<PAGE> 1
GREY
GREY ADVERTISING INC.
1996 FINANCIAL REPORT
GREY ADVERTISING INC.
777 THIRD AVENUE
NEW YORK, NEW YORK 10017
212-546-2000
<PAGE> 2
WHO WE ARE AND WHAT WE DO
Grey Advertising Inc. and its subsidiaries (collectively with Grey, the
"Company") have been engaged in the planning, creation, supervision and placing
of advertising since the Company's formation in 1917. Grey was incorporated in
New York 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 and related 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, planning and buying,
package and other design, product publicity, public affairs, public relations,
research and sales promotion.
The Company does business in only one industry segment, and no separate
class of similar services contributed 10% or more of the Company's gross income
or net income during 1996, 1995 or 1994. While the Company operates on a
worldwide basis, for the purposes of presenting certain financial information in
accordance with Securities and Exchange Commission rules, the Company's
operations are deemed to be conducted in three geographic areas. Related
information appears in Note N to the Consolidated Financial Statements.
BID PRICES* AND
DIVIDEND HISTORY 1995-1996
<TABLE>
<CAPTION>
DOLLARS PER
SHARE
---------------- DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
<S> <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.
Note: Stockholders of Record -- Common Stock 488 (5/30/97);
Limited Duration Class B Common Stock 279 (5/30/97).
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 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 advertising agencies was approximately
$31,295,000 and $8,649,000 related 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.
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 at
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. 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.
2
<PAGE> 4
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 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.
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.
3
<PAGE> 5
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
============== ============
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.
4
<PAGE> 6
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.
5
<PAGE> 7
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
PAID-IN HELD IN TREASURY
COMMON ADDITIONAL RETAINED -----------------------
STOCK CAPITAL EARNINGS SHARES AMOUNT
---------- ----------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........................... $1,432,000 $27,329,000 $131,835,000 191,223 $(23,073,000)
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..................... 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................................
Unrealized loss on marketable securities (Notes A and
E)..................................................
---------- ----------- ------------ -------- ------------
Balance at December 31, 1994........................... 1,432,000 31,895,000 105,123,000 188,133 (22,799,000)
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................................
Unrealized gain on marketable securities (Notes A and
E)..................................................
---------- ----------- ------------ -------- ------------
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)
========== =========== ============ ======== ============
<CAPTION>
OTHER
EQUITY
ACCOUNTS TOTAL
----------- ------------
<S> <C> <C>
Balance at December 31, 1993........................... $(8,446,000) $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 2,845,000
Unrealized loss on marketable securities (Notes A and
E).................................................. (1,345,000) (1,345,000)
----------- ------------
Balance at December 31, 1994........................... (6,946,000) 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 5,392,000
Unrealized gain on marketable securities (Notes A and
E).................................................. 2,042,000 2,042,000
----------- ------------
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.
6
<PAGE> 8
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>
7
<PAGE> 9
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.
8
<PAGE> 10
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts for years
prior to 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.
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.
9
<PAGE> 11
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles
The excess of purchase price over underlying net equity of certain
consolidated subsidiaries and nonconsolidated affiliated companies at the date
of acquisition ("goodwill") is amortized by the straight-line method over
periods of up to 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.
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>
10
<PAGE> 12
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated retained earnings at December 31, 1996 includes equity in
unremitted earnings of nonconsolidated foreign companies of approximately
$8,914,000.
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>
11
<PAGE> 13
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 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.
12
<PAGE> 14
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Chairman and Chief
Executive Office 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
13
<PAGE> 15
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not reflect the 1994 write-off of goodwill described in Note M, but rather
reflect amortization as if the Company had continued to write-off goodwill in
accordance with historical amortization schedules.
Following the distribution of Class B Common Stock, the holders of the
Preferred Stock became entitled to eleven votes per share on all matters
submitted to the vote of stockholders. The holder of the Series I Preferred
Stock is entitled, as well, to vote as a single class to elect or remove
one-quarter of the Board of Directors, to approve the merger or consolidation of
the Company or the sale by it of all or substantially all of its assets, and to
approve the authorization or issuance of any other class of Preferred Stock
having equivalent voting rights.
In the event of the liquidation of the Company, holders of Preferred Stock
are entitled to a preferential liquidation distribution of $1.00 per share in
addition to all accrued and unpaid preferential dividends.
The total carrying value of the Preferred Stock (applicable to those shares
outstanding at each respective year end) increased by $1,112,000, $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.
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.
14
<PAGE> 16
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
There were 33,400, 23,283 and 27,973 options exercisable at December 31,
1996, 1995 and 1994, respectively. The weighted average fair value 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 AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE 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>
15
<PAGE> 17
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
16
<PAGE> 18
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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.
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>
17
<PAGE> 19
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
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
18
<PAGE> 20
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
19
<PAGE> 21
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made two additional loans to this executive officer for $175,000 and $325,000
which are repayable with accrued interest in December 2003.
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>
<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.
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.
20
<PAGE> 22
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 CONSOLIDATED
---------------------------- ----------------------------- -------------------------- ------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------- ------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <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 $ 765,498 $688,219 $593,317
======== ======== ======== ======== ======== ======== ======== ======== ======== ========== ======== ========
Operating
profit
(loss)... $ 26,174 $ 21,368 $ 22,767 $ 30,279 $ 27,212 $ (20,457) $ 2,080 $ 1,660 $ (959) $ 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... $549,160 $464,067 $390,547 $445,038 $406,757 $ 353,904 $77,473 $71,916 $ 69,130 $1,071,671 $942,740 $813,581
======== ======== ======== ======== ======== ======== ======== ======== ========
Investments
in and
advances
to
nonconsolidated
affiliated
companies... 17,723 20,693 16,495
---------- -------- --------
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.
21
<PAGE> 23
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.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
New York, New York
February 7, 1997
22
