<PAGE> 1
GREY
GREY ADVERTISING INC.
1994 FINANCIAL REPORT
Grey Advertising Inc.
777 Third Avenue
New York, New York 10017
212-546-2000
<PAGE> 2
WHO WE ARE AND WHAT WE DO
Grey Advertising Inc. ("Company") was founded in 1917 as Grey Studios and
was incorporated in New York in 1925; it was reincorporated in Delaware 49 years
later. Its stock was first sold to the public in 1965. Since its inception, the
Company has engaged in the creation and placement of advertising. The Company
engages in the planning, creation, production and placement of advertising in
various media including television, radio, newspaper and magazines. The Company
has developed an expertise in and offers its clients such additional services as
marketing consultation, audio-visual production, direct marketing, media buying,
research, product publicity, public relations and sales promotion.
The Company does business in only one industry segment, and no separate
class of similar services contributed 10% or more of the Company's gross income
or net income during 1994, 1993 or 1992. While the Company operates on a
worldwide basis, for the purposes of presenting certain financial information in
accordance with Securities and Exchange Commission rules, the Company's
operations are deemed to be conducted in three geographic areas. Information
relating to this appears in Note N to the Consolidated Financial Statements.
BID PRICES* AND
DIVIDEND HISTORY 1993-1994
<TABLE>
<CAPTION>
DOLLARS PER
SHARE
-------------- DIVIDENDS
HIGH LOW PER SHARE
----- --- ---------
<S> <C> <C> <C> <C>
1993 First Quarter....................... 157 132 .775
Second Quarter...................... 165 143 .775
Third Quarter....................... 189 166 .775
Fourth Quarter...................... 187 174 .8125
1994 First Quarter....................... 196 178 .8125
Second Quarter...................... 195 182 .8125
Third Quarter....................... 190 159 .8125
Fourth Quarter...................... 165 144 .875
</TABLE>
- - ---------------
*Such over-the-counter market quotations reflect interdealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
Note: Stockholders of Record -- Common Stock 505 (6/1/95);
Limited Duration Class B Common Stock 307 (6/1/95).
1
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 4.6% in 1994
and 0.5% in 1993 as compared to the respective prior years. Absent exchange rate
fluctuations, gross income increased 6.0% in 1994 and 5.9% in 1993 as compared
to the respective prior years. In 1994, 1993 and 1992, respectively, 46.8%,
47.2% and 42.7% of consolidated gross income was attributable to domestic
operations and 53.2%, 52.8% and 57.3% respectively, to international operations.
The increases in gross income in both years primarily resulted from expanded
activities from existing clients and the continued growth of the Company's
general agency and specialized operations. In 1994, gross income from domestic
operations increased 3.5% versus 1993 and was up 11.1% in 1993 versus 1992.
Gross income from international operations increased 5.6% in 1994 when compared
to 1993 after a decrease of 7.4% in 1993. The decrease in international gross
income in 1993 was partially attributable to a general slow down of advertising
activity in certain markets and the relative strength of the United States
dollar.
Salaries and employee-related expenses increased 6.2% in 1994 and less than
1%, in 1993 as compared to the respective prior years. Office and general
expenses, absent the goodwill write-off (discussed below), increased 3.3% in
1994 and 2.1% in 1993 versus respective prior years. The increases in expenses
are generally in line with the increases in gross income shown for such years.
In the fourth quarter of 1994, the Company wrote-off $39,944,000 of
goodwill. The non-cash write-off related almost exclusively to international
acquisitions made by the Company principally in the 1980's. The carrying value
of the Company's goodwill prior to the write-off was approximately $84,000,000
and the write-off was associated with 34 of the almost 100 investments for which
the Company had unamortized goodwill. The portion of the write-off relating to
advertising agencies was approximately $31,295,000 and $8,649,000 related to
public relations agencies. Significant amounts of these write-offs related to
operations in the United Kingdom.
The widely recognized international recession seriously affected the
advertising industry, particularly in Western Europe, where the Company has its
largest and most developed international operations. As the recession abated in
the latter part of 1994, the Company was able to assess more clearly the
long-term prospects of the affected operations. At that point, and in connection
with the annual business plan meetings which took place in the fourth quarter,
it became clear that the goodwill associated with a number of the agencies had
become permanently impaired. Management's projections indicated that anticipated
future cash flows for these specific operations would not, as would be expected
in a normal post-recession environment, recover sufficiently to cover
amortization of the associated goodwill. The gross income of the operations for
which permanent impairment of goodwill was recognized in 1994 represented
approximately 7%, 9% and 12% of the Company's consolidated gross income in 1994,
1993 and 1992, respectively.
In reaching its conclusion as to the impairment of goodwill, the Company
took into account certain client related developments, such as client losses or
major changes in the business circumstances of clients significant to particular
operations, and the departure of key management personnel. In substantially all
of the 34 operations for which there were goodwill write-offs, the loss of key
clients and/or key personnel specific to those operations were significant
factors leading to management's determination that goodwill was impaired. While
indicators of impairment may have been developing during the course of the year,
until the recession abated, the business planning meetings were held and the
annual analysis of recoverability of goodwill was performed, management had not
determined whether permanent impairment of goodwill had occurred.
The material portion of the goodwill write-off related to ten agencies
acquired in the United Kingdom as part of a strategy to develop the Company's
representation outside of the London market in the general advertising category
and in certain specialized disciplines (such as retail advertising, promotional
services and public relations). With the revival of the industry, a review of
the Company's local market strategies, and in conjunction with several key
management changes, client losses or the inability of these operations to
maintain revenues with replacement or new clients, after the analysis referred
to above, management concluded that the
2
<PAGE> 4
goodwill associated with these operations had been permanently impaired. While
future client losses and management changes could affect the Company's
operations in the United Kingdom, the Company has consolidated a number of
operations, thereby lessening the likelihood of a negative impact from any
instance of client or management turnover. In addition, the unimpaired goodwill
balances associated with the United Kingdom operations represents less than 10%
of the Company's consolidated unamortized goodwill as of December 31, 1994.
Several of the operations where permanent impairment of goodwill was
identified will continue to operate as ongoing businesses; however, management
has concluded that such operations will likely continue to experience
difficulties. While the Company has no intention of closing any office or
terminating employees in these operations other than in the normal course of
business, the Company will take prudent and reasonable actions, which may
include expense reductions, consolidation of offices and perhaps making selected
acquisitions to supplement those operations, as may be necessary to have such
operations contribute to the Company's profitable activities.
In 1993 and 1992, respectively, the Company wrote-off $1,939,000 and
$3,065,000 of goodwill in excess of normal amortization schedules.
The Company will continue to assess the carrying value of its goodwill by
analyzing non-discounted cash flows and will recognize additional permanent
impairments, if any, as they arise.
Neither inflation nor changing prices had a material effect on revenue or
expenses in 1992, 1993 or 1994.
The effective tax rate was 1,342.9% in 1994, 52.7% in 1993 and 46.9% in
1992. The increase in the effective tax rate in 1994 as compared to 1993 is due
to the goodwill write-off in the fourth quarter, which is a non-deductible
expense for tax purposes. Absent the goodwill write-off, the 1994 effective tax
rate would have been 52.0%, approximately the same as 1993. The increase in the
effective tax rate in 1993 as compared to 1992 is primarily related to an
increase in the state and local tax provision which results from a higher
portion of income of consolidated companies before taxes on income being derived
from domestic operations in 1993. In addition, the 1993 effective tax rate
increased because the U.S. income tax statutory rate rose to 35% from 34%.
Minority interest decreased $1,468,000 in 1994 and $3,104,000 in 1993 as
compared to the respective prior years. The decreases in 1994 and in 1993 were
primarily due to changes in the level of profits of majority-owned companies.
Equity in earnings of nonconsolidated companies decreased $298,000 in 1994
and increased $1,068,000 in 1993 as compared to the respective prior years.
These changes are due primarily to changes in the level of profits attributable
to the nonconsolidated companies.
The Company reported a loss of $21,378,000 for 1994 as compared to net
income of $17,681,000 in 1993; absent the goodwill write-off, net income for
1994 would have been $18,566,000, an increase of 5.0% over 1993. Net income for
1993, increased 11.2% over net income in 1992. Net loss per common share for
1994 was $17.51 as compared to primary earnings per share of $13.46 in 1993.
Absent the goodwill write-off, primary net income per share would have been
$13.50, an increase of .3% over 1993. Primary net income per share increased
6.2% in 1993 over 1992.
For purposes of computing primary net income per common share, the
Company's net income was (i) reduced by dividends paid on the Company's
Preferred Stock and (ii) reduced or increased by the increase or decrease,
respectively, in redemption value of the Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a high level of liquidity, as it
continued to have high levels of cash and investments in highly marketable
liquid United States government securities. Cash and cash equivalents were
$170,077,000 and $181,267,000 at December 31, 1994 and 1993, respectively, and
the Company's investment in United States government securities was $22,463,000
and $22,425,000 at December 31, 1994
3
<PAGE> 5
and 1993, respectively. The high level of liquidity reflects the Company's
attention to the cash management process.
Domestically, the Company maintains committed bank lines of credit
totalling $40,000,000. These lines of credit were partially utilized during both
1994 and 1993 to secure obligations of selected foreign subsidiaries in the
respective year-end amounts of $15,000,000 and $11,100,000.
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 $49,460,000 and $34,751,000 outstanding under
such facilities at December 31, 1994 and 1993, respectively.
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 shall be sufficient to meet
its short-term cash requirements in the future.
While the Company has not had to utilize long-term borrowing to fund its
operating needs, in January 1993, taking advantage of favorable terms offered,
it borrowed $30,000,000, at a fixed interest rate of 7.68%, principal repayable
in equal installments in January 1998, 1999 and 2000. The Company does not
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 commissions
and fees 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.
4
<PAGE> 6
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $170,077,000 $181,267,000
Marketable securities -- (Notes A and E)...................... 7,678,000
Accounts receivable........................................... 403,973,000 363,105,000
Expenditures billable to clients.............................. 30,145,000 22,581,000
Other current assets.......................................... 63,796,000 69,116,000
----------- -----------
TOTAL CURRENT ASSETS.................................. 675,669,000 636,069,000
INVESTMENTS IN AND ADVANCES TO NONCONSOLIDATED AFFILIATED
COMPANIES -- (Notes A and B).................................. 16,495,000 16,104,000
FIXED ASSETS, net -- (Note D)................................... 61,174,000 57,724,000
MARKETABLE SECURITIES -- (Notes A and E)........................ 14,785,000 22,425,000
INTANGIBLES AND OTHER ASSETS, including loans to officers of
$5,347,000 in 1994 and $4,947,000 in 1993 -- (Notes A, F, G, I
and L(1))..................................................... 61,953,000 88,311,000
----------- -----------
TOTAL ASSETS.......................................... $830,076,000 $820,633,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $475,188,000 $469,227,000
Notes payable to banks -- (Note F)............................ 64,460,000 45,851,000
Accrued expenses and other.................................... 88,156,000 88,099,000
Income taxes payable.......................................... 14,130,000 7,891,000
----------- -----------
TOTAL CURRENT LIABILITIES............................. 641,934,000 611,068,000
OTHER LIABILITIES, including deferred compensation of
$16,244,000 and $15,342,000 -- (Note L(1)).................... 30,053,000 31,820,000
LONG-TERM DEBT -- (Note F)...................................... 33,025,000 33,025,000
MINORITY INTEREST............................................... 8,843,000 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 32,000 in 1993 -- (Note G).......... 7,516,000 6,590,000
COMMON STOCKHOLDERS' EQUITY:
Common Stock -- par value $1 per share; authorized 10,000,000
shares; issued 1,077,116 in 1994 and 1,062,046 in 1993..... 1,077,000 1,062,000
Limited Duration Class B Common Stock -- par value $1 per
share; authorized 2,000,000 shares; issued 354,668 shares
in 1994 and 369,738 shares in 1993......................... 355,000 370,000
Paid-in additional capital.................................... 31,895,000 27,329,000
Retained earnings............................................. 105,123,000 131,835,000
Cumulative translation adjustment............................. (728,000) (3,573,000)
Unrealized loss on marketable securities -- (Notes A and E)... (1,492,000) (147,000)
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock -- (Note I).................. (4,726,000) (4,726,000)
----------- -----------
131,504,000 152,150,000
Less -- cost of 161,382 and 164,372 shares of Common Stock and
26,751 and 26,851 shares of Limited Duration Class B Common
Stock held in treasury at December 31, 1994 and 1993,
respectively............................................... 22,799,000 23,073,000
----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY..................... 108,705,000 129,077,000
RETIREMENT PLANS, LEASES AND CONTINGENCIES -- (Note L)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $830,076,000 $820,633,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Commissions and fees........................... $593,317,000 $567,243,000 $564,468,000
Expenses:
Salaries and employee related
expenses -- (Note L(1))................... 370,196,000 348,462,000 346,933,000
Office and general expenses -- (Note L(2))... 181,826,000 176,054,000 172,512,000
Goodwill write-off -- (Notes A and M)........ 39,944,000 1,939,000 3,065,000
----------- ----------- -----------
591,966,000 526,455,000 522,510,000
----------- ----------- -----------
1,351,000 40,788,000 41,958,000
Other income -- net -- (Note C)................ 259,000 1,917,000 630,000
----------- ----------- -----------
INCOME OF CONSOLIDATED COMPANIES
BEFORE TAXES ON INCOME............. 1,610,000 42,705,000 42,588,000
Provision for taxes on income -- (Note K)...... 21,621,000 22,487,000 19,975,000
----------- ----------- -----------
NET INCOME OF CONSOLIDATED
COMPANIES.......................... (20,011,000) 20,218,000 22,613,000
Minority interest applicable to consolidated
companies.................................... (3,040,000) (4,508,000) (7,612,000)
Equity in nonconsolidated affiliated
companies.................................... 1,673,000 1,971,000 903,000
----------- ----------- -----------
NET (LOSS) INCOME.................... $(21,378,000) $17,681,000 $15,904,000
=========== =========== ===========
Earnings per Common Share -- (Note J):
Primary...................................... $(17.51) $13.46 $12.68
Fully diluted................................ * $13.00 $12.25
</TABLE>
- - ---------------
* Antidilutive.
See notes to consolidated financial statements.
6
<PAGE> 8
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK
PAID-IN HELD IN TREASURY OTHER
COMMON ADDITIONAL RETAINED ----------------------- EQUITY
STOCK CAPITAL EARNINGS SHARES AMOUNT ACCOUNTS TOTAL
--------- ---------- ----------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991..... $1,432,000 $20,030,000 $106,973,000 275,815 $(27,470,000) $4,188,000 $105,153,000
Net income....................... 15,904,000 15,904,000
Cash dividends -- Common
Shares -- $3.025............... (3,519,000) (3,519,000)
Cash dividends -- Redeemable
Preferred Stock -- $6.05....... (206,000) (206,000)
Common Shares acquired -- at
cost........................... 7,375 (891,000) (891,000)
Increase in redemption value of
Redeemable Preferred
Stock -- (Note G).............. (415,000) (415,000)
Restricted Stock Plan
activity -- (Note I)........... 252,000 252,000
Tax benefit from restricted
stock -- (Note K).............. 119,000 119,000
Common Shares issued upon
exercise of stock options...... 498,000 (70,999) 4,112,000 4,610,000
Tax benefit from exercise of
stock options -- (Note K)...... 1,556,000 1,556,000
Deferred compensation used to
purchase Common Shares......... 20,000 (17,810) 1,133,000 1,153,000
Senior Management Incentive Plan
activity -- (Note L)........... 1,160,000 1,160,000
Notes receivable from senior
executive related to exercise
of stock options -- (Note I)... (4,726,000) (4,726,000)
Translation adjustment........... (1,409,000) (1,409,000)
--------- ---------- ----------- -------- ----------- ---------- -----------
Balance at December 31, 1992..... 1,432,000 23,635,000 118,737,000 194,381 (23,116,000) (1,947,000) 118,741,000
Net income....................... 17,681,000 17,681,000
Cash dividends -- Common
Shares -- $3.1375 per share.... (3,911,000) (3,911,000)
Cash dividends -- Redeemable
Preferred Stock -- $6.275 per
share.......................... (204,000) (204,000)
Common Shares acquired -- at
cost........................... 5,426 (787,000) (787,000)
Increase in redemption value of
Redeemable Preferred
Stock -- (Note G).............. (468,000) (468,000)
Restricted Stock Plan
activity -- (Note I)........... 256,000 256,000
Tax benefit from restricted
stock -- (Note K).............. 66,000 66,000
Common Shares issued upon
exercise of stock options...... (44,000) (8,584) 830,000 786,000
Tax benefit from exercise of
stock options -- (Note K)...... 46,000 46,000
Senior Management Incentive Plan
activity -- (Note L)........... 3,370,000 3,370,000
Translation adjustment........... (6,352,000) (6,352,000)
Unrealized loss on marketable
securities -- (Notes A and
E)............................. (147,000) (147,000)
--------- ---------- ----------- -------- ----------- ---------- -----------
Balance at December 31, 1993..... 1,432,000 27,329,000 131,835,000 191,223 (23,073,000) (8,446,000) 129,077,000
Net loss......................... (21,378,000) (21,378,000)
Cash dividends -- Common
Shares -- $3.3125 per share.... (4,196,000) (4,196,000)
Cash dividends -- Redeemable
Preferred Stock -- $6.625 per
share.......................... (212,000) (212,000)
Common Shares acquired -- at
cost........................... 1,993 (372,000) (372,000)
Increase in redemption value of
Redeemable Preferred
Stock -- (Note G).............. (926,000) (926,000)
Restricted Stock Plan
activity -- (Note I)........... 30,000 (1,750) 226,000 256,000
Tax benefit from restricted
stock -- (Note K).............. 450,000 450,000
Common Shares issued upon
exercise of stock options...... (101,000) (3,333) 420,000 319,000
Tax benefit from exercise of
stock options -- (Note K)...... 118,000 118,000
Senior Management Incentive Plan
activity -- (Note L)........... 4,069,000 4,069,000
Translation adjustment........... 2,845,000 2,845,000
Unrealized loss on marketable
securities -- (Notes A and
E)............................. (1,345,000) (1,345,000)
--------- ---------- ----------- -------- ----------- ---------- -----------
Balance at December 31, 1994..... $1,432,000 $31,895,000 $105,123,000 188,133 $(22,799,000) $(6,946,000) $108,705,000
========= ========== =========== ======== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 9
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income...................................... $ (21,378,000) $ 17,681,000 $ 15,904,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of fixed assets...... 15,093,000 13,591,000 13,171,000
Goodwill write-off................................. 39,944,000 1,939,000 3,065,000
Amortization of intangibles........................ 7,475,000 5,486,000 5,107,000
Deferred compensation.............................. 9,006,000 6,379,000 8,572,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of
$903,000, $1,336,000 and $595,000............... (770,000) (635,000) (308,000)
Minority interest applicable to consolidated
companies....................................... 3,040,000 4,508,000 7,612,000
Amortization of restricted stock expense........... 116,000 256,000 280,000
Deferred income taxes.............................. (5,104,000) (3,271,000) 5,351,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... (31,058,000) (29,082,000) 27,633,000
(Increase) decrease in expenditures billable to
clients....................................... (6,006,000) 555,000 (4,014,000)
Decrease (increase) in other current assets..... 10,739,000 28,454,000 (11,434,000)
Increase in other assets........................ (3,077,000) (4,141,000) (5,082,000)
(Decrease) increase in accounts payable......... (4,220,000) 76,731,000 769,000
(Decrease) increase in accrued expenses and
other......................................... (9,424,000) (5,580,000) 8,976,000
Increase in income taxes payable................ 6,600,000 2,385,000 478,000
Decrease in other liabilities................... (2,507,000) (7,298,000) (26,160,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................................... 8,469,000 107,958,000 49,920,000
INVESTING ACTIVITIES
Purchases of fixed assets.......................... (17,067,000) (13,421,000) (11,904,000)
Increase in investments in and advances to
nonconsolidated affiliated companies............ (3,564,000) (4,849,000) (1,731,000)
Purchases of marketable securities................. (1,517,000) (22,572,000)
Increase in intangibles, primarily goodwill........ (14,800,000) (6,770,000) (1,780,000)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES........... (36,948,000) (47,612,000) (15,415,000)
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term
borrowings...................................... 15,826,000 9,762,000 (11,331,000)
Common Shares issued under Restricted Stock Plan... 141,000
Common Shares acquired for treasury................ (372,000) (787,000) (492,000)
Cash dividends paid on Common Shares............... (4,112,000) (3,884,000) (3,519,000)
Cash dividends paid on Redeemable Preferred
Stock........................................... (212,000) (204,000) (206,000)
Proceeds from exercise of stock options............ 319,000 786,000 1,041,000
Proceeds from the redemption of Redeemable
Preferred Stock................................. (300,000)
Proceeds from long-term debt....................... 30,000,000
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.......................... 11,590,000 35,373,000 (14,507,000)
Effect of exchange rate changes on cash................ 5,699,000 (7,207,000) 1,231,000
------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.............................. (11,190,000) 88,512,000 21,229,000
Cash and cash equivalents at beginning of year......... 181,267,000 92,755,000 71,526,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR....................................... $ 170,077,000 $ 181,267,000 $ 92,755,000
=============== =============== ===============
</TABLE>
SUPPLEMENTAL INFORMATION REGARDING NON-CASH FINANCING ACTIVITIES.
In 1992, the Company granted a loan of $3,170,000 in partial payment for
the purchase of common stock (see Note I).
See notes to consolidated financial statements.
8
<PAGE> 10
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. Certain amounts for years
prior to 1994 have been reclassified to conform with the current year
classification.
Commissions and Fees
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.
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.
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 income
statement accounts are translated at the average exchange rates prevailing
during the year. Resulting translation adjustments are made directly to a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are reported in income. During 1994, 1993 and 1992, 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 being amortized by the straight-line method over
periods of up to 20 years. The amounts of goodwill associated with consolidated
subsidiaries (included in Other Assets) and nonconsolidated investments
(included in Investments in and Advances to Nonconsolidated Affiliated
Companies) were $36,603,000 and $7,718,000 in 1994 and $63,965,000 and
$6,995,000 in 1993, 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
9
<PAGE> 11
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
management staff and any changes in general economic conditions. In 1994, the
Company formalized its assessment of goodwill and quantified the recoverability
of goodwill based on each agency's estimated future non-discounted cash flows
over the applicable remaining amortization periods. This required management to
make certain specific assumptions with respect to future revenue and expense
levels. Where multiple investments had been made in an agency, 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
non-discounted cash flows. If such cash flows are expected to recover less than
10% of the associated goodwill, a full write-off is recorded. No write-off is
recorded if the cash flows are expected to recover 90% or more of the associated
goodwill.
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 basis 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.
Marketable Securities
Effective December 31, 1993, the Company adopted FAS 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company has classified
its investments in marketable securities as available-for-sale at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Available-for-sale securities are carried at fair value, based on publicly
quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity.
B. FOREIGN OPERATIONS
The following financial data is applicable to consolidated foreign
subsidiaries:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Current assets......................... $349,208,000 $357,391,000 $369,342,000
Current liabilities.................... 364,571,000 367,048,000 372,391,000
Other assets -- net of other
liabilities.......................... 50,696,000 69,915,000 77,214,000
Net (loss) income...................... (35,043,000) 2,584,000 4,473,000
</TABLE>
Consolidated retained earnings at December 31, 1994 includes equity in
unremitted earnings of nonconsolidated foreign companies of approximately
$4,156,000.
C. OTHER INCOME - NET
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Interest income............................ $7,507,000 $7,307,000 $6,565,000
Interest expense........................... (7,833,000) (7,558,000) (7,170,000)
Dividends from affiliates.................. 86,000 674,000 198,000
Other -- net............................... 499,000 1,494,000 1,037,000
---------- ---------- ----------
$ 259,000 $1,917,000 $ 630,000
========== ========== ==========
</TABLE>
10
<PAGE> 12
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
D. FIXED ASSETS
Components of fixed assets-at cost are:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment...................... $97,988,000 $90,304,000
Leaseholds and leasehold improvements.................. 43,770,000 42,091,000
----------- -----------
141,758,000 132,395,000
Less accumulated depreciation and amortization......... 80,584,000 74,671,000
----------- -----------
$61,174,000 $57,724,000
============ ============
</TABLE>
E. MARKETABLE SECURITIES
At December 31, 1994 and 1993, the Company's investments in marketable
securities consist of U.S. Treasury obligations with maturities of 11 months to
6 years and a market value of $22,463,000 and $22,425,000, respectively. At
December 31, 1994 and 1993, the Company has recorded unrealized losses of
$1,492,000 and $147,000, respectively related to these investments.
F. CREDIT ARRANGEMENTS AND LONG-TERM DEBT
The Company maintains committed lines of credit of $40,000,000 with various
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 were partially
utilized during both 1994 and 1993 to secure obligations of selected foreign
subsidiaries in the respective year-end amounts of $15,000,000 and $11,100,000.
The weighted average interest rate related to the debt associated with the
committed lines of credit was 6.25% and 7.7% at December 31, 1994 and 1993
respectively. The Company had $49,460,000 and $34,751,000 outstanding under
other uncommitted lines of credit at December 31, 1994 and 1993, respectively.
The weighted average interest rate for the borrowings under the uncommitted
lines of credit was 7.7% and 10.9%, at December 31, 1994 and 1993, 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.
In January 1993, the Company borrowed $30,000,000 from the Prudential
Insurance Company at a fixed interest rate of 7.68% and principal repayable in
equal installments of $10,000,000 in January 1998, 1999 and 2000. The terms of
the loan agreement require, inter alia, that the Company maintain specified
levels of net worth, meet certain cash flow requirements and limit its
incurrence of additional indebtedness to certain specified amounts. At December
31, 1994, the Company was in compliance with all of these covenants. The fair
value of the Prudential debt is estimated to be $29,900,000 and $31,400,000 at
December 31, 1994 and 1993 respectively. This estimate was determined using a
discounted cash flow analysis using current interest rates for debt having
similar terms and remaining maturities.
The remaining balance of long-term debt consists of 8- 1/2% Convertible
Subordinated Debentures due December 10, 1996 which are currently convertible
into 8.43 shares of Common Stock and an equal amount of Limited Duration Class B
Common Stock, subject to certain adjustments, for each $1,000 principal amount
of such Debentures. The debt was issued in exchange for cash and a $3,000,000,
9% promissory note, payable December 10, 1997 from an officer of the Company
that is included in Other Assets at December 31, 1994 and 1993. During each of
the years 1994, 1993 and 1992, the Company paid to the officer interest of
$257,000 pursuant to the terms of the Debenture and the officer paid to the
Company interest of $270,000 pursuant to the terms of the 9% promissory note.
For the years 1994, 1993 and 1992, the Company made interest payments of
$7,839,000, $6,529,000 and $7,242,000, respectively.
11
<PAGE> 13
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
G. REDEEMABLE PREFERRED STOCK
As of December 31, 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 (included in Other
Assets). 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 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, unless redeemed
earlier under the circumstances described below, rather than on a date
determined by reference to the senior executive's 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 New 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 with cause. In addition, the maturity date for the outstanding
promissory notes referred to above was extended to April, 2004. The terms of the
Series 1 Preferred Stock permits the holder of shares thereof 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 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. In April 1993, the Company, at the option of one holder,
after attainment of age 65, redeemed 2,000 shares of Series 1 Preferred Stock at
a price of $347,000. The Company discharged its obligation by payment of cash of
$300,000 and forgiveness of the holder's promissory note of $47,000. The amount
of the full recourse promissory notes included in Other Assets at December 31,
1994 and 1993 was $763,000. The interest paid by the senior employees to the
Company in 1994, 1993 and 1992 pursuant to the terms of these notes was $70,000,
$70,000 and $77,000, respectively.
In accordance with the terms of the respective Certificates of Designation
and Terms of each Series of Preferred Stock ("Certificates"), the change in
redemption value in 1994 does not reflect the write-off of goodwill described in
Notes A and M, but rather reflects amortization as if the Company had continued
to write-off goodwill in accordance with historical amortization schedules.
Following the distribution of the new class of Common Stock designated
Limited Duration 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.
12
<PAGE> 14
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In the event of the liquidation of the Company, holders of Preferred Stock
are 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 $926,000, $468,000 and
$415,000 in 1994, 1993 and 1992, respectively. The change in carrying value
represents the change in redemption value during those periods. This change is
referred to as "Additional Capital Applicable to Redeemable Preferred Stock" in
the respective Certificates.
H. COMMON STOCK
The Company has authorized and outstanding two classes of common stock,
Common Stock and Limited Duration Class B Common Stock (Class B Common Stock),
both $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 30, 1996.
I. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") was
adopted in March 1994 subject to stockholder approval which was received in June
1994. The Stock Incentive Plan replaces the Restricted Stock Plan, the Executive
Growth Plan, the Incentive Stock Option Plan and the Nonqualified Stock Option
Plan ("Prior Plans") and any shares available for granting of awards under the
Prior Stock Plans are no longer available for such awards. Options granted
pursuant to the Prior Plans remain outstanding and in full force and shares
reserved remain 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
and no employee can be granted stock options in excess of 75,000 shares or more
than 75,000 shares of restricted stock. 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 ("the Committee") determines the
terms and conditions under which the awards may be granted or exercised.
Options, however, shall expire not later than ten years from 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). During 1994, non-qualified options for 3,250 shares of Common Stock were
granted at a total option price of $530,750. In addition, 1,750 shares of
Restricted Stock were issued at prices between $77.50 and $81.50 per share with
restrictions as to transferability expiring after five years. No restrictions
lapsed during 1994 and no restricted stock or options were forfeited during
1994. At December 31,1994, there were 245,000 shares of Common Stock available
for issuance under the Stock Incentive Plan.
Compensation to employees under the Plan of $134,000 representing the
unamortized 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 ($7,000 in 1994) over the related required period of
service of the respective employees.
13
<PAGE> 15
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Restricted Stock Plan
Shares which have been issued and are now outstanding under the provisions
of the Company's Restricted Stock Plan are subject to restrictions as to
transferability expiring generally five or six years from the date of issue. In
1990, an additional 100,000 shares of Common Stock were authorized under this
Plan. During 1994, the restriction lapsed on 13,800 shares of Common Stock. At
December 31, 1994, there were no shares of Common Stock or Class B Common Stock
reserved by the Company and available for issuance under this Plan. At December
31, 1993, there were 125,000 shares of Common Stock and 49,900 shares of Class B
Common Stock reserved for issuance under this Plan. Compensation to employees
under the Plan of $105,000 representing the unamortized 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 ($109,000 in
1994, $256,000 in 1993 and $252,000 in 1992) over the related required period of
service of the respective employees.
This plan was replaced by the Stock Incentive Plan discussed above.
Executive Growth Plan
Under the terms of the Company's qualified stock option plan (Executive
Growth Plan), options were granted to officers and other key employees at prices
not less than 100% of the fair market value of the shares on the date of grant.
At December 31, 1994, 1993 and 1992, there were no options outstanding and no
options exercisable. At December 31, 1991, there were 25,000 options for Class B
Common Stock and 25,000 options for Common Stock outstanding and exercisable
under this plan. During 1992, these options were exercised at a total option
price of $3,237,000, and were paid for with cash of $67,000 and a note from an
officer of the Company in the amount of $3,170,000 due and payable in December
2001 at a fixed interest rate of 6.06%. At December 31, 1994, there were no
shares of either Common Stock or Class B Common Stock reserved by the Company
for issuance with respect to the Plan. In addition, the holder of the options
was entitled to receive an additional amount representing the dividends which
would have been paid if the options had been exercised on the date of grant. The
holder used this additional amount ($1,153,000) to purchase an additional 8,905
shares of both Common Stock and Class B Common Stock. The additional amount was
reflected as compensation expense in 1992 and in years prior to the exercise.
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. The
Company received a tax benefit of $1,556,000 upon the exercise of the options. A
portion of this note equal to the tax benefit and the full amount of the note
for $3,170,000 are reflected in a separate component of stockholders' equity at
December 31, 1994 and 1993.
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 both
1994 and 1993.
This plan was replaced by the Stock Incentive Plan discussed above.
Incentive Stock Option Plan
In 1982, the Company adopted an Incentive Stock Option Plan. Under this
plan in which options were available to be granted through May 1992, options
were granted to key employees, including officers, at a price not less than 100%
of the fair market value of the shares on the date of grant. A Committee of the
Board of Directors determined the terms and conditions under which options may
be granted or exercised. However,
14
<PAGE> 16
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
options (i) may not be exercised within twelve months from the date of grant,
(ii) may not be granted to Committee members, (iii) expire within ten years from
the date of grant and (iv) must be exercised in the order of grant.
Transactions involving outstanding stock options under this Plan were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
CLASS B TOTAL
COMMON COMMON OPTION
STOCK STOCK PRICE
------- ------- ----------
<S> <C> <C> <C>
Outstanding, December 31, 1991............................ 14,833 19,833 $2,635,000
Cancelled................................................. (500) (500) (65,000)
Exercised................................................. (10,233) (10,233) (1,323,000)
------- ------- ----------
Outstanding, December 31, 1992............................ 4,100 9,100 1,247,000
Cancelled................................................. (300) (300) (58,000)
Exercised................................................. (3,700) (3,700) (676,000)
------- ------- ----------
Outstanding, December 31, 1993............................ 100 5,100 513,000
Exercised................................................. (100) (100) (18,000)
------- ------- ----------
Outstanding, December 31, 1994............................ -0- 5,000 $ 495,000
======== ======== ==========
</TABLE>
As of December 31, 1994, options to acquire 2,856 shares of Common Stock
were exercisable. There are 5,000 shares of Common Stock reserved to be issued
with respect to this plan.
This plan was replaced by the Stock Incentive Plan discussed above.
Nonqualified Stock Option Plan
On December 2, 1987, the Company adopted a Nonqualified Stock Option Plan,
whereby 100,000 shares of Common Stock were reserved for issuance. In 1990, the
number of shares of Common Stock authorized for issuance under this Plan was
increased to 200,000. No shares were available for grant after June, 1994. At
the discretion of a Committee of the Board of Directors, nonqualified 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, and
options must be exercised within 10 years of grant and for only specified
limited periods beyond termination of employment.
Transactions involving outstanding stock options under this Plan were:
<TABLE>
<CAPTION>
TOTAL
NUMBER OPTION
OF SHARES PRICE
--------- ----------
<S> <C> <C>
Outstanding, December 31, 1991....................................... 40,850 $4,307,000
Cancelled............................................................ (2,200) (257,000)
Issued............................................................... 1,000 131,000
Exercised............................................................ (533) (50,000)
--------- ----------
Outstanding, December 31, 1992....................................... 39,117 4,131,000
Cancelled............................................................ (567) (58,000)
Exercised............................................................ (1,184) (110,000)
--------- ----------
Outstanding, December 31, 1993....................................... 37,366 3,963,000
Cancelled............................................................ (1,084) (116,000)
Exercised............................................................ (3,133) (301,000)
--------- ----------
Outstanding, December 31, 1994....................................... 33,149 $3,546,000
========= ==========
</TABLE>
As of December 31, 1994 and 1993, 27,867 and 19,668 of the outstanding
options, respectively, were exercisable, and 33,149 shares were reserved for
issuance under this plan.
This plan was replaced by the Stock Incentive Plan discussed above.
15
<PAGE> 17
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
J. COMPUTATION OF NET INCOME PER COMMON SHARE
The computation of net income per common share is based on the weighted
average number of common shares outstanding, including adjustments for the
effect of the assumed exercise of dilutive stock options and shares issuable
pursuant to the Company's Senior Management Incentive Plan (see Note L(1))
(1,285,605 in 1994, 1,263,900 in 1993 and 1,205,241 in 1992) 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, the Company's net income is
reduced by dividends on the Preferred Stock and is reduced or increased to the
extent of an increase or decrease, respectively, in redemption value of the
Preferred Stock. Primary net income per common share is computed as if stock
options were exercised at the beginning of the period and the funds obtained
thereby used to purchase common shares at the average 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 is higher, is
used to determine the number of shares which are assumed to be repurchased.
The effects of the Preferred Stock dividend requirements and the change in
redemption values amounted to $.88, $.53 and $.52 per share in 1994, 1993 and
1992, respectively.
K. 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, 1994, 1993
and 1992, the Company had deferred tax assets of $19,651,000, $16,282,000 and
$15,334,000 and deferred tax liabilities of $10,459,000, $12,194,000 and
$14,517,000, respectively, detailed as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS (LIABILITIES)
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Restructuring costs and related future tax
benefits........................................ $ 2,056,000 $ 3,531,000 $ 5,767,000
Deferred compensation............................. 8,955,000 5,730,000 4,220,000
Accrued expenses.................................. 8,640,000 7,021,000 5,347,000
Safe harbor lease and depreciation................ (7,493,000) (9,228,000) (10,772,000)
Tax on unremitted foreign earnings and other...... (2,966,000) (2,966,000) (3,745,000)
----------- ----------- -----------
9,192,000 4,088,000 817,000
Valuation allowance for deferred tax assets....... -0- -0- -0-
----------- ----------- -----------
Net deferred tax assets........................... $ 9,192,000 $ 4,088,000 $ 817,000
============ ============ ============
</TABLE>
16
<PAGE> 18
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The components of income before taxes on income are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................................... $25,918,000 $28,646,000 $20,440,000
Foreign................................................ (24,308,000) 14,059,000 22,148,000
----------- ----------- -----------
$1,610,000 $42,705,000 $42,588,000
============= ============ ============
</TABLE>
Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------- -------------------------- -------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal......... $11,510,000 $(2,470,000) $12,106,000 $(2,448,000) $ 1,649,000 $3,752,000
Foreign......... 9,034,000 (1,197,000) 8,580,000 (1,578,000) 11,727,000
State and
local......... 6,181,000 (1,437,000) 5,072,000 755,000 1,248,000 1,599,000
----------- ----------- ----------- ----------- ----------- ----------
$26,725,000 $(5,104,000) $25,758,000 $(3,271,000) $14,624,000 $5,351,000
============ ============ ============ ============ ============ ==========
</TABLE>
The effective tax rate varied from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate........................................ 35.0% 35.0% 34.0%
State and local income taxes (benefits), net of Federal income
tax............................................................. 191.5 8.9 4.4
Difference in foreign tax rates................................... 215.0 6.8 8.7
Withholding tax on unremitted foreign earnings.................... 33.4 1.2 1.0
Goodwill write-off................................................ 868.3 1.6 2.5
Adjustment of prior years' provisions............................. (24.8) (2.2) (4.9)
Other--net........................................................ 24.5 1.4 1.2
-------- ----- -----
1,342.9% 52.7% 46.9%
========= ====== ======
</TABLE>
During the years 1994, 1993 and 1992, the Company made net income tax
payments of $19,005,000, $18,748,000 and $14,435,000, 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.
L. RETIREMENT PLANS, DEFERRED COMPENSATION, LEASES AND CONTINGENCIES
1. The Company's Profit Sharing Plan is available to all employees of the
Company and qualifying subsidiaries meeting certain eligibility requirements.
The Plan provides for contributions by the Company at the discretion of the
Board of Directors, subject to maximum limitations. The Company also operates
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 Plan in 1994, 1993
and 1992. 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, various subsidiaries maintain separate profit sharing and
retirement arrangements. Furthermore, the Company also provides additional
retirement and deferred compensation benefits to certain officers and
employees.
17
<PAGE> 19
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company maintains a Senior Management Incentive Plan in which deferred
compensation is granted to senior executive or management employees deemed
essential to the continued success of the Company. The amount recorded as an
expense related to this Plan amounted to $5,434,000, $4,581,000 and
$4,340,000 in 1994, 1993 and 1992, respectively. Approximately $4,215,300,
$3,343,000 and $1,160,000 of Plan expense incurred in 1994, 1993 and 1992,
respectively, will be payable in Company stock in accordance with the terms
of the Plan. These awards convert into 28,081, 18,461 and 8,624 equivalent
shares of Common Stock in 1994, 1993 and 1992, respectively. The future
obligation related to the stock award has been reflected as an increase to
Paid-In Additional Capital.
Expenses related to the foregoing plans and benefits aggregated $24,211,000
in 1994, $21,057,000 in 1993 and $25,002,000 in 1992.
In December 1990, the Company amended its employment agreement with its
Chairman and Chief Executive Officer. Concurrently, the Company also
discharged this individual's pension obligation which had been established
pursuant to the terms of his long-standing employment agreement. This
obligation was partially satisfied by a distribution of approximately $19.8
million from a trust fund previously established by the Company for this
purpose. The remainder of the amount necessary to discharge this obligation
(approximately $9.5 million) was distributed from general corporate funds.
Included in Other Assets at December 31, 1994 and 1993 is approximately
$7,100,000 and $9,500,000 respectively, related to this arrangement which is
being amortized to expense over the remaining term of the related employment
agreement.
Pursuant to an employment agreement, dated December 21, 1990, an executive
officer of the Company borrowed $1,000,000 from the Company repayable at
December 31, 1995, except that one-fifth of the principal of the loan is
forgiven by the Company each December 31, beginning with December 31, 1991,
provided that the officer continues to be employed by the Company on those
dates. In 1994, the executive officer entered into a new employment
agreement. Pursuant to that agreement, the executive officer borrowed an
additional $600,000 from the Company repayable at December 31, 1998 except
that one-third of the principal of the loan is forgiven by the Company each
December 31, beginning with December 31, 1996, provided that the officer
continues to be employed by the Company on those dates. In 1994, 1993 and
1992, the Company has included in each year $200,000 of compensation expense,
representing the amount of loan forgiven each year. As of December 31, 1994
and 1993, the remaining loan balance was $800,000 and $400,000, respectively
(the long-term portion of the loan, $600,000 in 1994 and $200,000 in 1993, is
included in Other Assets).
2. Rental expense amounted to approximately $35,568,000 in 1994, $32,725,000 in
1993 and $33,741,000 in 1992 which is net of sub-lease rental income of
$1,263,000 in 1994, $2,016,000 in 1993, and $3,343,000 in 1992. Approximate
minimum rental commitments, excluding escalations, under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
SUB-LEASE
OFFICE SPACE COMMITMENTS NET
------------ ------------ ------------
<S> <C> <C> <C>
1995........................... $ 27,822,000 $ (352,000) $ 27,470,000
1996........................... 25,847,000 (147,000) 25,700,000
1997........................... 24,381,000 (165,000) 24,216,000
1998........................... 20,486,000 (79,000) 20,407,000
1999........................... 19,945,000 (80,000) 19,865,000
Beyond 1999.................... 36,175,000 (65,000) 36,110,000
------------ ------------ ------------
$154,656,000 $ (888,000) $153,768,000
============= ============== =============
</TABLE>
18
<PAGE> 20
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. 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 either the results of operations, liquidity
or financial position of the Company.
M. GOODWILL WRITE-OFF
In the fourth quarter of 1994, the Company wrote-off $39,944,000 of
goodwill. The non-cash write-off related almost exclusively to international
acquisitions made by the Company principally in the 1980's. The carrying value
of the Company's goodwill prior to the write-off was approximately $84,000,000
and the write-off was associated with 34 of the almost 100 investments for which
the Company had unamortized goodwill. The portion of the write-off relating to
advertising agencies was approximately $31,295,000 and $8,649,000 relates to
public relations agencies. Significant amounts of these write-offs related to
operations in the United Kingdom.
The widely recognized international recession seriously affected the
advertising industry, particularly in Western Europe, where the Company has its
largest and most developed international operations. As the recession abated in
the latter part of 1994, the Company was able to assess more clearly the
long-term prospects of the affected operations. At that point, and in connection
with annual business plan meetings which took place in the fourth quarter, it
became clear that the goodwill associated with a number of the agencies had
become permanently impaired. Management's projections indicated that anticipated
future cash flows for these specific operations would not, as would be expected
in a normal post-recession environment, recover sufficiently to cover
amortization of the associated goodwill.
The material portion of the goodwill write-off related to ten agencies
acquired in the United Kingdom as part of a strategy to develop the Company's
representation outside of the London market in the general advertising category
and in specialized disciplines (such as retail advertising, promotional services
and public relations). With the revival of the industry, a review of the
Company's local market strategies and in conjunction with several key management
changes, client losses or the inability of these operations to maintain revenues
with replacement or new clients, after the analysis referred to above,
management concluded that the goodwill associated with these operations had been
permanently impaired. While future client losses and management changes could
affect the Company's operation in the United Kingdom, the Company has
consolidated a number of operations, thereby lessening the likelihood of a
negative impact from any instance of client or management turnover. In addition,
the unimpaired goodwill balances associated with the United Kingdom operations
represents less than 10% of the Company's consolidated unamortized goodwill as
of December 31, 1994.
In 1993 and 1992, respectively, the Company wrote-off $1,939,000 and
$3,065,000 of goodwill in excess of normal amortization schedules.
19
<PAGE> 21
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
N. INDUSTRY SEGMENT AND RELATED INFORMATION
Commissions and fees and operating profit by geographic area for the years
ended December 31, 1994, 1993 and 1992, and related identifiable assets at
December 31, 1994, 1993 and 1992 are summarized below (000s omitted):
<TABLE>
<CAPTION>
UNITED STATES WESTERN EUROPE OTHER
------------------------------ ------------------------------ ---------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees.......... $277,411 $267,964 $241,279 $273,754 $260,005 $281,632 $42,152 $39,274 $41,557
======== ======== ======== ======== ======== ======== ======= ======= =======
Operating profit (loss)....... $ 22,767 $ 28,809 $ 20,023 $(20,457) $ 11,415 $ 16,594 $ (959) $ 564 $ 5,341
======== ======== ======== ======== ======== ======== ======= ======= =======
Other income-net..............
Income of consolidated
companies before taxes on
income......................
Identifiable assets........... $390,547 $353,532 $260,849 $353,904 $389,723 $427,728 $69,130 $61,274 $52,627
======== ======== ======== ======== ======== ======== ======= ======= =======
Investments in and advances to
nonconsolidated affiliated
companies...................
Total assets..................
<CAPTION>
CONSOLIDATED
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Commissions and fees.......... $593,317 $567,243 $564,468
======== ======== ========
Operating profit (loss)....... $ 1,351 $ 40,788 $ 41,958
Other income-net.............. 259 1,917 630
-------- -------- --------
Income of consolidated
companies before taxes on
income...................... $ 1,610 $ 42,705 $ 42,588
======== ======== ========
Identifiable assets........... $813,581 $804,529 $741,204
Investments in and advances to
nonconsolidated affiliated
companies................... 16,495 16,104 11,160
-------- -------- --------
Total assets.................. $830,076 $820,633 $752,364
======== ======== ========
</TABLE>
Commissions and fees from one client amounted to 13.8%, 13.0% and 13.4% of
the consolidated total in 1994, 1993 and 1992, respectively.
20
<PAGE> 22
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, 1994
and 1993, 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, 1994. 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, 1994
and 1993, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 8, 1995
21
