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 September 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
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(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 October 30, 1998 was 65,378,152.
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Equity/(Deficit)
for the Nine Months Ended September 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 - 11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
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, (v) the Company's liquidity and financing
plans and (vi) risks associated with the Company's efforts to comply with Year
2000 requirements. 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 AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 71,181 $ 160,263
Accounts receivable, net of allowance for doubtful accounts of $15,509
and $14,125 at September 30, 1998 and December 31, 1997, respectively 780,230 790,342
Costs billable to clients, net 80,479 50,479
Other receivables 38,568 35,218
Deferred income taxes 26,434 32,832
Prepaid expenses and other assets 30,657 17,989
------------- -------------
Total Current Assets 1,027,549 1,087,123
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NONCURRENT ASSETS
Property and equipment, net 123,092 125,014
Deferred income taxes 164,754 124,192
Goodwill, less accumulated amortization of $85,269 and $80,166 at
September 30, 1998 and December 31, 1997, respectively 111,065 116,637
Equity in net assets of and advances to unconsolidated companies 30,741 26,393
Other assets 38,012 48,660
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Total Noncurrent Assets 467,664 440,896
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Total Assets $ 1,495,213 $ 1,528,019
============= =============
CURRENT LIABILITIES
Loans payable $ 37,822 $ 10,765
Accounts payable 834,592 811,162
Installment notes payable 451 3,231
Accrued expenses and other liabilities 238,022 273,011
Accrued payroll and bonuses 61,601 65,458
Income taxes payable 2,948 29,665
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Total Current Liabilities 1,175,436 1,193,292
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NONCURRENT LIABILITIES
Loans payable 70,469 330,552
Installment notes payable 400 6,503
Deferred compensation 32,542 31,077
Other liabilities 109,299 112,851
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Total Noncurrent Liabilities 212,710 480,983
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Commitments and Contingencies
Minority Interest 5,757 6,987
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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 September 30, 1998
and December 31, 1997, respectively -- 508,471
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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 - 66,215,842 and 11,086,950 shares at September 30,
1998 and December 31, 1997, respectively
(excluding 4,393,848 and 1,115,160 common shares in treasury) 706 111
Capital surplus 940,954 23,613
Accumulated deficit (785,552) (522,866)
Cumulative translation adjustment (13,650) (16,577)
Pension liability adjustment (706) (706)
Common stock in treasury, at cost (40,442) (8,550)
Unearned compensation - restricted stock -- (136,739)
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Total Stockholders' Equity/(Deficit) 101,310 (661,714)
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Total Liabilities, Mandatorily Redeemable Equity Securities and
Stockholders' Equity/(Deficit) $ 1,495,213 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 375,419 $ 333,387 $ 1,095,720 $ 977,067
Compensation expense, including employee benefits 227,184 206,676 659,449 600,767
General and administrative expenses 106,057 131,013 324,783 331,353
Other operating charges -- -- 234,449 --
------------ ------------ ------------ ------------
Operating expenses 333,241 337,689 1,218,681 932,120
------------ ------------ ------------ ------------
Income (loss) from operations 42,178 (4,302) (122,961) 44,947
Interest expense, net (2,843) (10,950) (13,015) (28,580)
Other income -- -- 2,200 --
------------ ------------ ------------ ------------
Income (loss) before income taxes 39,335 (15,252) (133,776) 16,367
Income tax expense (benefit) 15,914 (7,796) (22,291) 7,855
------------ ------------ ------------ ------------
23,421 (7,456) (111,485) 8,512
Equity in net income of unconsolidated companies 1,567 1,621 3,194 4,091
Minority interest in net (income) loss of
consolidated subsidiaries (682) 135 (604) (698)
------------ ------------ ------------ ------------
Income (loss) before extraordinary charge 24,306 (5,700) (108,895) 11,905
Extraordinary charge for early retirement of debt,
net of tax benefit of $2,834 -- -- (4,433) --
------------ ------------ ------------ ------------
Net income (loss) $ 24,306 ($ 5,700) ($ 113,328) $ 11,905
============ ============ ============ ============
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary charge $ 0.36 ($ 0.12) ($ 1.84) $ 0.25
============ ============ ============ ============
Extraordinary charge $ -- $ -- ($ 0.08) $ --
============ ============ ============ ============
Net income (loss) $ 0.36 ($ 0.12) ($ 1.92) $ 0.25
============ ============ ============ ============
Diluted:
Income (loss) before extraordinary charge $ 0.29 ($ 0.12) ($ 1.84) $ 0.20
============ ============ ============ ============
Extraordinary charge $ -- $ -- ($ 0.08) $ --
============ ============ ============ ============
Net income (loss) $ 0.29 ($ 0.12) ($ 1.92) $ 0.20
============ ============ ============ ============
Weighted average shares used to compute:
Basic 66,608,726 46,566,357 58,939,274 47,109,739
============ ============ ============ ============
Diluted 82,764,754 46,566,357 58,939,274 60,313,689
============ ============ ============ ============
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income ($113,328) $ 11,905
Adjustments to reconcile net (loss)/income to net cash used by operating activities:
Depreciation and amortization 43,061 41,474
Other operating charges 234,449 --
Extraordinary charge, net 4,433 --
Deferred income tax benefit (34,589) --
Equity in net income of unconsolidated companies (3,194) (4,091)
Dividends from unconsolidated companies 1,427 2,220
Minority interest in net income of consolidated subsidiaries 604 698
Change in assets and liabilities, excluding effects from acquisitions,
dispositions, recapitalization and foreign exchange:
Accounts receivable, net 15,450 135,539
Costs billable to clients, net (27,933) (31,447)
Other receivables (3,247) (2,167)
Prepaid expenses and other assets (12,218) (7,651)
Accounts payable (7,934) (50,958)
Accrued expenses and other liabilities (49,244) (30,284)
Accrued payroll and bonuses (5,901) (12,900)
Income taxes payable (23,996) (8,887)
Deferred compensation 3,209 4,295
Other 1,024 6,750
--------- ---------
Net cash provided by operating activities 22,073 54,496
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (34,784) (38,930)
Acquisitions, net of cash acquired (499) (5,337)
Investment in net assets of and advances to unconsolidated companies (4,316) (3,297)
Proceeds from notes receivable 339 647
--------- ---------
Net cash used in investing activities (39,260) (46,917)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable, long-term 224,795 236,361
Repayment of loans payable, long-term (484,816) (53,679)
Proceeds from loans payable, short-term, net 65,468 14,855
Proceeds from issuance of common stock in initial public offering, net 158,637 --
Deferred financing costs (667) --
Recapitalization payments -- (247,259)
Payments of non-recapitalization deferred compensation (3,985) (508)
Common stock repurchased (31,892) (1,500)
Common stock issued and other 7,431 99
Payment of installment notes, net (8,883) --
Dividends paid to minority shareholders (1,532) (1,418)
--------- ---------
Net cash used in financing activities (75,444) (53,049)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 3,549 (7,002)
--------- ---------
Net decrease in cash and cash equivalents (89,082) (52,472)
Cash and cash equivalents, beginning of period 160,263 110,180
--------- ---------
Cash and cash equivalents, end of period $ 71,181 $ 57,708
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 24,660 $ 28,563
========= =========
Income taxes paid $ 30,760 $ 15,624
========= =========
</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 -- -- (113,328) -- --
Issuance of restricted stock -- 94,039 -- -- 136,739
Common stock issued and other 19 7,412 -- -- --
Common stock repurchased -- -- -- (31,892) --
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 SEPTEMBER 30, 1998 $ 706 $ 940,954 ($785,552) ($ 40,442) $ --
========= ========= ========= ========= =========
</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 Statements. 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 Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic - weighted average shares 66,608,726 46,566,357 58,939,274 47,109,739
Effect of dilutive securities 16,156,028 -- -- 13,203,950
---------- ---------- ---------- ----------
Diluted - weighted average shares 82,764,754 46,566,357 58,939,274 60,313,689
========== ========== ========== ==========
</TABLE>
As of September 30, 1998, there were approximately 30.9 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 for the nine months ended September 30, 1998 because the effect would be
antidilutive.
4. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 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.
6
<PAGE>
5. Comprehensive Income (loss)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
requires presentation of information on comprehensive income (loss) and its
components in the financial statements. For the Company, comprehensive income
(loss) includes net income (loss), foreign currency translation adjustments and
minimum pension liability adjustments. Total comprehensive income (loss) and its
components for interim periods ended September 30, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 24,306 $ (5,700) $(113,328) $ 11,905
Foreign currency translation adjustment,
net of tax 5,036 (2,394) 2,927 (11,047)
Pension liability adjustment, net of tax -- -- -- --
--------- --------- --------- ---------
Total comprehensive income (loss) $ 29,342 $ (8,094) $(110,401) $ 858
========= ========= ========= =========
</TABLE>
6. 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 Registration Statement filed on 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.
7. 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 8) 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
statement of operations for the nine months ended September 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.
8. 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 statement of operations for the nine
months ended September 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.
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
Revenues for the third quarter of 1998 increased by $42.0 million, or 12.6%, to
$375.4 million compared to the third 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 17.1% to $195.8 million for the
third quarter of 1998 compared to the third quarter of 1997. International
revenues increased by 8.1% to $179.6 million for the third quarter of 1998
compared to the third quarter of 1997. Excluding the effect of the strengthening
(on average) of the U.S. dollar against foreign currencies, total revenues for
the third quarter of 1998 increased by 14.0% and international revenues
increased by 10.9% compared to the third quarter of 1997.
Compensation expense increased by $20.5 million, or 9.9%, to $227.2 million for
the third quarter of 1998 compared to the third quarter of 1997. This increase
was primarily attributable to additional staffing to support business growth and
to salary increases. Excluding the effect of foreign currency fluctuations,
compensation expense increased by 11.3% compared to the third quarter of 1997.
General and administrative expenses decreased by $25.0 million, or 19.0%, to
$106.1 million for the third quarter of 1998 compared to the third quarter of
1997. This decrease was primarily due to the inclusion in 1997 of a $25.5
million write-off of accounts receivable, costs billable to clients and other
capitalized costs with respect to the operations of Burson-Marsteller in Europe
and Asia in the third quarter of 1997. The write-offs in Europe were primarily
related to Burson-Marsteller's implementation of a new management information
system in 1997 which resulted in delayed and inaccurate billing of certain
clients and necessitated the creation of additional reserves against accounts
receivable and costs billable to clients. The write-offs in Asia were
attributable to the Company's evaluation of Burson-Marsteller's recent operating
performance in Asia and the determination that Burson-Marsteller was unlikely to
collect certain accounts receivable and costs billable to clients. Excluding the
effect of foreign currency fluctuations and the Burson-Marsteller write-off,
general and administrative expenses increased by 1.9% compared to the third
quarter of 1997.
Income from operations was $42.2 million for the third quarter of 1998 compared
to a loss from operations of $4.3 million for the third quarter of 1997, an
increase of $46.5 million, primarily due to the 1997 Burson-Marsteller write-off
described above. Excluding the 1997 Burson-Marsteller write-off, income from
operations increased by $21.0 million, or 98.8%, compared to the third quarter
of 1997.
Net interest expense decreased by $8.1 million to $2.8 million for the third
quarter of 1998 compared to the third quarter of 1997. The decline was due to
lower average borrowing levels and lower average borrowing rates during the
third quarter of 1998 compared to the third quarter of 1997.
Income tax expense was $15.9 million for the third quarter of 1998 compared to
an income tax benefit of $7.8 million for the third quarter of 1997. The
effective income tax rates were 40.4% and a benefit of 51.1%, respectively, for
the third quarter of 1998 and 1997. Such decrease in the effective tax rate
resulted primarily from lower foreign taxes on the Company's foreign operations
as well as a reduction in the effective rate at which state and local taxes were
provided on domestic income.
Net income for the third quarter of 1998 was $24.3 million compared to a net
loss of $5.7 million for the third quarter of 1997. Excluding the after-tax
effect of the Burson-Marsteller write-off, net income increased by $16.7 million
compared to the third quarter of 1997.
8
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues for the nine months ended September 30, 1998 increased by $118.7
million, or 12.1%, to $1,095.7 million compared to the nine months ended
September 30, 1997. The increase was primarily due to new business (including
business from new clients and higher revenue from existing clients). United
States revenues increased by 19.3% to $568.2 million for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997.
International revenues increased by 5.3% to $527.5 million for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
Excluding the effect of the strengthening (on average) of the U.S. dollar
against foreign currencies, total revenues for the nine months ended September
30, 1998 increased by 15.1% and international revenues increased by 11.0%
compared to the nine months ended September 30, 1997.
Compensation expense increased by $58.7 million, or 9.8%, to $659.4 million for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. This increase was primarily attributable to additional
staffing to support business growth and to salary increases. Excluding the
effect of foreign currency fluctuations, compensation expense increased by 12.7%
compared to the nine months ended September 30, 1997.
General and administrative expenses decreased by $6.6 million, or 2.0%, to
$324.8 million for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. This decrease was primarily due to the
inclusion in 1997 of a $25.5 million write-off of accounts receivable, costs
billable to clients and other capitalized costs with respect to the operations
of Burson-Marsteller in Europe and Asia offset in 1998 by additional operating
expenses to support new business growth. The Burson-Marsteller write-offs in
Europe were primarily related to its implementation of a new management
information system in 1997 which resulted in delayed and inaccurate billing of
certain clients and necessitated the creation of additional reserves against
accounts receivable and costs billable to clients. The write-offs in Asia were
attributable to the Company's evaluation of Burson-Marsteller's recent operating
performance in Asia and the determination that Burson-Marsteller was unlikely to
collect certain accounts receivable and costs billable to clients. Excluding the
effect of foreign currency fluctuations and the Burson-Marsteller write-off,
general and administrative expenses increased by 9.7% compared to the nine
months ended September 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 $123.0 million for the nine months ended September 30,
1998 compared to income from operations of $44.9 million for the nine months
ended September 30, 1997, a decrease of $167.9 million, primarily due to the
other operating charges described above partially offset by the effect of the
1997 Burson-Marsteller write-off. Excluding the other operating charges and the
Burson-Marsteller write-off, income from operations increased by $41.0 million,
or 58.2%, compared to the nine months ended September 30, 1997.
Net interest expense decreased by $15.6 million to $13.0 million for the nine
months ended September 30, 1998 compared to the nine months ended September 30,
1997. The decline was due to lower average borrowing levels and lower average
borrowing rates during the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997.
The Company recognized an income tax benefit of $22.3 million for the nine
months ended September 30, 1998 compared to income tax expense of $7.9 million
for the nine months ended September 30, 1997. Included in 1998 is an income tax
benefit of $64.6 million 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 rate
was a benefit of 16.7% for the nine months ended September 30, 1998. Excluding
the benefit derived from the other operating charges, the effective tax rate was
42.0% for the nine months ended September 30, 1998, a decrease from the 48.0%
effective tax rate for the nine months ended September 30, 1997. Such decrease
resulted primarily from lower foreign taxes on the Company's foreign operations
as well as a reduction in the effective rate at which state and local taxes were
provided on domestic income.
The Company incurred an extraordinary charge of $4.4 million in the nine months
ended September 30, 1998, which is 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 nine months ended September 30, 1998 was $113.3 million
compared to net income of $11.9 million for the nine months ended September 30,
1997. Excluding the after-tax effect of the other operating charges, the
Burson-Marsteller write-off and the extraordinary charge, net income increased
by $35.8 million compared to the nine months ended September 30, 1997.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its working capital, capital expenditures,
acquisitions and equity repurchases from cash generated from operations 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
$71.2 million at September 30, 1998 compared to $160.3 million at December 31,
1997. Cash was used during the nine months ended September 30, 1998 primarily to
repay long-term debt, including the prepayment of approximately $19.0 million of
certain non-negotiable subordinated payment obligations to former employee
stockholders, and for capital expenditures and common stock repurchases.
On May 15, 1998, the Company consummated 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 $34.8 million for the nine months ended September 30,
1998. The Company estimates that its capital expenditures in 1998 will be
approximately $70 million for information technology and certain leasehold
improvements.
On August 4, 1998, the Company announced that the Board of Directors ("the
Board") had approved a plan to repurchase up to 2,000,000 shares of common stock
over the next two years. Through September 30, 1998, the Company repurchased
712,800 shares of common stock for an aggregate of $21.9 million. On October 13,
1998, the Company announced that the Board had approved a new repurchase program
of up to an additional 6,000,000 of the Company's outstanding common shares over
the next two years. The shares may be repurchased by the Company from time to
time in the open market or in private transactions, possibly including
transactions with employees.
The Company's net deferred tax assets at September 30, 1998 were $191.2 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 future years. The consummation of the
offering gave rise to a non-recurring, non-cash, pre-tax compensation charge of
$234.4 million, which resulted in additional tax benefits to the company of
$64.6 million.
The Company expects to declare and pay a regular quarterly cash dividend
beginning in the first half of 1999. However, any determination to pay dividends
will be at the discretion of the Board and will depend upon, among other
factors, the Company's results of operations, financial condition, capital
requirements and contractual restrictions pursuant to the New Facility. The New
Facility contains certain financial and operating restrictions and covenant
requirements, and permits the payment of cash dividends except in the event of a
continuing default under the credit agreement.
The Company believes that cash provided by operations and funds available under
the New Facility will be sufficient to meet its anticipated cash requirements as
presently contemplated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 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.
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computer systems to accurately process information with
dates later than December 31, 1999, or to process date-sensitive information
accurately after the turn of the century (referred to as the "Year 2000" issue).
The Company has completed an assessment of its computer systems and is in the
process of modifying or replacing all affected systems for compliance with the
Year 2000 issue. While the Company believes it has made substantial progress in
resolving any Year 2000 issues, the modifications and testing necessary to fully
validate readiness are still being conducted. The Company is also monitoring the
adequacy of the processes and progress of third-party vendors of systems and
applications that may be affected by the Year 2000 issue. The Company is
dependent in part on third-party computer systems and applications, particularly
with respect to such critical tasks as accounting, billing and buying, planning
and paying for media, as well as on its own computer systems. The Company is in
the process of obtaining assurances from such vendors that their systems are or
are becoming Year 2000 compliant.
While the Company believes its process is designed to be successful, because of
the complexity of the Year 2000 issue and the interdependence of organizations
using computer systems, it is possible that the Company's efforts, or those of
third parties with whom the Company interacts, will not be satisfactorily
completed in a timely fashion. Failure to satisfactorily address the Year 2000
issue could have a material adverse effect on the Company's prospects, business,
financial condition and results of operations.
10
<PAGE>
The costs of the Company's Year 2000 project have not yet been determined but
are not expected to be material. However, there can be no assurance that the
Company will not experience cost overruns or delays in connection with its plan
for replacing or modifying systems, which could have a material adverse effect
on the Company's prospects, business, financial condition and results of
operations.
The Company has not yet determined the extent of contingency planning that may
be required.
11
<PAGE>
PART II: OTHER INFORMATION
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 November 6, 1998 /s/ Michael J. Dolan
---------------- --------------------
Name: Michael J. Dolan
Title: Vice Chairman and
Chief Financial Officer
13
<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 NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 71,181,000
<SECURITIES> 0
<RECEIVABLES> 795,739,000
<ALLOWANCES> (15,509,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,027,549,000
<PP&E> 363,168,000
<DEPRECIATION> (240,076,000)
<TOTAL-ASSETS> 1,495,213,000
<CURRENT-LIABILITIES> 1,175,436,000
<BONDS> 0
0
0
<COMMON> 706,000
<OTHER-SE> 100,604,000
<TOTAL-LIABILITY-AND-EQUITY> 1,495,213,000
<SALES> 0
<TOTAL-REVENUES> 1,095,720,000
<CGS> 0
<TOTAL-COSTS> 1,218,681,000
<OTHER-EXPENSES> (2,200,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,015,000
<INCOME-PRETAX> (133,776,000)
<INCOME-TAX> (22,291,000)
<INCOME-CONTINUING> (108,895,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,433,000
<CHANGES> 0
<NET-INCOME> (113,328,000)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
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