FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1493710
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
285 Madison Avenue, New York, New York 10017
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 210-3000
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, as of July 31, 2000 was 73,296,883.
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 2
Consolidated Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 4
Notes to Consolidated Condensed Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
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.
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ----------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 495,009 $ 414,361 $ 943,291 $ 798,234
Compensation expense, including employee benefits 284,043 239,016 556,445 474,034
General and administrative expenses 145,672 122,511 277,288 236,808
----------- ----------- ----------- -----------
Operating expenses 429,715 361,527 833,733 710,842
----------- ----------- ----------- -----------
Operating profit 65,294 52,834 109,558 87,392
Interest expense, net (4,970) (2,799) (8,119) (4,445)
Other income 1,359 -- 12,155 --
----------- ----------- ----------- -----------
Income before income taxes 61,683 50,035 113,594 82,947
Income tax provision 24,674 20,514 45,438 34,008
----------- ----------- ----------- -----------
37,009 29,521 68,156 48,939
Equity in net income of unconsolidated affiliates 1,520 1,668 2,247 1,652
Minority interest in net income of consolidated
subsidiaries (1,066) (604) (1,348) (305)
----------- ----------- ----------- -----------
Net income $ 37,463 $ 30,585 $ 69,055 $ 50,286
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.52 $ 0.45 $ 0.95 $ 0.75
=========== =========== =========== ===========
Diluted $ 0.45 $ 0.37 $ 0.83 $ 0.61
=========== =========== =========== ===========
Weighted average shares outstanding (Note 2):
Basic 72,442,663 67,502,175 72,627,811 66,912,004
=========== =========== =========== ===========
Diluted 86,220,419 82,200,161 86,388,529 82,047,778
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) JUNE 30, DECEMBER 31,
2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 173,256 $ 144,517
Accounts receivable, net of allowance for doubtful accounts of $24,223 and
$25,012 at June 30, 2000 and December 31, 19999, respectively 1,008,933 1,031,445
Costs billable to clients 115,014 76,982
Other receivables 41,994 43,138
Deferred income taxes 50,566 50,302
Prepaid expenses and other current assets 29,250 27,803
----------- -----------
Total Current Assets 1,419,013 1,374,187
----------- -----------
NONCURRENT ASSETS
Property, leasehold improvements and equipment at cost, net of accumulated
depreciation and amortization of $263,824 and $248,112 at June 30, 2000 and
December 31, 1999, respectively 189,362 194,569
Deferred income taxes 149,287 34,875
Intangibles, net of accumulated amortization of $98,627 and $91,285 at
June 30, 2000 and December 31, 1999, respectively 371,873 353,860
Equity in net assets of and advances to unconsolidated affiliates 35,067 36,001
Investments in equity securities 151,884 366,590
Other noncurrent assets 48,283 54,199
----------- -----------
Total Assets $ 2,364,769 $ 2,414,281
=========== ===========
CURRENT LIABILITIES
Accounts payable $ 1,201,938 $ 1,206,385
Accrued expenses and other current liabilities 217,853 226,006
Accrued payroll and bonuses 53,779 78,531
Advance billings 134,400 132,130
Accrued taxes on income 15,286 24,844
Short-term debt 41,933 31,710
----------- -----------
Total Current Liabilities 1,665,189 1,699,606
----------- -----------
NONCURRENT LIABILITIES
Long-term debt 297,920 127,568
Deferred compensation 31,957 31,328
Other noncurrent liabilities 104,390 117,405
Minority Interests 14,681 14,194
Commitments and Contingencies
----------- -----------
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 - 73,160,024 shares and 72,950,004 shares at June 30, 2000 and
December 31, 1999, respectively (excluding 192,684 shares and 2,471 shares in treasury) 734 730
Capital surplus 872,870 908,969
Accumulated deficit (530,994) (596,470)
Net unrealized (depreciation) appreciation in equity securities, net of tax (27,792) 144,977
Cumulative translation adjustment (53,915) (33,092)
Pension liability adjustment (817) (817)
----------- -----------
260,086 424,297
Common stock in treasury, at cost (9,454) (117)
----------- -----------
Total Stockholders' Equity 250,632 424,180
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,364,769 $ 2,414,281
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------
(IN THOUSANDS) 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,055 $ 50,286
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 42,209 32,465
Other income (12,155) --
Deferred income tax expense 28,662 24,049
Equity in net income of unconsolidated affiliates (2,247) (1,652)
Dividends from unconsolidated affiliates 418 1,181
Minority interest in net income of consolidated companies 1,348 305
Change in assets and liabilities, excluding effects from acquisitions, dispositions
and foreign exchange
Accounts receivable (8,212) (7,967)
Costs billable to clients (36,364) (33,194)
Other receivables (2,381) (304)
Prepaid expenses and other assets (3,079) (3,681)
Accounts payable 3,902 23,858
Accrued expenses and other current liabilities (1,090) (20,074)
Accrued payroll and bonuses (19,143) (30,382)
Advance billings 2,270 (8,324)
Accrued taxes on income (8,762) (1,687)
Deferred compensation 954 1,090
Other (10,870) (9,074)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 44,515 $ 16,895
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, leasehold improvements and equipment $ (27,061) $ (32,516)
Acquisitions, net of cash acquired (48,550) (102,659)
Investments in equity securities (35,438) (11,558)
Proceeds from investing activities 4,070 --
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES $ (106,979) $ (146,733)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from convertible subordinated notes $ 282,469 $ --
Proceeds from other long-term debt 8,143 189,955
Repayments of long-term debt (124,666) (5,109)
Net proceeds from short-term debt 32,013 (28,330)
Common stock issued 8,616 8,351
Purchase of treasury shares (90,296) (67,810)
Dividends paid (3,578) (1,752)
Payment of deferred compensation (3,456) (1,356)
Other financing activities (1,285) (1,001)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 107,960 $ 92,948
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (16,757) (5,676)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,739 (42,566)
Cash and cash equivalents, beginning of period 144,517 122,138
---------- ----------
Cash and cash equivalents, end of period $ 173,256 $ 79,572
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,943 $ 7,479
========== ==========
Income taxes paid $ 19,601 $ 14,208
========== ==========
NONCASH INVESTING ACTIVITY:
Common stock issued in acquisitions $ 2,310 $ 83,700
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
YOUNG & RUBICAM INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED 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 and six months ended
June 30, 2000 and 1999. Diluted earnings per share for the three and six months
ended June 30, 2000 and 1999 are calculated as net income adjusted for after-tax
interest expense on our 3% Convertible Subordinated Notes in 2000, 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, the 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------------------------------------------------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Basic - weighted average shares 72,442,663 67,502,175 72,627,811 66,912,004
Dilutive effect of stock options 9,827,661 14,697,986 10,241,271 15,135,774
Dilutive effect of convertible notes 3,950,095 -- 3,519,447 --
----------------------------------------------------------- --------------- --------------- ---------------- --------------
Diluted - weighted average shares 86,220,419 82,200,161 86,388,529 82,047,778
=========================================================== =============== =============== ================ ==============
</TABLE>
5
<PAGE>
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth total comprehensive income (loss) and its
components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------
(IN THOUSANDS) 2000 1999 2000 1999
------------------------------------------------------------------ ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Net income $ 37,463 $ 30,585 $ 69,055 $ 50,286
Unrealized depreciation in equity securities, net of tax:
Unrealized depreciation arising during period (41,232) -- (171,615) --
Less: Reclassification adjustment for gains included
in net income -- -- (1,154) --
---------------- -------------- --------------- -----------
Net unrealized depreciation in equity securities, net of tax (41,232) -- (172,769) --
Foreign currency translation adjustment (14,529) (7,332) (20,823) (14,546)
------------------------------------------------------------------ ---------------- -------------- --------------- -----------
Total comprehensive income $ (18,298) $ 23,253 $ (124,537) $ 35,740
================================================================== ================ ============== =============== ===========
</TABLE>
NOTE 4 - INVESTMENTS IN EQUITY SECURITIES
At June 30, 2000, all equity securities covered under Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115") were designated as
available-for-sale. In accordance with SFAS No. 115, these securities are
reported at fair value, adjusted for any other-than-temporary declines in value.
Such equity securities at June 30, 2000 had an aggregate cost basis of $122.5
million and included certain equity securities received as additional
consideration in the first half 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. These securities are carried at their
fair value of $77.0 million and are included in investments in equity securities
on the balance sheet. Differences between cost and fair value of $45.5 million
are carried net of $17.7 million of related income tax benefit as a separate
component of stockholders' equity under the balance sheet caption "Net
unrealized (depreciation) 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 June 30, 2000, the
carrying value of this cost investment was $14.3 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.
Also during the first half of 2000, Y&R invested an additional $29.0 million in
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.
6
<PAGE>
During the quarter ended June 30, 2000 revenue guarantee amounts totaling $1.0
million have been paid under such arrangements.
NOTE 5 - ACQUISITIONS
During the first half of 2000, Y&R acquired all outstanding membership interests
in 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. 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 six months of 2000, including any amounts
paid under existing contingent consideration obligations, amounted to
approximately $57 million.
NOTE 6 - LONG-TERM DEBT
Y&R's long-term debt is comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured revolving credit facilities $ 7,564 $ 123,500
3% Convertible subordinated notes 287,500 --
Capital lease obligations 1,479 2,197
Other borrowings 3,249 4,500
--------------------------------------------------------------------------------------------------------------------
299,792 130,197
Less - Current portion 1,872 2,629
--------------------------------------------------------------------------------------------------------------------
$ 297,920 $ 127,568
====================================================================================================================
</TABLE>
Interest expense was $6.6 million for the second quarter of 2000 compared to
interest expense of $5.4 million for the second quarter of 1999. Interest
expense was $12.2 million for the six months ended June 30, 2000 compared to
interest expense of $9.1 million for the six months ended June 30, 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. See Note 8 for recent developments
relating to the 3% Convertible Subordinated Notes.
NOTE 7 - CASH DIVIDEND
On June 15, 2000 and March 15, 2000, Y&R paid quarterly cash dividends of $0.025
per common share to all stockholders of record as of June 1, 2000 and March 1,
2000, respectively.
7
<PAGE>
NOTE 8 - RECENT DEVELOPMENTS
On May 12, 2000, Y&R and WPP Group plc ("WPP") announced that they have entered
into a definitive merger agreement dated as of May 11, 2000 providing for a
business combination of Young & Rubicam and WPP. The transaction is structured
as a merger of Young & Rubicam with a wholly owned subsidiary of WPP. Subject to
the terms of the definitive merger agreement, at the time of the merger, each
share of common stock, par value $0.01 per share, of Young & Rubicam, together
with any associated preferred share purchase rights, will be converted into the
right to receive .835 American Depositary Shares of WPP. Each American
Depositary Share of WPP represents five ordinary shares, with a nominal value of
10 pence each, of WPP, and Young & Rubicam stockholders will be entitled to
elect to receive WPP ordinary shares in lieu of the American Depositary Shares.
Subject to the completion of the merger, WPP intends, with the cooperation of
Y&R, to solicit the consent of the holders of the 3% Convertible Subordinated
Notes due January 15, 2005 to amend the indenture relating to those notes to
provide that Y&R's obligation under the indenture to file with the Securities
and Exchange Commission ("SEC") and distribute to noteholders annual and
quarterly financial information may be satisfied by distributing to noteholders
the same financial information WPP distributes to its shareholders. If the
requisite consent of the noteholders is obtained and the merger is completed,
Y&R has been informed by WPP that WPP will fully and unconditionally guarantee
Y&R's obligations under those notes and Y&R will discontinue filing periodic
reports with the SEC under the Securities Exchange Act of 1934.
The Merger is expected to close in the fall of 2000 and is subject to the
approval of each company's stockholders and other customary conditions. There
can be no assurance that such approvals will be obtained.
NOTE 9 - SUBSEQUENT EVENTS
On June 29, 2000, Y&R announced that it had agreed to acquire The Partners, a
leading UK design agency and corporate identity specialist. The transaction was
completed in July 2000.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our audited
consolidated financial statements and notes thereto, and the information under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in our Annual Report on Form 10-K for the year
ended December 31, 1999 as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Revenues for the second quarter of 2000 increased by $80.6 million, or
19.5%, to $495.0 million compared to the second quarter of 1999. Organic
worldwide revenue growth, excluding the effect of acquisitions and foreign
currency fluctuations, was 14.0%, due to the growth of existing businesses,
including net new business gains and net higher spending from existing clients.
Acquisitions contributed 9.6% of revenue growth, or $46.0 million. Domestic
revenues increased by 15.5%, or 9.3% excluding acquisitions, to $259.5 million
for the second quarter of 2000 compared to the second quarter of 1999.
International revenues increased by 24.1% to $235.5 million. Excluding the
effect of foreign currency fluctuations and acquisitions, international revenues
increased by 19.6% for the second quarter of 2000 compared to the second quarter
of 1999. International organic revenue growth was broad based across all
regions. Europe, our largest international region, achieved 17.4% organic
growth.
Compensation expense increased by $45.0 million to $284.0 million for the
second quarter of 2000 compared to the second quarter of 1999, but decreased as
a percentage of revenues to 57.4% from 57.7%. 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 $23.2 million to $145.7
million for the second quarter of 2000 compared to the second quarter of 1999,
and decreased as a percentage of revenues to 29.4% from 29.6%. 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 assets
acquired since the second quarter of 1999.
Operating profit was $65.3 million for the second quarter of 2000, as
compared to $52.8 million for the second quarter of 1999. This increase was
primarily due to net new business gains combined with improved operating
margins. The operating profit margin in the second quarter of 2000 was 13.2%, a
40 basis point improvement over the second quarter of 1999.
Net interest expense increased by $2.2 million to $5.0 million for the
second quarter of 2000 compared to the second quarter of 1999. The increase was
principally due to higher average borrowing levels to support acquisitions,
investment activity, share repurchases and dividend payments, 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.
The income tax provision was $24.7 million for the second quarter of 2000
compared to $20.5 million for the second quarter of 1999. The effective tax rate
for the second quarter of 2000 was 40.0% compared to 41.0% in the second 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 decreased from $1.7
million to $1.5 million in the second quarter of 2000 and minority interest in
net income of consolidated companies increased from $0.6 million to $1.1
9
<PAGE>
million in the second quarter of 2000, both reflecting the consolidation of the
results of Dentsu, Young & Rubicam companies throughout principal markets in
Asia, with the exception of Japan, effective August 2, 1999.
Net income was $37.5 million, or $0.45 per diluted share, for the second
quarter of 2000. This compares to net income for the second quarter of 1999 of
$30.6 million, or $0.37 per diluted share. Excluding other income of $1.4
million, which principally represents net gains from investment activities, net
income was $36.6 million, or $0.44 per diluted share, an increase of 19.8%. This
increase was principally due to revenue growth, acquisition activity, improved
operating margins and a reduced effective tax rate.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues for the six months ended June 30, 2000 increased by $145.1
million, or 18.2%, to $943.3 million compared to the six months ended June 30,
1999. Organic worldwide revenue growth, excluding the effect of acquisitions and
foreign currency fluctuations, was 12.7%, due to the growth of existing
businesses, including net new business gains and net higher spending from
existing clients. Acquisitions contributed 9.4% of revenue growth, or $85.9
million. Domestic revenues increased by 15.1%, or 7.9% excluding acquisitions,
to $498.6 million for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. International revenues increased by 21.8% to $444.7
million. Excluding the effect of foreign currency fluctuations and acquisitions,
international revenues increased by 18.3% for the six months ended June 30, 2000
compared to the six months ended June 30, 1999. International organic revenue
growth was broad based across all regions. Europe, our largest international
region, achieved 14.3% organic growth.
Compensation expense increased by $82.4 million to $556.4 million for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999,
but decreased as a percentage of revenues to 59.0% from 59.4%. 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 $40.5 million to $277.3
million for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999, but decreased as a percentage of revenues to 29.4% from 29.7%.
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 $109.6 million for the six months ended June 30, 2000,
as compared to $87.4 million for the six months ended June 30, 1999. This
increase was primarily due to net new business gains combined with improved
operating margins. The operating profit margin in the first half of 2000 was
11.6%, a 70 basis point improvement over the six months ended June 30, 1999.
Net interest expense increased by $3.7 million to $8.1 million for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999. The
increase was principally due to higher average borrowing levels to support
acquisitions, investment activity, share repurchases and dividend payments,
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 $12.2 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 other net
gains from investing activities in the first half of 2000, including additional
consideration received as a result of achieving revenue and operating profit
performance targets of the Brand Dialogue assets contributed to Luminant
Worldwide Corporation in 1999.
The income tax provision was $45.4 million for the six months ended June
30, 2000 compared to $34.0 million for the six months ended June 30, 1999. The
effective tax rate for the first half of 2000 was 40.0% compared to 41.0% in the
first half of 1999. The decrease in the effective tax rate resulted from foreign
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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 from $1.7
million to $2.2 million for the six months ended June 30, 2000, reflecting the
consolidation of the results of DY&R companies throughout principal markets in
Asia, with the exception of Japan, effective August 2, 1999, combined with
operating improvements in equity affiliates, principally Dentsu, Young & Rubicam
("DY&R") Japan. Minority interest in net income of consolidated companies
increased from $0.3 million to $1.3 million for the six months ended June 30,
2000, 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 $69.1 million, or $0.83 per diluted share, for the six
months ended June 30, 2000. This compares to net income for the six months ended
June 30, 1999 of $50.3 million, or $0.61 per diluted share. Excluding other
income of $12.2 million in 2000, net income increased by $11.5 million, or
22.8%, for the six months ended June 30, 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 $173.3 million and $144.5 million at June
30, 2000 and December 31, 1999, respectively. Cash provided by operating
activities for the six months ended June 30, 2000 was $44.5 million compared to
$16.9 million in the six months ended June 30, 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.
Cash used in investing activities for the six months ended June 30, 2000
was $107.0 million and included $27.1 million in capital expenditures and $84.0
million for investments and acquisitions, net of cash acquired. In the six
months ended June 30, 1999, cash used in investing activities was $146.7
million, consisting of $32.5 million in capital expenditures and $114.2 million
for investments and acquisitions. 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.
Free cash flow, which is defined as net cash provided by operating
activities less capital expenditures, was $17.5 million for the six months ended
June 30, 2000, compared to a use of $15.6 million for the six months ended June
30, 1999.
Cash provided by financing activities for the six months ended June 30,
2000 was $108.0 million and included net borrowings of $198.0 million. During
the first half 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 $48.83 per
share for an aggregate cost of $90.3 million. This brings the total to 7.3
million shares repurchased under our 12.0 million share authorized repurchase
program. In the first half of 1999, cash provided by financing activities was
$92.9 million and included net borrowings of $156.5 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
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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.
On June 15, 2000 and March 15, 2000, we paid a quarterly cash dividend of
$0.025 per share of common stock to all shareholders of record as of June 1,
2000 and March 1, 2000, respectively. 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 June 30, 2000, our net deferred tax assets were $199.8 million, an
increase of $114.7 million from December 31, 1999, primarily resulting from a
decrease in deferred tax liabilities related to unrealized (depreciation)
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. In June 2000, the Financial
Accounting Standards Board issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which provides for
additional guidance related to accounting for derivative instruments and hedging
activities as addressed by SFAS No. 133. We do not anticipate that the adoption
of SFAS No. 133 will have a significant effect on our financial condition.
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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 June 30,
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 June 30, 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 or
losses, net of taxes, reported in a separate component of shareholders' equity.
Such equity securities at June 30, 2000, had an aggregate cost basis of $122.5
million. These securities are carried at their fair value of $77.0 million and
are included in investments in equity securities on the balance sheet.
Differences between cost and fair value of $45.5 million are carried net of
$17.7 million of related income tax as a separate component of stockholders'
equity under the balance sheet caption "Net unrealized (depreciation)
appreciation in equity securities."
At June 30, 2000, we had $339.9 million in outstanding indebtedness,
principally consisting of $287.5 million of 3% Convertible Subordinated Notes.
At December 31, 1999, we had $159.3 million in outstanding indebtedness,
consisting primarily of floating rate debt. Since the majority of our
indebtedness is fixed, future earnings and cash flows are not expected to be
materially impacted by interest rate fluctuations. Based on outstanding
indebtedness as of June 30, 2000, the annual after-tax earnings impact resulting
from a one-percentage point increase or decrease in interest rates would be
approximately $0.3 million, holding other variables constant.
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PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of the Company was held on May 12, 2000.
The Company did solicit proxies. The Stockholders of the shares of Common Stock
and Money Market Preferred Stock entitled to vote at the Annual Meeting voted on
and approved the following matters:
A. Election of three Class II Directors, each to serve for a term expiring at
the Annual Meeting of the Company's Stockholders to be held in 2003 and
until his or her successor is duly elected and qualified.
Number of Shares
----------------
Name of Director For Withheld
---------------- --- --------
Michael J. Dolan 50,387,532 229,088
Michael H. Jordan 48,646,675 1,769,945
Judith S. Rodin 50,362,002 254,618
B. Ratification and approval of the Company's Employee Share Purchase Plan.
Number of Shares
----------------
For Against Abstentions
--- ------- -----------
48,282,380 2,313,074 21,166
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of May 11, 2000, by and among
WPP Group plc, Young & Rubicam Inc. and York Merger Corp. (filed as
Exhibit 2.1 to Young & Rubicam Inc.'s Current Report on Form 8-K dated
May 16, 2000 and incorporated herein by reference).
4.1 Amendment No. 1 to Rights Agreement, dated as of May 11, 2000, between
Young & Rubicam Inc. and The Bank of New York (filed as Exhibit 2 to
Young & Rubicam Inc.'s Registration Statement on Form 8-A/A filed May
18, 2000 and incorporated herein by reference).
11 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: On May 16, 2000, the Company filed a Current Report on
Form 8-K reporting that it had entered into a definitive merger agreement
dated as of May 11, 2000 providing for a business combination of Young &
Rubicam and WPP Group plc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Young & Rubicam Inc.
--------------------
(Registrant)
Date: August 2, 2000
/s/ Jacques Tortoroli
--------------------------------------------
Name: Jacques Tortoroli
Title: Chief Financial Officer
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EXHIBIT INDEX
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of May 11, 2000, by and among
WPP Group plc, Young & Rubicam Inc. and York Merger Corp. (filed as
Exhibit 2.1 to Young & Rubicam Inc.'s Current Report on Form 8-K dated
May 16, 2000 and incorporated herein by reference).
4.1 Amendment No. 1 to Rights Agreement, dated as of May 11, 2000, between
Young & Rubicam Inc. and The Bank of New York (filed as Exhibit 2 to
Young & Rubicam Inc.'s Registration Statement on Form 8-A/A filed May
18, 2000 and incorporated herein by reference).
11 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
16
