SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended: December 31, 1998 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 Identification No.)
incorporation or organization)
285 Madison Avenue, New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 210-3000
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 26, 1999, there were 66,521,003 shares of Common Stock
outstanding; the aggregate market value of the voting and non-voting common
equity held by nonaffiliates at March 26, 1999 was approximately $1,172,564,432
(based upon the closing price of such stock as quoted on the New York Stock
Exchange on such date).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of March 26, 1999
Common Stock, $.01 Par Value 66,521,003
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement relating to its
annual meeting of stockholders scheduled to be held on May 14, 1999 are
incorporated by reference into Part III of this Form 10-K.
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YOUNG & RUBICAM INC.
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INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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PART I Page
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Item 1. Business ................................................................ 1
Item 2. Properties .............................................................. 7
Item 3. Legal Proceedings ....................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders ..................... 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 8
Item 6. Selected Financial Data ................................................. 9
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations ................................................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............. 16
Item 8. Financial Statements and Supplementary Data ............................. 16
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure .................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 17
Item 11. Executive Compensation .................................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 17
Item 13. Certain Relationships and Related Transactions .......................... 17
The information called for by Items 10, 11, 12 and 13 is incorporated
herein by reference to the information to be included under the captions
"Election of Directors," "Executive Officers," "Executive Compensation,"
"Compensation of Directors" and "Security Ownership of Principal Stockholders,
Directors and Executive Officers" in the Company's definitive proxy statement
relating to its 1999 Annual Meeting of Stockholders which is expected to be
filed by April 9, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 18
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document 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 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 performance of Young & Rubicam Inc.
("Y&R" or the "Company"). 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.
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ITEM 1. BUSINESS
Young & Rubicam Inc. ("Y&R" or the "Company") is the fifth largest
consolidated marketing and communications organization in the world. Since our
founding 75 years ago, we have evolved from a single New York-based advertising
agency to a diversified global marketing and communications company operating in
121 cities in 76 countries worldwide as of December 31, 1998. We are a single
agency network, allowing us to centrally manage and utilize our resources.
Through multi-disciplinary, client-focused teams, we provide clients with global
access to fully integrated marketing and communications solutions. We operate
through recognized market leaders including:
o Young & Rubicam Advertising (full-service advertising);
o The Bravo Group/Kang & Lee (multi-cultural marketing and communications);
o Wunderman Cato Johnson (direct marketing and sales promotion);
o Brand Dialogue (digital interactive branding and digital commerce);
o The Media Edge (media planning, buying and placement services);
o Burson-Marsteller (perception management and public relations);
o Cohn & Wolfe (full-service public relations);
o Landor Associates (branding consultation and design services); and
o Sudler & Hennessey (healthcare communications).
In late 1992, we created the Key Corporate Account, or KCA, program, to
enhance the coordination of services sought by clients from both a global
coverage as well as an integrated solutions perspective. KCAs are large global
client accounts that, as a group, contribute the greatest share of our revenues
and profits, and are served on a multinational basis by two or more of our
businesses. Revenues from the KCAs, as a group, accounted for approximately
48.6% of our consolidated revenues in 1998. As part of our client focus, members
of our senior management team retain on-going responsibilities for individual
KCAs in addition to their managerial roles.
INDUSTRY OVERVIEW
The marketing and communications industry encompasses a wide range of
services used to develop and deliver messages to both broad and targeted
audiences through multiple communication channels. The industry includes
traditional advertising services as well as other marketing and communications
services such as direct marketing and sales promotion, public relations,
branding consultation and design services, new media marketing and other
specialized services.
Traditional advertising services include the development and planning of
marketing and branding campaigns; the creative design and production of
advertisements; the planning and buying of time and/or space in a variety of
media, including broadcast and cable television, radio, newspapers, general
interest/specialty magazines, billboards and the Internet; and the provision of
consumer, product and other market research to clients on an ongoing basis.
Direct marketing and sales promotion incorporate a broad range of services,
including direct mail and direct response television advertising (using
toll-free 800 numbers), inbound and outbound telemarketing, database marketing
and online marketing. Sales promotion includes the planning, design and
implementation of merchandising and sales promotions as well as design and
implementation of targeted interactive campaigns.
Perception management and public relations address clients' external
corporate or brand positioning, public image and relations with key external
constituencies. Functions provided by public relations firms include corporate
communications, public affairs, lobbying, crisis management, issue advertising
and internal, consumer grassroots communications.
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Branding consultation and design services encompass a range of services to
create, build and revitalize clients' brands. Among these services are corporate
identity, package design, retail design and branded environments, verbal
branding and nomenclature systems, corporate literature and interactive
branding.
New media marketing services include interactive marketing campaigns and
strategic consulting services, the design of Internet websites, banners and home
pages, the development of corporate intranets and digital commerce applications.
OPERATIONS
The following section contains a brief description of the Company's main
service offerings.
YOUNG & RUBICAM ADVERTISING. Young & Rubicam Advertising is one of the
world's leading full-service consumer advertising agencies, offering expertise
in creative development, consumer research and marketing, and media buying and
planning. In 1997, Young & Rubicam Advertising was ranked by industry sources as
the seventh largest advertising agency based in the United States.
Young & Rubicam Advertising operates in 86 cities in 61 countries
worldwide, in the Americas, Europe and Africa. Young & Rubicam Advertising
services clients through the Dentsu, Young & Rubicam Partnerships across the
Asia/Pacific region.
DENTSU, YOUNG & RUBICAM PARTNERSHIPS. The Dentsu, Young & Rubicam
Partnerships ("DY&R") are a network of full-service advertising agencies that
provide Young & Rubicam Advertising with access to major markets across the
Asia/Pacific region. DY&R was created as a joint venture between Y&R and Dentsu,
Inc. ("Dentsu") in 1991. In 1997, Dentsu ranked as the fourth largest marketing
and communications organization in the world and the largest marketing and
communications organization based in the Asia/Pacific region. DY&R is a series
of local ventures in which Y&R typically has a 50% interest, and is jointly
managed and operated by Y&R and Dentsu. To maximize local brand equity and
minimize conflicts, DY&R operates under different brand names and management in
each of its three regions -- Asia, Australia/New Zealand and the United States.
THE BRAVO GROUP/KANG & LEE. The Bravo Group ("Bravo") creates
multi-cultural marketing and communications programs targeted to the
fast-growing U.S. Hispanic community. Bravo's multi-disciplinary services
include advertising, promotion and event marketing, public relations, research
and direct marketing. The Company expanded its multi-cultural marketing and
communications capabilities in October 1998 with its acquisition of Kang & Lee,
an agency that creates Asian-language integrated marketing programs which are
designed to establish strong product positions in the Asian-American consumer
segments.
WUNDERMAN CATO JOHNSON. Wunderman Cato Johnson ("WCJ") is a leading
behavior-driven marketing and communications company. Behavior-driven marketing
and communications are designed to assist clients in producing immediate sales
and building brand and customer equity. WCJ addresses its clients' marketing
objectives through direct marketing, sales promotion, television commercials and
infomercials, customer loyalty programs, relationship marketing programs,
database development and management, merchandising, entertainment and sports
marketing, lead generation and new product launches.
WCJ was created by the 1992 merger of Wunderman Worldwide, a direct
marketing company acquired by Y&R in 1973, and Cato Johnson Associates, a sales
promotion company acquired by Y&R in 1976. Headquartered in New York, WCJ
operates in 47 cities in 31 countries worldwide. WCJ also has major database
facilities in Europe and Latin America.
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BRAND DIALOGUE. Brand Dialogue specializes in digital interactive branding
and digital commerce. Brand Dialogue's primary offerings consist of web
advertising, including the design, creation and production of websites, banners,
home pages and comprehensive interactive campaigns; digital commerce
applications; the development of corporate intranets to improve communications
and productivity within and among a defined set of users; and interactive
marketing consulting services.
THE MEDIA EDGE. The Media Edge provides integrated media planning, buying
and placement services for both Young & Rubicam Advertising and WCJ. In
addition, The Media Edge provides planning and buying of both traditional and
direct response media, and offers a range of media-related services to clients
other than those of Young & Rubicam Advertising and WCJ, as well as to smaller
independent advertising and communications agencies.
BURSON-MARSTELLER. Burson-Marsteller is a leading international perception
management, public relations and public affairs company. It provides a
comprehensive range of perception management capabilities to its clients,
including issues analysis, crisis management, consumer and business marketing
and research, corporate communications, investor relations and public affairs
advocacy. The perception management process begins with a statement of the
desired business results and then identifies current and targeted perceptions,
as well as different approaches to create the desired mindset with key
audiences.
Burson-Marsteller was founded in 1953 and was acquired by Y&R in 1979.
Burson-Marsteller is headquartered in New York and operates in 49 cities in 33
countries around the world.
COHN & WOLFE. Cohn & Wolfe is a full-service public relations firm that
provides creative, results-driven services to its clients. Cohn & Wolfe helps
its clients establish and communicate corporate and brand identity, launch new
products and expand sales. Areas of expertise include consumer marketing, sports
publicity and issues management, as well as healthcare, information technology
and business-to-business communications.
Cohn & Wolfe was founded in 1970 and was acquired by Burson-Marsteller in
1984. Cohn & Wolfe operates in 12 cities in North America, Europe and Australia.
LANDOR ASSOCIATES. Landor Associates ("Landor") is a leading branding
consultancy and strategic design firm. Landor creates, builds and revitalizes
clients' brands and helps position these brands for continued success. Landor's
branding and identity consultants, designers and researchers work with clients
on a full range of branding and identity projects, including corporate identity,
packaging and brand identity systems, retail design and branded environments,
interactive branding and design, verbal branding and nomenclature systems,
corporate literature, brand extensions and new brand development.
Landor was founded in 1941 and was acquired by Y&R in 1989. Landor is
headquartered in San Francisco and operates in 15 cities in 11 countries
worldwide, including multidisciplinary consulting and design studios in New
York, Seattle, Mexico City, Hamburg, London, Paris, Hong Kong and Tokyo.
SUDLER & HENNESSEY. Sudler & Hennessey ("S&H") is a leading healthcare
communications firm, which develops strategic promotional and educational
programs for a wide spectrum of healthcare brands. S&H creates advertising,
direct marketing and sales promotion programs for prescription drugs and
over-the-counter medications. In addition, S&H provides strategic consultancy
and communications support in the areas of managed care, medical devices and
equipment, nutrition, veterinary medicine and general healthcare. Communications
programs produced by S&H on behalf of its largely pharmaceutical industry client
base are directed to a wide range of healthcare professionals as well as
patients and their support networks.
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S&H was founded in 1941 and was acquired by Y&R in 1973. S&H is
headquartered in New York and operates in 15 cities in 10 countries in North
America, Europe and Asia/Pacific.
CLIENTS
We represent clients in various industries, including automotive, consumer
packaged goods, financial services, food and beverages, government services and
telecommunications. Among our approximately 5,500 client accounts are a number
of large multinational organizations, including AT&T, Citibank,
Colgate-Palmolive, Ford Motor Company and Philip Morris. Our top 20 clients
accounted for approximately 45.7% of consolidated revenues in 1998; our three
largest clients accounted for approximately 20.2% of consolidated revenues in
1998 and our largest client, Ford Motor Company, accounted for approximately
10.5% of consolidated revenues in 1998.
OTHER INFORMATION
For information concerning revenues and assets on a geographical basis for
each of the last three years, reference is made to Note 12 -- "Worldwide
Operations" of Notes to the Consolidated Financial Statements beginning on page
F-1.
DEVELOPMENTS IN 1998
The Company completed an initial public offering of Common Stock on May 15,
1998. Of the aggregate of 19,090,000 shares sold to the public, 6,912,730 shares
were sold by the Company and 12,177,270 shares were sold by certain selling
stockholders. For additional information, see Note 4 -- "Initial Public
Offering" of Notes to the Consolidated Financial Statements beginning on page
F-1.
In addition, a secondary public offering of Common Stock was completed on
November 30, 1998, pursuant to which certain selling stockholders sold an
aggregate of 11,500,000 shares to the public.
The Company did not receive any proceeds from the sale of shares of Common
Stock by selling stockholders in either of such offerings.
COMPETITION
The marketing and communications industry is highly competitive, and we
expect it to remain so. Our principal competitors in the advertising, direct
marketing and perception management and public relations businesses are large
multinational marketing and communications companies, as well as numerous
smaller agencies that operate only in the United States or in one or more
countries or local markets. We must compete with these other companies and
agencies to maintain existing client relationships and to obtain new clients and
assignments. Some clients, such as U.S. governmental agencies, require agencies
to compete for business at mandatory periodic intervals. We compete principally
on the basis of the following factors:
o creative reputation;
o knowledge of media;
o quality and breadth of services;
o geographical coverage and diversity;
o relationships with clients; and
o financial controls.
Recently, traditional advertising agencies also have been competing with
major consulting firms which have developed practices in marketing and
communications. New competitors also include smaller companies such as systems
integrators, database marketing and modeling companies and
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telemarketers, which offer technological solutions to marketing and
communications issues faced by clients. In addition, the trend towards
consolidation of global accounts requires companies seeking to compete
effectively in the international marketing and communications industry to make
significant investments. These investments include additional offices and
personnel around the world and new and improved technology for linking these
offices and people.
U.S. clients typically may cancel contracts with agencies upon 90 days'
notice, and non-U.S. clients typically also may cancel contracts with agencies
on 90 to 180 days' notice. In addition, clients generally remain able to move
from one agency to another with relative ease. However, we believe that clients
may find it increasingly difficult to terminate relationships with agencies that
represent their brands on a global basis because of the complexity of
coordinating creative, media and non-media services. As is typical in the
marketing and communications industry, we have lost or resigned client accounts
and assignments, including Blockbuster Video and International Home Foods, for a
variety of reasons, including conflicts with newly acquired clients. Although
typically we have replaced these losses with new clients and assignments, we may
not be successful in replacing clients that may leave Y&R or in replacing
revenues when a client significantly reduces the amount of work given to Y&R. A
significant reduction in the marketing and communications spending by, or the
loss of, one or more of our largest clients, if not replaced by new client
accounts or an increase in business from existing clients, would have a material
adverse effect on our prospects, business, financial condition and results of
operations.
When we represent a client, we do not always handle all advertising or
public relations for that client. Many large multinational companies are served
by a number of agencies within the marketing and communications industry. In
many cases, clients' policies on conflicts of interest or desires to be served
by multiple agencies result in one or more global agency networks representing a
client only for a portion of its marketing and communications needs or only in
particular geographic areas. In addition, the ability of agencies within
marketing and communications organizations to acquire new clients or additional
assignments from existing clients may be limited by the conflicts policy
followed by many clients. This conflicts policy typically prohibits agencies
from performing similar services for competing products or companies. Our
principal international competitors are holding companies for more than one
global advertising agency network. As a result, in some situations, separate
agency networks within these holding companies may be able to perform services
for competing products or for products of competing companies. We have one
global advertising agency network. Accordingly, our ability to compete for new
advertising assignments and, to a lesser extent, other marketing and
communications assignments, may be limited by these conflicts policies.
Industry practices in other areas of the marketing and communications
business reflect similar concerns with respect to client relationships.
REGULATION
The regulation of advertising takes several forms. The primary source of
governmental regulation in the United States is the Federal Trade Commission
("FTC") which is charged with administering the Federal Trade Commission Act
(the "FTC Act"). The FTC Act covers a wide range of practices involving false,
misleading and unfair advertising. In the event of violations of federal laws
and regulations, the FTC may seek cease and desist orders, may impose monetary
penalties and may require other remedies. The Federal Food and Drug
Administration, the Federal Communications Commission and other agencies also
have regulatory authority that affects the advertising business. In addition,
many state and local governments have adopted statutes and regulations similar
in scope to the FTC Act and the regulations thereunder.
Self-regulatory activities have become significant in the advertising
business. The Council of Better Business Bureaus has created the National
Advertising Division and the National Advertising Review
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Board, which review and process possible violations of proper business conduct
through advertising. The national television networks and various other media
have also adopted strict and extensive regulations governing the advertising
that they will accept for broadcast or publication. Trade associations in
certain industries publish advertising guidelines for their members and, in
addition, various consumer groups have been and continue to be powerful
advocates of increased regulation of advertising.
Advertising is also subject to regulation in countries other than the
United States in which we and our affiliates do business. We have developed
internal review procedures to help ensure that our work product, as well as that
of our affiliates, is in compliance with standards of accuracy, fair disclosure
and ethical proprieties, including those established by federal, state and local
laws and regulations and the pre-clearance procedures of the broadcast media.
In addition, as an international organization we are subject to the Foreign
Corrupt Practices Act (the "FCPA"). The FCPA imposes civil and criminal fines
and penalties on companies and individuals that violate its anti-bribery and
other provisions.
EMPLOYEES
We are highly dependent upon the skills of our creative, research, media
and account personnel and practice group specialists, and their relationships
with our clients. Employees generally are not subject to employment contracts
and are, therefore, typically able to move within the industry with relative
ease. Competition among the Company and its competitors for qualified personnel
is substantial, and the Company, like its principal competitors, is vulnerable
to the potentially adverse consequences which would arise from the inability to
attract or retain such qualified personnel. We have approximately 13,000
employees (including part-time employees) worldwide, including approximately
5,000 employed in the United States. None of our U.S. employees are covered by
collective bargaining agreements. We believe that our relations with employees
are good.
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ITEM 2. PROPERTIES
We own our headquarters office building at 285 Madison Avenue, New York,
New York. We lease other offices and space for our facilities in New York City
and elsewhere throughout the world. The following table sets forth certain
information relating to our principal properties:
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APPROXIMATE
SQUARE
LOCATION USE FOOTAGE EXPIRATION
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285 Madison Avenue (owned) Young & Rubicam Advertising, WCJ, Brand Dialogue and 370,000 N/A
New York, New York corporate headquarters
230 Park Avenue South Burson-Marsteller, Bravo, Landor and WCJ 340,500 1/22/06
New York, New York
Gallus Park Young & Rubicam Advertising, WCJ, Burson-Marsteller 154,000 4/26/04
Frankfurt, Germany and Sudler & Hennessey
825 Seventh Avenue The Media Edge 111,832 1/31/01
New York, New York
200 Renaissance Center Young & Rubicam Advertising and WCJ 96,000 11/30/99
Detroit, Michigan
675 Avenue of the Americas WCJ 92,500 6/30/03
New York, New York
Greater London House Young & Rubicam Advertising, WCJ and Sudler & 80,000 5/31/13
London, U.K. Hennessey
295 Madison Avenue Young & Rubicam Advertising 65,821 1/22/06
New York, New York
49-59 Avenue Andre Morizet Young & Rubicam Advertising and WCJ 65,000 3/30/08
Paris, France
100 First Street Young & Rubicam Advertising, WCJ, Burson-Marsteller 65,000 4/30/03
San Francisco, California and Bravo
One South Wacker Drive Young & Rubicam Advertising, WCJ and Landor 63,000 11/30/99
Chicago, Illinois
1801 K Street N.W. Burson-Marsteller and Cohn & Wolfe 60,000 10/31/06
Washington, D.C.
7535 Irvine Center Drive Young & Rubicam Advertising and WCJ 53,794 12/14/09
Irvine, California
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ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various claims and legal actions
incident to our operations, both as plaintiff and defendant. In the opinion of
management, these existing claims, in the aggregate, are not expected to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "YNR." The table below shows the range of reported last sale prices
on the New York Stock Exchange Composite Tape for the Company's Common Stock for
the periods indicated; the reported last sale price on March 26, 1999 was
$38.50. As of March 26, 1999, there were approximately 1,025 holders of record
of Common Stock.
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HIGH LOW
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1998
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Second Quarter
(commencing May 12, 1998) 33 1/16 26 1/2
Third Quarter 35 7/8 28 3/8
Fourth Quarter 33 5/8 19 3/4
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Since December 1996, the Company has not paid any cash or other dividends
on its Common Stock (other than a stock dividend paid in connection with the
Company's initial public offering in May 1998). The credit agreement governing
the Company's credit facility contains certain financial and operating
restrictions and covenant requirements and permits the payment of dividends
except in the event of a continuing default under the credit agreement. The
Company expects to declare and pay a cash dividend by the end of the first half
of 1999. The decision whether to apply legally available funds to the payment of
dividends on Common Stock will be made at the discretion of the Board of
Directors and will depend upon, among other factors, results of operations,
financial condition, capital requirements and the contractual restrictions of
the credit facility.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information for each of the
five years in the period ended December 31, 1998 set forth below has been
derived from and should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto (the "Consolidated Financial
Statements") beginning on page F-1 and the other financial information presented
elsewhere herein. Capitalized terms are as defined and described in such
Consolidated Financial Statements.
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YEAR ENDED DECEMBER 31,
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SELECTED STATEMENT OF OPERATIONS DATA 1998 1997 1996 1995 1994
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Revenues $ 1,522,464 $ 1,382,740 $ 1,222,139 $ 1,085,494 $ 959,275
Compensation expense, including employee
benefits (1) 903,948 836,150 730,261 672,026 594,322
General and administrative expenses (1) 455,578 463,936 391,617 356,523 323,087
Other operating charges (2) 234,449 11,925 17,166 31,465 4,507
Recapitalization-related charges (2) -- -- 315,397 -- --
(Loss) income from operations (71,511) 70,729 (232,302) 25,480 37,359
(Loss) income before extraordinary charge (81,635) (23,938) (238,311) 820 15,432
Net (loss) income (3) (86,068) (23,938) (238,311) 820 15,432
Loss per share (basic and diluted) (3)
Loss before extraordinary charge $ (1.34) $ (0.51)
Extraordinary charge ( 0.08) --
Net loss $ (1.42) $ (0.51)
Weighted average shares outstanding 60,673,994 46,949,355
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(1) For a discussion of charges included in compensation expense, including
employee benefits, and general and administrative expenses, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Results of Operations."
(2) For a discussion of Recapitalization-related charges and other operating
charges for the years ended December 31, 1998, 1997 and 1996, see Notes 4, 6
and 9 of Notes to the Consolidated Financial Statements.
(3) Net loss in 1998 includes an extraordinary loss on the retirement of debt of
$4.4 million ($.08 per share of Common Stock).
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DECEMBER 31,
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SELECTED BALANCE SHEET DATA 1998 1997 1996 1995 1994
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Cash and cash equivalents ................ $ 122,138 $ 160,263 $ 110,180 $ 21,646 $ 36,535
Total assets ............................. 1,635,255 1,537,807 1,598,812 1,226,581 1,118,846
Total debt (4) ........................... 63,959 351,051 267,238 230,831 256,032
Mandatorily Redeemable Equity Securities . -- 508,471 363,264 -- --
Total stockholders' equity (deficit) ..... 114,969 (661,714) (480,033) (55,485) 69,982
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</TABLE>
(4) Total debt includes current and non-current loans and installment notes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements beginning on page F-1.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
derived from the Company's consolidated statements of operations and the
percentages of revenue represented by such items.
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YEAR ENDED DECEMBER 31,
% OF % OF % OF
1998 REVENUES 1997 REVENUES 1996 REVENUES
------------ -------- ----------- --------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $ 1,522.5 100.0% $ 1,382.7 100.0% $ 1,222.1 100.0%
Compensation expense, including employee
benefits .......................... 903.9 59.4% 836.2 60.5% 730.3 59.8%
General and administrative expenses. 455.6 29.9% 463.9 33.6% 391.6 32.0%
- ------------------------------------ ------------- ------- ---------- -------- --------------------------
Income before non-recurring charges(1) 162.9 10.7% 82.7 6.0% 100.3 8.2%
Other operating charges ............ 234.4 15.4% 11.9 0.9% 17.2 1.4%
Recapitalization-related charges ... -- 0.0% -- 0.0% 315.4 25.8%
- ------------------------------------ ------------- ------- ---------- -------- --------------------------
(Loss) income from operations ...... (71.5) ( 4.7%) 70.7 5.1% (232.3) (19.0%)
Net loss ........................... $ (86.1) ( 5.7%) $ (23.9) ( 1.7%) $ (238.3) (19.5%)
==================================== ============= ======= ========== ======== ==========================
</TABLE>
* Totals may not add due to rounding.
(1) Management believes that income before non-recurring charges is an
appropriate measure for evaluating the operating performance of the Company;
however, it should be considered in addition to, not as a substitute for,
operating income, net income and other measures of financial performance
reported in accordance with generally accepted accounting principles.
1998 COMPARED TO 1997
Revenues for 1998 increased by $139.8 million, or 10.1%, to $1,522.5
million compared to 1997. The increase was primarily due to net new business
(including business from new clients and higher revenue from existing clients)
generated from clients such as Citibank and Ford. United States revenues
increased by 17.3% to $775.7 million for 1998 compared to 1997. International
revenues increased by 3.5% to $746.8 million for 1998 compared to 1997,
primarily due to strong performance in Europe, partially offset by declines in
Latin America and the impact of the overall strengthening of the U.S. dollar
against foreign currencies. Organic revenue growth (excluding acquisitions and
foreign currency fluctuations) was 12.2%. Excluding the effect of foreign
currency fluctuations, international revenues increased by 7.9% compared to
1997.
Compensation expense increased by $67.7 million to $903.9 million for 1998
compared to 1997. The growth in compensation expense was primarily attributable
to additional staffing to support business growth and to salary increases.
Compensation expense in 1997 also included a $12.3 million charge primarily for
deferred compensation awards granted to senior executives. Excluding the effect
of the 1997 deferred compensation awards, compensation expense in 1998 decreased
as a percentage of revenues to 59.4% from 59.6% in 1997.
General and administrative expenses decreased by $8.3 million to $455.6
million for 1998 compared to 1997. This decrease was primarily due to a $25.5
million write-off in 1997 of accounts receivable, costs billable to clients and
other capitalized costs with respect to the operations of Burson-Marsteller in
Europe and Asia, partially offset in 1998 by additional operating expenses to
support business growth. Excluding the effect of the Burson-Marsteller
write-off, general and administrative expenses in 1998 decreased as a percentage
of revenues to 29.9% from 31.7% in 1997.
10
<PAGE>
Income before non-recurring charges increased by $80.2 million, or 97.0%,
to $162.9 million for 1998 compared to 1997. This increase was primarily due to
net new business gains in 1998, improved operating margins, and the
Burson-Marsteller write-off and deferred compensation charge in 1997.
Effective upon the consummation of the Company's initial public offering of
Common Stock in May 1998 (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. In 1997, the Company
recognized $11.9 million of other operating charges for non-cash asset
impairment write-downs principally related to certain operations in the United
States, Africa, Latin America and Europe.
As a result of the $234.4 million in other operating charges associated
with the Offering, the Company reported a loss from operations of $71.5 million
for 1998. Excluding the other operating charges described above for both 1998
and 1997, and the Burson-Marsteller write-off and deferred compensation charge
in 1997, income from operations in 1998 increased by $42.4 million, or 35.2%,
compared to 1997.
Net interest expense decreased by $16.7 million to $17.7 million for 1998
compared to 1997. The decline was due to lower average borrowing levels and
lower average borrowing rates during 1998 compared to 1997.
The Company recognized an income tax benefit of $2.6 million for 1998
compared to income tax expense of $58.3 million for 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 3.0% for 1998. Excluding the benefit derived
from the other operating charges, the effective tax rate was 42% for 1998, a
decrease from the 160.6% effective tax rate 1997. The effective tax rate in 1997
includes the effect of incremental foreign taxes arising from losses outside the
United States which provided little or no tax benefit.
Equity in net income of unconsolidated companies was $4.7 million in 1998
compared to $0.3 million in 1997, reflecting improved worldwide operating
results by advertising agency affiliates.
Minority interest in net income of consolidated subsidiaries was $2.0
million in 1998 compared to $2.3 million in 1997, primarily due to lower
earnings from a Latin American operation.
The Company incurred an extraordinary charge of $4.4 million in 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 a credit facility which was
replaced in May 1998 in connection with the Offering.
Net loss for 1998 was $86.1 million compared to a net loss of $23.9 million
for 1997. Excluding the after-tax effect of the other operating charges
associated with the Offering and the extraordinary charge in 1998, and the other
operating charges, the Burson-Marsteller write-off and the deferred compensation
charge in 1997, net income increased by $86.3 million in 1998 compared to 1997.
This increase was primarily the result of revenue growth, improved operating
margins, lower net borrowing costs and a reduced effective tax rate.
1997 COMPARED TO 1996
Revenues for 1997 increased by $160.6 million, or 13.1%, to $1,382.7
million compared to 1996. This increase was primarily due to net new business
(including business from new clients and higher revenues from existing clients)
generated from clients such as Campbell's Soup, Citibank, Merck and United
Airlines. United States revenues increased by 15.8% to $661.3 million for 1997
compared to 1996. International revenues for 1997 increased by 10.8% to $721.4
million for 1997 compared to 1996.
11
<PAGE>
Organic revenue growth was 13.6%. An additional 3.0% of the revenue increase was
due to the acquisition of majority interests in investments previously accounted
for under the equity method. Such increases were partially offset by a 3.5%
decline related to a strengthening (on average) of the U.S. dollar against
foreign currencies.
Compensation expense increased by $105.9 million to $836.2 million for 1997
compared to 1996. The growth in compensation expense was generally in line with
revenue growth and also included a $12.3 million charge primarily for deferred
compensation awards granted to senior executives in 1997. Excluding the effect
of the 1997 deferred compensation charges, compensation expense in 1997
decreased as a percentage of revenues to 59.6% from 59.8% in 1996.
General and administrative expenses increased by $72.3 million to $463.9
million for 1997 compared to 1996. This increase included a $25.5 million
write-off in 1997 of accounts receivable, costs billable to clients and other
capitalized costs with respect to the operations of Burson-Marsteller in Europe
and Asia. 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. As a result of its analysis of the circumstances
which led to these write-offs, the Company made management changes at
Burson-Marsteller in Europe and Asia and implemented additional financial
control and reporting requirements for these operations, including strengthening
controls and procedures regarding regional billing and collection practices.
Excluding the effect of the 1997 Burson-Marsteller write-off, general and
administrative expenses in 1997 decreased as a percentage of revenues to 31.7%
from 32.0% in 1996.
Income before non-recurring charges decreased by $17.6 million, or 17.5%,
to $82.7 million for 1997 compared to 1996. This decrease was primarily due to
the inclusion of the deferred compensation charge and Burson-Marsteller
write-off in 1997, offset in part by net new business gains.
In 1997, the Company had income from operations of $70.7 million compared
to a loss from operations of $232.3 million in 1996, primarily due to charges of
$315.4 million related to the recapitalization of the Company that was
consummated in December 1996 (the "Recapitalization") which is described more
fully in Note 6 of Notes to the Consolidated Financial Statements. Income from
operations in 1997 included $11.9 million of other operating charges for asset
impairment write-downs principally related to certain operations in the United
States, Africa, Latin America and Europe.
Net interest expense increased by $16.1 million to $34.4 million for 1997
compared to 1996. The increase was primarily due to higher average borrowing
levels in 1997 as a result of the Recapitalization.
The Company recognized income tax expense of $58.3 million for 1997
compared to an income tax benefit of $20.6 million for 1996. The effective
income tax rate for 1997 was 160.6%. The primary difference between the U.S.
statutory tax rate and Y&R's effective tax rate in 1997 resulted from
incremental foreign taxes arising from losses outside the United States which
provided little or no tax benefit. The effective income tax rate for 1996 was a
benefit of 8.2%. This reflects the tax benefit from the Recapitalization-related
charges partially offset by foreign income taxed at rates greater than the U.S.
statutory rate. See Note 11 of Notes to the Consolidated Financial Statements.
Equity in net income of unconsolidated companies was $0.3 million in 1997
compared to a loss of $9.8 million in 1996. A $9.3 million charge to write down
an Australian equity investment was recorded in 1996.
Minority interest in net income of consolidated subsidiaries was $2.3
million in 1997 compared to minority interest in net loss of consolidated
subsidiaries of $1.5 million in 1996, primarily reflecting the
12
<PAGE>
minority interest share of charges for asset impairment write-downs relating to
an Italian operation in 1996.
Net loss for 1997 was $23.9 million compared to a net loss of $238.3
million for 1996, primarily as a result of charges recorded in connection with
the Recapitalization in 1996.
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. In addition, in May 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 Credit Facility
to repay all of the outstanding borrowings under the replaced credit facilities.
Cash and cash equivalents were $122.1 million and $160.3 million at
December 31, 1998 and 1997, respectively. Cash provided by operating cash flows
in 1998 was $195.6 million, reflecting strong operating performance and the
Company's continued focus on cash management. 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 used in investing activities in 1998 was $99.7 million and included
$76.4 million in capital expenditures and $23.3 million for net acquisitions and
investments. The majority of capital expenditures were for information
technology-related purchases and leasehold improvements. Acquisitions and
investments consisted primarily of the purchase of a multi-cultural advertising
agency and certain other related assets in the United States and additional
investment in partially owned international affiliates. Capital expenditures are
estimated to be approximately $80 million in 1999 primarily for additional
information technology-related purchases and leasehold improvements.
Cash used in financing activities in 1998 was $136.2 million. In 1998,
proceeds from a new $400 million revolving credit facility (the "Credit
Facility") and the Offering, along with cash generated by operations, were used
to repay obligations of the Company under its previous credit facilities.
During 1998, the Company announced that the Board of Directors had approved
a plan to repurchase an aggregate of up to 8.0 million shares of Common Stock
over the next two years (the "Plan"). 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. Through December 31, 1998, the
Company repurchased approximately 1.9 million shares of Common Stock for an
aggregate of $51.0 million under the Plan. Prior to the adoption of the Plan,
the Company had repurchased approximately 0.7 million shares for an aggregate of
$10.0 million from certain employees in private transactions. As of March 26,
1999, approximately 0.9 million additional shares of Common Stock had been
repurchased in 1999 for an aggregate of $36.9 million under the Plan.
In 1997, cash provided by operating cash flows was $224.5 million,
reflecting the implementation by the Company of cash management improvements
relating to the timing of billings, accounts receivable collections and payments
of obligations to media and other suppliers.
In 1997, cash used in investing activities was $67.1 million and included
$51.9 million in capital expenditures and $15.2 million for net acquisitions and
investments. The majority of capital expenditures were for information
technology-related purchases, while the remaining expenditures were for
13
<PAGE>
leasehold improvements, furniture and equipment. Acquisitions and investments
consisted primarily of additional investments in partially owned domestic and
international affiliates.
In 1997, cash flows used in financing activities were $98.7 million. Net
proceeds from the former credit facility were more than offset by payments
incurred in connection with the Recapitalization.
At December 31, 1998, the Company had $31.5 million in outstanding
indebtedness under the Credit Facility. The Company expects to fund its payments
of principal and interest under the Credit Facility with cash from operations.
As of December 31, 1998, the Company had entered into interest rate protection
agreements with respect to its indebtedness under the Credit Facility, which
effectively changed the Company's interest rate under the Credit Facility to
fixed rate borrowings. The interest rate protection agreements mature at various
times through 2001.
At December 31, 1998, the Company's net deferred tax assets were $205.4
million, $110.4 million of which related to net operating loss ("NOL")
carryforwards of approximately $258.3 million for U.S. tax purposes which expire
in the year 2018 and approximately $91.4 million of NOL carryforwards for
foreign tax purposes with carryforward periods ranging from one year to an
indefinite time. The remaining net deferred tax assets principally resulted from
compensation payments made in connection with the Recapitalization and the
Offering. 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 Credit 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
expects to declare and pay a cash dividend by the end of 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 Credit Facility.
The Company may, from time to time, pursue acquisition opportunities that
would expand or enhance existing capabilities or expand the geographic scope of
the Company's operations.
The Company believes that cash provided by operations and funds available
under the Credit Facility will be sufficient to meet its anticipated cash
requirements as presently contemplated.
MARKET RISK MANAGEMENT
At December 31, 1998 and 1997, the carrying value of the Company's
financial instruments approximated fair value in all material respects.
Interest Rate Risk
The Company enters into interest rate protection agreements in order to
reduce its exposure to changes in interest rates on its variable rate long-term
debt. At December 31, 1998 and 1997, the Company had entered into interest rate
protection agreements with respect to $31.5 million and $275 million of its
indebtedness, respectively, which expire at various times through 2001 and
result in the Company paying, on a quarterly basis, fixed interest amounts
ranging from 6.0% to 6.5%.
Foreign Exchange Rate Risk
The Company's Consolidated Financial Statements are denominated in U.S.
dollars. In 1998, the Company derived approximately 49% of its revenues from
operations outside of the United States. Currency fluctuations may give rise to
translation gains or losses when financial statements of foreign
14
<PAGE>
operating units are translated into U.S. dollars. Significant strengthening of
the U.S. dollar against other major foreign currencies could have a material
adverse effect on the Company's results of operations. Most of the Company's
revenues are billed in the same currency as the costs incurred to support the
revenues, thereby reducing exposure to transaction gains and losses. The Company
typically does not hedge foreign currency profits into U.S. dollars, believing
that over time the costs of a hedging program would outweigh any benefit of
greater predictability in the Company's U.S. dollar-denominated profits.
However, the Company selectively hedges some positions where management believes
it is economically beneficial to do so, and bases its foreign subsidiary
capitalization, debt and dividend policies on minimizing currency risk. The
Company also seeks, through pricing and other means, to anticipate and avoid
economic currency losses.
The Company enters into forward foreign exchange contracts to hedge certain
assets and liabilities which are recorded in a currency different from that in
which they settle. These contracts are generally entered into in order to hedge
intercompany transactions. Gains and losses on these contracts generally offset
losses and gains on the related foreign currency denominated intercompany
transactions. The gains and losses on these positions are deferred and included
in the basis of the transaction upon settlement. The terms of these contracts
are generally a one-month maturity. At December 31, 1998, the Company had
contracts for the sale of $19.4 million and the purchase of $6.1 million of
foreign currencies at fixed rates, compared to contracts for the sale of $18.5
million and the purchase of $12.8 million of foreign currencies at December 31,
1997.
Management believes that any losses resulting from market risk would not
have a material adverse impact on the consolidated financial position, results
of operations or cash flows of the Company.
International Business Risk
Economic prospects throughout Latin America may be adversely affected by
the devaluation of the Brazilian real which occurred in January 1999. Since its
devaluation, the value of the real has weakened by approximately 40% against the
U.S. dollar. In addition, there was a significant economic downturn in the
Asia/Pacific region in 1998 which has continued into 1999. There can be no
assurance as to when the value of the Brazilian real or the conditions in the
Asia/Pacific region will improve. However, because the Company does not derive a
significant amount of its revenues from these regions, the above conditions are
not expected to be material to the consolidated financial position, results of
operations or cash flows of the Company.
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "euro"). The transition period for the
introduction of the euro began on January 1, 1999. Beginning January 1, 2002,
the participating countries will issue new euro-denominated bills and coins for
use in cash transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions, making the conversion to the euro complete.
The Company is addressing the issues involved with the introduction of the
euro, including converting information technology systems, reassessing currency
risk and negotiating and amending agreements. Based on progress to date, the
Company believes that the use of the euro will not have a significant impact on
the manner in which it conducts its business. Accordingly, conversion to the
euro is not expected to have a material effect on the Company's liquidity,
financial condition or results of operations.
SEASONALITY
The Company's revenues generally reflect the media buying patterns of
advertisers and are concentrated in the second and fourth quarters of the year.
15
<PAGE>
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 completing the modification or replacement of 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 in some operating units. 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 has performed tests of major
systems in this category and continues to seek assurances from other less
critical vendors that their systems are 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 or results of operations.
The costs of the Company's Year 2000 project are not expected to be
material, and all identified remedial projects in connection therewith have been
funded. 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 or results of operations.
The Company has not yet determined the extent of contingency planning that
may be required.
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," ("SFAS
133") 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information required in response to this Item 7A, reference is made to
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Market Risk Management" and to Notes 2 and 20 of
Notes to the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required in response to
this Item 8 appear beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the
Company and compliance with Section 16(a) of the Securities and Exchange Act of
1934 and the rules thereunder is incorporated by reference to the Company's
definitive proxy statement for its 1999 Annual Meeting of Stockholders (the
"Proxy Statement") expected to be filed by April 9, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement expected to be filed by
April 9, 1999. Such incorporation shall not be deemed to incorporate
specifically by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement expected to be filed by
April 9, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement expected to be filed by
April 9, 1999. Such incorporation shall not be deemed to incorporate
specifically by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS; FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
(a)1. FINANCIAL STATEMENTS: Page
----
<S> <C>
Index to Consolidated Financial Statements ........................................ F-1
Report of Independent Accountants ................................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 ...................... F-3
Consolidated Statements of Operations for the three years ended December 31, 1998 . F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 1998 . F-5
Consolidated Statements of Changes in Equity (Deficit) for the three years ended
December 31, 1998 ................................................................. F-6
Notes to Consolidated Financial Statements ........................................ F-7
Quarterly Financial Information (Unaudited) ....................................... F-25
Report of Management .............................................................. F-26
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts for the three years ended
December 31, 1998 ................................................................. S-1
All other schedules are omitted because they are not applicable.
3. EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of Young & Rubicam
Inc. (incorporated by reference from Exhibit 4.4 to the Registration
Statement on Form S-8 (File No. 333-57605) filed by the Company).
3.2 Amended and Restated Bylaws of Young & Rubicam Inc. (incorporated by
reference from Exhibit 4.5 to the Registration Statement on Form S-8
(File No. 333-57605) filed by the Company).
4.1 Specimen Certificate of Common Stock of Young & Rubicam Inc.
(incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
4.2 Rights Agreement, dated as of May 1, 1998 (incorporated by reference
from Exhibit 4.9 to the Registration Statement on Form S-8 (File No.
333-57605) filed by the Company).
4.3 Certificate of Designation for Registrant's Cumulative Participating
Junior Preferred Stock (incorporated by reference from Exhibit 4.3 to
the Registration Statement on Form S-1 (File No. 333-66883) filed by the
Company).
9.1 Management Voting Trust Agreement, dated as of December 12, 1996
(incorporated by reference from Exhibit 9.1 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
9.2 Young & Rubicam Inc. Restricted Stock Trust Agreement, dated as of
December 12, 1996 (incorporated by reference from Exhibit 9.2 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
</TABLE>
18
<PAGE>
10.1 Stockholders' Agreement, dated as of May 8, 1998 (incorporated by
reference from Exhibit 4.8 to the Registration Statement on Form S-8
(File No. 333-57605) filed by the Company).
10.2 Contribution Agreement dated October 30, 1996 (incorporated by reference
from Exhibit 10.3 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.3 Young & Rubicam Holdings Inc. Restricted Stock Plan (incorporated by
reference from Exhibit 10.4 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.4 Young & Rubicam Holdings Inc. Management Stock Option Plan (incorporated
by reference from Exhibit 10.5 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.5 Young & Rubicam Inc. 1997 Incentive Compensation Plan (incorporated by
reference from Exhibit 10.6 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.6 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Peter A. Georgescu (incorporated by reference
from Exhibit 10.7 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.7 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Peter A. Georgescu (incorporated by reference
from Exhibit 10.8 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.8 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1986, with Peter A. Georgescu (incorporated by reference
from Exhibit 10.9 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.9 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with John P. McGarry, Jr. (incorporated by
reference from Exhibit 10.10 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.10 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1986, with John P. McGarry, Jr. (incorporated by reference
from Exhibit 10.11 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.11 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 31, 1994, with John P. McGarry, Jr. (incorporated by
reference from Exhibit 10.12 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.12 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Edward Vick (incorporated by reference from
Exhibit 10.13 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.13 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Edward Vick (incorporated by reference from
Exhibit 10.14 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
19
<PAGE>
10.14 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Alan J. Sheldon (incorporated by reference
from Exhibit 10.15 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.15 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Alan J. Sheldon (incorporated by reference from
Exhibit 10.16 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.16 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1988, with Alan J. Sheldon (incorporated by reference from
Exhibit 10.17 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.17 Registration Rights Agreement, dated as of December 12, 1996
(incorporated by reference from Exhibit 10.18 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.18 Letter Agreement dated as of October 16, 1997 by and between Young &
Rubicam Inc. and Michael J. Dolan (incorporated by reference from
Exhibit 10.19 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.19 Letter Agreement dated June 28, 1996 by and between Young & Rubicam Inc.
and Michael J. Dolan (incorporated by reference from Exhibit 10.20 to
the Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
10.20 Lease Agreement for 230 Park Avenue South (incorporated by reference
from Exhibit 10.21 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.21 H&F Option Agreement, dated as of December 12, 1996, among Young &
Rubicam Holdings Inc., a New York corporation ("Holdings"), Young &
Rubicam Inc., a New York corporation, Young & Rubicam Inc., a Delaware
corporation and a wholly-owned subsidiary of Holdings, and Hellman &
Friedman Capital Partners III, L.P. (incorporated by reference from
Exhibit 10.22 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.22 H&F Option Agreement, dated as of December 12, 1996, among Young &
Rubicam Holdings Inc., a New York corporation ("Holdings"), Young &
Rubicam Inc., a New York corporation, Young & Rubicam Inc., a Delaware
corporation and a wholly-owned subsidiary of Holdings, and H&F Orchard
Partners III, L.P. (incorporated by reference from Exhibit 10.23 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
10.23 Form of Young & Rubicam Inc. Key Corporation Managers Bonus Plan
(incorporated by reference from Exhibit 10.24 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.24 Amendment No. 1 to Restricted Stock Trust Agreement dated as of March
13, 1998 (incorporated by reference from Exhibit 10.25 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
10.25 Young & Rubicam Inc. Deferred Compensation Plan (incorporated by
reference from Exhibit 10.26 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.26 Amendment No. 1 to Young & Rubicam Inc. Deferred Compensation Plan
effective as of November 19, 1997.*
20
<PAGE>
10.27 Amendment No. 2 to Young & Rubicam Inc. Deferred Compensation Plan
effective as of January 1, 1999.*
10.28 Young & Rubicam Inc. Grantor Trust Agreement (incorporated by reference
from Exhibit 10.27 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.29 Amendment to Young & Rubicam Inc. 1997 Incentive Compensation Plan
(incorporated by reference from Exhibit 10.28 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.30 Credit Agreement for the Credit Facility (incorporated by reference from
Exhibit 10.28 to the Registration Statement on Form S-1 (File No.
333-66883) filed by the Company).
21.1 List of Subsidiaries (incorporated by reference from Exhibit 10.28 to
the Registration Statement on Form S-1 (File No. 333-66883) filed by the
Company).
23.1 Consent of PricewaterhouseCoopers LLP. *
24.1 Powers of Attorney to sign Form 10-K and resolution of Board of
Directors re Power of Attorney.*
- ---------------------
* Filed herewith.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1998.
21
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ..................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................... F-3
Consolidated Statements of Operations for the three years ended December 31, 1998 ..... F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 1998 ..... F-5
Consolidated Statements of Changes in Equity (Deficit) for the three years ended
December 31, 1998 .................................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
Quarterly Financial Information ....................................................... F-25
Report of Management .................................................................. F-26
Financial Statement Schedule II -- Valuation and Qualifying Accounts .................. S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Young & Rubicam Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
equity (deficit) present fairly, in all material respects, the financial
position of Young & Rubicam Inc. (the "Company") and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 16, 1999
F-2
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
(in thousands, except share and per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 122,138 $ 160,263
Accounts receivable, net of allowance for doubtful accounts of $17,938 and $14,125 at
December 31, 1998 and 1997, respectively 835,284 790,342
Costs billable to clients 55,187 60,267
Other receivables 37,177 35,218
Deferred income taxes 46,803 32,832
Prepaid expenses and other assets 25,979 17,989
----------- -----------
Total Current Assets 1,122,568 1,096,911
----------- -----------
NONCURRENT ASSETS
Property and equipment, net 150,413 125,014
Deferred income taxes 158,646 124,192
Goodwill, less accumulated amortization of $84,292 and $80,166 at December 31, 1998 and
1997, respectively 120,075 116,637
Equity in net assets of and advances to unconsolidated companies 38,397 26,393
Other assets 45,156 48,660
----------- -----------
Total Noncurrent Assets 512,687 440,896
----------- -----------
Total Assets $ 1,635,255 $ 1,537,807
=========== ===========
CURRENT LIABILITIES
Loans payable $ 31,365 $ 10,765
Accounts payable 1,008,624 861,939
Accrued expenses and other liabilities 203,099 235,253
Accrued payroll and bonuses 77,078 65,458
Income taxes payable 19,290 29,665
----------- -----------
Total Current Liabilities 1,339,456 1,203,080
----------- -----------
NONCURRENT LIABILITIES
Loans payable 31,494 330,552
Deferred compensation 30,635 31,077
Other liabilities 114,128 119,354
----------- -----------
Total Noncurrent Liabilities 176,257 480,983
----------- -----------
Commitments and Contingencies (Note 19)
Minority Interest 4,573 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 December 31, 1998 and 1997, -- 508,471
respectively ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
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 at December 31, 1998 and 1997 -- --
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 at December 31, 1998 and 1997 -- --
Common stock, par value $.01 per share; authorized--250,000,000 shares; issued and
outstanding -- 66,374,569 shares and 11,086,950 shares at December 31, 1998 and
1997, respectively
(excluding 3,976,941 shares and 1,115,160 shares in treasury) 704 111
Capital surplus 934,676 23,613
Accumulated deficit (758,292) (522,866)
Cumulative translation adjustment (10,810) (16,577)
Pension liability adjustment (1,738) (706)
----------- -----------
164,540 (516,425)
Common stock in treasury, at cost (49,571) (8,550)
Unearned compensation--Restricted Stock -- (136,739)
----------- -----------
Total Stockholders' Equity (Deficit) 114,969 (661,714)
----------- -----------
Total Liabilities, Mandatorily Redeemable Equity Securities and Stockholders' Equity
(Deficit) $ 1,635,255 $ 1,537,807
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except share and -------------------------------------------
per share amounts) 1998 1997 1996
- -------------------------------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
Revenues $ 1,522,464 $ 1,382,740 $ 1,222,139
Compensation expense, including employee benefits 903,948 836,150 730,261
General and administrative expenses 455,578 463,936 391,617
Other operating charges 234,449 11,925 17,166
Recapitalization-related charges -- -- 315,397
----------- ----------- -----------
Operating expenses 1,593,975 1,312,011 1,454,441
----------- ----------- -----------
(Loss) income from operations (71,511) 70,729 (232,302)
Interest income 8,315 8,454 10,269
Interest expense (26,001) (42,879) (28,584)
Other income 2,200 -- --
----------- ----------- -----------
(Loss) income before income taxes (86,997) 36,304 (250,617)
Income tax (benefit) provision (2,644) 58,290 (20,611)
----------- ----------- -----------
(84,353) (21,986) (230,006)
Equity in net income (loss) of unconsolidated companies 4,707 342 (9,837)
Minority interest in net (income) loss of consolidated
subsidiaries (1,989) (2,294) 1,532
----------- ----------- -----------
Loss before extraordinary charge (81,635) (23,938) (238,311)
Extraordinary charge for early retirement of debt, net of tax
benefit of $2,834 (4,433) -- --
----------- ----------- -----------
Net loss $ (86,068) $ (23,938) $ (238,311)
=========== =========== ===========
Loss per share (basic and diluted):
Loss before extraordinary charge $ (1.34) $ (0.51)
Extraordinary charge ( 0.08) --
----------- -----------
Net loss $ (1.42) $ (0.51)
=========== ===========
Weighted average shares outstanding (Note 3) 60,673,994 46,949,355
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (86,068) $ (23,938) $ (238,311)
Adjustments to reconcile net loss to net cash provided by operating activities:
Recapitalization-related charges -- -- 315,397
Depreciation and amortization 60,610 56,721 53,030
Extraordinary charge, net 4,433 -- --
Other operating charges 234,449 11,925 11,096
Deferred income tax benefit (38,664) (384) (59,671)
Equity in net (income) loss of unconsolidated companies (4,707) (342) 9,837
Dividends from unconsolidated companies 3,467 2,728 2,691
Minority interest in net income (loss) of consolidated subsidiaries 1,989 2,294 (1,532)
Change in assets and liabilities, excluding effects from acquisitions,
dispositions, recapitalization and foreign exchange:
Accounts receivable (29,398) 42,144 (209,518)
Costs billable to clients 5,418 15,834 7,784
Other receivables (2,346) 13,930 (2,883)
Prepaid expenses and other assets (6,702) 269 8,776
Accounts payable 87,290 69,324 256,460
Accrued expenses and other liabilities (29,374) (15,368) (7,565)
Accrued payroll and bonuses 8,869 2,179 3,192
Income taxes payable (10,652) 19,352 4,263
Deferred compensation 3,234 13,052 4,950
Other (6,233) 14,791 20,068
----------- ---------- -----------
Net cash provided by operating activities $ 195,615 $ 224,511 $ 178,064
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment $ (76,378) $ (51,899) $ (51,792)
Acquisitions, net of cash acquired (17,423) (11,281) (23,887)
Investment in net assets of and advances to unconsolidated companies (7,072) (5,640) (775)
Proceeds from notes receivable 1,190 1,678 360
----------- ---------- -----------
Net cash used in investing activities $ (99,683) $ (67,142) $ (76,094)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable, long-term 225,834 226,770 319,282
Repayment of loans payable, long-term (524,883) (105,870) (252,496)
Proceeds from loans payable, short-term, net 71,997 20,103 27,849
Proceeds from issuance of common stock in initial public offering, net 158,637 -- --
Deferred financing costs (667) -- (9,157)
Recapitalization cash contributions -- -- 242,007
Recapitalization payments -- (247,789) (323,920)
Payments of non-recapitalization deferred compensation (3,535) (1,118) (11,624)
Common stock/LPUs issued 7,995 10,390 4,163
Common stock/LPUs repurchased (60,956) (1,500) (8,971)
Payment of installment notes, net (8,883) -- --
Other financing activities (1,781) 347 253
----------- ---------- -----------
Net cash used in financing activities $ (136,242) $ (98,667) $ (12,614)
----------- ---------- -----------
Effect of exchange rate changes on cash and cash equivalents 2,185 (8,619) (822)
Net (decrease) increase in cash and cash equivalents (38,125) 50,083 88,534
Cash and cash equivalents, beginning of period 160,263 110,180 21,646
----------- ---------- -----------
Cash and cash equivalents, end of period $ 122,138 $ 160,263 $ 110,180
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 29,439 $ 39,986 $ 28,612
=========== ========== ===========
Income taxes paid $ 36,288 $ 25,020 $ 20,732
=========== ========== ===========
NONCASH INVESTING ACTIVITY:
Common stock issued in acquisition $ -- $ 1,126 $ --
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited
Non-voting Voting Partners'
Preferred Common Common Contributed Capital
(in thousands) Stock Stock Stock Equity Surplus
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 66 $ 4,000 $ -- $ 2,536 $ 57,103
- -------------------------------------------------------------------------------------------------
Net loss -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- --
Minimum pension liability
adjustments -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- -- --
Dividends paid -- -- -- -- --
Common stock/Limited
Partnership Units issued 3 -- -- 4,067 13,269
Limited Partnership Units
repurchased/capital
distributions -- -- -- (2,370) --
Common stock repurchased (2) -- -- -- (14,699)
Recapitalization redemptions (67) (3,900) -- (1,534) (36,435)
Recapitalization issuances -- -- 427 -- 326,590
Recapitalization exchanges -- (100) 158 (2,914) 122,732
Mandatorily Redeemable
Equity Securities -- -- (474) -- (362,790)
Equityholder loans -- -- -- 215 1,055
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ -- $ 111 $ -- $ 106,825
- -----------------------------------------------------------------------------------------------
Net loss -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- --
Minimum pension liability
adjustments -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- -- --
Common stock issued -- -- -- -- 1,501
Common stock repurchased -- -- -- -- --
Unearned compensation --
Restricted Stock -- -- -- -- 51,739
Common stock options
exercised -- -- 44 -- 8,711
Accretion of Mandatorily
Redeemable Equity Securities -- -- (44) -- (145,163)
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- $ -- $ 111 $ -- $ 23,613
- -----------------------------------------------------------------------------------------------
Net loss -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- --
Minimum pension liability
adjustments -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Comprehensive income (loss) -- -- -- -- --
Issuance of Restricted Stock -- -- -- -- 94,039
Common stock options
exercised and other -- -- 17 -- 1,134
Common stock repurchased -- -- -- -- --
Issuance of common stock in
initial public offering, net of
expenses -- -- 69 -- 158,568
Accretion of Mandatorily
Redeemable Equity Securities -- -- (3) -- (137,942)
Conversion of Mandatorily
Redeemable Equity Securities -- -- 510 -- 795,264
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ -- $ 704 $ -- $ 934,676
- -----------------------------------------------------------------------------------------------
<CAPTION>
<PAGE>
Retained and
Undistributed Accumulated
Earnings Common Other
(Accumulated Stock in Restricted Comprehensive
(in thousands) Deficit) Treasury Stock Income Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 17,636 $ (3,317) $ -- $ (22,539) $ 55,485
- ------------------------------------------------------------------------------------------------------------
Net loss (238,311) -- -- -- (238,311)
Foreign currency translation
adjustments -- -- -- (3,565) (3,565)
Minimum pension liability
adjustments -- -- -- 23,063 23,063
- ------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (238,311) -- -- 19,498 (218,813)
Dividends paid (696) -- -- -- (696)
Common stock/Limited
Partnership Units issued -- 61 -- -- 17,400
Limited Partnership Units
repurchased/capital
distributions (3,329) -- -- -- (5,699)
Common stock repurchased (8,863) (123) -- -- (23,687)
Recapitalization redemptions (265,365) 3,379 -- -- (303,922)
Recapitalization issuances -- -- (85,000) -- 242,017
Recapitalization exchanges -- -- -- -- 119,876
Mandatorily Redeemable
Equity Securities -- -- -- -- (363,264)
Equityholder loans -- -- -- -- 1,270
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ (498,928) $ -- $ (85,000) $ (3,041) $ (480,033)
- ------------------------------------------------------------------------------------------------------------
Net loss (23,938) -- -- -- (23,938)
Foreign currency translation
adjustments -- -- -- (14,255) (14,255)
Minimum pension liability
adjustments -- -- -- 13 13
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (23,938) -- -- (14,242) (38,180)
Common stock issued -- -- -- -- 1,501
Common stock repurchased -- (8,550) -- -- (8,550)
Unearned compensation --
Restricted Stock -- -- (51,739) -- --
Common stock options
exercised -- -- -- -- 8,755
Accretion of Mandatorily
Redeemable Equity Securities -- -- -- -- (145,207)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ (522,866) $ (8,550) $ (136,739) $ (17,283) $ (661,714)
- -------------------------------------------------------------------------------------------------------------
Net loss (86,068) -- -- -- (86,068)
Foreign currency translation
adjustments -- -- -- 5,767 5,767
Minimum pension liability
adjustments -- -- -- (1,032) (1,032)
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (86,068) -- -- 4,735 (81,333)
Issuance of Restricted Stock -- -- 136,739 -- 230,778
Common stock options
exercised and other -- 19,935 -- -- 21,086
Common stock repurchased -- (60,956) -- -- (60,956)
Issuance of common stock in
initial public offering, net of
expenses -- -- -- -- 158,637
Accretion of Mandatorily
Redeemable Equity Securities (149,358) -- -- -- (287,303)
Conversion of Mandatorily
Redeemable Equity Securities -- -- -- -- 795,774
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (758,292) $ (49,571) $ -- $ (12,548) $ 114,969
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE (1)--OPERATIONS AND BASIS OF PRESENTATION:
NATURE OF OPERATIONS: Young and Rubicam Inc. (the "Company") 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. The Company
operates in the United States, Canada, Europe, Latin America and Asia/Pacific as
well as through certain affiliations in other parts of the world.
BASIS OF PRESENTATION: On December 12, 1996, the Company effected a
recapitalization (the "Recapitalization") of Young & Rubicam Inc., a New York
corporation (the "Predecessor Company"). As the equity holders prior to the
Recapitalization retained control of the Company, the financial statements
reflect the consolidated financial position, results of operations and cash
flows of the Company on a continuous basis (see Note 6). References herein to
the "Company" refer to the Predecessor Company prior to December 12, 1996 and
Young & Rubicam Inc. thereafter unless the context indicates otherwise. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1998 presentation.
NOTE (2)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company, a Delaware corporation, and all subsidiaries in which
it holds a controlling interest, including a Delaware limited partnership, Young
& Rubicam L.P. Investments in affiliates in which the Company has significant
influence, but not a controlling interest, are accounted for under the equity
method. All significant intercompany transactions are eliminated.
CASH EQUIVALENTS: The Company considers all highly liquid instruments with an
initial maturity of three months or less to be cash equivalents at the time of
purchase. The Company records book overdrafts in accounts payable. Accounts
payable included $51.8 million and $41.0 million of book overdrafts as of
December 31, 1998 and 1997, respectively.
REVENUE RECOGNITION: Revenue from advertising and related services is comprised
of commissions and fees derived from billings to clients for media and
production activities. Public relations, sales promotion and other services are
generally billed on the basis of fees. Commission revenue is recognized
primarily when media placements appear on television, on radio or in print and
when labor and production costs are billed. Fee revenue is recognized when
services are rendered.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are computed using
the straight-line method over the estimated useful life of the respective asset.
Leasehold improvements are amortized over the shorter of their estimated useful
life or the remaining term of the lease. Goodwill is amortized on a
straight-line basis over a period not exceeding forty years.
INCOME TAXES: In accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax basis of assets and liabilities and are measured by applying enacted
tax rates and laws to taxable years in which such differences are expected to
reverse. The Company's practice is to provide currently for taxes that will be
payable upon remittance of foreign earnings of subsidiaries and affiliates to
the extent that such earnings are not considered to be reinvested indefinitely.
F-7
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages entities to account for employee stock
options or similar equity instruments using a fair value approach. However, it
also allows an entity to continue to measure compensation costs using the method
prescribed by Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has elected to continue to account
for such plans under the provisions of APB Opinion No. 25 and has included, in
Note 18, the required SFAS 123 pro forma disclosures of net income (loss) and
earnings (loss) per share as if the fair value-based method of accounting had
been applied.
FOREIGN CURRENCY: Assets and liabilities of certain non-U.S. subsidiaries are
translated at current exchange rates, and related revenues and expenses are
translated at average exchange rates in effect during the period. Resulting
translation adjustments are recorded as a separate component of stockholders'
equity. Financial results of non-U.S. subsidiaries in countries with highly
inflationary economies are translated using a combination of current and
historical exchange rates and recorded in general and administrative expenses.
Net remeasurement losses resulting from operations in highly inflationary
economies were $1.4 million, $2.6 million and $1.7 million in 1998, 1997 and
1996, respectively. Foreign currency transaction gains and losses are also
recorded in general and administrative expenses. The Company recorded net
foreign currency transaction losses of $12 thousand, $1.3 million and $0.9
million in 1998, 1997 and 1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments are used by
the Company principally in the management of its interest rate and foreign
currency exposures. The Company does not hold or issue derivative financial
investments for trading purposes. Gains and losses on hedges of existing assets
and liabilities are included in the carrying amounts of those assets and
liabilities and are ultimately recognized in income as part of those carrying
amounts. Gains and losses related to hedges of firm commitments are also
deferred and included in the basis of the transaction when it is completed.
Amounts to be paid or received under interest rate swap agreements are accrued
as interest and are recognized over the life of the swap agreements as an
adjustment to interest expense.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
management reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate to the carrying amount, including
associated intangible assets of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then intangible
assets are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
CONCENTRATIONS OF CREDIT RISK: The Company's clients are engaged in various
businesses located primarily in North America, Europe, Latin America and
Asia/Pacific. The Company performs ongoing credit evaluations of its clients.
Allowances for credit losses are maintained at levels considered adequate by
management. The Company invests its excess cash in deposits with major banks and
in money market securities. These securities typically mature within 90 days and
are highly rated instruments. Additionally, the Company is dependent upon a
relatively small number of clients who contribute a significant percentage of
revenues. The Company's largest client accounted for approximately 10%, 10% and
9% of consolidated revenues for the years ended December 31, 1998, 1997 and
1996, respectively.
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
F-8
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 1999. The Company anticipates that the adoption of SFAS
133 will not have a significant effect on the financial condition of the
Company.
NOTE (3)--NET LOSS PER COMMON SHARE:
Basic net loss per share is calculated by dividing net loss by the weighted
average shares of common stock outstanding during the years ended December 31,
1998 and 1997. Diluted earnings per share would reflect the dilutive effect of
stock options and other stock awards granted to employees under stock-based
compensation plans in periods where the effect would not be antidilutive.
As of December 31, 1998, there were approximately 30.1 million common stock
options outstanding that could potentially dilute basic earnings per share in
the future that were excluded from the computation of diluted net loss per share
because the effect would be antidilutive.
In computing basic net loss per share for the year ended December 31, 1997, the
Company's 11.1 million shares of restricted stock were excluded from the
weighted average number of common shares outstanding. Such shares vested upon
the consummation of the Company's initial public offering of common stock on May
15, 1998, a condition which was not satisfied at December 31, 1997 (see Note 4).
Earnings per share for the year ended December 31, 1996 cannot be computed
because the Company's capital structure prior to the Recapitalization consisted
of both common shares and limited partnership units in predecessor entities (see
Note 6).
NOTE (4) -- INITIAL PUBLIC OFFERING:
On May 15, 1998, the Company closed an initial public offering of its common
stock (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 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 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 year ended December 31, 1998. The Company
redeemed the remaining 1,855,845 shares of
F-9
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Restricted Stock held in the restricted stock trust upon the consummation of the
Offering. At December 31, 1997, the Company had recorded unearned compensation
of $136.7 million, representing the fair value of the Restricted Stock.
NOTE (5)--COMMON STOCK DIVIDEND:
On April 6, 1998, the Board of Directors declared a stock dividend of 14 shares
(the "Stock Dividend") 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 Offering.
The Company's historical financial statements have been presented to give
retroactive effect to the 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.
NOTE (6)--RECAPITALIZATION:
On December 12, 1996, the Recapitalization of Young & Rubicam Inc., a New York
corporation (the "Predecessor Company") was effected, whereby (a) the
Predecessor Company, Young & Rubicam Holdings Inc. ("Holdings"), or subsidiaries
of the Predecessor Company (i) acquired 2,058,678 of the 2,458,102 outstanding
shares of Predecessor Company common stock for an amount equal to $115 per share
less the principal and accrued interest of any outstanding loans relating to
such shares (which loans were thereby repaid), (ii) acquired 760,232 of the
1,869,682 outstanding Limited Partnership Units of the LP ("LPUs") together with
any related subordinated promissory notes of the Predecessor Company for an
amount equal to $115 per LPU less the principal and accrued interest of any
outstanding loans relating to such LPUs (which loans were thereby repaid); (iii)
canceled 332,636 of the 690,249 common stock options and 596,448 of the
1,600,414 LPU options (collectively, the "Nonrollover Options") and all
outstanding Growth Participation Units ("GPUs") for cash consideration of $115
per unit less the aggregate option exercise price and (iv) exchanged for, or
canceled in consideration of, the remaining outstanding common stock, LPUs and
options on common stock and LPUs held by certain members of the management of
the Predecessor Company (the "Management Investors") for 15,815,985 shares of
Holdings common stock and 16,823,565 options on common stock of Holdings
("Rollover Options"); (b) Hellman & Friedman Capital Partners III, L.P. ("HFCP")
and certain other investors contributed $242 million in cash to Holdings in
exchange for 31,566,345 shares of Holdings common stock at a price of $7.67 per
share ($115 per share prior to the Stock Dividend) and 2,598,105 options to
purchase additional shares of Holdings common stock at $7.67 per share ($115 per
share prior to the Stock Dividend) (the "HFCP Options"), and (c) senior secured
credit facilities of $700 million were arranged.
Common stock, LPUs, Nonrollover Options on common stock and LPUs and GPUs held
by non U.S.-based equity holders were acquired or canceled prior to December 31,
1996. Payment for previously tendered Nonrollover Options and GPUs of $161.7
million held by U.S.-based equity holders occurred in March 1997.
Under a stockholders' agreement entered into in connection with the
Recapitalization (the "Stockholders' Agreement"), the Management Investors are
required to deposit all Company common stock currently held or acquired in the
future into a voting trust (the "Management Voting Trust") under which all
rights to vote such shares are assigned to certain members of the Company's
senior management as voting trustees.
As the equity holders of the Predecessor Company retained control of the
Company, the transaction has been reported as a recapitalization. The financial
statements reflect the financial position, results of operations
F-10
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
and cash flows of the Company and the Predecessor Company on a continuous basis.
The excess of the Predecessor common stock and LPUs repurchase transaction
amount over the stated amount of the Predecessor common stock and LPUs
repurchased has been reported as a distribution to equity holders and charged to
limited partners' contributed equity, capital surplus and accumulated deficit.
As a result of the Recapitalization, the Company recorded charges of $315.4
million, primarily related to compensation. A summary of the significant
Recapitalization-related charges include the following:
(1) The cancellation of 1,244,647 GPUs outstanding for cash consideration of
$115 per unit. Compensation expense of $83.1 million represents the difference
between the cash consideration paid to GPU holders and the amount of previously
accrued compensation under the original terms of the GPU plan.
(2) The cancellation of 929,084 Nonrollover Options for cash consideration. The
cash consideration and the associated compensation expense of $66.6 million
represents the difference between the transaction price of $115 and the $40.2
million aggregate exercise price of the Nonrollover Options.
(3) Cancellation of the remaining outstanding options and award of Rollover
Options to acquire 16,823,565 shares of Company common stock at an exercise
price of $1.92 per share ($28.75 per share prior to the Stock Dividend), with
certain limited exceptions outside of the United States. As a result of the
change in the terms of the former stock option plan, which resulted in a new
measurement date, the Company recognized compensation expense of $96.7 million
representing the difference between the transaction price per Rollover Option of
$7.67 per share ($115 per share prior to the Stock Dividend) and the aggregate
exercise price of the Rollover Options.
(4) Professional fees and other charges amounted to approximately $69.0 million.
NOTE (7)--EQUITY IN NET ASSETS OF UNCONSOLIDATED COMPANIES:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Equity Equity Equity
Equity in in Net Equity in in Net Equity in in Net
Ownership Net Income Net Income Net Income
Affiliate Interest Assets (Loss) Assets (Loss) Assets (Loss)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dentsu, Y&R Partnerships Generally 50% $ 27,790 $ 2,389 $ 17,510 $ 2,587 $12,954 $ (9,181)
J.M.C. Creatividad
Orientada (Venezuela) 49% 1,474 412 953 (1,515) 2,471 (2,038)
Prolam (Chile) 30% 3,075 950 2,851 825 2,656 262
Eco S.A. (Guatemala) 40% 2,085 (75) 2,206 96 2,134 26
Cresswell, Munsell, Fultz &
Zirbel (United States) 33% 2,183 500 1,922 508 1,635 624
National Public Relations
(Canada) 22% 527 (19) 647 98 607 204
Other 50% or less 1,263 550 304 (2,257) 2,762 266
- ----------------------------------------------------------------------------------------------------------------------
$ 38,397 $ 4,707 $ 26,393 $ 342 $25,219 $ (9,837)
======================================================================================================================
</TABLE>
F-11
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
The summarized financial information below represents an aggregation of the
Company's unconsolidated companies.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
- ----------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------
EARNINGS DATA
<S> <C> <C> <C>
Revenues $ 218,973 $ 207,668 $ 238,810
Income from operations 22,320 13,768 22,132
Net income (loss) 15,424 4,347 (16,097)
- ----------------------------------------------------------------------
BALANCE SHEET DATA
Current assets $ 317,916 $ 321,372 $ 348,325
Noncurrent assets 60,624 40,147 33,996
Current liabilities 266,090 287,101 323,406
Noncurrent liabilities 17,023 13,215 11,683
Equity 95,427 61,203 47,232
- ---------------------------------------------------------------------
</TABLE>
NOTE 8 -- ACQUISITIONS AND INVESTMENTS
The Company acquires and makes investments in certain entities related to its
business if it believes it is strategically beneficial to do so. The Company
acquired, both domestically and internationally, full or partial interests in
certain entities and obtained additional interests in certain partially owned
entities for an aggregate purchase price of $17.6 million, $14.7 million and
$26.8 million during 1998, 1997 and 1996, respectively. In 1998, acquisitions
included the Company's purchase of a multi-cultural advertising agency and
certain other assets located in the United States.
In addition, effective January 1, 1997, the Company acquired an additional 37.5%
equity interest in the Australian and New Zealand joint ventures with Dentsu. In
consideration for this additional equity interest, the Company contributed to
Dentsu 12.5% of its equity interest in its advertising and direct marketing
agencies in Australia and New Zealand.
NOTE (9) -- OTHER OPERATING CHARGES
During 1998, the Company recorded $234.4 million in other operating charges
incurred in connection with the Offering. During 1997 and 1996, the Company
recorded $11.9 million and $17.2 million, respectively, in other operating
charges for certain asset impairment writedowns.
NOTE (10)--PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are comprised of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) As of December 31,
- ---------------------------------------------------------------------------------------------------------------------
Useful Lives 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and buildings 20-40 years $ 29,706 $ 29,716
Furniture, fixtures and equipment 3-10 years 252,673 235,836
Leasehold improvements Shorter of 10 years or life of lease 93,797 77,804
Automobiles 3-5 years 5,892 6,609
- ---------------------------------------------------------------------------------------------------------------------
382,068 349,965
- ---------------------------------------------------------------------------------------------------------------------
Less--Accumulated depreciation and amortization 231,655 224,951
- ---------------------------------------------------------------------------------------------------------------------
$ 150,413 $ 125,014
=====================================================================================================================
</TABLE>
F-12
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
During 1998, 1997 and 1996, depreciation expense amounted to $49.2 million,
$47.6 million, and $42.0 million, respectively.
NOTE (11)--INCOME TAXES:
The components of (loss) income before income taxes are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (127,325) $12,304 $ (242,578)
Foreign 40,328 24,000 (8,039)
- ---------------------------------------------------------------------------------
Total $ (86,997) $36,304 $ (250,617)
=================================================================================
</TABLE>
The following summarizes the (benefit) provision for income taxes:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 3,938 $ 18,195 $ 16,993
State and local 3,512 4,220 3,921
Foreign 28,570 36,259 18,146
- ------------------------------------------------------------------------------------
36,020 58,674 39,060
- ------------------------------------------------------------------------------------
Deferred:
Federal (28,126) 7,547 (51,363)
State and local (6,415) 2,472 (22,111)
Foreign (4,123) (10,403) 13,803
- ------------------------------------------------------------------------------------
(38,664) (384) (59,671)
- ------------------------------------------------------------------------------------
(Benefit) provision for income taxes $ (2,644) $ 58,290 $ (20,611)
====================================================================================
</TABLE>
The reconciliation of the United States statutory rate to the effective rate is
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
For the year ended December 31,
- -------------------------------------------------------------------------------------------------------
PERCENT OF (LOSS) INCOME BEFORE INCOME TAXES 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States statutory rate (35.0)% 35.0% (35.0)%
Effect of Offering * 32.1 -- --
State and local income taxes, net of federal tax effect ( 6.3) 17.1 ( 4.5)
Foreign income taxed greater than the United States
statutory rate 7.2 107.2 15.2
Change in valuation allowance and related components ( 2.8) (13.1) 5.9
Amortization of goodwill 0.7 8.5 2.1
Travel, entertainment and other non-deductible expenses 1.2 6.2 8.4
Other, net ( 0.1) ( 0.3) ( 0.3)
- -------------------------------------------------------------------------------------------------------
Consolidated effective tax rate ( 3.0)% 160.6% ( 8.2)%
=======================================================================================================
</TABLE>
* Represents charges related to the Offering for which the Company has
determined it will receive little or no tax benefit.
F-13
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The Company's share of the undistributed earnings of foreign subsidiaries not
included in its consolidated Federal income tax return that could be subject to
additional income taxes if remitted was approximately $59.1 million at December
31, 1998. No provision has been recorded for the United States in respect of
foreign taxes that could result from the remittance of such undistributed
earnings since the earnings are permanently reinvested outside the United States
and it is not practicable to estimate the amount of such taxes. Withholding
taxes of approximately $8.1 million would be payable upon remittance of all
previously unremitted earnings at December 31, 1998.
The components of the Company's net deferred income tax assets are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(in thousands) As of December 31,
- ------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 4,274 $ 3,118
Net operating loss carryforwards 45,126 32,797
Deferred compensation 2,424 1,172
- ------------------------------------------------------------------------------------
51,824 37,087
Valuation allowance (5,021) (4,255)
- ------------------------------------------------------------------------------------
Current portion 46,803 32,832
Deferred compensation 53,501 40,650
Depreciable and amortizable assets 30,417 30,561
Long-term leases 7,377 7,436
Postretirement benefits 3,570 3,654
Other non-current items 11,801 11,989
Net operating loss carryforwards 65,300 42,338
Tax credit carryforwards 3,658 3,658
- ------------------------------------------------------------------------------------
175,624 140,286
Valuation allowance (16,978) (16,094)
- ------------------------------------------------------------------------------------
Non-current portion 158,646 124,192
Net deferred income tax assets $ 205,449 $ 157,024
====================================================================================
</TABLE>
The Company's net deferred income tax assets arise from temporary differences
which represent the cumulative deductible or taxable amounts recorded in the
financial statements in different years than recognized in the tax returns. The
majority of the temporary differences result from expenses accrued for financial
reporting purposes which are not deductible for tax purposes until actually paid
and net operating losses.
The net operating loss ("NOL") carryforwards represent the benefit recorded for
U.S., state and local, and foreign NOLs. At December 31, 1998, the Company had
approximately $258.3 million of NOL carryforwards for U.S. tax purposes which
expire in the year 2018 and approximately $91.4 million of NOL carryforwards for
foreign tax purposes with carryforward periods ranging from one year to an
indefinite time. The Company had approximately $3.2 million of alternative
minimum tax credits which are not subject to expiration and $0.4 million of
foreign tax credits which expire in the year 2001.
The Company is required to provide a valuation allowance against deferred income
tax assets when it is more likely than not that some or all of the deferred tax
assets will not be realized. Valuation allowances of $22.0 million and $20.4
million were recorded at December 31, 1998 and 1997, respectively. The valuation
F-14
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
allowances represent a provision for uncertainty as to the realization of
certain deferred tax assets, including NOL carryforwards in certain
jurisdictions. The Company has concluded that based upon expected future
results, it is more likely than not that the net deferred tax asset balance will
be realized.
NOTE (12) -- Worldwide Operations
The Company conducts and manages its business using an integrated,
multi-disciplinary approach. It operates as a single agency network, allowing
the Company to centrally manage and utilize its resources. The Company operates
in one business segment: global marketing and communications. Amounts related to
specified geographic areas are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) UNITED STATES EUROPE OTHER TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $775,700 $532,404 $214,360 $1,522,464
Total assets 844,070 589,128 202,057 1,635,255
- --------------------------------------------------------------------------------
1997
Revenues $661,367 $472,225 $249,148 $1,382,740
Total assets 697,250 582,424 258,133 1,537,807
- --------------------------------------------------------------------------------
1996
Revenues $571,155 $444,644 $206,340 $1,222,139
Total assets 819,828 533,318 245,666 1,598,812
================================================================================
</TABLE>
NOTE (13)--Employee Benefits:
The Company has a defined benefit pension plan ("the Plan") that covers all
full-time U.S. employees upon commencement of employment. Contributions to the
Plan are based upon current costs and prior service costs. Both costs are
actuarially computed and the latter are amortized over the average remaining
service period. Effective July 1, 1996, the Predecessor Company amended the
Plan. Benefits credited to each employee's account under the Plan are based on
3.2% of the employee's annual compensation up to $150,000. The Plan also credits
each employee's account with interest based on the average one-year U.S.
Treasury Bill interest rate multiplied by the account balance at the beginning
of the year. Subject to certain limitations, most vested retirement benefits
available under the Plan are insured by the Pension Benefit Guaranty Corporation
("PBGC"). The Company is in compliance with the minimum funding standards
required by the Employee Retirement Income Security Act of 1974 ("ERISA").
Total contributions to the Plan made in 1998 and 1997 were $10.0 million and
$6.6 million, respectively. Pursuant to an agreement with the PBGC, the Company
has also agreed to make contributions to the Plan in an amount required to cause
the credit balance at the end of each Plan year to be at least equal to $12.5
million plus interest. The Company is not required to make any payment that
would not be deductible under Internal Revenue Code section 404. The Company's
credit balance maintenance requirement terminates when the Company's debt
obtains specified rating levels (or, if there are no such ratings from certain
major ratings agencies, when the Company meets a fixed charge coverage ratio
test), but in no event earlier than December 31, 2001. In addition, such credit
balance maintenance requirements terminate if the Plan's unfunded benefit
liabilities are zero at the end of two consecutive Plan years.
The Company also contributes to government mandated plans and maintains various
noncontributory retirement plans at certain foreign subsidiaries, some of which
are considered to be defined benefit plans for
F-15
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
accounting purposes. Plans are funded in accordance with the laws of the
countries where the plans are in effect and, in accordance with such local
statutory requirements, may have no plan assets.
A summary of the components of net periodic pension costs for the defined
benefit plans is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
U.S. NON-U.S. TOTAL U.S. NON-U.S. TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service costs for benefits earned
during the period $ 3,801 $ 543 $ 4,344 $ 2,671 $ 550 $ 3,221
Interest costs on projected
benefit obligation 9,151 722 9,873 8,804 789 9,593
Expected return on plan assets (10,263) -- (10,263) (9,281) -- (9,281)
Amortization of prior service
benefit (411) -- (411) (411) -- (411)
Amortization of transition
(asset)/obligation (61) 80 19 (61) 82 21
Recognized actuarial loss 1,910 69 1,979 1,057 68 1,125
- -------------------------------------------------------------------------------------------------------
Net periodic pension cost
of the plans $ 4,127 $ 1,414 $ 5,541 $ 2,779 $ 1,489 $ 4,268
=======================================================================================================
<CAPTION>
- -------------------------------------------------------------------
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------
1996
- -------------------------------------------------------------------
U.S. NON-U.S. TOTAL
- -------------------------------------------------------------------
<S> <C> <C> <C>
Service costs for benefits earned
during the period $ 2,834 $ 674 $ 3,508
Interest costs on projected
benefit obligation 8,488 893 9,381
Expected return on plan assets (7,561) -- (7,561)
Amortization of prior service
benefit (107) -- (107)
Amortization of transition
(asset)/obligation (61) 96 35
Recognized actuarial loss 2,327 92 2,419
- ------------------------------------------------------------------
Net periodic pension cost
of the plans $ 5,920 $ 1,755 $ 7,675
==================================================================
</TABLE>
Changes in the benefit obligation and plan assets are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
U.S. NON-U.S. TOTAL U.S. NON-U.S. TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 130,036 $ 10,753 $ 140,789 $ 114,710 $ 12,198 $ 126,908
Service costs 3,801 543 4,344 2,671 550 3,221
Interest costs 9,151 722 9,873 8,804 789 9,593
Foreign currency exchange rate loss/(gain) -- 888 888 -- (1,770) (1,770)
Actuarial loss/(gain) 6,958 716 7,674 10,874 (241) 10,633
Benefits paid (11,530) (717) (12,247) (7,023) (773) (7,796)
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 138,416 12,905 151,321 130,036 10,753 140,789
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year,
primarily fixed income and equity securities 129,421 -- 129,421 114,264 -- 114,264
Actual return on plan assets 11,309 -- 11,309 15,558 -- 15,558
Company contributions 10,000 717 10,717 6,622 773 7,395
Benefits paid (11,530) (717) (12,247) (7,023) (773) (7,796)
- ------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 139,200 -- 139,200 129,421 -- 129,421
- ------------------------------------------------------------------------------------------------------------------------------
Funded status 784 (12,905) (12,121) (615) (10,753) (11,368)
Unrecognized net transition (asset) obligation (103) 425 322 (164) 471 307
Unrecognized prior service benefit (2,131) -- (2,131) (2,542) -- (2,542)
Unrecognized net loss 20,354 2,029 22,383 16,352 1,260 17,612
Additional liability -- (1,738) (1,738) -- (706) (706)
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension costs for defined
benefit plans $ 18,904 $ (12,189) $ 6,715 $ 13,031 $ (9,728) $ 3,303
==============================================================================================================================
</TABLE>
F-16
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assumptions used were:
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S.
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discount and settlement rate 7.0% 5.5%-6.0% 7.25% 6.5%-7.0% 8.0% 7.0%-8.0%
Rate of increase in compensation levels 5.0% 2.5%-4.0% 5.0% 3.5%-5.0% 5.5% 3.5%-5.0%
Expected long-term rate of return on assets 9.0% N/A 9.0% N/A 9.0% N/A
============================================================================================================================
</TABLE>
The Company recorded liabilities of $1.7 million and $0.7 million at December
31, 1998 and 1997, respectively, for the portion of its unfunded pension
liabilities that had not been recognized as expense with corresponding
adjustments to equity.
Contributions to foreign defined contribution plans were $7.2 million, $7.5
million and $6.2 million in 1998, 1997 and 1996, respectively.
The Company also has an employee savings plan that qualifies as a deferred
salary arrangement under section 401(k) of the Internal Revenue Code. Under the
plan, participating U.S. employees may defer a portion of their pre-tax earnings
up to the Internal Revenue Service annual contribution limit. The Company
currently matches 100% of each employee's contribution up to a maximum of 5% of
the employee's earnings up to $150,000. Amounts expensed by the Company for its
contributions to the plan were $8.4 million, $7.8 million and $7.0 million in
1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, other non-current liabilities include $8.6
million and $7.9 million relating to postretirement and postemployment benefits
other than pensions.
The Company maintains certain deferred cash incentive plans which are either
tied to operating performance or contractual deferred compensation agreements.
The costs of these compensation plans were expensed over the applicable service
period. At December 31, 1998 and 1997, included in non-current liabilities were
deferred compensation liabilities of $30.6 million and $31.1 million,
respectively.
NOTE (14) -- INSTALLMENT PAYMENT OBLIGATIONS:
Effective through the closing of the Offering, pursuant to the Stockholders'
Agreement, the Company was able, at its election, to pay for shares purchased
from Management Investors pursuant to a call or put at the applicable call price
or applicable put price in up to four equal installments. Pursuant to the
Stockholders' Agreement, effective at the time of the Offering, the Company no
longer had the right or obligation to pay for shares purchased from Management
Investors pursuant to a call or put. The Company also accelerated the payment of
substantially all of the outstanding installment notes to June 30, 1998. At
December 31, 1998, other current and non-current liabilities include installment
notes payable of $0.7 million and $0.4 million, respectively. At December 31,
1997, other current and non-current liabilities include installment notes
payable of $3.2 million and $6.5 million, respectively.
NOTE (15)--LOANS PAYABLE:
The Company's short term loans payable are primarily advances under bank lines
of credit and generally bear interest at prevailing market rates. The Company's
current loans payable of $31.4 million and $10.8 million include short-term
portions of long-term loans payable of $0.5 million and $1.2 million at December
31, 1998 and 1997, respectively.
F-17
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-term loans payable are comprised of the following at December 31:
- --------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Unsecured revolving credit facility $ 31,460 $ --
Senior secured credit facility -- 330,552
Capital lease obligations 34 404
Other borrowings 462 818
- -------------------------------------------------------------------------------
31,956 331,774
Less -- Current portion 462 1,222
- -------------------------------------------------------------------------------
$ 31,494 $ 330,552
================================================================================
</TABLE>
On May 15, 1998, the Company entered into a $400 million, five-year unsecured
multicurrency revolving credit facility (the "Credit Facility") and used the net
proceeds from the Offering together with $155 million of borrowings under the
Credit Facility to repay all outstanding borrowings outstanding 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 year ended December 31, 1998.
The Credit Facility permits borrowings of up to $400 million. Amounts due under
the Credit Facility are required to be repaid on May 15, 2003. The Company is
required to pay varying rates of interest, generally based on LIBOR plus an
applicable margin ranging from 0.275% to 0.3% depending on its leverage ratio,
or the Federal Funds Rate plus 0.5%. The Company is also required to pay a
facility fee depending on its leverage ratio ranging from 0.125% and 0.2% per
annum. In 1998, the total facility fee under the Credit Facility was $0.4
million.
Under the Credit Facility, the Company is subject to certain financial and
operating restrictions and covenant requirements, including a maximum leverage
ratio and a minimum interest coverage requirement.
At December 31, 1998 and 1997, the Company had entered into interest rate
protection agreements with respect to $31.5 million and $275 million of its
indebtedness, respectively, which expire at various times through 2001 and
result in the Company paying, on a quarterly basis, fixed interest amounts from
6.0% to 6.5%. The weighted average interest rate on outstanding debt, including
the effect of interest rate swap contracts, was 6.27% and 6.875% for the years
ended December 31, 1998 and 1997, respectively.
The interest expense amount for the year ended December 31, 1996 includes
prepayment penalties of $2.9 million related to certain prior outstanding
indebtedness.
At December 31, 1998, the Company had $543 million in availability under its
commercial lines of credit ($435 million in the United States and $108 million
outside the United States). Unused commercial lines of credit at December 31,
1998 were $480 million. The Company has no obligation to pay commitment fees on
the Credit Facility. During 1998, the Company paid commitment fees of
approximately $0.1 million on the unused portion of the replaced credit
facility. At December 31, 1997, the Company had $690 million in availability
under its commercial lines of credit ($449 million in the United States and $241
million outside the United States). Unused commercial lines of credit at
December 31, 1997 were $349 million. The Company paid commitment fees of
approximately $0.9 million in 1997.
F-18
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE (16) -- EQUITY
The following schedule summarizes the changes in the number of outstanding
shares of preferred stock, common stock, LPUs and treasury stock:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Voting Limited
Preferred Common Non-voting Partnerships Common Stock
Stock Stock Common Stock Units in Treasury
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996 1,324 -- 16,000,000 2,032,010 13,266,072
- -----------------------------------------------------------------------------------------------------------------
Issued 67 -- -- 83,993 (215,907)
Repurchased -- -- -- (246,321) 491,733
Recapitalization (1,391) 58,469,280 (16,000,000) (1,869,682) (13,541,898)
- -----------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 -- 58,469,280 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Issued -- 4,391,010 -- -- --
Repurchased -- (1,115,160) -- -- 1,115,160
- -----------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 -- 61,745,130 -- -- 1,115,160
- -----------------------------------------------------------------------------------------------------------------
Issued -- Offering -- 6,912,730 -- -- --
Issued -- Option Exercises -- 2,178,436 -- -- (1,599,946)
Restricted Stock Redeemed -- (1,855,845) -- -- 1,855,845
Repurchased -- (2,605,882) -- -- 2,605,882
- -----------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 -- 66,374,569 -- -- 3,976,941
=================================================================================================================
</TABLE>
The preferred stock of the Predecessor Company was owned by members of the
Predecessor Company's Board of Directors. On December 12, 1996, all outstanding
Predecessor Company equity was purchased for cash or exchanged for Company
common stock pursuant to the Recapitalization. In addition, all outstanding
Predecessor Company options were canceled for cash consideration or the award of
Company options and all outstanding GPUs were canceled for cash consideration
(see Note 6). In addition, all treasury shares were retired.
In connection with the consummation of the Recapitalization in December 1996,
the Company created a class of preferred stock designated as Money Market
Preferred Stock (the "Money Market Preferred"). The Money Market Preferred
carries a variable rate dividend and is redeemable at the Company's election for
$115.00 per share following the fifth anniversary of the issuance thereof. At
December 31, 1998 and 1997, 50,000 shares of Money Market Preferred were
authorized and 87 shares were issued and outstanding.
NOTE (17)--MANDATORILY REDEEMABLE EQUITY SECURITIES:
Concurrent with the Recapitalization, the Company entered into a stockholders'
agreement which included both put rights and calls on the Company's common
stock. Effective at the time of the Offering, such call and put provisions were
terminated and, accordingly, the carrying value of such mandatorily redeemable
equity securities was reclassified to stockholders' equity. The carrying value
of the mandatorily redeemable equity securities held by the Management Investors
was equivalent to the redemption value of $12.33 per share at December 31, 1997.
The carrying value of the mandatorily redeemable equity securities for common
shares held by HFCP was being accreted to redemption value over the six-year
period from the date of the Recapitalization. Accordingly, the carrying value of
mandatorily redeemable equity securities held by HFCP was $8.47 per share at
December 31, 1997.
F-19
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE (18)--OPTIONS:
The Company has adopted the Young & Rubicam Inc. 1997 Incentive Compensation
Plan (the "ICP"). The ICP superseded the pre-existing stock option plan
maintained by the Company (the "Stock Option Plan"); however, all awards granted
under the Stock Option Plan will remain outstanding in accordance with their
terms and will be subject to the Stock Option Plan.
The ICP provides for grants of stock options, stock appreciation rights
("SARS"), restricted stock, deferred stock, other stock-related awards, and
performance or annual incentive awards that may be settled in cash, stock or
other property ("Awards"). Under the ICP, the total number of shares of Company
common stock reserved and available for delivery to participants in connection
with Awards is 19,125,000, plus the number of shares of Company common stock
subject to awards under pre-existing plans that become available (generally due
to cancellation or forfeiture) after the effective date of the ICP; provided,
however that the total number of shares of Company common stock with respect to
which incentive stock options may be granted shall not exceed 1,000,000. Any
shares of Company common stock delivered under the ICP may consist of authorized
and unissued shares or treasury shares.
The Board of Directors is authorized to grant stock options, including incentive
stock options, non-qualified stock options, and SARS entitling the participant
to receive the excess of the fair market value of a share of common stock on the
date of exercise over the grant price of the SAR. The exercise price per share
subject to an option and the grant price of a SAR is determined by the Board of
Directors, but must not be less than the fair market value of a share of common
stock on the date of grant. The maximum term of each option or SAR, the times at
which each option or SAR will be exercisable, and provisions requiring
forfeiture of unexercised options or SARS at or following termination of
employment generally is fixed by the Board of Directors, except no option or SAR
may have a term exceeding ten years.
Generally, options granted under the ICP become exercisable over a three-year
vesting period beginning on the three-year anniversary of the date of grant and
expire ten years from the date of grant. However, the Board of Directors may, at
its discretion, accelerate the exercisability, the lapsing of restrictions, or
the expiration of deferral or vesting periods of any award, and such accelerated
exercisability, lapse, expiration and vesting shall occur automatically in the
case of a "change in control" of the Company except to the extent otherwise
provided in the award agreement. In addition, the Board of Directors may provide
that the performance goals relating to any performance-based awards will be
deemed to have been met upon the occurrence of any change in control.
At the closing of the Recapitalization, the Board of Directors granted the
Rollover Options which were immediately vested and exercisable. Each Rollover
Option has an exercise price of $1.92 per share, with certain limited exceptions
outside of the United States. Of the Rollover Options, 50% have a term of five
years and the remaining 50% have a term of seven years. In connection with the
issuance of the Rollover Options, the Company recognized compensation expense of
$96.7 million.
At the closing of the Recapitalization, the Board of Directors granted to
employees options to purchase 5,200,590 shares of Company common stock at $7.67
per share. In addition, from the closing of the Recapitalization through
December 31, 1997, the Board of Directors granted additional options to purchase
1,891,200 shares of Company common stock at $7.67 per share (the "Additional
Options"). As a result of the granting of the Additional Options, during 1997
the Company recognized a compensation charge of $1.3 million reflecting the
difference between the estimated fair market value of Company
F-20
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
common stock on the date of grant and the exercise price of the Additional
Options. All options granted to employees in connection with the
Recapitalization were pursuant to and are governed by the Stock Option Plan.
Additionally, at the closing of the Recapitalization, the Company granted to
HFCP options to purchase 2,598,105 shares of Company common stock at $7.67 per
share which were exercisable immediately and expire on the seventh anniversary
of the closing. The HFCP Options are not governed by the Stock Option Plan.
The Company has adopted SFAS 123 (see Note 2). In accordance with the provisions
of SFAS 123, the Company applies APB Opinion No. 25, and related
interpretations, in accounting for its plans. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date for
awards under its plans consistent with the methodology prescribed by SFAS 123,
the Company's net loss would be increased by $7.8 million, $6.3 million and $9.4
million for the years ended December 31, 1998, 1997 and 1996, respectively, and
the net loss per common share would be increased by $0.13 for each of the years
ended December 31, 1998 and 1997.
These SFAS 123 pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the years
ended December 31, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected term 6 years 10 years 5-10 years
Risk-free rate 4.26%-5.84% 5.59%-7.12% 5.92-6.61%
Dividend yield 0% 0% 0%
Expected volatility 24.90% 0% 0%
========================================================================
</TABLE>
Since the Company's common stock was publicly traded for the first time in 1998
as a result of the Offering, it does not yet have sufficient historical
information to make a reasonable assumption as to the expected volatility of its
common stock price in the future. As a result, the assumption in the table above
reflects the expected volatility of stock prices of entities similar to the
Company. In addition, the decrease in the expected term of options for 1998 as
compared to 1997 is due to the creation of an active, liquid market for the
Company's common stock resulting from the Company's initial public offering in
1998.
The weighted-average fair value and weighted average exercise price of options
granted on and subsequent to the Recapitalization for which the exercise price
equals the fair value of Company common stock on the grant date was $5.25 and
$22.59 in 1998, respectively, $5.28 and $12.33 in 1997, respectively, and $3.69
and $7.67 in 1996, respectively. The weighted-average fair value and weighted
average exercise price of options granted prior to the Recapitalization for
which the exercise price equals the fair value of Company common stock on the
grant date was $13.28 and $47.14 in 1996, respectively.
In 1997 and 1996, the Company granted options to certain executives at exercise
prices below the fair value of Company common stock on the date of grant. The
weighted-average fair value and weighted-average exercise price of these options
was $6.76 and $7.67 in 1997, respectively, and $6.30 and $1.97 in 1996,
respectively.
F-21
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
weighted-average fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Transactions involving options are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING* EXERCISE PRICE*
- --------------------------------------------------------------------------------
JANUARY 1, 1996 2,426,108 $ 42.99
- --------------------------------------------------------------------------------
<S> <C> <C>
Granted 284,773 47.14
Exercised (252,278) 41.94
Cancellations (167,940) 42.83
Recapitalization cancellations (2,290,663) 43.64
Recapitalization grants 24,622,260 3.76
- --------------------------------------------------------------------------------
December 31, 1996 24,622,260 3.76
- --------------------------------------------------------------------------------
Granted 11,469,150 11.56
Exercised (4,250,790) 2.19
Cancellations (827,415) 4.50
- --------------------------------------------------------------------------------
December 31, 1997 31,013,205 6.84
- --------------------------------------------------------------------------------
Granted 2,472,933 22.59
Exercised (2,178,436) 3.10
Cancelled (1,230,060) 10.81
- --------------------------------------------------------------------------------
December 31, 1998 30,077,642 $ 8.23
================================================================================
</TABLE>
* Options outstanding and related weighted-average exercise prices prior to the
Recapitalization have not been retroactively adjusted for the Stock Dividend.
At December 31, 1998, 1997 and 1996, the Company had exercisable options of
14,963,354, 17,242,995, and 21,501,900, respectively.
The following information is as of December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.92 10,563,983 4.11 $ 1.92 10,563,983 $ 1.92
$ 7.67 8,297,586 7.24 7.67 4,369,371 7.67
$ 12.00-$15.00 9,734,850 9.11 12.46 30,000 12.33
$ 25.00-$31.00 1,481,223 9.95 28.55 -- --
- -----------------------------------------------------------------------------------------------------
Total 30,077,642 6.88 $ 8.23 14,963,354 $ 3.62
=====================================================================================================
</TABLE>
F-22
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE (19)--LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES:
The Company has performed, and continues to perform, services for clients in a
wide range of businesses, including tobacco products manufacturers. As a result,
the Company may from time to time be joined as a defendant in litigation brought
against its clients and others by third parties, including its competitors,
governmental and regulatory bodies, or consumers, alleging that advertising
claims made through the Company with respect to such clients' products are
false, deceptive or misleading; that such clients' products are defective,
injurious or pose some manner of threat to the public generally; or that
marketing or communications materials created for such clients infringe upon the
proprietary rights of third parties. The Company's practice is to attempt to
minimize such potential liabilities through insurance coverage and/or
indemnification provisions in its agreements with clients and others.
The Company is also named as party in litigation matters which arise from time
to time in the ordinary course of its business, including without limitation
claims by former employees for money damages and other relief based upon the
circumstances or consequences of their separation from employment. The Company
believes that it has meritorious defenses to these claims, and is contesting
such claims vigorously. In addition, the Company is covered by insurance with
respect to some of such claims. Accordingly, the Company does not expect such
current matters to have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
Net rental expense was $75.5 million, $74.4 million, and $62.9 million in 1998,
1997 and 1996, respectively. Future minimum rental commitments as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(IN THOUSANDS)
- ----------------------------------------------------------
<S> <C>
1999 $ 68,060
2000 54,613
2001 50,137
2002 47,056
2003 41,114
Thereafter 131,018
==========================================================
</TABLE>
Certain leases contain renewal options calling for increased rentals. Others
contain certain escalation clauses relating to taxes and other operating
expenses.
The Company had outstanding guarantees of $8.6 million and $7.6 million at
December 31, 1998 and 1997, respectively, primarily in support of credit lines
of unconsolidated companies.
The Company and its corporate affiliates conduct business in various developing
countries in Asia, Africa, Latin America and Eastern Europe, where the systems
and bodies of commercial law and trade practices arising thereunder are in a
continuing state of evolution. Commercial laws in such countries are often
vague, arbitrary, contradictory, inconsistently administered and retroactively
applied. Under such circumstances, it is difficult for the Company to determine
with certainty at all times the exact requirements of such local laws.
Nevertheless, the Company believes that any difficulty in compliance with local
laws in such developing countries will not have a materially adverse impact on
the consolidated financial position, results of operations or cash flows of the
Company.
F-23
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE (20) -- FAIR VALUE OF FINANCIAL INSTRUMENTS AND HEDGING ACTIVITY
At December 31, 1998 and 1997, the carrying value of the Company's financial
instruments approximated fair value in all material respects.
The Company enters into interest rate protection agreements with off-balance
sheet risk in order to reduce its exposure to changes in interest rates on its
variable rate long-term debt. These interest rate protection agreements included
interest rate swaps, interest rate floors and interest rate caps. At December
31, 1998 and 1997, the Company had entered into interest rate protection
agreements with respect to $31.5 million and $275 million of its indebtedness.
The Company enters into forward foreign exchange contracts to hedge certain
assets and liabilities which are recorded in a currency different from that in
which they settle. These contracts are generally entered into in order to hedge
intercompany transactions. Gains and losses on these contracts generally offset
losses and gains on the related foreign currency denominated intercompany
transactions. The gains and losses on these positions are deferred and included
in the basis of the transaction upon settlement. The terms of these contracts
are generally a one-month maturity. At December 31, 1998, the Company had
contracts for the sale of $19.4 million and the purchase of $6.1 million of
foreign currencies at fixed rates, compared to contracts for the sale of $18.5
million and the purchase of $12.8 million of foreign currencies at December 31,
1997.
Management believes that any losses resulting from market risk would not have a
material adverse impact on the consolidated financial position, results of
operations or cash flows of the Company.
F-24
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
INCOME (LOSS) BEFORE EXTRAORDINARY
INCOME (LOSS) BEFORE CHARGE COMMON STOCK
FROM EXTRAORDINARY ----------------------- NET INCOME -------------------
QUARTER REVENUES OPERATIONS CHARGE BASIC DILUTED (LOSS) HIGH LOW
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
1st $ 348,173 $ 25,333 $ 12,190 $ 0.24 $ 0.19 $ 12,190 $ -- $ --
2nd (1) (2) 372,128 (190,472) (145,391) ( 2.45) ( 2.45) (149,824) 33 1/16 26 1/2
3rd 375,419 42,178 24,306 0.36 0.29 24,306 35 7/8 28 3/8
4th 426,744 51,450 27,260 0.41 0.34 27,260 33 5/8 19 3/4
- ---- ----------- ---------- ---------- ----------
Year 1,522,464 (71,511) (81,635) ( 1.34) ( 1.34) (86,068) 35 7/8 19 3/4
1997
1st $ 298,206 $ 14,093 $ 4,089 $ 0.09 $ 0.07 $ 4,089
2nd 345,474 35,156 13,516 0.29 0.22 13,516
3rd 333,387 (4,302) (5,700) ( 0.12) ( 0.12) (5,700)
4th 405,673 25,782 (35,843) ( 0.77) ( 0.77) (35,843)
- ---- ----------- ---------- ---------- ----------
Year 1,382,740 70,729 (23,938) ( 0.51) ( 0.51) (23,938)
=======================================================================================================================
</TABLE>
(1) Income from operations for the second quarter of 1998 includes $234.4
million of non-recurring, non-cash, pre-tax compensation charges recognized
upon the consummation of the Offering resulting from the vesting of shares
of restricted stock allocated to employees. Net income for the second
quarter of 1998 also includes an extraordinary charge of $4.4 million, which
is net of a tax benefit of $2.8 million, due to the write-off of unamortized
deferred financing costs related to the Company's replaced credit facility.
(2) The high and low prices of common stock reflect amounts from the period
commencing upon the consummation of the Offering on May 12, 1998, the first
day of public trading, through June 30, 1998.
F-25
<PAGE>
REPORT OF MANAGEMENT
The management of Young & Rubicam Inc. (the "Company") and its subsidiaries is
responsible for the integrity of the financial data reported by the Company.
Management uses its best judgment to ensure that the financial statements
present fairly, in all material respects, the consolidated financial position
and results of operations of the Company. These financial statements have been
prepared in accordance with generally accepted accounting principles.
The system of internal controls of the Company is designed to provide reasonable
assurance that assets are safeguarded, that transactions are executed in
accordance with management's authorization and are properly recorded, and that
accounting records may be relied upon for the preparation of financial
statements and other financial information. Underlying this concept of
reasonable assurance is the premise that the cost of control should not exceed
the benefits derived and that the evaluation of those factors requires estimates
and judgments by management. Further, because of inherent limitations in any
system of internal accounting control, errors or irregularities may occur and
not be detected. Nevertheless, management believes that a high level of internal
control is maintained by the Company through the selection and training of
qualified personnel, the establishment and communication of accounting and
business policies, and its internal audit program.
The financial statements have been audited by independent accountants. Their
report expresses an independent informed judgment as to the fairness of
management's reported operating results and financial position. This judgment is
based on the procedures described in their report.
The Audit Committee of the Board of Directors, which is comprised solely of
directors who are not officers or employees of the Company, meets regularly with
corporate management, the Company's internal auditors and legal counsel, and the
independent accountants to review the activities of each and to satisfy itself
that each is properly discharging its responsibility. In addition, the Audit
Committee meets on a scheduled basis with the independent accountants, without
management's presence, to discuss the audit of the financial statements as well
as other auditing and financial reporting matters.
Peter A. Georgescu Michael J. Dolan
Chairman and Chief Executive Officer Vice Chairman and
Chief Financial Officer
F-26
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 14,125 $ 9,404 -- $ 5,591 $ 17,938
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Allowance for Doubtful Accounts $ 9,849 $ 14,269 -- $ 9,993 $ 14,125
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
Allowance for Doubtful Accounts $ 11,526 $ 11,411 -- $13,088 $ 9,849
=================================================================================================================
</TABLE>
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter A. Georgescu Chairman of the Board and Chief March 31, 1999
- ------------------------ Executive Officer
Peter A. Georgescu
/s/ Edward H. Vick Chief Operating Officer and March 31, 1999
- ------------------------ Director
Edward H. Vick
/s/ Thomas D. Bell, Jr. Chairman and Chief Executive March 31, 1999
- ------------------------ Officer, Young & Rubicam
Thomas D. Bell, Jr. Advertising and Director
/s/ Michael J. Dolan Vice Chairman, Chief Financial March 31, 1999
- ------------------------ Officer and Director
Michael J. Dolan
/s/ Stephanie W. Abramson Executive Vice President, General March 31, 1999
- ------------------------ Counsel and Secretary
Stephanie W. Abramson
/s/ John A. Wozniak Senior Vice President -- Controller March 31, 1999
- ------------------------ (Principal Accounting Officer)
John A. Wozniak
/s/ Richard S. Bodman Director March 31, 1999
- ------------------------
Richard S. Bodman
/s/ Philip U. Hammarskjold Director March 31, 1999
- ------------------------
Philip U. Hammarskjold
/s/ F. Warren Hellman Director March 31, 1999
- ------------------------
F. Warren Hellman
/s/ John F. McGillicuddy Director March 31, 1999
- ------------------------
John F. McGillicuddy
/s/ Alan D. Schwartz Director March 31, 1999
- ------------------------
Alan D. Schwartz
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation of Young & Rubicam
Inc. (incorporated by reference from Exhibit 4.4 to the Registration
Statement on Form S-8 (File No. 333-57605) filed by the Company).
3.2 Amended and Restated Bylaws of Young & Rubicam Inc. (incorporated by
reference from Exhibit 4.5 to the Registration Statement on Form S-8
(File No. 333-57605) filed by the Company).
4.1 Specimen Certificate of Common Stock of Young & Rubicam Inc.
(incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
4.2 Rights Agreement, dated as of May 1, 1998 (incorporated by reference
from Exhibit 4.9 to the Registration Statement on Form S-8 (File No.
333-57605) filed by the Company).
4.3 Certificate of Designation for Registrant's Cumulative Participating
Junior Preferred Stock (incorporated by reference from Exhibit 4.3 to
the Registration Statement on Form S-1 (File No. 333-66883) filed by
the Company).
9.1 Management Voting Trust Agreement, dated as of December 12, 1996
(incorporated by reference from Exhibit 9.1 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
9.2 Young & Rubicam Inc. Restricted Stock Trust Agreement, dated as of
December 12, 1996 (incorporated by reference from Exhibit 9.2 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
10.1 Stockholders' Agreement, dated as of May 8, 1998 (incorporated by
reference from Exhibit 4.8 to the Registration Statement on Form S-8
(File No. 333-57605) filed by the Company).
10.2 Contribution Agreement dated October 30, 1996 (incorporated by
reference from Exhibit 10.3 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.3 Young & Rubicam Holdings Inc. Restricted Stock Plan (incorporated by
reference from Exhibit 10.4 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
<PAGE>
10.4 Young & Rubicam Holdings Inc. Management Stock Option Plan
(incorporated by reference from Exhibit 10.5 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.5 Young & Rubicam Inc. 1997 Incentive Compensation Plan (incorporated by
reference from Exhibit 10.6 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.6 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Peter A. Georgescu (incorporated by
reference from Exhibit 10.7 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.7 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Peter A. Georgescu (incorporated by reference
from Exhibit 10.8 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.8 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1986, with Peter A. Georgescu (incorporated by reference
from Exhibit 10.9 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.9 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with John P. McGarry, Jr. (incorporated by
reference from Exhibit 10.10 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.10 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1986, with John P. McGarry, Jr. (incorporated by
reference from Exhibit 10.11 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.11 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 31, 1994, with John P. McGarry, Jr. (incorporated by
reference from Exhibit 10.12 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.12 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Edward Vick (incorporated by reference from
Exhibit 10.13 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.13 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Edward Vick (incorporated by reference from
Exhibit 10.14 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
<PAGE>
10.14 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of December 19, 1997, with Alan J. Sheldon (incorporated by reference
from Exhibit 10.15 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.15 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1995, with Alan J. Sheldon (incorporated by reference
from Exhibit 10.16 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.16 Young & Rubicam Inc. Select Executive Retirement Income Plan, dated as
of January 1, 1988, with Alan J. Sheldon (incorporated by reference
from Exhibit 10.17 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.17 Registration Rights Agreement, dated as of December 12, 1996
(incorporated by reference from Exhibit 10.18 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.18 Letter Agreement dated as of October 16, 1997 by and between Young &
Rubicam Inc. and Michael J. Dolan (incorporated by reference from
Exhibit 10.19 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.19 Letter Agreement dated June 28, 1996 by and between Young & Rubicam
Inc. and Michael J. Dolan (incorporated by reference from Exhibit 10.20
to the Registration Statement on Form S-1 (File No. 333-46929) filed by
the Company).
10.20 Lease Agreement for 230 Park Avenue South (incorporated by reference
from Exhibit 10.21 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.21 H&F Option Agreement, dated as of December 12, 1996, among Young &
Rubicam Holdings Inc., a New York corporation ("Holdings"), Young &
Rubicam Inc., a New York corporation, Young & Rubicam Inc., a Delaware
corporation and a wholly-owned subsidiary of Holdings, and Hellman &
Friedman Capital Partners III, L.P. (incorporated by reference from
Exhibit 10.22 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.22 H&F Option Agreement, dated as of December 12, 1996, among Young &
Rubicam Holdings Inc., a New York corporation ("Holdings"), Young &
Rubicam Inc., a New York corporation, Young & Rubicam Inc., a Delaware
corporation and a wholly-owned subsidiary of Holdings, and H&F Orchard
Partners III, L.P. (incorporated by reference from Exhibit 10.23 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
<PAGE>
10.23 Form of Young & Rubicam Inc. Key Corporation Managers Bonus Plan
(incorporated by reference from Exhibit 10.24 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.24 Amendment No. 1 to Restricted Stock Trust Agreement dated as of March
13, 1998 (incorporated by reference from Exhibit 10.25 to the
Registration Statement on Form S-1 (File No. 333-46929) filed by the
Company).
10.25 Young & Rubicam Inc. Deferred Compensation Plan (incorporated by
reference from Exhibit 10.26 to the Registration Statement on Form S-1
(File No. 333-46929) filed by the Company).
10.26 Amendment No. 1 to Young & Rubicam Inc. Deferred Compensation Plan
effective as of November 19, 1997.*
10.27 Amendment No. 2 to Young & Rubicam Inc. Deferred Compensation Plan
effective as of January 1, 1999.*
10.28 Young & Rubicam Inc. Grantor Trust Agreement (incorporated by reference
from Exhibit 10.27 to the Registration Statement on Form S-1 (File No.
333-46929) filed by the Company).
10.29 Amendment to Young & Rubicam Inc. 1997 Incentive Compensation Plan
(incorporated by reference from Exhibit 10.28 to the Registration
Statement on Form S-1 (File No. 333-46929) filed by the Company).
10.30 Credit Agreement for the Credit Facility (incorporated by reference
from Exhibit 10.28 to the Registration Statement on Form S-1 (File No.
333-66883) filed by the Company).
21.1 List of Subsidiaries (incorporated by reference from Exhibit 10.28 to
the Registration Statement on Form S-1 (File No. 333-66883) filed by
the Company).
23.1 Consent of PricewaterhouseCoopers LLP. *
24.1 Powers of Attorney to sign Form 10-K and resolution of Board of
Directors re Power of Attorney.*
- ----------
* Filed herewith.
EXHIBIT 10.26
AMENDMENT NO. 1 TO THE
YOUNG & RUBICAM INC. DEFERRED COMPENSATION PLAN
WHEREAS, Young & Rubicam Inc., a corporation organized under the laws of
the State of Delaware (hereinafter referred to as the "Company"), established
the Young & Rubicam Inc. Deferred Compensation Plan as of November 19, 1997 (the
"Plan");
WHEREAS, Section 11 of the Plan provides for the amendment of the Plan by
the Compensation Committee of the Board of Directors of the Company or any other
directors of the Company designated as the Committee by the Board of Directors
of the Company;
NOW, THEREFORE, the Plan is hereby amended, effective as of November 19,
1997, as follows:
1. Section 12(f) is amended and restated in its entirety as follows:
Tax Withholding or Payments. The Company and any Affiliate shall have the
right to deduct from amounts otherwise payable in settlement of a Deferral
Account any sums that federal, state, local or foreign tax law requires to
be withheld with respect to such payment. Shares may be withheld to satisfy
such obligations in any case where taxation would be imposed upon the
delivery of shares, except that shares issued or delivered under any plan,
program, employment agreement or other arrangement may be withheld only in
accordance with the terms of such plan, program, employment agreement or
other arrangement and any applicable rules, regulations, or resolutions
thereunder. With respect to any foreign taxes or withholding that may be
due prior to payment in settlement of the Deferral Account, the Company and
any Affiliate shall have the right to withdraw, in cash or in stock from
and reduce the Deferral Account by the amount of such taxes or withholdings
and arrange to provide for the payment of such taxes or withholding to the
appropriate taxing authorities.
EXHIBIT 10.27
AMENDMENT NO. 2 TO THE
YOUNG & RUBICAM INC. DEFERRED COMPENSATION PLAN
WHEREAS, Young & Rubicam Inc., a corporation organized under the laws of
the State of Delaware (hereinafter referred to as the "Company"), maintains the
Young & Rubicam Inc. Deferred Compensation Plan, effective as of November 19,
1997, as amended (the "Deferred Compensation Plan");
WHEREAS, Section 11 of the Deferred Compensation Plan provides that the
Compensation Committee of the Board of Directors of the Company (the
"Committee") may amend the Deferred Compensation Plan;
NOW, THEREFORE, effective as of January 1, 1999, the Deferred Compensation
Plan is amended by amending and restating Section 12(f) in its entirety as
follows:
Tax Withholding or Payments. The Company and any Affiliate shall have the
right to deduct from amounts otherwise payable in settlement of a Deferral
Account any sums that federal, state, local or foreign tax law requires to
be withheld with respect to such payment. Shares may be withheld to satisfy
such obligations in any case where taxation would be imposed upon the
delivery of shares, except that shares issued or delivered under any plan,
program, employment agreement or other arrangement may be withheld only in
accordance with the terms of such plan, program, employment agreement or
other arrangement and any applicable rules, regulations, or resolutions
thereunder. In addition, at the election of the Participant or Beneficiary
and upon the agreement of the Company (subject to the approval of the
Committee, in the case of any Participant subject to Section 16 of the
Exchange Act at the time of such transaction), (i) in order to satisfy
withholding taxes or other similar charges incurred in connection with the
receipt of shares of Stock in settlement of a Deferral Account under
federal, state, local or foreign tax law, the Company or any Affiliate
shall repurchase from the Participant or Beneficiary for cash the number of
shares of Stock received by such Participant or Beneficiary in settlement
of such Deferral Account necessary to fund such obligations, and (ii) in
order to satisfy the estimated total taxes and charges that would be
incurred by a Participant or Beneficiary in connection with the receipt of
shares of Stock in settlement of a Deferral Account in excess of any sums
that federal, state, local or foreign tax law requires to be withheld with
respect to such payment, the Company or any Affiliate shall repurchase from
the Participant or Beneficiary for cash the number of shares of Stock
received by such Participant or Beneficiary in settlement of such Deferral
Account necessary to fund such obligations, and the Company and any such
Affiliate shall, as appropriate, either deliver such cash payment directly
to the appropriate taxing authorities or to the Participant or Beneficiary,
in return for a written representation to the Company or such Affiliate
that the cash payment shall be used to fund such obligations. With respect
to any foreign taxes or withholding that may be due prior to payment in
settlement of the Deferral Account, the Company and any Affiliate
<PAGE>
shall have the right to withdraw, in cash or in stock from and reduce the
Deferral Account by the amount of such taxes or withholdings and arrange to
provide for the payment of such taxes or withholding to the appropriate
taxing authorities.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Young & Rubicam Inc. (File No. 333-57605) of our report
dated February 16, 1999 included in this Annual Report on Form 10-K. We also
consent to the application of such report to the Financial Statement Schedule
for the years ended December 31, 1996, 1997 and 1998 listed in the accompanying
index when such schedule is read in conjunction with the financial statements
referred to in our report. The audits referred to in such report also included
these schedules.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 16, 1999
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints PETER A. GEORGESCU, MICHAEL J. DOLAN and
STEPHANIE W. ABRAMSON, and each of them, as true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him, and in
his name, place and stead, in any and all capacities, to sign the Report on Form
10-K for the year ended December 31, 1998, for Young & Rubicam Inc., S.E.C. File
No. 001-14093, and any and all amendments and supplements thereto and all other
instruments necessary or desirable in connection therewith, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission and the New York Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requested and necessary
to be done in and about the premises as fully to all intents and purposes as he
might do or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: March 23, 1999
/s/PETER A. GEORGESCU /s/F. WARREN HELLMAN
- ------------------------- -----------------------
PETER A. GEORGESCU F. WARREN HELLMAN
/s/THOMAS D. BELL, JR. /s/JOHN F. MCGILLICUDDY
- ------------------------- -----------------------
THOMAS D. BELL, JR. JOHN F. MCGILLICUDDY
/s/RICHARD S. BODMAN /s/ALAN D. SCHWARTZ
- ------------------------- -----------------------
RICHARD S. BODMAN ALAN D. SCHWARTZ
/s/MICHAEL J. DOLAN /s/EDWARD H. VICK
- ------------------------- -----------------------
MICHAEL J. DOLAN EDWARD H. VICK
/s/PHILIP U. HAMMARSKJOLD /s/JOHN A. WOZNIAK
- ------------------------- -----------------------
PHILIP U. HAMMARSKJOLD JOHN A. WOZNIAK
<PAGE>
CERTIFIED RESOLUTIONS
I, Stephanie W. Abramson, Secretary of Young & Rubicam (the "Company"),
hereby certify that the resolutions attached hereto were duly adopted on March
23, 1999 by the Board of Directors of the Company and that such resolutions have
not been amended or revoked.
WITNESS my hand on this 29th day of March, 1999.
/s/ STEPHANIE W. ABRAMSON
- -------------------------
STEPHANIE W. ABRAMSON
YOUNG & RUBICAM INC.
MEETING OF THE BOARD OF DIRECTORS
RESOLVED, that the form of Annual Report on Form 10-K for the year ended
December 31, 1998, including all exhibits thereto (the "Form 10-K") in the
form presented to this meeting, with such changes therein as the Chief
Executive Officer, the Chief Financial Officer and the Senior Vice
President, Controller, in consultation with the General Counsel, shall
approve, be and is hereby approved subject only to execution of the
signature page by a majority of the members of the Board of Directors; and
further
RESOLVED, that the officers and directors of the Company who may be
required to execute the Form 10-K be, and each of them hereby is,
authorized to execute a power of attorney in the form submitted to this
meeting appointing Peter A. Georgescu, Michael J. Dolan and Stephanie W.
Abramson, and each of them, severally, his true and lawful attorneys and
agents to act in his name, place and stead, to execute said Form 10-K and
any and all amendments and supplements thereto and all other instruments
necessary or desirable in connection therewith; and further
RESOLVED, that the signature of any officer of the Company required by law
to affix his signature to such Form 10-K or to any amendment or supplement
thereto and such additional documents as they may deem necessary or
advisable in connection therewith, may be affixed by said officer
personally or by any attorney-in-fact duly constituted in writing by said
officer to sign his name thereto; and further
RESOLVED, that the proper officers of the Company be and each of them is
hereby authorized to take any and all other action, including the execution
of any and all documents, agreements and instruments, deemed by them
necessary or desirable in order to carry out the purposes and intent of the
foregoing resolutions; and further
RESOLVED, that all actions heretofore taken consistent with the purposes
and intent of the foregoing resolutions and each of them be and they are
hereby ratified.
<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-K AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 122,138,000
<SECURITIES> 0
<RECEIVABLES> 853,222,000
<ALLOWANCES> (17,938,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,122,568,000
<PP&E> 382,068,000
<DEPRECIATION> (231,655,000)
<TOTAL-ASSETS> 1,635,255,000
<CURRENT-LIABILITIES> 1,339,456,000
<BONDS> 0
0
0
<COMMON> 704,000
<OTHER-SE> 114,265,000
<TOTAL-LIABILITY-AND-EQUITY> 1,635,255,000
<SALES> 0
<TOTAL-REVENUES> 1,522,464,000
<CGS> 0
<TOTAL-COSTS> 1,593,975,000
<OTHER-EXPENSES> (2,200,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,686,000
<INCOME-PRETAX> (86,997,000)
<INCOME-TAX> (2,644,000)
<INCOME-CONTINUING> (81,635,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,433,000
<CHANGES> 0
<NET-INCOME> (86,068,000)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
