<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 June 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 July 31, 1999, the total number of shares outstanding of Registrant's
Common Stock, par value $1 per share ("Common Stock"), was 1,008,982 and of
Registrant's Limited Duration Class B Common Stock, par value $1 per share
("Class B Common Stock"), was 237,362.
<PAGE> 2
GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX
PAGE NO.
--------
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 15
Signatures 16
Index to Exhibits 17
2
<PAGE> 3
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (A)
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 159,905,000 $ 153,816,000
Marketable securities 14,742,000 55,130,000
Accounts receivable 791,921,000 797,474,000
Expenditures billable to clients 72,676,000 66,681,000
Other current assets 78,105,000 75,481,000
-------------------------------------
Total current assets 1,117,349,000 1,148,582,000
Investments in and advances to nonconsolidated
affiliated companies 18,251,000 16,705,000
Fixed assets-at cost, less accumulated depreciation of
$147,334,000 in 1999 and $137,534,000 in 1998 116,654,000 113,084,000
Marketable securities 26,739,000 30,827,000
Goodwill-net of accumulated amortization of
$36,426,000 in 1999 and $31,466,000 in 1998 126,894,000 116,499,000
Other assets - including loans to executive officers
of $5,372,000 in 1999 and $5,572,000 in 1998 70,306,000 63,956,000
-------------------------------------
Total assets $1,476,193,000 $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>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (A)
----------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 932,166,000 $ 865,427,000
Notes payable to banks 75,895,000 70,911,000
Accrued expenses and other 117,470,000 184,497,000
Income taxes payable 25,770,000 24,283,000
----------------------------------------
Total current liabilities 1,151,301,000 1,145,118,000
Other liabilities, including deferred compensation of
$39,841,000 in 1999 and $41,871,000 in 1998 65,847,000 68,676,000
Long-term debt 78,025,000 78,025,000
Minority interest 10,569,000 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 9,552,000 10,333,000
Common stockholders' equity:
Common Stock - par value $1 per share; authorized
10,000,000 shares; issued 1,203,247 in 1999 and
1,205,041 in 1998 1,203,000 1,205,000
Limited Duration Class B Common Stock - par value $1
per share; authorized 2,000,000 shares; issued
286,511 shares in 1999 and 282,765 shares in 1998 287,000 283,000
Paid-in additional capital 38,137,000 38,832,000
Retained earnings 181,362,000 189,714,000
Accumulated other comprehensive loss:
Cumulative translation adjustment (15,852,000) (11,716,000)
Unrealized loss on marketable securities (1,586,000) (1,307,000)
----------------------------------------
Total accumulated other comprehensive loss (17,438,000) (13,023,000)
----------------------------------------
Loans to officer used to purchase Common Stock and
Limited Duration Class B Common Stock (4,726,000) (4,726,000)
----------------------------------------
198,825,000 212,285,000
Less - cost of 213,938 and 222,950 shares of Common
Stock and 26,770 and 26,762 shares of Limited
Duration Class B Common Stock held in treasury in
1999 and 1998, respectively 37,926,000 38,896,000
----------------------------------------
Total common stockholders' equity 160,899,000 173,389,000
----------------------------------------
Total liabilities and stockholders' equity $ 1,476,193,000 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commissions and fees $ 260,953,000 $ 233,271,000 $ 488,860,000 $ 448,985,000
Expenses:
Salaries and employee related expenses 176,445,000 145,812,000 328,080,000 282,005,000
Office and general expenses 84,037,000 67,436,000 157,252,000 136,433,000
----------------------------------------------------------------------
260,482,000 213,248,000 485,332,000 418,438,000
----------------------------------------------------------------------
471,000 20,023,000 3,528,000 30,547,000
Other income - net 348,000 559,000 1,308,000 2,131,000
----------------------------------------------------------------------
Income of consolidated companies before taxes on
income 819,000 20,582,000 4,836,000 32,678,000
Provision for taxes on income 6,000,000 10,331,000 9,000,000 16,835,000
----------------------------------------------------------------------
(Loss) income of consolidated companies (5,181,000) 10,251,000 (4,164,000) 15,843,000
Minority interest applicable to consolidated
companies (1,244,000) (2,436,000) (2,431,000) (3,511,000)
Equity in (losses) earnings of nonconsolidated
affiliated companies (204,000) 502,000 73,000 1,018,000
----------------------------------------------------------------------
Net (loss) income $ (6,629,000) $ 8,317,000 $ (6,522,000) $ 13,350,000
======================================================================
Weighted average number
of common shares outstanding
Basic 1,239,718 1,233,670 1,238,705 1,207,753
Diluted 1,239,718 1,344,721 1,238,705 1,354,219
(Loss) earnings per common share
Basic ($4.93) $6.47 ($4.73) $11.01
Diluted ($4.93) $5.96 ($4.73) $ 9.87
Dividends per common share $1.00 $1.00 $ 2.00 $ 2.00
======================================================================
</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 SIX MONTHS ENDED
JUNE 30,
1999 1998
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (6,522,000) $ 13,350,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization of fixed assets 15,893,000 13,824,000
Amortization of intangibles 4,960,000 3,603,000
Deferred compensation 490,000 5,008,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $162,000 in
1999 and $209,000 in 1998 89,000 (809,000)
Gains from the sale of marketable securities (8,000) (163,000)
Minority interest applicable to consolidated companies 2,431,000 3,511,000
Restricted stock expense (income) 262,000 (32,000)
Deferred income taxes 586,000 (1,980,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (18,642,000) (49,699,000)
Increase in expenditures billable to clients (10,321,000) (11,636,000)
Increase in other current assets (5,406,000) (2,161,000)
(Increase) decrease in other assets (9,555,000) 3,498,000
Increase in accounts payable 92,486,000 44,532,000
Decrease in accrued expenses and other (59,231,000) (864,000)
Increase (decrease) in income taxes payable 3,462,000 (2,187,000)
Decrease in other liabilities (7,138,000) (4,400,000)
-----------------------------
Net cash provided by operating activities 3,836,000 13,395,000
INVESTING ACTIVITIES
Purchases of fixed assets (23,494,000) (22,273,000)
Trust fund deposits (2,054,000) (3,253,000)
Increase in investments in and advances to
nonconsolidated affiliated companies (1,635,000) (2,109,000)
Purchases of marketable securities (379,000) (53,095,000)
Proceeds from the sale of marketable securities 44,603,000 41,721,000
Increase in intangibles, primarily goodwill (15,355,000) (13,369,000)
-----------------------------
Net cash provided by (used in) investing activities 1,686,000 (52,378,000)
</TABLE>
6
<PAGE> 7
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
1999 1998
----------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 9,970,000 31,930,000
Common shares acquired for treasury (98,000) --
Redemption of preferred stock -- (651,000)
Cash dividends paid on common shares (2,491,000) (2,419,000)
Cash dividends paid on redeemable preferred stock (120,000) (124,000)
Issuance (repurchase) of restricted stock 12,000 (88,000)
Proceeds from exercise of stock options 751,000 --
----------------------------------
Net cash provided by financing activities 8,024,000 28,648,000
Effect of exchange rate changes on cash (7,457,000) (2,774,000)
----------------------------------
Increase (decrease) in cash and cash equivalents 6,089,000 (13,109,000)
Cash and cash equivalents at beginning of period 153,816,000 150,553,000
----------------------------------
Cash and cash equivalents at end of period $ 159,905,000 $ 137,444,000
==================================
</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 June 30, 1999 and for the three and six
months ended June 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 six months ended June 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 June 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC (LOSS) EARNINGS PER
-------------------------
COMMON SHARE
------------
WEIGHTED AVERAGE SHARES 1,239,718 1,233,670 1,238,705 1,207,753
----------------------------------------------------------------------
Net (loss) income $ (6,629,000) $ 8,317,000 $ (6,522,000) $ 13,350,000
Effect of dividend requirements and the change in
redemption value of redeemable preferred stock 521,000 (336,000) 661,000 (51,000)
----------------------------------------------------------------------
NET (LOSS) EARNINGS USED IN COMPUTATION $ (6,108,000) $ 7,981,000 $ (5,861,000) $ 13,299,000
----------------------------------------------------------------------
PER SHARE AMOUNT ($4.93) $6.47 ($4.73) $11.01
======================================================================
DILUTED (LOSS) EARNINGS PER
---------------------------
COMMON SHARE
------------
Weighted average shares used in the Basic EPS
calculation 1,239,718 1,233,670 1,238,705 1,207,753
Net effect of dilutive stock options and stock
incentive plans (2) (1) -- 60,011 (1) -- 95,426
Assumed conversion of 8.5% convertible
subordinated debentures (1) -- 51,040 (1) -- 51,040
----------------------------------------------------------------------
ADJUSTED WEIGHTED AVERAGE SHARES 1,239,718 1,344,721 1,238,705 1,354,219
----------------------------------------------------------------------
Net (loss) earnings used in the Basic EPS
calculation $(6,108,000) $ 7,981,000 $ (5,861,000) $ 13,299,000
8.5% convertible subordinated debentures
interest net of income tax effect (1) -- 34,000 (1) -- 68,000
----------------------------------------------------------------------
NET (LOSS) EARNINGS USED IN COMPUTATION $(6,108,000) $ 8,015,000 $ (5,861,000) $ 13,367,000
----------------------------------------------------------------------
PER SHARE AMOUNT ($4.93) $5.96 ($4.73) $9.87
======================================================================
</TABLE>
(1) For the three and six months ended June 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 three and six months ended June 30,
1999 were not included in the calculation. For the three and six months
ended June 30, 1998, 11,152 shares and 51,021 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 (loss) for the three and six
months ended June 30, 1999 and 1998, and related identifiable assets at
June 30, 1999 and December 31, 1998 are summarized below according to
geographic region (000s omitted):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 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 $106,251 $105,652 $ 128,207 $106,684 $ 26,495 $20,935 $ 260,953 $233,271
-------- -------- --------- -------- -------- ------- --------- --------
Operating profit (loss) 1,025 11,398 3,738 11,500 (4,292) (2,875) 471 20,023
-------- -------- --------- -------- -------- ------- --------- --------
Income (loss) of
consolidated
companies before
taxes on income 1,605 12,572 3,998 11,115 (4,784) (3,105) 819 20,582
-------- -------- --------- -------- -------- ------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
FOR SIX MONTHS ENDED
JUNE 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 $205,368 $206,332 $ 234,634 $ 200,063 $ 48,858 $ 42,590 $ 488,860 $ 448,985
-------- -------- --------- --------- --------- -------- ---------- ----------
Operating profit (loss) 6,546 19,314 5,796 16,516 (8,814) (5,283) 3,528 30,547
-------- -------- --------- --------- --------- -------- ---------- ----------
Income (loss) of
consolidated
companies before
taxes on income 8,703 22,003 5,718 16,288 (9,585) (5,613) 4,836 32,678
-------- -------- --------- --------- --------- -------- ---------- ----------
Identifiable assets 605,087 608,882 673,269 699,636 179,586 164,430 1,457,942 1,472,948
-------- -------- --------- --------- --------- --------
Investments in and
advances to
nonconsolidated
affiliated companies 18,251 16,705
---------- ----------
Total assets $1,476,193 $1,489,653
========== ==========
</TABLE>
10
<PAGE> 11
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. During the second quarter of 1999 and 1998, total comprehensive loss
amounted to $9,882,000 and total comprehensive income was $8,026,000,
respectively, and for the six months ended June 30, 1999 and 1998 total
comprehensive loss was $10,937,000 and total comprehensive income was
$11,328,000, respectively. The difference between net income and total
comprehensive income 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
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 11.9% during the
second quarter of 1999 and 8.9% during the six months ended June 30, 1999 when
compared to the same periods in 1998. Absent exchange rate fluctuations, gross
income increased 13.2% in the three months ended June 30, 1999 and 9.3% in the
six months ended June 30, 1999 when compared to the same periods in 1998. In the
second quarters of 1999 and 1998, respectively, 40.7% and 45.3% of consolidated
gross income was attributable to domestic operations and 59.3% and 54.7% to
international operations. In the second quarter of 1999 and the first six months
of 1999, respectively, gross income from domestic operations increased 0.6% and
decreased 0.5% versus the respective prior periods, while gross income from
international operations increased 21.2%, (23.7% absent exchange rate
fluctuations) for the second quarter of 1999 and 16.8% (17.6% absent exchange
rate fluctuations) for the first six 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 and specialized operations as
well as the contribution of acquisitions made in 1998 and early 1999. The
decrease in the domestic gross income was basically attributable to reduced
income levels at the U.S. general advertising agencies.
Salaries and employee related expenses increased 21.0% in the second quarter of
1999 and 16.3% for the first six months of 1999 when compared to the respective
prior periods. Office and general expenses increased 24.6% and 15.3% for the
three and six months ended June 30, 1999 versus the comparable prior periods.
These increases reflect the fact that in its core advertising operation the
Company has lost, but not yet replaced certain business; therefore, the growth
in total expenses is not completely in line with the growth in gross income.
Further, this increase reflects the fact that significant resources have been
devoted to building the Company's developing new technology business and other
growth practices which are designed to have a long term positive impact on the
Company's health.
Inflation did not have a material effect on revenue or expenses during 1999 or
1998.
Minority interest applicable to consolidated companies decreased by $1,192,000
in the second quarter of 1999 and decreased by $1,080,000 for the first six
months of 1999 as compared to the respective prior periods. The fluctuations in
minority interest are primarily due to the levels of profits of nonconsolidated
affiliated companies.
Equity in earnings of nonconsolidated affiliated companies decreased by $706,000
in the second quarter of 1999 and decreased by $945,000 for the first six 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.
The effective tax rates were considerably in excess of the comparable prior
periods and the provision for taxes on income exceeded consolidated pretax
income for both the three and six months ended June 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.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The net loss in the second quarter of 1999 was $6,629,000 and the net loss for
the six months ended June 30, 1999 was $6,522,000 as compared to net income of
$8,317,000 and net income of $13,350,000 in the respective prior periods. Both
basic and diluted loss per common share for the second quarter of 1999 were
$4.93 as compared to earnings per common share of $6.47 and $5.96, respectively,
in the comparable quarter in 1998. For the six months ended June 30, 1999, both
basic and diluted loss per common share were $4.73 as compared to earnings per
common share of $11.01 and $9.87, 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 replaced and continuing weakness
in selected international markets.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $37,416,000 to a deficit of $33,952,000 at June
30, 1999, versus $3,464,000 at December 31, 1998. Cash and cash equivalents
increased by $6,089,000 from $153,816,000 to $159,905,000 at June 30, 1999. The
increase 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 $44,476,000,
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 six months ended June 30, 1999 and 1998 to secure obligations of
selected foreign subsidiaries. There was $17,350,000 and $18,700,000
outstanding under these credit lines as of June 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 $58,545,000 and $52,211,000 outstanding at June
30, 1999 and December 31, 1998, respectively.
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 and upgrade. The Company
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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.
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.
14
<PAGE> 15
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 June 30, 1999.
15
<PAGE> 16
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: August 16, 1999 By:/s/ Steven G. Felsher
-----------------------------
Steven G. Felsher
Executive Vice President -
Finance - Worldwide
Secretary and Treasurer
(Duly Authorized Officer)
DATE: August 16, 1999 By:/s/ Lester M. Feintuck
-----------------------------
Lester M. Feintuck
Senior Vice President -
Chief Financial Officer - US Operations
Controller
(Chief Accounting Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in Sequential
Number Assigned to Exhibit Table of Item 601 Exhibits Numbering System Where
(i.e. 601 of Regulation S-K) Description of Exhibits Exhibit May be Found
---------------------------- ----------------------- --------------------
<S> <C> <C>
27 Financial Data Schedule 19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATION FOR THE SIX MONTHS ENDED
JUNE 30, 1999 OF GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 159,905
<SECURITIES> 14,742
<RECEIVABLES> 791,921
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,117,349
<PP&E> 116,654
<DEPRECIATION> 147,334
<TOTAL-ASSETS> 1,476,193
<CURRENT-LIABILITIES> 1,151,301
<BONDS> 78,025
9,552
0
<COMMON> 1,490
<OTHER-SE> 159,409
<TOTAL-LIABILITY-AND-EQUITY> 1,476,193
<SALES> 488,860
<TOTAL-REVENUES> 488,860
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 485,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,789
<INCOME-PRETAX> 4,836
<INCOME-TAX> 9,000
<INCOME-CONTINUING> (6,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,522)
<EPS-BASIC> (4.73)
<EPS-DILUTED> (4.73)
</TABLE>
