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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from
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 30, 1999 was 70,173,772.
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 12
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
</TABLE>
This document, information included in future filings by Young & Rubicam Inc.
("Y&R") 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 Y&R 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 Y&R 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 Y&R's performance. It is important to note that Y&R'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 Y&R 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 overall level of
economic activity in the principal markets in which Y&R conducts business and
other trends affecting Y&R's financial condition or results of operations, (iv)
the impact of competition in the marketing and communications industry, (v)
Y&R's liquidity and financing plans and (vi) risks associated with Y&R's efforts
to comply with Year 2000 requirements. All forward-looking statements in this
document are based on information available to Y&R on the date hereof.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except share and per share amounts) 1999 1998
--------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 79,572 $ 122,138
Accounts receivable, net of allowance for doubtful accounts of $16,846 and $17,938 at
June 30, 1999 and December 31, 1998, respectively 855,630 835,284
Costs billable to clients 88,410 55,187
Other receivables 37,604 37,177
Deferred income taxes 46,866 46,803
Prepaid expenses and other assets 33,407 25,979
--------- ---------
Total Current Assets 1,141,489 1,122,568
--------- ---------
Noncurrent Assets
Property and equipment, net 159,072 150,413
Deferred income taxes 155,622 158,646
Goodwill, less accumulated amortization of $77,277 and $84,292 at June 30, 1999 and
December 31, 1998, respectively 264,204 120,075
Equity in net assets of and advances to unconsolidated companies 45,277 38,397
Other assets 66,589 45,156
--------- ---------
Total Noncurrent Assets 690,764 512,687
--------- ---------
Total Assets $ 1,832,253 $ 1,635,255
========= =========
Current Liabilities
Loans payable $ 35,976 $ 31,365
Accounts payable 995,296 1,008,624
Accrued expenses and other liabilities 185,135 203,099
Accrued payroll and bonuses 45,914 77,078
Income taxes payable 17,177 19,290
--------- ---------
Total Current Liabilities 1,279,498 1,339,456
--------- ---------
Noncurrent Liabilities
Loans payable 214,430 31,494
Deferred compensation 31,856 30,635
Other liabilities 108,822 114,128
--------- ---------
Total Noncurrent Liabilities 355,108 176,257
--------- ---------
Commitments and Contingencies
Minority Interest 3,532 4,573
--------- ---------
Stockholders' Equity
Money Market Preferred Stock - cumulative variable dividend; liquidating value of $115
per share; one-tenth of one vote per share; authorized - 50,000 shares; issued and -- --
outstanding - 87 shares
Cumulative Participating Junior Preferred Stock - minimum $1.00 dividend; liquidating
value of $1.00 per share; 100 votes per share; authorized - 2,500,000 shares; issued -- --
and outstanding - 0 shares
Common stock - par value $.01 per share; authorized - 250,000,000 shares; issued and
outstanding - 70,056,836 shares and 66,374,569 shares at June 30, 1999 and December 31,
1998, respectively (excluding 151,559 shares and 3,976,941 shares in treasury) 702 704
Capital surplus 935,405 934,676
Accumulated deficit (709,761) (758,292)
Cumulative translation adjustment (25,356) (10,810)
Pension liability adjustment (1,738) (1,738)
--------- ---------
199,252 164,540
Common stock in treasury, at cost (5,137) (49,571)
--------- ---------
Total Stockholders' Equity 194,115 114,969
--------- ---------
Total Liabilities and Stockholders' Equity $ 1,832,253 $ 1,635,255
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands, except share and THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
per share amounts) ------------------------------- ------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 414,361 $ 372,128 $ 798,234 $ 720,301
Compensation expense, including employee benefits 239,016 218,667 474,034 432,265
General and administrative expenses 122,511 109,484 236,808 218,726
Other operating charges -- 234,449 -- 234,449
---------- ---------- ---------- ----------
Operating expenses 361,527 562,600 710,842 885,440
---------- ---------- ---------- ----------
Income (loss) from operations 52,834 (190,472) 87,392 (165,139)
Interest expense, net (2,799) (4,597) (4,445) (10,172)
Other income -- 1,373 -- 2,200
---------- ---------- ---------- ----------
Income (loss) before income taxes 50,035 (193,696) 82,947 (173,111)
Income tax provision (benefit) 20,514 (47,057) 34,008 (38,205)
---------- ---------- ---------- ----------
29,521 (146,639) 48,939 (134,906)
Equity in net income of unconsolidated companies 1,668 1,512 1,652 1,627
Minority interest in net (income) loss of
consolidated subsidiaries (604) (264) (305) 78
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge 30,585 (145,391) 50,286 (133,201)
Extraordinary charge for early retirement of debt,
net of tax benefit of $2,834 in 1998 -- (4,433) -- (4,433)
---------- ---------- ---------- ----------
Net income (loss) $ 30,585 $ (149,824) $ 50,286 $ (137,634)
========== ========== ========== ==========
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary charge $ 0.45 ($ 2.45) $ 0.75 ($ 2.42)
Extraordinary charge -- (0.08) -- (0.08)
---------- ---------- ---------- ----------
Net income (loss) $ 0.45 ($ 2.53) $ 0.75 ($ 2.50)
========== ========== ========== ==========
Diluted:
Income (loss) before extraordinary charge $ 0.37 ($ 2.45) $ 0.61 ($ 2.42)
Extraordinary charge -- (0.08) -- (0.08)
---------- ---------- ---------- ----------
Net income (loss) $ 0.37 ($ 2.53) $ 0.61 ($ 2.50)
========== ========== ========== ==========
Weighted average shares outstanding (Note 3):
Basic 67,502,175 59,272,814 66,912,004 55,040,989
========== ========== ========== ==========
Diluted 82,200,161 59,272,814 82,047,778 55,040,989
========== ========== ========== ==========
</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
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
(in thousands) 1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 50,286 $(137,634)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 32,465 28,353
Other operating charges -- 234,449
Extraordinary charge, net -- 4,433
Deferred income tax expense (benefit) 24,049 (64,329)
Equity in net income of unconsolidated companies (1,652) (1,627)
Dividends from unconsolidated companies 1,181 908
Minority interest income (loss) of consolidated subsidiaries 305 (78)
Change in assets and liabilities,excluding effect from acquisitions,
dispositions and foreign exchange:
Accounts receivable (7,967) (20,259)
Costs billable to clients (33,194) (13,061)
Other receivables (304) 2,241
Prepaid expenses and other assets (3,681) (4,102)
Accounts payable 15,534 16,933
Accrued expenses and other liabilities (20,074) (35,255)
Accrued payroll and bonuses (30,382) (17,607)
Income taxes payable (1,687) (4,176)
Deferred compensation 1,090 1,957
Other (9,074) 5,101
--------- ---------
Net cash provided by (used in) operating activities $ 16,895 $ (3,753)
--------- ---------
Cash flows from investing
activities:
Additions to property and equipment $ (32,516) $ (20,044)
Acquisitions, net of cash acquired (102,659) (499)
Investment in net assets of and advances to unconsolidated companies (11,558) (2,428)
Proceeds from notes receivable -- 339
--------- ---------
Net cash used in investing activities $(146,733) $ (22,632)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) loans payable, net $ 156,516 $(197,028)
Proceeds from issuance of common stock in initial public offering, net -- 158,637
Common stock issued 8,351 3,081
Common stock repurchased (67,810) (10,009)
Dividends paid (1,752) --
Payment of deferred compensation (1,356) (3,302)
deferred compensation
Payment of installment notes, net -- (5,229)
Other financing activities (1,001) (1,873)
--------- ---------
Net cash provided by (used in) financing activities $ 92,948 $ (55,723)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (5,676) (1,395)
Net decrease in cash and cash equivalents (42,566) (83,503)
Cash and cash equivalents, beginning of period 122,138 160,263
--------- ---------
Cash and cash equivalents, end of period $ 79,572 $ 76,760
========= ==========
Supplemental disclosure of cash flow information:
Interest paid $ 7,479 $ 12,279
========= ==========
Income taxes paid $ 14,208 $ 16,020
========= ==========
Noncash investing activity:
Common stock issued in acquisitions $ 83,700 $ --
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS: Young and Rubicam Inc. ("Y&R") is a global marketing and
communications enterprise with integrated services in advertising, perception
management and public relations, branding consultation and design, sales
promotion, direct marketing and healthcare communications. Y&R operates, through
wholly owned subsidiaries, joint ventures and non-equity affiliations, in the
United States, Canada, Europe, Latin America and the Asia/Pacific region and
other parts of the world.
BASIS OF PRESENTATION: The accompanying unaudited consolidated financial
statements of Y&R have been prepared pursuant to the rules of the Securities and
Exchange Commission. 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 Y&R's Annual Report on Form 10-K for the year ended December 31,
1998. 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. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1999 presentation.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the full year.
NOTE 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 during the reporting period.
Actual results could differ from those estimates.
NOTE 3 - EARNINGS PER COMMON SHARE
Basic net earnings (loss) per share is calculated by dividing net income by the
weighted average shares of common stock outstanding during the period. Diluted
earnings per share reflects the dilutive effect of stock options, primarily
stock options granted to employees under stock-based compensation plans, and
other dilutive securities. Shares used in computing basic and diluted earnings
per share were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Basic - weighted average shares 67,502,175 59,272,814 66,912,004 55,040,989
Effect of dilutive securities 14,697,986 -- 15,135,774 --
--------------- --------------- ---------------- ---------------
Diluted - weighted average shares 82,200,161 59,272,814 82,047,778 55,040,989
=============== =============== ================ ===============
</TABLE>
In 1998, basic and dilutive weighted average shares used in the calculation were
the same since the inclusion of the effect of stock options on loss per share
would have been antidilutive.
5
<PAGE>
NOTE 4 - COMPREHENSIVE INCOME
The following table sets forth total comprehensive income (loss) and its
components:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended
June 30,
------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 30,585 $ (149,824) $ 50,286 $ (137,634)
Foreign currency translation adjustment (7,332) (55) (14,546) (2,109)
--------------- --------------- ---------------- ---------------
Total comprehensive income (loss) $ 23,253 $ (149,879) $ 35,740 $ (139,743)
=============== =============== ================ ===============
</TABLE>
NOTE 5 - ACQUISITIONS AND INVESTMENTS
On May 21, 1999, Y&R acquired KnowledgeBase Marketing, Inc. ("KBM"), a provider
of database and analytical services, in a stock and cash transaction valued at
approximately $175 million. In connection with this transaction, Y&R issued an
aggregate of 2.1 million shares of common stock and agreed to grant options to
purchase approximately 275,000 additional shares of common stock, of which
approximately 255,000 were granted as of June 30, 1999. This transaction has
been accounted for under the purchase method of accounting for business
combinations. A preliminary allocation of the cost to acquire KBM has been made
based on the fair value of KBM's net assets.
On March 31, 1999, Y&R acquired The Direct Impact Company, a company
specializing in grassroots issues management. Also, effective in the second
quarter, Y&R completed several other acquisitions. The aggregate purchase price
of acquisitions in the first half of 1999, excluding KBM, was approximately $15
million. All such acquisitions were accounted for under the purchase method of
accounting.
In June 1999, Y&R announced its intention to invest in Luminant Worldwide
Corporation ("Luminant"), a newly formed internet and e-commerce services
consulting firm (formerly known as Clarant Worldwide Corporation). Luminant will
bring together eight companies, including the New York office of Y&R's Brand
Dialogue, in the interactive media services market. Y&R expects to receive an
ownership interest in Luminant in exchange for certain net assets of Brand
Dialogue - New York. The closing of this transaction, which is contingent upon
the completion of Luminant's initial public offering, is expected to occur later
in the year.
NOTE 6 - NEW DEBT FACILITY
On June 30, 1999, Y&R increased its borrowing capacity by entering into a $200
million 364-day revolving credit facility. This facility contains certain
financial and operating restrictions and covenant requirements, including a
maximum leverage ratio and a minimum interest coverage requirement. Y&R is
required to pay varying rates of interest on outstanding borrowings, generally
based on LIBOR plus an applicable margin ranging from 0.525% to 0.70% depending
on the leverage ratio. Y&R is also required to pay a facility fee ranging from
0.10% to 0.175% and, if the outstanding advances exceed 50% of the aggregate
facility, a utilization fee will be charged ranging from .075% to .125%.
NOTE 7 - CASH DIVIDEND
On June 15, 1999 Y&R paid a quarterly cash dividend of $0.025 per common share
to all stockholders of record as of June 1, 1999.
6
<PAGE>
NOTE 8 - SUBSEQUENT EVENTS
On August 3, 1999, Y&R announced that it reached agreement with Dentsu Inc. to
change the ownership and management structure of the joint venture, Dentsu Young
& Rubicam ("DY&R"). This new agreement will generally result in Y&R acquiring
majority ownership in and operational control of all DY&R companies throughout
the principal markets in Asia, excluding Japan, for an estimated purchase price
of approximately $11 million. In Japan, Dentsu will acquire a majority share.
This transaction is expected to close later in the year.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited
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 our Annual Report on Form 10-K for the year
ended December 31, 1998 as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Revenues for the second quarter of 1999 increased by $42.2 million, or
11.3%, to $414.4 million compared to the second quarter of 1998. The increase
was primarily due to net new business, including business from new clients and
higher revenue from existing clients. Acquisitions contributed 2.9% of revenue
growth, or $10.8 million. United States revenues increased by 19.1%, or 14.3%
excluding acquisitions, to $224.6 million for the second quarter of 1999
compared to the second quarter of 1998. International revenues increased by 3.4%
to $189.8 million, primarily due to strong performance in Europe, which was
partially offset by a decline in Latin America and the impact of the overall
strengthening of the U.S. dollar against foreign currencies. Organic worldwide
revenue growth, excluding the effect of acquisitions and foreign currency
fluctuations, was 10.6%, with the impact of the strengthening of the U.S. dollar
against foreign currencies more than offset by revenues from acquisitions.
Excluding the effect of foreign currency fluctuations and acquisitions,
international revenues increased 6.8% for the second quarter of 1999 compared to
the second quarter of 1998.
Compensation expense increased by $20.3 million to $239.0 million for the
second quarter of 1999 compared to the second quarter of 1998. This increase in
compensation expense was primarily due to normal salary increases and
compensation expense attributable to acquired entities. Compensation expense in
the second quarter of 1999 decreased as a percentage of revenues to 57.7% from
58.8% in the second quarter of 1998, reflecting improved productivity.
General and administrative expenses increased by $13.0 million to $122.5
million for the second quarter of 1999 compared to the second quarter of 1998.
This increase was primarily due to additional operating expenses to support
revenue growth, amortization of goodwill and other intangible assets
attributable to acquired entities, and incremental facilities costs associated
with the relocation of certain domestic offices, partially offset by our ongoing
cost containment measures. General and administrative expenses in the second
quarter of 1999 increased as a percentage of revenues to 29.6% from 29.4% in the
second quarter of 1998.
Effective upon the consummation of our initial public offering of common
stock in May 1998, we recognized other operating charges of $234.4 million.
These charges consisted of non-recurring, non-cash compensation charges
resulting from the vesting of shares of restricted stock allocated to employees.
Income from operations was $52.8 million for the second quarter of 1999. As
a result of the $234.4 million other operating charge associated with our
initial public offering, loss from operations was $190.5 million for the second
quarter of 1998. Excluding the other operating charge in 1998, income from
operations increased $8.9 million, or 20.1%, in the second quarter of 1999
compared to the second quarter of 1998.
Net interest expense decreased by $1.8 million to $2.8 million for the
second quarter of 1999 compared to the second quarter of 1998. The decline was
due to lower average borrowing levels and lower average borrowing rates during
the second quarter of 1999 compared to the second quarter of 1998.
8
<PAGE>
We recognized income tax expense of $20.5 million for the second quarter of
1999 compared to a net income tax benefit of $47.1 million for the second
quarter of 1998. An income tax benefit of $64.6 million in 1998 was attributable
to other operating charges incurred in connection with our initial public
offering and reflected the anticipated federal, state and foreign tax effect of
these charges after consideration of valuation allowances for certain non - U.S.
deductions, partially offset by income tax expense of $17.5 million. The
effective tax rate for the second quarter of 1999 was 41.0% compared to 43.0% in
the second quarter of 1998, after excluding the benefit derived from the other
operating charges. The decrease in the effective tax rate resulted from various
international tax initiatives and a shift in foreign income to jurisdictions
taxed at rates lower than the U.S. statutory rate.
In May 1998, we incurred an extraordinary charge of $4.4 million, net of a
tax benefit of $2.8 million, due to the write-off of unamortized deferred
financing costs related to a previous credit facility.
Net income for the second quarter of 1999 was $30.6 million compared to net
loss of $149.8 million for 1998, primarily as a result of the other operating
charge incurred in 1998 in connection with our initial public offering.
Excluding the other operating charge and extraordinary charge in 1998, net
income increased $6.1 million, or 24.9%, in the second quarter of 1999 compared
to the second quarter of 1998. This increase was principally due to revenue
growth, improved operating margins, lower net borrowing costs and a reduced
effective tax rate.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues for the six months ended June 30, 1999 increased by $77.9 million,
or 10.8%, to $798.2 million compared to the six months ended June 30, 1998. The
increase was primarily due to net new business, including business from new
clients and higher revenue from existing clients. Acquisitions contributed 1.8%
of revenue growth, or $13.3 million. United States revenues increased by 16.3%,
or 13.6% excluding acquisitions, to $433.2 million for the six months ended June
30, 1999 compared to the six months ended June 30, 1998. International revenues
increased by 4.9% to $365.1 million, primarily due to strong performance in
Europe, which was partially offset by declines in Latin America and Asia and the
impact of the overall strengthening of the U.S. dollar against foreign
currencies. Organic worldwide revenue growth, excluding the effect of
acquisitions and foreign currency fluctuations, was 10.5%, with the impact of
the strengthening of the U.S. dollar against foreign currencies more than offset
by revenues from acquisitions. Excluding the effect of foreign currency
fluctuations and acquisitions, international revenues increased 7.0% for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998.
Compensation expense increased by $41.8 million to $474.0 million for the
six months ended June 30, 1999 compared to the six months ended June 30, 1998.
This increase in compensation expense was primarily due to normal salary
increases and compensation expense attributable to acquired entities.
Compensation expense in the six months ended June 30, 1999 decreased as a
percentage of revenues to 59.4% from 60.0% in the six months ended June 30,
1998, reflecting improved productivity.
General and administrative expenses increased by $18.1 million to $236.8
million for the six months ended June 30, 1999 compared to the six months ended
June 30, 1998. This increase was primarily due to additional operating expenses
to support revenue growth, amortization of goodwill and other intangible assets
attributable to acquired entities, and incremental facilities costs associated
with the relocation of certain domestic offices, partially offset by our ongoing
cost containment measures. General and administrative expenses in the six months
ended June 30, 1999 decreased as a percentage of revenues to 29.7% from 30.4% in
the six months ended June 30, 1998.
Effective upon the consummation of our initial public offering of common
stock in May 1998, we recognized other operating charges of $234.4 million.
These charges consisted of non-recurring, non-cash compensation charges
resulting from the vesting of shares of restricted stock allocated to employees.
9
<PAGE>
Income from operations was $87.4 million for the six months ended June 30,
1999. As a result of the $234.4 million other operating charge associated with
our initial public offering, loss from operations was $165.1 million for the six
months ended June 30, 1998. Excluding the other operating charge in 1998, income
from operations increased $18.1 million, or 26.1%, in the six months ended June
30, 1999 compared to the six months ended June 30, 1998.
Net interest expense decreased by $5.7 million to $4.4 million for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998. The
decline was due to lower average borrowing levels and lower average borrowing
rates during the six months ended June 30, 1999 compared to the six months ended
June 30, 1998.
We recognized income tax expense of $34.0 million for the six months ended
June 30, 1999 compared to an income tax benefit of $38.2 million for the six
months ended June 30, 1998. An income tax benefit of $64.6 million in 1998 was
attributable to other operating charges incurred in connection with our initial
public offering and reflected the anticipated federal, state and foreign tax
effect of these charges after consideration of valuation allowances for certain
non - U.S. deductions, partially offset by income tax expense of $26.4 million.
The effective tax rate for the six months ended June 30, 1999 was 41.0% compared
to 43.0% in the six months ended June 30, 1998, after excluding the benefit
derived from the other operating charges. The decrease in the effective tax rate
resulted from various international tax initiatives and a shift in foreign
income to jurisdictions taxed at rates lower than the U.S. statutory rate.
In May 1998, we incurred an extraordinary charge of $4.4 million, net of a
tax benefit of $2.8 million, due to the write-off of unamortized deferred
financing costs related to a previous credit facility.
Net income for the six months ended June 30, 1999 was $50.3 million
compared to net loss of $137.6 million for 1998, primarily as a result of the
other operating charge incurred in 1998 in connection with our initial public
offering. Excluding the other operating charge and extraordinary charge in 1998,
net income increased $13.6 million, or 37.1%, in the six months ended June 30,
1999 compared to the six months ended June 30, 1998. This increase was
principally due to revenue growth, improved operating margins, lower net
borrowing costs and a reduced effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We generally finance our working capital, capital expenditures,
acquisitions and equity repurchases from cash generated from operations and
third-party borrowings.
Cash and cash equivalents were $79.6 million and $122.1 million at June 30,
1999 and December 31, 1998. Cash provided by operating activities in the six
months ended June 30, 1999 was $16.9 million compared to cash used in operating
activities of $3.8 million in the six months ended June 30, 1998, reflecting
strong business growth. Quarterly 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 these expenditures.
Our practice is to bill and collect from our clients in sufficient time to pay
the amounts due the media.
Cash used in investing activities in the six months ended June 30, 1999 was
$146.7 million and included $32.5 million in capital expenditures and $114.2
million for investments and acquisitions net of cash acquired. In the six months
ended June 30, 1998, cash used in investing activities was $22.6 million,
principally consisting of $20.0 million in capital expenditures. The majority of
capital expenditures in the first half of 1999 were for information
technology-related purchases and leasehold improvements. These capital
expenditures are estimated to be approximately $50 million for the remainder of
1999. Acquisitions and investments in the first half of 1999 consisted primarily
of the purchase of KnowledgeBase Marketing, Inc., a provider of database and
analytical services, in a stock and cash transaction valued at approximately
$175 million, and the purchase of The Direct Impact Company, a company
specializing in grassroots issues management.
10
<PAGE>
Cash provided by financing activities in the six months ended June 30, 1999
was $92.9 million and included net borrowings of $156.5 million. In the six
months ended June 30, 1999, we repurchased 1.7 million shares of our common
stock on the open market and in other transactions for an aggregate of $67.8
million. As of June 30, 1999, we had repurchased a total of 3.6 million shares
under the existing 8.0 million shares repurchase program. On July 28, 1999, our
Board of Directors approved an increase of 4.0 million shares to our authorized
share repurchase program, bringing the total remaining number of shares we can
repurchase to 8.4 million through August 2001. In the six months ended June 30,
1998, cash used in financing activities was $55.7 million, reflecting the
repayment of our previous credit facility, offset by the proceeds received from
the consummation of our initial public offering and borrowings under our current
credit facility.
In the second quarter of 1999, we increased our borrowing capacity by
entering into an additional $200 million credit facility. At June 30, 1999, we
had approximately $214 million in outstanding indebtedness under our aggregate
$600 million credit facilities. We expect to fund payments of principal and
interest under these credit facilities with cash from operations. During the
first quarter of 1999, all interest rate protection agreements to which we were
party either matured or were retired. Accordingly, at June 30, 1999, we had no
such agreements outstanding.
At June 30, 1999, our net deferred tax assets were $202.5 million
consisting primarily of federal, state and foreign net operating loss carry
forwards and deferred tax assets resulting from prior period compensation
payments made in connection with our initial public offering of common stock in
1998 and our recapitalization in 1996.
Our credit facilities contain financial and operating restrictions and
covenant requirements, and permit the payment of cash dividends except in the
event of a continuing default under the credit agreement. On June 15, 1999, we
paid a quarterly cash dividend of $0.025 per common share to all stockholders of
record as of June 1, 1999. The payment of additional dividends in the future
will be at the discretion of our Board of Directors and will depend upon, among
other factors, our results of operations, financial condition, capital
requirements and contractual restrictions in our credit facilities.
We may, from time to time, pursue acquisition opportunities that would
expand or enhance existing capabilities or expand the geographic scope of our
operations.
We believe that cash provided by operations and funds available under our
credit facilities will be sufficient to meet our anticipated cash requirements
as presently contemplated.
YEAR 2000 COMPLIANCE
We are working to resolve the potential impact of the year 2000 on the
ability of our 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).
We have modified or replaced the majority of all affected systems and are in the
process of completing the tests of these systems to fully validate their
readiness for compliance with the Year 2000 issue. We are also 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 our own computer systems. We have performed tests of major
systems in this category and have received assurances as to their readiness for
compliance with the Year 2000 issue. However, we continue to monitor the
adequacy of the processes and progress of other less critical vendors of systems
and applications that may be affected by the Year 2000 issue and to seek
assurances from these vendors that their systems are Year 2000 compliant.
While we believe our 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 our efforts, or those of third parties
11
<PAGE>
with whom we interact, will not be satisfactorily completed in a timely
fashion. Our failure to satisfactorily address the Year 2000 issue could have a
material adverse effect on our prospects, business, financial condition and
results of operations.
We do not expect the costs of our Year 2000 project to be material, and we
have funded all identified remedial projects in connection with our program.
However, we may experience cost overruns or delays as we replace or modify
systems, which could have a material adverse effect on our prospects, business,
financial condition and results of operations.
We are presently developing transition and contingency plans for critical
business processes to ensure a smooth migration into the year 2000.
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, 2001. We do not
anticipate that the adoption of this statement will have a significant effect on
our financial condition.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Y&R was held on May 14, 1999. Y&R did
solicit proxies. The holders of the shares of common stock and money market
preferred stock entitled to vote at the Annual Meeting voted on and approved the
following matters:
A. Election of three Class I Directors, each to serve for a term expiring at
the Annual Meeting of Y&R's Stockholders to be held in 2002 and until his
successor is duly elected and qualified.
Number of Shares
Name of Director For Withheld
F. Warren Hellman 61,515,594 25,418
Alan D. Schwartz 59,041,548 2,499,464
Edward H. Vick 61,516,394 24,618
B. Ratification and approval of Y&R's 1997 Incentive Compensation Plan, as
amended.
Number of Shares
For Against Abstentions
46,041,566 15,485,356 14,090
C. Ratification of the appointment of the firm of PricewaterhouseCoopers LLP
as Y&R's independent auditors for the year ending December 31,1999.
Number of Shares
For Against Abstentions
61,376,922 160,550 3,540
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K: None.
13
<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 13, 1999
/s/ Jacques Tortoroli
--------------------------------------------
Name: Jacques Tortoroli
Title: Senior Vice President of Finance
Principal Accounting Officer
14
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
15
<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,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001030048
<NAME> Young & Rubicam Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 79,572,000
<SECURITIES> 0
<RECEIVABLES> 872,476,000
<ALLOWANCES> (16,846,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,141,489,000
<PP&E> 397,078,000
<DEPRECIATION> (238,006,000)
<TOTAL-ASSETS> 1,832,253,000
<CURRENT-LIABILITIES> 1,279,498,000
<BONDS> 0
0
0
<COMMON> 702,000
<OTHER-SE> 193,413,000
<TOTAL-LIABILITY-AND-EQUITY> 1,832,253,000
<SALES> 0
<TOTAL-REVENUES> 798,234,000
<CGS> 0
<TOTAL-COSTS> 710,842,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,445,000
<INCOME-PRETAX> 82,947,000
<INCOME-TAX> 34,008,000
<INCOME-CONTINUING> 50,286,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,286,000
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.61
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