1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-7898
GREY ADVERTISING INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-0802840
- ------------------------------ -------------------------------------
(State or other 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 October 31, 1996, the total number of shares outstanding of Registrant's
Common Stock, par value $1 per share ("Common Stock"), was 886,800 and of
Registrant's Limited Duration Class B Common Stock, par value $1 per share
("Class B Common Stock"), was 294,274.
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GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX
PAGE NO.
--------
Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 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 10
Other Information 12
Signatures 13
Index to Exhibits 14
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3
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(UNAUDITED) (A)
-----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 69,631,000 $134,313,000
Marketable securities 28,349,000 20,419,000
Accounts receivable 537,518,000 495,349,000
Expenditures billable to clients 44,939,000 46,449,000
Other current assets 58,277,000 49,614,000
--------------------------------------
Total current assets 738,714,000 746,144,000
Investments in and advances to nonconsolidated
affiliated companies 16,654,000 20,693,000
Fixed assets - at cost, less accumulated depreciation
of $99,164,000 and $93,789,000 78,394,000 74,706,000
Marketable securities 57,500,000 48,252,000
Intangible assets and other assets-including loans to
officers of $5,522,000 in 1996 and 1995 68,637,000 65,342,000
--------------------------------------
Total assets $959,899,000 $955,137,000
======================================
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS(CONTINUED)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(UNAUDITED) (A)
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $535,590,000 $549,533,000
Notes payable to banks 86,008,000 71,336,000
Accrued expenses and other 94,443,000 97,126,000
Income taxes payable 14,207,000 18,567,000
-------------------------------------
Total current liabilities 730,248,000 736,562,000
Other liabilities including deferred compensation of
$28,913,000 and $22,021,000 39,272,000 39,620,000
Long-term debt 33,025,000 33,025,000
Minority interest 10,167,000 9,281,000
Redeemable preferred stock-at redemption value; par
value $1 per share; authorized 500,000 shares; issued
and outstanding 32,000 shares in 1996 and 1995 9,481,000 8,986,000
Common stockholders' equity:
Common Stock-par value $1 per share; authorized
10,000,000 shares; issued 1,108,909 in 1996 and
1,096,096 in 1995 1,109,000 1,096,000
Limited Duration Class B Common Stock-par value
$1 per share; authorized 2,000,000 shares; issued
322,875 shares in 1996 and 335,688 shares in 1995 323,000 336,000
Paid-in additional capital 37,862,000 37,898,000
Retained earnings 136,440,000 122,345,000
Cumulative translation adjustment 4,146,000 4,664,000
Unrealized (loss) gain on marketable securities (1,258,000) 550,000
Loans to officer used to purchase Common Stock
and Limited Duration Class B Common Stock (4,726,000) (4,726,000)
-------------------------------------
173,896,000 162,163,000
Less-cost of 218,926 and 212,848 shares of Common
Stock and 26,751 and 26,751 shares of Limited
Duration Class B Common Stock held in treasury at
Sept. 30, 1996 and December 31, 1995, respectively 36,190,000 34,500,000
-------------------------------------
Total common stockholders' equity 137,706,000 127,663,000
-------------------------------------
Total liabilities and stockholders' equity $959,899,000 $955,137,000
=====================================
See accompanying notes to condensed consolidated financial statements.
(A) The consolidated balance sheet has been derived from the audited financial
statements at that date.
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------------
1996 1995 1996 1995
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Commissions and fees $182,487,000 $174,277,000 $542,497,000 $495,917,000
Expenses:
Salaries and employee related
expenses 118,859,000 110,196,000 347,501,000 314,477,000
Office and general expenses 53,904,000 54,444,000 160,603,000 149,539,000
-------------------------------------------------------------------------
172,763,000 164,640,000 508,104,000 464,016,000
-------------------------------------------------------------------------
9,724,000 9,637,000 34,393,000 31,901,000
Other income 529,000 199,000 5,658,000 135,000
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Income of consolidated companies
before taxes on income 10,253,000 9,836,000 40,051,000 32,036,000
Provision for taxes on income (5,050,000) (4,842,000) (20,661,000) (16,228,000)
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Net income of consolidated
companies 5,203,000 4,994,000 19,390,000 15,808,000
Minority interest applicable to
consolidated companies (730,000) (1,125,000) (2,757,000) (3,026,000)
Equity in earnings of nonconsolidated
affiliated companies 574,000 536,000 1,484,000 1,322,000
-------------------------------------------------------------------------
Net income $ 5,047,000 $ 4,405,000 $ 18,117,000 $ 14,104,000
=========================================================================
Weighted average number
of common shares outstanding
Primary 1,295,764 1,279,936 1,295,757 1,306,992
Fully diluted 1,351,004 1,332,202 1,351,465 1,366,769
Net income per common share
Primary $3.71 $3.21 $13.46 $10.07
Fully diluted $3.58 $3.11 $12.98 $9.71
Dividends per common share $0.9375 $0.875 $2.8125 $2.625
=========================================================================
See accompanying notes to condensed consolidated financial statements
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------------------------------------
OPERATING ACTIVITIES
Net income $ 18,117,000 $ 14,104,000
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization of fixed assets 13,714,000 12,993,000
Amortization of intangibles 3,948,000 3,074,000
Deferred compensation 10,692,000 9,233,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $235,000
and $187,000 (1,249,000) (1,135,000)
Gains from the sale of a nonconsolidated affiliated
company, a non-marketable investment security
and marketable securities (4,754,000)
Minority interest applicable to consolidated
companies 2,757,000 3,026,000
Deferred income taxes (4,500,000) (3,550,000)
Amortization of restricted stock 75,000 167,000
Changes in operating assets and liabilities:
Increase in accounts receivable (50,175,000) (24,523,000)
Increase in expenditures billable to clients (785,000) (8,732,000)
(Increase) decrease in other current assets (10,583,000) 4,947,000
Increase in other assets (1,743,000) (575,000)
Decrease in accounts payable (4,834,000) (21,572,000)
(Decrease) increase in accrued expenses and other (2,707,000) 11,314,000
Decrease in income taxes payable (3,597,000) (7,206,000)
Decrease in other liabilities (2,653,000) (3,925,000)
------------------------------------------
Net cash used in operating activities (38,277,000) (12,360,000)
INVESTING ACTIVITIES
Purchases of fixed assets (19,133,000) (19,170,000)
Trust fund deposits (1,868,000) (1,278,000)
Proceeds from the sale of marketable securities 91,634,000 20,293,000
Purchases of marketable securities (110,620,000) (32,717,000)
Proceeds from the sale of a nonconsolidated affiliated
company and a non-marketable investments security 8,947,000
Increase in intangibles (primarily goodwill) (7,002,000) (4,675,000)
Decrease (increase) in investments and advances to
nonconsolidated affiliated companies 539,000 (829,000)
------------------------------------------
Net cash used in investing activities (37,503,000) (38,376,000)
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
----------------------------------------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 18,234,000 18,408,000
Proceeds from loan from life insurance policies 11,779,000
Common shares acquired for treasury (1,910,000) (12,619,000)
Cash dividends paid on Common Shares (3,346,000) (3,190,000)
Cash dividends paid on Redeemable Preferred Stock (180,000) (168,000)
Issuance of restricted stock 25,000
Proceeds from exercise of stock options 300,000 732,000
----------------------------------------
Net cash provided by financing activities 13,123,000 14,942,000
Effect of exchange rate changes on cash (2,025,000) 3,748,000
----------------------------------------
Decrease in cash and cash equivalents (64,682,000) (32,046,000)
Cash and cash equivalents at beginning of period 134,313,000 170,077,000
----------------------------------------
Cash and cash equivalents at end of period $ 69,631,000 $138,031,000
========================================
See accompanying notes to condensed consolidated financial statements.
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GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. As permitted by the Securities and Exchange Commission, the accompanying
unaudited Consolidated Financial Statements and Notes thereto have been
condensed and therefore do not contain all disclosures required by
generally accepted accounting principles. Reference should be made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
filed with the Securities and Exchange Commission. Certain amounts for the
prior year have been reclassified to conform to the current period
classification.
2. The financial statements as of September 30, 1996 and for the three and
nine month periods ended September 30, 1996 and 1995 are unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair representation have been
included.
3. The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
4. The computations of net income per common share for the three and nine
month periods ended September 30, 1996 and 1995 are based on the weighted
average number of common shares outstanding, adjusted for the effect, if
any, of the assumed exercise of dilutive stock options and of shares
payable in Common Stock pursuant to the Company's Senior Management
Incentive Plan and, for fully diluted net income per common share, the
assumed conversion of the 8-1/2% Convertible Subordinated Debentures issued
in December 1983. Also, for the purpose of computing net income per common
share for the three and nine month periods ended September 30, 1996 and
1995, the Company's net income was reduced by dividends on the Preferred
Stock and also adjusted by the change in the redemption value of Preferred
Stock. Primary net income per common share is computed as if the stock
options were exercised at the beginning of the period and as if the funds
obtained thereby were used to purchase Common Stock at the average market
price during the period. In computing fully diluted net income per common
share, the market price at the close of the period or the average market
price, whichever was higher, was used to determine the number of shares
which would be assumed to be repurchased. The market price for a share of
Class B Common Stock, which is not publicly traded, is deemed to be equal
to the market price of a share of Common Stock, into which a share of Class
B Common Stock may be converted at the option of the holder, as of the date
such valuation is made.
5. The provision for taxes on income is greater than the Federal statutory
rate principally due to state and local income taxes and effective foreign
tax rates that are in excess of the Federal statutory rate.
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6. As of September 30, 1996 and December 31, 1995, the Company had outstanding
20,000 shares of Series I Preferred Stock, 5,000 shares each of its Series
II and Series III Preferred Stock, and 2,000 shares of Series 1 Preferred
Stock. 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 pertaining upon redemption
(subject to certain adjustments), less a fixed discount established upon
the issuance of the Preferred Stock. The holders (including one senior
executive) of each class of Preferred Stock are 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. The
terms of the Series I, Series II and Series III Preferred Stock also give
the holder, his estate or legal representative, as the case may be, the
option to require the Company to redeem his Preferred Stock for a period of
12 months following his (i) death, (ii) permanent disability or permanent
mental disability, (iii) termination of full-time employment for good
reason or (iv) termination of full-time employment by the Company without
cause. The holder of the Series 1 Preferred Stock has the option to have
his shares redeemed upon termination of his employment prior to age 65; the
Company is obligated to redeem such shares following the attainment of age
65 by such holder thereof following termination of employment. In
connection with the ownership of Series I, Series II and Series III
Preferred Stock, the senior executive issued to the Company full recourse
promissory notes (which are included in Other Assets in the accompanying
condensed consolidated balance sheet).
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Income from commissions and fees increased 4.7% during the third quarter of
1996 and 9.4% during the nine months ended September 30, 1996 when compared to
the same periods in 1995. Absent exchange rate fluctuations, gross income
increased 7.0% in the three months ended September 30, 1996 and 9.5% in the
nine months ended September 30, 1996 when compared to the same periods in 1995.
In the third quarter of 1996 and 1995, respectively, 45.9% and 43.5% of
consolidated gross income was attributable to domestic operations and 54.1% and
56.5% to international operations. In the third quarter of 1996 and for the
first nine months of 1996, respectively, gross income from domestic operations
increased 10.5% and 12.6% versus the respective prior periods. Gross income
from international operations increased 0.2% for the third quarter (4.3%
absent exchange rate fluctuations) and 6.9% for the first nine months of 1996
(7.0% absent exchange rate fluctuations) when compared to the same periods in
1995. The increase in gross income in both years primarily resulted from
expanded activities from existing clients and the continued growth of the
Company's general agency and specialized operations.
Salaries and employee related expenses increased 7.9% in the third quarter of
1996 and 10.5% for the first nine months of 1996 when compared to the
respective prior periods. Office and general expenses decreased 1.0% and
increased 7.4% for the three and nine month periods ended September 30, 1996,
respectively, versus the comparable prior periods. These changes in expenses,
when taken together, are generally in line with the increases in gross income.
Inflation did not have a material effect on revenue or expenses during 1996 or
1995.
Minority interest applicable to consolidated companies decreased by $395,000 in
the third quarter of 1996 and by $269,000 for the first nine months of 1996 as
compared to the respective prior periods. These variances are primarily due to
changes in the level of profits of majority-owned companies.
Equity in earnings of nonconsolidated affiliated companies increased by $38,000
in the third quarter of 1996 and by $162,000 for the first nine months of 1996
as compared to the respective prior periods. These variances are primarily due
to changes in the level of profits of nonconsolidated affiliated companies.
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RESULTS OF OPERATIONS (CONTINUED)
The effective tax rate was 49.3% in the third quarter of 1996 and 51.6% in the
first nine months of 1996 versus 49.2% and 50.7% in the same periods in 1995,
respectively.
Other income was affected positively, in the first quarter of 1996, by
non-recurring, non-operating pre-tax income of approximately $4,000,000
primarily related to gains on the sale of the Company's equity position in a
nonconsolidated subsidiary and the liquidation of a non-marketable investment
security.
Net income increased by 14.6% and 28.5% in the three and nine months ended
September 30, 1996, respectively, when compared to net income for the same
periods in 1995. Primary net income per common share increased by 15.6% and
33.7% in the three and nine month periods ended September 30, 1996,
respectively, versus the comparable periods in 1995. Fully diluted net income
per common share increased by 15.1% for the three months ended September 30,
1996 and 33.7% for the nine months ended September 30, 1996 when compared to
the same periods in 1995. Absent the non-recurring, non-operating gains which
occurred in the first quarter of 1996, primary and fully diluted net income per
common share increased by 18.3% and 18.4%, respectively, for the nine months
ended September 30, 1996 as compared to the same period in 1995. For purposes
of computing primary net income per common share, the Company's net income is
adjusted by (i) dividends paid on the Company's Preferred Stock and (ii) the
change in redemption value of the Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $1,116,000 from $9,582,000 at December 31, 1995 to
$8,466,000 at September 30, 1996. Cash and cash equivalents decreased by
$64,682,000 from $134,313,000 to $69,631,000. The decrease in cash and cash
equivalents is largely attributable to the increase in long-term marketable
securities and the timing of collections of accounts receivable versus payments
to trade vendors. Domestically, the Company has committed lines of credit
totaling $50,000,000. These lines of credit were partially utilized during the
three and nine months ended September 30, 1996 and 1995 to secure obligations
of selected foreign subsidiaries. There was $25,000,000 outstanding under
these credit lines as of September 30, 1996 and $15,000,000 as of September
30, 1995.
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 were $61,008,000 and $70,461,000 outstanding under
these credit lines as of September 30, 1996 and 1995, respectively.
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PART II
OTHER INFORMATION
Item 5. Other Information
In order to comply with recent changes to the rules promulgated
under Section 16 of the Securities and Exchange Act of 1934, as
amended, the Company has amended its 1993 Senior Management
Incentive Plan and 1994 Stock Incentive Plan. Copies of the amended
and restated plans are attached hereto as Exhibits 10.01 and 10.02
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Reference is made to the Index annexed hereto and
made a part hereof.
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the quarter ended September 30, 1996.
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GREY ADVERTISING INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREY ADVERTISING INC.
(REGISTRANT)
DATE: November 13, 1996 By: /s/ Steven G. Felsher
--------------------------------
Steven G. Felsher
Executive Vice President -
Finance - Worldwide
Secretary and Treasurer
(Duly Authorized Officer)
DATE: November 13, 1996 By: /s/ William P. Garvey
---------------------------------
William P. Garvey
Executive Vice President
Chief Financial Officer -
United States
(Chief Accounting Officer)
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INDEX TO EXHIBITS
Number Assigned to Exhibit Page Number in Sequential
(i.e., Exhibit Table of Item 601 Table of Item 601 Exhibits Numbering System Where
of Regulation S-K) Description of Exhibit Exhibit May Be Found
-------------------------------------------------------------------------------------------------
(10.01) Grey Advertising Inc. amended and
restated 1993 Senior Management
Incentive Plan
(10.02) Grey Advertising Inc. amended and
restated 1994 Stock Incentive
Plan
(11) Statement Re: Computation of Net
Income per Common Share
(unaudited)
(27) Financial Data Schedule
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