GREY GLOBAL GROUP INC - 10-Q Quarterly Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 JUNE 30, 2004

[ ] 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 (IRS Employer
of 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 Securities Exchange Act of 1934) [X] Yes [ ] No

As of July 31, 2004, the total number of shares outstanding of Registrant's
Common Stock, par value $0.01 per share ("Common Stock"), was 1,159,665 and of
Registrant's Limited Duration Class B Common Stock, par value $0.01 per share
("Class B Common Stock"), was 231,065.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

GREY GLOBAL GROUP INC.

AND CONSOLIDATED SUBSIDIARY COMPANIES

INDEX

1

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

- ---------------

(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 (UNAUDITED)

See accompanying notes to condensed consolidated financial statements.
3

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to condensed consolidated financial statements.
4

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 in the United States
for interim financial statements. The interim financial statements include all
adjustments, which are of a normal recurring nature, that management considers
necessary to present fairly the 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, 2003 filed with the Securities and
Exchange Commission.

2. The financial statements as of June 30, 2004 and for the three and six
months ended June 30, 2004 and 2003 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.
Material intercompany balances and transactions have been eliminated in
consolidation.

3. The results of operations for the three and six months ended June 30,
2004 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 December 31, 2003, 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 (collectively, "Preferred Stock"). All of these shares were
redeemed for cash in accordance with their terms on April 7, 2004 for the value
of the shares shown on the balance sheet ($12.0 million) as at December 31,
2003. The holder of the Preferred Stock was the Chairman and Chief Executive
Officer of the Company. Each share of Preferred Stock was 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) as at the year end prior to redemption, less a fixed discount
established upon the issuance of the Preferred Stock. The holder of the
Preferred Stock had been 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.

6. The computation of basic earnings per common share for the three and six
months ended June 30, 2004 is based on net income and the weighted average
number of common shares outstanding and, for diluted earnings per common share,
includes adjustments for the effect of the assumed exercise of dilutive stock
options and the effect of certain share grants pursuant to the Company's stock
incentive plans.

For the purpose of computing basic earnings per common share for the three
and six months ended June 30, 2003, the Company's net income was reduced by the
increase in the redemption value of the Company's Preferred Stock, which was
redeemed in accordance with its terms after December 31, 2003, the date at which
the Preferred Stock was valued. For the purpose of computing diluted earnings
per common share for periods in 2003, net income was also adjusted by the
interest savings, net of tax, on the assumed conversion of the Company's 8 1/2%
Convertible Subordinated Debentures, which were converted on December 31, 2003.

Shares issuable upon conversion of the Company's 5% Contingent Convertible
Subordinated Debentures are excluded from the computation of diluted earnings
per common share since the contingent conditions for conversion have not been
met.

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
dilutive potential common shares:

- ---------------

(1) Dividends paid on the Preferred Stock prior to redemption in 2004 have been
treated as interest expense.

(2) Includes 4,941 shares expected to be issued pursuant to the Senior
Management Incentive Plan for the three and six months ended June 30, 2004,
respectively, and 14,877 and 19,468 shares expected to be issued pursuant to
the Senior Management Incentive Plan for the three and six months ended June
30, 2003, respectively.

7. During the second quarter of 2004 and 2003, total comprehensive income
amounted to $7.9 million and $13.4 million, respectively, and for the six months
ended June 30, 2004 and 2003 total comprehensive income was $27.5 million and
$29.0 million, 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.

6

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Revenue, operating income (loss) and income (loss) of
consolidated companies before taxes on income for the three and six months ended
June 30, 2004 and 2003, and related identifiable assets at June 30, 2004 and
December 31, 2003 are summarized below by geographic region:

Revenue from the United States amounted to, approximately, 93.4% and 93.5%
of the North American total for the three months ended June 30, 2004 and 2003,
respectively, and for the six months ended June 30, 2004 and 2003 amounted to
approximately 93.2% and 93.8%, respectively.

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 expenses stock options issued
after January 1, 2003 using the fair value method as provided for in FAS 148.
There were 4,488 options granted in the second quarter 2004 and 1,500 options
granted in the first quarter of 2004. There were 326 options granted in the
second quarter of 2003 and no options were granted in the first quarter 2003.
Under FAS 123 the compensation expense for the three and six months ended June
30, 2004 was $16,000 and $32,000, respectively.

Pro forma information regarding net income and earnings per common share
has been determined as if the Company had accounted for employee stock options
issued prior to January 1, 2003 under the fair value method. The approximate
fair value for these options was estimated at the date of grant using a
Black-Scholes

7

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

option valuation model with the following weighted average assumptions for the
period ending June 30, 2004: 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.

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
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 vesting period of the options. 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

8

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$58.8 million. Of such amount, 52% is estimated to be paid over the period from
2004 through 2007 and the remainder to be paid from 2008 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. 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 $69.2 million; if the
earnings assumptions were decreased uniformly by 10%, the estimated amounts
payable would decrease to $48.4 million.

11. The Company assesses annually 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. As part of
the annual evaluation, the fair value of the business units, on the regional
levels of North America and Europe, is compared to the carrying value of those
business units. For the purposes of the analysis, Asian and Latin American
business units 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 impairment is indicated, the excess of the carrying value
of the goodwill over fair value of the business units is written off. The
Company completed its annual impairment test of goodwill and intangible assets
with indefinite lives as of March 31, 2004, and no impairment was identified nor
were there impairment indicators subsequent to March 31, 2004.

12. 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 or other obligations of its consolidated
subsidiaries.

13. 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 had been classified as a liability.
Additionally, thereafter the change in the redemption value of the Company's
redeemable Preferred Stock and dividend payments to the preferred shareholder
which previously had been recorded as changes in Retained Earnings were recorded
as increases in interest expense. The adoption of FAS 150 did not have an effect
on EPS. The Company redeemed the Preferred Stock on April 7, 2004.

14. 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 was effective as of January 31, 2003 for variable interest entities
created after that date and other variable interest
9

GREY GLOBAL GROUP INC. AND CONSOLIDATED SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

entities in the first quarter of 2004. The adoption of FIN 46 did not have any
impact on the Company's consolidated financial statements.

15. On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief
Executive Officer, exercised non-qualified stock options (the "Options") to
purchase 40,000 shares of Common Stock at an aggregate exercise price of $5.94
million (or $148.50 per share). The Options, which had been issued in 1995
pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), were set to
expire on January 5, 2004. In accordance with the terms of the Plan, Mr. Meyer
elected to pay the exercise price through delivery to the Company of 8,774
shares, based on the $677 per share closing price on January 5, 2004. Mr. Meyer
also delivered to the Company 12,316 shares of Common Stock in satisfaction of
tax withholding obligations, based on the $676.51 per share price as determined
in accordance with applicable tax regulations.

16. The Company recognized a $6.1 million loss on the sale of a subsidiary
at its Scandinavian operation in the first quarter of 2004. The Company believes
it has no continuing liability that will have a material impact on the financial
statements.

17. On April 7, 2004, the Company redeemed, in accordance with their terms,
all of the outstanding shares of the Preferred Stock. The Preferred Stock, which
was originally issued over 20 years ago pursuant to the Company's Book Value
Preferred Stock Plan, was owned by Mr. Edward H. Meyer, the Company's Chairman
and Chief Executive Officer. The redemption price paid of $12.0 million was paid
in cash. On April 7, 2004, Mr. Meyer repaid in full $0.8 million of certain
promissory notes provided to the Company by Mr. Meyer at the time the Preferred
Stock was originally acquired.

10

PART I

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

ITEM 2. RESULTS OF OPERATIONS

Overview

The Company ranks among the largest global communications companies in the
world, operating business units in many communications disciplines. These
disciplines include general advertising, public relation/public affairs, direct
marketing, internet communications, healthcare marketing, brand strategy and
design, and on-line and off-line media services. Frequently, our clients use a
number of our business units.

In the second quarter of 2004, revenue was up 13.8%, income of consolidated
companies before taxes ("pre-tax profit") improved by 87.3% and net income was
better by 127.0%. For the six months ended June 30, 2004, revenue grew by 14.6%,
pre-tax profit grew by 66.6% and net income increased by 73.9% over the same
period in 2003. There were increases in revenues and profitability in all
regions.

Liquidity is strong with continued high cash and cash equivalents balances.

SECOND QUARTER ENDED 2004 COMPARED TO SECOND QUARTER ENDED 2003

Revenue

The following chart shows the breakdown of the Company's revenue in the
second quarter of 2004 and 2003 by region:

International operations contributed a greater percentage of the Company's
revenue in the second quarter of 2004 than the corresponding quarter in the
previous year because of the strengthening of foreign,

11

particularly European, currencies against the United States dollar; the impact
of exchange rate movements is summarized in the following chart:

Revenue increased 13.8%, or $44.1 million, during the second quarter of
2004 when compared to the same period in 2003. Revenue at the Company's
international operations grew by $32.1 million, of which $21.9 million was due
to the weakening of the dollar against selected foreign, principally European,
currencies. In the second quarter of 2004, revenue in North America increased
8.4% versus the respective prior period primarily from increased business from
existing clients.

Expenses

Salaries and employee related expenses increased 10.0% in the second
quarter of 2004 as compared to the same period in 2003. Of the increase, 7.0%
was attributable to exchange rate movements. Office and general expenses
increased 5.4% in the second quarter of 2004, as compared to the second quarter
of the prior year. Absent the impact of exchange rates, office and general
expenses declined by 1.9% because of the Company's continued focus on cost
containment.

Inflation did not have a material effect on revenue or expenses during 2004
or 2003.

Other Income/Expense

Other Income/Expense for 2004 compared to 2003 is set forth below:

Interest expense increased because of the impact of the issuance in the
fourth quarter of 2003 of the Company's 5% Contingent Convertible Subordinated
Debentures ("Convertible Debentures"). Interest income decreased despite higher
cash balances because of generally lower returns on invested cash. The decrease
in other income/expense -- net reflects the absence of a $2.5 million gain on
the sale of a majority owned operating unit in Germany in the second quarter of
2003.

12

Pre-tax Profit

The Company's pre-tax profit rose by $10.6 million (up 87.3%) from the
second quarter of 2003.

North American pre-tax profit increased by 56.0% for the quarter ended June
30, 2004 as compared to the same period in 2003 as a result of the continued
revenue growth and emphasis on cost containment. The pre-tax profit from the
Company's European operations in the second quarter of 2004 showed strong growth
and increased margins. This result was achieved despite continuing losses in the
Company's Scandinavian operations ($4.6 million in the second quarter 2004
compared to a loss of $4.7 million in the corresponding quarter in 2003). The
loss in Scandinavia in the second quarter of 2004 primarily related to the costs
incurred in reducing expenses further at the region's parent organization and in
certain other units.

Taxes

The effective tax rate was 49.3% for the second quarter of 2004 versus
50.8% in the same period in 2003. The improvement in the tax rate was impacted
by the increase in profitability.

Minority Interest/Equity Accounting

Minority interest applicable to consolidated companies decreased by $0.4
million and equity in earnings of nonconsolidated affiliated companies increased
by $28,000 during the second quarter of 2004 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 and nonconsolidated affiliated companies.

Net Income/EPS

Net income was $10.8 million in the second quarter of 2004 as compared to
net income of $4.7 million in the respective prior period, an increase of
127.0%. Diluted earnings per share increased by 148.2% to $7.62 per share as
against $3.07 per share. Diluted earnings per share increased at a greater
percentage rate than the increase in net income because increases in the value
of the Preferred Stock reduced the earnings used for the determination of
earnings per share calculations in 2003; the Preferred Stock was redeemed in
April 2004 and there was no such reduction in earnings used for the
determination of earnings per share calculations after April 2004. The Company's
Preferred Stock was redeemed on April 7, 2004 and its value was fixed as of
December 31, 2003.

SIX MONTHS 2004 COMPARED TO SIX MONTHS 2003

Revenue

The following chart shows the breakdown of the Company's revenue for the
six months ended June 30, 2004 and 2003 by area:

International operations contributed a greater percentage of the Company's
revenue for the six months ended June 30, 2004 than the first six months of the
previous year because of the strengthening of foreign,

13

particularly European, currencies against the United States dollar; the impact
of exchange rate movements is summarized in the following chart:

Revenue increased 14.6%, or $90.3 million, for the six months ended June
30, 2004 when compared to the same period in 2003. Revenue at the Company's
international operations grew by $65.4 million, of which $46.4 million was due
to the weakening of the dollar against selected foreign, principally European,
currencies. For the six months ended June 30, 2004, revenue in North America
increased 9.1% versus the respective prior period primarily from increased
business from existing clients.

Expenses

Salaries and employee related expenses increased 12.0% during the first six
months of 2004 as compared to the same period in 2003. Of the increase, 7.6% was
attributable to exchange rate movements. The increase is generally in line with
the increase in revenue.

Office and general expenses increased 10.4% during the first six months of
2004, as compared to same period in the prior year. Absent the impact of
exchange rates, office and general expenses increased 8.7%.

The increases in expenses are generally in line with the increase in
revenue.

Inflation did not have a material effect on gross income or expenses during
2004 or 2003.

Other Income/Expense

Other Income/Expense for the six months ended June 30, 2004 compared to the
six months ended June 30, 2003 is set forth below:

Interest expense increased because of the impact of the issuance in the
fourth quarter of 2003 of the Company's 5% Contingent Convertible Subordinated
Debentures ("Convertible Debentures"). Interest income increased because of
higher invested cash balances. The decrease in other income/expense -- net

14

reflects the absence of a $2.5 million gain on the sale of a majority owned
operating unit in Germany in the second quarter of 2003.

Pre-tax Profit

The Company's pre-tax profit rose by $15.5 million for the first six months
of 2004 as compared to the same period in 2003. Pre-tax profit in North America
improved by 27.0%. The pre-tax profit from the Company's European operations for
the first six months of 2004 more than doubled. This result was achieved despite
a loss at the Company's Scandinavian operations of $13.5 million (absent
exchange rate movements of $10.9 million) for the first six months in 2004, as
compared to a $7.4 million pre-tax loss incurred in the corresponding period in
2003. The loss included $6.1 million recognized in the first quarter of 2004 on
the sale of a subsidiary of the Scandinavian operations. This subsidiary, and
another Scandinavian operation which was sold and for which a loss was taken in
2003, had period losses of $1.1 million for the six months ended June 30, 2004
versus $1.3 million for the six months ended June 30, 2003; the Company
anticipates incurring no further losses from these business units. The pre-tax
loss incurred in Scandinavia also reflects the costs of extensive steps the
Company has taken to remediate its operations there.

Taxes

The effective tax rate is 50.0% for the six months ended June 30, 2004
versus 49.0% in the same period in 2003. The increase is due principally to
losses incurred in Scandinavia for which no tax benefit is recorded.

Minority Interest/Equity Accounting

Minority interest applicable to consolidated companies increased by $0.3
million and equity in earnings of nonconsolidated affiliated companies increased
by $93,000 during the second quarter of 2004 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 and nonconsolidated affiliated companies.

Net Income/EPS

Net income was $17.1 million in the first six months ended June 30, 2004 as
compared to net income of $9.8 million in the respective prior period, an
increase of 73.9%. Diluted earnings per share increased by 95.8% to $12.12 per
share as against $6.19 per share. Diluted earnings per share increased at a
greater percentage rate than the increase in net income because increases in the
value of the Preferred Stock reduced the earnings used for the determination of
earnings per share calculations in 2003; the Preferred Stock was redeemed in
April 2004 and there was no such reduction in earnings used for the
determination of earnings per share calculations after April 2004. The Company's
Preferred Stock was redeemed on April 7, 2004 and its value was fixed as of
December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $17.7 million from $510.4 million at
December 31, 2003 to $492.8 million at June 30, 2004. Working capital increased
to $45.8 at June 30, 2004, versus $44.1 million at December 31, 2003. The
changes in cash and cash equivalents and the elements of working capital are,
primarily, attributable to the timing of collections of accounts receivable and
billing of expenses to clients versus payments to trade vendors.

The Company had available $110.0 million under an annual revolving credit
facility from a syndicate of JP Morgan Chase Bank, HSBC Bank USA, Barclays Bank
PLC, Bank of America, North Fork Bank and City National Bank at June 30, 2004
and December 31, 2003. This line of credit was not utilized during the quarter.
A portion of the line can be borrowed in certain foreign currencies and used by
the Company's international operations. 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 $45.9 million
and $70.5 million outstanding at June 30, 2004 and December 31, 2003,
respectively, under these

15

facilities. 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.

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 cash requirements.

The Company has two loans outstanding from the Prudential Insurance Company
of America. The first loan of $75.0 million from December 1997 bore interest at
the rate of 6.94% and was originally repayable in three equal annual
installments, commencing in December 2003. This loan was renegotiated in March
2003, with a fixed interest rate of 7.41%, and principal repayments of $25.0
million in March, 2007, 2008 and 2009, respectively. The second loan of $50.0
million was drawn in November 2000, bears interest at the rate of 8.17% and is
repayable in two equal annual installments, commencing in November 2006.

In October 2003, the Company sold $150 million principal amount of its 5.0%
Contingent Convertible Subordinated Debentures, due 2033 ("Debentures"). 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 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 June 30, 2004 and December 31, 2003, the Company was in compliance
with these covenants.

On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief
Executive Officer, exercised non-qualified stock options (the "Options") to
purchase 40,000 shares of Common Stock at an aggregate exercise price of $5.94
million (or $148.50 per share). The Options, which had been issued in 1995
pursuant to the Company's 1994 Stock Incentive Plan ("Plan"), were set to expire
on January 5, 2004. In accordance with the terms of the Plan, Mr. Meyer elected
to pay the exercise price through delivery to the Company of 8,774 shares, based
on the $677 per share closing price on January 5, 2004. Mr. Meyer also delivered
to the Company 12,316 shares of Common Stock in satisfaction of tax withholding
obligations, based on the $676.51 per share price as determined in accordance
with applicable tax regulations.

SUMMARY OF SIGNIFICANT CONTRACTUAL OBLIGATIONS

As at June 30, 2004, there have been no material changes, except for media
commitments which can fluctuate by material amounts in the ordinary course of
business, as compared to the contractual obligations identified at December 31,
2003. Media commitments decreased significantly in the quarter ended June 30,
2004 as compared to December 31, 2003 as a result of the seasonality of media
purchasing patterns and related billings in the normal course of business.

The Company makes commitments when it purchases media time and space from
various media suppliers on behalf of its clients. The liability for the media is
generally recorded on the Company's balance sheet when the client is billed,
usually in the month that the underlying advertising appears. As part of the
general practice in the industry, the Company frequently is required to reserve,
or commit to purchase, media time and space with the media suppliers well before
a commercial is aired or a publication reaches the market. The duration of these
commitments vary depending on the type of media purchased and the terms of the
particular purchase. The duration of any commitment may be as short as a few
days or as long as a year. These commitments are only entered into following the
specific authorization of clients who, in turn, commit to
16

reimburse the Company. In practice, clients fulfill their commitments to the
Company enabling it, in turn, to fulfill its commitments. There are, however,
instances where a client may seek to alter its commitments to purchase media. It
is general industry practice that media suppliers seek to accommodate the
client's wishes, in part, because the media suppliers wish to maintain good,
on-going relations with important clients, such as the Company represents, and
large buyers of media like the Company.

The Company guards against loss in respect of its media commitments in
various ways. The Company considers the credit-worthiness of its clients and
sets relevant terms of business appropriately, and may purchase credit insurance
in certain instances. In certain markets, the Company is also protected in
respect of its commitments if a client does not fulfill its underlying
obligations by the rule of sequential liability, which generally provides that a
buyer of media is not required to pay a media supplier unless such buyer has
been paid by its client.

At December 31, 2003, the amount of Company's media commitments not
recorded on its balance sheet was $1,048.7 million, of which $357.0 million was,
as of that date, cancelable by the terms of those commitments.

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.

The Company assesses the fair value and recoverability of intangible
assets, almost exclusively goodwill, in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. When
assessing potential impairment of goodwill, the fair value of all business units
at the regional levels of North America and Europe is compared to the carrying
value of those business units. For the purposes of the analysis, Asian and Latin
American business units are combined with the respective North American and
European regions reflecting the fact that investments in the Asian and Latin
American regions
17

are principally needed to support multi-national clients serviced in North
America and Europe. If impairment is indicated, the excess of the carrying value
of the goodwill over fair value of the business units is written-off. The
Company completed its annual impairment test of goodwill and intangible assets
with indefinite lives as of March 31, 2004, and no impairment was identified,
nor were there any impairment indicators subsequent to March 31, 2004.

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.

SALARIES AND EMPLOYEE RELATED EXPENSES

The Company records salaries and employee related expenses as a period cost
when incurred. Salary expense is generally recorded in the period that the
salary is paid. Discretionary bonuses are estimated and accrued as short-term
liabilities each period. Bonuses are paid shortly after year end. Stock and
other incentive plans and contractual bonuses are clearly identifiable and
determinable, and are generally accrued when earned by the employee.

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 June 30, 2004 and December 31, 2003, the
Company had $54.5 million and $53.7 million, respectively, of deferred tax
assets net of a valuation reserve of $28.1 million, in 2004 and $25.4 million in
2003, 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 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
fluctuations given the Company's extensive international operations. Generally,
the foreign currency exchange risk is limited to net income of

18

each operation because the Company's revenue 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 2004 and 2003 was for less than
three months and the amount open at June 30, 2004 and December 31, 2003 was not
material. At June 30, 2004 and December 31, 2003, there were no foreign currency
contracts open. The Company had no derivative contracts outstanding at June 30,
2004 or December 31, 2003, 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 generally 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.

19

PART II

OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

ISSUER PURCHASES OF EQUITY SECURITIES

- ---------------

(1) On January 5, 2004, Edward H. Meyer, the Company's Chairman and Chief
Executive Officer, exercised non-qualified stock options (the "Options") to
purchase 40,000 shares of Common Stock at an aggregate exercise price of
$5,940,000 (or $148.50 per share). The Options, which had been issued in
1995 pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), were
set to expire on January 5, 2004. In accordance with the terms of the Plan,
Mr. Meyer elected to pay the exercise price through delivery to the Company
of 8,774 shares, based on the $677 per share closing price on January 5,
2004. Mr. Meyer also delivered to the Company 12,316 shares of Common Stock
in satisfaction of tax withholding obligations, based on the $676.51 per
share price as determined in accordance with applicable tax regulations.

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

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The information required by this subsection of this Item is provided in
the Index to Exhibits of this report. Such index provides a listing of
exhibits filed with this report and those incorporated herein by
reference.

(b) Reports on Form 8-K.

The Company filed a report on Form 8-K, dated April 9, 2004, reporting
Item 5, "Other Events".

The Company filed a report on Form 8-K, dated April 19, 2004, reporting
Item 5, "Other Events".

The Company filed a report on Form 8-K, dated May 10, 2004, reporting
Item 5, "Other Events".

The Company filed a report on Form 8-K, dated May 18, 2004, reporting
Item 5, "Other Events".

The Company filed a report on Form 8-K, dated July 20, 2004, reporting
Item 5, "Other Events".

20

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: August 9, 2004

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

Dated: August 9, 2004

21

INDEX TO EXHIBITS