<PAGE> 1
GREY
GREY ADVERTISING INC.
1995 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. and its subsidiaries (collectively with Grey, the
"Company") have been engaged in the planning, creation, supervision and placing
of advertising since the Company's formation in 1917. Grey was incorporated in
New York in 1925 and changed its state of incorporation to Delaware in 1974.
The Company's principal business activity consists of providing a full
range of advertising services to its clients. Typically, this involves
developing an advertising and/or marketing plan after study of a client's
business, the distribution or utilization of the client's products or services
and the use of various media (e.g., television, radio, newspapers, magazines,
direct mail, outdoor billboards and the Internet) by which desired market
performance can best be achieved. The Company then creates advertising, prepares
media recommendations and places advertising in the media. The Company's
business also involves it in allied areas such as marketing consultation,
audio-visual production, cooperative advertising programs, direct marketing,
interactive consulting and production, media research and buying, research,
product publicity, public affairs, 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 1995, 1994 or 1993. 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 1994-1995
<TABLE>
<CAPTION>
DOLLARS PER
SHARE
---------------- DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
<C> <S> <C> <C> <C>
1994 First Quarter..................... 196 178 .8125
Second Quarter.................... 195 182 .8125
Third Quarter..................... 190 159 .8125
Fourth Quarter.................... 165 144 .875
1995 First Quarter..................... 178 145 .875
Second Quarter.................... 188 160 .875
Third Quarter..................... 205 183 .875
Fourth Quarter.................... 196 182 .9375
</TABLE>
- ---------------
* Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
Note: Stockholders of Record -- Common Stock 496 (6/3/96);
Limited Duration Class B Common Stock 285 (6/3/96).
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 16.0% in 1995
and 4.6% in 1994 as compared to the respective prior years. Absent exchange rate
fluctuations, gross income increased 11.4% in 1995 and 6.0% in 1994 as compared
to the respective prior years. In 1995, 1994 and 1993, respectively, 44.1%,
46.8% and 47.2% of consolidated gross income was attributable to domestic
operations and 55.9%, 53.2% and 52.8%, respectively, to international
operations. In 1995, gross income from domestic operations increased 9.5% versus
1994 and was up 3.5% in 1994 versus 1993. Gross income from international
operations increased 21.7% (13.1% absent exchange rate fluctuations) in 1995
when compared to 1994 and increased 5.6% (7.7% absent exchange rate
fluctuations) in 1994 when compared to 1993. 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.
The increase in gross income from international operations is indicative of the
continued development of the Company's worldwide business. In addition, the
Company benefited from the continuing strong economic conditions in Europe that
carryover from 1994.
Salaries and employee-related expenses increased 16.8% in 1995 and 6.2% in
1994 as compared to the respective prior years. Office and general expenses
increased 13.1% in 1995 and 3.3% in 1994 versus respective prior years. The
increases in expenses are generally in line with the increases in gross income
in such years.
In 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. A significant portion of the write-off 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, it became clear
that the goodwill associated with a number of the agencies had become
permanently impaired.
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.
A material portion of the goodwill write-offs 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). 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, which lessens the likelihood of a
negative impact from any instance of client or management turnover. The
unimpaired goodwill balances associated with the United Kingdom operations
represented 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 continue to operate as ongoing businesses. 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 has and will continue
to 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, the Company wrote-off $1,939,000 of goodwill in excess of normal
amortization schedules. There were no goodwill write-offs in 1995 in excess of
normal amortization schedules.
2
<PAGE> 4
The Company will continue to assess the carrying value of its goodwill by
analyzing indicators of impairment, and will recognize additional permanent
impairments, if any, as they arise in accordance with current policy.
Inflation did not have a material effect on revenue or expenses in 1995,
1994 or 1993.
The effective tax rate was 49.6% in 1995, 1,342.9% in 1994 (52.0% not
including the goodwill write-off) and 52.7% in 1993. The decrease in the
effective tax rate in 1995 as compared to 1994 is due, in part, to the reduction
of goodwill amortization and write-off (which are not deductible for tax
purposes) and other factors.
Minority interest increased $3,233,000 in 1995 and decreased $1,468,000 in
1994 as compared to the respective prior years. The changes in 1995 and in 1994
were primarily due to changes in the level of profits of majority-owned
companies.
Equity in earnings of nonconsolidated companies increased $677,000 in 1995
and decreased $298,000 in 1994 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 net income of $23,438,000 for 1995 as compared to a
net loss of $21,378,000 in 1994. Absent the goodwill write-off, net income for
1994 would have been $18,566,000. Net income for 1995 was up 26.2% over 1994's
results absent the goodwill write-off. Net income for 1994, absent the goodwill
write-off, increased 5.0% over 1993. For 1995, primary earnings per common share
was up 24.4% versus 1994, absent the goodwill write-off. Primary earnings per
common share for 1994 not including the write-off increased 0.3% over 1993.
For purposes of computing primary net income (loss) per common share, the
Company's net income (loss) was adjusted by (i) dividends paid on the Company's
Preferred Stock and (ii) by the change in redemption value of the Company's
Preferred Stock.
The Company's results may be affected by currency exchange rate
fluctuations given the Company's extensive non-United States operations.
Generally, the foreign currency exchange risk is limited to net income because
the Company's revenues and expenses, by country, are almost exclusively
denominated in the local currency of each respective operation with both revenue
and expense items matched. Occasionally, the Company enters into foreign
currency contracts for known cash flows related to repatriation of earnings from
its international subsidiaries. The term of each such foreign currency contract
entered into in 1995 was for less than three months. At December 31, 1995, there
were no foreign currency contract transactions open. In addition, the Company
had no derivative contracts outstanding at December 31, 1995, and did not enter
into any derivative contracts during 1995.
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 liquid
marketable securities, a significant majority of which are United States
government securities. Cash and cash equivalents were $134,313,000 and
$170,077,000 at December 31, 1995 and 1994, respectively, and the Company's
investment in marketable securities was $68,671,000 and $25,433,000 at December
31, 1995 and 1994, respectively. The continued high level of liquidity reflects
the Company's ongoing focus on the cash management process. Working capital
decreased by $27,178,000 from $33,735,000 at December 31, 1994 to $6,557,000 at
December 31, 1995. The decrease in working capital is largely attributable to
the increase in the portion of marketable securities which are classified as
non-current assets due to their stated maturity dates and the repurchase of
approximately 77,000 shares of the Company's stock during 1995.
Domestically, the Company maintains committed bank lines of credit totaling
$40,000,000. These lines of credit were partially utilized during both 1995 and
1994 to secure obligations of selected foreign subsidiaries in the amount of
$15,000,000 at each year end.
3
<PAGE> 5
Other lines of credit are available to the Company in foreign countries in
connection with short-term borrowings and bank overdrafts used in the normal
course of business. Amounts outstanding under such facilities at December 31,
1995 and 1994 were $56,336,000 and $49,460,000, 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 will be sufficient to meet
its short-term cash requirements in the future. While the Company has not
utilized long-term borrowing to fund its operating needs, in 1993, it took
advantage of favorable terms offered, and borrowed $30,000,000, at a fixed
interest rate of 7.68%. The principal is repayable in equal installments in
January 1998, 1999 and 2000. Additionally, during 1995 the Company borrowed
against the cash value of life insurance policies it owns on the Chairman and
Chief Executive Officer at a fixed rate of 8.75%. The amount borrowed against
the cash value at December 31, 1995 was $13,024,000. 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 gross
income earned in the second and fourth quarters, particularly the fourth
quarter. As a result, cash, accounts receivable, accounts payable and accrued
expenses are typically higher on the Company's year-end balance sheet than at
the end of any of the preceding three quarters.
FASB STATEMENT 121
The Financial Accounting Standards Board has issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of. The Company will adopt the new statement in the first quarter of
1996. The adoption of the new statement will not have a material impact on the
Company's financial statements.
FASB STATEMENT 123
The Financial Accounting Standards Board has issued Statement No. 123,
Accounting for Stock-Based Compensation. The Company will adopt the new
statement in 1996. The Company will continue to account for stock-based
compensation by applying APB Opinion No. 25, Accounting for Stock Issued to
Employees, and will provide required footnote disclosures as appropriate.
4
<PAGE> 6
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $134,313,000 $170,077,000
Marketable securities (Notes A and E)......................... 20,419,000 10,648,000
Accounts receivable........................................... 495,349,000 403,973,000
Expenditures billable to clients.............................. 46,449,000 30,145,000
Other current assets.......................................... 49,614,000 60,826,000
------------ ------------
TOTAL CURRENT ASSETS.................................. 746,144,000 675,669,000
INVESTMENTS IN AND ADVANCES TO NONCONSOLIDATED AFFILIATED
COMPANIES (Notes A and B)..................................... 20,693,000 16,495,000
FIXED ASSETS -- net (Note D).................................... 74,706,000 61,174,000
MARKETABLE SECURITIES (Notes A and E)........................... 48,252,000 14,785,000
INTANGIBLES AND OTHER ASSETS -- including loans to officers of
$5,522,000 in 1995 and $5,347,000 in 1994 (Notes A, F, G, I
and L(1))..................................................... 65,342,000 61,953,000
------------ ------------
TOTAL ASSETS.......................................... $955,137,000 $830,076,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $549,533,000 $475,188,000
Notes payable to banks (Note F)............................... 71,336,000 64,460,000
Accrued expenses and other.................................... 97,126,000 88,156,000
Current portion of long-term debt (Note F).................... 3,025,000
Income taxes payable.......................................... 18,567,000 14,130,000
------------ ------------
TOTAL CURRENT LIABILITIES............................. 739,587,000 641,934,000
OTHER LIABILITIES, including deferred compensation of
$22,021,000 and $16,244,000 (Note L(1))....................... 39,620,000 30,053,000
LONG-TERM DEBT (Note F)......................................... 30,000,000 33,025,000
MINORITY INTEREST............................................... 9,281,000 8,843,000
REDEEMABLE PREFERRED STOCK -- at redemption value; par value $1
per share; authorized 500,000 shares; issued and outstanding
32,000 shares in 1995 and 1994, respectively (Note G)......... 8,986,000 7,516,000
COMMON STOCKHOLDERS' EQUITY:
Common Stock -- par value $1 per share; authorized 10,000,000
shares; issued 1,096,096 shares in 1995 and 1,077,116
shares in 1994............................................. 1,096,000 1,077,000
Limited Duration Class B Common Stock -- par value $1 per
share; authorized 2,000,000 shares; issued 335,688 shares
in 1995 and 354,668 shares in 1994......................... 336,000 355,000
Paid-in additional capital.................................... 37,898,000 31,895,000
Retained earnings............................................. 122,345,000 105,123,000
Cumulative translation adjustment............................. 4,664,000 (728,000)
Unrealized gain (loss) on marketable securities (Notes A and
E)......................................................... 550,000 (1,492,000)
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock (Note I)..................... (4,726,000) (4,726,000)
------------ ------------
162,163,000 131,504,000
Less -- cost of 212,848 and 161,382 shares of Common Stock and
26,751 and 26,751 shares of Limited Duration Class B Common
Stock held in treasury at December 31, 1995 and 1994,
respectively............................................... 34,500,000 22,799,000
------------ ------------
TOTAL COMMON STOCKHOLDERS' EQUITY..................... 127,663,000 108,705,000
RETIREMENT PLANS, LEASES AND CONTINGENCIES (Note L)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $955,137,000 $830,076,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Commissions and fees............................. $688,219,000 $593,317,000 $567,243,000
Expenses:
Salaries and employee related expenses (Note
L(1)).......................................... 432,311,000 370,196,000 348,462,000
Office and general expenses (Note L(2)).......... 205,668,000 181,826,000 176,054,000
Goodwill write-off (Notes A and M)............... 39,944,000 1,939,000
------------ ------------ ------------
637,979,000 591,966,000 526,455,000
------------ ------------ ------------
50,240,000 1,351,000 40,788,000
Other income -- net (Note C)..................... 4,087,000 259,000 1,917,000
------------ ------------ ------------
INCOME OF CONSOLIDATED COMPANIES BEFORE
TAXES ON INCOME...................... 54,327,000 1,610,000 42,705,000
Provision for taxes on income (Note K)........... 26,966,000 21,621,000 22,487,000
------------ ------------ ------------
NET INCOME (LOSS) OF CONSOLIDATED
COMPANIES............................ 27,361,000 (20,011,000) 20,218,000
Minority interest applicable to consolidated
companies...................................... (6,273,000) (3,040,000) (4,508,000)
Equity in earnings of nonconsolidated affiliated
companies...................................... 2,350,000 1,673,000 1,971,000
------------ ------------ ------------
NET INCOME (LOSS)...................... $ 23,438,000 $(21,378,000) $ 17,681,000
============ ============ ============
Earnings per Common Share (Note J):
Primary........................................ $16.79 $(17.51) $13.46
Fully diluted.................................. $16.16 * $13.00
</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, 1995, 1994 AND 1993
<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, 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........................ (3,884,000) (3,884,000)
Cash dividends -- Redeemable
Preferred Stock -- $6.275 per
share........................ (204,000) (204,000)
Common Shares acquired -- at
cost......................... 5,426 (787,000) (787,000)
Dividends payable in Company
Stock pursuant to Senior
Management Incentive Plan
(Note L)..................... 27,000 (27,000)
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)....... 3,343,000 3,343,000
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........................ (4,112,000) (4,112,000)
Cash dividends -- Redeemable
Preferred Stock -- $6.625 per
share........................ (212,000) (212,000)
Common Shares acquired -- at
cost......................... 1,993 (372,000) (372,000)
Dividends Payable in Company
Stock pursuant to Senior
Management Incentive Plan
(Note L)..................... 84,000 (84,000)
Increase in redemption value of
Redeemable Preferred Stock
(Note G)..................... (926,000) (926,000)
Restricted stock 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)....... 3,985,000 3,985,000
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
Net income..................... 23,438,000 23,438,000
Cash dividends -- Common
Shares -- $3.5625 per
share........................ (4,333,000) (4,333,000)
Cash dividends -- Redeemable
Preferred Stock -- $7.125 per
share........................ (228,000) (228,000)
Common Shares acquired -- at
cost......................... 77,001 (14,434,000) (14,434,000)
Dividends Payable in Company
Stock pursuant to Senior
Management Incentive Plan
(Note L)..................... 185,000 (185,000)
Increase in redemption value of
Redeemable Preferred Stock... (1,470,000) (1,470,000)
(Note G) Restricted stock
activity (Note I)............ 133,000 133,000
Tax benefit from restricted
stock (Note K)............... 164,000 164,000
Common Shares issued upon
exercise of stock options.... (287,000) (25,535) 2,733,000 2,446,000
Tax benefit from exercise of
stock options (Note K)....... 959,000 959,000
Senior Management Incentive
Plan activity (Note L)....... 4,849,000 4,849,000
Translation adjustment......... 5,392,000 5,392,000
Unrealized gain on marketable
securities (Notes A and E)... 2,042,000 2,042,000
---------- ----------- ------------ ------- ------------ ----------- ------------
Balance at December 31, 1995..... $1,432,000 $ 37,898,000 $122,345,000 239,599 $(34,500,000) $ 488,000 $127,663,000
========== =========== ============ ======= ============ =========== ============
</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
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................. $ 23,438,000 $(21,378,000) $ 17,681,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of fixed assets............ 17,388,000 15,093,000 13,591,000
Goodwill write-off....................................... 39,944,000 1,939,000
Amortization of intangibles.............................. 4,146,000 7,475,000 5,486,000
Deferred compensation.................................... 15,162,000 9,006,000 6,379,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $483,000,
$903,000 and $1,336,000................................ (1,867,000) (770,000) (635,000)
Minority interest applicable to consolidated companies... 6,273,000 3,040,000 4,508,000
Amortization of restricted stock expense................. 133,000 116,000 256,000
Deferred income taxes.................................... (2,999,000) (5,104,000) (3,271,000)
Changes in operating assets and liabilities:
Increase in accounts receivable........................ (79,612,000) (31,058,000) (29,082,000)
(Increase) decrease in expenditures billable to
clients............................................. (14,109,000) (6,006,000) 555,000
Decrease in other current assets....................... 4,351,000 10,739,000 31,454,000
Decrease (increase) in other assets.................... 3,680,000 (3,077,000) (4,141,000)
Increase (decrease) in accounts payable................ 61,846,000 (4,220,000) 76,731,000
Increase (decrease) in accrued expenses and other...... 3,180,000 (9,424,000) (5,580,000)
Increase in income taxes payable....................... 2,431,000 6,600,000 2,385,000
Decrease in other liabilities.......................... (2,509,000) (2,507,000) (7,298,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 40,932,000 8,469,000 110,958,000
INVESTING ACTIVITIES
Purchases of fixed assets................................ (29,136,000) (17,067,000) (13,421,000)
Trust fund deposits...................................... (2,426,000)
Increase in investments in and advances to
nonconsolidated affiliated companies................... (1,686,000) (3,564,000) (4,849,000)
Purchases of marketable securities....................... (68,500,000) (2,003,000) (25,572,000)
Sales of marketable securities........................... 26,957,000 486,000
Increase in intangibles, primarily goodwill.............. (6,183,000) (14,800,000) (6,770,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.................. (80,974,000) (36,948,000) (50,612,000)
FINANCING ACTIVITIES
Net proceeds from short-term borrowings..................... 4,834,000 15,826,000 9,762,000
Common Shares issued under Stock Incentive Plan.......... 141,000
Common Shares acquired for treasury...................... (14,434,000) (372,000) (787,000)
Cash dividends paid on Common Shares..................... (4,333,000) (4,112,000) (3,884,000)
Cash dividends paid on Redeemable Preferred Stock........ (228,000) (212,000) (204,000)
Proceeds from exercise of stock options.................. 2,446,000 319,000 786,000
Redemption of Redeemable Preferred Stock................. (300,000)
Proceeds from long-term debt............................. 30,000,000
Borrowings under life insurance policies................. 11,779,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 64,000 11,590,000 35,373,000
Effect of exchange rate changes on cash....................... 4,214,000 5,699,000 (7,207,000)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (35,764,000) (11,190,000) 88,512,000
Cash and cash equivalents at beginning of year................ 170,077,000 181,267,000 92,755,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $134,313,000 $170,077,000 $181,267,000
============ ============ ============
</TABLE>
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 1995 have been reclassified to conform with the current year
classification.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Commissions and Fees and Accounts Receivable
Income derived from advertising placed with media is generally recognized
based upon the publication or broadcast dates. Income resulting from
expenditures billable to clients is generally recognized when billed. Payroll
costs are expensed as incurred. Accounts receivable include both the income
recognized as well as the actual media and production costs which are paid for
by the Company and rebilled to clients at the Company's cost.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less from the purchase date to be cash equivalents. The carrying
amount of cash equivalents approximates fair value because of the short
maturities of those instruments.
Investments in and Advances to Nonconsolidated Affiliated Companies
The Company generally carries its investments in nonconsolidated affiliated
companies on the equity method. Certain investments which are not material in
the aggregate are carried on the cost method.
Fixed Assets
Depreciation of furniture, fixtures and equipment is provided for over
their estimated useful lives ranging from three to ten years and has been
computed principally by the straight-line method. Amortization of leaseholds and
leasehold improvements is provided for principally over the terms of the related
leases, which are not in excess of the lives of the assets.
Foreign Currency Translation
Primarily all balance sheet accounts of the Company's foreign operations
are translated at the exchange rate in effect at each year end and statement of
operations 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 1995, 1994 and 1993, foreign currency
transaction gains and losses were not material.
9
<PAGE> 11
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Intangibles
The excess of purchase price over underlying net equity of certain
consolidated subsidiaries and nonconsolidated affiliated companies at the date
of acquisition ("goodwill") is amortized by the straight-line method over
periods of up to 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 $41,237,000 and $8,325,000 at the end of 1995 and $36,603,000
and $7,718,000 at the end of 1994, respectively.
Annually, the Company assesses the carrying value of its goodwill and the
respective periods of amortization. As part of the evaluation, the Company
considers a number of factors including actual operating results, the impact of
gains and losses of major local clients, the impact of any loss of key local
management staff and any changes in general economic conditions. In 1994, the
Company formalized its assessment of goodwill and since then quantifies the
recoverability of goodwill based on each agency's estimated future non-
discounted cash flows over the applicable remaining amortization periods. This
requires management to make certain specific assumptions with respect to future
revenue and expense levels. Where multiple investments had been made in a single
company, a weighted average amortization period is used.
Charges to reflect permanent impairment are recorded to the extent that the
unamortized book value of the goodwill exceeds the future cumulative
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 bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company provides appropriate
foreign withholding taxes on unremitted earnings of consolidated and
nonconsolidated foreign companies.
Marketable Securities
The Company considers all its investments in marketable securities as
available-for-sale. Available-for-sale securities are carried at fair value,
based on publicly quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity.
Stock-Based Compensation
The Company accounts for stock-based awards in accordance with APB Opinion
No. 25, Accounting For Stock Issued to Employees. No compensation expense is
recorded for options granted at fair market value at the date of grant. The
excess of the fair market value of Restricted Stock over the cash consideration
received is amortized, as compensation, over the period of restriction. The
future obligation to issue stock pursuant to the Company's Senior Management
Incentive Plan, included in Paid-In Additional Capital, is increased by periodic
charges to compensation.
10
<PAGE> 12
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. FOREIGN OPERATIONS
The following financial data is applicable to consolidated foreign
subsidiaries:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Current assets..................... $395,016,000 $349,208,000 $357,391,000
Current liabilities................ 408,541,000 364,571,000 367,048,000
Other assets -- net of other
liabilities...................... 56,312,000 50,696,000 69,915,000
Net income (loss).................. 9,384,000 (35,043,000) 2,584,000
</TABLE>
Consolidated retained earnings at December 31, 1995 includes equity in
unremitted earnings of nonconsolidated foreign companies of approximately
$6,517,000.
C. OTHER INCOME -- NET
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Interest income...................... $ 12,183,000 $ 7,507,000 $ 7,307,000
Interest expense..................... (8,928,000) (7,833,000) (7,558,000)
Dividends from affiliates............ 217,000 86,000 674,000
Other -- net......................... 615,000 499,000 1,494,000
----------- ---------- -----------
$ 4,087,000 $ 259,000 $ 1,917,000
=========== ========== ===========
</TABLE>
D. FIXED ASSETS
Components of fixed assets -- at cost are:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Furniture, fixtures and equipment................. $119,575,000 $ 97,988,000
Leaseholds and leasehold improvements............. 48,920,000 43,770,000
------------ ------------
168,495,000 141,758,000
Less accumulated depreciation and amortization.... 93,789,000 80,584,000
------------ ------------
$ 74,706,000 $ 61,174,000
============ ============
</TABLE>
11
<PAGE> 13
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
E. MARKETABLE SECURITIES
The marketable securities, by type of investment, held by the Company at
December 31, 1995 and 1994 are described as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Maturities of one year or less:
U.S. Treasury Securities.......................... $ 4,758,000 $ 7,678,000
Money market funds................................ 12,394,000 2,970,000
Corporate bonds................................... 3,267,000
----------- -----------
20,419,000 10,648,000
----------- -----------
Maturities greater than one year:
U.S. Treasury Securities.......................... 41,946,000 14,785,000
Government National Mortgage Association
Securities...................................... 1,838,000
Corporate bonds................................... 4,468,000
----------- -----------
48,252,000 14,785,000
----------- -----------
$68,671,000 $25,433,000
=========== ===========
</TABLE>
At December 31, 1995, the Company had unrealized gains of $550,000 and at
December 31, 1994 unrealized losses of $1,492,000, principally related to the
investments in U.S. Treasury Securities. At December 31, 1995 and 1994, the
Company's investments in marketable securities classified as non-current had an
average maturity of 6 years and 4 years, respectively.
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, which are
renewable annually, were partially utilized during both 1995 and 1994 to secure
obligations of selected foreign subsidiaries in the amount of $15,000,000 at the
end of each year. The weighted average interest rate related to the debt
associated with the committed lines of credit was 6.95% and 6.25% at December
31, 1995 and 1994, respectively. The Company had $56,336,000 and $49,460,000
outstanding under other uncommitted lines of credit at December 31, 1995 and
1994, respectively. The weighted average interest rate for the borrowings under
the uncommitted lines of credit was 7.91% and 7.70% at December 31, 1995 and
1994, respectively. The carrying amount of the debt outstanding under both the
committed and uncommitted lines of credit approximates fair value because of the
short maturities of the underlying notes. Occasionally, the Company enters into
foreign currency contracts for known cash flows related to the repatriation of
earnings from its international subsidiaries. The term of each foreign currency
contract entered into in 1995 was for less than three months. At December 31,
1995, there were no foreign currency contract transactions open. In addition,
the Company had no derivative contracts outstanding at December 31, 1995, and
did not enter into any derivative contracts during 1995.
Long-term debt at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Term loans.......................................... $30,000,000 $30,000,000
Convertible debentures.............................. 3,025,000 3,025,000
----------- -----------
33,025,000 33,025,000
Current maturities.................................. 3,025,000 -0-
----------- -----------
Long-term Debt...................................... $30,000,000 $33,025,000
=========== ===========
</TABLE>
12
<PAGE> 14
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The term loans consist of $30,000,000 borrowed from the Prudential
Insurance Company at a fixed interest rate of 7.68% with 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, 1995, the Company was in compliance with all of these covenants. The fair
value of the Prudential debt is estimated to be $30,900,000 and $29,900,000 at
December 31, 1995 and 1994, respectively. This estimate was determined using a
discounted cash flow analysis using current interest rates for debt having
similar terms and remaining maturities.
During 1995, the Company borrowed against the cash value of the life
insurance policies that it owns on the life of its Chairman and Chief Executive
Officer. The amount borrowed at December 31, 1995 is $13,024,000 with a fixed
interest rate of 8.75% and is carried as a reduction of the related cash value
that is included in Other Assets. Of the amount borrowed in 1995, the Company
received $11,779,000 in cash and $1,245,000 was used in payment of the 1995
premiums due on the life insurance policies.
The current portion of long-term debt consists of 8 1/2% Convertible
Subordinated Debentures, due December 10, 1996, which are currently convertible
into 8.41 shares of Common Stock and an equal number 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, 1995 and 1994. During each of
the years 1995, 1994 and 1993, the Company paid to the officer interest of
$257,000 pursuant to the terms of the debentures and the officer paid to the
Company interest of $270,000 pursuant to the terms of the 9% promissory note.
The scheduled repayment of long-term debt is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31 AMOUNT
------------------------------------------------------------------ -----------
<S> <C>
1996.............................................................. $ 3,025,000
1997.............................................................. -0-
1998.............................................................. 10,000,000
1999.............................................................. 10,000,000
2000.............................................................. 10,000,000
-----------
$33,025,000
===========
</TABLE>
For the years 1995, 1994 and 1993, the Company made interest payments of
$8,934,000, $7,839,000 and $6,529,000, respectively.
G. REDEEMABLE PREFERRED STOCK
As of December 31, 1995 and 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. The holder of the
Series I, Series II and Series III Preferred Stock is a senior executive of the
Company, and the Series 1 Preferred Stock is held by a former employee. The
terms of each class of Preferred Stock, including the basic economic terms
relating thereto, are essentially the same, except with respect to the
redemption date of each series. The redemption date for the Series I, Series II
and Series III Preferred Stock is fixed at April 7, 2004, unless redeemed
earlier under circumstances described below. The terms of the Series I, Series
II and Series III Preferred Stock also give the holder, his estate or legal
representative, as the case may be, the option to require the Company to redeem
his Preferred Stock for a period of 12 months following his (i) death, (ii)
permanent disability or permanent mental disability, (iii) termination of
full-time employment for good reason or (iv) termination of full-time employment
by the Company without cause. The
13
<PAGE> 15
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
terms of the Series 1 Preferred Stock permit 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 Limited Duration Class B Common Stock (Class B Common Stock)
(subject to certain adjustments) upon redemption, 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 connection with his
ownership of the Series I, Series II and Series III Preferred Stock, the senior
executive issued to the Company full recourse promissory notes totaling $763,000
(included in Other Assets at December 31, 1995 and 1994) with a maturity date of
April 2004. The interest paid by the senior executive to the Company in 1995,
1994 and 1993 pursuant to the terms of these notes was $70,000 in each year.
In accordance with the terms of the respective Certificates of Designation
and Terms of each Series of Preferred Stock ("Certificates"), the Board of
Directors determined the change in redemption value would not reflect the 1994
write-off of goodwill described in Note M, but rather reflect amortization as if
the Company had continued to write-off goodwill in accordance with historical
amortization schedules.
Following the distribution of Class B Common Stock, the holders of the
Preferred Stock became entitled to eleven votes per share on all matters
submitted to the vote of stockholders. The holder of the Series I Preferred
Stock is entitled, as well, to vote as a single class to elect or remove
one-quarter of the Board of Directors, to approve the merger or consolidation of
the Company or the sale by it of all or substantially all of its assets, and to
approve the authorization or issuance of any other class of Preferred Stock
having equivalent voting rights.
In the event of the liquidation of the Company, 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 $1,470,000, $926,000 and
$468,000 in 1995, 1994 and 1993, 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 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. In October 1995, the shareholders of the
Company approved an amendment to the Company's Articles of Incorporation to
extend to April 3, 2006 the automatic conversion date of the Class B Common
Stock.
I. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") was
adopted in June 1994. The Stock Incentive Plan replaced the Restricted Stock
Plan, the Executive Growth Plan, the Incentive Stock
14
<PAGE> 16
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Option Plan and the Nonqualified Stock Option Plan (collectively, the "Prior
Plans"), and any shares available for granting of awards under the Prior Plans
are no longer available for such awards. Options granted pursuant to the Prior
Plans remain outstanding and in full force and shares reserved remain so for
such purposes.
Stock Incentive Plan
Under the Stock Incentive Plan, awards in the form of incentive or
nonqualified stock options or restricted stock are available to be granted
through June 2003 to officers and other key employees. A maximum of 250,000
shares of Common Stock are available for grant under the Stock Incentive Plan
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 ("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). In 1994,
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
shares of restricted stock were issued in 1995. No restrictions lapsed during
either 1995 or 1994 and no restricted stock was forfeited during either year.
Transactions involving outstanding stock options under this Plan were:
<TABLE>
<CAPTION>
NUMBER TOTAL
OF SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding, December 31, 1993......................................... -0- $ -0-
Granted................................................................ 3,250 531,000
------ -----------
Outstanding, December 31, 1994......................................... 3,250 531,000
Cancelled.............................................................. (250) (43,000)
Granted................................................................ 84,174 12,670,000
------ -----------
Outstanding, December 31, 1995......................................... 87,174 $ 13,158,000
====== ===========
</TABLE>
At December 31, 1995, options to acquire 13,333 shares were exercisable and
161,076 shares of Common Stock were available for issuance under the Stock
Incentive Plan.
Compensation to employees under the Plan of $106,000 in 1995 and $134,000
in 1994, 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 ($28,000 in 1995 and $7,000 in 1994)
over the related required period of service of the respective employees.
Restricted Stock Plan
There are no shares outstanding under this plan at December 31, 1995.
During 1995, the restriction lapsed on 5,000 shares of Common Stock.
Compensation to employees 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 ($104,000 in
1995, $109,000 in 1994 and $256,000 in 1993) over the related required period of
service of the respective employees.
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
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, 1995, there were no options outstanding. In connection with a
1992 exercise of the plan options, the Company received a cash payment of
$67,000 and a note from an officer of the Company in the amount of $3,170,000,
due in December 2001, at a fixed interest rate of 6.06%.
In addition, and in accordance with the terms of the option agreement, the
holder of the options issued to the Company a promissory note in the principal
amount of $2,340,000 bearing interest at the rate of 6.06%, payable in December
2001, to settle his obligation to provide the Company with funds necessary to
pay the required withholding taxes due upon the exercise of the options. A
portion of this note ($1,556,000) equal to the tax benefit received by the
Company upon exercise and the full amount of the note for $3,170,000 are
reflected in a separate component of stockholders' equity at December 31, 1995
and 1994.
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 1995,
1994 and 1993.
This plan was replaced by the Stock Incentive Plan discussed above.
Incentive Stock Option Plan
Under this plan, 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.
Transactions involving outstanding stock options under this plan were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------
CLASS B
COMMON COMMON TOTAL
STOCK STOCK OPTION PRICE
------- ------ ------------
<S> <C> <C> <C>
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
Exercised.................................................... (3,570) (353,000)
------ ------ ----------
Outstanding, December 31, 1995............................... -0- 1,430 $ 142,000
====== ====== ==========
</TABLE>
As of December 31, 1995, options to acquire 714 shares of Common Stock were
exercisable. There are 1,430 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
Under this plan, 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.
16
<PAGE> 18
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Transactions involving outstanding stock options under this plan were:
<TABLE>
<CAPTION>
NUMBER TOTAL
OF SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
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
Cancelled.............................................................. (34) (4,000)
Exercised.............................................................. (21,965) (2,092,000)
------- ----------
Outstanding, December 31, 1995......................................... 11,150 $ 1,450,000
======= ==========
</TABLE>
As of December 31, 1995, options to acquire 9,950 shares of Common Stock
were exercisable, and 11,150 shares were reserved for issuance under this plan.
This plan was replaced by the Stock Incentive Plan discussed above.
J. COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
The computation of net income (loss) 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))
(1,295,182 in 1995, 1,285,605 in 1994 and 1,263,900 in 1993) and, for fully
diluted net income (loss) 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 (loss) per common share, the Company's net
income (loss) is adjusted by dividends on the Preferred Stock and by the
increase or decrease, in redemption value of the Preferred Stock. Primary net
income (loss) 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 (loss) 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 $1.31, $0.88 and $0.53 per share in 1995, 1994 and
1993, respectively.
17
<PAGE> 19
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, 1995, 1994
and 1993, the Company had deferred tax assets of $19,550,000, $19,651,000 and
$16,282,000 and deferred tax liabilities of $7,359,000, $10,459,000 and
$12,194,000, respectively, detailed as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS (LIABILITIES)
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Restructuring costs and related future tax benefits... $ 1,642,000 $ 2,056,000 $ 3,531,000
Deferred compensation................................. 15,250,000 8,955,000 5,730,000
Accrued expenses...................................... 2,658,000 8,640,000 7,021,000
Safe harbor lease and depreciation.................... (5,134,000) (7,493,000) (9,228,000)
Tax on unremitted foreign earnings and other.......... (2,225,000) (2,966,000) (2,966,000)
----------- ----------- -----------
12,191,000 9,192,000 4,088,000
Valuation allowance for deferred tax assets........... -0- -0- -0-
----------- ----------- -----------
Net deferred tax assets............................... $12,191,000 $ 9,192,000 $ 4,088,000
=========== =========== ===========
</TABLE>
The components of income of consolidated companies before taxes on income
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Domestic............................................. $26,704,000 $ 25,918,000 $28,646,000
Foreign.............................................. 27,623,000 (24,308,000) 14,059,000
------------- ------------- -------------
$54,327,000 $ 1,610,000 $42,705,000
============= ============= =============
</TABLE>
Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- --------------------------- ---------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal............. $13,607,000 $(4,248,000) $11,510,000 $(2,470,000) $12,106,000 $(2,448,000)
Foreign............. 10,167,000 2,888,000 9,034,000 (1,197,000) 8,580,000 (1,578,000)
State and local..... 6,191,000 (1,639,000) 6,181,000 (1,437,000) 5,072,000 755,000
----------- ----------- ----------- ----------- ----------- -----------
$29,965,000 $(2,999,000) $26,725,000 $(5,104,000) $25,758,000 $(3,271,000)
=========== =========== =========== =========== =========== ===========
</TABLE>
The effective tax rate varied from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ------- ----
<S> <C> <C> <C>
Statutory Federal tax rate............................................. 35.0% 35.0% 35.0%
State and local income taxes, net of Federal income tax benefits....... 5.4 191.5 8.9
Difference in foreign tax rates........................................ 6.5 215.0 6.8
Withholding tax on unremitted foreign earnings......................... 0.5 33.4 1.2
Goodwill write-off..................................................... 868.3 1.6
Adjustment of prior years' provisions.................................. (24.8) (2.2)
Other -- net........................................................... 2.2 24.5 1.4
---- ------- ----
49.6% 1,342.9% 52.7%
==== ======= ====
</TABLE>
During the years 1995, 1994 and 1993, the Company made net income tax
payments of $21,368,000, $19,005,000 and $18,748,000, respectively.
18
<PAGE> 20
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
This 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 ESOT in 1995, 1994
and 1993. 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.
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 $6,873,000, $5,434,000 and
$4,581,000 in 1995, 1994 and 1993, respectively. Approximately $5,223,000,
$4,215,300 and $3,343,000 of plan expense incurred in 1995, 1994 and 1993,
respectively, will be payable in Company Stock in accordance with the terms
of the plan. These awards converted into 27,705, 28,647 and 18,610 equivalent
shares of Common Stock at December 31, 1995, 1994 and 1993, respectively,
including an amount for the dividends that would have been payable on the
Company Stock as if such stock was outstanding from the time the awards were
granted. 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 $29,307,000
in 1995, $24,211,000 in 1994 and $21,057,000 in 1993.
In December 1990, the Company amended its employment agreement with its
Chairman and Chief Executive Officer and concurrently, also discharged this
individual's pension obligation which had been established pursuant to the
terms of his long-standing employment agreement with a payment of
approximately $29,300,000. Included in Other Assets at December 31, 1995 and
1994 is approximately $4,700,000 and $7,100,000, respectively, related to
this arrangement which is being amortized to expense over the remaining term
of the related employment agreement.
In the first quarter of 1995, the Company and its Chairman and Chief
Executive Officer entered into an agreement extending the term of the
Chairman and Chief Executive Officer employment agreement through December
31, 2002. This agreement further provides for the deferral of certain
compensation otherwise payable to the Chairman and Chief Executive pursuant
to his employment agreement and the payment of such deferred compensation
into a trust, commonly referred to as a rabbi trust, established with United
States Trust Company of New York. The purpose of the trust arrangement is to
ensure the Company's ability to deduct compensation paid to the Chairman and
Chief Executive Officer without the application of Section 162(m) of the
Internal Revenue Code ("Section"). The Section, under certain circumstances,
denies a tax deduction to an employer for certain compensation expenses in
excess of $1,000,000 per year paid by a publicly-held corporation to certain
of its executives. Amounts deferred and paid into the trust, as adjusted for
the earnings, gains or losses on the trust assets, shall be paid to the
19
<PAGE> 21
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Chairman and Chief Executive Officer or to his estate, as the case may be,
upon the expiration of his employment agreement, or the termination of his
employment by reason of death or disability.
At December 31, 1995, the value of the trust was $2,496,000 and is included
in Other Assets and the Company's related deferred compensation obligation
for the same amount is included in Other Liabilities.
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 amount 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 amount 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 1995, 1994 and
1993, the Company has included in each year $200,000 of compensation expense,
representing the amount of loan forgiven each year. As of December 31, 1995
and 1994, the remaining loan balance was $600,000 and $800,000, respectively,
included in Other Assets.
In addition, a second executive officer has three loans outstanding with the
Company. The first loan, granted in 1994, was for $50,000 and is forgivable
contingent upon employment by the Company through 1998. During 1995, the
Company made two additional loans to this executive officer for $125,000 and
$200,000 which are repayable with accrued interest in May 1998 and 1999,
respectively. As of December 31, 1995, the loan balance was $375,000 and is
reflected in Other Assets.
2. Rental expense amounted to approximately $36,445,000 in 1995, $35,568,000 in
1994 and $32,725,000 in 1993 which is net of sub-lease rental income of
$129,000 in 1995, $1,263,000 in 1994, and $2,016,000 in 1993. 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>
1996............................... $ 29,935,000 $(111,000) $ 29,824,000
1997............................... 27,724,000 27,724,000
1998............................... 25,216,000 25,216,000
1999............................... 24,387,000 24,387,000
2000............................... 18,314,000 18,314,000
Beyond 2000........................ 51,142,000 51,142,000
----------- --------- -----------
$176,718,000 $(111,000) $176,607,000
=========== ========= ===========
</TABLE>
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 the results of operations, liquidity or
financial position of the Company.
M. GOODWILL WRITE-OFF
In 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.
20
<PAGE> 22
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
represented less than 10% of the Company's consolidated unamortized goodwill as
of December 31, 1994.
In 1993, the Company wrote-off $1,939,000 of goodwill in excess of normal
amortization schedules. There were no write-offs in excess of normal
amortization schedules in 1995.
21
<PAGE> 23
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, 1995, 1994 and 1993, and related identifiable assets at
December 31, 1995, 1994 and 1993 are summarized below (000s omitted):
<TABLE>
<CAPTION>
UNITED STATES WESTERN EUROPE
------------------------------ ------------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commissions and fees......................... $303,826 $277,411 $267,964 $337,726 $273,754 $260,005
======== ======== ======== ======== ======== ========
Operating profit (loss)...................... $ 21,368 $ 22,767 $ 28,809 $ 27,212 $(20,457) $ 11,415
======== ======== ======== ======== ======== ========
Other income-net.............................
Income of consolidated companies before taxes
on income..................................
Identifiable assets.......................... $455,771 $390,547 $353,532 $406,757 $353,904 $389,723
======== ======== ======== ======== ======== ========
Investments in and advances to
nonconsolidated affiliated companies.......
Total assets.................................
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOLIDATED
------------------------------ ------------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commissions and fees......................... $ 46,667 $ 42,152 $ 39,274 $688,219 $593,317 $567,243
======== ======== ======== ======== ======== ========
Operating profit (loss)...................... $ 1,660 $ (959) $ 564 $ 50,240 $ 1,351 $ 40,788
======== ======== ========
Other income-net............................. $ 4,087 $ 259 $ 1,917
-------- -------- --------
Income of consolidated companies before taxes
on income.................................. $ 54,327 $ 1,610 $ 42,705
======== ======== ========
Identifiable assets.......................... $ 71,916 $ 69,130 $ 61,274 $934,444 $813,581 $804,529
======== ======== ========
Investments in and advances to
nonconsolidated affiliated companies....... $ 20,693 $ 16,495 $ 16,104
-------- -------- --------
Total assets................................. $955,137 $830,076 $820,633
======== ======== ========
</TABLE>
Commissions and fees from one client amounted to 13.8%, 13.8% and 13.0% of
the consolidated total in 1995, 1994 and 1993, respectively.
22
<PAGE> 24
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, 1995
and 1994, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 7, 1996
23
