FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from
Commission file number 001-14093
YOUNG & RUBICAM INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-1493710
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
285 Madison Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
(212) 210-3000
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, as of May 1, 2000 was 72,170,992.
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YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 2
Consolidated Condensed Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 4
Notes to Consolidated Condensed Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document, information included in future filings by Young & Rubicam Inc.
("Y&R") with the United States Securities and Exchange Commission (the "SEC"),
and information contained in written materials, press releases and oral
statements issued by or on behalf of Y&R contain, or may contain, statements
that constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include statements regarding
the intent, belief or current expectations of Y&R or its officers (including
statements preceded by, followed by or that include forward-looking terminology
such as "may," "will," "should," "believes," "expects," "anticipates,"
"estimates," "continues" or similar expressions or comparable terminology,
including the negative thereof) with respect to various matters. These
forward-looking statements include statements in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section of this
document relating to our performance. It is important to note that our 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 under incentive compensation arrangements entered into
by us 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) our ability to successfully integrate companies and businesses
that we acquire, (iv) the overall level of economic activity in the principal
markets in which we conduct business and other trends affecting our financial
condition or results of operations, (v) the impact of competition in the
marketing and communications industry and (vi) our liquidity and financing
plans. All forward-looking statements in this document are based on information
available to us on the date hereof. We do not undertake to update any
forward-looking statements that may be made by or on behalf of us, in this
document or otherwise.
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YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 448,282 $ 383,873
Compensation expense, including employee benefits 272,402 235,018
General and administrative expenses 131,616 114,297
-----------------------------------
Operating expenses 404,018 349,315
-----------------------------------
Operating profit 44,264 34,558
Interest expense, net (3,149) (1,646)
Other income 10,796 -
-----------------------------------
Income before income taxes 51,911 32,912
Income tax provision 20,764 13,494
-----------------------------------
31,147 19,418
Equity in net income (loss) of unconsolidated affiliates 727 (16)
Minority interest in net (income) loss of consolidated companies (282) 299
-----------------------------------
Net income $ 31,592 $ 19,701
===================================
Earnings per share:
Basic $ 0.43 $ 0.30
===================================
Diluted $ 0.38 $ 0.24
===================================
Weighted average shares outstanding:
Basic 72,790,225 66,324,420
===================================
Diluted 86,446,025 81,892,192
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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Young & Rubicam Inc. and Subsidiary Companies
Consolidated Condensed Balance Sheets
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<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2000 1999
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 126,222 $ 144,517
Accounts receivable, net of allowance for doubtful accounts of $21,492 and
$25,012 at March 31, 2000 and December 31, 1999, respectively 1,003,773 1,031,445
Costs billable to clients 100,962 76,982
Other receivables 47,675 43,138
Deferred income taxes 50,302 50,302
Prepaid expenses and other current assets 31,778 27,803
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Total Current Assets 1,360,712 1,374,187
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NONCURRENT ASSETS
Property, leasehold improvements and equipment at cost, net of accumulated
depreciation and amortization of $252,865 and $248,112 at March 31, 2000 and
December 31, 1999, respectively 195,485 194,569
Deferred income taxes 113,659 34,875
Intangibles, net of accumulated amortization of $91,936 and $91,285 at March
31, 2000 and December 31, 1999, respectively 383,598 353,860
Equity in net assets of and advances to unconsolidated affiliates 34,408 36,001
Investments in equity securities 200,856 366,590
Other noncurrent assets 46,901 54,199
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Total Assets $ 2,335,619 $ 2,414,281
=========== ===========
CURRENT LIABILITIES
Accounts payable $ 1,146,660 $ 1,206,385
Accrued expenses and other current liabilities 197,667 226,006
Accrued payroll and bonuses 48,151 78,531
Advance billings 134,752 132,130
Accrued taxes on income 23,925 24,844
Short-term debt 32,358 31,710
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Total Current Liabilities 1,583,513 1,699,606
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NONCURRENT LIABILITIES
Long-term debt 347,858 127,568
Deferred compensation 30,715 31,328
Other noncurrent liabilities 110,320 117,405
Minority Interests 14,123 14,194
Commitments and Contingencies
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STOCKHOLDERS' EQUITY
Money Market Preferred Stock - cumulative variable dividend; liquidating value of $115
per share; one-tenth of one vote per share; authorized - 50,000 shares; issued and
outstanding - 87 shares -- --
Cumulative Participating Junior Preferred Stock - minimum $1.00 dividend;
liquidating value of $1.00 per share, 100 votes per share, authorized - 2,500,000
shares; issued and outstanding - 0 shares -- --
Common stock - par value $.01 per share; authorized - 250,000,000
shares; issued and outstanding - 72,189,892 shares and 72,950,004
shares at March 31, 2000 and December 31, 1999, respectively (excluding
1,162,816 shares and 2,471 shares in treasury) 734 730
Capital surplus 899,404 908,969
Accumulated deficit (566,676) (596,470)
Net unrealized appreciation in equity securities 13,440 144,977
Cumulative translation adjustment (39,386) (33,092)
Pension liability adjustment (817) (817)
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306,699 424,297
Common stock in treasury, at cost (57,609) (117)
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Total Stockholders' Equity 249,090 424,180
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Total Liabilities and Stockholders' Equity $ 2,335,619 $ 2,414,281
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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(IN THOUSANDS) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,592 $ 19,701
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 20,740 15,769
Other income (10,796) --
Deferred income tax expense 15,801 8,280
Equity in net (income) loss of unconsolidated affiliates (727) 16
Dividends from unconsolidated affiliates 176 905
Minority interest in net income (loss) of consolidated companies 282 (299)
Change in assets and liabilities, excluding effects from acquisitions, dispositions and foreign exchange:
Accounts receivable 13,845 (29,034)
Costs billable to clients (20,140) (9,306)
Other receivables (6,802) (9,527)
Prepaid expenses and other assets (3,644) (5,895)
Accounts payable (63,463) (58,743)
Accrued expenses and other current liabilities (32,037) (18,868)
Accrued payroll and bonuses (25,620) (26,616)
Advance billings 2,622 (11,016)
Accrued taxes on income (486) 1,167
Deferred compensation (298) 355
Other 5,559 (1,359)
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NET CASH USED IN OPERATING ACTIVITIES $ (84,514) $(124,470)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, leasehold improvements and equipment $ (15,448) $ (14,788)
Acquisitions, net of cash acquired (37,633) (8,669)
Investments in equity securities (25,217) (1,912)
Proceeds from investing activities 4,054 322
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NET CASH USED IN INVESTING ACTIVITIES $ (74,244) $ (25,047)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from convertible subordinated notes $ 282,469 $ --
Proceeds from other long-term debt 6,469 126,036
Repayments of long-term debt (73,917) (5,256)
Net proceeds from short-term debt 17,537 10,992
Common stock issued 3,177 1,134
Purchase of treasury shares (87,180) (42,403)
Dividends paid (1,797) --
Payment of deferred compensation (3,456) --
Other financing activities (256) (59)
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 143,046 $ 90,444
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (2,583) 144
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,295) (58,929)
Cash and cash equivalents, beginning of period 144,517 122,138
--------- ---------
Cash and cash equivalents, end of period $ 126,222 $ 63,209
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 822 $ 2,939
========= =========
Income taxes paid $ 5,051 $ 4,960
========= =========
NONCASH INVESTING ACTIVITY:
Common stock issued in acquisitions $ 2,310 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
BUSINESS: Young & Rubicam Inc. ("Y&R") is a global marketing and communications
company which offers clients integrated services in the creation and production
of advertising, strategic media planning and buying, direct marketing and
customer relationship management, perception management and public relations,
branding consultancy and design services, and healthcare communications. Y&R
operates through wholly owned subsidiaries, joint ventures and non-equity
affiliations worldwide. Operations cover the major geographic regions of North
America, Europe, Latin America, the Far East, Australia, New Zealand, the Middle
East and Africa.
CONSOLIDATION: The accompanying unaudited consolidated condensed financial
statements of Y&R have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These unaudited consolidated condensed
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Y&R's Annual Report on Form
10-K for the year ended December 31, 1999. In the opinion of management, the
accompanying financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the results for the
periods presented. Certain reclassifications have been made to the prior year's
financial statements to conform to the 2000 presentation.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the full year.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average shares of common stock outstanding during the three months ended March
31, 2000 and 1999. Diluted earnings per share for the three months ended March
31, 2000 and 1999 are calculated as net income adjusted for after-tax interest
expense on our 3% Convertible Subordinated Notes divided by weighted average
shares of common stock outstanding, adjusted for the dilutive effect of stock
options, primarily stock options granted to employees under stock-based
compensation plans, convertible subordinated notes and other dilutive
securities.
Shares used in computing basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
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<S> <C> <C>
Basic - weighted average shares 72,790,225 66,324,420
Dilutive effect of stock options 10,567,001 15,567,772
Dilutive effect of convertible subordinated notes 3,088,799 -
- -------------------------------------------------------------------------------------------------- ---------------- ----------------
Diluted - weighted average shares 86,446,025 81,892,192
================================================================================================== ================ ================
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5
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NOTE 3 - Comprehensive Income
The following table sets forth total comprehensive income (loss) and its
components:
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THREE MONTHS ENDED MARCH 31,
--------------------------------
(IN THOUSANDS) 2000 1999
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<S> <C> <C>
Net income $ 31,592 $ 19,701
Unrealized depreciation in equity securities:
Unrealized depreciation arising during period (130,383) --
Less: Reclassification adjustment for gains included in net income (1,154) --
---------------- ---------------
Net unrealized depreciation in equity securities (131,537) --
Foreign currency translation adjustments (6,294) (7,214)
- --------------------------------------------------------------------------------------------------- ---------------- ---------------
Total comprehensive (loss) income $ (106,239) $ 12,487
=================================================================================================== ================ ===============
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NOTE 4 - INVESTMENTS IN EQUITY SECURITIES
At March 31, 2000, all equity securities covered under Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115") were designated as
available-for-sale. Such equity securities at March 31, 2000 had an aggregate
cost basis of $122.1 million. These securities are carried at their fair value
of $144.1 million and are included in investments in equity securities on the
balance sheet. Differences between cost and fair value of $22.0 million are
carried net of $8.6 million of related income tax as a separate component of
stockholders' equity under the balance sheet caption "Net unrealized
appreciation in equity securities."
In January 2000, Y&R contributed cash and certain assets and rights known as Y&R
TeamSpace, a proprietary software tool, to eMotion Inc. ("eMotion"), a firm that
provides digital media management solutions that facilitate the creative
workflow, sale, distribution and management of media rich broadband content, in
exchange for an ownership interest in eMotion. The equity securities received in
connection with this transaction are carried on the balance sheet at net cost,
as readily determinable fair values are not available. At March 31, 2000, the
carrying value of this cost investment was $13.3 million. In addition, Y&R
recorded a gain on the contribution of Y&R TeamSpace to eMotion in the first
quarter of 2000 totaling approximately $7.6 million.
During the first quarter of 2000, Y&R invested an additional $20.0 million in
marketable equity securities that are carried on the balance sheet at cost.
These cost investments include Y&R's investment in Naviant Inc., a leading
provider of precision marketing solutions to web advertisers, web publishers and
consumer marketers of approximately $15.0 million.
Under certain investment agreements, Y&R is eligible to share with the
respective entities a portion of revenues, if any, generated from the use or
referral by Y&R or its clients of the respective entity's products or services.
In certain instances, Y&R may also be required to make payments pursuant to
minimum revenue guarantees over a specified period. While Y&R cannot reasonably
estimate the amount, if any, that could be earned or become payable under such
agreements, such amounts are not expected to be material to Y&R's consolidated
results of operations, financial position or cash flow. To date no commission
fee revenue has been earned or recognized and no revenue guarantee amounts have
become payable under such arrangements.
6
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NOTE 5 - ACQUISITIONS
During the first quarter of 2000, Y&R acquired 100% of Robinson Lerer &
Montgomery, LLC ("RLM"), a leading public relations and strategy consulting firm
in a cash and stock transaction, and also made several other acquisitions and
strategic investments in certain other entities. All of these acquisitions were
accounted for under the purchase method of accounting and a preliminary
allocation of the costs to acquire these entities has been made based on the
fair value of the net assets acquired. Certain acquisitions may require Y&R to
pay incremental amounts as additional consideration in future years, based on
the operating results achieved by the companies that were acquired. The
aggregate purchase price of acquisitions completed in the first quarter of 2000,
including any amounts paid under existing contingent consideration obligations,
amounted to approximately $52.5 million.
NOTE 6 - LONG-TERM DEBT
Y&R's long-term debt is comprised of the following:
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<CAPTION>
(IN THOUSANDS) MARCH 31, 2000 DECEMBER 31, 1999
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<S> <C> <C>
Unsecured revolving credit facilities $ 55,573 $ 123,500
3% Convertible subordinated notes 287,500 -
Capital lease obligations 1,776 2,197
Other borrowings 3,335 3,821
- --------------------------------------------------------------------------------------------------------------------
348,184 129,518
Less - Current portion 326 1,950
- --------------------------------------------------------------------------------------------------------------------
$ 347,858 $ 127,568
====================================================================================================================
</TABLE>
Interest expense was $5.6 million for the first quarter of 2000 compared to
interest expense of $3.7 million for the first quarter of 1999.
On January 20, 2000, we completed the placement of $287.5 million of 3%
Convertible Subordinated Notes due January 15, 2005. At the option of the
holder, the notes are convertible into shares of our common stock at a
conversion price of $73.36 per share, subject to adjustment, beginning 90 days
following the issuance of the notes. The notes may be redeemed at Y&R's option
on or after January 20, 2003. Additionally, under certain circumstances, holders
of the notes may have the right to require Y&R to repurchase the notes. Interest
on the notes is payable on January 15 and July 15 of each year, beginning on
July 15, 2000. The notes are unsecured obligations of Y&R and are subordinated
in right of payment to all senior indebtedness and liabilities of subsidiaries
of Y&R. Y&R used the net proceeds of the offering to repay outstanding debt
under our existing bank credit facilities and to fund operations, acquisitions,
investment activity and share repurchases.
NOTE 7 - CASH DIVIDEND
On March 15, 2000, Y&R paid quarterly cash dividends of $0.025 per common share
to all stockholders of record as of March 1, 2000.
7
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited
consolidated financial statements and notes thereto, and the information under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in our Annual Report on Form 10-K for the year
ended December 31, 1999 as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Revenues for the first quarter of 2000 increased by $64.4 million, or
16.8%, to $448.3 million compared to the first quarter of 1999. Organic
worldwide revenue growth, excluding the effect of acquisitions and foreign
currency fluctuations, was 11.2%, due to the growth of existing businesses,
including net new business gains and net higher spending from existing clients.
Acquisitions contributed 9.2% of revenue growth, or $39.9 million. Domestic
revenues increased by 14.6%, or 6.4% excluding acquisitions, to $239.1 million
for the first quarter of 2000 compared to the first quarter of 1999.
International revenues increased by 19.3% to $209.2 million. Excluding the
effect of foreign currency fluctuations and acquisitions, international revenues
increased by 17.0% for the first quarter of 2000 compared to the first quarter
of 1999. International organic revenue growth was broad based across all
regions. Europe, our largest international region, achieved 11.0% organic
growth.
Compensation expense increased by $37.4 million to $272.4 million for the
first quarter of 2000 compared to the first quarter of 1999, but decreased as a
percentage of revenues to 60.8% from 61.2%. The improvement in the compensation
expense margin was driven by continued lower cost of non-salary related benefit
expenses, as well as productivity gains.
General and administrative expenses increased by $17.3 million to $131.6
million for the first quarter of 2000 compared to the first quarter of 1999, but
decreased as a percentage of revenues to 29.4% from 29.8%. The margin
improvement is primarily the result of savings in domestic facilities costs and
other ongoing cost containment initiatives, which more than offset incremental
amortization of goodwill and other intangible assets attributable to acquired
assets.
Operating profit was $44.3 million for the first quarter of 2000, as
compared to $34.6 million for the first quarter of 1999. This increase was
primarily due to net new business gains combined with improved operating
margins. The operating profit margin in the first quarter of 2000 was 9.9%, a 90
basis point improvement over the operating profit margin of 9.0% in the first
quarter of 1999.
Net interest expense increased by $1.5 million to $3.1 million for the
first quarter of 2000 compared to the first quarter of 1999. The increase was
principally due to higher average borrowing levels to support acquisitions,
investment activity and share repurchases, partially offset by lower average
borrowing rates as compared to 1999, which is primarily a result of the 3%
Convertible Subordinated Notes refinancing that was completed on January 20,
2000.
Other income of $10.8 million principally consists of the gain on the sale
in January 2000 of certain assets and rights known as Y&R TeamSpace to eMotion
Inc., a firm that provides digital media management solutions; and gains on the
sale of certain marketable securities and additional consideration received in
the first quarter of 2000 as a result of achieving revenue and operating profit
performance targets of the Brand Dialogue assets contributed to Luminant
Worldwide Corporation in 1999.
8
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The income tax provision was $20.8 million for the first quarter of 2000
compared to $13.5 million for the first quarter of 1999. The effective tax rate
for the first quarter of 2000 was 40.0% compared to 41.0% in the first quarter
of 1999. The decrease in the effective tax rate resulted from foreign earnings
being taxed at an effective rate lower than the U.S. statutory rate, partially
offset by an increase in domestic nondeductible goodwill.
Equity in net income of unconsolidated affiliates increased to $0.7 million
in the first quarter of 2000, reflecting operating improvements in equity
affiliates, principally Dentsu, Young & Rubicam ("DY&R") Japan. Minority
interest in net income of consolidated companies was $0.3 million in the first
quarter of 2000 compared to minority interest in net losses of $0.3 million in
the first quarter of 1999, reflecting the consolidation of the results of DY&R
companies throughout principal markets in Asia, with the exception of Japan,
effective August 2, 1999.
Net income was $31.6 million, or $0.38 per diluted share, for the first
quarter of 2000. This compares to net income for the first quarter of 1999 of
$19.7 million. Excluding other income of $10.8 million in 2000, net income
increased by $5.4 million, or 27.5% in the first quarter of 2000 as compared to
1999. This increase was principally due to revenue growth, acquisition activity,
improved operating margins and a reduced effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We generally finance our working capital, capital expenditures,
acquisitions and share repurchases from cash generated from operations and
third-party borrowings.
Cash and cash equivalents were $126.2 million and $144.5 million at March
31, 2000 and December 31, 1999, respectively. Cash used in operating activities
in the first quarter of 2000 was $84.5 million compared to $124.5 million in the
first quarter of 1999, reflecting revenue and net income growth, improved
operating margins and improved working investment. Quarterly operating cash
flows are significantly impacted by seasonal media spending patterns of
advertisers, including the timing of payments made to media and other suppliers
on behalf of clients as well as the timing of cash collections from clients to
fund these expenditures. Our practice, where possible, is to bill and collect
from our clients in sufficient time to pay the amounts due the media.
Free cash flow, which is defined as net cash provided by (used in)
operating activities less capital expenditures, was a net use of $100.0 million
in the first quarter of 2000, a 28.2% improvement from the first quarter of
1999.
Cash used in investing activities in the first quarter of 2000 was $74.2
million and included $15.5 million in capital expenditures and $62.9 million for
investments and acquisitions, net of cash acquired. In the first quarter of
1999, cash used in investing activities was $25.0 million, principally
consisting of $14.8 million in capital expenditures. The majority of capital
expenditures in 2000 and 1999 were for leasehold improvements and information
technology-related purchases. Acquisitions and investments in 2000 included the
purchase of Robinson Lerer & Montgomery, LLC, the cash contribution to eMotion
Inc., and an investment in Naviant Inc.
Cash provided by financing activities in the first quarter of 2000 was
$143.0 million and included net borrowings of $232.6 million. During the first
quarter of 2000, we repurchased 1.8 million shares of our common stock on the
open market and in other transactions at an average price of $49.12 per share
for an aggregate cost of $87.2 million. This brings the total to 7.2 million
shares repurchased under our 12.0 million share authorized repurchase program.
In the first quarter of 1999, cash provided by financing activities was $90.4
million and included net borrowings of $131.8 million.
On January 20, 2000, we completed the placement of $287.5 million of 3%
Convertible Subordinated Notes due January 15, 2005. At the option of the
holder, the notes are convertible into shares of our common stock at a
conversion price of $73.36 per share, subject to adjustment, beginning 90 days
following the issuance of the notes. The notes may be redeemed at Y&R's option
9
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on or after January 20, 2003. Additionally, under certain circumstances, holders
of the notes may have the right to require Y&R to repurchase the notes. Interest
on the notes is payable on January 15 and July 15 of each year, beginning on
July 15, 2000. The notes are unsecured obligations of Y&R and are subordinated
in right of payment to all senior indebtedness and liabilities of subsidiaries
of Y&R. Y&R used the net proceeds of the offering to repay outstanding debt
under our existing bank credit facilities and to fund operations, acquisitions,
investment activity and share repurchases.
On March 15, 2000, we paid a quarterly cash dividend of $0.025 per share of
common stock to all shareholders of record as of March 1, 2000. The payment of
additional dividends in the future will be at the discretion of our Board of
Directors and will depend upon, among other factors, our results of operations,
financial condition, capital requirements and restrictions in our credit
facilities.
We may, from time to time, pursue acquisition opportunities that would
expand or enhance existing capabilities or strengthen the geographic scope of
our operations.
At March 31, 2000, our net deferred tax assets were $164.0 million, an
increase of $78.8 million from December 31, 1999, primarily resulting from a
decrease in deferred tax liabilities related to unrealized appreciation in
equity securities.
We believe that cash provided by operations and funds available under our
credit facilities will be sufficient to meet our anticipated cash requirements
as presently contemplated.
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 No.
133"), which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. In June 1999,
the Financial Accounting Standards Board issued Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133", which delays implementation of SFAS No. 133
until fiscal years beginning after June 15, 2000. We do not anticipate that the
adoption of SFAS No. 133 will have a significant effect on our financial
condition.
10
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Y&R's market risks primarily consist of the impact of changes in currency
exchange rates on assets and liabilities of non-U.S. operations and the impact
of changes in interest rates on debt. Our 1999 Form 10-K provides a more
detailed discussion of the market risks affecting our operations. As of March
31, 2000, no material change had occurred in Y&R's market risks, as compared to
the disclosure in its Form 10-K for the year ending December 31, 1999, except as
noted below.
Y&R accounts for its investments in equity securities with readily
determinable fair values under SFAS No. 115. The value of the equity securities
may fluctuate based on the volatility of the respective entity's stock price and
other general market conditions. The value of these equity securities has
declined since December 31, 1999. At March 31, 2000, all equity securities
covered by SFAS No. 115 were designated as available-for-sale. Accordingly,
these securities are stated at fair value, with unrealized holding gains, net of
taxes, reported in a separate component of shareholders' equity. Such equity
securities at March 31, 2000, had an aggregate cost basis of $122.1 million.
These securities are carried at their fair value of $144.1 million and are
included in investments in equity securities on the balance sheet. Differences
between cost and fair value of $22.0 million are carried net of $8.6 million of
related income tax as a separate component of stockholders' equity under the
balance sheet caption "Net unrealized appreciation in equity securities."
11
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K: On January 7, 2000, the Company filed a report on
Form 8-K (Item 5), describing its intention to raise approximately
$250 million through the sale of Convertible Subordinated Notes.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Young & Rubicam Inc.
--------------------
(Registrant)
Date: May 11, 2000
/s/ Jacques Tortoroli
--------------------------------------------
Name: Jacques Tortoroli
Title: Senior Vice President of Finance
Principal Accounting Officer
13
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
11 Computation of Earnings Per Share
27.1 Financial Data Schedule
14
<PAGE>
EXHIBIT 11
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 72,790,225 66,324,420
=========== ===========
Net income $ 31,592 $ 19,701
=========== ===========
Earnings per common share $ 0.43 $ 0.30
=========== ===========
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 72,790,225 66,324,420
Dilutive effects of stock options 10,567,001 15,567,772
Dilutive effect of convertible subordinated notes 3,088,799 -
----------- -----------
Weighted average common shares and common share equivalents outstanding 86,446,025 81,892,192
=========== ===========
Net income $ 31,592 $ 19,701
Add: After-tax interest expense on 3% Convertible Subordinated Notes 1,016 -
----------- -----------
Net income, as adjusted $ 32,608 $ 19,701
=========== ===========
Earnings per common share and common share equivalents $ 0.38 $ 0.24
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF YOUNG & RUBICAM AND SUBSIDIARY
COMPANIES FOUND IN THE COMPANY'S FORM 10-Q AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001030048
<NAME> Young & Rubicam Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 126,222,000
<SECURITIES> 0
<RECEIVABLES> 1,025,265,000
<ALLOWANCES> (21,492,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,360,712,000
<PP&E> 448,350,000
<DEPRECIATION> (252,865,000)
<TOTAL-ASSETS> 2,335,619,000
<CURRENT-LIABILITIES> 1,583,513,000
<BONDS> 0
0
0
<COMMON> 734,000
<OTHER-SE> 248,356,000
<TOTAL-LIABILITY-AND-EQUITY> 2,335,619,000
<SALES> 0
<TOTAL-REVENUES> 448,282,000
<CGS> 0
<TOTAL-COSTS> 404,018,000
<OTHER-EXPENSES> (10,796,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,149,000
<INCOME-PRETAX> 51,911,000
<INCOME-TAX> 20,764,000
<INCOME-CONTINUING> 31,592,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,592,000
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.38
</TABLE>
