By:/s/ Steven G. Felsher ----------------------------- Steven G. Felsher Executive Vice President - Finance - Worldwide Secretary and Treasurer (Duly Authorized Officer) DATE: November 15, 1999 By:/s/ Lester M. Feintuck ----------------------------- Lester M. Feintuck Senior Vice President - Chief Financial Officer - US Operations Controller (Chief Accounting Officer) 17 18 INDEX TO EXHIBITS
Page Number in Number Assigned to Sequential Numbering Exhibit (i.e. 601 Table of Item 601 Exhibits System Where Exhibit of Regulation S-K) Description of Exhibits May be Found 27 Financial Data Schedule 19
18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS DEC-31-1999 SEP-30-1999 147,735 15,267 846,967 0 0 1,156,788 121,855 151,246 1,530,636 1,205,295 78,025 9,576 0 1,489 159,996 1,530,636 750,908 750,908 0 0 738,092 0 14,300 14,902 14,254 (1,891) 0 0 0 (1,891) (1.06) (1.06)
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