GREY GLOBAL GROUP INC - 10-Q Quarterly Report

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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, 2003

[ ] 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 and (2) has been subject to the filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act) [X] Yes [ ] No

As of October 31, 2003, the total number of shares outstanding of
Registrant's Common Stock, par value $0.01 per share ("Common Stock"), was
1,096,941 and of Registrant's Limited Duration Class B Common Stock, par value
$0.01 per share ("Class B Common Stock"), was 206,887.

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GREY GLOBAL GROUP INC.
AND CONSOLIDATED SUBSIDIARY COMPANIES

INDEX

1

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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(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

See accompanying notes to condensed consolidated financial statements.
3

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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. The Condensed Consolidated Financial Statements have been prepared by
the Company without audit as permitted by the Securities and Exchange
Commission. In accordance with generally accepted accounting principles for
interim financial statements. The interim financial statements include all
adjustments, which are of a normal recurring nature, that management considers
necessary to fairly present he financial position and the results of operations
for such periods. Reference should be made to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission.

2. The financial statements as of September 30, 2003 and for the three and
nine months ended September 30, 2003 and 2002 are unaudited. Certain of the
Company's international operations are consolidated on an up to three month lag
as permitted by accounting principles generally accepted in the United States.

3. The results of operations for the three and nine months ended September
30, 2003 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, 2003 and December 31, 2002, 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, issued to the 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. Effective July 1,
2003, the Company's Preferred Stock has been classified as a liability on the
Condensed Consolidated Balance Sheet.

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, includes adjustments for the effect, if any, of the assumed
exercise of dilutive stock options, the 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 through the period ending June 30,
2003, the Company's net income is decreased for dividends paid on the Company's
Preferred Stock and increased or decreased, as the case may be, by changes in
redemption value of the Company's Preferred Stock during the relevant period.
For the quarter ended September 30, 2003 and beyond, the dividends paid on the
Company's Preferred Stock and the increase or decrease in the redemption value
of the Preferred Stock is recorded, respectively, as interest expense and, as
such, there are no adjustments relating to Preferred Stock to reported net
income for the purpose of computing basic earnings per common share.

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)

The following table shows the amounts affecting net income used in
computing earnings per common share ("EPS") and the weighted average number of
shares of dilutive potential common stock:

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(1) For the three months ended September 30, 2003, net income includes as
interest expense the effect of dividend requirements and the increase in
redemption value of Redeemable Preferred Stock.

(2) Includes 14,877 and 17,938 shares expected to be issued pursuant to the
Senior Management Incentive Plan for the purpose of computing EPS for the
three and nine months ended September 30, 2003, respectively, and 20,211
shares expected to be issued pursuant to the Senior Management Incentive
Plan for the purpose of computing EPS for the three months and nine months
ended September 30, 2002, respectively.

7. During the third quarter of 2003 and 2002, total comprehensive income
amounted to $13,358 and $8,339, respectively, and for the nine months ended
September 30, 2003 and 2002 total comprehensive income was $42,385 and $18,158,
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, principally, due to the change in value of
the United States dollar versus other currencies.

8. The Company is not engaged in more than one industry segment. The
Company evaluates performance by geographic region based on income or loss
before income taxes. Commissions and fees, operating income, and income (loss)
of consolidated companies before taxes on income for the nine months

6

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ended September 30, 2003 and 2002, and related identifiable assets at September
30, 2003 and December 31, 2002 are summarized below according to geographic
region:

Commissions and fees from the United States amounted to, approximately, 94%
of the North American total for the three and nine month periods in both 2003
and 2002.

9. In December 2002, the Financial Accounting Standard Board, issued
Statement of Financial Accounting Standards No. 148 ("FAS 148"), Accounting for
Stock-Based Compensation -- Transition and Disclosure which amends Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. FAS 148 provides alternative methods of transition to FAS 123's
fair value method of accounting for stock-based employee compensation and amends
the disclosure provisions of FAS 123. The Company adopted FAS 123 effective
January 1, 2003, using the prospective method and will expense stock options
issued after January 1, 2003 using the fair value method as provided for in FAS
148. The Company has also adopted the disclosure requirements of FAS 148, for
2003. There were no options granted in the first or second quarter of 2003 and
626 options were granted in the third quarter 2003. Under FAS 123 the
compensation expense for the three and nine months ended September 30, 2003 was
$12.

Pro forma information regarding net income and earnings per common share
has been determined as if the Company had accounted for its employee stock
options under the fair value method for all periods presented. The approximate
fair value for these options was estimated at the date of grant using a Black-
Scholes option valuation model with the following weighted average assumptions
for the period ending September 30, 2002: risk-free interest rates of 4.96%;
dividend yields of 0.60%; volatility factors of the expected market price of the
Company's Common Stock of 0.30; and a weighted-average expected life for the
options of 7.0 years for 2002.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in

7

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. Management
reviews, from time to time, whether there are more reliable option valuation
models available for use and at some point may adopt an alternative valuation
methodology. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:

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 (collectively, "Agreements") pursuant to certain acquisition
arrangements not reflected as liabilities on its consolidated balance sheet of
approximately $38.1 million. Of such amount, 21% is estimated to be paid over
the period from 2003 through 2005 and the remainder to be paid from 2006 and
beyond. The foregoing information is estimated and the actual payments made will
be dependent on future events primarily related to the attainment of earnings
goals, specified operating margins and revenue targets or a combination thereof
in respect of a number of subject companies. Other factors which must be
considered in making the estimate include 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.

8

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Many of the Agreements do not provide for maximum or minimum amounts
payable. Therefore, there is no definitive range of the amounts payable in the
future. The estimated amounts payable were computed using assumptions as to
earnings bases, dividend rates, earnings growth rates and other factors deemed
to be reasonable for the underlying situations. If the Company were to increase
the earnings assumptions used in estimating the amounts payable uniformly by
10%, the estimated amounts payable would increase to $40.1 million; if the
earnings assumptions were decreased uniformly by 10%, the estimated amounts
payable would decrease to $36.1 million.

11. Since March 2001, the Company has been cooperating with a criminal
investigation being conducted by U.S. Department of Justice Antitrust Division.
The investigation relates to the Graphic Services Department ("Department") of
the Company's New York Division of Grey Worldwide and several former vendors of
the Department. In April 2003, Mr. Mitchell Mosallem, who served as director of
the Department until December 31, 2001, pleaded guilty to a series of criminal
charges alleging, among other things, that Mosallem and others (including other
employees in the Department) conspired (1) to restrain trade by rigging bids and
allocating contracts for certain graphic services performed for a client of the
Company; (2) to charge clients of the Company in excess of amounts appropriately
chargeable, including 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; and (3) to obtain kickbacks from former vendors of the
Department. In November 2002, two of Mosallem's codefendants -- a vendor known
as The Color Wheel, Inc. and its principal owner, Haluk Ergulec -- pleaded
guilty to various charges, including conspiracy to defraud the Company and its
clients. The government also had previously indicated that it was examining
whether there was Company responsibility in this matter. In connection with Mr.
Ergulec's guilty plea, however, the government filed with the court a written
plea agreement identifying the Company as a victim of Ergulec's offenses and
requiring Ergulec to pay $1.1 million to the Company in restitution. In February
2002, the Company hired from outside the Company a new Director of the
Department. In addition, Deloitte & Touche was retained on behalf of the Company
and has conducted a comprehensive review of the Department. Based on their
reviews, the Company has implemented improved policies and procedures with
respect to the department and the Company in general.

12. The Company assesses the fair value and recoverability of intangible
assets, primarily goodwill, in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets which was adopted
January 1, 2002. When assessing impairment, the carrying value of the assets
less non-debt liabilities is compared to the fair value of the business units
holding the goodwill at the regional levels North America and Europe. (For the
purposes of the calculation, Asian and Latin American goodwill of approximately
$24.0 million are combined with the respective North American and European
regions reflecting the fact that investments in the Asian and Latin American
regions are principally needed to support multi-national clients in North
America and Europe.) If goodwill is deemed to be impaired, the excess of
carrying value of goodwill over fair value of net tangible and intangible assets
is written-off. The Company completed its annual impairment test of goodwill as
of March 31, 2003, and no impairment was identified.

13. A significant part of the Company's business involves 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. The utilization of these instruments may at times absorb some of
the Company's credit capacity. In addition, from time to time, the Company may
guarantee certain financial and other obligations of its consolidated
subsidiaries,

9

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. The following data relates to the Company's investments in
nonconsolidated subsidiaries that met the criteria for a significant subsidiary
as set forth in Rule 1.02(w) of Regulation S-X either individually or in the
aggregate. Summarized financial information based on audited and unaudited
financial statements as of and for the twelve months ended December 31, 2002,
2001 and 2000 is as follows:

KPE Inc., AS-Grey OY, GCI Ringpress and the aggregate of other of the
Company's non-consolidated subsidiaries have been accounted for under the equity
method. KPE Inc. an internet services provider was acquired in 2001 by a
professional administrator to liquidate it on behalf of its creditors. The
foregoing data for KPE Inc. is unaudited and comes from its internal statements
which did not value assets or liabilities in such a manner as to reflect its
liquidity or commercial difficulties. In 2001, the Company wrote off its entire
investment in KPE Inc. and has no continuing liabilities or obligations. The
Company has a minority interest in AS-Grey OY which has been, and continues to
be, the Company's affiliate in Finland. GCI Ringpress GmbH is a small public
relations subsidiary in Germany. Its financial statements were consolidated into
the Company's financial statements beginning in 2002.

15. On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("FAS 150"). This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer, and have
characteristics of both liabilities and equity. FAS 150 represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments. Effective July 1, 2003, the
Company's redeemable Preferred Stock has been classified as a liability.
Additionally, the change in the redemption value of the Company's redeemable
Preferred Stock and dividend payments to the preferred shareholder which were

10

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

previously recorded as changes in Retained Earnings will be prospectively
recorded increases or decreases to interest expense. The adoption of FAS 150
will impact working capital and net income. The adoption of FAS 150 will not
have an effect on EPS. The EPS calculation currently includes an adjustment to
net income for the change in the redemption value of preferred stock, which will
now be designated as interest expense eliminating the need for the adjustment.
The income used in the calculation will be the same and not have an effect on
EPS.

16. In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" an Interpretation of ARB No. 51
("FIN 46"), which requires variable interest entities (often referred to as
special purpose entities or SPEs) to be consolidated if certain criteria are
met. FIN 46 is effective as of December 31, 2003 for variable interest entities
that existed prior to February 1, 2003. Companies may adopt the provisions of
FIN 46 effective July 1, 2003 for some or all of the variable interest entities
in which it is the primary beneficiary or holds an interest. The Company has
elected to adopt FIN 46 as of December 31, 2003 for its variable interest
entities (i.e., equity investments and joint venture arrangements) that may
require disclosure or consolidation pursuant to FIN 46. The Company currently
does not believe the impact of adopting FIN 46 for such investment interests
will have a material impact on its consolidated financial statements.

17. Other income-net increased by $3.9 million for the nine months ended
September 30, 2003 primarily as the result of the gain on the sale of an
operating unit in Germany of approximately $2.5 million.

18. In October 2003, a majority-owned subsidiary of the Company's Dutch
operations was closed. The Company wrote off its investment, including goodwill,
in this operation in the amount of $2.6 million in the third quarter upon the
determination that the asset was impaired. The Company believes it has no
continuing liability that would have a material impact on the financial
statements.

19. On October 28, 2003, the Company sold $125 million principal amount of
its 5.0% contingent convertible subordinated debentures, due 2033
("Debentures"), to JP Morgan Securities Inc. ("Initial Purchaser") in a
transaction exempt from the registration requirements of the Securities Act of
1933. On November 7, 2003, the Company sold an additional $25 million principal
amount of Debentures pursuant to an overallotment option held by the Initial
Purchaser. The total net proceeds of the offering, after expenses, is estimated
to be $145 million. The Debentures are convertible in shares of the Common Stock
at an initial conversion price of $961.20 per share provided that any one of
several contingencies are met, including that the Common Stock trades above
$1,153.44 for specified periods of time. The Company expects to use the proceeds
for working capital and other general corporate purposes.

11

PART I

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS

ITEM 2. RESULTS OF OPERATIONS

THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002

Commissions and fees ("gross income") increased 11.7%, or $34.0 million,
during the third quarter of 2003 when compared to the same period in 2002.
Absent exchange rate fluctuations, gross income increased 2.1% in the three
months ended September 30, 2003 versus to the same period in 2002. In the third
quarters of 2003 and 2002, respectively, 45.3% and 48.9% of consolidated gross
income was attributable to the North American operations and 54.7% and 51.1% to
Non-North American ("international") operations. Of the increase in gross income
for the quarter, $22.4 million was due to the weakening of the dollar against
foreign, principally European, currencies. In the third quarter of 2003 gross
income from operations in North America increased 3.3% versus the respective
prior period primarily from increased business from existing clients. Gross
income from international operations increased 19.8% (or 4.7% without the impact
of exchange rate fluctuations) during the third quarter. On a constant currency
basis, gross income in Asia and Latin America improved while Europe remained
flat.

Salaries and employee related expenses increased 9.7% in the third quarter
of 2003 as compared to the same period in 2002. Most of the increase, 8.2%, was
attributable to exchange rate movements, while the remainder is generally in
line with the increase in gross income.

Office and general expenses increased 9.3% in the third quarter of 2003 as
compared to the third quarter of the prior year. Absent the impact of exchange
rates, office and general expenses were up 0.3% reflecting, in part, an
impairment charge of $2.6 million related to the closure of a majority-owned
subsidiary of the Company's operations in The Netherlands.

Inflation did not have a material effect on gross income or expenses during
2003 or 2002.

Interest expense was $3.9 million in the third quarter in each of 2003 and
2002. Interest expense increased as the result of the change in accounting
treatment for the increase in the redemption value of the Company's Preferred
Stock, offset by lower interest expense on short-term borrowing under overdraft
and revolving credit facilities.

Interest income was $0.6 million in the third quarter of 2003 as compared
to $2.2 million for the same period in 2002. The decrease is the result of lower
invested cash balances and lower interest rates earned on such balances.

Other income-net increased by $1.0 million during the third quarter
principally reflecting the absence of write-downs of marketable securities in
the third quarter of 2002.

Minority interest applicable to consolidated companies increased by
$982,000 and equity in earnings of nonconsolidated affiliated companies
decreased by $482,000 during the third quarter of 2003 as compared to the
respective prior period. The fluctuations were primarily due to changes in the
level of profits of the Company's majority-owned companies and nonconsolidated
affiliated companies.

The effective tax rate was 51.0% for the third quarter of 2003 versus 52.4%
in the same period in 2002. The decrease in the third quarter is due principally
to the mix in the concentration of pre-tax income in jurisdictions with lower
effective tax rates.

Net income was $4.6 million in the third quarter of 2003 as compared to net
income of $2.8 million in the respective prior period. Currency movements did
not have a significant impact on net income for the third quarter of 2003.

Currency movements had no effect on pretax profit given the low absolute
level of net income. This was particularly true in the European region where
currency movement was the strongest.

12

Basic and diluted earnings per common share for the third quarter of 2003
were $3.57 and $3.28, respectively. Basic and diluted earnings per common share
for the third quarter of 2002 were $1.92 and $1.76, respectively.

NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002

Gross income increased 8.8%, or $75.9 million, during the nine months ended
September 30, 2003 when compared to the same period in 2002. Absent exchange
rate movements, gross income increased 1.6% in the nine months ended September
30, 2003 when compared to the same period in 2002. Of the increase in gross
income for the nine months ended September 30, 2003, $62.1 million was
attributable to the weakening of the dollar against foreign, principally
European, currencies. In the first nine months of 2003 gross income from
operations in North America increased 3.1% versus the respective prior period
primarily from increased business from existing clients. Gross income from
international operations increased 13.8% (but only 0.8% on a constant currency
basis) during the first nine months when compared to the same periods in 2002.
During the nine months ended September 30, 2003 gross income from Europe was up
15.3% versus the same period in 2002 but, absent the impact of currency
movements was down slightly (0.9%). Gross income in Latin America and Asia
increased 7.6% and was not materially impacted by exchange rates.

Salaries and employee related expenses increased 8.4% for the first nine
months of 2003. Absent exchange rate movements, salary and employee related
expenses increased 1.3% for the first nine months of 2003 and are generally in
line with the increase in gross income.

The increase in office and general expenses of 6.2% (a decrease of 1.7%
absent exchange rate movement) for the nine months ended September 30, 2003 was
less than the increase in gross income reflecting the absence of a $5.1 million
expense recognized in the first three quarters of 2002 for professional fees and
other expenses incurred in connection with the Company's cooperation with the
government investigation mentioned below in the section of this report entitled
"Legal Proceedings" despite an impairment charge of $2.6 million recorded in the
third quarter of 2003 related to the closure of a majority-owned subsidiary of
the Company's operations in The Netherlands.

Inflation did not have a material effect on gross income or expenses during
2003 or 2002.

Interest expense of $11.3 million was relatively constant compared to $11.7
million from the same period in 2002. Interest expense increased as the result
of the change in accounting treatment for the increase in the redemption value
of Preferred Stock, offset by lower interest expense on short-term borrowing
under overdraft and revolving credit facilities.

Interest income was $4.0 million for the nine months ended September 30,
2003 versus $4.5 million for the nine months ended September 30, 2002. The
decrease is the result of lower invested cash balances and lower interest rates
earned on such balances.

Other income-net increased by $3.5 million for the first nine months of
2003 primarily as the result of the gain of approximately $2.5 million on the
sale of a majority owned operating unit in Germany.

Minority interest applicable to consolidated companies decreased by
$783,000 and equity in earnings of nonconsolidated affiliated companies
decreased by $825,000, during the nine months ended September 30, 2003 when
compared to the same period in 2002. The fluctuations were primarily due to
changes in the level of profits of the Company's majority-owned companies and
nonconsolidated affiliated companies. Minority interest was also impacted by the
acquisition of additional shares in the Company's media operation in the United
Kingdom and the sale of a majority owned operating unit in Germany.

The effective tax rate was 49.7% for the first nine months of 2003 versus
48.9% in the same period in 2002. The increase for the nine months ended
September 30, 2003 is due principally to the mix in the concentration of pre-tax
income in jurisdictions with higher effective tax rates.

Net income was $14.4 million for the first nine months of 2003 as compared
to net income of $8.7 million in the respective prior period. Currency movements
did not have a significant impact on net income for the nine months ended
September 30, 2003.

13

Currency movements had no effect on pretax profit given the low absolute
level of net income. This was particularly true in the European region where
currency movement was the strongest.

Basic and diluted earnings per common share for the first nine months of
2003 were $10.30 and $9.45, respectively. Basic and diluted earnings per common
share for the first nine months of 2002 were $6.38 and $5.84, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $119.4 million from $351.0 million
at December 31, 2002 to $231.6 million at September 30, 2003. The working
capital deficit increased to $116.5 million at September 30, 2003, versus a
deficit of $94.8 million at December 31, 2002. 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 since December 31, 2002 is primarily due to a
liability recorded, at the end of the first quarter of 2003, for the purchase
obligation of additional shares in the Company's media operation in the United
Kingdom which was settled in the second quarter for approximately $10.0 million
and the reclassification of the Preferred Stock, with a redemption value of
$11.4 million, to current liabilities.

Domestically, the Company had a short-term committed revolving credit
facility in the amount of $110.0 million at both December 31, 2002 and September
30, 2003. This line of credit was not being utilized at September 30, 2003.
There was $10.0 million outstanding under this credit facility at December 31,
2002. Additionally, this line of credit may be used to secure borrowings in
international 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 $60.1 million and
$57.0 million outstanding at September 30, 2003 and December 31, 2002,
respectively. The changes in the level of short-term borrowing and bank
overdrafts are primarily due to the timing differences on payments to media and
other vendors.

A significant part of the Company's business involves 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. The
utilization of these instruments may at times absorb some of the Company's
credit capacity. In addition, from time to time, the Company may guarantee
certain financial and other obligations of its consolidated subsidiaries.

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 (collectively, "Agreements") pursuant to certain acquisition
arrangements not reflected as liabilities on its consolidated balance sheet of
approximately $38.1 million. Of such amount, 21% is estimated to be paid over
the period from 2003 through 2005 and the remainder to be paid from 2006 and
beyond. The foregoing information is estimated and the actual payments made will
be dependent on future events primarily related to the attainment of earnings
goals, specified operating margins and revenue targets or a combination thereof
in respect of a number of subject companies. Other factors which must be
considered in making the estimate include 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.

Many of the Agreements do not provide for maximum or minimum amounts
payable. As such, there is no definitive range of the amounts payable in the
future. The estimated amounts payable were computed using assumptions as to
earnings bases, dividend rates, earnings growth rates and other factors deemed
to be reasonable for the underlying situations. If the Company were to increase
the earnings assumptions used in estimating the amounts payable uniformly by
10%, the estimated amounts payable would increase to $40.1 million; if the
earnings assumptions were decreased uniformly by 10%, the estimated amounts
payable would decrease to $36.1 million.

14

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. A loan of $50.0
million was taken in November 2000, bears interest at the rate of 8.17% and is
repayable in two equal annual installments, commencing in November 2006. The
other loan of $75.0 million, originally taken in December 1997 and renegotiated
in March 2003 bears interest at the rate of 7.41% and is repayable in three
equal annual installments, commencing in December 2007.

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, 2003 and December 31, 2002, the Company was in
compliance with these covenants.

On October 28, 2003, the Company sold $125 million principal amount of its
5.0% contingent convertible subordinated debentures, due 2033 ("Debentures"), to
JP Morgan Securities Inc. ("Initial Purchaser") in a transaction exempt from the
registration requirements of the Securities Act of 1933. On November 7, 2003,
the Company sold an additional $25 million principal amount of Debentures
pursuant to an overallotment option held by the Initial Purchaser. The total net
proceeds of the offering, after expenses, is estimated to be $145 million. The
Debenture are convertible in shares of the Common Stock at an initial conversion
price of $961.20 per share provided that any one of several contingencies are
met, including that the Common Stock trades above $1,153.44 for specified
periods of time. The Company expects to use the proceeds for working capital and
other general corporate purposes.

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 accounting principles generally accepted in the United States
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
examined to determine what was earned and collectable on such earned amounts for
the purposes of recognizing revenue amounts appropriate for the period. Income
from performance-based incentive fees is generally recorded at the end of a
contract period when the amount to be received can be reasonably estimated.

ACQUISITIONS AND IMPAIRMENT OF INTANGIBLES

The Company, from time to time, makes acquisitions that complement its core
capabilities and strategies, enhance its existing client service infrastructure
and/or provide additional support for current clients. The price of the
acquisitions may be in excess of the fair value of the net tangible assets
acquired. The Company accounts for these acquisitions in accordance with
Statement of Financial Accounting Standards No. 141, Business Combinations.
Normally, acquired client and employment relationships are short term in nature
or cancelable at will, and an acquired entity will have a minimum of tangible
assets over which to allocate purchase price. Therefore, a substantial portion
of the purchase price is allocated to goodwill.

15

The Company assesses the fair value and recoverability of intangible
assets, primarily goodwill, in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets which was adopted
January 1, 2002. When assessing impairment, the carrying value of the assets
less non-debt liabilities is compared to the fair value of the business units
holding the goodwill at the regional levels North America and Europe. (For the
purposes of the calculation, Asian and Latin American goodwill of approximately
$24.0 million are combined with the respective North American and European
regions reflecting the fact that investments in the Asian and Latin American
regions are principally needed to support multi-national clients in North
America and Europe.) If goodwill is deemed to be impaired, the excess of
carrying value of goodwill over fair value of net tangible and intangible assets
is written-off. The Company completed its annual impairment test of goodwill and
intangible assets with indefinite lives as of March 31, 2003, and no impairment
was identified.

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 reviewed regularly 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, 2003 and December 31, 2002,
the Company had $48.0 million and $51.0 million, respectively, of deferred tax
assets net of a valuation reserve of $26.9 million, in both 2003 and 2002, which
it believes to be appropriate.

FIXED ASSETS

Fixed assets fall into three main categories; furniture and fixtures,
computer equipment and leasehold improvements. Depreciation of furniture and
fixtures, and computer equipment is computed principally by the straight-line
method over the useful life of the asset, normally five to ten years for
furniture and fixtures, and three to five years for computer equipment.
Amortization of leasehold improvements is provided for on a straight-line basis
principally over the terms of the related leases but not in excess of the useful
lives of the underlying assets.

FORWARD LOOKING STATEMENTS

In connection with the provisions of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), the Company may include Forward Looking
Statements (as defined in the Reform Act) in oral or written public statements
issued by or on behalf of the Company. These Forward Looking Statements may
include, among other things, plans, objectives, projections, anticipated future
economic performance or assumptions and the like that are subject to risks and
uncertainties. Actual results or outcomes may differ materially from those
discussed in the Forward Looking Statements. Important factors which may cause
actual results to differ include, but are not limited to, the following: the
unanticipated loss of a material client or key personnel, delays or reductions
in client budgets, shifts in industry rates of compensation, government
compliance costs or litigation, unanticipated natural disasters, terrorist
attacks, war, technological developments, creditworthiness of clients and
suppliers, changes in the general economic conditions that affect exchange
rates, changes in interest rates and/or consumer spending either in the United
States or non-United States markets in which the Company operates, unanticipated
expenses, client preferences which can be affected by competition, and/or
changes in the competitive frame, 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 movements
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.

16

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. At September 30,
2003 and December 31, 2002, there were no foreign currency contracts open. The
Company had no derivative contracts outstanding at September 30, 2003 and
December 31, 2002, 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 movements 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, has 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.
PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Since March 2001, the Company has been cooperating with a criminal
investigation being conducted by U.S. Department of Justice Antitrust Division.
The investigation relates to the Graphic Services Department ("Department") of
the Company's New York Division of Grey Worldwide and several former vendors of
the Department. In April 2003, Mr. Mitchell Mosallem, who served as director of
the Department until December 31, 2001, pleaded guilty to a series of criminal
charges alleging, among other things, that Mosallem and others (including other
employees in the Department) conspired (1) to restrain trade by rigging bids and
allocating contracts for certain graphic services performed for a client of the
Company; (2) to charge clients of the Company in excess of amounts appropriately
chargeable, including 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; and (3) to obtain kickbacks from former vendors of the
Department. In November 2002, two of Mosallem's codefendants -- a vendor known
as The Color Wheel, Inc. and its principal owner, Haluk Ergulec -- pleaded
guilty to various charges, including conspiracy to defraud the Company and its
clients. The government also had previously indicated that it was examining
whether there was Company responsibility in this matter. In connection with Mr.
Ergulec's guilty plea, however, the government filed with the court a written
plea agreement identifying the Company as a victim of Ergulec's offenses and
requiring Ergulec to pay $1.1 million to the Company in restitution. In February
2002, the Company hired from outside the Company a new Director of the
Department. In addition, Deloitte & Touche was retained on behalf of the Company
and has conducted a comprehensive review of the Department. Based on their
reviews, the Company has implemented improved policies and procedures with
respect to the department and to the Company in general.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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 13, 2003, reporting Items 5, 9
and 12. "Other Events", "Regulation FD Disclosure" and "Disclosure of
Results of Operations and Financial Conditions", respectively.

The Company filed reports, dated October 21, 2003, October 23, 2003 and
October 28, 2003, reporting Items 5 and 7, "Other Events" and
"Financial Statements, Pro Forma Financial Information and Exhibits",
respectively.

The Company filed a report, dated October 22, 2003, reporting Items 7
and 9, "Financial Statements, Pro Forma Financial Information and
Exhibits" and "Regulation FD Disclosure", respectively.

17

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

GREY GLOBAL GROUP INC.
(Registrant)

Dated: November 13, 2003 By: /s/ STEVEN G. FELSHER
------------------------------------
Steven G. Felsher,
Vice Chairman
Chief Financial Officer
Secretary and Treasurer
(Duly Authorized Officer)

Dated: November 13, 2003 By: /s/ LESTER M. FEINTUCK
------------------------------------
Lester M. Feintuck,
Senior Vice President
Chief Financial Officer U.S.
Controller
(Chief Accounting Officer)

18

INDEX TO EXHIBITS