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 March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-7898
GREY GLOBAL GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 13-0802840
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS 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 April 30, 2002, the total number of shares outstanding of Registrant's
Common Stock, par value $0.01 per share ("Common Stock"), was 1,048,488 and of
Registrant's Limited Duration Class B Common Stock, par value $0.01 per share
("Class B Common Stock"), was 217,332.
GREY GLOBAL GROUP 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 13
Other Information 17
Signatures 18
2
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
(in thousands, except share and per share data) (UNAUDITED) (A)
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 196,314 $ 276,602
Marketable securities 1,800 1,260
Accounts receivable 981,240 950,925
Expenditures billable to clients 43,236 77,293
Other current assets 118,390 99,949
---------- ----------
Total current assets 1,340,980 1,406,029
Investments in and advances to nonconsolidated affiliated companies 14,258 14,679
Fixed assets-at cost, less accumulated depreciation of $175,928 in
2002 and $184,720 in 2001 149,768 155,249
Marketable securities 9,096 9,861
Intangibles-net of accumulated amortization of $76,255 in 2002 and 2001 216,209 211,812
Other assets - including loans to executive officers of $5,247 in 2002
and 2001 104,440 102,176
---------- ----------
Total assets $1,834,751 $1,899,806
========== ==========
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
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
MARCH 31, DECEMBER 31,
2002 2001
(in thousands, except share and per share data) (UNAUDITED) (A)
----------- -----------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,128,100 $ 1,165,958
Notes payable to banks 67,919 80,789
Accrued expenses and other 230,085 226,412
Income taxes payable 22,539 24,388
----------- -----------
Total current liabilities 1,448,643 1,497,547
Other liabilities, including deferred compensation of $53,088 in 2002
and $52,856 in 2001 78,745 102,141
Long-term debt 128,025 128,025
Minority interest 22,856 22,153
Redeemable Preferred Stock - at redemption value; par value $0.01 per
share; authorized 500,000 shares; issued and outstanding 30,000
shares in 2002 and 2001 8,434 8,180
Common stockholders' equity:
Common Stock - par value $0.01 per share; authorized 50,000,000 shares;
issued 1,247,881 shares in 2002 and 1,244,603 shares in 2001 12 12
Limited Duration Class B Common Stock - par value $0.01 per share;
authorized 10,000,000 shares; issued 247,795 shares in 2002 and
248,275 shares in 2001 2 2
Paid-in additional capital 50,259 48,784
Retained earnings 180,237 177,503
Accumulated other comprehensive loss:
Cumulative translation adjustment (38,324) (40,216)
Unrealized loss on marketable securities (1,071) (1,112)
----------- -----------
Total accumulated other comprehensive loss (39,395) (41,328)
----------- -----------
Loans to officer used to purchase Common Stock and
Limited Duration Class B Common Stock (4,726) (4,726)
----------- -----------
186,389 180,247
Less - cost of 202,703 and 202,469 shares of Common Stock and 26,937 and
26,937 shares of Limited Duration Class B Common Stock held in treasury in
2002 and 2001, respectively 38,341 38,487
----------- -----------
Total common stockholders' equity 148,048 141,760
----------- -----------
Total liabilities and common stockholders' equity $ 1,834,751 $ 1,899,806
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(in thousands, except share and per share data) 2002 2001
----------- -----------
Commissions and fees $ 285,581 $ 304,851
Expenses:
Salaries and employee related expenses 192,364 205,119
Office and general expenses 80,269 94,033
----------- -----------
272,633 299,152
----------- -----------
12,948 5,699
Other income - net (2,555) (769)
----------- -----------
Income of consolidated companies before taxes on income
10,393 4,930
Provision for taxes on income 4,681 2,474
----------- -----------
Income of consolidated companies 5,712 2,456
Minority interest applicable to consolidated companies (1,847) (1,914)
Equity in earnings (loss) of nonconsolidated affiliated companies 449 (297)
----------- -----------
Net income $ 4,314 $ 245
=========== ===========
Weighted average number
of common shares outstanding
Basic 1,247,801 1,235,139
Diluted 1,381,557 1,369,927
Earnings per common share
Basic $ 3.21 $ 0.27
Diluted $ 2.92 $ 0.27
Dividends per common share $ 1.00 $ 1.00
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(in thousands, except share and per share data) 2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ 4,314 $ 245
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of fixed assets 9,809 10,420
Amortization of intangibles -- 3,328
Deferred compensation 494 500
Equity in earnings of nonconsolidated affiliated companies, net of
dividends received of $32 in 2002 and $23 in 2001 (417) 320
(Gain) loss from the sale of marketable securities (241) 19
Minority interest applicable to consolidated companies 1,847 1,914
Restricted stock expense 636 461
Deferred income taxes (571) (1,117)
Changes in operating assets and liabilities (66,311) (118,778)
--------- ---------
Net cash used in operating activities (50,440) (102,688)
INVESTING ACTIVITIES
Purchases of fixed assets (6,338) (16,867)
Trust fund deposits (89) (1,416)
Decrease in investments in and advances to
nonconsolidated affiliated companies 838 397
Proceeds from the sale of marketable securities 761 3,677
Purchases of investment securities (112) (746)
Increase in intangibles, primarily goodwill (4,397) (2,213)
--------- ---------
Net cash used in investing activities (9,337) (17,168)
6
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(in thousands, except share and per share data) 2002 2001
--------- ---------
FINANCING ACTIVITIES
(Repayments of) net proceeds from short-term borrowings (11,468) 13,060
Common shares acquired for treasury -- (122)
Cash dividends paid on common shares (1,265) (1,252)
Cash dividends paid on redeemable Preferred Stock (60) (60)
Payments for repurchase of restricted stock -- (79)
Proceeds from exercise of stock options 984 209
--------- ---------
Net cash (used in) provided by financing activities (11,809) 11,756
Effect of exchange rate changes on cash (8,702) 1,244
--------- ---------
Decrease in cash and cash equivalents (80,288) (106,856)
Cash and cash equivalents at beginning of period 276,602 309,750
--------- ---------
Cash and cash equivalents at end of period $ 196,314 $ 202,894
========= =========
See accompanying notes to condensed consolidated financial statements.
7
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
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
accounting principles generally accepted in the United States. Reference
should be made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission.
2. The financial statements as of March 31, 2002 and for the three months
ended March 31, 2002 and 2001 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 months ended March 31, 2002 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 state and local
income taxes and an overall effective foreign tax rate in excess of the
Federal statutory rate.
5. As of March 31, 2002 and December 31, 2001, 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 $0.25 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.
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
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
8
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 effecting income used in computing earnings per common share
("EPS") and the weighted average number of shares of dilutive potential
common stock:
FOR THE THREE MONTHS ENDED
MARCH 31,
2002 2001
----------- -----------
BASIC EARNINGS PER
COMMON SHARE
WEIGHTED AVERAGE SHARES 1,247,801 1,235,139
----------- -----------
Net income $ 4,314 $ 245
Effect of dividend requirements and the change in redemption value of
redeemable preferred stock (315) 88
----------- -----------
NET EARNINGS USED IN COMPUTATION $ 3,999 $ 333
----------- -----------
PER SHARE AMOUNT $ 3.21 $ 0.27
=========== ===========
DILUTED EARNINGS PER
COMMON SHARE
Weighted average shares used in the Basic EPS calculation 1,247,801 1,235,139
Net effect of dilutive stock options and stock incentive plans (1) 82,628 83,660
Assumed conversion of 8.5% convertible subordinated debentures 51,128 51,128
----------- -----------
ADJUSTED WEIGHTED AVERAGE SHARES 1,381,557 1,369,927
----------- -----------
Net earnings used in the Basic EPS calculation $ 3,999 $ 333
8.5% convertible subordinated debentures interest net of income tax effect 36 35
----------- -----------
NET EARNINGS USED IN COMPUTATION $ 4,035 $ 368
----------- -----------
PER SHARE AMOUNT $ 2.92 $ 0.27
=========== ===========
(1) Includes 20,211 shares expected to be issued pursuant to the Senior
Management Incentive Plan.
7. During the first quarter of 2002 and 2001, total comprehensive income
amounted to $6,247 and total comprehensive loss amounted to $944,
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 change in value
of the United States dollar versus other currencies, the change in fair
market value of marketable securities, and the recognition in 2001 of
permanent diminution of the market value of certain investments.
9
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
8. 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. Prior period information has been restated to better align
with the management of the regions. Commissions and fees are attributed to
the geographic region that generates the billings. Commissions and fees,
operating profit, and income (loss) of consolidated companies before taxes
on income for the three months ended March 31, 2002 and 2001, and related
identifiable assets at March 31, 2002 and December 31, 2001 are summarized
below according to geographic region:
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
NORTH AMERICA EUROPE
2002 2001 2002 2001
----------- ----------- ----------- -----------
Commissions and fees $ 129,106 $ 137,085 $ 127,078 $ 139,954
----------- ----------- ----------- -----------
Operating profit (loss) 7,725 (376) 6,463 9,392
----------- ----------- ----------- -----------
Income (loss) of consolidated
companies before taxes on income 6,765 (309) 5,246 8,239
----------- ----------- ----------- -----------
Identifiable assets $ 782,807 $ 844,817 $ 859,240 $ 833,285
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
OTHER CONSOLIDATED
2002 2001 2002 2001
----------- ----------- ----------- -----------
Commissions and fees $ 29,397 $ 27,812 $ 285,581 $ 304,851
----------- ----------- ----------- -----------
Operating profit (loss) (1,240) (3,317) 12,948 5,699
----------- ----------- ----------- -----------
Income (loss) of consolidated
companies before taxes on income (1,618) (3,000) 10,393 4,930
----------- ----------- ----------- -----------
Identifiable assets $ 178,446 $ 207,025 1,820,493 1,885,127
----------- -----------
Investments in and advances to
non-consolidated affiliated
companies 14,258 14,679
----------- -----------
Total assets $ 1,834,751 $ 1,899,806
=========== ===========
10
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
9. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("FAS 142"), Goodwill and Other Intangible
Assets. FAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized, but will be subject to annual impairment tests in accordance
with the statements. Other intangible assets, with definite lives, will
continue to be amortized over their useful lives. The standard requires a
transitional impairment test of these assets within six months of the date
of adoption and an annual impairment test thereafter. The Company has
completed the transitional and annual impairment tests of goodwill and
intangible assets with indefinite lives as of March 31, 2002, and no
impairment was noted.
The 2001 results on a historical basis do not reflect the provisions of FAS
142. Had the Company adopted FAS 142 on January 1, 2001, the historical net
income and basic and diluted net income per common share would have been
changed to the adjusted amounts indicated below:
Three Months Ended March 31, 2001
-------------------------------------------------
Basic earnings per Diluted earnings per
Net income common share common share
------- ----- -----
Reported net income $ 245 $0.27 $0.27
Goodwill amortization 3,328 2.84 2.58
Income tax adjustment (1,242) (1.23) (1.13)
------- ----- -----
Adjusted net income $ 2,331 $1.88 $1.72
======= ===== =====
The income tax adjustment reflects the impact of the annual estimated
income tax rate without goodwill amortization expense. There will be no
tax adjustment for the twelve months ended December 31, 2001.
10. From March 2001, the Company received a number of grand jury subpoenas
primarily seeking documents of the Graphic Services Department
("Department") of the Company's New York Division of Grey Worldwide,
relating to various vendors doing business with the Department. The
subpoenas were issued at the request of the Department of Justice Antitrust
Division.
In March 2002, the government filed a federal criminal complaint (the
"Complaint") against Mr. Mitchell Mosallem, who served as Director of the
Department until December 31, 2001. The Complaint alleges that between 1991
and July 2000, Mosallem and other individuals, including employees of the
Company, conspired with unnamed vendors doing business with the Department
to charge clients of the Company in excess of amounts appropriately
chargeable by the vendors for their services by approving vendor invoices
that included charges for cost overruns on unrelated work and the cost of
certain entertainment or other goods or services provided to Mosallem and
other Company employees. The Complaint alleges that in the period February
1998 to July 2000, such unwarranted charges represented some portion of
vendor invoices that total approximately $500,000. The government also has
11
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share data)
indicated that it is examining whether there is Company responsibility in
this matter. The Company has been cooperating with the government's
investigation. In February 2002, the Company hired from outside the Company
a new Director of the Department, who is actively engaged in reviewing all
policies and procedures of the Department and its relationships with all
vendors. In addition, Deloitte & Touche has been retained on behalf of the
Company to conduct a comprehensive review of the Department, to recommend
improved policies and procedures, and to assist in the determination of
remedial action as appropriate.
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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
(in thousands, except share and per share data)
RESULTS OF OPERATIONS
Commissions and fees ("gross income") decreased 6.3% during the first quarter of
2002 when compared to the same period in 2001. Absent exchange rate
fluctuations, gross income decreased 5.3 % in the three months ended March 31,
2002 when compared to the same period in 2001. In the first quarters of 2002 and
2001, respectively, 45.2% and 45.0% of consolidated gross income was
attributable to North American operations and 54.8% and 55.0% to international
operations. In the first quarter of 2002, gross income from North American
operations decreased 5.8% versus the respective prior period, while gross income
from international operations decreased 6.7% (4.9% absent exchange rate
fluctuations) when compared to the same period in 2001. The decrease in gross
income primarily resulted from the closure and disposal of certain business
units, a decrease in client spending in certain markets and the negative impact
of exchange rate movements.
Salaries and employee related expenses decreased 6.2% in the first quarter of
2002 when compared to the respective prior period. Office and general expenses
decreased 14.6% for the three months ended March 31, 2002 versus the comparable
prior period. The decrease in operating expenses is the result of staff cuts and
cost containment effected in the prior year. Office and general expenses were
lower, in part, by the absence of goodwill amortization expense of $3,328 in the
first quarter of 2001 as well as the effect of the disposition of real estate in
the fourth quarter of 2001.
Inflation did not have a material effect on gross income or expenses during 2002
or 2001.
Other net income decreased by $1,786, primarily, as the result of a reduced
interest income due to lower interest rates earned on invested funds.
Minority interest applicable to consolidated companies decreased by $67 in the
first quarter of 2002 as compared to the respective prior period. Equity in
earnings of nonconsolidated affiliated companies increased by $746 in the first
quarter of 2002 as compared to the respective prior period. The fluctuations are
primarily due to changes in the level of profits of majority-owned companies and
of nonconsolidated affiliated companies.
The effective tax rate is 45.0% for the first quarter of 2002 versus 50.2% in
the same period in 2001. The decrease is due, in large part, to lower effective
tax rates resulting primarily from the absence of generally non-deductible
goodwill amortization expense.
Net income was $4,314 in the first quarter of 2002 as compared to net income of
$245 in the respective prior period. For the first quarter of 2002, basic and
diluted earnings per common share were $3.21 and $2.92, respectively.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
(in thousands, except share and per share data)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $80,288 from $276,602 at December 31,
2001 to $196,314 at March 31, 2002. The working capital deficit increased to
$107,663 at March 31, 2002, versus a deficit of $91,518 at December 31, 2001.
The decrease in cash and cash equivalents is, primarily, attributable to the
timing of collections of accounts receivable and billing of expenses to clients
versus payments to trade vendors. The decrease in working capital is primarily
due to the expected settlement of an obligation in the first quarter of 2003
related to an acquisition made in a previous year.
Domestically, the Company has committed bank lines of credit totaling $90,000 at
both December 31, 2001 and March 31, 2002. These lines of credit were partially
utilized during the three months ended March 31, 2002 and 2001 to secure
obligations of selected foreign subsidiaries. There was $18,500 and $18,300
outstanding under these credit lines as of March 31, 2002 and December 31, 2001,
respectively. Additionally, these lines of credit may be used to secure
borrowings in other foreign subsidiaries. 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 $49,400 and
$62,400 outstanding at March 31, 2002 and December 31, 2001, respectively. The
changes in the level of short-term borrowing and bank overdrafts are primarily
due to the timing differences on the payments to media and other vendors.
A significant part of the Company's business practice is the purchase of media
time and space in many markets from various media suppliers. Consistent with
industry practices, in a number of countries, the Company from time to time,
directly or through a local media buying operation, is required to guarantee
payment to the media suppliers in the form of performance bonds, letters of
credit or other similar financial instruments which relate to liabilities shown
in the Accounts Payable section of the Condensed Consolidated Balance Sheet. In
addition, from time to time, the Company may guarantee certain financial and
other obligations of its consolidated subsidiaries. These instruments may at
times absorb some of the Company's credit capacity.
Historically, funds from operations, bank and other borrowings have been
sufficient to meet the Company's dividend, capital expenditure, acquisition and
working capital needs. The Company expects that such sources will be sufficient
to meet its near-term cash requirements in the future and will enable the
Company to meet its longer-term obligations. The Company has two loans
outstanding from the Prudential Insurance Company of America. The first loan of
$75.0 million from December 1997 bears interest at the rate of 6.94% and is
repayable in three equal annual installments, commencing in December 2003. The
second loan of $50.0 million was taken in November 2000, bears interest at the
rate of 8.17% and is repayable in two equal annual installments, commencing in
November 2006.
The loans and the availability of the Company's committed lines of credit
contain certain covenants related to the Company's capital, debt load and cash
flow. As of March 31, 2002 and December 31, 2001, the Company was in compliance
with these covenants. The total interest expense related to the Company's
borrowings for the three months ended March 31, 2002 and 2001 was $3,879 and
$4,448, respectively.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
(in thousands, except share and per share data)
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and results from
operations are based on the condensed consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these 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. The Company's critical accounting policies include:
Revenue Recognition
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 the service is
performed and billed. Media income and income resulting from expenditures
billable to clients is clearly defined and determinable. Labor based income is
recognized in the month of service as service is provided throughout the life of
each contract. At the end of the reporting period, labor based contracts are
reviewed to determine what was earned and what is collectible on such earned
amounts for the purposes of recognizing revenue amounts appropriate for the
period.
Impairment of Intangibles
The Company assesses the fair value and recoverability of intangible
assets, primarily goodwill, in accordance with Statement of Financial Accounting
Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. When
assessing impairment, the carrying value of goodwill is compared to the fair
value of the business units holding the goodwill at a regional level; North
America, Europe, Asia and Latin America. The excess of carrying value over fair
value is deemed to be impaired and written-off. The Company has completed the
transitional and annual impairment tests of goodwill and intangible assets with
indefinite lives as of March 31, 2002, and no impairment was noted.
Deferred Taxes
The Company recognizes deferred taxes based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. The net deferred tax assets are regularly reviewed for
recoverability and a valuation allowance is established, based upon historical
losses, projected future taxable income and the expected timing of the reversals
of existing temporary differences. At March 31, 2002 and December 31, 2001 the
Company had $46,200 and $45,600, respectively, of deferred tax assets net of a
valuation reserve of $27,300, in both 2002 and 2001, which it believes to be
appropriate.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
(in thousands, except share and per share data)
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,
terrorist acts, 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 and the ability to project risk factors which may
vary.
LEGAL PROCEEDINGS
From March 2001, the Company received a number of grand jury subpoenas primarily
seeking documents of the Graphic Services Department ("Department") of the
Company's New York Division of Grey Worldwide, relating to various vendors doing
business with the Department. The subpoenas were issued at the request of the
Department of Justice Antitrust Division.
In March 2002, the government filed a federal criminal complaint (the
"Complaint") against Mr. Mitchell Mosallem, who served as Director of the
Department until December 31, 2001. The Complaint alleges that between 1991 and
July 2000, Mosallem and other individuals, including employees of the Company,
conspired with unnamed vendors doing business with the Department to charge
clients of the Company in excess of amounts appropriately chargeable by the
vendors for their services by approving vendor invoices that included charges
for cost overruns on unrelated work and the cost of certain entertainment or
other goods or services provided to Mosallem and other Company employees. The
Complaint alleges that in the period February 1998 to July 2000, such
unwarranted charges represented some portion of vendor invoices that total
approximately $500,000. The government also has indicated that it is examining
whether there is Company responsibility in this matter. The Company has been
cooperating with the government's investigation. In February 2002, the Company
hired from outside the Company a new Director of the Department, who is actively
engaged in reviewing all policies and procedures of the Department and its
relationships with all vendors. In addition, Deloitte & Touche has been retained
on behalf of the Company to conduct a comprehensive review of the Department, to
recommend improved policies and procedures, and to assist in the determination
of remedial action as appropriate.
In the Company's judgment, it is not involved in any other material pending
proceedings.
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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 filed the following report on
Form 8-K during the quarter ended March 31, 2002:
1) Report, dated March 13, 2002. Item 5 Other Events and
Exhibit 99.1 Press Release.
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GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 GLOBAL GROUP INC.
(REGISTRANT)
Dated: May 15, 2002 By: /s/ Steven G. Felsher
Steven G. Felsher,
Vice Chairman
General Manager
(Duly Authorized Officer)
Dated: May 15, 2002 By: /s/ Lester M. Feintuck
Lester M. Feintuck,
Senior Vice President
Chief Financial Officer U.S.
Controller
(Chief Accounting Officer)
18