1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-7898
GREY ADVERTISING INC.
(Exact name of registrant as specified in its charter)
Delaware 13-0802840
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Third Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, 212-546-2000
including area code:
NOT APPLICABLE
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of April 30, 1998, the total number of shares outstanding of Registrant's
Common Stock, par value $1 per share ("Common Stock"), was 962,796 and of
Registrant's Limited Duration Class B Common Stock, par value $1 per share
("Class B Common Stock"), was 274,969.
2
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 11
Other Information 13
Signatures 14
Index to Exhibits 15
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3
GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
ASSETS (A)
Current assets:
Cash and cash equivalents $ 97,139,000 $ 150,553,000
Marketable securities 43,757,000 15,401,000
Accounts receivable 653,690,000 647,524,000
Expenditures billable to clients 53,967,000 54,687,000
Other current assets 54,501,000 56,225,000
-------------- --------------
Total current assets 903,054,000 924,390,000
Investments in and advances to nonconsolidated affiliated companies 20,021,000 18,386,000
Fixed assets-at cost, less accumulated depreciation of $118,334,000
and $116,443,000 90,157,000 88,006,000
Marketable securities 37,362,000 57,340,000
Intangibles and other assets - including loans to executive officers
of $5,572,000 in 1998 and 1997 110,295,000 111,865,000
============== ==============
Total assets $1,160,889,000 $1,199,987,000
============== ==============
See accompanying notes to condensed consolidated financial statements.
(A) The consolidated balance sheet has been derived from the
audited financial statements at that date.
3
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(CONTINUED)
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (A)
Current liabilities:
Accounts payable $ 683,854,000 $ 709,959,000
Notes payable to banks 41,729,000 22,455,000
Accrued expenses and other 106,603,000 122,269,000
Income taxes payable 9,644,000 19,181,000
--------------- ---------------
Total current liabilities 841,830,000 873,864,000
Other liabilities, including deferred compensation of $35,313,000 in
1998 and $36,481,000 in 1997 60,498,000 61,723,000
Long-term debt 78,025,000 78,025,000
Minority interest 11,994,000 13,309,000
Redeemable preferred stock - at redemption value; par value $1 per share;
authorized 500,000 shares; issued and outstanding 30,000 shares in 1998 and
32,000 shares in 1997
10,459,000 10,760,000
Common stockholders' equity:
Common Stock - par value $1 per share; authorized 10,000,000 shares; issued
1,184,080 in 1998 and 1,124,324 in 1997 1,184,000 1,124,000
Limited Duration Class B Common Stock - par value $1 per share; authorized
2,000,000 shares; issued 303,091 shares in 1998 and 307,460 shares in 1997 303,000 308,000
Paid-in additional capital 38,582,000 44,349,000
Retained earnings 172,653,000 169,214,000
Cumulative translation adjustment (11,404,000) (9,422,000)
Unrealized gain on marketable securities 440,000 189,000
Loans to officer used to purchase Common Stock and
Limited Duration Class B Common Stock (4,726,000) (4,726,000)
--------------- ---------------
197,032,000 201,036,000
Less - cost of 224,219 and 222,098 shares of Common Stock and 26,762 and
26,762 shares of Limited Duration Class B Common Stock held in treasury at
March 31, 1998 and December 31, 1997,
respectively 38,949,000 38,730,000
--------------- ---------------
Total common stockholders' equity 158,083,000 162,306,000
=============== ===============
Total liabilities and stockholders' equity $ 1,160,889,000 $ 1,199,987,000
=============== ===============
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 MARCH 31,
1998 1997
-------------------------------------
Commissions and fees $ 215,714,000 $ 188,748,000
Expenses:
Salaries and employee related expenses 136,193,000 122,086,000
Office and general expenses 68,997,000 58,019,000
-------------------------------------
205,190,000 180,105,000
-------------------------------------
10,524,000 8,643,000
Other income - net 1,572,000 939,000
-------------------------------------
Income of consolidated companies
before taxes on income 12,096,000 9,582,000
Provision for taxes on income 6,504,000 5,263,000
-------------------------------------
Income of consolidated companies 5,592,000 4,319,000
Minority interest applicable to
consolidated companies (1,075,000) (369,000)
Equity in earnings of nonconsolidated affiliated
companies 516,000 625,000
-------------------------------------
Net income $ 5,033,000 $ 4,575,000
=====================================
Weighted average number
of common shares outstanding
Basic 1,181,642 1,180,611
Diluted 1,367,401 1,352,311
Earnings per common share
Basic $4.50 $4.07
Diluted $3.91 $3.58
Dividends per common share $1.00 $1.00
=====================================
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 THREE MONTHS ENDED MARCH 31,
1998 1997
-------------------------------------
OPERATING ACTIVITIES
Net income $ 5,033,000 $ 4,575,000
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of fixed assets 6,909,000 5,726,000
Amortization of intangibles 1,693,000 1,326,000
Deferred compensation 2,799,000 3,016,000
Equity in earnings of nonconsolidated affiliated
companies, net of dividends received of $68,000 in
1998 and none in 1997 (448,000) (625,000)
Gains from the sale of marketable securities (131,000)
Minority interest applicable to consolidated companies 1,075,000 369,000
Restricted stock (income) expense (57,000) 49,000
Deferred income taxes 520,000 (1,775,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (9,903,000) (7,124,000)
Decrease in expenditures billable to clients 222,000 427,000
Decrease (increase) in other current assets 1,990,000 (3,150,000)
Decrease (increase) in other assets 1,355,000 (2,022,000)
Decrease in accounts payable (23,428,000) (32,473,000)
Decrease in accrued expenses and other (31,926,000) (9,193,000)
Decrease in income taxes payable (4,063,000) (4,675,000)
(Decrease) increase in other liabilities (759,000) 474,000
-------------------------------------
Net cash used in operating activities (49,119,000) (45,075,000)
INVESTING ACTIVITIES
Purchases of fixed assets (9,485,000) (6,254,000)
Trust fund deposits (1,328,000) (1,051,000)
Increase in investments and advances to
nonconsolidated affiliated companies (1,187,000) (168,000)
Purchases of marketable securities (48,507,000) (6,277,000)
Proceeds from the sale of marketable securities 40,492,000 7,320,000
Increase in intangibles, primarily goodwill (81,000) (2,948,000)
-------------------------------------
Net cash used in investing activities (20,096,000) (9,378,000)
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
--------------------------------------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 19,465,000 15,777,000
Common Shares acquired for treasury (39,000) (56,000)
Redemption of preferred stock (651,000)
Cash dividends paid on Common Shares (1,180,000) (1,183,000)
Cash dividends paid on redeemable preferred stock (64,000) (64,000)
Repurchase of restricted stock (26,000)
Proceeds from exercise of stock options 71,000
--------------------------------------
Net cash provided by financing activities 17,505,000 14,545,000
Effect of exchange rate changes on cash (1,704,000) (2,875,000)
--------------------------------------
Decrease in cash and cash equivalents (53,414,000) (42,783,000)
Cash and cash equivalents at beginning of period 150,553,000 112,485,000
--------------------------------------
Cash and cash equivalents at end of period $ 97,139,000 $ 69,702,000
=====================================
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, 1997
filed with the Securities and Exchange Commission.
2. The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and 1997 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 months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
4. 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 in excess of the Federal statutory rate.
5. As of March 31, 1998 and December 31, 1997, 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. In addition, on
December 31, 1997 there were outstanding 2000 shares of Series 1 Preferred
Stock which were held by a former employee; these shares were redeemed
during the quarter ended March 31, 1998. 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. Each class
of Preferred Stock is entitled to receive cumulative preferential dividends
at the annual rate of $.25 per share, and to participate in dividends on
one share of the Common Stock and one share of the Class B Common Stock to
the extent such dividends exceed the per share preferential dividend.
The redemption date for the Series I, Series II and Series III Preferred
Stock is fixed at April 7, 2004. The terms of the Series I, Series II and
Series III Preferred Stock also give the holder, his estate or his legal
representative, as the case may be, the option to require the Company to
redeem 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. In connection with his
ownership of Series I, Series II and Series III Preferred Stock, the holder
issued to the Company full recourse promissory notes (which are included in
Other Assets in the accompanying condensed consolidated balance sheets).
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. The computations of basic earnings per common share for the three months
ended March 31, 1998 and 1997 are based on the weighted average number of
common shares outstanding and, for diluted earnings per common share, are
adjusted for the effect, if any, of the assumed exercise of dilutive stock
options, for shares issuable pursuant to the Company's Senior Management
Incentive Plan and for the assumed conversion of the 8-1/2% Convertible
Subordinated Debentures. Also, for the purpose of computing earnings per
common share for the three months ended March 31, 1998 and March 31, 1997,
the Company's net income was adjusted by dividends paid on the Company's
preferred stock and also by the change in redemption value of the Company's
preferred stock. In computing diluted earnings per common share, the
average quarterly market price 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. The following table shows the amounts used in
computing earnings per common share ("EPS") and the effect on income and
the weighted average number of shares of dilutive potential common stock:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997 (2)
------------------------------
BASIC EARNINGS PER COMMON SHARE
WEIGHTED AVERAGE SHARES 1,181,642 1,180,611
------------------------------
Net income $5,033,000 $4,575,000
Effect of dividend requirements
and the change in redemption value
of redeemable preferred stock 286,000 236,000
------------------------------
NET EARNINGS USED IN COMPUTATION $5,319,000 $4,811,000
------------------------------
PER SHARE AMOUNT $4.50 $4.07
==============================
DILUTED EARNINGS PER COMMON SHARE
Weighted average shares used in the Basic EPS calculation 1,181,642 1,180,611
Net effect of dilutive stock options and
stock incentive plans (1) 134,720 120,808
Assumed conversion of 8.5%
convertible subordinated
debentures issued December 1983 51,039 50,892
------------------------------
ADJUSTED WEIGHTED AVERAGE SHARES 1,367,401 1,352,311
------------------------------
Net earnings used in the Basic EPS calculation $5,319,000 $4,811,000
8.5% convertible subordinated
debentures interest net of income tax effect 34,000 35,000
------------------------------
NET EARNINGS USED IN COMPUTATION $5,353,000 $4,846,000
------------------------------
PER SHARE AMOUNT $3.91 $3.58
==============================
(1) Includes 94,919 and 94,686 shares for 1998 and 1997, respectively,
issuable pursuant to the terms of the Senior Management Incentive Plan.
(2) After restatement for adoption of FAS 128, Earnings Per Share
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GREY ADVERTISING INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income ("FAS 130"). FAS
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no
impact on the Company's net income or stockholders' equity. FAS 130
requires the unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity,
to be included in other comprehensive income. The prior year Consolidated
Statement of Common Stockholders' Equity will be reclassified to conform to
the requirements of FAS 130.
During the first quarter of 1998 and 1997, total comprehensive income
(loss) amounted to $3,302,000 and ($3,929,000), respectively. The
difference between net income and comprehensive income (loss) in both 1998
and 1997 is primarily attributable to the reduction of the net assets of
the Company's European operations due to the strengthening of the US dollar
against the European currencies.
8. In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosure About Segments of an Enterprise and Related Information
("FAS 131"). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. FAS 131 is effective for fiscal years beginning
after December 15, 1997. The adoption of this statement is not expected to
have any impact on the Company's consolidated financial statements.
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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 14.3% during the first quarter of
1998 when compared to the same period in 1997. Absent exchange rate
fluctuations, gross income increased 19.3 % in 1998 when compared to the same
period in 1997. In the first quarters of 1998 and 1997, respectively, 46.7% and
46.4% of consolidated gross income was attributable to domestic operations and
53.3% and 53.6% to international operations. In the first quarter of 1998, gross
income from domestic operations increased 15.0% versus the respective prior
period, while gross income from international operations increased 13.6%, (23.0%
absent exchange rate fluctuations) for the quarter. The increase in gross income
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 11.6% in 1998 when compared to
the respective prior period. Office and general expenses increased 18.9% in 1998
versus the respective prior period. These changes, taken together, are generally
in line with the increase in gross income.
Inflation did not have a material effect on revenue or expenses during 1998 or
1997.
Minority interest increased by $706,000 in the first quarter of 1998 as compared
to the respective prior period. The increase is primarily due to changes in the
level of profits of majority-owned companies.
Equity in earnings of nonconsolidated affiliated companies decreased by $109,000
in the first quarter of 1998 as compared to the respective prior period. The
decrease is primarily due to changes in the level of profits of nonconsolidated
affiliated companies.
The effective tax rate was 53.8% in the first quarter of 1998 versus 54.9% in
the same period in 1997. The decrease is due, in large part, to the change in
the mix of pre-tax income from consolidated companies in countries with lower
effective tax rates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Net income was $5,033,000 in the first quarter of 1998 as compared to $4,575,000
in the respective prior period. Basic and diluted earnings per common share for
the first quarter of 1998 was $4.50 and $3.91, respectively, as compared to
$4.07 and $3.58 in the comparable quarter in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $10,698,000 from $50,526,000 at December 31, 1997
to $61,224,000 at March 31, 1998. The increase in working capital is largely
attributable to the increase in short-term marketable securities. Cash and cash
equivalents decreased by $53,414,000 from $150,553,000 to $97,139,000. The
decrease in cash and cash equivalents is largely attributable to the settlement
of year-end payable balances which were higher at the end of 1997. Domestically,
the Company has committed lines of credit totaling $51,000,000. These lines of
credit were partially utilized during the three months ended March 31, 1998 and
1997 to secure obligations of selected foreign subsidiaries. There was
$3,000,000 and $26,000,000 outstanding under these credit lines as of March 31,
1998 and 1997, respectively.
Other lines of credit are available to the Company in foreign countries in
connection with short-term borrowings and bank overdrafts used in the normal
course of business. There was $38,729,000 and $80,335,000 outstanding at March
31, 1998 and 1997, respectively.
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PART II
OTHER INFORMATION
13
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: Press Release issued by the Company on
December 23, 1997. (Incorporated herein by reference to Grey's report on Form
8-K dated and filed as of January 6, 1998.)
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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: May 14, 1998 By:/s/ Steven G. Felsher
-----------------------------
Steven G. Felsher
Executive Vice President -
Finance - Worldwide
Secretary and Treasurer
(Duly Authorized Officer)
DATE: May 14, 1998 By:/s/ Lester M. Feintuck
-----------------------------
Lester M. Feintuck
Senior Vice President -
Chief Financial Officer - US Operations
Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
Page Number in
Number Assigned to Sequential Numbering
Exhibit (i.e. 601 of Table of Item 601 Exhibits System Where Exhibit
Regulation S-K) Description of Exhibits May be Found
--------------- ----------------------- ------------
10.01 Tenth Amendment to Employment Agreement, dated 16
as of April 30, 1998, by and between Grey and
Edward H. Meyer.
10.02 Second Amendment to Deferred Compensation Trust 24
Agreement, dated as of April 30, 1998, by and
between Grey and United States Trust Company of
New York.
27 Financial Data Schedule 30
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