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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 SEPTEMBER 30, 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
incorporation or organization) Identification Number)
777 THIRD AVENUE, 10017
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
212-546-2000
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, 2002, the total number of shares outstanding of
Registrant's Common Stock, par value $0.01 per share ("Common Stock"), was
1,066,872 and of Registrant's Limited Duration Class B Common Stock, par value
$0.01 per share ("Class B Common Stock"), was 210,141.
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GREY GLOBAL GROUP INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX
PAGE
NO.
----
Financial Statements:
Condensed Consolidated Balance Sheets..................... 2
Condensed Consolidated Statements of Operations........... 3
Condensed Consolidated Statements of Cash Flows........... 4
Notes to Condensed Consolidated Financial Statements...... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Other Information........................................... 14
Signatures.................................................. 15
Index to Exhibits........................................... 18
1
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001(A)
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 261,952 $ 276,602
Marketable securities..................................... 970 1,260
Accounts receivable....................................... 1,003,580 950,925
Expenditures billable to clients.......................... 100,057 77,293
Other current assets...................................... 113,985 99,949
---------- ----------
Total current assets........................................ 1,480,544 1,406,029
Investments in and advances to nonconsolidated affiliated
companies................................................. 14,847 14,679
Fixed assets -- at cost, less accumulated depreciation of
$201,663 in 2002 and $184,720 in 2001..................... 144,274 155,249
Marketable securities....................................... 6,120 9,861
Intangibles -- net of accumulated amortization of $76,255 in
2002 and 2001............................................. 238,263 211,812
Other assets -- including loans to executive officers of
$5,047 in 2002 and $5,247 in 2001......................... 111,045 102,176
---------- ----------
Total assets................................................ $1,995,093 $1,899,806
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,244,886 $1,165,958
Notes payable to banks.................................... 66,567 80,789
Accrued expenses and other................................ 272,898 226,412
Income taxes payable...................................... 12,842 24,388
---------- ----------
Total current liabilities................................... 1,597,193 1,497,547
Other liabilities, including deferred compensation of
$54,813 in 2002 and $52,856 in 2001....................... 81,646 102,141
Long-term debt.............................................. 128,025 128,025
Minority interest........................................... 20,822 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................ 8,780 8,180
Common stockholders' equity:
Common Stock -- par value $0.01 per share; authorized
50,000,000 shares; issued 1,263,147 shares in 2002 and
1,244,603 shares in 2001................................ 13 12
Limited Duration Class B Common Stock -- par value $0.01
per share; authorized 10,000,000 shares; issued 237,113
shares in 2002 and 248,275 shares in 2001............... 2 2
Paid-in additional capital................................ 51,027 48,784
Retained earnings......................................... 181,648 177,503
Accumulated other comprehensive loss:
Cumulative translation adjustment....................... (30,751) (40,216)
Unrealized loss on marketable securities................ (1,158) (1,112)
---------- ----------
Total accumulated other comprehensive loss................ (31,909) (41,328)
---------- ----------
Loans to officer used to purchase Common Stock and Limited
Duration Class B Common Stock........................... (4,726) (4,726)
---------- ----------
196,055 180,247
Less -- cost of 196,310 and 202,469 shares of Common Stock
and 26,937 shares of Limited Duration Class B Common
Stock held in treasury in 2002 and 2001................. 37,428 38,487
---------- ----------
Total common stockholders' equity........................... 158,627 141,760
---------- ----------
Total liabilities and common stockholders' equity........... $1,995,093 $1,899,806
========== ==========
- ---------------
(A) The condensed consolidated balance sheet has been derived from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
2
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Commissions and fees......................... $ 290,441 $ 295,964 $ 866,104 $ 915,075
Expenses:
Salaries and employee related expenses..... 192,037 196,781 575,191 612,954
Office and general expenses................ 89,995 92,538 262,637 280,050
---------- ---------- ---------- ----------
282,032 289,319 837,828 893,004
---------- ---------- ---------- ----------
8,409 6,645 28,276 22,071
Other expense -- net......................... (2,396) (2,285) (7,259) (4,471)
---------- ---------- ---------- ----------
Income of consolidated companies before taxes
on income.................................. 6,013 4,360 21,017 17,600
Provision for taxes on income................ 3,151 2,076 10,278 8,802
---------- ---------- ---------- ----------
Income of consolidated companies............. 2,862 2,284 10,739 8,798
Minority interest applicable to consolidated
companies.................................. (595) (537) (3,246) (4,023)
Equity in earnings (losses) of
nonconsolidated affiliated companies....... 488 (237) 1,246 (593)
---------- ---------- ---------- ----------
Net income................................... $ 2,755 $ 1,510 $ 8,739 $ 4,182
========== ========== ========== ==========
Weighted average number of common shares
outstanding
Basic...................................... 1,244,686 1,238,575 1,246,740 1,236,575
Diluted.................................... 1,377,518 1,369,988 1,381,952 1,373,799
Earnings per common share
Basic...................................... $ 1.92 $ 1.33 $ 6.38 $ 3.50
Diluted.................................... $ 1.76 $ 1.23 $ 5.84 $ 3.22
Dividends per common share................... $ 1.00 $ 1.00 $ 3.00 $ 3.00
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
3
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
OPERATING ACTIVITIES
Net income.................................................. $ 8,739 $ 4,182
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets............. 29,849 32,728
Amortization of intangibles............................... -- 10,708
Deferred compensation..................................... 3,872 5,100
Equity in (loss) earnings of non-consolidated affiliated
companies, net of dividends received of $448 in 2002
and $1,343 in 2001..................................... (798) 1,936
Loss from the sale of marketable securities............... 348 1,498
Loss on the write-down of marketable securities........... 648 --
Minority interest applicable to consolidated companies.... 3,246 4,023
Restricted stock expense.................................. 1,935 1,252
Deferred income taxes..................................... (1,713) (3,600)
Changes in operating assets and liabilities............... (7,177) (161,537)
-------- ---------
Net cash provided by (used in) operating activities......... 38,949 (103,710)
INVESTING ACTIVITIES
Purchases of fixed assets................................... (20,292) (47,630)
Trust fund deposits......................................... (2,562) (3,217)
Decrease in investments in and advances to nonconsolidated
affiliated companies...................................... 630 712
Proceeds from the sale of marketable securities............. 3,224 4,189
Purchases of investment securities.......................... (112) (1,032)
Increase in intangibles, primarily goodwill................. (15,451) (10,152)
-------- ---------
Net cash used in investing activities....................... (34,563) (57,130)
FINANCING ACTIVITIES
(Repayments of) net proceeds from short-term borrowings..... (19,821) 13,125
Common shares acquired for treasury......................... -- (122)
Cash dividends paid on common shares........................ (3,813) (3,765)
Cash dividends paid on redeemable Preferred Stock........... (180) (180)
Net proceeds from issuance of restricted stock.............. 198 91
Proceeds from exercise of stock options..................... 1,169 505
-------- ---------
Net cash (used in) provided by financing activities......... (22,447) 9,654
Effect of exchange rate changes on cash..................... 3,412 (1,059)
-------- ---------
Decrease in cash and cash equivalents....................... (14,650) (152,245)
Cash and cash equivalents at beginning of period............ 276,602 309,750
-------- ---------
Cash and cash equivalents at end of period.................. $261,952 $ 157,505
======== =========
See accompanying notes to condensed consolidated financial statements.
4
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 September 30, 2002, and for the three and
nine months ended September 30, 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 and nine months ended September 30,
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 September 30, 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 $.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 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
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table shows the amounts affecting 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
BASIC EARNINGS PER COMMON SHARE
WEIGHTED AVERAGE SHARES.............. 1,244,686 1,238,575 1,246,740 1,236,575
---------- ---------- ---------- ----------
Net income........................... $ 2,755 $ 1,510 $ 8,739 $ 4,182
Effect of dividend requirements and
the change in redemption value of
redeemable preferred stock......... (366) 143 (780) 140
---------- ---------- ---------- ----------
NET EARNINGS USED IN COMPUTATION..... $ 2,389 $ 1,653 $ 7,959 $ 4,322
---------- ---------- ---------- ----------
PER SHARE AMOUNT..................... $ 1.92 $ 1.33 $ 6.38 $ 3.50
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Weighted average shares used in the
Basic EPS calculation.............. 1,244,686 1,238,575 1,246,740 1,236,575
Net effect of dilutive stock options
and stock incentive plans(1)....... 81,704 80,285 84,084 86,096
Assumed conversion of 8.5%
convertible subordinated
debentures......................... 51,128 51,128 51,128 51,128
---------- ---------- ---------- ----------
ADJUSTED WEIGHTED AVERAGE SHARES..... 1,377,518 1,369,988 1,381,952 1,373,799
---------- ---------- ---------- ----------
Net earnings used in the Basic EPS
calculation........................ $ 2,389 $ 1,653 $ 7,959 $ 4,322
8.5% convertible subordinated
debentures interest net of income
tax effect......................... 36 35 107 106
---------- ---------- ---------- ----------
NET EARNINGS USED IN COMPUTATION..... $ 2,425 $ 1,688 $ 8,066 $ 4,428
---------- ---------- ---------- ----------
PER SHARE AMOUNT..................... $ 1.76 $ 1.23 $ 5.84 $ 3.22
========== ========== ========== ==========
- ---------------
(1) Includes 20,211 shares expected to be issued pursuant to the Senior
Management Incentive Plan.
7. During the third quarter of 2002 and 2001, total comprehensive income
amounted to $8,339 and total comprehensive loss amounted to $2,280,
respectively, and for the nine months ended September 30, 2002 and 2001
total comprehensive income was $18,158 and $655, 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 and the change in fair market value of
marketable securities.
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 reclassified to better
reflect the management reporting structure of the Company. 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 nine months ended
6
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, 2002 and 2001, and related identifiable assets at September
30, 2002 and December 31, 2001 are summarized below according to geographic
region:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
NORTH AMERICA EUROPE OTHER CONSOLIDATED
------------------- ------------------- ------------------- -----------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- -------- ---------- ----------
Commissions and
fees............... $142,119 $128,186 $121,280 $130,178 $ 27,042 $ 37,600 $ 290,441 $ 295,964
-------- -------- -------- -------- -------- -------- ---------- ----------
Operating profit
(loss)............. 12,237 6,362 (4,017) (2,312) 189 2,595 8,409 6,645
-------- -------- -------- -------- -------- -------- ---------- ----------
Income (loss) of
consolidated
companies before
taxes on income.... 10,305 4,318 (4,473) (2,462) 181 2,504 6,013 4,360
-------- -------- -------- -------- -------- -------- ---------- ----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
NORTH AMERICA EUROPE OTHER CONSOLIDATED
------------------- ------------------- ------------------- -----------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- -------- ---------- ----------
Commissions and
fees............... $406,532 $400,176 $369,238 $412,308 $ 90,334 $102,591 $ 866,104 $ 915,075
-------- -------- -------- -------- -------- -------- ---------- ----------
Operating profit
(loss)............. 26,478 6,459 2,196 13,154 (398) 2,458 28,276 22,071
-------- -------- -------- -------- -------- -------- ---------- ----------
Income (loss) of
consolidated
companies before
taxes on income.... 21,985 2,498 (13) 13,302 (955) 1,800 21,017 17,600
-------- -------- -------- -------- -------- -------- ---------- ----------
Identifiable assets.. $853,664 $844,817 $937,799 $833,285 $188,783 $207,025 1,980,246 1,885,127
-------- -------- -------- -------- -------- --------
Investments in and
advances to non-
consolidated
affiliated
companies.......... 14,847 14,679
---------- ----------
Total assets......... $1,995,093 $1,899,806
========== ==========
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 nine months of the date
of adoption and an annual impairment test thereafter. The Company 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.
7
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 SEPTEMBER 30, 2001
--------------------------------------------------
DILUTED EARNINGS
BASIC EARNINGS PER PER COMMON
NET INCOME COMMON SHARE SHARE
---------- ------------------ ----------------
Reported net income................ $ 1,510 $ 1.33 $ 1.23
Goodwill amortization.............. 4,065 4.20 3.83
Income tax adjustment.............. (2,322) (3.01) (2.75)
------- ------ ------
Adjusted net income................ $ 3,253 $ 2.52 $ 2.31
======= ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------------
DILUTED EARNINGS
BASIC EARNINGS PER PER COMMON
NET INCOME COMMON SHARE SHARE
---------- ------------------ ----------------
Reported net income................ $ 4,182 $ 3.50 $ 3.22
Goodwill amortization.............. 10,708 11.74 10.65
Income tax adjustment.............. (5,041) (7.38) (6.72)
------- ------ ------
Adjusted net income................ $ 9,849 $ 7.86 $ 7.15
======= ====== ======
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.
In April 2001, the Emerging Issues Task Force, as part of the Financial
Accounting Standard Board, issued Topic D-96, "Accounting for Management
Fees Based on a Formula". This pronouncement provides guidance on revenue
recognition under arrangements that contain performance-based incentive fees
that are not finalized until the end of a period of time specified in the
arrangement and gives the Company the option to recognize the related
revenue at the end of the contract year or alternatively recognize revenue
due at any point in time as if the contract were terminated at the given
reporting period. The Company has adopted the provisions of this
pronouncement effective January 1, 2002 and has elected to record income
generally at the end of a contract period when the amount to be received is
certain.
In November 2001, the Emerging Issues Task Force, as part of the Financial
Accounting Standard Board, issued Topic D-103, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred". This pronouncement provides guidance on the accounting treatment
in the income statement for reimbursements received for out-of-pocket
expenses incurred, and is effective for all financial reporting periods
beginning after December 15, 2001. The Company has adopted, and its revenue
recognition policies are in substantial compliance with, the provisions of
this pronouncement effective January 1, 2002.
10. The Company estimates that it will be required to make future payments to
acquire additional shares of subsidiary companies or to complete earn-out
agreements pursuant to certain acquisition arrangements not reflected as
liabilities on its consolidated balance sheet of approximately $54,200. Of
such amount, approximately 44% is estimated to be paid from 2005 and beyond
and the remainder over the period from 2002 to 2005. The foregoing
information is estimated and the actual payments made will be dependent on
future events including profit and other performance measures of a number
of subject companies, the fulfillment and amendment of certain contractual
obligations by third parties, the movement of exchange
8
GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
rates, the timing of when the Company or other parties choose to exercise
certain contractual rights and other variables.
11. Since 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 U.S. 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, 200l. 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. In May 2002,
Mosallem was charged in a federal indictment. The indictment alleges that
between 1994 and 2001 Mosallem -- together with two codefendants (a former
vendor to the Department and a sales person for an unnamed
vendor) -- conspired to restrain trade by rigging bids and allocating
contracts for certain graphic services performed for a client of the
Company. The indictment also alleges that between 1991 and May 2000,
Mosallem -- together with the principal owner of the former vendor and a
sales person of that former vendor -- conspired to commit mail fraud by the
means outlined in the Complaint previously filed against Mosallem. In
September 2002, additional mail fraud charges were added to the indictment
alleging that Mosallem conspired to defraud the Company and its clients by
receiving kickbacks from former vendors to the Department. In addition, in
October 2002, Mr. Joseph Pannacione, a former manager in the Department who
served under Mosallem, pleaded guilty to federal mail fraud charges similar
to those alleged against Mosallem. Several individuals associated with
former vendors to the Department have pleaded guilty to federal charges
relating to the allegations with respect to Mosallem and Pannacione. 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.
9
PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ITEM 2. RESULTS OF OPERATIONS
Commissions and fees ("gross income") decreased 1.9% during the third
quarter of 2002 and 5.4% during the nine months ended September 30, 2002 when
compared to the same periods in 2001. Absent exchange rate fluctuations, gross
income decreased 3.5% and 5.3%, respectively, in the three and nine months ended
September 30, 2002 when compared to the same periods in 2001. In the third
quarters of 2002 and 2001, respectively, 48.9% and 43.3% of consolidated gross
income was attributable to the North American operations and 51.1% and 56.7% to
international operations. In the third quarter of 2002 and the first nine months
of 2002, gross income from operations in North America increased 10.9% and 1.6%,
respectively, versus the respective prior periods. Gross income from
international operations decreased 11.6% (14.5% absent exchange rate
fluctuations) during the third quarter and decreased 10.7% (5.3% absent exchange
rate fluctuations) during the first nine months when compared to the same
periods in 2001. The gross international income decrease was centered on the
Company's European operations which declined 6.8% during the third quarter
(12.4% absent exchange rate fluctuations) and 10.4% during the nine months ended
(11.8% absent exchange rate fluctuation) and on the Latin American operations in
the third quarter which decreased by 49.11% (30.45% absent exchange rate
fluctuations) when compared to the same periods in 2001. In Europe, particularly
in Northern Europe, results were affected by the generally slow economic
conditions, coupled with losses of selected local clients, and weakness in a
number of advertising categories including telephony. Comparisons are also
affected by the closure or disposal of certain business units in 2001.
Salaries and employee related expenses decreased 2.4% in the third quarter
of 2002 and 6.2% for the first nine months of 2002. Office and general expenses
decreased 2.7% in the third quarter and 6.2% for the nine months ended September
30, 2002. The decrease in operating expenses is the result of staff cuts and
cost containment effected in 2001 offset somewhat by continuing costs associated
with reducing staff further in a number of markets in connection with declines
in gross income. Office and general expenses were lower, in part, by the absence
of goodwill amortization expense of $4,065 and $10,708, respectively, for the
three and nine months ended September 30, 2002, as well as the effect of the
disposition of real estate in the fourth quarter of 2001. Office and general
expenses during the first nine months of 2002 also included $5,049 for
professional fees incurred and accruable costs in connection with the
investigation mentioned in Item 1 in the Other Information section and below in
the section of this report entitled "Legal Proceedings".
Inflation did not have a material effect on gross income or expenses during
2002 or 2001.
Other expense-net increased by $111 and $2,788, respectively, during the
third quarter and for the first nine months of 2002 primarily as the result of
reduced interest income due to lower interest earned on invested funds.
Minority interest applicable to consolidated companies increased by $58
during the third quarter of 2002 and decreased by $777 for the nine months ended
September 30, 2002 as compared to the respective prior periods. Equity in
earnings of nonconsolidated affiliated companies increased by $725 during the
third quarter of 2002 and increased $1,839, during the nine months ended
September 30, 2002 when compared to the same periods in 2001. 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 52.4% for the third quarter of 2002 versus 47.6%
in the same period in 2001 and 48.9% and 50.0%, respectively, for the first nine
months of 2002 and 2001. The increase in the third quarter is due principally to
a heavier concentration of pre-tax income in jurisdictions with higher effective
tax rates as well as currently non-recognizable tax benefits, attributable to
losses in certain countries.
Net income was $2,755 in the third quarter of 2002 and $8,739 for the first
nine months of 2002 as compared to net income of $1,510 and $4,182 in the
respective prior periods. Basic and diluted earnings per
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
common share for the third quarter of 2002 were $1.92 and $1.76, respectively,
and for the first nine months of 2002 were $6.38 and $5.83, respectively. Basic
and diluted earnings per common share for the third quarter of 2001 were $1.33
and $1.23, respectively, and for the first nine months of 2001 were $3.50 and
$3.22, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $14,650 from $276,602 at December
31, 2001 to $261,952 at September 30, 2002. The working capital deficit
increased to $116,649 at September 30, 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 which
was reclassified from a long-term liability to a current liability earlier this
year.
Domestically, the Company has a short-term committed bank line of credit in
the amount of $90,000 at both December 31, 2001 and September 30, 2002, which is
renewable annually. This line of credit was partially utilized during the nine
months ended September 30, 2002 and 2001. There was $19,900 and $18,300
outstanding under this credit line as of September 30, 2002 and December 31,
2001, respectively. Additionally, this line 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 $46,667 and
$62,400 outstanding at September 30, 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; the
utilization of these instruments may at times absorb some of the Company's
credit capacity.
The Company estimates that it will be required to make future payments to
acquire additional shares of subsidiary companies or to complete earn-out
agreements pursuant to certain acquisition arrangements not reflected as
liabilities on its consolidated balance sheet of approximately $54,200. Of such
amount, approximately 44% is estimated to be paid from 2005 and beyond and the
remainder over the period from 2002 to 2005. The foregoing information is
estimated and the actual payments made will be dependent on future events
including profit and other performance measures of a number of subject
companies, the fulfillment and amendment of certain contractual obligations by
third parties, the movement of exchange rates, the timing of when the Company or
other parties choose to exercise certain contractual rights and other variables.
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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 September 30, 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 nine months ended September 30, 2002 and 2001 was
$11,686 and $13,296, respectively.
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 amounts earned and amounts collectible from 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. For the purposes of the calculation,
Asia and Latin America are then combined with North America and Europe
indicating the need to support multi-national clients in those markets. 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 September 30, 2002 and December 31, 2001,
the Company had $47,300 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.
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
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 or
methods of compensation, consolidation of client businesses, 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.
The forward looking statements speak only as of the date when made. The Company
does not undertake to update such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Occasionally, the Company enters into foreign currency contracts for known
cash flows related to repatriation of earnings from its international
subsidiaries or identified liabilities in foreign currencies. The term of each
such foreign currency contract entered into in 2001 was for less than three
months. At September 30, 2002 and December 31, 2001, there were no foreign
currency contracts open. The Company had no derivative contracts outstanding at
September 30, 2002 or December 31, 2001, respectively. The Company has
investments in private equity securities, corporate bonds and equity securities
that may be subject to changes in general economic conditions and fluctuations
in interest rates. Excess funds are invested in short term liquid securities and
money market funds.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since 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 U.S. 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, 200l. 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. In May 2002, Mosallem was
charged in a federal indictment. The indictment alleges that between 1994 and
2001 Mosallem -- together with two codefendants (a former vendor to the
Department and a sales person for an unnamed vendor) -- conspired to restrain
trade by rigging bids and allocating contracts for certain graphic services
performed for a client of the Company. The indictment also alleges that between
1991 and May 2000, Mosallem -- together with the principal owner of the former
vendor and a sales person of that former vendor -- conspired to commit mail
fraud by the means outlined in the Complaint previously filed against Mosallem.
In September 2002, additional mail fraud charges were added to the indictment
alleging that Mosallem conspired to defraud the Company and its clients by
receiving kickbacks from former vendors to the Department. In addition, in
October 2002, Mr. Joseph Pannacione, a former manager in the Department who
served under Mosallem, pleaded guilty to federal mail fraud charges similar to
those alleged against Mosallem. Several individuals associated with former
vendors to the Department have pleaded guilty to federal charges relating to the
allegations with respect to Mosallem and Pannacione. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual stockholders' meeting on September 20, 2002.
Proxies for the meeting were solicited by the Company pursuant to Regulation 14A
under the Securities Exchange Act of 1934. At the meeting, Daniel S. Shapiro,
the nominee for the election to the Board of Directors as listed in the
Company's Proxy Statement for the meeting , was elected. The following number of
shares were cast with respect to the election of Mr. Shapiro: 3,252,546 votes
FOR; -0- votes AGAINST; 43,166 abstentions; and 115,217 broker non-votes. In
addition, votes cast regarding the ratification of the selection of independent
auditors of the Company for fiscal year 2002 were as follows: 3,225,224 votes
FOR; 70,295 votes AGAINST; 193 abstentions; and 115,217 broker non-votes.
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 a report dated August 8, 2002,
reporting Item 9. "Regulation FD Disclosure." No financial statements were
furnished with this report, which included exhibits related to the Statement
Under Oath of the Principal Executive Officer and the Principal Financial
Officer pursuant to Securities and Exchange Commissions Order No. 4-460.
14
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)
By: /s/ STEVEN G. FELSHER
------------------------------------
Steven G. Felsher,
Vice Chairman
Chief Financial Officer
Secretary and Treasurer
(Duly Authorized Officer)
Dated: November 13, 2002
By: /s/ LESTER M. FEINTUCK
------------------------------------
Lester M. Feintuck,
Senior Vice President
Chief Financial Officer U.S.
Controller
(Chief Accounting Officer)
Dated: November 13, 2002
15
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward H. Meyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grey Global Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ EDWARD H. MEYER
--------------------------------------
Name: Edward H. Meyer
Title: Chief Executive Officer
Date: November 13, 2002
16
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven G. Felsher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grey Global Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ STEVEN G. FELSHER
--------------------------------------
Name: Steven G. Felsher
Title: Chief Financial Officer
Date: November 13, 2002
17
INDEX TO EXHIBITS
NUMBER ASSIGNED TO
EXHIBIT (I.E. 601 OF TABLE OF ITEM 601
REGULATION S-K) EXHIBITS DESCRIPTION OF EXHIBITS
- -------------------- --------------------------------
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
18