<PAGE> 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 June 30, 1994
/ / 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 July 31, 1994, the total number of shares outstanding of Registrant's
Common Stock, par value $1 per share ("Common Stock"), was 910,358 and of
Registrant's Limited Duration Class B Common Stock, par value $1 per share
("Class B Common Stock"), was 330,140.
<PAGE> 2
GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
Financial Statements: Page No.
--------
<S> <C>
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 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 10
Other Information 12
Signatures 13
Index to Exhibits 14
</TABLE>
2
<PAGE> 3
Grey Advertising Inc. and Consolidated Subsidiary Companies
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
(UNAUDITED) (A)
------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $152,886,000 $181,267,000
Accounts receivable 394,303,000 363,105,000
Expenditures billable to clients 29,359,000 22,581,000
Other current assets 71,538,000 69,116,000
-----------------------------------------
Total current assets 648,086,000 636,069,000
Investments in and advances to nonconsolidated
affiliated companies 15,760,000 16,104,000
Fixed assets-at cost, less accumulated depreciation
of $79,273,330 and $74,671,000 59,716,000 57,724,000
Marketable securities 22,834,000 22,425,000
Intangibles and other assets-including loans to
officers of $5,547,000 in 1994 and $4,947,000
in 1993 94,439,000 88,311,000
-----------------------------------------
Total assets $840,835,000 $820,633,000
=========================================
</TABLE>
3
<PAGE> 4
Grey Advertising Inc. and Consolidated Subsidiary Companies
Condensed Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
(UNAUDITED) (A)
-------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $444,858,000 $469,227,000
Notes payable to banks 63,545,000 45,851,000
Accrued expenses and other 106,070,000 88,099,000
Income taxes payable 9,054,000 7,891,000
-----------------------------------
Total current liabilities 623,527,000 611,068,000
Other liabilities including deferred compensation of
$17,276,000 and $15,342,000 32,395,000 31,820,000
Long-term debt 33,025,000 33,025,000
Minority interest 8,759,000 9,053,000
Redeemable preferred stock-at redemption value; par value $1 per
share; authorized 500,000 shares; issued and outstanding 32,000
shares in 1994 and 1993 6,960,000 6,590,000
Common stockholders' equity:
Common Stock-par value $1 per share; authorized 10,000,000
shares; issued 1,074,476 in 1994 and 1,062,046 in 1993 1,075,000 1,062,000
Limited Duration Class B Common Stock-par value $1 per share;
authorized 2,000,000 shares; issued 357,308 shares in 1994 and
369,738 shares in 1993 357,000 370,000
Paid-in additional capital 27,815,000 27,329,000
Retained earnings 137,635,000 131,835,000
Cumulative translation adjustment (1,341,000) (3,573,000)
Unrealized loss on marketable securities (1,412,000) (147,000)
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock (4,726,000) (4,726,000)
------------------------------------
159,403,000 152,150,000
Less-cost of 164,801 and 164,372 shares of Common Stock and
26,851 and 26,851 shares of Limited Duration Class B Common
Stock held in treasury at June 30, 1994 and December 31, 1993,
respectively 23,234,000 23,073,000
-----------------------------------
Total common stockholders' equity 136,169,000 129,077,000
-----------------------------------
Total liabilities and stockholders' equity $840,835,000 $820,633,000
===================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(A) The consolidated balance sheet has been derived from the audited financial
statements at that date.
4
<PAGE> 5
Grey Advertising Inc. and Consolidated Subsidiary Companies
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------
1994 1993 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commissions and fees $147,859,000 $143,244,000 $280,816,000 $274,771,000
Expenses:
Salaries and employee related expenses 92,083,000 87,853,000 176,530,000 173,357,000
Office and general expenses 44,236,000 41,653,000 84,429,000 80,807,000
--------------------------------------------------------------------------
136,319,000 129,506,000 260,959,000 254,164,000
--------------------------------------------------------------------------
11,540,000 13,738,000 19,857,000 20,607,000
Other (expense) income-net (289,000) (96,000) (1,172,000) 263,000
--------------------------------------------------------------------------
Income before taxes on income of
consolidated companies 11,251,000 13,642,000 18,685,000 20,870,000
Provision for taxes on income 6,466,000 7,543,000 10,552,000 11,488,000
--------------------------------------------------------------------------
Net income of consolidated companies 4,785,000 6,099,000 8,133,000 9,382,000
Minority interest applicable to
consolidated companies (747,000) (513,000) (1,307,000) (1,128,000)
Equity in nonconsolidated affiliated
companies 1,042,000 214,000 1,464,000 773,000
--------------------------------------------------------------------------
Net income $5,080,000 $5,800,000 $8,290,000 $9,027,000
==========================================================================
Weighted average number
of common shares outstanding
Primary 1,285,863 1,261,451 1,286,090 1,260,457
Fully diluted 1,336,862 1,314,113 1,337,537 1,315,713
Net income per common share
Primary $3.69 $4.39 $6.08 $6.93
Fully diluted $3.58 $4.24 $5.90 $6.70
Dividends per common share $0.8125 $0.775 $1.63 $1.55
=========================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
Grey Advertising Inc. and Consolidated Subsidiary Companies
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1994 1993
---------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,290,000 $ 9,027,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization of fixed assets 6,947,000 7,098,000
Amortization of intangibles 3,632,000 2,503,000
Deferred compensation 4,080,000 4,370,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $513,000
and $140,000 (951,000) (676,000)
Minority interest applicable to consolidated
companies 1,307,000 1,128,000
Amortization of restricted stock expense 55,000 230,000
Deferred income taxes (2,240,000) (1,925,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (28,518,000) (32,060,000)
(Increase) decrease in expenditures billable
to clients (6,320,000) 3,066,000
Decrease (increase) in other current assets 655,000 (9,256,000)
Increase in other assets (28,000) (3,285,000)
(Decrease) increase in accounts payable (29,880,000) 48,308,000
Increase in accrued expenses and other 14,573,000 1,271,000
Increase in income taxes payable 1,332,000 4,906,000
Decrease in other liabilities (3,381,000) (2,538,000)
---------------------------------------
Net cash (used in) provided by operating activities (30,447,000) 32,167,000
INVESTING ACTIVITIES
Purchases of fixed assets (8,456,000) (6,379,000)
Increase in investments in and advances to
nonconsolidated affiliated companies (1,546,000) (2,061,000)
Purchases of marketable securities (1,517,000)
Increase in intangibles, primarily goodwill (4,200,000) (4,900,000)
---------------------------------------
Net cash used in investing activities (15,719,000) (13,340,000)
</TABLE>
6
<PAGE> 7
Grey Advertising Inc. and Consolidated Subsidiary Companies
Condensed Consolidated Statements of Cash Flows (Unaudited)
(continued)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
1994 1993
-----------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from short-term borrowings $ 23,406,000 $ 9,172,000
Common Shares acquired for treasury (347,000) (669,000)
Cash dividends paid on Common Shares (2,016,000) (1,920,000)
Redemption of Preferred Stock (300,000)
Cash dividends paid on Redeemable Preferred Stock (104,000) (102,000)
Proceeds from exercise of stock options 141,000 288,000
Proceeds from long-term debt 30,000,000
-----------------------------------
Net cash provided by financing activities 21,080,000 36,469,000
Effect of exchange rate changes on cash (3,295,000) (5,055,000)
-----------------------------------
(Decrease) increase in cash and cash equivalents (28,381,000) 50,241,000
Cash and cash equivalents at beginning of period 181,267,000 92,755,000
-----------------------------------
Cash and cash equivalents at end of period $152,886,000 $142,996,000
===================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 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, 1993
filed with the Securities and Exchange Commission.
2. The financial statements as of June 30, 1994 and for the three and six
months ended June 30, 1994 and June 30, 1993 are unaudited. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair representation have been included.
3. The results of operations for the three and six months ended June 30, 1994
and June 30, 1993 are not necessarily indicative of the results to be
expected for the full year.
4. The computations of net income per common share for the three and six
months ended June 30, 1994 and June 30, 1993 are based on the weighted
average number of common shares outstanding, adjusted for the effect, if
any, of the assumed exercise of dilutive stock options and of shares
payable in Common Stock pursuant to the Company's Senior Management
Incentive Plan, and, for fully diluted net income per common share, the
assumed conversion of the 8-1/2% Convertible Subordinated Debentures issued
in December 1983. Also, for the purpose of computing net income per common
share for the three and six months ended June 30, 1994 and June 30, 1993,
the Company's net income was reduced by dividends on the Preferred Stock
and also adjusted by the change in the redemption value of Preferred Stock.
Primary net income per common share is computed as if the stock options
were exercised at the beginning of the period and as if the funds obtained
thereby were used to purchase Common Stock at the market price during the
period. In computing fully diluted net income per common share, the market
price at the close of the period or the average market price, whichever was
higher, was used to determine the number of shares which would be assumed
to be repurchased. The market price for a share of Class B Common Stock,
which is not publicly traded, is deemed to be equal to the market price of
a share of Common Stock, into which a share of Class B Common Stock may be
converted at the option of the holder, as of the date such valuation is
made.
5. The provision for taxes on income is greater than the Federal statutory
rate principally due to state and local income taxes, and effective foreign
tax rates that are in excess of the Federal statutory rate.
8
<PAGE> 9
6. As of June 30, 1994, the Company had outstanding 20,000 shares of
Series I Preferred Stock, 5,000 shares each of its Series II and
Series III Preferred Stock, and 2,000 shares of Series 1 Preferred
Stock. As of December 31, 1993, the Company had outstanding 22,000
shares of Series 1 Preferred Stock and 5,000 shares each of its Series
2 and 3 Preferred Stock which were sold to certain current and former
employees, including one senior executive, for a combination of cash
and full recourse promissory notes (which are included in Other Assets
in the accompanying condensed consolidated balance sheet). In April
1994, the senior executive entered into an Exchange Agreement pursuant
to which he exchanged 20,000 shares of Series 1 Preferred Stock and
5,000 shares each of Series 2 Preferred Stock and Series 3 Preferred
Stock (collectively, the "Original Preferred Stock") for a like number
of shares of New Preferred Stock, designated Series I Preferred Stock,
Series II Preferred Stock and Series III Preferred Stock
(collectively, the "New Preferred Stock"). The terms of the New
Preferred Stock, including the basic economic terms relating thereto,
are essentially the same as the Original Preferred Stock, except that
the redemption date of the new Preferred Stock is fixed at April 7,
2004 rather than on a date determined by reference to his termination
of full-time employment with the Company as was the case with the
Original Preferred Stock. The terms of the New 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. The holder of the Series 1
Preferred Stock has the option to have his shares redeemed upon
termination of his employment prior to age 65. The Company is
obligated to redeem such shares following the attainment of age 65 by
the holder thereof following termination of employment.
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 pertaining upon
redemption (subject to certain adjustments), less a fixed discount
established upon the issuance of the Preferred Stock. The holders of
each class of Preferred Stock are 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.
7. During the first quarter of 1994, the Company adopted FAS 112,
Employers' Accounting for Postemployment Benefits. The costs incurred
resulting from the adoption of this pronouncement were not material.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Income from commissions and fees increased 3.2% during the second quarter and
2.2% during the six months ended June 30, 1994 as compared to the same periods
in 1993. The increases result primarily from expanded activity from existing
clients, and the continued growth of the Company's general agency and
specialized operations.
Salaries and employee related expenses increased 4.8% during the second quarter
and 1.8% during the six months ended June 30, 1994 when compared to respective
prior periods. Office and general expenses increased 6.2% during the second
quarter and 4.5% during the six months ended June 30, 1994, as compared to the
same periods in 1993. The increased expenses incurred in the second quarter
and the six months ended June 30, 1994 are attributable to costs incurred in
the general growth of the business and, in part, due to costs associated with
securing and integrating substantial new business assignments, and increased
charges for goodwill write-offs principally as a result of the shortening of
amortization periods for selected past acquisitions. The increase in goodwill
write-offs during the three months ended June 30, 1994 was $630,000 when
compared to the comparable quarter in the prior year.
Inflation did not have a material effect on either revenue or expenses during
1994 or 1993.
The effective tax rate increased to 57.5% from 55.3% in the second quarter and
to 56.5% from 55% in the six months ended June 30, 1994 versus the respective
prior periods. These increases primarily relate to a greater portion of the
pre-tax profit being derived from companies operating in countries with higher
effective tax rates.
Minority interest increased by $234,000 in the second quarter and $179,000
during the six months ended June 30, 1994 as compared to the respective prior
periods. The increases are primarily due to changes in the level of profits of
majority-owned companies.
Equity in earnings of nonconsolidated affiliated companies increased by
$828,000 in the second quarter and $691,000 during the six months ended June
30, 1994 as compared to the respective prior periods. These increases are
primarily due to changes in the level of profits of nonconsolidated companies.
10
<PAGE> 11
RESULTS OF OPERATIONS (continued)
Net income decreased by 12.4% in the second quarter and 8.2% during the six
months ended June 30, 1994 when compared to the comparable periods in 1993.
Net income decreased during the second quarter principally because of the
additional costs discussed above, continued softness in the European
advertising market (which represents in excess of 40% of the Company's annual
commissions and fees) and the relative strength of the dollar in 1994 as
compared to the respective prior periods. Primary net income per common share
decreased by 15.9% in the second quarter and 12.3% in the six months of 1994 as
compared to the same periods in 1993. Fully diluted net income per common
share decreased 15.6% in the second quarter and 11.9% in the first six months
of 1994 as compared to the same periods in 1993. For purposes of computing
primary net income per common share, the Company's net income was reduced by
(i) dividends paid on the Company's Preferred Stock and (ii) the change in
redemption value of the Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased marginally by $442,000 from $25,001,000 at December
31, 1993 to $24,559,000 at June 30, 1994. Cash and cash equivalents decreased
by $28,381,000 from $181,267,000 to $152,886,000. The decrease in cash and
cash equivalents is largely attributable to the settlement of year-end payable
balances which were higher at the end of 1993. Domestically, the Company has
committed lines of credit totaling $40,000,000. These lines of credit were
partially utilized during the three and six months ended June 30, 1994 and 1993
to secure obligations of selected foreign subsidiaries. There was $15,000,000
and $11,186,000 outstanding under these credit lines as of June 30, 1994 and
1993, respectively.
Domestically, the Company also maintains uncommitted lines of credit. These
facilities, which are available at the discretion of the offering banks, were
not utilized during the period. There were no amounts outstanding under these
arrangements at June 30, 1994 or June 30, 1993.
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 were $48,545,000 and $34,039,000 outstanding at June
30, 1994 and 1993, respectively.
11
<PAGE> 12
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: On April 15, 1994 the Company filed a
report on Form 8-K dated April 7, 1994, relating to Item 5
thereof, and including as an exhibit thereto, the Restated
Certificate of Incorporation of the Company.
12
<PAGE> 13
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: Aug 12, 1994 By:/s/ Steven G. Felsher
------------------------
Steven G. Felsher
Executive Vice President,
Secretary and Treasurer (Duly
Authorized Officer)
DATE: Aug 12, 1994 By:/s/ William P. Garvey
------------------------
William P. Garvey
Executive Vice President
Chief Financial Officer
(Chief Accounting Officer)
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Assigned to Exhibit Page Number in Sequential
(i.e., Exhibit Table of Item 601 Numbering System Where
of Regulation S-K) Description of Exhibit Exhibit May Be Found
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Table of Item 601 of Exhibit
(11) Description of Exhibit
Statement re Computation
of Net Income per Common
Share (unaudited) (15)
</TABLE>
14
<PAGE> 1
Grey Advertising Inc. and Consolidated Subsidiary Companies
Exhibit - Statement Re: Computation of Net Income Per Common Share (unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June 30, Months Ended June 30,
1994 1993 1994 1993
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding (1) 1,267,359 1,245,362 1,267,722 1,246,326
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 18,504 16,089 18,368 14,131
--------------- --------------- --------------- ---------------
TOTAL 1,285,863 1,261,451 1,286,090 1,260,457
=============== =============== =============== ===============
Net Income $5,080,000 $5,800,000 $8,290,000 $9,027,000
Less: Effect of dividend requirements
and the change in the redemption
value of redeemable preferred stock (329,000) (259,000) (474,000) (288,000)
--------------- --------------- --------------- ---------------
NET EARNINGS USED IN COMPUTATION $4,751,000 $5,541,000 $7,816,000 $8,739,000
=============== =============== =============== ===============
Per share amount $3.69 $4.39 $6.08 $6.93
=============== =============== =============== ===============
FULLY DILUTED
Average shares outstanding(1) 1,267,359 1,245,362 1,267,722 1,246,326
Net effect of dilutive stock options -
based on the treasury stock method
using the period-end market price, if
higher than the average market price 18,504 17,751 18,816 18,387
Assumed conversion of 8.5% convertible
subordinated debentures issued
December 1983 50,999 51,000 50,999 51,000
--------------- --------------- --------------- ---------------
TOTAL 1,336,862 1,314,113 1,337,537 1,315,713
=============== =============== =============== ===============
Net Income $5,080,000 $5,800,000 $8,290,000 $9,027,000
Less: Effect of dividend requirements
and the change in the redemption
value of redeemable preferred stock (329,000) (259,000) (474,000) (288,000)
Add: 8.5% convertible subordinated
debentures interest, net of income
tax effect 35,000 35,000 69,000 70,000
--------------- --------------- --------------- ---------------
NET EARNINGS USED IN COMPUTATION $4,786,000 $5,576,000 $7,885,000 $8,809,000
=============== =============== =============== ===============
Per share amount $3.58 $4.24 $5.90 $6.70
=============== =============== =============== ===============
</TABLE>
(1) Includes 27,273 shares and 8,628 shares for 1994 and 1993, respectively,
expected to be issued pursuant to the terms of the Senior Management
Incentive Plan
15
