<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-7898
GREY ADVERTISING INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-0802840
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Third Avenue, New York, New York 10017
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 212-546-2000
------------------- ------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1 per share
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes X No
----- -----
<PAGE> 2
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $194,248,241 as at March 1, 1997.
The registrant had 890,021 shares of its Common Stock, par value $1 per share,
and 292,907 shares of its Limited Duration Class B Common Stock, par value $1
per share, outstanding as at March 1, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement to be furnished in connection with the
registrant's 1997 annual meeting of stockholders are incorporated by reference
into Part III.
<PAGE> 3
PART I.
ITEM 1. BUSINESS.
The Registrant ("Grey") and its subsidiaries (collectively
with Grey, the "Company") have been engaged in the planning, creation,
supervision and placing of advertising since the Company's formation in 1917.
Grey was incorporated in New York in 1925 and changed its state of incorporation
to Delaware in 1974.
The Company's principal business activity consists of
providing a full range of advertising 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, co-marketing programs, direct marketing,
interactive consulting and production, media research and buying, research,
product publicity, public affairs, public relations and sales promotion.
The Company is not engaged in more than one industry segment,
and no separate class of similar services contributed 10% or more of the
Company's gross income or net income during 1996, 1995 or 1994.
3
<PAGE> 4
The Company serves a diversified client roster in the apparel,
automobile, beverage, chemical, communications, community service, computer,
corporate, electrical appliance, entertainment, food product, home furnishing,
houseware, office product, packaged goods, publishing, restaurant, retailing,
toy, travel and other sectors.
Advertising is a highly competitive business in which agencies
of all sizes and other providers of creative or media services strive to attract
new clients or additional assignments from existing clients. Competition for new
business, however, is restricted from time to time because large agencies (such
as the Company) often are precluded from providing advertising services products
or services that may be viewed as being competitive with those of an existing
client. Generally, since advertising agencies charge clients substantially
equivalent rates for their services, competitive efforts principally focus on
the skills of the competing agencies.
Published reports indicate that there are over 500 advertising
agencies of all sizes in the United States. According to a report published in
1996 (Advertising Age, a trade publication), the Company was the 7th largest
United States advertising agency in terms of worldwide gross income.
Approximately 53% of Grey's present domestic advertising
clients, representing a majority of the Company's 1996 domestic gross income,
have been with the Company since 1991. The agreements between the Company and
most of its clients are generally terminable by either the Company or the client
on 90 days' notice, as is the custom in the industry. Clients may also modify
advertising budgets at any time and for any reason, and because the agency's
compensation for many clients is determined on the basis of commission rates,
shifts in advertising budgets may result in increased or reduced levels of
revenue for the Company.
4
<PAGE> 5
During 1996, one client (The Procter & Gamble Company), which
has been a client of the Company for forty years, represented more than 10% of
the Company's consolidated income from commissions and fees. The loss of this
client would be expected to have an adverse effect on the results of the
Company. No other client represented more than 5% of the Company's total
consolidated income from commissions and fees. The loss of any single client in
past years has not had a long-term negative impact on the Company's financial
condition or its competitive position.
On December 31, 1996, the Company and its nonconsolidated
affiliated companies employed approximately 6,300 persons, of whom eight are
executive officers of Grey.
As is generally the case in the advertising industry, the
Company's business traditionally has been seasonal, with greater revenues
generated in the second and fourth quarters of each year. This reflects, in
large degree, the media placement patterns of the Company's clients.
Advertising programs created by the Company and its
nonconsolidated affiliated companies are placed principally in media distributed
within the United States and overseas through its offices in the United States
and more than 70 foreign countries. While the Company operates on a worldwide
basis, for the purpose of presenting certain financial information in accordance
with Securities and Exchange Commission rules, its operations are deemed to be
conducted in three geographic areas.
5
<PAGE> 6
Commissions and fees, and operating profit by each such geographic area for the
years ended December 31, 1996, 1995 and 1994, and related identifiable assets
at December 31 of each of the years, are summarized in Note N of the Notes to
Consolidated Financial Statements, which is incorporated herein by reference.
While the Company has no reason to believe that its foreign
operations as a whole are presently jeopardized in any material respect, there
are certain risks of operating which do not affect domestic operations but which
may affect the Company's foreign operations from time to time. Such risks
include the possibility of limitations on repatriation of capital or dividends,
political instability, currency devaluation and restrictions on the percentage
of permitted foreign ownership.
In connection with the provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company may include
Forward Looking Statements (as defined in the Reform Act) in oral or written
public statements issued by or on behalf of the Company. These Forward Looking
Statements may include, among other things, plans, objectives, projections,
anticipated future economic performance or assumptions and the like that are
subject to risks and uncertainties. As such, actual results or outcomes may
differ materially from those discussed in the Forward Looking Statements.
Important factors which may cause actual results to differ include but are not
limited to the following: the unanticipated loss of a material client or key
personnel, delays or reductions in client advertising budgets, shifts in
industry rates of compensation, government compliance costs or litigation,
unanticipated natural disasters, changes in the general economic conditions that
affect interest rates and/or consumer spending both in the U.S. and the
Company's international marketplace, unanticipated expenses, client preferences
which can be affected by competition and the ability to project risk factors
which may vary.
6
<PAGE> 7
Executive Officers of the Registrant
as of March 1, 1997
<TABLE>
<CAPTION>
Year First became
Executive Officers (a) Position Age Executive Officer
- ---------------------- -------- --- -----------------
<S> <C> <C> <C>
Robert L. Berenson President - Grey, N.Y. 57 1978
Barbara S. Feigin Exec. Vice President 59 1983
Steven G. Felsher Exec. Vice President Finance -
Worldwide, Secretary & Treasurer 47 1989
William P. Garvey Exec. Vice President,
Chief Financial Officer
- United States 59 1970
John A. Gerster Exec. Vice President 49 1983
Edward H. Meyer Chairman of the Board,
President & Chief Executive
Officer 70 1959
Stephen A. Novick Exec. Vice President 56 1984
O. John C. Shannon President - Grey Int'l. 60 1993
</TABLE>
(a) All executive officers are elected annually by the Board of Directors of
Grey. Each executive officer has been with Grey for a period greater
than five years. There exists no family relationship between any of
Grey's directors or executive officers and any other director or
executive officer or person nominated or chosen to become a director or
executive officer.
7
<PAGE> 8
ITEM 2. PROPERTIES.
Substantially all offices of the Company are located in leased
premises. The Company's principal office is at 777 Third Avenue, New York, New
York, where it occupies approximately 357,000 square feet of space. The main
lease covering the bulk of this space expires at the end of 1999. The Company
also has significant leases covering other offices in New York, Los Angeles,
Amsterdam, Brussels, Copenhagen, Dusseldorf, Hong Kong, London, Madrid,
Melbourne, Milan, Paris, Stockholm and Toronto.
The Company considers all space leased by it to be adequate
for the operation of its business and does not foresee any significant
difficulty in meeting its space requirements.
ITEM 3. LEGAL PROCEEDINGS.
In the Company's judgement, it is not involved in any
material pending legal proceedings other than ordinary routine litigation
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
8
<PAGE> 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is traded on The NASDAQ Stock Market's
National Market and listed on the NASDAQ Stock Market under the symbol GREY.
As of March 1, 1997, there were 488 holders of record of the
Common Stock and 279 holders of record of the Limited Duration Class B Common
Stock.
The following table sets forth certain information about
dividends paid, and the bid prices on the NASDAQ Stock Market during the periods
indicated with respect to the Common Stock:
<TABLE>
<CAPTION>
BID PRICES*
DOLLARS PER SHARE DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C> <C>
1995 First Quarter 178 145 .875
Second Quarter 188 160 .875
Third Quarter 205 183 .875
Fourth Quarter 196 182 .9375
1996 First Quarter 223 190 .9375
Second Quarter 233 219 .9375
Third Quarter 240 204 .9375
Fourth Quarter 251 230 1.000
</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.
9
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commissions and fees ..... $ 765,498,000 $688,219,000 $ 593,317,000 $567,243,000 $564,468,000
Expenses ................. 706,965,000 637,979,000 552,022,000 526,455,000 522,510,000
Goodwill write-off (a) ... 39,944,000
Income of consolidated
companies before taxes
on income .............. 65,693,000 54,327,000 1,610,000 42,705,000 42,588,000
Provision for taxes
on income ................ 31,612,000 26,966,000 21,621,000 22,487,000 19,975,000
Net income (loss) ........ 28,602,000 23,438,000 (21,378,000) 17,681,000 15,904,000
Net income (loss) per
common share (b)
Primary .............. 21.03 16.79 (17.51) 13.46 12.68
Fully diluted ........ 20.19 16.16 N/A 13.00 12.25
Weighted average number
of common shares out-
standing
Primary .............. 1,295,441 1,295,182 1,285,605 1,263,900 1,205,241
Fully diluted ........ 1,356,645 1,353,849 1,336,829 1,319,349 1,258,799
Working capital .......... 3,843,000 9,582,000 33,735,000 25,001,000 12,588,000
Total assets ............. 1,089,394,000 963,433,000 830,076,000 820,633,000 752,364,000
Long-term debt ........... 33,025,000 33,025,000 33,025,000 33,025,000 3,025,000
Redeemable preferred
stock at redemption
value .................. 10,098,000 8,986,000 7,516,000 6,590,000 6,468,000
Common stockholders'
equity ................. 147,922,000 127,663,000 108,705,000 129,077,000 118,741,000
Cash dividend per share
of Common Stock and
Limited Duration Class B
Common Stock ........... 3.8125 3.5625 3.3125 3.1375 3.025
</TABLE>
(a) In 1994, the Company recorded a charge of $39,944,000 on both a
pre-tax and after-tax basis, for a non-cash write-off which related
almost exclusively to write-offs of goodwill.
(b) Gives effect (i) to amounts attributable to redeemable preferred
stock, (ii) to the assumed exercise of dilutive stock options, (iii)
to shares issuable pursuant to the Company's Senior Management
Incentive Plan and (iv) for fully diluted net income per common
share, the assumed conversion of 8-1/2% Convertible Subordinated
Debentures.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 11.2% in
1996 and 16.0% in 1995 as compared to the respective prior years. Absent
exchange rate fluctuations, gross income increased 11.6% in 1996 and 11.4% in
1995. In 1996, 1995 and 1994, respectively, 44.2%, 44.1% and 46.8% of
consolidated gross income was attributable to domestic operations and 55.8%,
55.9% and 53.2%, respectively, to international operations. In 1996, gross
income from domestic operations increased 11.4% versus 1995 and was up 9.5% in
1995 versus 1994. Gross income from international operations increased 11.1%
(11.8% absent exchange rate fluctuations) in 1996 when compared to 1995 and
21.7% (13.1% absent exchange rate fluctuations) in 1995 when compared to 1994.
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.
Salaries and employee-related expenses increased 9.8% in 1996 and 16.8%
in 1995 as compared to the respective prior years. Office and general expenses
increased 12.9% in 1996 and 13.1% in 1995 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 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
11
<PAGE> 12
advertising agencies was approximately $31,295,000 and $8,649,000 relates to
public relations agencies. A significant amount of this write-off related to
operations in the United Kingdom. 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). 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. There were
no write-offs in excess of normal amortization schedules in 1996 or 1995.
Inflation did not have a material effect on revenue or expenses in
1996, 1995 or 1994.
In 1996, other income was affected positively by non-recurring,
non-operating pre-tax income of approximately $4,000,000 primarily related to
gains on the sale of the Company's equity position in a nonconsolidated
subsidiary and the liquidation of a non-marketable investment security.
The effective tax rate was 48.1% in 1996, 49.6% in 1995, and 1,342.9%
in 1994 (52.0% not factoring in the goodwill write-off). The decrease in the
effective tax rate in 1996 as compared to 1995 is due, in part, to a lower
effective foreign tax rate in 1996. 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
items.
12
<PAGE> 13
Minority interest increased $390,000 in 1996 and $3,233,000 in 1995
as compared to the respective prior years. The changes in 1996 and in 1995 were
primarily due to changes in the level of profits of majority-owned companies.
Equity in earnings of nonconsolidated companies decreased $1,166,000
in 1996 and increased $677,000 in 1995 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 $28,602,000 for 1996 as compared
to $23,438,000 in 1995. Net income for 1996 was up 22.0% over 1995's results.
For 1996, primary earnings per common share was up 25.3% versus 1995. Primary
earnings per common share for 1995 was up 24.4% versus 1994, absent the goodwill
write-off. Absent the non-recurring, non-operating gains, primary earnings per
common share for 1996 increased by approximately 16.0% over 1995.
For purposes of computing primary earnings 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
13
<PAGE> 14
contract entered into in 1996 was for less than three months. At December 31,
1996, there were no foreign currency contract transactions open. In addition,
the Company had no derivative contracts outstanding at December 31, 1996, and
did not enter into any derivative contracts during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to be highly liquid by maintaining significant
levels of cash, cash equivalents and investments in highly liquid marketable
securities, a majority of which are United States government securities. Cash
and cash equivalents were $112,485,000 and $134,313,000 at December 31, 1996 and
1995, respectively, and the Company's investment in marketable securities was
$96,107,000 and $68,671,000 at December 31, 1996 and 1995, respectively. The
continued high level of liquidity reflects the Company's ongoing focus on its
cash management process. Working capital decreased by $5,739,000 from $9,582,000
at December 31, 1995 to $3,843,000 at December 31, 1996. 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.
Domestically, the Company maintains committed bank lines of credit
totaling $51,000,000. These lines of credit were partially utilized during both
1996 and 1995 to secure obligations of selected foreign subsidiaries in the
amount of $26,000,000 and $15,000,000 at December 31, 1996 and 1995,
respectively.
14
<PAGE> 15
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, 1996 and 1995 were $60,004,000 and $56,336,000, 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 three equal annual
installments, commencing in January 1998. During 1996 and 1995, the Company
borrowed $1,709,000 and $13,024,000, respectively, against the cash surrender
value of life insurance policies it owns on the life of its Chairman and Chief
Executive Officer at rates of 7.30% and 8.75%, respectively. 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.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is presented in this report
beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors of the Company is
incorporated herein by reference to the Company's proxy statement ("Proxy
Statement") to be sent to its stockholders in connection with its 1997 Annual
Meeting, under the caption "Election of Directors". Information with respect to
the Company's executive officers is set forth in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference to the Proxy Statement and will be included under the caption
"Management Remuneration and Other Transactions".
16
<PAGE> 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by
reference to the Proxy Statement and will be included under the captions
"Election of Directors" and "Voting Securities".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to the Proxy Statement and will be included under the captions
"Election of Directors" and "Voting Securities".
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) (2) The information required by this subsection
of this Item is presented in the index to Financial
Statements on Page F-1.
(3) The information required by this subsection of
this Item is provided in the Index of Exhibits at
Page E-1 of this report. Such index provides a
listing of exhibits filed with this report and those
incorporated herein by reference.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) needs of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GREY ADVERTISING INC.
By: /s/ Edward H. Meyer
----------------------------
Edward H. Meyer,
Chairman, Chief Executive
Officer & President
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the date indicated.
/s/ Mark N. Kaplan Dated: March 28, 1997
- -----------------------------
Mark N. Kaplan, Director
/s/ Edward H. Meyer Dated: March 28, 1997
- -----------------------------
Edward H. Meyer, Director;
Principal Executive Officer
/s/ O. John C. Shannon Dated: March 28, 1997
- -----------------------------
O. John C. Shannon, Director;
President - Grey International
/s/ Richard R. Shinn Dated: March 28, 1997
- -----------------------------
Richard R. Shinn, Director
/s/ Steven G. Felsher Dated: March 28, 1997
- -----------------------------
Steven G. Felsher,
Principal Financial Officer
/s/ William P. Garvey Dated: March 28, 1997
- -----------------------------
William P. Garvey,
Principal Accounting Officer
<PAGE> 19
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2) and Item 14(d)
Financial Statements and Supplementary Data
List of Financial Statements
Year ended December 31, 1996
GREY ADVERTISING INC.
New York, New York
<PAGE> 20
Form 10-K - Item 8, Item 14(a)(1) and (2)
Grey Advertising Inc. and Consolidated Subsidiary Companies
Index to Financial Statements
The following consolidated financial statements of Grey Advertising Inc. and
consolidated subsidiary companies are included in Item 8:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets -- December 31, 1996 and 1995.............. F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Common Stockholders' Equity --
Years Ended December 31, 1996, 1995 and 1994......................... F-6
Consolidated Statements of Cash Flows --
Years Ended December 31, 1996, 1995 and 1994......................... F-8
Notes to Consolidated Financial Statements --
December 31, 1996.................................................... F-10
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
Summarized financial information and financial statements for nonconsolidated
foreign investee companies accounted for by the equity method have been omitted
because such companies, considered individually or in the aggregate, do not
constitute a significant subsidiary.
F-1
<PAGE> 21
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, 1996 and 1995, 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,
1996. 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 7, 1997
F-2
<PAGE> 22
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 112,485,000 $134,313,000
Marketable securities (Notes A and E) 28,688,000 20,419,000
Accounts receivable 590,002,000 495,349,000
Expenditures billable to clients 52,285,000 46,449,000
Other current assets (Note K) 52,982,000 49,614,000
--------------------------------
Total current assets 836,442,000 746,144,000
Investments in and advances to nonconsolidated
affiliated companies (Notes A and B) 17,723,000 20,693,000
Fixed assets-net (Note D) 78,223,000 74,706,000
Marketable securities (Notes A and E) 67,419,000 48,252,000
Intangibles and other assets-including loans to executive
officers of $5,822,000 in 1996 and $5,522,000 in 1995
(Notes A, F, G, K and L(2)) 89,587,000 73,638,000
--------------------------------
Total assets $1,089,394,000 $963,433,000
================================
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 23
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 619,003,000 $549,533,000
Notes payable to banks (Note F) 86,004,000 71,336,000
Accrued expenses and other 107,368,000 97,126,000
Income taxes payable 20,224,000 18,567,000
-----------------------------------
Total current liabilities 832,599,000 736,562,000
Other liabilities, including deferred compensation of
$28,738,000 and $22,021,000 (Note L(1)) 55,217,000 47,916,000
Long-term debt (Note F) 33,025,000 33,025,000
Minority interest 10,533,000 9,281,000
Redeemable preferred stock - at redemption value; par
value $1 per share; authorized 500,000 shares; issued
and outstanding 32,000 shares in 1996 and 1995 (Note G) 10,098,000 8,986,000
Common stockholders' equity:
Common Stock - par value $1 per share; authorized
10,000,000 shares; issued 1,110,918 in 1996 and
1,096,096 shares in 1995 1,111,000 1,096,000
Limited Duration Class B Common Stock - par value
$1 per share; authorized 2,000,000 shares; issued
320,866 in 1996 and 335,688 shares in 1995 321,000 336,000
Paid-in additional capital 42,814,000 37,898,000
Retained earnings 144,789,000 122,345,000
Cumulative translation adjustment 2,579,000 4,664,000
Unrealized (loss) gain on marketable securities
(Notes A and E) (870,000) 550,000
Loans to officer used to purchase Common Stock and
Limited Duration Class B Common Stock (Note L(2)) (4,726,000) (4,726,000)
-----------------------------------
186,018,000 162,163,000
Less - cost of 222,810 and 212,848 shares of Common
Stock and 26,759 and 26,751 shares of Limited
Duration Class B Common Stock held in treasury
at December 31, 1996 and 1995, respectively 38,096,000 34,500,000
-----------------------------------
Total common stockholders' equity 147,922,000 127,663,000
Retirement plans, leases and contingencies (Note L)
-----------------------------------
Total liabilities and stockholders' equity $1,089,394,000 $963,433,000
===================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 24
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Commissions and fees $765,498,000 $688,219,000 $593,317,000
Expenses:
Salaries and employee related
expenses (Note L(1)) 474,686,000 432,311,000 370,196,000
Office and general expenses (Note L(3)) 232,279,000 205,668,000 181,826,000
Goodwill write-off (Notes A and M) 39,944,000
-----------------------------------------------------
706,965,000 637,979,000 591,966,000
-----------------------------------------------------
58,533,000 50,240,000 1,351,000
Other income - net (Note C) 7,160,000 4,087,000 259,000
-----------------------------------------------------
Income of consolidated companies
before taxes on income 65,693,000 54,327,000 1,610,000
Provision for taxes on income (Note K) 31,612,000 26,966,000 21,621,000
-----------------------------------------------------
Net income (loss) of consolidated companies 34,081,000 27,361,000 (20,011,000)
Minority interest applicable to consolidated
companies (6,663,000) (6,273,000) (3,040,000)
Equity in earnings of nonconsolidated affiliated
companies 1,184,000 2,350,000 1,673,000
-----------------------------------------------------
Net income (loss) $28,602,000 $23,438,000 $(21,378,000)
=====================================================
Earnings (loss) per Common Share
(Note J):
Primary $21.03 $16.79 $(17.51)
Fully diluted $20.19 $16.16 *
</TABLE>
*Antidilutive
See notes to consolidated financial statements.
F-5
<PAGE> 25
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Statements of Common Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
PAID-IN COMMON STOCK OTHER
COMMON ADDITIONAL RETAINED HELD IN TREASURY EQUITY
STOCK CAPITAL EARNINGS SHARES AMOUNT ACCOUNTS
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $1,432,000 $27,329,000 $131,835,000 191,223 $(23,073,000) $(8,446,000)
Net loss (21,378,000)
Cash dividends - Common Shares $3.3125 per share (4,112,000)
Cash dividends - Redeemable Preferred Stock - $6.625 (212,000)
per share
Common Shares acquired - at cost 1,993 (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)
Restricted stock activity (Note I) 30,000 (1,750) 226,000
Tax benefit from restricted stock (Note K) 450,000
Common Shares issued upon exercise of stock options (101,000) (3,333) 420,000
Tax benefit from exercise of stock options (Note K) 118,000
Senior Management Incentive Plan activity (Note L) 3,985,000
Translation adjustment 2,845,000
Unrealized loss on marketable securities (Notes A
and E) (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)
Net income 23,438,000
Cash dividends - Common Shares - $3.5625 per share (4,333,000)
Cash dividends - Redeemable Preferred Stock - $7.125
per share (228,000)
Common Shares acquired - at cost 77,001 (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 (Note G) (1,470,000)
Restricted stock activity (Note I) 133,000
Tax benefit from restricted stock (Note K) 164,000
Common Shares issued upon exercise of stock options (287,000) (25,535) 2,733,000
Tax benefit from exercise of stock options (Note K) 959,000
Senior Management Incentive Plan activity (Note L) 4,849,000
Translation adjustment 5,392,000
Unrealized gain on marketable securities (Notes A
and E) 2,042,000
----------------------------------------------------------------------------
Balance at December 31, 1995 $1,432,000 $37,898,000 $122,345,000 239,599 $(34,500,000) $ 488,000
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------------
<S> <C>
Balance at December 31, 1993 $129,077,000
Net loss (21,378,000)
Cash dividends - Common Shares $3.3125 per share (4,112,000)
Cash dividends - Redeemable Preferred Stock - $6.625
per share (212,000)
Common Shares acquired - at cost (372,000)
Dividends Payable in Company Stock pursuant to Senior
Management Incentive Plan (Note L)
Increase in redemption value of Redeemable Preferred
Stock (Note G) (926,000)
Restricted stock activity (Note I) 256,000
Tax benefit from restricted stock (Note K) 450,000
Common Shares issued upon exercise of stock options 319,000
Tax benefit from exercise of stock options (Note K) 118,000
Senior Management Incentive Plan activity (Note L) 3,985,000
Translation adjustment 2,845,000
Unrealized loss on marketable securities (Notes A
and E) (1,345,000)
---------------
Balance at December 31, 1994 108,705,000
Net income 23,438,000
Cash dividends - Common Shares - $3.5625 per share (4,333,000)
Cash dividends - Redeemable Preferred Stock - $7.125
per share (228,000)
Common Shares acquired - at cost (14,434,000)
Dividends Payable in Company Stock pursuant to Senior
Management Incentive Plan (Note L)
Increase in redemption value of Redeemable Preferred
Stock (Note G) (1,470,000)
Restricted stock activity (Note I) 133,000
Tax benefit from restricted stock (Note K) 164,000
Common Shares issued upon exercise of stock options 2,446,000
Tax benefit from exercise of stock options (Note K) 959,000
Senior Management Incentive Plan activity (Note L) 4,849,000
Translation adjustment 5,392,000
Unrealized gain on marketable securities (Notes A
and E) 2,042,000
---------------
Balance at December 31, 1995 $127,663,000
</TABLE>
F-6
<PAGE> 26
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Statements of Common Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 (continued)
<TABLE>
<CAPTION>
PAID-IN COMMON STOCK
COMMON ADDITIONAL RETAINED HELD IN TREASURY
--------------------------
STOCK CAPITAL EARNINGS SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,432,000 $ 37,898,000 $ 122,345,000 239,599 $ (34,500,000)
Net income 28,602,000
Cash dividends - Common Shares - $3.8125 per share (4,527,000)
Cash dividends - Redeemable Preferred Stock $7.625
per share (244,000)
Common Shares acquired - at cost 20,818 (4,733,000)
Dividends Payable in Company Stock pursuant to Senior
Management Incentive Plan (Note L) 275,000 (275,000)
Increase in redemption value of Redeemable Preferred
Stock (Note G) (1,112,000)
Restricted stock activity (Note I) 43,000 (250) 14,000
Tax benefit from restricted stock (Note K) 3,000
Common Shares issued upon exercise of stock options 250,000 (10,598) 1,123,000
Tax benefit from exercise of stock options (Note K) 483,000
Senior Management Incentive Plan activity (Note L) 3,862,000
Translation adjustment
Unrealized loss on marketable securities (Notes A
and E)
----------------------------------------------------------------------------
Balance at December 31, 1996 $ 1,432,000 $ 42,814,000 $ 144,789,000 249,569 $ (38,096,000)
============================================================================
</TABLE>
<TABLE>
<CAPTION>
OTHER
EQUITY
ACCOUNTS TOTAL
---------------------------------------
<S> <C> <C>
Balance at December 31, 1995 $ 488,000 $ 127,663,000
Net income 28,602,000
Cash dividends - Common Shares - $3.8125 per share (4,527,000)
Cash dividends - Redeemable Preferred Stock $7.625
per share (244,000)
Common Shares acquired - at cost (4,733,000)
Dividends Payable in Company Stock pursuant to Senior
Management Incentive Plan (Note L)
Increase in redemption value of Redeemable Preferred
Stock (Note G) (1,112,000)
Restricted stock activity (Note I) 57,000
Tax benefit from restricted stock (Note K) 3,000
Common Shares issued upon exercise of stock options 1,373,000
Tax benefit from exercise of stock options (Note K) 483,000
Senior Management Incentive Plan activity (Note L) 3,862,000
Translation adjustment (2,085,000) (2,085,000)
Unrealized loss on marketable securities (Notes A
and E) (1,420,000) (1,420,000)
---------------------------------------
Balance at December 31, 1996 $ (3,017,000) $ 147,922,000
=======================================
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 27
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 28,602,000 $ 23,438,000 $(21,378,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of fixed assets 22,880,000 17,388,000 15,093,000
Goodwill write-off 39,944,000
Amortization of intangibles 4,976,000 4,146,000 7,475,000
Deferred compensation 16,217,000 15,162,000 9,006,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $441,000,
$483,000 and $903,000 (743,000) (1,867,000) (770,000)
Gains from the sale of a nonconsolidated affiliated
company, a non-marketable investment security and
marketable securities (4,911,000)
Minority interest applicable to consolidated companies 6,663,000 6,273,000 3,040,000
Deferred income taxes (7,085,000) (2,999,000) (5,104,000)
Amortization of restricted stock expense 33,000 133,000 116,000
Changes in operating assets and liabilities:
Increase in accounts receivable (103,252,000) (79,612,000) (31,058,000)
Increase in expenditures billable to clients (7,229,000) (14,109,000) (6,006,000)
(Increase) decrease in other current assets (4,782,000) 4,351,000 10,739,000
(Increase) decrease in other assets (2,741,000) 3,680,000 (3,077,000)
Increase (decrease) in accounts payable 78,157,000 61,846,000 (4,220,000)
Increase (decrease) in accrued expenses
and other 8,611,000 3,180,000 (9,424,000)
Increase in income taxes payable 2,419,000 2,431,000 6,600,000
Decrease in other liabilities (2,592,000) (2,509,000) (2,507,000)
--------------------------------------------------
Net cash provided by operating activities 35,223,000 40,932,000 8,469,000
INVESTING ACTIVITIES
Purchases of fixed assets (27,896,000) (29,136,000) (17,067,000)
Trust fund deposits (2,833,000) (2,426,000)
Increase in investments in and advances to non-consolidated
affiliated companies (320,000) (1,686,000) (3,564,000)
Purchases of marketable securities (129,491,000) (68,500,000) (2,003,000)
Proceeds from the sales of marketable securities 101,012,000 26,957,000 486,000
Proceeds from the sale of a nonconsolidated affiliated
company and a non-marketable investment security 8,568,000
Increase in intangibles, primarily goodwill (13,103,000) (6,183,000) (14,800,000)
--------------------------------------------------
Net cash used in investing activities (64,063,000) (80,974,000) (36,948,000)
</TABLE>
F-8
<PAGE> 28
Grey Advertising Inc. and Consolidated Subsidiary Companies
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from short-term borrowings $18,180,000 $4,834,000 $15,826,000
Common Shares issued under Stock Incentive Plan 24,000 141,000
Common Shares acquired for treasury (4,733,000) (14,434,000) (372,000)
Cash dividends paid on Common Shares (4,527,000) (4,333,000) (4,112,000)
Cash dividends paid on Redeemable Preferred Stock (244,000) (228,000) (212,000)
Proceeds from exercise of stock options 1,373,000 2,446,000 319,000
Borrowings under life insurance policies 464,000 11,779,000
-----------------------------------------------------
Net cash provided by financing activities 10,537,000 64,000 11,590,000
Effect of exchange rate changes on cash (3,525,000) 4,214,000 5,699,000
-----------------------------------------------------
Decrease in cash and cash equivalents (21,828,000) (35,764,000) (11,190,000)
Cash and cash equivalents at beginning of year 134,313,000 170,077,000 181,267,000
-----------------------------------------------------
Cash and cash equivalents at end of year $112,485,000 $134,313,000 $170,077,000
=====================================================
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 29
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 1996
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.
F-10
<PAGE> 30
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Primarily all balance sheet accounts of the Company's foreign operations are
translated at the exchange rate in effect at each year end and statement of
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 1996, 1995 and 1994, foreign currency
transaction gains and losses were not material.
INTANGIBLES
The excess of purchase price over underlying net equity of certain consolidated
subsidiaries and nonconsolidated affiliated companies at the date of acquisition
("goodwill") is amortized by the straight-line method over periods of up to
twenty years. The amounts of goodwill, net of accumulated amortization,
associated with consolidated subsidiaries (included in Other Assets) and
nonconsolidated investments (included in Investments in and Advances to
Nonconsolidated Affiliated Companies) were $46,084,000 and $5,592,000 in 1996
and $41,237,000 and $8,325,000 in 1995, respectively.
Annually, the Company assesses the carrying value of its goodwill and the
respective periods of amortization. As part of the evaluation, the Company
considers a number of factors including actual operating results, the impact of
gains and losses of major local clients, the impact of any loss of key local
management staff and any changes in general economic conditions. The Company
quantifies the recoverability of goodwill based on each agency's estimated
future non-discounted cash flows over the applicable remaining amortization
periods. This requires management to make certain specific assumptions with
respect to future revenue and expense levels. 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.
F-11
<PAGE> 31
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
As permitted by Financial Accounting Standards Statement No. 123, Accounting
for Stock Based Compensation, the Company accounts for stock-based awards in
accordance with APB Opinion No.25, Accounting For Stock Issued to Employees.
No compensation expense is recorded for options granted at fair market value
at the date of grant. The excess of the fair market value of Restricted Stock
over the cash consideration received is amortized, as compensation, over the
period of restriction. The future obligation to issue stock, pursuant to the
Company's Senior Management Incentive Plan, is included in Paid-In Additional
Capital and results in periodic charges to compensation.
B. FOREIGN OPERATIONS
The following financial data is applicable to consolidated foreign subsidiaries:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Current assets $429,863,000 $395,016,000 $349,208,000
Current liabilities 452,220,000 408,541,000 364,571,000
Other assets--net of
other liabilities 62,363,000 56,312,000 50,696,000
Net income (loss) 9,276,000 9,384,000 (35,043,000)
</TABLE>
Consolidated retained earnings at December 31, 1996 includes equity in
unremitted earnings of nonconsolidated foreign companies of approximately
$8,914,000.
F-12
<PAGE> 32
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
C. OTHER INCOME - NET
Details of other income - net are:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Interest income $ 12,211,000 $12,183,000 $ 7,507,000
Interest expense (10,065,000) (8,928,000) (7,833,000)
Gain from the sale of a non-consolidated
affiliated company, a non-marketable
investment security and marketable securities 4,911,000
Dividends from affiliates 151,000 217,000 86,000
Other -- net (expense) income (48,000) 615,000 499,000
===============================================
$ 7,160,000 $ 4,087,000 $ 259,000
===============================================
</TABLE>
D. FIXED ASSETS
Components of fixed assets - at cost are:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $131,329,000 $119,575,000
Leaseholds and leasehold improvements 51,705,000 48,920,000
----------------------------------------------
183,034,000 168,495,000
Less accumulated depreciation and amortization 104,811,000 93,789,000
==============================================
$ 78,223,000 $ 74,706,000
==============================================
</TABLE>
E. MARKETABLE SECURITIES
The marketable securities, by type of investment, held by the Company at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------
<S> <C> <C>
Maturities of one year or less:
U.S. Treasury Securities $ 2,506,000 $ 4,758,000
Money market funds 22,556,000 12,394,000
Corporate bonds 3,626,000 3,267,000
-------------------------------------
28,688,000 20,419,000
-------------------------------------
Maturities greater than one year:
U.S. Treasury Securities 49,355,000 41,946,000
Government National Mortgage Association
Securities 4,920,000 1,838,000
Corporate bonds 13,144,000 4,468,000
-------------------------------------
67,419,000 48,252,000
-------------------------------------
$96,107,000 $68,671,000
=====================================
</TABLE>
F-13
<PAGE> 33
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
E. MARKETABLE SECURITIES (CONTINUED)
At December 31, 1996, the Company had unrealized losses of $870,000 and at
December 31, 1995 unrealized gains of $550,000, principally related to the
investments in U. S. Treasury Securities. At December 31, 1996 and 1995, the
Company's investments in marketable securities classified as non-current had an
average maturity of approximately 6 years.
F. CREDIT ARRANGEMENTS AND LONG-TERM DEBT
The Company maintains committed lines of credit of $51,000,000 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 1996 and 1995 to secure
obligations of selected foreign subsidiaries in the amount of $26,000,000 and
$15,000,000 at the end of each respective year. The weighted average interest
rate related to the debt associated with the committed lines of credit was 7.11%
and 6.95% at December 31, 1996 and 1995, respectively. The Company had
$60,004,000 and $56,336,000 outstanding under other uncommitted lines of credit
at December 31, 1996 and 1995, respectively. The weighted average interest rate
for the borrowings under the uncommitted lines of credit was 6.94% and 7.91% at
December 31, 1996 and 1995, 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 1996
was for less than three months. At December 31, 1996, there were no foreign
currency contract transactions open. In addition, the Company had no derivative
contracts outstanding at December 31, 1996, and did not enter into any
derivative contracts during 1996.
Long-term debt at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------
<S> <C> <C>
Term loans $30,000,000 $30,000,000
Convertible debentures 3,025,000 3,025,000
--------------------------------------
Long-term debt $33,025,000 $33,025,000
======================================
</TABLE>
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
F-14
<PAGE> 34
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
F. CREDIT ARRANGEMENTS AND LONG-TERM DEBT (CONTINUED)
amounts. At December 31, 1996, the Company was in compliance with all of these
covenants. The fair value of the Prudential debt is estimated to be $30,275,000
and $30,900,000 at December 31, 1996 and 1995, 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 portion of long-term debt consists of 8-1/2% Convertible
Subordinated Debentures, due December 31, 2003, which are currently convertible
into 8.48 shares of Common Stock and an equal number of shares of Limited
Duration Class B Common Stock, subject to certain adjustments, for each $1,000
principal amount of such debentures. The debentures were issued in exchange for
cash and a $3,000,000, 9% promissory note, payable December 31, 2004, from the
Chairman and Chief Executive Officer of the Company, that is included in Other
Assets at December 31, 1996 and 1995. During each of the years 1996, 1995 and
1994, 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>
1998 $10,000,000
1999 10,000,000
2000 10,000,000
2003 3,025,000
=============
$33,025,000
=============
</TABLE>
During 1996 and 1995, the Company borrowed against the cash surrender value of
the life insurance policies that it owns on the life of its Chairman and Chief
Executive Officer. The amounts borrowed at December 31, 1996 and 1995 are
$14,733,000 and $13,024,000, respectively, with interest rates of 7.30% and
8.75%, respectively, and are carried as a reduction of the related cash
surrender value that is included in Other Assets. Of the amounts borrowed in
1996 and 1995, the Company received $464,000 and $11,779,000 in cash,
respectively, and $1,245,000 was used in each year to pay premiums on the
underlying life insurance policies.
For the years 1996, 1995 and 1994, the Company made interest payments of
$10,065,000, $8,934,000 and $7,839,000, respectively.
F-15
<PAGE> 35
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
G. REDEEMABLE PREFERRED STOCK
As of December 31, 1996 and 1995, the Company had outstanding 20,000 shares of
Series I Preferred Stock, 5,000 shares each of 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 the Chairmen and Chief
Executive Officer 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 Company is obligated to
redeem the Series 1 Preferred Stock following the attainment of age 65 by the
holder thereof.
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 holder
issued to the Company full recourse promissory notes totaling $763,000
(included in Other Assets at December 31, 1996 and 1995) with a maturity date of
April 2004. The interest paid by the senior executive to the Company in 1996,
1995 and 1994 pursuant to the terms of these notes was approximately $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.
F-16
<PAGE> 36
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
G. REDEEMABLE PREFERRED STOCK (CONTINUED)
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 $1,112,000, $1,470,000 and
$926,000 in 1996, 1995 and 1994, respectively. The change in carrying value
represents the change in aggregate 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, each having a $1 par value per share. The Class
B Common Stock has the same dividend and liquidation rights as the Common Stock,
and a holder of each share of Class B Common Stock is entitled to ten votes on
all matters submitted to stockholders. The shares of Class B Common Stock are
restricted as to transferability and upon transfer, except to specified limited
classes of transferees, will convert into shares of Common Stock which have one
vote per share. The Class B Common Stock will automatically convert to Common
Stock on April 3, 2006.
I. RESTRICTED STOCK AND STOCK OPTION PLANS
The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") is the
Company's active restricted stock and stock option plan. The Stock Incentive
Plan replaced the Restricted Stock Plan, the Executive Growth Plan, the
Incentive Stock Option Plan and the Nonqualified Stock Option Plan
(collectively, the "Prior Plans"), and any shares available for granting of
awards under the Prior Plans are no longer available for such awards. Options
granted pursuant to the Prior Plans remain outstanding and in full force, and
shares reserved thereunder remain so for such purposes.
F-17
<PAGE> 37
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
I. RESTRICTED STOCK AND STOCK OPTION PLANS (CONTINUED)
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, vest or are exercisable. Options must be exercised
within ten years of the date of grant. Shares of restricted stock may be sold to
participants at a purchase price determined by the Committee (which may be less
than fair market value per share). Under the Prior Plans, nonqualified and
incentive stock options were granted to employees eligible to receive options at
prices not less than 100% of the fair market value of the shares on the date of
grant. Options must be exercised within ten years of grant and for only
specified limited periods beyond termination of employment. There were 1,916
shares reserved for issuance under the Prior Plans at December 31, 1996.
NONQUALIFIED OPTIONS
Transactions involving nonqualified options under the Stock Incentive and Prior
Plans were:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------------------------------------
<S> <C> <C>
Outstanding, December 31, 1993 37,366 $106
Granted 3,250 163
Exercised (3,133) 96
Forfeited (1,084) 107
--------------------------------------
Outstanding, December 31, 1994 36,399 112
Granted 84,174 151
Exercised (21,965) 95
Forfeited (284) 165
--------------------------------------
Outstanding, December 31, 1995 98,324 149
GRANTED 47,100 229
EXERCISED (9,884) 130
FORFEITED (66) 118
======================================
OUTSTANDING, DECEMBER 31, 1996 135,474 178
======================================
</TABLE>
F-18
<PAGE> 38
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
I. RESTRICTED STOCK AND STOCK OPTION PLANS (CONTINUED)
There were 33,400, 23,283 and 27,973 options exercisable at December 31, 1996,
1995 and 1994, respectively. The weighted average fair value the of the options
granted during 1996 and 1995 was $77 and $51, respectively.
The remaining weighted average contractual life of options outstanding as of
December 31, 1996 and the weighted average exercise price for options
exercisable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES LIFE EXERCISE SHARES EXERCISE
PRICES OUTSTANDING PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$131-142 1,200 3.2 years $133 67 $141
149-171 86,674 7.3 years 151 26,666 149
188-196 7,600 9.0 years 195 -0- -0-
235 40,000 9.8 years 235 6,667 235
----------------------------------------------------------------------------------------
Total 135,474 33,400
========================================================================================
</TABLE>
INCENTIVE STOCK OPTIONS
Transactions involving outstanding incentive stock options under the plans were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------
CLASS B WEIGHTED
COMMON COMMON AVERAGE
STOCK STOCK EXERCISE PRICE
---------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1993 100 5,100 $99
Exercised (100) (100) 99
---------------------------------------------------------------
Outstanding, December 31, 1994 0 5,000 99
Exercised 0 (3,570) 99
---------------------------------------------------------------
Outstanding, December 31, 1995 0 1,430 99
EXERCISED 0 (714) 99
---------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1996 0 716 99
===============================================================
</TABLE>
As of December 31, 1996, there were no incentive stock options which were
exercisable. As of December 31, 1995 and 1994, options to acquire 714 and 2,856
shares of Common Stock were exercisable. All incentive stock options outstanding
as of December 31, 1996 have a remaining contractual life of approximately one
year.
F-19
<PAGE> 39
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
I. RESTRICTED STOCK AND STOCK OPTIONS PLANS (CONTINUED)
RESTRICTED STOCK
In 1994, the Company issued 1,750 shares of Restricted Stock 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. In 1996,
250 shares of Restricted Stock were issued at a price of $97.75 per share with
restrictions as to transferability expiring after five years. During 1995, the
restrictions lapsed on 5,000 shares of Common Stock. No restrictions lapsed in
either 1996 or 1994.
Compensation to employees under the Stock Incentive and Prior Plans of $98,000
in 1996, $106,000 in 1995 and $238,000 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 ($33,000 in 1996, $132,000 in 1995 and $116,000 in 1994) over the
related required period of service of the respective employees.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is required by
Financial Accounting Standards Statement No. 123, Accounting for
Stock-Based Compensation, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. The approximate fair value for these options was estimated at the
date of grant using a Black-Scholes option valuation model with the following
weighted average assumptions for the years 1996 and 1995, respectively;
risk-free interest rates of 6.16% and 7.85%; dividend yields of 1.73% and 2.37%;
volatility factors of the expected market price of the Company's Common Stock of
.17 each year; and a weighted-average expected life for the options of 9.6
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-20
<PAGE> 40
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
I. RESTRICTED STOCK AND STOCK OPTIONS PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Pro forma net income $27,861,000 $22,493,000
Pro forma earnings per share:
Primary $20.64 $16.26
Fully Diluted $19.82 $15.62
</TABLE>
The pro forma information for 1996 and 1995 is not necessarily indicative of
future year calculations because options issued prior to 1995 have not been
valued for purposes of the pro forma calculation.
J. COMPUTATION OF EARNINGS PER COMMON SHARE
The computation of earnings 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)) (1,295,441 in 1996,
1,295,182 in 1995, 1,285,605 in 1994) and, for fully diluted earnings per common
share, the assumed conversion of the 8-1/2% Convertible Subordinated Debentures.
Also, for the purpose of computing earnings 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
earnings 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
earnings 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 $1.05, $1.31, and $0.88 per share in 1996, 1995
and 1994, respectively.
F-21
<PAGE> 41
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, 1996 and
1995, the Company had deferred tax assets and deferred tax liabilities as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS (LIABILITIES)
1996 1995
------------ ------------
<S> <C> <C>
Restructuring costs and related future tax benefits $ 1,373,000 $ 1,642,000
Deferred compensation 23,056,000 15,250,000
Accrued expenses 2,613,000 2,658,000
Safe harbor lease and depreciation (3,415,000) (5,134,000)
Tax on unremitted foreign earnings and other (4,351,000) (2,225,000)
------------ ------------
Net deferred tax assets $ 19,276,000 $ 12,191,000
============ ============
Included in:
Other current assets $ 4,426,000 $ 3,665,000
Intangibles and other assets 14,850,000 8,526,000
============ ============
$ 19,276,000 $ 12,191,000
============ ============
</TABLE>
The components of income of consolidated companies before taxes on income are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Domestic $36,553,000 $26,704,000 $ 25,918,000
Foreign 29,140,000 27,623,000 (24,308,000)
------------------------------------------------
$65,693,000 $54,327,000 $ 1,610,000
================================================
</TABLE>
Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- --------------------------- -------------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ 16,285,000 $ (3,890,000) $ 13,607,000 $(4,248,000) $ 11,510,000 $(2,470,000)
Foreign 13,677,000 (280,000) 10,167,000 2,888,000 9,034,000 (1,197,000)
State and
local 8,735,000 (2,915,000) 6,191,000 (1,639,000) 6,181,000 (1,437,000)
--------------------------------------------------------------------------------------------
$ 38,697,000 $ (7,085,000) $ 29,965,000 $(2,999,000) $ 26,725,000 $(5,104,000)
============================================================================================
</TABLE>
F-22
<PAGE> 42
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
K. INCOME TAXES (CONTINUED)
The effective tax rate varied from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<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 5.8 5.4 191.5
Difference in foreign tax rates 4.3 6.5 215.0
Withholding tax on unremitted foreign earnings 0.6 0.5 33.4
Goodwill write-off 868.3
Adjustment of prior years' provisions (24.8)
Other -- net 2.4 2.2 24.5
------------------------------------------
48.1% 49.6% 1,342.9%
==========================================
</TABLE>
During the years 1996, 1995 and 1994, the Company made net income tax payments
of $36,513,000, $21,368,000 and $19,005,000, 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, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES
1. The Company's Profit Sharing Plan is available to 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 maintains a noncontributory Employee Stock Ownership Plan covering
eligible employees of the Company and specified, 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 1996, 1995 and
1994. 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.
F-23
<PAGE> 43
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
L. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS,
LEASES AND CONTINGENCIES (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 Plan operates as an
ongoing series of individual five year plans. The latest plan in the series
commenced in 1993 and will end on December 31, 1997. At that date,
participants with 5 years of participation in the current plan will vest in
their awards. Those participants who commenced participation after 1993
will vest in their awards five years from the year of their initial
participation. The amount recorded as an expense related to this plan
amounted to $8,211,000, $6,873,000 and $5,434,000 in 1996, 1995 and 1994,
respectively. Approximately $5,634,000, $5,223,000 and $4,215,300 of plan
expense incurred in 1996, 1995 and 1994, respectively, will be payable in
Common Stock in accordance with the terms of the plan. These awards
converted, at the fair value of the Common Stock on the date of grant, into
22,424, 27,705 and 28,647 equivalent shares of Common Stock at December 31,
1996, 1995 and 1994, respectively, including an amount of shares for the
dividends that would have been payable assuming awards were outstanding
from the date of the grant. The future obligation to issue stock related to
these stock awards has been reflected as an increase to Paid-In Additional
Capital. At December 31, 1996, there were 95,543 shares which were payable
in Common Stock pursuant to this plan.
Expenses related to the foregoing plans and benefits aggregated $36,140,000
in 1996, $29,307,000 in 1995 and $24,211,000 in 1994.
In 1995, the Company and its Chairman and Chief Executive Officer entered
into an agreement extending the term of his employment agreement with the
Company through December 31, 2002. This agreement further provides for the
deferral of certain compensation otherwise payable to the Chairman and
Chief Executive pursuant to his employment agreement and the payment of
such deferred compensation into a trust, commonly referred to as a rabbi
trust, established with United States Trust Company of New York. The
purpose of the trust arrangement is to ensure the Company's ability to
deduct compensation paid to the Chairman and Chief Executive Officer
without the application of Section 162(m) of the Internal
F-24
<PAGE> 44
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
L. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES
AND CONTINGENCIES (CONTINUED)
Revenue Code ("Section"). The Section, under certain circumstances, denies
a tax deduction to an employer for certain compensation expenses in excess
of $1,000,000 per year paid by a publicly-held corporation to certain of
its executives. Amounts deferred and paid into the trust, as adjusted for
the earnings and gains or losses on the trust assets, will be paid to the
Chairman and Chief Executive Officer or to his estate, as the case may be,
upon the expiration of his employment agreement, or the termination of his
employment by reason of death or disability. At December 31, 1996 and 1995,
the value of the trust was $5,648,000 and $2,496,000 respectively and is
included in Other Assets and the Company's related deferred compensation
obligation for the same amount is included in Other Liabilities.
2. Pursuant to an employment agreement, dated December 21, 1990, an executive
officer of the Company borrowed $1,000,000 from the Company. One-fifth of
the principal amount of the loan was forgiven by the Company each December
31, beginning with December 31, 1991, as the officer continued 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 1996, 1995 and 1994, the Company has
included in each year $200,000 of compensation expense, representing the
amount of loan forgiven each year. As of December 31, 1996 and 1995, the
remaining loan balance was $400,000 and $600,000, respectively, included
in Other Assets.
In addition, a second executive officer has outstanding loans with the
Company totaling $875,000 and $375,000 as of December 31, 1996 and 1995,
respectively, which are reflected in Other Assets. The first of these
loans, granted in 1995, was for $50,000 and is forgivable contingent upon
employment by the Company through 1998, while two other loans for $125,000
and $200,000 made in 1995 are repayable with accrued interest in December
1999 and May 1999, respectively. The loan for $125,000 is forgivable on
December 31, 1999 provided that the executive officer is employed by the
Company on that date. During 1996, the Company made two additional loans to
this executive officer for $175,000 and $325,000 which are repayable with
accrued interest in December 2003.
F-25
<PAGE> 45
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
L. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES
AND CONTINGENCIES (CONTINUED)
In connection with a 1992 exercise of the stock options, the Company
received a cash payment of $67,000 and a note from the Chairman and
Chief Executive Officer of the Company in the amount of $3,170,000, due
in December 2001, 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 the second note ($1,556,000) equal to the tax
benefit received by the Company upon exercise and the full amount of the
note for $3,170,000 are reflected in a separate component of stockholders'
equity at December 31, 1996 and 1995. 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 1996, 1995 and 1994.
3. Rental expense amounted to approximately $41,104,000 in 1996, $36,445,000
in 1995 and $35,568,000 in 1994 which is net of sub-lease rental income of
$66,000 in 1996, $129,000 in 1995 and $1,263,000 in 1994. Approximate
minimum rental commitments, excluding escalations, under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
OFFICE SPACE
--------------
<S> <C>
1997 $ 35,062,000
1998 33,450,000
1999 33,094,000
2000 26,726,000
2001 26,010,000
Beyond 2001 54,818,000
==============
$ 209,160,000
==============
</TABLE>
4. The Company is not involved in any pending legal proceedings not covered by
insurance or by adequate indemnification or which, if decided adversely,
would have a material effect on the results of operations, liquidity or
financial position of the Company.
F-26
<PAGE> 46
Grey Advertising Inc. and Consolidated Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
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 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. A significant amount of this
write-off related to operations in the United Kingdom. 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). 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. There were no write-offs in excess of normal amortization
schedules in 1996 or 1995.
F-27
<PAGE> 47
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, 1996, 1995 and 1994, and related identifiable assets at December
31, 1996, 1995 and 1994 are summarized below (000s omitted):
<TABLE>
<CAPTION>
UNITED STATES WESTERN EUROPE OTHER
--------------------------------- ----------------------------------- ----------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees $338,496 $303,826 $277,411 $370,888 $337,726 $ 273,754 $56,114 $46,667 $ 42,152
-------------------------------------------------------------------------------------------------
Operating profit (loss) $ 26,174 $ 21,368 $ 22,767 $ 30,279 $ 27,212 $ (20,457) $ 2,080 $ 1,660 $ (959)
-------------------------------------------------------------------------------------------------
Other income-net
Income of consolidated companies
before taxes on income
Identifiable assets $549,160 $464,067 $390,547 $445,038 $406,757 $ 353,904 $77,473 $71,916 $ 69,130
-------------------------------------------------------------------------------------------------
Investments in and advances to
nonconsolidated affiliated
companies
Total assets
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Commissions and fees $ 765,498 $688,219 $593,317
-------------------------------------
Operating profit (loss) $ 58,533 $ 50,240 $ 1,351
Other income-net 7,160 4,087 259
-------------------------------------
Income of consolidated companies
before taxes on income $ 65,693 $ 54,327 $ 1,610
-------------------------------------
Identifiable assets $1,071,671 $942,740 $813,581
Investments in and advances to
nonconsolidated affiliated 17,723 20,693 16,495
companies
-------------------------------------
Total assets $1,089,394 $963,433 $830,076
-------------------------------------
</TABLE>
Commissions and fees from one client amounted to 13.2%, 13.8% and 13.8% of the
consolidated total in 1996, 1995 and 1994, respectively.
F-28
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
3.01 Restated Certificate of Incorporation of Grey
Advertising Inc. ("Grey"). (Incorporated herein
by reference to Exhibit 3.01 to Grey's Current
Report on Form 8-K, dated October 31, 1995, filed
with the SEC pursuant to Section 13 of the 1934
Act.)
3.02 By-Laws of Grey as amended. (Incorporated herein
by reference to Exhibit 3.02 to Grey's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1988.)
4.01 Stockholder Exchange Agreement, dated as of April
7, 1994, by and between Grey and Edward H.
Meyer. (Incorporated herein by reference to
Exhibit 10(a) of Grey's Current Report on Form
8-K, dated April 7, 1994, filed with the SEC
pursuant to Section 13 of the 1934 Act.
4.02 Purchase Agreement, dated as of December 10,
1983, between Grey and Edward H. Meyer relating
to the sale to Mr. Meyer of Grey's 8-1/2%
Convertible Debentures, of even date therewith
("Convertible Debenture"). (Incorporated herein
by reference to Exhibit 3.08 to Grey's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1983.)
4.03 Extension Agreement, dated as of November 19,
1991 between Grey and Edward H. Meyer relating to
the extension of the maturity dates of the
Convertible Debenture and related Promissory
Note. (Incorporated herein by reference to
Exhibit 3.07 to Grey's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.)
4.04 Form of Convertible Debenture. (Incorporated
herein by reference to Exhibit 3.09 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1983.)
</TABLE>
E-1
<PAGE> 49
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
4.05 Extension Agreements dated as of July 29, 1996
between Grey and Edward H. Meyer relating to the
extension of the maturity dates of the
Convertible Debenture and related Promissory
Note. (Incorporated herein by reference to
Exhibit 4.01 and 4.02 to Grey's Quarterly
Report on Form 10-Q for the quarter ended June
30, 1996).
9.01 Voting Trust Agreement, dated as of December 1,
1989, among the several Beneficiaries, Grey and
Edward H. Meyer as Voting Trustee. (Incorporated
herein by reference to Exhibit 9.03 to Grey's
Annual report on Form 10-K for the fiscal year
ended December 31, 1989.)
9.02 Amended and Restated Voting Trust Agreement,
dated as of February 24, 1986, as amended and
restated as of August 31, 1987 and again amended
and restated as of March 21, 1994, among the
several Beneficiaries where-under, Grey and
Edward H. Meyer as Voting Trustee. (Incorporated
herein by reference to Exhibit 9.04 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.)
10.01 * Employment Agreement, dated as of February 9,
1984, between Grey and Edward H. Meyer ("Meyer
Employment Agreement"). (Incorporated herein by
reference to Exhibit 10.01 to Grey's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1983.)
10.02 * Amendments Two through Seven to Meyer Employment
Agreement. (Incorporated herein by reference to
Exhibit 10.02 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31, 1985,
Exhibit 10.03 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31, 1987,
Exhibit 1 to Grey's Current Report on Form 8-K,
dated May 9, 1988, filed with the SEC pursuant to
Section 13 of the 1934 Act, Exhibit 2 to Grey's
Current Report on Form 8-K, dated May 9, 1988,
filed with the SEC pursuant to Section 13 of the
1934 Act. Exhibit I to Grey's Current Report on
Form 8-K, dated June 9, 1989, filed with the SEC
pursuant to Section 13 of the 1934 Act and
Exhibit 10.07 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
respectively.)
</TABLE>
E-2
<PAGE> 50
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
10.03 * Amendment and Extension Agreement, to Meyer
Employment Agreement, dated March 22, 1995, by and
between Grey and Edward H. Meyer. (Incorporated
herein by reference to Exhibit 10.03 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.)
10.04 * Deferred Compensation Trust Agreement dated March
22, 1995 ("Trust Agreement"), by and between Grey
and United States Trust Company of New York.
(Incorporated herein by reference to Exhibit
10.04 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.)
10.05 * First Amendment to Trust Agreement, dated as of
February 26, 1996, by and between Grey and United
States Trust Company of New York. (Incorporated
herein by reference to Exhibit 10.05 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.)
10.06 * Pension Agreement, dated as of May 9, 1988,
between Grey and Edward H. Meyer. (Incorporated
herein by reference to Exhibit 3 to Grey's
Current Report on Form 8-K, dated May 9, 1988
filed with the SEC pursuant to Section 13 of the
1934 Act.)
10.07 * Employment Agreement, dated as of December 21,
1990, by and between Grey and Stephen A. Novick.
(Incorporated herein by reference to exhibit
10.11 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.)
10.08 * Amendment to Employment Agreement, dated as of
April 26, 1994, by and between Grey and Stephen
A. Novick. (Incorporated herein by reference to
Exhibit 10.07 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31,
1994.)
10.09 * Employment Agreement, dated as of December 1,
1992, by and between Grey and Robert L.
Berenson. (Incorporated herein by reference to
Exhibit 10.05 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31,
1992.)
</TABLE>
E-3
<PAGE> 51
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
10.10 * Employment Agreement, dated as of January 1,
1993, by and between Grey and Barbara S.
Feigin. (Incorporated herein by reference to
exhibit 10.06 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31,
1993.)
10.11 * Grey Advertising Inc. Book Value Preferred Stock
Plan, as amended. (Incorporated herein by
reference to Exhibit 4.1 to Grey's Current
Report on Form 8-K, dated June 14, 1983, filed
with the SEC pursuant to Section 13 of the 1934
Act.)
10.12 * Grey Advertising Inc. Amended and Restated
Senior Executive Officer Pension Plan.
(Incorporated herein by reference to Exhibit
10.08 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1984.)
10.13 * Grey Advertising Inc. Amended and Restated 1993
Senior Management Incentive Plan. (Incorporated
herein by reference to Exhibit 10.01 to Grey's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
10.14 * Stock Option Agreement, dated as of October
13, 1984, by and between Grey and Edward H.
Meyer ("Meyer 1984 Option Agreement").
(Incorporated herein by reference to Exhibit
10.15 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985.)
10.15 * Extension Agreement, dated as of March 27, 1992,
by and between Grey and Edward H. Meyer,
relating to the Meyer 1984 Option Agreement.
(Incorporated herein by reference to Exhibit
10.13 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.)
</TABLE>
E-4
<PAGE> 52
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
10.16 * Amendment One to Meyer 1984 Option Agreement,
dated as of December 29, 1992. (Incorporated
herein by reference to Exhibit 10.14 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.)
10.17 * Notice of Exercise, dated December 29, 1992,
from Edward H. Meyer to Grey pursuant to the
Meyer 1984 Option Agreement. (Incorporated
herein by reference to Exhibit 10.15 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.)
10.18 * Promissory Notes I and II, dated as of December
29, 1992, from Edward H. Meyer to Grey,
delivered pursuant to the Meyer 1984 Option
Agreement. (Incorporated herein by reference to
Exhibit 10.16 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31,
1992.)
10.19 * Stock Option Agreement, effective as of January
5, 1995, by and between Grey and Edward H.
Meyer. (Incorporated herein by reference to
Exhibit 13 to Amendment No. 8 to the Statement
on Schedule 13D, dated as of March 10, 1995,
filed by Edward H. Meyer.)
10.20* Stock Option Agreement effective as of November
26, 1996, by and between Grey and Edward H.
Meyer. (Incorporated herein by reference to
Exhibit 15 to Amendment No. 10 to the Statement
on Schedule 13D, dated as of February 11, 1997,
filed by Edward H. Meyer.)
10.21 Registration Rights Agreement, dated as of June
5, 1986, between Grey and Edward H. Meyer.
(Incorporated herein by reference to Exhibit 12
to Amendment No. 8 to the Statement on Schedule
13D, dated as of March 10, 1995, filed by Edward
H. Meyer.)
10.22 * Grey Advertising Inc. Incentive Stock Option
Plan, as amended and restated as of April 3,
1986. (Incorporated herein by reference to
Exhibit 4.04 to Grey's Registration Statement
on Form S-8 filed with the SEC pursuant to
Section 6(a) of the '33 Act.)
</TABLE>
E-5
<PAGE> 53
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
10.23 * Grey Advertising Inc. 1987 Stock Option Plan.
(Incorporated herein by reference to Exhibit
10.24 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988.)
10.24 * Grey Advertising Inc. amended and restated 1994
Stock Incentive Plan. (Incorporated herein by
reference to Exhibit 10.02 Grey's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996.
10.25 * Note Agreement, dated as of January 19, 1993, by
and between Grey and The Prudential Insurance
Company of America. (Incorporated herein by
reference to Exhibit 10.21 to Grey's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1992.)
10.26 * Bonuses - Grey has paid bonuses to certain of
its executive officers (including those who are
directors) and employees in prior years
including 1993, and may do so in future years.
Bonuses have been and may be in the form of
cash, shares of stock or both although Grey
presently does not have any plans to pay stock
bonuses. Bonuses are not granted pursuant to
any formal plan.
10.27 * Director's Fees - It is the policy of Grey to
pay each of its non-employee directors a fee of
$4,500 per fiscal quarter and a fee of $3,000
for each meeting of the Board of Directors
attended. This policy is not embodied in any
written document.
10.28 * Deferred Compensation Agreement, dated December
23, 1981, between Grey and Mark N. Kaplan,
regarding deferral of payment of director's fees
to which Mr. Kaplan may become entitled.
(Incorporated herein by reference to Exhibit
10.18 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1982.)
</TABLE>
E-6
<PAGE> 54
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
10.29 * On March 23, 1978, Grey's Board of Directors, at
a meeting thereof held on such date, approved an
arrangement whereby Grey is required to accrue
for Edward H. Meyer, the difference between the
amount contributed by Grey on behalf of Mr.
Meyer under the Profit Sharing Plan and Grey's
Employee Stock Ownership Plan, and the amount
which would have been contributed to such plans
on his behalf had such plans not contained
maximum annual limitations on contributions and
credits, as required by the Employee Retirement
Income Security Act of 1974. Such accrual is to
be paid to Mr. Meyer as if it had been
contributed to his account under the Profit
Sharing Plan. Such arrangement is not embodied
in any written document.
10.30 Lease, dated as of July 1, 1978, by and between
Grey and William Kaufman and J. D. Weiler,
regarding space at 777 Third Avenue, New York,
New York ("Main Lease"). (Incorporated herein
by reference to Exhibit 10.21 to Grey's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1982.)
10.31 First through Fourteenth Amendments to Main
Lease (Incorporated herein by reference to
Exhibits 10.22, 10.23, 10.24, 10.25, 10.26,
10.27, 10.28 and 10.29 to Grey's Annual Report
on Form 10-K for the fiscal year ended December
31, 1982, Exhibit 10.30 to Grey's Annual Report
on Form 10-K for the fiscal year ended December
31, 1983, Exhibits 10.33 and 10.34 to Grey's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1984, Exhibits 10.35 and
10.36 to Grey's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985, and
Exhibit 10.36 to Grey's Annual Report on Form
10-K for the fiscal year ended December 31,
1986, respectively.)
11.01 Statement re: Computation of Net Income (Loss)
per Share
21.01 Subsidiaries of Grey
24.01 Consent of Independent Auditors
27.01 Financial Data Schedule
</TABLE>
E-7
<PAGE> 55
<TABLE>
<CAPTION>
Number Assigned to Exhibit
(i.e. 601 of Regulation S-K) Description of Exhibits
---------------------------- -----------------------
<S> <C>
*Management contract or compensatory plan or
arrangement identified in compliance with Item
14(c) of the rules governing the preparation of
this report.
10K-Exhibits
</TABLE>
E-8
<PAGE> 1
Grey Advertising Inc. and Consolidated Subsidiary Companies
Exhibit - 11.01
Statement Re: Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------------
1996 1995
----------------------------
<S> <C> <C>
PRIMARY
Average shares outstanding(1) 1,262,443 1,269,888
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 32,998 25,294
----------------------------
TOTAL 1,295,441 1,295,182
============================
Net Income $28,602,000 $23,438,000
Less: Effect of dividend requirements
and the change in redemption value
of redeemable preferred stock (1,356,000) (1,698,000)
----------------------------
NET EARNINGS USED IN
COMPUTATION $27,246,000 $21,740,000
============================
Per share amount $21.03 $16.79
============================
FULLY DILUTED
Average shares outstanding(1) 1,262,443 1,269,888
Net effect of dilutive stock options-
based on treasury stock method
using the period-end market price,
if higher than average market price 43,310 32,961
Assumed conversion of 8.5%
convertible subordinated
debentures issued December 1983 50,892 51,000
----------------------------
TOTAL 1,356,645 1,353,849
============================
Net Income $28,602,000 $23,438,000
Less: Effect of dividend requirements
and the change in redemption value
of redeemable preferred stock (1,356,000) (1,698,000)
Add: 8.5% convertible subordinated
debentures interest net of income
tax effect 139,000 139,000
----------------------------
NET EARNINGS USED IN
COMPUTATION $27,385,000 $21,879,000
============================
Per share amount $20.19 $16.16
============================
</TABLE>
(1) Includes 74,602 shares and 54,024 shares for 1996 and 1995,
respectively, expected to be issued pursuant to the terms of the
Senior Management Incentive Plan.
E-9
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF GREY
(as of March 1, 1997)
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Alonso y Asociados S.A. Mexico
AS Grey Oy Finland
CR & Grey Advertising Pty. Ltd. Singapore
CSS & Grey Cyprus
Cenajans Grey Reklamcilik A.S. Turkey
Creative Collaboration Grey S.A. Switzerland
Crescendo Productions Inc. New York
Dorland & Grey S.A. Belgium
Dorland & Grey S.A. France
Esfera Grey, S.A. Columbia
Fischer-Grey, C.A. Venezuela
FOVA Inc. Delaware
G2 Advertising Inc. California
GCG Norge A/S Norway
GCG Scandinavia A/S Denmark
GCI Group Inc. New York
GEM F&C Inc. California
Great Productions Inc. Delaware
Great Spot Films Ltd. Delaware
Grey Advertising (Hong Kong) Ltd. Hong Kong
Grey Advertising (NSW) Pty. Ltd. Australia
Grey Advertising (New Zealand) Ltd. New Zealand
Grey Advertising de Venezuela, C.A. Venezuela
Grey Advertising (Victoria) Pty. Ltd. Australia
</TABLE>
-1-
<PAGE> 2
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Grey Advertising Inc. Maryland
Grey Advertising Ltd. Canada
Grey Argentina S.A. Argentina
Grey Athens Advertising S.A. Greece
Grey Australia Pty. Ltd. Australia
Grey Austria GmbH Austria
Grey Chile S.A. Chile
Grey Communications Group A/S Denmark
Grey Communications Group B.V. The Netherlands
Grey Communications Group Ltd. United Kingdom
Grey-Daiko Advertising, Inc. Japan
Grey Denmark A/S Denmark
Grey Diciembre S.A. Uruguay
Grey Direct Inc. Delaware
Grey Direct International GmbH Germany
Grey Directory Marketing Inc. Delaware
Grey Dusseldorf GmbH Co. Kommanditgesellschaft Germany
Grey Entertainment Inc. New York
Grey Espana S.A. Spain
Grey GmbH Germany
Grey Holding S.A. Belgium
Grey Holdings A.B. Sweden
Grey Holding GmbH Germany
Grey Holdings Pty. Ltd. South Africa
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Grey IFC Inc. Delaware
Grey India Inc. Delaware
Grey Advertising (Malaysia) Sdn. Bhd. Malaysia
Grey Media Connections Inc. New York
Grey Mexico, S.A. de C.V. Mexico
Grey Peru S.A. Peru
Grey Strategic Marketing Inc. Delaware
Grey Thailand Co. Ltd. Thailand
Greycom S.A.R.L. France
Grey Healthcare Group Inc. Delaware
Hwa Wei & Grey Advertising Co. Ltd. Taiwan
Indigo Entertainment Inc. Delaware
Local Marketing Corporation Ohio
Mediacom Inc. Delaware
Milano e Grey S.p.A. Italy
National Research Foundation for
Business Statistics, Inc. New York
Principal Communications Inc. Delaware
Preferred Professionals Inc. New York
Rigel Ltd. Cayman Islands
SEK & Grey Ltd. Finland
The Tape Center Inc. Delaware
Group Trace, S.A. Spain
</TABLE>
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Triple Seven Concepts Inc. Delaware
Visual Communications Group Inc. New York
Walther, Gesess, Grey AG Switzerland
West Indies & Grey Advertising Inc. Puerto Rico
Z&G Grey Comunicacao Ltda. Brazil
</TABLE>
-4-
<PAGE> 1
Exhibit 24.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-98101 and 2-97465) pertaining to the Incentive Stock
Option Plan of Grey Advertising Inc. of our report dated February 7, 1997
on the consolidated financial statements of Grey Advertising Inc. and
consolidated subsidiary companies included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
New York, New York
March 28, 1997
F-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE AUDITED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 OF GREY
ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 112,485
<SECURITIES> 28,688
<RECEIVABLES> 590,002
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 836,442
<PP&E> 183,034
<DEPRECIATION> 104,811
<TOTAL-ASSETS> 1,089,394
<CURRENT-LIABILITIES> 832,599
<BONDS> 33,025
10,098
0
<COMMON> 1,432
<OTHER-SE> 146,490
<TOTAL-LIABILITY-AND-EQUITY> 1,089,394
<SALES> 765,498
<TOTAL-REVENUES> 765,498
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 706,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,065
<INCOME-PRETAX> 65,693
<INCOME-TAX> 31,612
<INCOME-CONTINUING> 28,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,602
<EPS-PRIMARY> 21.03
<EPS-DILUTED> 20.19
</TABLE>
