FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________to_________
Commission file number 001-14093
Young & Rubicam Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1493710
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
285 Madison Avenue, New York, New York 10017
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 210-3000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, as of July 31, 1998 was 66,706,897.
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Equity/(Deficit)
for the Six Months Ended June 30, 1998 and for the
Year Ended December 31, 1997 5
Notes to Consolidated Financial
Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 10
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document, information included in future filings by Young & Rubicam Inc.
(the "Company") with the United States Securities and Exchange Commission (the
"SEC"), and information contained in written materials, press releases and oral
statements issued by or on behalf of the Company contain, or may contain,
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include statements
regarding the intent, belief or current expectations of the Company or its
officers (including statements preceded by, followed by or that include
forward-looking terminology such as "may," "will," "should," "believes,"
"expects," "anticipates," "estimates," "continues" or similar expressions or
comparable terminology, including the negative thereof) with respect to various
matters. These forward-looking statements include statements in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this document relating to the Company's performance. It
is important to note that the Company's actual results could differ materially
from those anticipated in these forward-looking statements depending on, among
other important factors, (i) revenues received from clients, including revenues
pursuant to incentive compensation arrangements entered into by the Company with
certain clients, (ii) gains or losses of clients and client business and
projects, as well as changes in the marketing and communications budgets of
clients, (iii) the level of economic activity in the principal markets in which
the Company conducts business and other trends affecting the Company's financial
condition or results of operations, (iv) the impact of competition in the
marketing and communications industry and (v) the Company's liquidity and
financing plans. All forward-looking statements in this document are based on
information available to the Company on the date hereof. In addition, the
matters set forth under the caption "Risk Factors" in the Company's Prospectus
dated May 11, 1998 filed with the SEC pursuant to Rule 424(b) of the Securities
Act of 1933, as amended, constitute cautionary statements identifying important
factors with respect to such forward-looking statements, including certain risks
and uncertainties that could cause actual results to differ materially from
those in such forward-looking statements.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 76,760 $ 160,263
Accounts receivable, net of allowance for doubtful accounts of $14,839
and $14,125 at June 30, 1998 and December 31, 1997, respectively 803,313 790,342
Costs billable to clients, net 64,619 50,479
Other receivables 32,355 35,218
Deferred income taxes 29,034 32,832
Prepaid expenses and other assets 21,937 17,989
------------- -------------
Total Current Assets 1,028,018 1,087,123
------------- -------------
NONCURRENT ASSETS
Property and equipment, net 119,934 125,014
Deferred income taxes 192,319 124,192
Goodwill, less accumulated amortization of $78,804 and $80,166 at
June 30, 1998 and December 31, 1997, respectively 108,095 116,637
Equity in net assets of and advances to unconsolidated companies 28,031 26,393
Other assets 39,241 48,660
------------- -------------
Total Noncurrent Assets 487,620 440,896
------------- -------------
Total Assets $ 1,515,638 $ 1,528,019
============= =============
CURRENT LIABILITIES
Loans payable $ 28,486 $ 10,765
Accounts payable 878,871 811,162
Installment notes payable 4,104 3,231
Accrued expenses and other liabilities 217,752 273,011
Accrued payroll and bonuses 48,840 65,458
Income taxes payable 22,839 29,665
------------- -------------
Total Current Liabilities 1,200,892 1,193,292
------------- -------------
NONCURRENT LIABILITIES
Loans payable 75,059 330,552
Installment notes payable 400 6,503
Deferred compensation 31,894 31,077
Other liabilities 112,748 112,851
------------- -------------
Total Noncurrent Liabilities 220,101 480,983
------------- -------------
Commitments and Contingencies
Minority Interest 5,144 6,987
------------- -------------
MANDATORILY REDEEMABLE EQUITY SECURITIES
Common stock, par value $.01 per share; authorized - 250,000,000
shares; issued and outstanding - 0 shares and 50,658,180 shares at
June 30, 1998 and December 31, 1997, respectively - 508,471
------------- -------------
STOCKHOLDERS' EQUITY/(DEFICIT)
Preferred stock:
Money Market Preferred Stock - Cumulative variable dividend; liquidating
value of $115.00 per share; one-tenth of one vote per share; authorized
50,000 shares; 87 shares issued and outstanding - -
Cumulative Participating Junior Preferred Stock - $ dividend; liquidating
value of $1.00 per share; 100 votes per share; authorized 2,500,000
shares; no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized - 250,000,000
shares; issued and outstanding - 66,670,462 and 11,086,950 shares at
June 30, 1998 and December 31, 1997, respectively 704 111
Capital surplus 936,606 23,613
Accumulated deficit (809,858) (522,866)
Cumulative translation adjustment (18,686) (16,577)
Pension liability adjustment (706) (706)
Common stock in treasury, at cost; 3,681,048 and 1,115,160 shares at
June 30, 1998 and December 31, 1997, respectively (18,559) (8,550)
Unearned compensation - restricted stock - (136,739)
------------- -------------
Total Stockholders' Equity/(Deficit) 89,501 (661,714)
------------- -------------
Total Liabilities, Mandatorily Redeemable Equity Securities
and Stockholders' Equity/(Deficit) $ 1,515,638 $ 1,528,019
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 372,128 $ 345,474 $ 720,301 $ 643,680
Compensation expense, including employee benefits 218,667 205,491 432,265 394,091
General and administrative expenses 109,484 104,827 218,726 200,340
Other operating charges 234,449 - 234,449 -
------------ ------------ ------------ ------------
Operating expenses 562,600 310,318 885,440 594,431
------------ ------------ ------------ ------------
(Loss)/income from operations (190,472) 35,156 (165,139) 49,249
Interest expense, net (4,597) (9,327) (10,172) (17,630)
Other income 1,373 - 2,200 -
------------ ------------ ------------ ------------
(Loss)/income before income taxes (193,696) 25,829 (173,111) 31,619
Income tax (benefit)/expense (47,057) 12,808 (38,205) 15,651
------------ ------------ ------------ ------------
(146,639) 13,021 (134,906) 15,968
Equity in net income of unconsolidated companies 1,512 1,430 1,627 2,470
Minority interest in net (income)/loss of
consolidated subsidiaries (264) (935) 78 (833)
------------ ------------ ------------ ------------
(Loss)/income before extraordinary charge (145,391) 13,516 (133,201) 17,605
Extraordinary charge for early retirement of debt,
net of tax benefit of $2,834 (4,433) - (4,433) -
------------ ------------ ------------ ------------
Net (loss)/income ($ 149,824) $ 13,516 ($ 137,634) $ 17,605
============ ============ ============ ============
(Loss)/earnings per share:
Basic:
(Loss)/income before extraordinary charge ($ 2.45) $ 0.29 ($ 2.42) $ 0.37
============ ============ ============ ============
Extraordinary charge ($ 0.08) $ - ($ 0.08) $ -
============ ============ ============ ============
Net (loss)/income ($ 2.53) $ 0.29 ($ 2.50) $ 0.37
============ ============ ============ ============
Diluted:
(Loss)/income before extraordinary charge ($ 2.45) $ 0.22 ($ 2.42) $ 0.29
============ ============ ============ ============
Extraordinary charge ($ 0.08) $ - ($ 0.08) $ -
============ ============ ============ ============
Net (loss)/income ($ 2.53) $ 0.22 ($ 2.50) $ 0.29
============ ============ ============ ============
Weighted average shares used to compute:
Basic 59,272,814 47,382,330 55,040,989 47,382,330
============ ============ ============ ============
Diluted 59,272,814 60,619,742 55,040,989 60,433,102
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income ($137,634) $ 17,605
Adjustments to reconcile net (loss)/income to net cash used by operating activities:
Depreciation and amortization 28,353 27,096
Other operating charges 234,449 -
Extraordinary charge, net 4,433 -
Deferred income tax (benefit)/ expense (64,329) 7,188
Equity in net income of unconsolidated companies (1,627) (2,470)
Dividends from unconsolidated companies 908 1,980
Minority interest in net (loss)/income of consolidated subsidiaries (78) 833
Change in assets and liabilities, excluding effects from acquisitions,
dispositions, recapitalization and foreign exchange:
Accounts receivable, net (20,259) 52,411
Costs billable to clients, net (14,949) (16,001)
Other receivables 2,241 (9,797)
Prepaid expenses and other assets (4,102) (5,244)
Accounts payable 49,586 (50,030)
Accrued expenses and other liabilities (66,020) (40,541)
Accrued payroll and bonuses (17,607) (20,619)
Income taxes payable (4,176) (5,852)
Deferred compensation 1,957 1,380
Other 5,101 5,547
--------- ---------
Net cash used in operating activities (3,753) (36,514)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (20,044) (28,277)
Acquisitions, net of cash acquired (499) (2,846)
Investment in net assets of and advances to unconsolidated companies (2,428) (5,379)
Proceeds from notes receivable 339 647
--------- ---------
Net cash used in investing activities (22,632) (35,855)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable, long-term 215,000 230,619
Repayment of loans payable, long-term (470,125) (2,714)
Proceeds from loans payable, short-term, net 58,097 31,647
Proceeds from issuance of common stock in initial public offering, net 158,637 -
Deferred financing costs (667) -
Recapitalization payments - (247,272)
Payments of non-recapitalization deferred compensation (3,302) (11)
Common stock repurchased (10,009) -
Common stock issued and other 3,081 -
Payment of installment notes, net (5,229) -
Dividends paid to minority shareholders (1,206) (612)
--------- ---------
Net cash (used in)/provided by financing activities (55,723) 11,657
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (1,395) (5,103)
--------- ---------
Net decrease in cash and cash equivalents (83,503) (65,815)
Cash and cash equivalents, beginning of period 160,263 110,180
--------- ---------
Cash and cash equivalents, end of period $ 76,760 $ 44,365
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 12,279 $ 16,709
========= =========
Income taxes paid $ 16,020 $ 11,461
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY/(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
VOTING COMMON
COMMON CAPITAL ACCUMULATED STOCK IN RESTRICTED
STOCK SURPLUS DEFICIT TREASURY STOCK
------- ------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $ 111 $ 106,825 ($498,928) $ - ($ 85,000)
Net loss - - (23,938) - -
Common stock issued - 1,501 - - -
Common stock repurchased - - - (8,550) -
Unearned compensation -
restricted stock - 51,739 - - (51,739)
Common stock options
exercised/repurchased 44 8,711 - - -
Accretion of mandatorily redeemable
equity securities (44) (145,163) - - -
-------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 $ 111 $ 23,613 ($522,866) ($ 8,550) ($136,739)
Net loss - - (137,634) - -
Issuance of restricted stock - 94,039 - - 136,739
Common stock issued and other 17 3,064 - - -
Common stock repurchased - - - (10,009) -
Issuance of common stock in
initial public offering, net of expenses 69 158,568 - - -
Accretion of mandatorily redeemable
equity securities (3) (137,942) (149,358) - -
Conversion of mandatorily redeemable
equity securities 510 795,264 - - -
-------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 1998 $ 704 $ 936,606 ($809,858) ($ 18,559) $ -
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Young & Rubicam
Inc. (the "Company") have been prepared pursuant to the rules of the Securities
and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Registration Statement filed on Form
S-1 (File No. 333-46929) (the "Form S-1"). In the opinion of management, the
accompanying financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the results for the
periods presented.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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 and
the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
3. Earnings (loss) per Share
The Company computes earnings (loss) per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average shares of common stock outstanding during each period. Diluted
earnings per share reflects the dilutive effect of stock options and other stock
awards granted to employees under stock-based compensation plans. Shares used in
computing basic and diluted earnings (loss) per share were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic - weighted average shares 59,272,814 47,382,330 55,040,989 47,382,330
Effect of dilutive securities - 13,237,412 - 13,050,772
---------- ---------- ---------- ----------
Diluted - weighted average shares 59,272,814 60,619,742 55,040,989 60,433,102
========== ========== ========== ==========
</TABLE>
As of June 30, 1998, there were approximately 31.4 million common stock options
outstanding that could potentially dilute basic earnings (loss) per share in the
future that were excluded from the computation of diluted loss per share because
the effect would be antidilutive.
6
<PAGE>
4. Comprehensive (Loss) Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
requires presentation of information on comprehensive income and its components
in the financial statements. For the Company, comprehensive (loss) income
includes net (loss) income, foreign currency translation adjustments and minimum
pension liability adjustments. Total comprehensive (loss) income and its
components for interim periods ended June 30, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss)/income $(149,824) $13,516 $(137,634) $17,605
Foreign currency translation adjustment,
net of tax (55) (655) (2,109) (8,653)
Pension liability adjustment, net of tax - - - -
--------- ------- --------- --------
Total comprehensive (loss)/income $(149,879) $12,861 $(139,743) $ 8,952
========== ======= ========== ========
</TABLE>
5. Common Stock Dividend
On April 6, 1998, the Board of Directors declared a stock dividend of 14 shares
of common stock payable for each share of common stock outstanding, which
dividend became effective and was paid on May 11, 1998, the effective date of
the Form S-1 for the Company's initial public offering of common stock (the
"Offering"). The Company's historical financial statements have been presented
to give retroactive effect to such common stock dividend. In addition, the
number of shares of common stock the Company is authorized to issue was
increased from 10,000,000 to 250,000,000 and the number of authorized preferred
shares was increased from 50,000 to 10,000,000. Of the authorized preferred
shares, 50,000 shares have been designated as Money Market Preferred Stock and
2,500,000 shares have been designated as Cumulative Participating Junior
Preferred Stock.
6. Public Offering
On May 15, 1998, the Company closed the Offering. An aggregate of 19,090,000
shares (including 2,490,000 shares subject to the underwriters' overallotment
option) of the Company's common stock was offered to the public, of which
6,912,730 shares were sold by the Company and 12,177,270 shares were sold by
certain selling stockholders. Net proceeds to the Company were $158.6 million,
after deducting underwriting discounts and commissions and expenses paid by the
Company in connection with the Offering. The Company did not receive any of the
net proceeds from the sale of common stock by the selling stockholders. The
Company used the net proceeds from the Offering together with $155 million of
borrowings under a new credit facility (see Note 7) to repay all of the
outstanding borrowings under its then existing $700 million senior secured
credit facility.
Upon the consummation of the Offering, 9,231,105 shares of common stock
("Restricted Stock") held in a restricted stock trust vested and resulted in
non-recurring, non-cash, pre-tax compensation charges of $234.4 million which
have been reflected as "other operating charges" in the Company's consolidated
statements of operations for the periods ended June 30, 1998. The Company
redeemed the remaining 1,855,845 shares of Restricted Stock held in the
restricted stock trust upon the consummation of the Offering.
7. New Debt Facility
On May 15, 1998, the Company entered into a $400 million, five-year unsecured
multicurrency revolving credit facility (the "New Facility") which replaced its
then existing $700 million senior secured credit facility. The New Facility
contains certain financial and operating restrictions and covenant requirements,
including a maximum leverage ratio and a minimum interest coverage requirement.
The Company is required to pay a facility fee tied to the leverage ratio ranging
from 0.125% to 0.2% per annum. Under the terms of the New Facility, interest
charged on loans ranges from base rate to Eurodollar and Eurocurrency rate plus
applicable margins tied to the leverage ratio ranging from 0.275% to 0.3%. On
May 15, 1998, the Company used the net proceeds from the Offering together with
$155 million of borrowings under the New Facility to repay all outstanding
borrowings under its then existing $700 million senior secured credit facility.
Approximately $7.3 million of unamortized deferred financing costs related to
the replaced credit facility were charged to expense and have been reflected as
an extraordinary charge, net of an applicable tax benefit of approximately $2.8
million, in the Company's consolidated statements of operations for the periods
ended June 30, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The discussion which follows should be read in conjunction with the Company's
consolidated financial statements and notes thereto, and the information under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contained in the Company's Prospectus dated May 11, 1998
filed in connection with the Offering.
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Revenues for the second quarter of 1998 increased by $26.7 million, or 7.7%, to
$372.1 million compared to the second quarter of 1997. The increase was
primarily due to new business (including business from new clients and higher
revenue from existing clients). U.S. revenues increased by 16.1% to $187.8
million for the second quarter of 1998 compared to the second quarter of 1997.
International revenues increased by 0.4% to $184.3 million for the second
quarter of 1998 compared to the second quarter of 1997. Excluding the effect of
the strengthening (on average) of the U.S. dollar against foreign currencies,
total revenues for the second quarter of 1998 increased by 10.8% and
international revenues increased by 6.1% compared to the second quarter of 1997.
Compensation expense increased by $13.2 million, or 6.4%, to $218.7 million for
the second quarter of 1998 compared to the second quarter of 1997. This increase
was primarily attributable to additional staffing to support business growth and
salary increases. Excluding the effect of foreign currency fluctuations,
compensation expense increased by 8.9% compared to the second quarter of 1997.
General and administrative expenses increased by $4.7 million, or 4.4%, to
$109.5 million for the second quarter of 1998 compared to the second quarter of
1997. This increase was primarily due to additional operating expenses to
support new business growth. Excluding the effect of foreign currency
fluctuations, general and administrative expenses increased by 7.3% compared to
the second quarter of 1997.
Effective upon the consummation of the Offering, the Company recognized other
operating charges of $234.4 million. These other operating charges consisted of
non-recurring, non-cash compensation charges resulting from the vesting of
shares of Restricted Stock allocated to employees. As a result of these charges,
the Company expects to incur a net loss for the year ending December 31, 1998.
Loss from operations was $190.5 million for the second quarter of 1998 compared
to income from operations of $35.2 million for the second quarter of 1997, a
decrease of $225.7 million, primarily due to the other operating charges
described above. Excluding the other operating charges, income from operations
increased by $8.8 million, or 25.1%, to $44.0 million for the second quarter of
1998 compared to the second quarter of 1997.
Net interest expense decreased by $4.7 million to $4.6 million for the second
quarter of 1998 compared to the second quarter of 1997. The decline was due to
lower average borrowing levels and lower average borrowing rates during the
second quarter of 1998 compared to the second quarter of 1997.
The Company recognized an income tax benefit of $47.1 million for the second
quarter of 1998 compared to income tax expense of $12.8 million for the second
quarter of 1997. An income tax benefit of $64.6 million was attributable to the
other operating charges of $234.4 million described above and reflects the
anticipated federal, state and foreign tax effect of such other operating
charges after consideration of valuation allowance amounts for certain non-U.S.
deductions. The effective income tax rates were a benefit of 24.3% and an
expense of 49.6%, respectively, for the second quarter of 1998 and 1997.
Excluding the benefit derived from the other operating charges, the effective
tax rate was 43.0% for the second quarter of 1998, a decrease from the 49.6%
effective tax rate for the second quarter of 1997. Such decrease resulted from
lower foreign taxes on the Company's foreign operations as well as a reduction
in the rate at which state and local taxes were assessed on domestic income.
The Company incurred an extraordinary charge of $4.4 million, net of a tax
benefit of approximately $2.8 million, due to the write-off of unamortized
deferred financing costs related to the replaced credit facility.
Net loss for the second quarter of 1998 was $149.8 million compared to net
income of $13.5 million for the second quarter of 1997.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 increased by $76.6 million, or
11.9%, to $720.3 million compared to the six months ended June 30, 1997. The
increase was primarily due to new business (including business from new clients
and higher revenue from existing clients). U.S. revenues increased by 20.5% to
$372.3 million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. International revenues increased by 4.0% to $348.0 million
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Excluding the effect of the strengthening (on average) of the U.S. dollar
against foreign currencies, total revenues for the six months ended June 30,
1998 increased by 15.6% and international revenues increased by 11.1% compared
to the six months ended June 30, 1997.
Compensation expense increased by $38.2 million, or 9.7%, to $432.3 million for
the six months ended June 30, 1998 compared to the six months ended June 30,
1997. This increase was primarily attributable to additional staffing to support
business growth and salary increases. Excluding the effect of foreign currency
fluctuations, compensation expense increased by 13.4% compared to the six months
ended June 30, 1997.
General and administrative expenses increased by $18.4 million, or 9.2%, to
$218.7 million for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. This increase was primarily due to additional operating
expenses to support new business growth. Excluding the effect of foreign
currency fluctuations, general and administrative expenses increased by 12.8%
compared to the six months ended June 30, 1997.
Effective upon the consummation of the Offering, the Company recognized other
operating charges of $234.4 million. These other operating charges consisted of
non-recurring, non-cash compensation charges resulting from the vesting of
shares of Restricted Stock allocated to employees. As a result of these charges,
the Company expects to incur a net loss for the year ending December 31, 1998.
Loss from operations was $165.1 million for the six months ended June 30, 1998
compared to income from operations of $49.2 million for the six months ended
June 30, 1997, a decrease of $214.3 million, primarily due to the other
operating charges described above. Excluding the other operating charges, income
from operations increased by $20.1 million, or 40.7%, to $69.3 million for the
six months ended June 30, 1998 compared to the six months ended June 30, 1997.
Net interest expense decreased by $7.5 million to $10.2 million for the six
months ended June 30, 1998 compared to the six months ended June 30, 1997. The
decline was due to lower average borrowing levels and lower average borrowing
rates during the six months ended June 30, 1998 compared to the six months ended
June 30, 1997.
The Company recognized an income tax benefit of $38.2 million for the six months
ended June 30, 1998 compared to income tax expense of $15.7 million for the six
months ended June 30, 1997. An income tax benefit of $64.6 million was
attributable to the other operating charges of $234.4 million described above
and reflects the anticipated federal, state and foreign tax effect of such other
operating charges after consideration of valuation allowance amounts for certain
non-U.S. deductions. The effective income tax rates were a benefit of 22.1% and
an expense of 49.5%, respectively, for the six months ended June 30, 1998 and
1997. Excluding the benefit derived from the other operating charges, the
effective tax rate was 43.0% for the six months ended June 30, 1998, a decrease
from the 49.5% effective tax rate for the six months ended June 30, 1997. Such
decrease resulted from lower foreign taxes on the Company's foreign operations
as well as a reduction in the rate at which state and local taxes were assessed
on domestic income.
The Company incurred an extraordinary charge of $4.4 million, net of a tax
benefit of approximately $2.8 million, due to the write-off of unamortized
deferred financing costs related to the replaced credit facility.
Net loss for the six months ended June 30, 1998 was $137.6 million compared to
net income of $17.6 million for the six months ended June 30, 1997.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's operations have been financed by internally
generated funds and third-party borrowings. Quarterly and annual operating cash
flows are significantly impacted by the seasonal media spending patterns of
advertisers, including the timing of payments made to media and other suppliers
on behalf of clients as well as the timing of cash collections from clients to
fund such expenditures. The Company's practice is to bill and collect from its
clients in sufficient time to pay the amounts due the media. Cash and cash
equivalents were $76.8 million at June 30, 1998 compared to $160.3 million at
December 31, 1997. Cash was used during the six months ended June 30, 1998
primarily to repay long-term debt, including the prepayment of approximately
$15.3 million of certain non-negotiable subordinated payment obligations to
former employee stockholders and for capital expenditures.
On May 15, 1998, the Company closed the Offering. Net proceeds to the Company
were $158.6 million, after deducting underwriting discounts and commissions and
expenses paid by the Company in connection with the Offering. The Company used
the net proceeds from the Offering together with $155 million of borrowings
under the New Facility to repay all of the outstanding borrowings under its then
existing $700 million senior secured credit facility.
Capital expenditures were $20 million for the six months ended June 30, 1998.
The Company estimates that its capital expenditures in 1998 will be
approximately $75 million for information technology and certain leasehold
improvements which will be required as a result of lease renewals.
The Company's net deferred tax assets at June 30, 1998 were $221.4 million
consisting primarily of federal, state and foreign net operating loss
carryforwards. Consequently, the Company expects a reduction in the amount of
cash taxes paid on a worldwide basis in current and future years.
The Company believes that cash provided by operations and funds available under
the New Facility will be sufficient to meet its anticipated cash requirements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Company
anticipates that the adoption of SFAS No. 133 will not have a significant effect
on the financial condition of the Company.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Form S-1, which was declared effective by the SEC on May 11,
1998, and a registration statement on Form S-1 (File No. 333-52395) filed by the
Company pursuant to Rule 462(b) of the Securities Act of 1933, as amended
(together with the Form S-1, the "Form S-1 Registration Statement"), the Company
registered for sale pursuant to the Securities Act of 1933, as amended, an
aggregate of 16,600,000 shares of common stock (the "Firm Shares"), of which
6,912,730 shares were offered by the Company and 9,687,270 shares were offered
by certain selling stockholders (the "Selling Stockholders").
Of the 16,600,000 shares of common stock registered pursuant to the Form S-1
Registration Statement, 13,280,000 shares were offered initially in the United
States by the U.S. Underwriters (as defined in the Underwriting Agreement dated
May 11, 1998 among the Company, the Selling Stockholders, the U.S. Underwriters
named therein and the International Managers named therein (the "Underwriting
Agreement")), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co. Inc., Furman Selz LLC, Goldman, Sachs & Co. and Smith Barney
Inc. acted as U.S. Representatives, and 3,320,000 shares of common stock were
offered initially outside the United States by the International Managers (as
defined in the Underwriting Agreement) for whom Donaldson, Lufkin & Jenrette
International, Bear, Stearns International Limited, Furman Selz LLC, Goldman
Sachs International and Smith Barney Inc. acted as International
Representatives.
In addition, pursuant to the Form S-1 Registration Statement, the Company
registered for sale an aggregate of 2,490,000 shares of common stock (the
"Option Shares") subject to an overallotment option (the "Overallotment Option")
granted by certain non-management Selling Stockholders to the U.S. Underwriters
to purchase up to an additional 2,490,000 shares of common stock solely to cover
overallotments, which Overallotment Option was exercised by the U.S.
Underwriters for an aggregate of 2,490,000 shares of common stock.
The offering of the Firm Shares and Option Shares has terminated. The public
offering price of the Firm Shares and the Option Shares was $25.00 per share.
The closing of the sale of the Firm Shares and the Option Shares occurred on May
15, 1998. The aggregate gross proceeds to the Company and the Selling
Stockholders from the sale of the Firm Shares and the Option Shares was
$477,250,000.
The Form S-1 Registration Statement registered for sale by the Company an
aggregate of 6,912,730 Firm Shares at a proposed maximum offering price of
$24.00 per share, for aggregate gross proceeds (before deducting underwriting
discounts and commissions and Company expenses) of $165,905,520. The Company
sold an aggregate of 6,912,730 Firm Shares at the public offering price of
$25.00 per share, for aggregate gross proceeds (before deducting underwriting
discounts and commissions and Company expenses) of $172,818,250. The Form S-1
Registration Statement registered for sale by the Selling Stockholders an
aggregate of 12,177,270 shares of common stock (consisting of 9,687,270 Firm
Shares and up to 2,490,000 Option Shares) at a proposed maximum offering price
of $24.00 per share, for aggregate gross proceeds (before deducting underwriting
discounts and commissions) of $292,254,480. The Selling Stockholders sold an
aggregate of 12,177,270 shares of common stock (consisting of 9,687,270 Firm
Shares and 2,490,000 Option Shares) at the public offering price of $25.00 per
share, for aggregate gross proceeds (before deducting underwriting discounts and
commissions) of $304,431,750.
The Company incurred the following fees and expenses in connection with the
Offering pursuant to the Form S-1 Registration Statement: (i) $9,505,004 of
underwriters' discounts and commissions, (ii) $135,635 of SEC registration fees,
(iii) $30,500 of National Association of Securities Dealers, Inc. filing fees,
(iv) $335,023 of New York Stock Exchange listing fees, (v) $3,520,100 of legal
fees, accounting fees, and other professional services and expenses, (vi)
$475,000 of printing and engraving expenses, (vii) $20,000 of registrar and
transfer agent's fees and (viii) approximately $160,000 of miscellaneous
expenses.
The aggregate net proceeds to the Company from the Offering of the 6,912,730
Firm Shares, after deducting underwriting discounts and commissions and expenses
paid by the Company in connection with the Offering, were $158.6 million. The
Company used the net proceeds from the Offering, together with $155 million of
borrowings under the New Facility to repay outstanding borrowings under its then
existing credit facility.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of the Company was held on May 8, 1998.
The Company did not solicit proxies. The Stockholders voted on and approved the
election of the Board of Directors in its entirety with the Directors listed
below elected to serve as indicated below as Class I, Class II or Class III
Directors, with terms expiring at the Annual Meetings of the Company's
Stockholders to be held in 1999, 2000 and 2001, respectively, which elections
became effective upon completion of the Offering. The results of the vote of the
4,032,088 shares of common stock voted out of the 4,102,610 shares of common
stock and Money Market Preferred Stock that were eligible to vote were as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF DIRECTOR FOR WITHHELD
---------------- --- --------
<S> <C> <C>
F. Warren Hellman (Class I) 4,032,088 70,522
Alan D. Schwartz (Class I) 4,032,088 70,522
Edward H. Vick (Class I) 4,032,088 70,522
Michael J. Dolan (Class II) 4,032,088 70,522
Peter A. Georgescu (Class II) 4,032,088 70,522
Philip U. Hammarskjold (Class II) 4,032,088 70,522
Thomas D. Bell (Class III) 4,032,088 70,522
Richard S. Bodman (Class III) 4,032,088 70,522
John F. McGillicuddy (Class III) 4,032,088 70,522
</TABLE>
Additionally, the Stockholders voted on and approved (i) the adoption of the
Amended and Restated Certificate of Incorporation of the Company which was to
become effective immediately prior to the consummation of the Offering; (ii) the
adoption of the Amended and Restated By-Laws of the Company which were to become
effective immediately prior to the consummation of the Offering; (iii) the
execution, delivery and performance by the Company of the Amended Stockholders'
Agreement entered into among the HFCP Investors, the Management Investors and
the Management Voting Trust (as such terms are defined therein) and the Company,
which was to become effective immediately prior to the consummation of the
Offering; (iv) the execution, delivery and performance of the Rights Agreement
between the Company and The Bank of New York, as Rights Agent; (v) the Company's
1997 Incentive Compensation Plan, as amended; and (vi) the appointment of the
firm of Price Waterhouse LLP as the Company's independent auditors for the
calendar year 1998. For all such matters voted on by the Stockholders, votes
representing 4,032,088 shares of common stock were cast in favor of such matters
and votes representing 70,522 shares of common stock and Money Market Preferred
Stock were withheld. All numbers of shares of common stock contained within this
item do not reflect the common stock dividend of 14 shares of common stock
payable for each share of common stock outstanding, which dividend became
effective and was paid on May 11, 1998, subsequent to the Annual Meeting.
ITEM 5. OTHER INFORMATION
On August 4, 1998, the Company announced that its Board of Directors had
approved a plan to repurchase up to 2,000,000 shares of common stock over the
next two years. The shares will be repurchased by the Company from time to time
in anticipation of exercises of stock options and will be reissued as options
are exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K: None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Young & Rubicam Inc.
--------------------
(Registrant)
Date August 14, 1998 /s/ Michael J. Dolan
--------------- ------------------------------
Name: Michael J. Dolan
Title: Vice Chairman and
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF YOUNG & RUBICAM AND SUBSIDIARY COMPANIES
FOUND IN THE COMPANY'S FORM 10-Q AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 76,760,000
<SECURITIES> 0
<RECEIVABLES> 818,152,000
<ALLOWANCES> (14,839,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,028,018,000
<PP&E> 349,037,000
<DEPRECIATION> (229,103,000)
<TOTAL-ASSETS> 1,515,638,000
<CURRENT-LIABILITIES> 1,200,892,000
<BONDS> 0
0
0
<COMMON> 704,000
<OTHER-SE> 88,797,000
<TOTAL-LIABILITY-AND-EQUITY> 1,515,638,000
<SALES> 0
<TOTAL-REVENUES> 720,301,000
<CGS> 0
<TOTAL-COSTS> 885,440,000
<OTHER-EXPENSES> (2,200,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,172,000
<INCOME-PRETAX> (173,111,000)
<INCOME-TAX> (38,205,000)
<INCOME-CONTINUING> (133,201,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,433,000
<CHANGES> 0
<NET-INCOME> (137,634,000)
<EPS-PRIMARY> (2.50)
<EPS-DILUTED> (2.50)
</TABLE>