<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-7898
GREY ADVERTISING INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 13-0802840
------------------------------ --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Third Avenue, New York, New York 10017
- ------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, 212-546-2000
including area code: ------------
NOT APPLICABLE
--------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1999, the total number of shares outstanding of Registrant's
Common Stock, par value $1 per share ("Common Stock"), was 1,011,864 and of
Registrant's Limited Duration Class B Common Stock, par value $1 per share
("Class B Common Stock"), was 235,425.
<PAGE> 2
GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Other Information 16
Signatures 17
Index to Exhibits 18
</TABLE>
2
<PAGE> 3
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (A)
---------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 147,735,000 $ 153,816,000
Marketable securities 15,267,000 55,130,000
Accounts receivable 846,967,000 797,474,000
Expenditures billable to clients 59,335,000 66,681,000
Other current assets 87,484,000 75,481,000
---------------------------------------------------
Total current assets 1,156,788,000 1,148,582,000
Investments in and advances to nonconsolidated affiliated companies 19,737,000 16,705,000
Fixed assets-at cost, less accumulated depreciation of $151,246,000 in
1999 and $137,534,000 in 1998 121,855,000 113,084,000
Marketable securities 24,261,000 30,827,000
Goodwill-net of accumulated amortization of $39,727,000 in 1999 and
$31,466,000 in 1998 135,332,000 116,499,000
Other assets - including loans to executive officers of $5,372,000 in
1999 and $5,572,000 in 1998 72,663,000 63,956,000
---------------------------------------------------
Total assets $ 1,530,636,000 $ 1,489,653,000
===================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(A) The condensed consolidated balance sheet has been derived from the audited
financial statements at that date.
3
<PAGE> 4
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (A)
-------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 976,645,000 $ 865,427,000
Notes payable to banks 81,999,000 70,911,000
Accrued expenses and other 116,143,000 184,497,000
Income taxes payable 30,508,000 24,283,000
---------------------------------------------
Total current liabilities 1,205,295,000 1,145,118,000
Other liabilities, including deferred compensation of $42,499,000 in
1999 and $41,871,000 in 1998 64,851,000 68,676,000
Long-term debt 78,025,000 78,025,000
Minority interest 11,404,000 14,112,000
Redeemable preferred stock - at redemption value; par value
$1 per share; authorized 500,000 shares; issued and outstanding 30,000
shares in 1999 and 1998 9,576,000 10,333,000
Common stockholders' equity:
Common Stock - par value $1 per share; authorized 10,000,000 shares;
issued 1,227,307 in 1999 and 1,205,041 in 1998 1,227,000 1,205,000
Limited Duration Class B Common Stock - par value $1 per share;
authorized 2,000,000 shares; issued 262,451 shares in 1999 and
282,765 shares in 1998 262,000 283,000
Paid-in additional capital 38,164,000 38,832,000
Retained earnings 184,661,000 189,714,000
Accumulated other comprehensive loss:
Cumulative translation adjustment (16,718,000) (11,716,000)
Unrealized loss on marketable securities (2,668,000) (1,307,000)
---------------------------------------------
Total accumulated other comprehensive loss (19,386,000) (13,023,000)
---------------------------------------------
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock (4,726,000) (4,726,000)
---------------------------------------------
Less - cost of 215,562 and 222,950 shares of Common Stock 200,202,000 212,285,000
and 26,899 and 26,762 shares of Limited Duration Class B
Common Stock held in treasury in 1999 and 1998, respectively 38,717,000 38,896,000
---------------------------------------------
Total common stockholders' equity 161,485,000 173,389,000
---------------------------------------------
Total liabilities and stockholders' equity $ 1,530,636,000 $ 1,489,653,000
=============================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(A) The condensed consolidated balance sheet has been derived from the audited
financial statements at that date.
4
<PAGE> 5
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commissions and fees $262,048,000 $234,105,000 $ 750,908,000 $ 683,090,000
Expenses:
Salaries and employee related expenses 171,099,000 152,106,000 499,179,000 434,111,000
Office and general expenses 81,661,000 71,184,000 238,913,000 207,617,000
--------------------------------------------------------------------------------
252,760,000 223,290,000 738,092,000 641,728,000
--------------------------------------------------------------------------------
9,288,000 10,815,000 12,816,000 41,362,000
Other income - net 778,000 2,720,000 2,086,000 4,851,000
--------------------------------------------------------------------------------
Income of consolidated companies before taxes on
income 10,066,000 13,535,000 14,902,000 46,213,000
Provision for taxes on income 5,254,000 6,689,000 14,254,000 23,524,000
--------------------------------------------------------------------------------
Income of consolidated companies 4,812,000 6,846,000 648,000 22,689,000
Minority interest applicable to consolidated
companies (1,262,000) (1,088,000) (3,693,000) (4,599,000)
Equity in earnings of nonconsolidated affiliated
companies 1,081,000 272,000 1,154,000 1,290,000
--------------------------------------------------------------------------------
Net income (loss) $ 4,631,000 $ 6,030,000 $ (1,891,000) $ 19,380,000
================================================================================
Weighted average number
of common shares outstanding
Basic 1,237,281 1,233,571 1,238,225 1,216,456
Diluted 1,337,006 1,339,736 1,238,225 1,349,600
Earnings (loss) per common share
Basic $3.68 $4.86 $(1.06) $15.86
Diluted $3.43 $4.50 $(1.06) $14.37
Dividends per common share $1.00 $1.00 $3.00 $3.00
================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income $ (1,891,000) $ 19,380,000
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization of fixed assets 23,835,000 20,634,000
Amortization of intangibles 8,274,000 5,678,000
Deferred compensation 2,714,000 9,204,000
Equity in earnings of nonconsolidated affiliated companies, net of
dividends received of $630,000 in 1999 and $665,000 in 1998 (524,000) (625,000)
Gains from the sale of marketable securities 25,000 (259,000)
Minority interest applicable to consolidated companies 3,693,000 4,599,000
Restricted stock expense 401,000 22,000
Deferred income taxes 878,000 1,960,000
Changes in operating assets and liabilities:
Increase in accounts receivable (78,340,000) (32,276,000)
Decrease (increase) in expenditures billable to clients 2,046,000 (2,954,000)
(Increase) decrease in other current assets (15,923,000) 10,000
Increase in other assets (19,621,000) (1,498,000)
Increase in accounts payable 141,917,000 8,357,000
Decrease in accrued expenses and other (60,504,000) (3,344,000)
Increase (decrease) in income taxes payable 8,695,000 (440,000)
Decrease in other liabilities (8,478,000) (2,729,000)
----------------------------------------------------
Net cash provided by operating activities 7,197,000 25,719,000
INVESTING ACTIVITIES
Purchases of fixed assets (38,016,000) (33,062,000)
Trust fund deposits (2,866,000) (4,065,000)
(Increase) decrease in investments in and advances to
nonconsolidated affiliated companies (2,508,000) (1,253,000)
Purchases of marketable securities (1,689,000) (29,883,000)
Proceeds from the sale of marketable securities 46,762,000 20,497,000
Increase in intangibles, primarily goodwill (27,107,000) (18,382,000)
----------------------------------------------------
Net cash used in investing activities (25,424,000) (66,148,000)
</TABLE>
6
<PAGE> 7
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 17,547,000 32,302,000
Common shares acquired for treasury (1,007,000) (163,000)
Redemption of preferred stock -- (651,000)
Cash dividends paid on common shares (3,739,000) (3,657,000)
Cash dividends paid on redeemable preferred stock (180,000) (184,000)
Issuance (repurchase) of restricted stock 16,000 (18,000)
Proceeds from exercise of stock options 751,000 --
------------------------------------
Net cash provided by financing activities 13,388,000 27,629,000
Effect of exchange rate changes on cash (1,242,000) (4,914,000)
-----------------------------------
Decrease in cash and cash equivalents (6,081,000) (17,714,000)
Cash and cash equivalents at beginning of period 153,816,000 150,553,000
-----------------------------------
Cash and cash equivalents at end of period $ 147,735,000 $ 132,839,000
===================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. As permitted by the Securities and Exchange Commission, the accompanying
unaudited Consolidated Financial Statements and Notes thereto have been
condensed and, therefore, do not contain all disclosures required by
generally accepted accounting principles. Reference should be made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998
filed with the Securities and Exchange Commission.
2. The financial statements as of September 30, 1999 and for the three and nine
months ended September 30, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
3. The results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the
full year.
4. The provision for taxes on income results in an effective tax rate that is
greater than the Federal statutory rate principally due to the
non-recognition of tax benefits of certain international net operating losses
incurred in the period; state and local income taxes; and effective
individual foreign country tax rates in excess of the Federal statutory rate.
5. As of September 30, 1999 and December 31, 1998, the Company had outstanding
20,000 shares of Series I Preferred Stock, and 5,000 shares each of its
Series II and Series III Preferred Stock. The holder of these shares is the
Chairman and Chief Executive Officer of the Company. Each share of preferred
stock is to be redeemed by the Company at a price equal to the book value per
share attributable to one share of Common Stock and one share of Class B
Common Stock (subject to certain adjustments) upon redemption, less a fixed
discount established upon the issuance of the preferred stock. The holder of
each class of preferred stock is 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.
The redemption date for the Series I, Series II and Series III Preferred
Stock is fixed at April 7, 2004. The terms of the Series I, Series II and
Series III Preferred Stock also give the holder, his estate or his legal
representative, as the case may be, the option to require the Company to
redeem the 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. In connection with his ownership of
the preferred stock, the holder issued to the Company full recourse
promissory notes (which are included in Other Assets in the accompanying
condensed consolidated balance sheets).
6. The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding and, for diluted earnings per
common share, is adjusted for the dilutive effect, if any, of the assumed
exercise of dilutive stock options, shares issuable pursuant to the Company's
Senior Management Incentive Plan and the assumed conversion of
8
<PAGE> 9
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the Company's 8-1/2% Convertible Subordinated Debentures. For the purpose
of computing basic earnings per common share, the Company's net income is
adjusted by dividends paid on the Company's preferred stock and by the
change in redemption value of the Company's preferred stock during the
period. For the purpose of computing diluted earnings per common share,
net income is also adjusted by the interest savings, net of tax, on the
assumed conversion of the Company's 8-1/2% Convertible Subordinated
Debentures. Additionally, in computing diluted earnings per common share,
the average quarterly market price is used to determine the number of
shares which would be assumed to be repurchased. The market price for a
share of Class B Common Stock, which is not publicly traded, is deemed to
be equal to the market price of a share of Common Stock, into which a
share of Class B Common Stock may be converted at the option of the
holder, as of the date such valuation is made. The following table shows
the amounts used in computing earnings per common share ("EPS") and the
weighted average number of shares of dilutive potential common stock:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
-------------------------
COMMON SHARE
------------
WEIGHTED AVERAGE SHARES 1,237,281 1,233,571 1,238,225 1,216,456
-------------------------------------------------------------------------
Net income (loss) $ 4,631,000 $ 6,030,000 $ (1,891,000) $ 19,380,000
Effect of dividend requirements and the change in
redemption value of redeemable preferred stock (84,000) (34,000) 577,000 (85,000)
-------------------------------------------------------------------------
NET EARNINGS (LOSS) USED IN COMPUTATION $ 4,547,000 $ 5,996,000 $ (1,314,000) $ 19,295,000
-------------------------------------------------------------------------
PER SHARE AMOUNT $3.68 $4.86 $(1.06) $15.86
=========================================================================
DILUTED EARNINGS (LOSS) PER
---------------------------
COMMON SHARE
------------
Weighted average shares used in the Basic EPS
calculation 1,237,281 1,233,571 1,238,225 1,216,456
Net effect of dilutive stock options and stock
incentive plans (2) 48,597 55,125 (1) - 82,104
Assumed conversion of 8.5% convertible
subordinated debentures 51,128 51,040 (1) - 51,040
-------------------------------------------------------------------------
ADJUSTED WEIGHTED AVERAGE SHARES 1,337,006 1,339,736 1,238,225 1,349,600
-------------------------------------------------------------------------
Net earnings (loss) used in the Basic EPS
calculation $ 4,547,000 $ 5,996,000 $ (1,314,000) $ 19,295,000
8.5% convertible subordinated debentures
interest net of income tax effect 34,000 34,000 (1) - 103,000
-------------------------------------------------------------------------
NET EARNINGS (LOSS) USED IN COMPUTATION $ 4,581,000 $ 6,030,000 $ (1,314,000) $ 19,398,000
-------------------------------------------------------------------------
PER SHARE AMOUNT $3.43 $4.50 $(1.06) $14.37
=========================================================================
</TABLE>
(1) For the nine months ended September 30, 1999, the assumed exercise of
stock options, issuances under stock incentive plans and the assumed
conversion of the 8-1/2% Convertible Subordinated Debentures each had an
anti-dilutive effect. As such, these items have been excluded from the
diluted EPS calculation for the period.
(2) Due to their anti-dilutive effect, shares issued pursuant to the Senior
Management Incentive Plan for the nine months ended September 30, 1999
were not included in the calculation. For the three months ended September
30, 1999, 11,030 shares were included. For the three and nine months ended
September 30, 1998, 12,072 shares and 38,038 shares, respectively, were
included.
9
<PAGE> 10
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. The Company is not engaged in more than one industry segment. The Company
evaluates performance by geographic region based on profit or loss before
income taxes. Commissions and fees are attributed to the geographic region
that generates the billings.
Commissions and fees, operating profit (loss), and income (loss) of
consolidated companies before taxes on income for the three and nine
months ended September 30, 1999 and 1998, and related identifiable assets
at September 30, 1999 and December 31, 1998 are summarized below according
to geographic region (000s omitted):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------------------------------------------------
UNITED STATES EUROPE OTHER CONSOLIDATED
--------------- --------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees $120,163 $106,186 $107,278 $104,271 $ 34,607 $ 23,648 $262,048 $234,105
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit
(loss) 6,641 8,300 1,642 2,646 1,005 (131) 9,288 10,815
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) of
consolidated companies
before taxes on income 7,651 10,352 1,729 3,262 686 (79) 10,066 13,535
-------- -------- -------- -------- -------- -------- -------- --------
Total assets
</TABLE>
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
UNITED STATES EUROPE OTHER CONSOLIDATED
---------------------- -------------------- ---------------------- -------------------------
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees $ 325,531 $ 312,518 $341,912 $ 304,334 $ 83,465 $ 66,238 $ 750,908 $ 683,090
--------- --------- -------- --------- -------- -------- ---------- ----------
Operating profit
(loss) 13,187 27,614 7,438 19,162 (7,809) (5,414) 12,816 41,362
--------- --------- -------- --------- -------- -------- ---------- ----------
Income (loss) of
consolidated
companies before
taxes on income 16,354 32,355 7,447 19,550 (8,899) (5,692) 14,902 46,213
--------- --------- -------- --------- -------- -------- ---------- ----------
Identifiable assets 650,464 608,882 646,628 699,636 213,807 164,430 1,510,899 1,472,948
--------- --------- -------- --------- -------- --------
Investments in and
advances to
nonconsolidated
affiliated companies 19,737 16,705
---------- ----------
Total assets $1,530,636 $1,489,653
========== ==========
</TABLE>
10
<PAGE> 11
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. During the third quarter of 1999 and 1998, total comprehensive income
amounted to $2,683,000 and $2,135,000, respectively, and for the nine months
ended September 30, 1999 and 1998 total comprehensive loss was $8,254,000 and
total comprehensive income was $13,463,000, respectively. The difference
between net income (loss) and total comprehensive income (loss) is the result
of the change in the translated value of the net assets of the Company's
international operations due to the strengthening of the United States dollar
and changes in values of certain marketable securities.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 11.9% during the
third quarter of 1999 and 9.9% during the nine months ended September 30, 1999
when compared to the same periods in 1998. Absent exchange rate fluctuations,
gross income increased 14.7% in the three months ended September 30, 1999 and
11.1% in the nine months ended September 30, 1999 when compared to the same
periods in 1998. In the third quarters of 1999 and 1998, respectively, 45.9% and
45.4% of consolidated gross income was attributable to domestic operations and
54.1% and 54.6% to international operations. In the third quarter of 1999 and
the first nine months of 1999, respectively, gross income from domestic
operations increased 13.2% and increased 4.2% versus the respective prior
periods, while gross income from international operations increased 10.9%,
(15.9% absent exchange rate fluctuations) for the third quarter of 1999 and
14.8% (17.0% absent exchange rate fluctuations) for the first nine months of
1999 when compared to the same periods in 1998. The increase in gross income in
both years primarily resulted from the continued growth of the Company's media
operations and expanded presence in the high growth specialties of interactive
marketing, healthcare and public relations as well as the contribution of
acquisitions made in 1998 and early 1999.
Salaries and employee related expenses increased 12.5% in the third quarter of
1999 and 15.0% for the first nine months of 1999 when compared to the respective
prior periods. Office and general expenses increased 14.7% and 15.1% for the
three and nine months ended September 30, 1999, respectively, versus the
comparable prior periods. These expenses increased at a greater rate than the
increase in gross income in order to assist the Company in replacing business
which had been lost in 1998 but not yet fully replaced; to building the
Company's new technology business and other growth practices; and to enhance and
expand it's capabilities generally which are designed to have a long-term
positive impact on the Company's financial health. The Company has secured
significant new business which is reflected in the third quarter results and in
improved operating margins when compared to earlier periods in the year.
Inflation did not have a material effect on revenue or expenses during 1999 or
1998.
Minority interest applicable to consolidated companies increased by $174,000 in
the third quarter of 1999 and decreased by $906,000 for the first nine months of
1999 as compared to the respective prior periods. The fluctuations in minority
interest are primarily due to the levels of profits of majority-owned companies.
Equity in earnings of nonconsolidated affiliated companies increased by $809,000
in the third quarter of 1999 and decreased by $136,000 for the first nine months
of 1999 as compared to the respective prior periods. The fluctuations are
primarily due to changes in the level of profits of nonconsolidated affiliated
companies.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The effective tax rate for the nine months ended September 30, 1999 is
considerably in excess of the comparable prior periods. The provision for taxes
on income approximated consolidated pretax income for the nine months ended
September 30, 1999, primarily because the Company determined it could not
recognize, currently, the future tax benefits attributable to net operating
losses at certain international subsidiaries. For the three months ended
September 30, 1999, the Company's tax rate returned approximately to historical
levels.
Net income in the third quarter of 1999 was $4,631,000 and the net loss for the
nine months ended September 30, 1999 was $1,891,000 as compared to net income of
$6,030,000 and net income of $19,380,000 in the respective prior periods. Basic
earnings per common share for the third quarter of 1999 was $3.68 and diluted
earnings per common share for the same period was $3.43 as compared to earnings
per common share of $4.86 and $4.50, respectively, in the comparable quarter in
1998. For the nine months ended September 30, 1999, both basic and diluted loss
per common share were $1.06 as compared to earnings per common share of $15.86
and $14.37, respectively, for the same periods in 1998. The decrease in net
income is attributable principally to reduced gross income at the Company's
general advertising agency operations resulting from the loss of certain
business in 1998 which has yet to be fully replaced and the continuing weakness
in selected international markets without a corresponding reduction of expenses
for the reasons discussed plus the increase in the Company's effective tax rate.
The decrease for the nine months ended September 30, 1999, however, has been
mitigated by the impact of new business won this year that is being reflected in
the upturn in gross income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $51,971,000 to a deficit of $48,507,000 at
September 30, 1999, versus $3,464,000 at December 31, 1998. Cash and cash
equivalents decreased by $6,081,000 from $153,816,000 to $147,735,000 at
September 30, 1999. The change in cash and cash equivalents is largely
attributable to the timing of collections of accounts receivable and billing of
expenses to clients versus payments to trade vendors. Marketable securities
decreased by $46,429,000, which was primarily due to their liquidation for the
payment made for the acquisition of TMBG Media Co. Domestically, the Company has
committed lines of credit totaling $51,000,000. These lines of credit were
partially utilized during the nine months ended September 30, 1999 and 1998 to
secure obligations of selected foreign subsidiaries. There was $17,660,000 and
$18,700,000 outstanding under these credit lines as of September 30, 1999 and
December 31, 1998, 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. There was $64,339,000 and $52,211,000 outstanding at
September 30, 1999 and December 31, 1998, respectively.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Accordingly,
computer equipment, software and other devices with embedded technology that are
time-sensitive may not be able to distinguish between the year 1900 and the year
2000 and may encounter other difficulties as a result. This could result in
system failures or miscalculations causing a temporary disruption of the
ordinary course of business.
Grey and its operating subsidiaries have completed an assessment of their
computer programs, those of its third party software vendors and those of
mission critical business partners and have undertaken what they believe to be
the appropriate steps to modify or replace hardware and software as necessary.
The remediation strategy includes a combination of conversions of all in-house
systems and upgrades to Year 2000 compliant third party systems. The majority of
operations, including all entities in the larger markets, are in the final
stages of conversion upgrade and testing. The Company envisages final testing to
be completed well in advance of year end and does not expect the Year 2000 issue
to pose significant operational problems for its computer network.
The Company is also dependent in various ways, both domestically and
internationally, on the Year 2000 readiness of broadcasters, governments,
financial institutions, utilities, communications suppliers and building
services, other infrastructure suppliers and other parties with whom it does
business. The effects of failures in the systems utilized by these third party
suppliers can not be estimated or anticipated and no assurance can be given that
the Company's information systems or operations will not be affected by
mistakes, if any, of third parties or third party failures to complete the Year
2000 projects on a timely basis. There can be no assurance that the systems of
other companies on which the Company relies will be converted on a timely basis
or that any such failure to convert by another company would not have an adverse
effect on the Company's systems. However, with respect to operations under the
Company's control, the Company does not expect, in light of its Year 2000
readiness efforts and the diversity of its suppliers and customers, that
occurrences of Year 2000 failures will have a material adverse effect on the
financial position or results of operations of the Company.
Grey and its subsidiaries are utilizing both internal and external resources to
reprogram, replace, implement and test the software modifications necessary for
Year 2000 compliance. The cost of the project has been estimated to be
approximately $4,000,000 and will not have a material effect on the Company. The
project is being funded through operating cash; costs specifically identified
with the Year 2000 remediation are being expensed as incurred. Other hardware
and purchased software costs have been capitalized. The Company believes it has
an effective program in place to resolve the Year 2000 issue. However, due to
the magnitude and complexity of the problem it is difficult to identify all
possible contingencies. Current contingency plans call for manual workarounds
and staffing strategies that provide a prompt response time in the event of
problems. The development of the Company's contingency plans is ongoing and will
be amended as appropriate.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
FORWARD LOOKING STATEMENTS
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 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 international markets in which the
Company operates, unanticipated expenses, client preferences which can be
affected by competition, the inability to implement upgrades for certain
computer programs which are not Year 2000 compliant and the ability to project
risk factors which may vary.
15
<PAGE> 16
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Reference is made to the Index annexed hereto and made a
part hereof.
(b)Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended September 30, 1999.
16
<PAGE> 17
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREY ADVERTISING INC.
(REGISTRANT)
DATE: November 15, 1999 By:/s/ Steven G. Felsher
-----------------------------
Steven G. Felsher
Executive Vice President -
Finance - Worldwide
Secretary and Treasurer
(Duly Authorized Officer)
DATE: November 15, 1999 By:/s/ Lester M. Feintuck
-----------------------------
Lester M. Feintuck
Senior Vice President -
Chief Financial Officer - US Operations
Controller
(Chief Accounting Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in
Number Assigned to Sequential Numbering
Exhibit (i.e. 601 Table of Item 601 Exhibits System Where Exhibit
of Regulation S-K) Description of Exhibits May be Found
<S> <C> <C> <C>
27 Financial Data Schedule 19
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 147,735
<SECURITIES> 15,267
<RECEIVABLES> 846,967
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,156,788
<PP&E> 121,855
<DEPRECIATION> 151,246
<TOTAL-ASSETS> 1,530,636
<CURRENT-LIABILITIES> 1,205,295
<BONDS> 78,025
9,576
0
<COMMON> 1,489
<OTHER-SE> 159,996
<TOTAL-LIABILITY-AND-EQUITY> 1,530,636
<SALES> 750,908
<TOTAL-REVENUES> 750,908
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 738,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,300
<INCOME-PRETAX> 14,902
<INCOME-TAX> 14,254
<INCOME-CONTINUING> (1,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,891)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
