<PAGE> 1
GREY
GREY ADVERTISING INC.
1999 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") is the sixth largest United States-headquartered, worldwide marketing
communications services company in the world according to Advertising Age, a
respected trade publication. The Company was founded in 1917, incorporated in
New York in 1925 and changed its state of incorporation to Delaware in 1974.
The Company has evolved from a traditional advertising agency to a
full-service, marketing communications company operating principally through
equity-owned operations in 158 cities in 90 countries worldwide. Its primary
business is to create marketing communications programs for its clients across
every channel of the media spectrum. The Company offers full-service advertising
through Grey Worldwide, one of the largest global agency networks. In addition,
it provides a broad array of specialized communications and integrated marketing
services including: public relations/public affairs (GCI/APCO); direct marketing
(Grey Direct); strategic co-marketing (J. Brown/LMC Group); interactive
communications and e-commerce (Grey Interactive, Beyond Interactive, MediaCom
Digital Technologies); healthcare marketing (Grey Healthcare Group);
entertainment and youth marketing (G-Whiz Entertainment); Hispanic marketing
(FOVA); Yellow Pages advertising (Grey Directory Marketing); business, marketing
and sales communications (Great! Communications); corporate identify and sales
promotion (Grey Design & Promotion); financial services multimedia
communications (Visual Communications); media research, buying and planning
services (MediaCom); and brand planning (Grey Brand Planning and Research). The
Company's client roster includes major national and international advertisers of
consumer and commercial goods and services.
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 1999, 1998 or 1997. 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 1998-1999
<TABLE>
<CAPTION>
DOLLARS PER
SHARE
---------------- DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
1998
First Quarter............................................... 370 325 $1.00
Second Quarter.............................................. 455 360 1.00
Third Quarter............................................... 417 312 1.00
Fourth Quarter.............................................. 369 262 1.00
1999
First Quarter............................................... 388 311 1.00
Second Quarter.............................................. 342 284 1.00
Third Quarter............................................... 372 322 1.00
Fourth Quarter.............................................. 397 325 1.00
</TABLE>
---------------
* Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessary represent actual
transactions.
Note Stockholders of Record -- Common Stock 459 (5/1/00);
Limited Duration Class B Common Stock 218 (5/1/00).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
Income from commissions and fees ("gross income") increased 14.1% in 1999
and 8.9% in 1998 as compared to the respective prior years. Absent exchange rate
fluctuations, gross income increased 16.9% in 1999 and 11.7% in 1998. In 1999,
1998 and 1997, respectively, 43.6%, 44.9% and 44.5% of consolidated gross income
was attributable to domestic operations and 56.4%, 55.1% and 55.5%,
respectively, to international operations. In 1999, gross income from domestic
operations increased 10.8% versus 1998 and was up 9.7% in 1998 versus 1997.
Gross income from international operations increased 16.8% (21.8% absent
exchange rate fluctuations) in 1999 when compared to 1998 and 8.2% (13.3% absent
exchange rate fluctuations) in 1998 when compared to 1997. The increases in
gross income in both years primarily resulted from expanded activities from
existing clients, the continued growth of the Company's general advertising
agency and specialized communications operations, and from acquired companies.
Salaries and employee related expenses increased 16.2% in 1999 and 13.2% in
1998 as compared to the respective prior years. Office and general expenses
increased 19.2% in 1999 and 7.2% in 1998 versus respective prior years. The 1999
increases in salary and employee related expenses are marginally higher than
revenue growth reflecting the fact that a number of the operations grew and
added to staff, compensation costs were not commensurably reduced at those
operations which experienced losses of business which were not fully replaced,
and the costs of staff retrenchment in a number of international markets. The
increase in office and general expenses in 1999 is partially attributable to
higher costs of amortizing acquisitions, the write-off of certain assets at a
number of the Company's loss making locations, and the need for greater and
generally more expensive real estate. The 1998 cost increases reflect the
general growth of the business, and an increased investment in staffing to
better serve our multinational clients and their businesses in developing
markets.
Inflation did not have a material effect on revenue or expenses in 1999,
1998 or 1997.
Other income-net decreased in 1999 by $1,098,000 and increased in 1998 by
$2,124,000 as compared to the comparable prior periods. The 1999 decrease is
primarily due to a reduction of interest income from marketable securities which
were liquidated, offset to a limited degree by overall gains on the sale of
certain of those securities. The 1998 increase was due primarily to increased
net interest income generated from higher average invested balances.
The effective tax rate increased to 71.6% in 1999 as compared to 50.5% in
1998 primarily because the Company decided it was not prudent to recognize the
future tax benefit attributable to losses at certain international subsidiaries;
should the benefit from these losses be realized against taxable profits in the
future, it will have a positive impact on the Company's results when recognized.
The tax rate in 1997 was 48.7%. The change in the effective tax rate in 1998, as
compared to 1997, was due to higher effective state and local tax rates and
higher effective foreign tax rates, largely dependent upon where the Company
generates profits.
Minority interest increased in 1999 by $1,524,000 and decreased $2,602,000
in 1998 as compared to the respective prior years. The changes in 1999 and in
1998 were primarily due to changes in the levels of ownership and the level of
profits, of majority-owned companies.
Equity in earnings of nonconsolidated affiliated companies increased
$474,000 in 1999 and decreased $900,000 in 1998 as compared to the respective
prior years. These changes are due primarily to changes in the level of
ownership and the level of profits attributable to the nonconsolidated
companies.
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The Company reported net income of $6,401,000 in 1999 as compared to
$25,877,000 in 1998 and $30,451,000 in 1997. Diluted earnings per common share
was $4.86 in 1999 as compared to $18.98 in 1998 and $21.89 in 1997.
For purpose of computing basic earnings per common share, the Company's net
income 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. For the
purpose of computing diluted earnings per common share, net income was also
adjusted by the interest savings, net of tax, on the assumed conversion of the
Company's 8 1/2% Convertible Subordinated Debentures.
The Company's 1999 results were adversely affected by the loss of certain
clients in 1998 in its general advertising business, which had not been fully
replaced, the continued losses at some of its international operations and the
associated costs incurred to address those international operations. During
1999, the Company won significant assignments in its core advertising agency
business and secured additional important assignments from existing clients, won
a significant number of new integrated communications "Dot.com" accounts and new
business in its specialized communications units. The Company also expanded the
scope and capabilities of its global network by completing a number of selected
acquisitions.
The Company's results may be affected by currency exchange rate
fluctuations given the Company's extensive international operations. Generally,
the foreign currency exchange risk is limited to net income of each operation
because the Company's revenues and expenses, by country, are almost exclusively
denominated in the local currency of each respective country with both revenue
and expense items matched.
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
date-sensitive may not be able to distinguish between the year 1900 and the year
2000 and may encounter difficulties as a result. This could result in system
failures or miscalculations causing a temporary disruption of the ordinary
course of business.
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, Grey and its operating subsidiaries,
both domestically and internationally, completed their remediation and testing
of systems. As a result of those planning and implementation efforts, the
Company experienced no disruptions in information technology and non-information
technology systems and believes those systems successfully responded to the Year
2000 date change. Neither did the Company experience any disruptions from the
Year 2000 readiness of broadcasters, governments, financial institutions,
utilities, communications suppliers, building services, other infrastructure
suppliers and other parties with whom it does business and upon whom it is
dependent in various ways, both domestically and internationally, but over which
it has no direct control.
Grey and its subsidiaries utilized both internal and external resources to
reprogram, replace, implement and test the software modifications necessary for
Year 2000 compliance. The cost of the project was approximately $4,000,000, was
in-line with previous estimates and did not have a material effect on the
Company.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its services to client, its internal systems, or the
products and services of third parties. While there have been no material
problems to date, and the Company believes that there will be no major issues
throughout the year, the magnitude and complexity of the Year 2000 issue
precludes absolute assurance that issues may not arise during the year 2000. The
Company will continue to monitor its computer applications and those of its
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<PAGE> 5
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to be liquid by maintaining significant levels of
cash, cash equivalents and investments in highly liquid marketable securities,
most of which are money market funds and corporate bonds. Cash and cash
equivalents were $306,556,000 and $153,816,000 at December 31, 1999 and 1998,
respectively, and the Company's investment in marketable securities was
$28,010,000 and $85,957,000 at December 31, 1999 and 1998, respectively. The
continued high level of liquidity reflects the Company's ongoing focus on its
cash management process. The Company generated significant cash from operations
in 1999; yet, working capital decreased by $60,351,000 to a deficit of
$56,887,000 at December 31, 1999 versus $3,464,000 positive balance at December
31, 1998 because of continued steady levels of investment in its business. The
decrease in working capital is largely attributable to acquisitions of new
companies, increased ownership in majority-owned subsidiaries and investments in
private securities.
Domestically, the Company maintains committed bank lines of credit totaling
$60,000,000. These lines of credit were partially utilized during both 1999 and
1998 to secure obligations of selected international subsidiaries in the amounts
of $20,500,000 and $18,700,000 at December 31, 1999 and 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. Amounts outstanding under such facilities at December 31,
1999 and 1998 were $48,000,000 and $52,211,000, respectively. Total borrowings
remained relatively constant.
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 borrowings to fund its operating needs, the Company has a
$75,000,000 loan outstanding from December 1997 from the Prudential Insurance
Company of America. The loan bears interest at the rate of 6.94% and is
repayable in three equal annual installments, commencing in December 2003. The
Company does not anticipate any material increased requirement for capital or
other expenditures which will adversely affect its liquidity.
The Company's business generally has been seasonal with greater gross
income earned in the second and fourth quarters, particularly the fourth
quarter. As a result, cash, accounts receivable, accounts payable and accrued
expenses are typically higher on the Company's year-end balance sheet than at
the end of any of the preceding three quarters.
FASB STATEMENT 133
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Changes in derivative fair values will either be recognized in earnings in the
period of change or reported as a component of other comprehensive income
(outside earnings) and subsequently reclassified into earnings
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when the forecasted transaction affects earnings. FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
will adopt the new statement in the first quarter of 2001. The adoption of this
standard is not expected to have any significant impact on the Company's Balance
Sheets or its Statements of Income and Cash Flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
1999 was for less than three months. At December 31, 1999, there were no foreign
currency contracts open. In 1998, the Company did take advantage of an inverted
yield curve in the United Kingdom and entered into an interest rate swap
agreement as a hedge against rising interest rates by exchanging the cash flow
on borrowings of L5,000,000 at a variable interest rate for the cash flow from a
similar borrowing at a fixed interest rate of 5.67%. The Company had no other
derivative contracts outstanding at December 31, 1999 and did not enter into any
other derivative contracts during 1999.
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. 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, technological
developments, changes in the general economic conditions that affect exchange
rates, interest rates and/or consumer spending either in the United States or
international markets in which the Company operates, unanticipated expenses,
client preferences which can be affected by competition, undetected issues with
certain computer programs which may not yet be fully year 2000 compliant and the
ability to project risk factors which may vary. Certain of these factors are
discussed in greater detail elsewhere herein.
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998
---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 306,556 $ 153,816
Marketable securities..................................... 5,581 55,130
Accounts receivable....................................... 940,612 797,474
Expenditures billable to clients.......................... 51,991 66,681
Other current assets...................................... 93,207 75,481
---------- ----------
Total current assets.............................. 1,397,947 1,148,582
Investments in and advances to nonconsolidated affiliated
companies................................................. 17,961 16,705
Fixed assets -- net......................................... 126,939 113,084
Marketable securities....................................... 22,429 30,827
Intangibles -- net of accumulated amortization of $42,818 in
1999 and $31,466 in 1998.................................. 157,115 116,499
Other assets -- including loans to executive officers of
$5,247 in 1999 and $5,572 in 1998......................... 86,863 63,956
---------- ----------
Total assets...................................... $1,809,254 $1,489,653
========== ==========
</TABLE>
See notes to consolidated financial statements.
7
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998
---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,161,508 $ 865,427
Notes payable to banks.................................... 68,500 70,911
Accrued expenses and other................................ 208,254 184,497
Income taxes payable...................................... 16,572 24,283
---------- ----------
Total current liabilities......................... 1,454,834 1,145,118
Other liabilities -- including deferred compensation of
$44,160 in 1999 and $41,871 in 1998....................... 75,260 68,676
Long-term debt.............................................. 78,025 78,025
Minority interest........................................... 19,620 14,112
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................ 10,150 10,333
Common stockholders' equity:
Common Stock -- par value $1 per share; authorized
10,000,000 shares; issued 1,228,534 shares in 1999 and
1,205,041 shares in 1998............................... 1,229 1,205
Limited Duration Class B Common Stock -- par value $1 per
share; authorized 2,000,000 shares; issued 261,224
shares in 1999 and 282,765 shares in 1998.............. 261 283
Paid-in additional capital................................ 39,763 38,832
Retained earnings......................................... 191,042 189,714
Accumulated other comprehensive loss:
Cumulative translation adjustment...................... (15,462) (11,716)
Unrealized loss on marketable securities............... (141) (1,307)
---------- ----------
Total accumulated other comprehensive loss........ (15,603) (13,023)
---------- ----------
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock.......................... (4,726) (4,726)
---------- ----------
211,966 212,285
Less -- cost of 218,514 and 222,950 shares of Common Stock
and 26,937 and 26,762 shares of Limited Duration Class
B Common Stock held in treasury at December 31, 1999
and 1998, respectively................................. 40,601 38,896
---------- ----------
Total common stockholders' equity................. 171,365 173,389
Retirement plans, leases and contingencies..................
---------- ----------
Total liabilities and common stockholders'
equity.......................................... $1,809,254 $1,489,653
========== ==========
</TABLE>
See notes to consolidated financial statements.
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Commissions and fees........................................ $1,067,212 $935,181 $858,752
Expenses:
Salaries and employee related expenses.................... 697,083 599,681 529,863
Office and general expenses............................... 337,256 282,843 263,969
---------- -------- --------
1,034,339 882,524 793,832
---------- -------- --------
32,873 52,657 64,920
Other income -- net......................................... 5,397 6,495 4,371
---------- -------- --------
Income of consolidated companies before taxes on income..... 38,270 59,152 69,291
Provision for taxes on income............................... 27,400 29,856 33,719
---------- -------- --------
Income of consolidated companies............................ 10,870 29,296 35,572
Minority interest applicable to consolidated companies...... (5,665) (4,141) (6,743)
Equity in earnings of nonconsolidated affiliated
companies................................................. 1,196 722 1,622
---------- -------- --------
Net income.................................................. $ 6,401 $ 25,877 $ 30,451
========== ======== ========
Earnings per Common Share:
Basic.................................................. $ 5.13 $ 20.81 $ 25.03
Diluted................................................ $ 4.86 $ 18.98 $ 21.89
</TABLE>
See notes to consolidated financial statements.
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PAID-IN
COMMON ADDITIONAL COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS
------ ---------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Balance at December 31, 1996........ $1,432 $42,814 $144,789
Comprehensive income:
Net income...................... $ 30,451 30,451
Other comprehensive loss:
Translation adjustment........ (12,001)
Unrealized gain on marketable
securities, net of
reclassification adjustment
for gains included in net
income of $215.............. 1,059
--------
Other comprehensive loss........ (10,942)
--------
Total comprehensive income........ $ 19,509
========
Cash dividends -- Common Shares --
$4.00 per share................. (4,738)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share........................... (256)
Common Shares acquired -- at
cost............................
Dividends payable in Common Shares
pursuant to the Senior
Management Incentive Plan....... (370)
Increase in redemption value of
Redeemable Preferred Stock...... (662)
Restricted stock activity......... (143)
Tax benefit from restricted
stock........................... 8
Common Shares issued upon exercise
of stock options................ 52
Senior Management Incentive Plan
activity........................ 1,618
------ ------- --------
Balance at December 31, 1997........ 1,432 44,349 169,214
------ ------- --------
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
HELD IN TREASURY COMPREHENSIVE
------------------ LOANS TO INCOME
SHARES AMOUNT OFFICERS (LOSS) TOTAL
------- -------- -------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 249,569 $(38,096) $(4,726) $ 1,709 $147,922
Comprehensive income:
Net income...................... 30,451
Other comprehensive loss:
Translation adjustment........
Unrealized gain on marketable
securities, net of
reclassification adjustment
for gains included in net
income of $215..............
Other comprehensive loss........ (10,942) (10,942)
Total comprehensive income........
Cash dividends -- Common Shares --
$4.00 per share................. (4,738)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share........................... (256)
Common Shares acquired -- at
cost............................ 3,007 (962) (962)
Dividends payable in Common Shares
pursuant to the Senior
Management Incentive Plan....... (370)
Increase in redemption value of
Redeemable Preferred Stock...... (662)
Restricted stock activity......... (3,000) 309 166
Tax benefit from restricted
stock........................... 8
Common Shares issued upon exercise
of stock options................ (716) 19 71
Senior Management Incentive Plan
activity........................ 1,618
------- -------- ------- -------- --------
Balance at December 31, 1997........ 248,860 (38,730) (4,726) (9,233) 162,306
------- -------- ------- -------- --------
</TABLE>
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PAID-IN
COMMON ADDITIONAL COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS
------ ---------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Balance at December 31, 1997........... $1,432 $44,349 $169,214
Comprehensive income:
Net income......................... $25,877 25,877
Other comprehensive loss:
Translation adjustment........... (2,294)
Unrealized loss on marketable
securities, net of
reclassification adjustment for
gains included in net income of
$256........................... (1,496)
-------
Other comprehensive loss........... (3,790)
-------
Total comprehensive income........... $22,087
=======
Cash dividends -- Common Shares --
$4.00 per share.................... (4,895)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share.............................. (244)
Common Shares acquired -- at cost....
Dividends payable in Common Shares
pursuant to the Senior Management
Incentive Plan..................... (14)
Increase in redemption value of
Redeemable Preferred Stock......... (224)
Restricted stock activity............ 81
Tax benefit from restricted stock.... 8
Common Shares issued upon exercise of
stock options...................... 5
Senior Management Incentive Plan
activity........................... 56 (5,611)
------ ------- --------
Balance at December 31, 1998........... 1,488 38,832 189,714
------ ------- --------
<CAPTION>
COMMON STOCK ACCUMULATED
HELD IN TREASURY OTHER
------------------ LOANS TO COMPREHENSIVE
SHARES AMOUNT OFFICERS LOSS TOTAL
------- -------- -------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997........... 248,860 $(38,730) $(4,726) $ (9,233) $162,306
Comprehensive income:
Net income......................... 25,877
Other comprehensive loss:
Translation adjustment...........
Unrealized loss on marketable
securities, net of
reclassification adjustment for
gains included in net income of
$256...........................
Other comprehensive loss........... (3,790) (3,790)
Total comprehensive income...........
Cash dividends -- Common Shares --
$4.00 per share.................... (4,895)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share.............................. (244)
Common Shares acquired -- at cost.... 427 (168) (168)
Dividends payable in Common Shares
pursuant to the Senior Management
Incentive Plan..................... (14)
Increase in redemption value of
Redeemable Preferred Stock......... (224)
Restricted stock activity............ 625 (21) 60
Tax benefit from restricted stock.... 8
Common Shares issued upon exercise of
stock options...................... (200) 23 28
Senior Management Incentive Plan
activity........................... (5,555)
------- -------- ------- -------- --------
Balance at December 31, 1998........... 249,712 (38,896) (4,726) (13,023) 173,389
------- -------- ------- -------- --------
</TABLE>
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PAID-IN
COMMON ADDITIONAL COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS
------ ---------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Balance at December 31, 1998........... $1,488 $38,832 $189,714
Comprehensive income:
Net income......................... $ 6,401 6,401
Other comprehensive loss:
Translation adjustment........... (3,746)
Unrealized gain on marketable
securities, net of
reclassification adjustment for
gains included in net income of
$1,980......................... 1,166
-------
Other comprehensive loss........... (2,580)
-------
Total comprehensive income........... $ 3,821
=======
Cash dividends -- Common Shares --
$4.00 per share.................... (4,979)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share.............................. (240)
Common Shares acquired -- at cost....
Dividends payable in cash pursuant to
the Senior Management Incentive
Plan............................... (37)
Decrease in redemption value of
Redeemable Preferred Stock......... 183
Restricted stock activity............ (536)
Tax benefit from restricted stock.... 12
Common Shares issued upon exercise of
stock options...................... 230
Senior Management Incentive Plan
activity........................... 2 1,225
------ ------- --------
Balance at December 31, 1999........... $1,490 $39,763 $191,042
====== ======= ========
<CAPTION>
COMMON STOCK ACCUMULATED
HELD IN TREASURY OTHER
------------------- LOANS TO COMPREHENSIVE
SHARES AMOUNT OFFICERS LOSS TOTAL
-------- -------- -------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998........... 249,712 $(38,896) $(4,726) $(13,023) $173,389
Comprehensive income:
Net income......................... 6,401
Other comprehensive loss:
Translation adjustment...........
Unrealized gain on marketable
securities, net of
reclassification adjustment for
gains included in net income of
$1,980.........................
Other comprehensive loss........... (2,580) (2,580)
Total comprehensive income...........
Cash dividends -- Common Shares --
$4.00 per share.................... (4,979)
Cash dividends -- Redeemable
Preferred Stock -- $8.00 per
share.............................. (240)
Common Shares acquired -- at cost.... 10,043 (3,361) (3,361)
Dividends payable in cash pursuant to
the Senior Management Incentive
Plan............................... (37)
Decrease in redemption value of
Redeemable Preferred Stock......... 183
Restricted stock activity............ (9,820) 1,132 596
Tax benefit from restricted stock.... 12
Common Shares issued upon exercise of
stock options...................... (4,484) 524 754
Senior Management Incentive Plan
activity........................... 1,227
------- -------- ------- -------- --------
Balance at December 31, 1999........... 245,451 $(40,601) $(4,726) $(15,603) $171,365
======= ======== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 13
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 6,401 $ 25,877 $ 30,451
Adjustments to reconcile net income to net cash provided by
operating activities, net of acquisitions:
Depreciation and amortization of fixed assets............... 33,532 27,992 25,866
Amortization of intangibles................................. 11,405 7,957 6,160
Deferred compensation....................................... 6,844 12,366 14,002
Equity in earnings of nonconsolidated affiliated companies,
net of dividends received of $645 in 1999, $856 in 1998,
and $658 in 1997.......................................... (551) 134 (964)
Gains from the sale of marketable securities................ (1,980) (256) (215)
Gains from the sale of a nonconsolidated affiliated
company................................................... -- (336) (384)
Minority interest applicable to consolidated companies...... 5,665 4,141 6,743
Amortization of restricted stock expense.................... 586 84 140
Deferred income taxes....................................... (3,211) (4,793) (7,366)
Changes in operating assets and liabilities:
Increase in accounts receivable........................... (169,498) (106,600) (89,556)
Decrease (increase) in expenditures billable to clients... 11,059 (9,644) (6,103)
Increase in other current assets.......................... (21,169) (9,590) (5,314)
Increase in other assets.................................. (13,470) (7,264) (652)
Increase in accounts payable.............................. 320,910 110,878 121,303
Increase (decrease) in accrued expenses and other......... 33,601 (1,721) 14,473
(Decrease) increase in income taxes payable............... (5,761) 7,656 480
Increase in other liabilities............................. 1,264 35 1,380
--------- --------- --------
Net cash provided by operating activities................... 215,627 56,916 110,444
INVESTING ACTIVITIES
Purchases of fixed assets................................... (51,255) (47,068) (39,718)
Trust fund deposits......................................... (3,660) (5,306) (2,974)
Increase in investments in and advances to nonconsolidated
affiliated companies...................................... (705) (840) (1,142)
Purchases of marketable securities.......................... (7,840) (41,088) (25,038)
Proceeds from the sales of marketable securities............ 67,236 26,684 49,613
Purchases of investment securities.......................... (7,123) -- --
Increase in intangibles, primarily goodwill................. (52,021) (24,839) (19,912)
--------- --------- --------
Net cash used in investing activities....................... (55,368) (92,457) (39,171)
</TABLE>
13
<PAGE> 14
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term borrowings..... 1,941 45,694 (60,895)
Proceeds from term loan..................................... -- -- 75,000
Repayment of term loan...................................... -- -- (30,000)
Common Shares acquired for treasury......................... (3,361) (168) (962)
Preferred Shares redeemed to treasury....................... -- (651) --
Cash dividends paid on Common Shares........................ (5,016) (4,895) (4,738)
Cash dividends paid on Redeemable Preferred Stock........... (240) (244) (256)
Net proceeds from issuance (payments for repurchase) of
Restricted Stock.......................................... 22 (18) 27
Proceeds from exercise of stock options..................... 754 28 71
Borrowings under life insurance policies.................... 536 510 450
--------- --------- --------
Net cash (used in) provided by financing activities......... (5,364) 40,256 (21,303)
Effect of exchange rate changes on cash..................... (2,155) (1,452) (11,902)
--------- --------- --------
Increase in cash and cash equivalents....................... 152,740 3,263 38,068
Cash and cash equivalents at beginning of year.............. 153,816 150,553 112,485
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 306,556 $ 153,816 $150,553
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 15
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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.
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 international
operations are translated at the exchange rate in effect at each year end and
statement of income accounts are translated at the average exchange rates
prevailing during the year. Resulting translation adjustments are recorded as a
component of
15
<PAGE> 16
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other comprehensive income (loss). Foreign currency transaction gains and losses
are reported in income. During 1999, 1998 and 1997, foreign currency transaction
gains and losses were not material.
Intangibles
The excess of purchase price over the underlying net equity of certain
consolidated subsidiaries and nonconsolidated affiliated companies ("goodwill")
is amortized by the straight-line method over periods of up to twenty years. The
amounts of intangibles, net of accumulated amortization, associated with
consolidated subsidiaries and nonconsolidated investments (included in
Investments in and Advances to Nonconsolidated Affiliated Companies) were
$157,115 and $3,001 in 1999, and $116,499 and $3,394 in 1998, respectively.
The Company periodically 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. When multiple investments are 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
carrying value of the goodwill exceeds the future cumulative 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 has designated all its 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 other comprehensive income (loss).
Investment Securities
Investment securities are primarily investments in private companies and
are included in Other Assets. Because quoted market prices are not available,
such investments are recorded at cost, net of impairment write-downs, if
necessary.
16
<PAGE> 17
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Earnings Per Common Share
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 includes adjustments for the effect of the assumed exercise of dilutive
stock options, shares issuable pursuant to the Company's Senior Management
Incentive Plan (see Note M(1)) and the assumed conversion of the 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 on the
Preferred Stock and by the increase or decrease in redemption value of the
Preferred Stock during the relevant 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.
B. INTERNATIONAL OPERATIONS
The following financial data is applicable to the Company's consolidated
international subsidiaries:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets........................................ $685,512 $610,767 $489,242
Current liabilities................................... 718,620 621,164 480,514
Other assets -- net of other liabilities.............. 186,271 161,619 79,391
Net (loss) income..................................... (14,665) 745 8,921
</TABLE>
Consolidated retained earnings at December 31, 1999 includes equity in
unremitted earnings of nonconsolidated international companies of approximately
$10,590.
17
<PAGE> 18
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
C. OTHER INCOME -- NET
Details of other income -- net are:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income....................................... $ 14,995 $ 16,113 $ 13,826
Interest expense...................................... (12,479) (11,506) (11,095)
Gains from the sale of marketable securities.......... 1,980 592 599
Dividends from affiliates............................. 86 93 83
Other income -- net................................... 815 1,203 958
-------- -------- --------
$ 5,397 $ 6,495 $ 4,371
======== ======== ========
</TABLE>
D. FIXED ASSETS
Components of fixed assets -- at cost are:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment........................... $ 205,451 $ 180,657
Leaseholds and leasehold improvements....................... 79,858 69,961
--------- ---------
285,309 250,618
Accumulated depreciation and amortization................... (158,370) (137,534)
--------- ---------
$ 126,939 $ 113,084
========= =========
</TABLE>
E. ACQUISITIONS AND RELATED COSTS
In 1999, the Company completed a number of acquisitions that expanded its
core capabilities and presence in specialized communications areas and also
increased its investments in majority-owned subsidiaries in key markets. The
acquisitions and increased investments were accounted for under the purchase
method and had an aggregate purchase price of $53,784. The purchase price and
corresponding goodwill in connection with a number of the acquisitions may be
increased by contingent payouts to certain of the sellers depending on the
future earnings of the acquired entities. Goodwill arising from these
transactions is being amortized in accordance with the Company's policy. Results
of the operations from these acquired entities for the period were not material.
In late December 1998, pursuant to a cash tender offer, the common and preferred
shareholders of TMBG Media Co. ("TMBG"), a United Kingdom company, agreed to be
acquired by the Company. In January 1999, the Company distributed cash in the
amount of $47,006 in exchange for 100% of TMBG's voting common stock and 90% of
its preferred stock. The acquisition was funded out of operating cash and has
been accounted for using the purchase method. Results of operations of TMBG for
the period December 23, 1998 to December 31, 1998 were not material and thus
were not included in the Consolidated Statement of Income for the year ended
December 31, 1998. TMBG's net assets of $8,007, including $14,158 of cash as
well as the liability related to the tendered shares of TMBG were included in
the consolidated balance sheet at December 31, 1998. The excess of purchase
price over the underlying net equity of TMBG
18
<PAGE> 19
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
E. ACQUISITIONS AND RELATED COSTS (CONTINUED)
was recorded as goodwill and is being amortized in accordance with the Company's
accounting policy. Pro-forma results of operations for 1999 and 1998 would not
be materially different from the reported amounts for those periods.
F. MARKETABLE SECURITIES AND OTHER INVESTMENT SECURITIES
The marketable securities and other investment securities, by type of
investment, held by the Company at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Marketable securities:
Maturities of one year or less:
Money market funds..................................... $ 1,355 $55,130
Equity securities...................................... 4,226 --
------- -------
5,581 55,130
------- -------
Maturities greater than one year:
Corporate bonds........................................ 22,429 30,827
------- -------
Total marketable securities....................... $28,010 $85,957
======= =======
Investment securities, primarily private equity
securities................................................ $ 9,985 $ 2,343
======= =======
</TABLE>
At December 31, 1999, the Company had unrealized gains of $2,790 and
unrealized losses of $2,931 related primarily to investments in both U.S. and
non-U.S. corporate bonds; all such bonds are denominated in U.S. dollars. At
December 31, 1998, the Company had unrealized gains of $5,412 and unrealized
losses of $6,719 related primarily to investments in both U.S. and non-U.S.
corporate bonds; all such bonds are denominated in U.S. dollars. At December 31,
1999 and 1998, the Company's investments in marketable securities, classified as
long-term, had an average maturity of approximately 5.43 and 6 years,
respectively.
G. CREDIT ARRANGEMENTS AND LONG-TERM DEBT
The Company maintains committed lines of credit of $60,000 with various
domestic 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 1999 and 1998 by
selected foreign subsidiaries in the amount of $20,500 and $18,700 at the end of
each respective year. The weighted average interest rate related to the debt
associated with the committed lines of credit was 5.67% and 7.43% at December
31, 1999 and 1998, respectively. The Company had $48,000 and $52,211 outstanding
under other uncommitted lines of credit at December 31, 1999 and 1998,
respectively. The weighted average interest rate for the borrowings under the
uncommitted lines of credit was 5.91% and 6.24% at December 31, 1999 and 1998,
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.
19
<PAGE> 20
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
G. CREDIT ARRANGEMENTS AND LONG-TERM DEBT (CONTINUED)
from its international subsidiaries. The terms of each foreign currency contract
entered into in 1999 and 1998 were for less than three months. At December 31,
1999, there were no foreign currency contracts transactions open. In December
1998, the Company did take advantage of an inverted yield curve in the United
Kingdom and entered into a two year interest rate swap agreement as a hedge
against rising interest rates by exchanging the cash flow on borrowings of
L5,000 at a variable interest rate under the uncommitted lines of credit, for
the cash flow from a similar borrowing at a fixed interest rate of 5.67%. The
fair value of the swap agreement was not material. This estimate was determined
using a discounted cash flow analysis using current interest rates for debt
having similar terms and remaining maturities.
Long-term debt at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Term loans.................................................. $75,000 $75,000
Convertible debentures...................................... 3,025 3,025
------- -------
Long-term debt.............................................. $78,025 $78,025
======= =======
</TABLE>
The Company has a $75,000 loan outstanding from 1997 from the Prudential
Insurance Company ("Prudential") at a fixed interest rate of 6.94% with the
principal repayable in equal installments of $25,000 in December 2003, 2004 and
2005. The terms of the loan agreement require, inter alia, that the Company meet
certain cash flow requirements and limit its incurrence of additional
indebtedness to certain specified amounts. At December 31, 1999 and 1998, the
Company was in compliance with all of these covenants. The fair value of the
Prudential debt is estimated to be $72,510 and $79,105 at December 31, 1999 and
1998, 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 8.44 shares of Common Stock and an equal number of shares of Limited
Duration Class B Common Stock ("Class B Common Stock"), subject to certain
adjustments, for each $1 principal amount of such debentures. The debentures
were issued in exchange for cash and a $3,000, 9% promissory note from the
Chairman and Chief Executive Officer of the Company, payable on December 31,
2004 (included in Other Assets at December 31, 1999 and 1998). During each of
the years 1999, 1998 and 1997, the Company paid to the officer interest of $257
pursuant to the terms of the debentures and the officer paid to the Company
interest of $270 pursuant to the terms of the 9% promissory note.
20
<PAGE> 21
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
G. CREDIT ARRANGEMENTS AND LONG-TERM DEBT (CONTINUED)
The scheduled repayment of long-term debt is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31 AMOUNT
------------ -------
<S> <C>
2003........................................................ $28,025
2004........................................................ 25,000
2005........................................................ 25,000
-------
$78,025
=======
</TABLE>
During 1999 and 1998, 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, 1999 and 1998 are
$19,965 and $18,184, respectively, with an interest rate of 7.30% in each year,
and are carried as a reduction of the related cash surrender value that is
included in Other Assets. Of the amounts borrowed in 1999 and 1998, the Company
received $536 and $510 in cash, respectively, and $1,245 was used in each year
to pay premiums on the underlying life insurance policies.
For the years 1999, 1998 and 1997, the Company made interest payments of
$12,502, $11,673 and $11,969, respectively.
H. REDEEMABLE PREFERRED STOCK
As of December 31, 1999 and 1998, the Company had outstanding 20,000 shares
of Series I Preferred Stock and 5,000 shares each of Series II and Series III
Preferred Stock. In 1997, 2,000 shares of Series 1 Preferred Stock were
outstanding which were redeemed in 1998. The holder of the Series I, Series II
and Series III Preferred Stock is the Chairman and Chief Executive Office of the
Company. The terms of each class of Preferred Stock, including the basic
economic terms relating thereto are essentially the same. 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.
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 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 (included in Other Assets at December 31, 1999 and 1998)
with a
21
<PAGE> 22
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
H. REDEEMABLE PREFERRED STOCK (CONTINUED)
maturity date of April 2004. The interest paid by the holder to the Company in
1999, 1998 and 1997 pursuant to the terms of these notes was approximately $69
in each year.
In accordance with the terms of the respective Certificates of Designation
and Terms of each Series of Preferred Stock ("Certificates"), the Board of
Directors determined the change in redemption value would not reflect a 1994
write-off of goodwill 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 holder 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, the holder of the Preferred
Stock is 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) decreased by $183 in 1999 and increased
by $224 and $662 in 1998 and 1997, 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.
I. 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.
J. 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.
22
<PAGE> 23
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
J. RESTRICTED STOCK AND STOCK OPTION PLANS (CONTINUED)
Stock Incentive Plan
Under the Stock Incentive Plan, awards in the form of incentive or
nonqualified stock options or restricted stock are available to be granted
through June 2003 to officers and other key employees. A maximum of 250,000
shares of Common Stock is available for grant under the Stock Incentive Plan.
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 1,000 shares reserved for issuance
under the Prior Plans at December 31, 1999.
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, 1996.............................. 135,474 $178
Granted..................................................... 8,450 260
Exercised................................................... -- --
Forfeited................................................... (1,500) 189
-------
Outstanding, December 31, 1997.............................. 142,424 183
Granted..................................................... 45,400 333
Exercised................................................... (200) 141
Forfeited................................................... (8,675) 209
-------
Outstanding, December 31, 1998.............................. 178,949 220
GRANTED..................................................... 18,870 318
EXERCISED................................................... (4,484) 168
FORFEITED................................................... (14,449) 221
-------
OUTSTANDING, DECEMBER 31, 1999.............................. 178,886 231
=======
</TABLE>
There were 93,273, 76,750, and 50,133 options exercisable at December 31,
1999, 1998 and 1997, respectively. The weighted average fair value of the
options granted during 1999, 1998 and 1997 was $135, $108 and $101,
respectively.
23
<PAGE> 24
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
J. RESTRICTED STOCK AND STOCK OPTION PLANS (CONTINUED)
The remaining weighted average contractual life and weighted average
exercise price of options outstanding as of December 31, 1999 and the weighted
average exercise price for options exercisable at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF
SHARES REMAINING WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$131.................. 1,000 0.2 years $131 1,000 $131
149-171............... 74,666 4.4 years 150 44,106 150
187-196............... 1,950 6.0 years 194 167 187
235................... 33,150 6.3 years 235 20,000 235
259-282............... 8,450 7.3 years 260 8,000 259
268-393............... 59,670 6.9 years 330 20,000 333
------- ------
Total....... 178,886 93,273
======= ======
</TABLE>
Incentive Stock Options
There were no incentive stock options outstanding under the plan at
December 31, 1999, 1998 or 1997.
Restricted Stock
In 1999, 9,820 shares of Restricted Stock were issued at a price of $1.00
per share. In 1998, 1,375 shares of Restricted Stock were issued at a price of
$1.00 per share. In 1997, 3,000 shares of Restricted Stock were issued at prices
between $1.00 and $93.50 per share. All stock is issued with restrictions as to
transferability with various expiration dates between two and five years. In
1999, 1,750 restricted shares lapsed with no forfeitures. No restrictions lapsed
in 1998 or 1997. In 1998, 2,000 shares were forfeited and held in treasury.
Compensation to employees under the Stock Incentive and Prior Plans of
$3,447 in 1999, $671 in 1998 and $756 in 1997, representing the 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
($586 in 1999, $166 in 1998 and $140 in 1997) over the related required period
of service of the respective employees. In 1998, accumulated amortization of $82
was added back to income resulting from the forfeiture of Restricted Stock.
Pro Forma Information
Pro forma information regarding net income and earnings per common share
has been determined as if the Company had accounted for its employee stock
options under the fair value method. 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
1999, 1998 and 1997, respectively; risk-free interest rates of 5.69%, 5.53% and
6.70%; dividend yields of 1.26%, 1.18% and 1.40%; volatility factors of the
expected
24
<PAGE> 25
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
J. RESTRICTED STOCK AND STOCK OPTION PLANS (CONTINUED)
market price of the Company's Common Stock of .27, .19 and .19; and a
weighted-average expected life for the options of 10.0, 9.3, and 10.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restriction
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. 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>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Pro forma net income...................................... $5,613 $24,450 $29,689
Pro forma earnings per common share:
Basic................................................ $ 4.52 $ 19.67 $ 24.41
Diluted.............................................. $ 4.30 $ 17.95 $ 21.39
</TABLE>
The pro forma information for 1999, 1998 and 1997 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.
25
<PAGE> 26
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
K. COMPUTATION OF EARNINGS PER COMMON SHARE
The following table shows the amounts used in computing earnings per common
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
WEIGHTED-AVERAGE SHARES.................................. 1,237,007 1,220,767 1,180,146
Net Income............................................... $6,401 $25,877 $30,451
Effect of dividend requirements and the change in
redemption value of redeemable preferred stock......... (57) (468) (917)
---------- ---------- ----------
NET EARNINGS USED IN COMPUTATION......................... $6,344 $25,409 $29,534
---------- ---------- ----------
PER SHARE AMOUNT......................................... $5.13 $20.81 $25.03
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Weighted-average shares used in Basic.................... 1,237,007 1,220,767 1,180,146
Net effect of dilutive stock options and stock incentive
plans(1)............................................... 45,244 74,121 124,289
Assumed conversion of 8.5% Convertible Subordinated
Debentures............................................. 51,128 51,040 51,017
---------- ---------- ----------
ADJUSTED WEIGHTED-AVERAGE SHARES......................... 1,333,379 1,345,928 1,355,452
---------- ---------- ----------
Net Income used in Basic................................. $6,344 $25,409 $29,534
8.5% Convertible Subordinated Debentures interest net of
income tax effect...................................... 137 137 139
---------- ---------- ----------
NET EARNINGS USED IN COMPUTATION......................... $6,481 $25,546 $29,673
---------- ---------- ----------
PER SHARE AMOUNT......................................... $4.86 $18.98 $21.89
========== ========== ==========
</TABLE>
---------------
(1) Includes 11,954, 31,481, and 92,391 shares for 1999, 1998 and 1997,
respectively, expected to be issued pursuant to the terms of the Senior
Management Incentive Plan.
26
<PAGE> 27
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
L. 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, 1999 and
1998, the Company had deferred tax assets and deferred tax liabilities as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS
(LIABILITIES)
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred compensation....................................... $ 23,691 $ 24,485
Accrued expenses............................................ 3,928 3,649
Safe harbor lease and depreciation.......................... 2,041 749
Foreign net operating losses................................ 24,857 14,517
Tax on unremitted foreign earnings and other................ (1,956) (1,477)
-------- --------
52,561 41,923
Valuation allowance......................................... (17,915) (10,488)
-------- --------
Net deferred tax assets..................................... $ 34,646 $ 31,435
======== ========
Included in:
Other current assets...................................... $ 9,520 $ 10,914
Other assets.............................................. 25,126 20,521
-------- --------
$ 34,646 $ 31,435
======== ========
</TABLE>
The components of income of consolidated companies before taxes on income
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Domestic................................................. $33,143 $44,600 $40,476
Foreign.................................................. 5,127 14,552 28,815
------- ------- -------
$38,270 $59,152 $69,291
======= ======= =======
</TABLE>
Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal....................... $11,698 $(1,052) $11,382 $ 1,526 $16,763 $(3,989)
Foreign....................... 13,476 (2,048) 16,010 (6,886) 15,171 (1,204)
State and local............... 5,437 (111) 7,257 567 9,151 (2,173)
------- ------- ------- ------- ------- -------
$30,611 $(3,211) $34,649 $(4,793) $41,085 $(7,366)
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE> 28
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
L. INCOME TAXES (CONTINUED)
The effective tax rate varied from the statutory Federal income tax rate as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<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.................................................. 9.0 8.6 6.6
Difference in foreign tax rates inclusive of not-tax
benefited net operating losses............................ 27.3 6.8 4.7
Withholding tax on unremitted foreign earnings.............. 0.1 0.1 0.9
Other -- net................................................ 0.2 -- 1.5
----- ---- ----
71.6% 50.5% 48.7%
===== ==== ====
</TABLE>
During the years 1999, 1998 and 1997, the Company made income tax payments
of $37,026 $31,104, and $39,689, 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.
At December 31, 1999, the Company had cumulative net operating losses
attributable to foreign subsidiaries of approximately $74,000. The duration over
which the tax benefits attributable to these losses may be realized varies on a
country by country basis, but in no instance will any of the benefits expire
before 2003. Since a portion of the benefits may fail to be realized, a
valuation allowance has been reflected.
M. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES
1. The Company's Profit Sharing Plan is available to employees of Grey 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, as well as employee
pre-tax contributions. The Company also maintains a noncontributory
Employee Stock Ownership Plan covering eligible employees of the Company
and qualifying subsidiaries, under which the Company may make
contributions (in stock or cash) to an Employee Stock Ownership Trust
(ESOT) in amounts each year as determined at the discretion of the Board
of Directors. The Company made only cash contributions to the ESOT in
1999, 1998 and 1997. 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, a number of subsidiaries maintain
separate profit sharing and retirement arrangements. Furthermore, the
Company also provides additional retirement and deferred compensation
benefits to certain executive officers and employees. The Company
maintains a Senior Management Incentive Plan ("Plan") in which deferred
compensation is granted to senior executive or management employees
deemed important to the continued success of the Company. The Plan
operates as an ongoing series of individual five year plans. The latest
plan in the series commenced in 1998. Awards will vest to individuals
achieving five years of participation in the current plan. Those
28
<PAGE> 29
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
M. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES (CONTINUED)
participants who commence participation after 1998 will vest in their
awards five years from the year of their initial participation. The
amount recorded as an expense related to the Plan amounted to $4,414,
$7,600 and $8,377 in 1999, 1998 and 1997, respectively. Approximately
$1,876, $2,295 and $1,113 of plan expense incurred in 1999, 1998 and
1997, respectively, will be payable in Common Stock in accordance with
the terms of the Plan. The awards payable in Common Stock were
converted into an equivalent number of shares of Common Stock, based on
the average of the market values on the last 15 business days of the
calendar year. The net increase to Paid-in Additional Capital for the
1999 Plan is $1,225 and relates to the future obligation to issue
Common Stock. The 1998 Plan activity included increases to Paid-in
Additional Capital of $1,899 related to the future obligation to issue
Common Stock and $3,648 related to the tax benefit resulting from the
issuance of shares in settlement of the previous plan's awards offset
by a decrease of $11,158 related to the repurchase of shares to satisfy
statutory minimum tax withholding requirements. At December 31, 1999,
approximately 17,000 shares are payable in Common Stock pursuant to the
Plan of which approximately 1,300 shares were vested.
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 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, following the expiration of his
employment agreement, or the termination of his employment by reason of
death or disability. In 1998, the Company made payments to the rabbi
trust which are to be used to fund a pension obligation to be payable to
the Chairman and Chief Executive Officer over the eleven year period
following the normal expiration of his current employment agreement
("pension period"). The initial pension deposit was for $1,040 with
annual pension deposits of $360 ratably payable through 2002, inclusive.
The amount of the pension to be paid to the Chairman and Chief Executive
Officer will depend on and be limited to, the funds in the rabbi trust
during the pension period. In addition, upon termination of his
employment prior to the commencement of the pension period or upon his
death, any undistributed funds in the rabbi trust would be paid to his
estate, as the case may be, in satisfaction of any future obligations
with respect to this pension.
29
<PAGE> 30
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
M. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES (CONTINUED)
At December 31, 1999 and 1998, the value of the trust was $21,260 and
$15,706, respectively, and is included in Other Assets and the Company's
related deferred compensation obligation for the same amount is included
in Other Liabilities.
Amounts charged to expense related to the foregoing plans and benefits
aggregated $30,961 in 1999, $32,266 in 1998 and $33,230 in 1997.
2. Pursuant to an employment agreement, dated January 1, 1994, an executive
officer of the Company borrowed $600 from the Company which was forgiven
in $200 annual installments, the last of which occurred in 1999. The
Company included $200 as compensation expense in each year that an
amount was forgiven.
In addition, a second executive officer has outstanding loans with the
Company totaling $700 as of December 31, 1999 and $825 as of December
31,1998, which are reflected in Other Assets. The first loan for $125
was made in 1995 and was forgiven in 1999. The $700 additional loan to
this executive officer will be forgiven by the Company in installments
of $200 and $500 in 2003 and 2004, respectively, assuming his continued
employment through those dates.
In connection with a 1992 exercise of the stock options, the Company
received a cash payment of $67 and a note from the Chairman and Chief
Executive Officer of the Company in the amount of $3,170, due in
December 2001, bearing interest at the 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 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) equal to the tax
benefit received by the Company upon exercise and the full amount of the
note for $3,170 are reflected in a separate component of common
stockholders' equity. 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 in 1999, 1998 and 1997.
3. Rental expense amounted to approximately $51,943 in 1999, $44,364 in
1998 and $41,239 in 1997. Approximate minimum rental commitments,
excluding escalations, under noncancellable operating leases are as
follows:
<TABLE>
<S> <C>
2000........................................................ $ 51,192
2001........................................................ 49,249
2002........................................................ 44,659
2003........................................................ 39,263
2004........................................................ 36,884
Beyond 2004................................................. 126,568
--------
$347,815
========
</TABLE>
30
<PAGE> 31
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
M. RETIREMENT PLANS, DEFERRED COMPENSATION, EXECUTIVE OFFICER LOANS, LEASES AND
CONTINGENCIES (CONTINUED)
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.
31
<PAGE> 32
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except share and per share data)
N. INDUSTRY SEGMENT AND RELATED INFORMATION
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 billings. Commissions and fees, operating profit, interest
income/expense, and related identifiable assets at December 31, 1999, 1998 and
1997, are summarized below according to geographic region:
<TABLE>
<CAPTION>
UNITED STATES EUROPE OTHER
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions and fees......... $464,858 $419,469 $382,288 $478,219 $415,685 $380,675 $124,135 $100,027 $ 95,789
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss)...... 26,668 38,501 32,570 22,322 27,509 30,534 (16,117) (13,353) 1,816
Interest income
(expense) -- net............ 3,699 4,677 6,366 121 853 (2,501) (1,304) (923) (1,135)
Other income (expense)....... 2,776 1,422 1,540 66 785 194 39 (319) (93)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) of consolidated
companies before taxes on
income...................... $ 33,143 $ 44,600 $ 40,476 $ 22,509 $ 29,147 $ 28,227 $(17,382) $(14,595) $ 588
======== ======== ======== ======== ======== ======== ======== ======== ========
Equity in earnings of
nonconsolidated affiliated
companies...................
Identifiable assets.......... $796,657 $608,880 $581,557 $752,662 $699,637 $457,099 $241,974 $164,431 $142,945
Investments in and advances
to nonconsolidated
affiliated companies........
Total assets..........
<CAPTION>
CONSOLIDATED
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Commissions and fees......... $1,067,212 $ 935,181 $ 858,752
---------- ---------- ----------
Operating profit (loss)...... 32,873 52,657 64,920
Interest income
(expense) -- net............ 2,516 4,607 2,730
Other income (expense)....... 2,881 1,888 1,641
---------- ---------- ----------
Income (loss) of consolidated
companies before taxes on
income...................... $ 38,270 $ 59,152 $ 69,291
========== ========== ==========
Equity in earnings of
nonconsolidated affiliated
companies................... $ 1,196 $ 722 $ 1,622
========== ========== ==========
Identifiable assets.......... $1,791,293 $1,472,948 $1,181,601
Investments in and advances
to nonconsolidated
affiliated companies........ 17,961 16,705 18,386
---------- ---------- ----------
Total assets.......... $1,809,254 $1,489,653 $1,199,987
========== ========== ==========
</TABLE>
Commissions and fees from one client amounted to 11.2%, 13.4% and 12.8% of
the consolidated total in 1999, 1998 and 1997, respectively.
32
<PAGE> 33
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, 1999
and 1998, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999
and 1998, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
February 15, 2000
33
