As filed with the Securities and Exchange Commission on June 29, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-13119
CORDIANT COMMUNICATIONS GROUP PLC
(Exact name of Registrant as specified in its charter)
ENGLAND
(Jurisdiction of incorporation or organization)
121-141 WESTBOURNE TERRACE
LONDON W2 6JR, ENGLAND
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
registered:
Ordinary shares of 50p each represented New York Stock Exchange, Inc.
by American Depositary Shares
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report: 225,461,044
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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 which financial statement item the registrant
has elected to follow.
Item 17 [ ] Item 18 [ X ]
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TABLE OF CONTENTS
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PART I 4
Item 1. Description of Business.....................................................4
Item 2. Description of Property....................................................22
Item 3. Legal Proceedings..........................................................22
Item 4. Control of Registrant......................................................22
Item 5. Nature of Trading Markets..................................................23
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.........24
Item 7. Taxation...................................................................24
Item 8. Selected Financial Data....................................................29
Item 9. Managements Discussion and Analysis ofFinancial Condition and Results
of Operations..............................................................32
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.................46
Item 10. Directors and Officers of Registrant.......................................46
Item 11. Compensation of Directors and Officers.....................................52
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.............55
Item 13. Interest of Management in Certain Transactions.............................72
PART II.....................................................................................73
Item 14.Description of Securities to be Registered..................................73
PART III....................................................................................73
Item 15. Defaults Upon Senior Securities...........................................73
Item 16. Changes in Securities, Changes in Security
for Registered Securities and Use of Proceeds.............................73
PART IV 73
Item 17. Financial Statements......................................................73
Item 18. Financial Statements......................................................73
Item 19. Financial Statements and Exhibits.........................................74
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INTRODUCTION
Unless the context otherwise requires, the following definitions shall
have the following meanings in this document:
"Company" shall mean Cordiant Communications Group plc (previously
called Cordiant plc until December 14, 1997).
"Consolidated Financial Statements" shall mean audited consolidated
financial statements and notes thereto of the Company as of December 31, 1998
and 1997 and for each of the years in the three year period ended December 31,
1998 included elsewhere herein.
"Consolidation" shall mean the share consolidation that occurred as a
result of the Demerger.
"Cordiant" shall mean Cordiant plc (now called Cordiant Communications
Group plc) and its subsidiaries in relation to the period prior to the Demerger.
"Cordiant Ordinary Shares" shall mean ordinary shares of 25p of
Cordiant prior to the Demerger.
"Demerger" shall mean the demerger on December 14, 1997 by Cordiant of
Saatchi & Saatchi Holdings Limited in accordance with the Demerger Agreement (as
defined herein).
"Disposed" operations refers to businesses demerged from Cordiant to
form the Saatchi & Saatchi Group, Zenith and other businesses disposed of.
"Group", "CCG" and "CCG Group" shall mean the Company and its
subsidiaries from the date of the Demerger.
"NRG" shall mean National Research Group, Inc. and its subsidiaries,
NRG-UK Ltd. and Movie View, Inc.
"ongoing" operations refers to businesses that remain with the Group
following the Demerger and the disposal of other businesses and excludes Zenith.
"Ordinary Shares" shall mean ordinary shares of 50p of the Company.
"Saatchi & Saatchi" or "Saatchi & Saatchi Group" shall mean Saatchi &
Saatchi plc and, where the context requires, its subsidiaries, from the date of
the Demerger.
"Saatchi Ordinary Shares" shall mean ordinary shares of 10p of Saatchi
& Saatchi plc.
"Zenith" shall mean Zenith Media Holdings Limited and, where the
context requires, its subsidiary undertakings from time to time.
The Company publishes its consolidated financial statements in pounds
sterling ("L"). References to "US dollars" or "$" are to United States dollars
and references to "pounds sterling", "L", "pence" or "p" are to UK currency. The
noon buying rate in the City of New York for cable transfers in foreign
currencies as announced by the Federal Reserve Bank of New York for customs
purposes (the "Noon Buying Rate") on December 31, 1998 was L1.00 to $1.66.
Unless otherwise specified, translations into US dollars contained herein are
made at the Noon Buying Rate on December 31, 1998. The Noon Buying Rate on June
18, 1999 was L1.00 to $1.59.
References in this document to the "Companies Act" are to the
Companies Act 1985, as amended, of Great Britain and references to the
"Articles" are to the Company's Memorandum and Articles of Association.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
This report contains certain "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward
looking statements include statements in the "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Industry Background"
section relating to trends in the advertising and marketing services industry,
particularly with respect to anticipated advertising expenditures in the world's
advertising markets. Actual advertising expenditures may differ materially from
the estimates contained therein depending on, among other things, regional,
national and international political and economic conditions, technological
changes, the availability of media and regulatory regimes in the world's
advertising markets. Additionally, this report contains a number of "forward
looking statements" relating to the Group's performance, particularly in
"Description of Business - Organization and Services" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Group's actual results could differ materially from those anticipated depending
on, among other things, gains to or losses from its client base, the amount of
revenue derived from clients, the Group's exposure to changes in the exchange
rates of major currencies against the pound sterling (because a substantial
portion of its revenues are derived and costs incurred outside of the UK), the
general level of advertising expenditures in the Company's markets referred to
above, the ability of the Group and its significant customers and suppliers to
successfully implement timely Year 2000 solutions and the overall level of
economic activity in the Group's major markets as discussed above. The Group's
ability to reduce its fixed cost base in the short term is limited and therefore
its trading performance can be significantly affected by variations in the level
of its revenues.
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PART I
Item 1. Description of Business.
GENERAL
CCG is a global creative communications group. The Group comprises:
Bates Worldwide, one of the largest advertising and integrated communications
networks in the world; Scholz & Friends, the largest multinational advertising
network headquartered in Germany; HP:ICM, event conference and exhibition
managers; a 30% shareholding in The Facilities Group, a pre-production agency;
and a 50% shareholding in Zenith Media Worldwide, a global specialist media
services and planning agency.
CCG comprises the ongoing businesses of Cordiant after the Demerger of
the Saatchi & Saatchi Group in December 1997. Prior to the Demerger, Cordiant
was the holding company for a group of advertising and creative marketing
communication businesses, the two largest of which were the advertising
networks, Bates Worldwide ("Bates Worldwide") and Saatchi & Saatchi ("S&S").
The origins of Bates Worldwide date back to 1940 when Ted Bates &
Company was founded in New York by Theodore Bates and Rosser Reeves. It was
Rosser Reeves who first developed the concept of the Unique Selling Proposition
("U.S.P.(TM)") and this philosophy still drives the advertising strategies of
Bates Worldwide today. Ted Bates & Company grew rapidly in the 1960s and 1970s,
developing a worldwide network through acquisitions and organic growth. In 1964,
Ted Bates & Company acquired the largest advertising agency in Australia, the
George Patterson Advertising Agency. In 1985, the German agency Scholz & Friends
was acquired.
In 1986, Ted Bates Worldwide was acquired by Cordiant. Earlier that
year, Cordiant had acquired a US agency, Backer and Spielvogel and, in 1987, the
two agencies were merged to form Backer Spielvogel Bates Worldwide. The network
was later rebranded Bates Worldwide, although Scholz & Friends was preserved as
a separately branded advertising agency. The combined network formed a second
major component of Cordiant which, at that time, was also establishing another
substantial advertising network, S&S. Throughout their period of ownership by
Cordiant, the two networks operated independently.
During the mid 1980s, Cordiant also acquired a number of specialist
marketing communications businesses. In 1985, it acquired HP:ICM, a business
based in London providing creative and production services for conferences and
exhibitions. In 1987, The Facilities Group was formed through the amalgamation
of a group of companies providing specialist advertising production services in
design, print and television. Following the Demerger, CCG retained a 30 percent
shareholding in The Facilities Group with the remainder held by Saatchi &
Saatchi.
In 1988, Cordiant formed a single media buying operation in the UK
called Zenith Media Buying Services. This was created through the acquisition of
Ray Morgan & Partners which was merged with the media buying departments of
Cordiant's London advertising agencies. This was the first time a major agency
group had consolidated its media buying operations into a discrete unit. The
operation was renamed Zenith Media Worldwide in 1991 and in 1992 extended its
services to include media planning. Zenith had expanded its operations
internationally by opening offices in Europe in 1994 and in the US and Asia
Pacific in 1995. This expansion was achieved by combining and rebranding the
in-house media operations of S&S and Bates Worldwide. Following the Demerger,
CCG and Saatchi & Saatchi each retained a 50 percent shareholding in Zenith,
which is accounted for as a joint venture.
From the late 1980s to the end of 1995, Cordiant's history was
characterized by a period of financial and management instability which had an
adverse effect on Cordiant's businesses. During the late 1980s, poor trading
conditions in the advertising industry, coupled with the requirement to service
debt incurred to fund a number of acquisitions, contributed to a serious decline
in Cordiant's financial position. By 1990, Cordiant's accounts showed that
financial liabilities had reached almost L700 million. As a result, during the
early 1990s, Cordiant embarked on a series of refinancings and disposals,
culminating in a rights issue in November 1995. This series of actions
substantially eliminated Cordiant's net financial liabilities and restored its
financial stability.
The rights issue in 1995 enabled Cordiant to be in a better position
to focus on revenue growth and margin improvement. As part of this process,
Cordiant decided in April 1997 to propose to Cordiant Shareholders the demerger
of Cordiant into two autonomous advertising and marketing communications groups.
As a result of the Demerger, the CCG Group comprised of the advertising business
of Bates Worldwide and Scholz & Friends, together with HP:ICM, a 30 percent
shareholding in The Facilities Group and a 50 percent shareholding in Zenith
Media Worldwide.
In 1997, 141 Worldwide was established as a separately branded network
within Bates Worldwide, specializing in sales promotion, direct marketing,
interactive media and associated activities. Since the Demerger, 141 Worldwide
has expanded rapidly and now operates in 40 offices in 31 countries.
The Group's principal corporate offices are located at 121-141
Westbourne Terrace, London W2 6JR, England, telephone number
011-44-171-262-4343. Information about the Group can be found on the CCG
website, www.ccgww.com.
Strategic Objectives
The Group has three key strategic objectives designed to position its
business for profitable growth. By the end of year 2000, CCG aims to: grow
revenues from multinational clients (where CCG represents the client in five or
more countries) to 40% of CCG's business; grow the share of revenues
attributable to the Group's North American operations to 30% of Group revenues;
and grow the revenues from diversified marketing services to 30% of total
revenues.
Multinational Business
CCG possesses a truly global advertising network. Bates Worldwide,
with 156 offices in over 70 countries, has both the global reach and local
creative expertise to provide the Group's clients with the competitive advantage
Bates' "Think Global. Act Local."(R) philosophy asserts. While the proportion of
revenues coming from multinational clients increased to 33 percent in 1998 from
30 percent in 1997, CCG's revenue contribution from multinational clients
remains below that of its major competitors. The Company seeks to exploit
opportunities to build existing local client relationships into profitable
regional and global partnerships. This has been, in the Company's experience, an
important source of new multinational business in 1998, and an avenue we intend
to exploit further in 1999.
North America
In 1998, revenue attributable to the Group's North American operations
represented 24 percent of total revenues, up from 22 percent in 1997. North
America has been the Group's best performing region in terms of improved
profitability in 1998, with strong organic growth being bolstered by the
acquisition of diversified services businesses.
Taking the industry as a whole, North America accounted for
approximately 40 percent(1) of worldwide advertising expenditure in 1998, with
an even greater proportion of global spending being controlled from the region.
With approximately 24 percent of the Group's revenues coming from North America,
CCG is currently under-represented in this important market. CCG intends to
further build its operations in the region to 30 percent of Group revenues by a
combination of organic growth and value-enhancing acquisitions.
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(1) Source: Zenith Media Worldwide, Advertising Expenditure Forecasts, January
1999.
Diversified Marketing Services
Although, according to industry sources, approximately 45 percent of
worldwide advertising expenditure in 1998 was directed towards major media
advertising, the Group believes that an increasing proportion is spent on other
marketing disciplines such as direct marketing, sales promotion, consulting and
research, public relations and other specialist communications. The rapidly
increasing cost of traditional media, combined with clients' increasing desire
for integrated marketing solutions, suggests that diversified services will grow
more rapidly than traditional media advertising over the next five years. CCG
has sought to capitalize on these market developments by developing 141
Worldwide into a highly effective global network offering common methodologies
in sales promotion, direct marketing, events marketing, interactive media,
merchandising and sponsorship across the globe. 141 Worldwide increased its
representation to 40 offices in 31 countries in 1998. The Group intends to open
a further 10 offices in 1999, servicing multinational clients across Continental
Europe, Asia Pacific and Latin America. In 1998, diversified marketing services
represented 22 percent of Group revenues, an increase of 2 percent over 1997,
towards our target of 30 percent by 2000.
CORPORATE DEVELOPMENTS
The Demerger
On April 21, 1997, the Board of Directors of Cordiant announced its
decision to recommend to its shareholders that they approve a spinoff or
demerger of Saatchi & Saatchi from Cordiant (the "Demerger") with the remaining
businesses renamed CCG. The Demerger was motivated by the desire to allow each
of CCG and Saatchi & Saatchi to stand on its own and to allow the primary
advertising agencies of the CCG Group and the Saatchi & Saatchi Group, namely
Bates Worldwide and S&S, to respond more quickly to client needs and
opportunities. The Demerger took effect on December 15, 1997 and, from the
effective date of the Demerger (the "Effective Date"), CCG and Saatchi & Saatchi
have operated as separate public companies and neither CCG nor Saatchi & Saatchi
beneficially owns any shares of the other. As a result of the Demerger, CCG and
Saatchi & Saatchi each own a 50 percent shareholding in Zenith.
Relationship Between CCG and Saatchi & Saatchi Following the Demerger
As a result of the Demerger, the Company and Saatchi & Saatchi are
separate publicly traded companies and operate independently of each other.
Neither company has any interest in the shares of the other. However, the
Company and certain companies within the CCG Group entered into certain
agreements and arrangements with the Saatchi & Saatchi Group and Zenith in order
to enable the Demerger to be carried out, allocate responsibility for certain
obligations, provide for certain transitional arrangements and otherwise define
their relationship following the Demerger. The terms of these agreements and
arrangements are principally governed by the Demerger Agreement, dated September
30, 1997, between Cordiant, Saatchi & Saatchi, Holdings and Zenith (the
"Demerger Agreement"), and certain agreements required to be entered into
pursuant to the Demerger Agreement. The principal terms of these agreements and
arrangements are described below.
Property Guarantees
The following outstanding guarantees by CCG companies of obligations
of certain companies in the Saatchi & Saatchi Group were not released in
connection with the Demerger: (i) the Saatchi & Saatchi Group's lease of
premises at 375 Hudson Street, New York, for a term expiring on January 31,
2013, at a current annual base rent of $17.9 million subject to periodic rent
reviews; and (ii) the Saatchi & Saatchi Group's lease of premises at 21 Dukes
Road, London, for a term expiring on October 31, 2016 with a tenant's right to
break on October 31, 2006 with a current annual base rent is L255,882, subject
to periodic rent reviews. In the Demerger Agreement, Saatchi & Saatchi agreed to
give additional, or in some cases substitute, guarantees and to indemnify CCG
against any liability in its preexisting guarantees.
Bank Facilities
In connection with the Demerger, the management of Cordiant allocated
the consolidated indebtedness of Cordiant between CCG, the Saatchi & Saatchi
Group and Zenith. Under an Agreement dated September 30, 1997 between Cordiant,
various other members of the CCG Group, The Bank of New York and Midland Bank
Plc as Arrangers and certain banks and financial institutions (the "Bank
Facility Agreement"), the CCG Group established new banking arrangements. The
banking arrangements are described in greater detail in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In addition, Zenith entered into an agreement (the "Zenith Facility
Agreement") providing a L21.5 million secured reducing multi-currency revolving
credit facility (the "Zenith Facility"). The Company and Saatchi & Saatchi
provided unlimited guarantees to the lenders in respect of the Zenith Facility
and agreed between themselves that any liability under such guarantees is to be
shared equally.
At December 31, 1998 the amount outstanding under the Zenith Facility
was L20.5 million. These facilities amortize by L2 million in each of 1999 and
2000 and L4 million in 2001, with the balance due in 2002. In addition, the
Zenith Facility will be reduced by an amount equal to 75 percent of the net
proceeds received (subject to a de minimus of $1.5 million per annum) on or
following a sale by Zenith of any subsidiary (or a material part of the business
of any subsidiary).
The Zenith Facility Agreement requires Zenith to comply with various
financial covenants relating to gross interest cover, maximum gross debt and
gross capital expenditure. It also contains provisions whereby under certain
specified events of default, amounts made available could be declared
immediately due and payable. In addition to customary events of default, these
events include defaults by certain companies in the Zenith Group in respect of
indebtedness over specified limits or in circumstances where there has been a
change of control of Zenith.
Ownership and Operation of Zenith Media Worldwide
Zenith Shareholders' Agreement
The Company, Saatchi & Saatchi, Saatchi & Saatchi Holdings Limited
("Holdings") and Zenith, with effect from the Effective Date, entered into a
shareholders' agreement (the "Zenith Shareholders' Agreement") to regulate the
relationship between the Company and Holdings as shareholders of Zenith. Saatchi
& Saatchi is a party to the Zenith Shareholders' Agreement in order to guarantee
the obligations of Holdings.
The Zenith Shareholders' Agreement makes provision for the operation
of Zenith including: the composition of executive and non-executive management;
matters that require consent of both shareholders before they can be undertaken
by Zenith (alteration of capital structure, annual business plan and contracts
out of the ordinary course of its business or not at arm's length terms); the
transfer of shares of Zenith; resolution of disputes both between shareholders
and Zenith and clients of the shareholders and Zenith.
Seventy-five percent of the distributable profits of Zenith will be
distributed to shareholders and divided between them in part by reference to the
proportions in which Zenith receives revenue from clients of each shareholder.
The remainder may be retained by Zenith.
The Zenith Shareholders' Agreement prohibits the transfer of shares in
Zenith, except in certain limited circumstances. It also contains options
whereby one shareholder is entitled to acquire all of the Zenith shares of the
other shareholder in the event that: (i) the other shareholder becomes
insolvent; (ii) the other shareholder experiences a change of control and
following which there is a material breach of any of the terms of the media
services agreement (described below) to which that shareholder is a party which
either is not capable of remedy or is not remedied within a certain period; or
(iii) the other shareholder terminates the media services agreement to which it
is a party.
The Zenith Shareholders' Agreement will remain in force until (i)
either shareholder acquires all of the shares in Zenith held by the other, (ii)
an order is made or resolution is passed for the winding up of Zenith or (iii) a
third party acquires all of the shares of Zenith.
Both CCG and Saatchi & Saatchi have guaranteed the new Zenith bank
facilities described above.
Zenith Media Services Agreements
Pursuant to the Demerger Agreement, at the time the Zenith
Shareholders' Agreement was entered into, each of the Group and Saatchi &
Saatchi entered into a media services agreement with Zenith. Under the terms of
these agreements the shareholders each appointed Zenith as the exclusive
supplier of media buying, media planning and certain related services for all of
the clients, subject to certain exceptions, of each shareholder. The media
services agreements also set out the duties of Zenith in respect of each country
in which Zenith operates.
Each of the media services agreements will terminate on December 31,
2000 or on any subsequent anniversary of that date provided either party has
given to the other not less than 12 months' written notice of such termination.
Ownership and Operation of The Facilities Group
The Company, Saatchi & Saatchi, Saatchi & Saatchi (Central Services)
Limited ("SSCSL") and The Facilities Group Limited ("The Facilities Group"),
with effect from the Effective Date, entered into a shareholders' agreement
("The Facilities Group Agreement") in order to regulate the relationship between
the Company and SSCSL as shareholders of The Facilities Group. Saatchi & Saatchi
is a party to that agreement in order to guarantee the obligations of SSCSL. The
Company holds 30 percent of the outstanding shares of The Facilities Group and
Saatchi & Saatchi holds 70 percent. The Facilities Group Agreement makes
provision for the operation of The Facilities Group, including the composition
of executive management and the transfer of shares.
The distributable profits of The Facilities Group will be divided
between shareholders in the proportions in which The Facilities Group receives
revenue from clients of each shareholder. Revenue of The Facilities Group not
attributable to clients of either shareholder will be divided in proportion to
the shareholdings. It also contains options whereby one shareholder is entitled
to acquire all of the shares in The Facilities Group of the shareholder in the
event that: (i) the other shareholder becomes insolvent; or (ii) the other
shareholder suffers a change in control.
The Facilities Group Agreement will remain in force until (i) either
shareholder acquires all of the shares in The Facilities Group held by the
other, (ii) an order is made or resolution is passed for the winding up of The
Facilities Group or (iii) a third party acquires all of the shares of The
Facilities Group.
Employee Benefits Plans
CCG employees are members of a number of pension schemes throughout
the world, but principally in the UK and the US. CCG currently operates two
principal UK pension schemes: a defined benefits scheme (the Cordiant Group
Pension Scheme) and a defined contribution scheme (the Cordiant Group Money
Purchase Pension Plan). Since the Demerger, CCG employees have remained members
of these schemes.
Employees of the Saatchi & Saatchi Group and Zenith have continued
their membership in both schemes during the year pursuant to Inland Revenue
approval. The Company and Saatchi & Saatchi have agreed that, at the end of a
transitional period, Saatchi & Saatchi's members within the two UK pension
schemes will be given the opportunity to transfer to new pension arrangements
being set up by Saatchi & Saatchi. A transfer payment determined by the trustee
of the two UK pension schemes, having taken actuarial advice, will be made to
the new Saatchi & Saatchi pension arrangements in respect of the accrued rights
under the relevant UK pension scheme of those members who request a transfer.
The same provisions apply to employees of Zenith who are members of CCG's UK
pension schemes.
The arrangements with respect to options under the CCG Share Schemes
are described in "Options to Purchase Securities From Registrant or
Subsidiaries."
Other Provisions of the Demerger Agreement
Network Affiliates
Prior to the Demerger, there were over 40 affiliated agencies of S&S
around the world in which the Saatchi & Saatchi Group held only a minority
interest or no equity interest. Prior to the Demerger, the relationship with
these affiliates was in most cases governed by a "network membership agreement"
between the affiliate and Cordiant, on behalf of S&S. Under these agreements,
the affiliate was given the sole license to use the "Saatchi & Saatchi" name in
relation to advertising services in a specified territory and received certain
services and referrals of clients from S&S, in return for paying to Cordiant
fees based on income earned by the affiliate. In most cases, these agreements
provided for termination by either party on 3 months' notice.
Pursuant to the Demerger Agreement, CCG and the Saatchi & Saatchi
Group endeavored to obtain the agreement of the S&S affiliates to the novation
of their network membership agreements, so that Saatchi & Saatchi succeeded to
all of the rights and obligations of Cordiant under these agreements with effect
from completion of the Demerger. To the extent that such agreement was not
obtained prior to the Effective Date, CCG continues to hold these agreements for
the benefit of the Saatchi & Saatchi Group pending novation or termination and
the Saatchi & Saatchi Group is responsible for ensuring that all obligations of
CCG thereunder are performed. Similar arrangements exist in relation to
agreements with Zenith affiliates.
Disputes
The Demerger Agreement sets out agreed procedures to be followed by
the Company, Saatchi & Saatchi and Zenith in seeking to resolve any dispute that
may arise between any of them under or in connection with the Demerger
Agreement, other than disputes arising under the Zenith Shareholders' Agreement.
ORGANIZATION AND SERVICES
The Group's operations consist of advertising and other creative
marketing services including direct marketing, media services, sales promotion,
production services, interactive media and market research. In 1998, the Group's
largest five clients accounted for 19.6 percent of revenues. The two largest
clients accounted for 5.7 percent and 5.3 percent, respectively, of total
revenues. The Group's principal activities are organized as follows:
Organization Activities
Bates Worldwide Advertising and integrated communications
Scholz & Friends Advertising and integrated communications
The Campaign Palace Advertising and integrated communications
141 Worldwide Diversified marketing services
The Decision Shop Strategic marketing and research
HP:ICM Live communications
Zenith Media Worldwide(1) Media services
The Facilities Group(2) Production services
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(1) Owned 50 percent by the Company, 50 percent by Saatchi & Saatchi
(2) Owned 30 percent by the Company, 70 percent by Saatchi & Saatchi
During 1998, advertising services accounted for 78 percent of CCG's
ongoing revenues and other diversified marketing services accounted for 22
percent.
Advertising and Integrated Communications
The Group's advertising agencies are principally involved in the
creation of advertising and marketing programs for products, services, brands,
companies and organizations. These programs involve various media such as
television, magazines, newspapers, cinema, radio, outdoor, electronic and
interactive media, as well as techniques such as direct marketing, sales
promotion and design. The creation of advertising and marketing materials
includes the writing, designing and development of concepts. When the concepts
have been approved by the client, the agency supervises the production of
materials necessary to implement that program. These include film, video, print
and electronic materials, which are produced externally.
The agencies often perform a strategic planning function which
involves analysis of the particular product, service, brand, company or
organization against its competitors and the market.
The Group's agencies also evaluate the choice of media to reach the
desired market most efficiently. In the case of global and regional campaigns,
the Group's networks, Bates Worldwide and Scholz & Friends, plan and coordinate
the implementation of their program through their networks of national agencies.
The Group's agencies are involved in buying media space and time for
their clients. This is executed by Zenith, by the agencies' in-house teams or
sourced from external suppliers.
Bates Worldwide
Bates Worldwide is a global advertising and integrated communications
network. With 156 owned or affiliated offices located in over 70 countries, the
network is characterized by a strong local presence and an entrepreneurial
management style. In 1998, Bates Worldwide (including 141 Worldwide, The
Campaign Palace and The Decision Shop) accounted for 86 percent of CCG's
revenues.
Bates Worldwide's creative approach is derived from each product's
Unique Selling Proposition ("U.S.P.(TM)"), in the belief that the foundation for
effective communication is a strong selling proposition. Bates Worldwide, the
U.S.P. agency, adheres to the operating philosophy of "Think Global, Act
Local"(R), which reflects both the networks' global reach and its creative
expertise at a local level.
Organizational Developments
Expanding out from its advertising base, Bates Worldwide is
energetically building its total integrated service capacity. Most notably, in
1997 141 Worldwide was established as a separately branded network with special
expertise in sales promotion, direct marketing, interactive media, and
associated activities. Strategic acquisitions were also made in 1998 to
strengthen Bates Worldwide's diversified services capabilities. In North
America, Churchill Public Relations, a business to business PR, advertising and
research company, and The Criterion Group, a travel and tourism specialist, were
acquired.
As part of CCG's commitment to provide an enhanced service to its
international clients, a number of acquisitions were made in Latin America. In
Argentina, Bates Worldwide purchased Fernando Fernandez and merged it with
Verdino Bates. It also acquired an equity interest in Newcomm Bates in Brazil.
During 1998, a regional new business team was established in Miami to develop
pan regional Latin American business.
In addition, a number of small "in-fill" acquisitions were made,
primarily in Continental Europe, either to support the development of 141
Worldwide or to strengthen existing operations.
Clients
Bates Worldwide has a broad client base. In 1998, Bates Worldwide's 10
largest clients accounted for 24 percent of CCG's revenues in 1998.
A representative selection of Bates Worldwide's current major clients
is set forth in the table below:
Client Years a Client
------ --------------
Allied Domecq 1
B.A.T. Industries 31
Estee Lauder 31
Fort James 4
HSBC 19
Hyundai 14
Kingfisher 17
Nokia 5
Ralston Purina 18
Roche Nicholas 22
Safeway Stores plc 13
SEAT International 1
Warner-Lambert 40
Wendy's International 12
Bates Worldwide enjoyed strong new business performance in 1998, both
from new clients (including SEAT and Allied Domecq) and existing clients
(including Warner-Lambert and B.A.T.). This new business performance coincided
with the formation of a dedicated global new business team. This team's twofold
task is to pursue new global clients and to actively encourage the expansion of
local client business into regional and global partnerships.
Reputation and awards
During 1998 Bates Worldwide agencies around the network won
recognition at a number of international and creative awards competitions. Bates
Norway and Delvico Bates won awards at Cannes and at the Clio Awards. In Asia,
regional client Nokia won the "Advertiser of the Year" award, while Bates Hong
Kong won several awards at the Hong Kong AAAA's awards, including the Grand
Prize for Best of Show. Bates Midwest won recognition at the regional Midwestern
Addy's, while Bates Southwest won the prestigious American Research Federation's
David Ogilvy award, and Bates Canada took numerous awards, including one at the
International Advertising Festival in Montreux for its Dentyne Ice TV
advertising.
The Campaign Palace
The Campaign Palace is a full-service advertising agency operating in
Australia and New Zealand as a separately branded creative agency within Bates
Worldwide.
In 1998, Australia's marketing magazine, `B&T Weekly' chose The
Campaign Palace as Agency of the Year, which added to a number of international
creative awards from prestigious festivals such as Cannes, the Clio Awards and
the Australian Television Awards. During 1998, the Campaign Palace had a number
of new business wins, including Cable & Wireless, Gatorade, DHL and department
store, Georges.
Part of The Campaign Palace is The Media Palace, a media planning and
strategy consultancy. The Media Palace has a core philosophy that media should
be a lead discipline in advertising developments and should drive the
communications process. New clients in 1998 included Pepsico, Lion Nathan,
Whitehall Laboratories and Paramount Foods. The Media Palace was successful at
the 1998 Australian Advertising Media Awards, winning four of the silver
categories including Best Use of Outdoor, Best Use of Radio, Best Use of
Magazine and Best Use of Multimedia. In 1999, The Media Palace operation is
planned to extend to New Zealand.
Scholz & Friends
Scholz & Friends is the largest German-based multinational network(2)
with 13 offices operating across Europe. Scholz & Friends provides clients with
a wide range of marketing services including advertising, sales promotion,
public relations, direct marketing, design, consulting and interactive media.
CCG currently owns 90 percent of Scholz & Friends. During 1998, the network
accounted for approximately 12 percent of CCG's revenue.
- ------------
(2) Source: Advertising Age, Agency Report April 1999.
With its headquarters in Germany, Scholz & Friends' most significant
clients include major German companies such as Deutsche Bank, Deutsche Telekom,
Frankfurter Allgemeine Zeitung, Lufthansa, Mercedes, Schwarkopf/Henkel and
Tchibo.
In 1998, Scholz & Friends won new business from new and existing
clients including Yellow Pages, RWE Energie, CNBC, Bastos, Berliner Sparkasse
and Deutsche Telekom. Its only significant loss in 1998 was BMW.
Scholz & Friends further consolidated its integrated marketing
services capabilities to clients in 1998, acquiring Market Lab AG, a corporate
consulting firm, and Scholz & Friends NeuMarkt, an agency specializing in mail
order and sales.
In 1995, Scholz & Friends moved from operating independently within
the Bates Worldwide network to operating as an independent network. The Scholz &
Friends network has expanded to include 13 offices in 11 European countries,
with the Asia Pacific region served by a central office in Singapore. In the
Middle East, the Balkan region and the Baltic countries, Scholz & Friends
operates affiliate relationships with partner agencies. The expansion of Scholz
& Friends was further developed in 1998 with the opening of a new office in
London and Moscow.
Scholz & Friends has developed a "family" system by dividing the
agency into independent agency units. Each unit or "family" operates
autonomously within the agency, headed by a managing director and creative
director. This concept has been extended across the Scholz & Friends network,
providing clients with a coordinated response from experienced local management.
Scholz & Friends' creative abilities have been recognized by over 150
awards in competitions such as Cannes, the Clio Awards, Epica, Effie, the Moscow
and New York Festivals and ADC. In 1998, its campaign on behalf of the
Frankfurter Allgemeine Zeitung became the first ever to be voted "Best Campaign
of the Year" on three different occasions.
Diversified Marketing Services
CCG has been developing a number of its diversified marketing services
as separately branded operations. These businesses have potential for
high-margin revenue growth and the Company expects them to enhance the network's
ability to generate global client accounts. The services provided are set out
below.
141 Worldwide
141 Worldwide is a global network specializing in diversified
marketing services, offering expertise in a wide range of activities including
sales promotion, direct marketing, event marketing, merchandising, sponsorship,
design and interactive media. Launched in 1997 as a separately branded network
within Bates Worldwide, 141 Worldwide has grown rapidly and now comprises 40
offices in 31 countries.
The network has over 250 clients worldwide, with over 50 percent of
revenues coming from multinational clients. Major clients include 3M, British
American Tobacco, Coca-Cola, Heineken, Roche, Warner Lambert and Nokia. New
business was gained in 1998 from both new and existing clients, including Heinz,
Coca-Cola, Philips, HSBC and Moet et Chandon. New assignments in 1999 include
the design of the Lucky Strike and 555 liveries for British American Racing's
Formula 1 team.
141 Worldwide has developed internet marketing expertise in four
regional centers: New York, London, Sydney and Singapore. Work includes the
design, creation and maintenance of websites and the development of marketing
opportunities on the Internet for clients' products. Internet-related revenues
accounted for 5 percent of 141 Worldwide's business in 1998.
141 Worldwide's international network operates to standard practices
and a unified philosophy utilizing two operating systems: the 141 Management
system is used by the network to guide clients from strategic development
through to the execution of creative work; the 141 Creative Project Flow is a
methodology used to help clients understand better the creative process used by
the network. There is also a central 141 Networking office in London to transfer
knowledge of the latest research and legislation across the network.
The development of 141 Worldwide is key to CCG's strategic objective
that 30 percent of total Group revenues be derived from diversified marketing
services by the year 2000. The Company expects continued development of the 141
Worldwide brand from both organic growth and strategic acquisitions.
Strategic Marketing and Research
The Decision Shop
The Decision Shop is a strategic marketing and research business
within Bates Worldwide specializing in brand positioning research, consultancy
and econometric modeling. The Decision Shop provides analytical skills that
assist multinational clients to reposition their key brands for future growth.
The Decision Shop's work has included the global repositioning project
for Smirnoff Vodka, which followed work for other IDV brands such as Baileys
Irish Cream, J&B Whisky and Metaxa. The Decision Shop has also conducted the
European repositioning of the Electrolux white goods range and the launch of
Nicorette and Zovirax in the pharmaceutical fields, alongside similar work for
clients such as B&Q, Mars, Bang & Olufsen, Tchibo Coffee, Esso, Diners Club,
Miller beer, 3M Scotchgard and Hyundai. In all, The Decision Shop has conducted
over 100 brand positioning studies around the world using its proprietary Brand
Essence Programme technology.
In 1998, the company launched the N-Vision positioning program, an
integrated solution in brand positioning. This followed the introduction of
Brand Health, a program to assess the value to brands of alternative marketing
and communications strategies. Brand Health, which is both evaluative and
diagnostic, is of increasing relevance in the increasingly accountable world of
marketing communication. A major project was completed for Shell in this area
during the year.
Live Communications
HP:ICM
HP:ICM is a leading specialist communications agency providing
creative and production consultancy in the areas of live events, exhibitions,
film, video, multimedia and brand experience. The agency provides a full service
to its clients, from strategic and creative development through to design,
production and implementation. HP:ICM provides a complete service to clients to
successfully operate live events, embracing all key supports such as delegate
management, film and video production, graphic design, print and interactive
media. The company's end products take many forms, such as displays at visitor
centers, exhibition stands, conferences, internal corporate television networks,
trans-continental roadshows, multi-media training programs and corporate videos.
The agency is based in London although approximately half of its revenues are
generated outside the UK.
During 1998, HP:ICM earned creative recognition at awards ceremonies
including the ITMA Gold Award for Delegate Management and the Marketing Event
Gold Award for Best Product launch. In 1998, Televisual Magazine named HP:ICM as
the UK's number one Live Communications agency for the fourth consecutive year.
Major assignments in 1998 included the Global Dealer launch of the new
Opel/Vauxhall Astra for General Motors, the second Asia-Europe summit meeting in
London, and the British Pavilion at Expo '98 in Lisbon. The company has also
staged dealer launches for General Motors' Frontera, Zafira and Vectra models
throughout Europe, and designed two zones within the much publicized Millennium
Dome in London.
Production Services
The Facilities Group
Based in central London, The Facilities Group provides a broad range
of technical and creative services to clients in the areas of design, print,
production, artwork, audio visual, multimedia and television production. The
Facilities Group was created to offer clients a quicker, more efficient service
by maximizing the potential of new technology in the management of advertising
production processes. The Facilities Group is jointly owned by the Company and
Saatchi & Saatchi, with the Company holding a 30 percent stake.
In addition to providing for the majority of press, television, design
and new media production requirements of it shareholders, The Facilities Group
has continued to expand its list of external clients.
New business wins from external clients during 1998 included an 18
month assignment to produce brochures for Toyota Europe and a two year
assignment from Woolworth's to produce home shopping and corporate brochures.
Other wins included retail advertising and production projects for Staples, the
production of annual reports for Premier Oil and Signet plc, property brochures
for the Millennium Dome/Greenwich Peninsula project and assignments from
Cosmopolitan magazine.
Media Services
Zenith Media Worldwide
Zenith Media Worldwide is a specialist media agency, providing media
planning, buying, evaluation and consultancy services to its clients. Zenith is
headquartered in London and has 51 offices or affiliated agencies in 28
countries across the world.
Zenith provides its services to clients of Bates Worldwide and S&S. In
addition, in 1998 approximately 60 percent of its revenues were generated from
Zenith's list of direct clients.
Zenith has invested in recruiting, training and retaining talent and
in providing these people with sophisticated proprietary media systems under the
brand name Zenith Optimization of Media, ZOOM(TM). This includes the upgrading
and the standardization of hardware and software platforms across its network,
the development of Intranet Communications with clients and the launch of global
and national optimization systems and research such as ZOOM Wizard, ZOOM Merlin,
ZOOM Mediamaps and ZOOM Director.
CCG and Saatchi & Saatchi each have a 50 percent shareholding in
Zenith, and both companies account for Zenith as a joint venture. In addition,
both CCG and Saatchi & Saatchi entered into an agreement in which they agree to
use Zenith as their exclusive media services supplier, subject to certain
exceptions, until at least December 31, 2000. Each media services agreement will
introduce revised commercial terms for the purchase of media services from
Zenith. See "Description of Business--Ownership and Operation of Zenith Media
Worldwide."
PERSONNEL
As of June 1, 1999, CCG employed approximately 5,100 people worldwide.
The success of CCG's advertising and media services businesses, like that of all
other advertising agencies, depends largely on the skill and creativity of their
personnel and their relationships with clients. CCG believes that its
relationship with its employees is good.
ACQUISITIONS & DISPOSALS
Acquisitions
During 1998, CCG made the following acquisitions:
In the US, The Criterion Group, Inc., a company specializing in
marketing for the travel and tourism industry, was acquired and renamed Bates
Travel and Tourism, Inc. Churchill Group, Inc., a public relations company, and
Churchill Advertising, Inc., a business to business advertising company, were
acquired and renamed Bates Churchill Group, Inc. and Bates Churchill Advertising
Group, Inc., respectively.
In Australia, a 24.9 percent holding in The Communications Group Pty
Ltd. (the holding company for the Company's Australian businesses), was
acquired, giving the Group 100 percent control.
In Argentina, the Group's 10 percent investment in Verdino Bates SA
was increased, at the same time acquiring and merging with it Fernando Fernandez
SA, to give a 63 percent holding in the merged entity which was renamed Verdino
Bates Fernando Fernandez SA. Also, in December 1998, the Group acquired a 32
percent equity interest in Newcomm Bates SA in Brazil; the effect of this
acquisition will be reflected in the Group's 1999 financial results.
In Europe, small acquisitions were made of a 50.8 percent interest in
EMC Starke & Gerlach GmbH, the holding company of 141 Germany Promotion and
Communication GmbH, 51 percent of Kontoret As Reklamebyra in Norway, and the
business of Not Just Film BV in the Netherlands which was merged into Bates
Nederland BV, renamed Bates Not Just Film BV.
During 1997, Cordiant made the following acquisitions: a 51 percent
interest in Grapple Group 141 (Pty) Ltd., a South African company; a further 25
percent interest in X/M Harrow Pty Limited, an Australian company, raising its
holding to 75 percent; and Scholz & Friends GmbH acquired a further 33 percent
interest in Scholz & Friends Dresden GmbH, in Germany, increasing the Group's
effective holding of Scholz & Friends Dresden to 76.5 percent.
During 1996 the minority 47.4 percent of the share capital of Saatchi
& Saatchi Advertising SA in France was acquired by Cordiant. The acquisition was
completed in September 1996, but for accounting purposes the minority was
treated as having been acquired on January 1, 1996.
In May 1996, Cordiant acquired a further 10.7 percent interest in the
share capital of Scholz & Friends GmbH in Germany, increasing its holding to 90
percent. During the second half of 1996, Cordiant made the following
acquisitions: 51 percent in each of two South African agencies, BLGK Advertising
(Proprietary) Limited and Saatchi & Saatchi Klerk & Barrett Holdings
(Proprietary) Limited; the minority interest in BSB Saatchi & Saatchi MC Limited
in Poland; and a 50 percent stake in X/M Harrow Pty Limited.
Disposals
During 1998, CCG divested itself of a controlling interest in Bates
Japan Ltd to retain a 31 percent share of the company now operating as a joint
venture and renamed Saatchi & Saatchi Bates Yomiko KKK. Neither a profit nor a
loss arose from this restructuring.
In October 1997, Cordiant completed the sale of NRG. See Note 2 in the
Notes to Consolidated Financial Statements.
In September 1995, the Kobs & Draft Worldwide network ("KDW") was sold
to its management by Cordiant. In 1996 KDW was sold by its management to The
Interpublic Group of Companies. This transaction resulted in the receipt of
contingent consideration by Cordiant, as specified in the 1995 sale agreement
between Cordiant and KDW Management. As a result, Cordiant recognized further
gains in 1996 and 1997.
GEOGRAPHIC COVERAGE
CCG serves clients in all of the world's major advertising markets.
Geographic analysis of CCG ongoing revenue in 1998
Percentage of
worldwide major media
Percentage of advertising
CCG revenue expenditure(1)
(%) (%)
- --------------------------------------------------------------------------
UK 13.2 4.1
The Americas 24.3 48.3
Continental Europe 35.9 26.0
Asia Pacific 26.6 21.6
Total 100.0 100.0
(1) Source: Zenith Media Worldwide, Advertising Expenditure Forecasts, January
1999.
CCG's global reach is reflected in its geographical revenue mix.
North America was CCG's best performing region in 1998, in terms of
improved profitability. Taking the industry as a whole, North America accounts
for approximately 40 percent of worldwide advertising expenditure. With only 24%
of its revenues coming from North America, CCG is currently underrepresented in
this important market. The Group intends to further build its operations in this
region, with an initial target of 30 percent of Group revenues set for the year
2000.
Continental Europe represents approximately 36 percent of Group
revenues, reflecting CCG's principal businesses, Bates Europe and Scholz &
Friends.
Asia Pacific represents approximately 27 percent of Group revenues,
with Australasia alone representing approximately 17 percent of Group revenues.
The worst affected economies of South East Asia represent less than 2 percent of
Group revenues.
COMPETITION
The advertising industry is highly competitive at both an
international and local level. CCG's principal competitors in the advertising
industry are the large multi-national agencies based in the US, the UK and
France as well as smaller agencies which operate in local markets. The principal
competitive factors include an agency's reputation, its creative strength and
quality of client service, its ability to perceive clients' needs accurately,
the commercial effectiveness of its ideas, its geographic coverage and
diversity, its understanding of advertising media and its media buying power. In
addition, an agency's ability to maintain its existing clients and develop new
relationships depends to a significant degree on factors such as the
interpersonal skills of the individuals managing client accounts. Normal
practice in the industry is for agency contracts to have a three month
termination period.
The Company believes that the Group is well positioned to compete in
the advertising industry. From a client perspective, Bates Worldwide's
reputation is enhanced by being the original U.S.P.(TM) agency. The Company also
believes that the combination of the Group's local presence and its worldwide
network provides it with one of the strongest operating formats to implement
advertising strategies on a worldwide basis. Furthermore, the process of clients
consolidating their business in the advertising market will continue to offer
opportunities for Bates Worldwide to win new business.
REGULATION
Governments, government agencies and industry self-regulatory bodies
in the various countries in which the Group operates continue to adopt
legislation and regulations which directly or indirectly affect the form,
content and scheduling of advertising and other communications services, or
otherwise affect the activities of such businesses and their clients. Certain of
the legislation and regulations relate to considerations such as truthfulness,
substantiation, interpretation of claims made and comparative advertising. In
addition, there is a tendency toward restrictions or prohibitions relating to
advertising for such products as pharmaceuticals, tobacco and alcohol.
Item 2. Description of Property.
CCG leases all its premises. The principal properties leased by CCG
are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------ --------------------- ------------------ ----------------
Location Area Annual Base Next Rent Expiration
Sq. Ft. Rental-Millions Review Date of Lease
- ---------------------------------------------- ------------ --------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
498 Seventh Avenue 204,000 $6.0 2004 2014
New York, New York
121-141 Westbourne Terrace 62,500 L1.5 -- 2003
London, England
- ---------------------------------------------- ------------ --------------------- ------------------ ----------------
</TABLE>
In addition, in respect to Landsdowne House, Berkeley Square London,
England CCG leases 103,000 square feet at an annual rental of L6.5 million which
is sublet for mainly coterminous periods as CCG at an average annualized rental
of approximately L6.1 million during 1998. A further 72,000 square feet at an
annual rental of L3.1 million is sublet on a short-term basis at an average
annualized rental of approximately L1.9 million during 1998.
At December 31, 1998, CCG's owned and leased properties and fixtures
(including furniture and equipment) had a net book value of L11.9 million ($19.8
million).
CCG considers its offices and other facilities to be in good
condition. However, it has surplus office space based on the needs of its
current business. At December 31, 1998, L33.2 million ($55.1 million) had been
reserved by the Group for potential costs of surplus space, primarily in London
and New York City.
Item 3. Legal Proceedings.
CCG has no material pending legal proceedings.
Item 4. Control of Registrant.
The Company is not owned or controlled by any government or by any
other corporation.
The following table lists, as of June 1, 1999, the total number of
Ordinary Shares owned by the Directors and officers of the Company as a group.
Identity of
Title of Class Person or Group Amount Owned Percent of Class
Ordinary Shares Directors and officers of 183,218 0.1%
the Company as a group
The Directors have also been notified of the following non-beneficial
holdings of ten percent or more of the issued Ordinary Share capital of the
Company as of June 1, 1999:
Identity of
Title of Class Person or Group Amount Owned Percent of Class
Ordinary Shares Phillips & Drew Fund 46,378,279 20.4%
Management
Item 5. Nature of Trading Markets.
The Company's Ordinary Shares are quoted on the London Stock Exchange
Limited (the "London Stock Exchange"). The table below sets forth, for the
quarters indicated, the reported high and low middle market quotations for the
Ordinary Shares on the London Stock Exchange based on its Daily Official List.
Such quotations have been translated in each case into US dollars at the Noon
Buying Rate on each of the respective dates of such quotations.
Pence Per Translated into
Ordinary Share US Dollars
High Low High Low
1997 First Quarter.............. 123.5 98.5 2.01 1.60
Second Quarter............. 135.5 120.0 2.22 1.97
Third Quarter.............. 135.0 118.0 2.27 1.90
Fourth Quarter............. 134.5 100.0 2.20 1.67
1998 First Quarter.............. 123.5 88.5 2.07 1.46
Second Quarter............. 135.5 115.5 2.26 1.93
Third Quarter.............. 133.5 101.5 2.20 1.67
Fourth Quarter.............. 112.5 95.0 1.86 1.62
1999 First Quarter.............. 167.0 107.5 2.72 1.78
Second Quarter.............
(through June 23, 1999) 192.0 155.5 3.11 2.49
The Ordinary Shares trade in the US on the New York Stock Exchange,
Inc. in the form of American Depositary Shares ("ADSs") which are evidenced by
American Depositary Receipts ("ADRs"). Each ADS represents five Ordinary Shares.
The depositary for the ADSs is The Bank of New York (the "Depositary"). The
table below sets forth the high and low sales prices for the ADSs as reported in
the New York Stock Exchange-Composite Transactions. The Company believes that,
as of June 1, 1999, 14.27 percent of the outstanding Ordinary Shares, which are
represented by ADSs, were held in the US by 647 record holders and 0.16 percent
of the Ordinary Shares were held in the US by approximately 45 record holders.
CCG estimates that, as of June 1, 1999, an additional 11.28 percent of the
Ordinary Shares are owned beneficially by US persons giving an aggregate US
holding of 25.7 percent.
US dollars per
ADS
High Low
1997
First Quarter ........................................ 6 4 5/8
Second Quarter ....................................... 6 7/8 5 5/8
Third Quarter......................................... 6 11/16 5 1/2
Fourth Quarter........................................ 9 1/2 5 3/8
1998
First Quarter........................................ 10 11/16 7
Second Quarter....................................... 12 1/4 9 1/2
Third Quarter........................................ 11.13/16 8.1/2
Fourth Quarter....................................... 10 3/8 8 1/4
1999
First Quarter........................................ 13 5/8 9 1/4
Second Quarter........................................15 1/2 12 7/16
(through June 23, 1999)
Item 6. Exchange Controls and Other
Limitations Affecting Security Holders.
There are no limitations on the rights of nonresident or foreign
persons to hold or vote with Ordinary Shares imposed by the laws of the UK or by
the Company's Articles other than those which are customary and generally
applicable to all shareholders. In particular, Article 151 of the Company's
Articles provides that a member who has no registered address within the UK and
has not notified the Company in writing of an address within the UK for the
service of notice, shall not be entitled to receive notice from the Company.
Item 7. Taxation.
The following is a summary of certain UK tax consequences generally
applicable to a beneficial owner of American Depository Receipts ("ADRs") or
Ordinary Shares in the Company who is resident in the United States and not
resident in the United Kingdom (a "US Holder") for the purposes of the current
double taxation convention on income and capital gains between the United States
and the United Kingdom (the "Convention").
Subject to the following paragraph, this summary is based on current
UK tax law and practice as of the date of this filing and is subject to any
changes in UK tax law and practice (including changes in the Convention)
occurring after that date. As the following discussion is only a general
summary, it does not purport to address all potential tax consequences for all
types of investors and, consequently, its applicability will depend upon the
particular circumstances of individual investors. Investors should, therefore,
consult their own tax advisers about their UK tax position in relation to the
Company including the particular tax consequences to them of owning and
disposing of ADRs or Ordinary Shares.
The discussion of UK tax is based on current UK tax law as potentially
amended by the Finance Bill 1999. The Chancellor of the Exchequer's Budget was
delivered on March 9, 1999, containing proposals for enactment in the Finance
Act 1999.
United Kingdom Taxation of Dividends and Refunds of Tax Credits
For the purposes of the Convention and for the purposes of the United
States Internal Revenue Code of 1986, as amended (the "Code"), the holders of
the ADRs should be treated as the owners of the underlying Ordinary Shares
represented by the American Depositary Shares ("ADSs") that are evidenced by
such ADRs.
The payment by the Company of a dividend in respect of the Ordinary
Shares generally gives rise to a tax credit in the hands of shareholders who are
UK resident individuals. As from April 6, 1999, the rate of the tax credit is
10% of the sum of the cash dividend and the tax credit.
Under the Convention, certain US Holders who receive a dividend from a
UK company are entitled in certain circumstances to claim from the Inland
Revenue payment of the tax credit or part of the tax credit (a "Tax Credit
Refund") to which a UK resident individual would be entitled, subject to a
withholding tax. However, as from April 6, 1999, as a result of a reduction in
the rate of tax credit to 10%, the withholding tax will eliminate or virtually
eliminate the Tax Credit Refund. In view of this, the availability of Tax Credit
Refunds under the Convention is not discussed any further in this summary. US
Holders should consult their own tax advisers as to the availability or
otherwise of Tax Credit Refunds as from April 6, 1999.
The Convention further provides, subject to various exceptions and
limitations set our therein, that, although dividends paid by a UK resident
company may be taxed in the UK, if the beneficial owner of such a dividend is a
US Holder, the tax so charged is not to exceed the tax withheld from the Tax
Credit Refund.
United Kingdom Taxation of Capital Gains
Holders of ADRs or Ordinary Shares who are US citizens or residents of
the United States for US federal income tax purposes, and who are not resident
nor ordinarily resident in the United Kingdom for UK income tax purposes, will
not normally be liable to UK taxation of capital gains arising on the disposal
or deemed disposal of their ADRs or Ordinary Shares, unless the ADRs or Ordinary
Shares are held in connection with a trade, profession or vocation carried on in
the UK through a branch or agency or, in certain circumstances, their non-UK
residence is only temporary. However, US citizens and residents holding ADRs or
Ordinary Shares may be liable for taxation of such gains under the laws of the
United States.
United Kingdom Inheritance and Gift Tax
UK Inheritance Tax ("IHT") is a tax charged, broadly, on the value of
an individual's estate at his death, upon certain transfers of value (e.g.,
gifts) made by individuals during their lifetime and on certain transfers of
value involving trusts and closely held companies. A transfer of value made
during an individual's lifetime may lead to an immediate liability to IHT (e.g.,
a transfer into discretionary trust), or it may be potentially exempt (e.g., an
outright gift to another individual), in which case it will only become
chargeable if the donor dies within 7 years. The transfer of value which is
deemed to occur on death is an immediately chargeable transfer of value. Special
rules apply to assets held in trusts, gifts out of which the donor reserves a
benefit and gifts to or from closely held companies, which are not discussed
herein.
Many chargeable transfers of value do not in fact result in a charge
to tax because IHT is charged at a "zero-rate" on transfers of value up to
L223,000 (for chargeable transfers made on or after April 6, 1998). The March
1999 Budget has proposed that this should be increased to L231,000 as from April
6, 1999. In simple terms, the value of all immediately chargeable transfers made
within the seven year period before the transfer under consideration are
aggregated with the value of that transfer in determining whether the limit of
the L223,000 (or L231,000) "zero-rate band" has been reached. For transfers of
value which (in accordance with the aggregation principle) go beyond the limit
of the zero rate band, the rates of tax are 20% on lifetime chargeable transfers
and 40% on transfers on, or within the period of three years before, death (with
modified rules applying to transfers within the period from seven to three years
before death).
IHT is chargeable upon the worldwide assets of individuals who are
domiciled or deemed to be domiciled in the United Kingdom, and upon the UK
situate assets of individuals domiciled elsewhere.
Accordingly, an individual who is domiciled in the United States and
is not deemed to be domiciled in the United Kingdom for IHT purposes is only
within the scope of IHT to the extent of his UK situate assets. These will
include Ordinary Shares in the Company which are registered in the United
Kingdom. It is understood to be the Inland Revenue's normal practice to treat
ADRs representing shares in UK companies as assets situated in the United
Kingdom for IHT purposes.
The rules outlined above will, in many cases, be modified by the US-UK
Convention on Inheritance and Gift Taxes. In general, an individual who is
domiciled in the US for the purposes of that convention and who is not a UK
national will not be subject to IHT in relation to Ordinary Shares in a UK
company or ADRs representing Ordinary Shares in a UK company on death or on a
lifetime gift, provided that any gift or estate tax due in the USA is paid and
that the Ordinary Shares or ADRs are not part of the business property of a
permanent establishment in the UK or part of the assets of a fixed UK base used
by the holder for the performance of services.
In the exceptional case where the Ordinary Shares or ADRs are subject
both to IHT and to US federal gift or estate tax, the gift tax convention
provides a credits system designed to avoid double taxation.
United Kingdom Stamp Duty and Stamp Duty Reserve Tax
Transfers of Ordinary Shares for a consideration
UK stamp duty is payable ad valorem on certain documents or
instruments conveying or transferring shares or securities (including Ordinary
Shares in the Company) on sale and UK stamp duty reserve tax ("SDRT") is imposed
on agreements for the transfer of certain shares and securities (including
Ordinary Shares in the Company) for a consideration in money or money's worth.
In the case of stamp duty, the charge is normally at the rate of L0.50 per L100
(or part of L100) of the amount or value of the consideration given for the
transfer and, in the case of SDRT, 0.5 percent of such amount or value. The
March 1999 Budget proposes to change the rate of stamp duty to 0.5 percent with
rounding up to a multiple of L5. Stamp duty and SDRT are generally payable by
the purchaser but SDRT can in certain circumstances be collected from persons
other than the purchaser (e.g., certain brokers and market makers). The charge
to SDRT is normally incurred on the day ("the relevant day") on which the
agreement is made or, if later, becomes unconditional and it normally becomes
payable on the seventh day of the month following that in which it is incurred.
However, if the SDRT is paid and at any time on or within six years after the
relevant day the agreement is completed by a duly stamped transfer, a claim can
be made within that six year period for repayment of the SDRT and, to the extent
that it has not been paid, the charge will be canceled.
Consequently, transfers of, or agreements to transfer, Ordinary Shares
in the Company will normally be subject to ad valorem stamp duty or SDRT.
The electronic transfer system known as CREST permits shares to be
held in uncertificated form and to be transferred without a written instrument.
The absence of a written instrument of transfer results in such paperless
transfers generally being liable to SDRT rather than stamp duty. Special rules
apply to the collection of SDRT on paperless transfers settled within CREST.
Transfers of Ordinary Shares into ADS form
UK stamp duty or SDRT will normally be payable on any transfer of
Ordinary Shares to the Depositary or its nominee, or where the Depositary issues
an ADR in respect of Ordinary Shares hitherto held for another purpose by it or
its nominee. The charge is at the rate of L1.50 per L100 (or part of
L100) or, in the case of SDRT, 1.5 percent:
(i) in the case of a transfer of Ordinary Shares for consideration, of the
amount or value of the consideration for the transfer, and
(ii) in the case of a transfer of Ordinary Shares other than for consideration
and in the case of the issue of an ADR in respect of Ordinary Shares
hitherto held for another purpose, of the value of the Ordinary Shares.
Transfers of Ordinary Shares within the depositary arrangements
No UK stamp duty will be payable on an instrument transferring an ADR
or on a written agreement to transfer an ADR, provided that the instrument of
transfer or the agreement to transfer is executed and remains at all times
outside the UK. Where these conditions are not met, the transfer of, or
agreement to transfer, an ADR could, depending on the circumstances, give rise
to a charge to ad valorem stamp duty.
No SDRT will be payable in respect of an agreement to transfer an ADR
(whether made in or outside the UK).
Transfers of Ordinary Shares out of ADS form
Where no sale is involved, a transfer of Ordinary Shares by the
Depositary or its nominee to the holder of an ADR upon cancellation of the ADR
is not subject to any ad valorem stamp duty or SDRT, though it will generally be
subject to a fixed UK stamp duty of 50p per instrument of transfer. The March
1999 Budget has proposed that this should be increased to L5. By contrast, a
transfer of, or agreement to transfer, Ordinary Shares underlying an ADR by the
Depositary or its nominee at the direction of the ADR seller directly to a
purchaser for a consideration may give rise to a liability to ad valorem stamp
duty or SDRT generally by reference to the amount of value of the consideration
for the transfer.
Gifts of Ordinary Shares
A transfer of Ordinary Shares for no consideration whatsoever is not
chargeable to ad valorem stamp duty or SDRT, nor would it normally give rise to
the fixed stamp duty of 50p L5) per instrument of transfer.
Item 8. Selected Financial Data.(3)
The selected financial data set forth below is derived from the
Consolidated Financial Statements of the Company and should be read in
conjunction with, and is qualified in its entirety by reference to, such
Consolidated Financial Statements, including the notes thereto. The Company's
Consolidated Financial Statements as of December 31, 1998 and 1997 and for each
of the years in the three year period ended December 31, 1998, which have been
audited by KPMG Audit Plc, are included elsewhere herein.
In respect to 1997, significant changes were made to the Company's
capital structure as a result of the Demerger. The selected financial data set
forth below reflects the capital structure in place prior to the Demerger, which
was appropriate historically to Cordiant and the capital position, finance
charges and tax liabilities included in such data do not reflect the Group's
capital position, finance charges and tax liabilities in respect of any of the
periods covered had the Group effected the Demerger prior to such period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
- --------------------
(3) The Consolidated Financial Statements of the Company are prepared in
accordance with UK Generally Accepted Accounting Principles ("UK GAAP")
which differ in certain significant respects from US Generally Accepted
Accounting Principles ("US GAAP"). Reconciliation to US GAAP is set forth
in Note 37 in the Notes to Consolidated Financial Statements. The per share
data have been translated into dollars per ADS where appropriate.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1998 1997 1996 1995 1994
US$(1) L L L L L
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
DATA:(2)
Amounts in Accordance with UK GAAP
Commission and fee income
Continuing operations $501.0 L301.8 L736.1 L754.9 L761.1 L775.4
Discontinued operations
Total $501.0 L301.8 L736.1 L754.9 L761.1 L775.4
Profit (loss) before tax, and
minority interests(3) $43.0 L25.9 L34.6 L41.8 L(22.6) L32.4
Net profit (loss) $24.9 L15.0 L15.1 L24.2 L(37.3) L13.9
Net profit (loss) per Cordiant
Ordinary Share basic(4) $0.11 6.7p 3.4p 5.5p (12.8)p 4.9p
Approximate Amounts in Accordance
with US GAAP
Profit (loss) from continuing $7.9 L4.8 L6.8 L6.9 L(46.8) L(11.5)
operations
Profit from discontinued operations
Net profit (loss) $7.9 L4.8 L6.8 L6.9 L(46.8) L(11.5)
Net profit (loss) per Ordinary
Share:(2)
Continuing operations $0.04 2.2p 3.1p 3.1p (32.0)p (8.2)p
Discontinued operations
Net profit (loss) per $0.04 2.2p 3.1p 3.1p (32.0)p (8.2)p
Ordinary Share(2)
Net profit (loss) per ADS:(2)
Continuing operations $0.20 11.0p 15.5p 15.5p (160.0)p (40.6)p
Discontinued operations
Net profit (loss) per ADS(2) $0.20 11.0p 15.5p 15.5p (160.0)p (40.6)p
Dividends including tax credit
Per Ordinary Share $0.06 3.5p 3.0p 2.6p - -
Per ADS $0.29 17.5p 15.0p 13.0p - -
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1998 1997 1996 1995 1994
US$(1) L L L L L
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:(2)
Amounts in Accordance with UK GAAP
Commission and fee income
Continuing operations $501.0 L301.8 L736.1 L754.9 L761.1 L775.4
Discontinued operations -
------ ------ ------ ------ ------ ------
Total $501.0 L301.8 L736.1 L754.9 L761.1 L775.4
Profit (loss) before tax, and
minority interests(3) $43.0 L25.9 L34.6 L41.8 L(22.6) L32.4
Net profit (loss) $24.9 L15.0 L15.1 L24.2 L(37.3) L13.9
Net profit (loss) per Cordiant
Ordinary Share basic(4) $0.11 6.7p 3.4p 5.5p (12.8)p 4.9p
Approximate Amounts in Accordance with
US GAAP
Profit (loss) from continuing $7.9 L4.8 L6.8 L6.9 L(46.8) L(11.5)
operations
Profit from discontinued operations - - - - - -
------ ------ ------ ------ ------ ------
Net profit (loss) $7.9 L4.8 L6.8 L6.9 L(46.8) L(11.5)
Net profit (loss) per Ordinary
Share:(2)
Continuing operations $0.04 2.2p 3.1p 3.1p (32.0)p (8.2)p
Discontinued operations
Net profit (loss) per Ordinary $0.04 2.2p 3.1p 3.1p (32.0)p (8.2)p
Share(2)
Net profit (loss) per ADS:(2)
Continuing operations $0.20 11.0p 15.5p 15.5p (160.0)p (40.6)p
Discontinued operations - - - - - -
Net profit (loss) per ADS(2) $0.20 11.0p 15.5p 15.5p (160.0)p (40.6)p
Dividends including tax credit
Per Ordinary Share $0.06 3.5p 3.0p 2.6p - -
Per ADS $0.29 17.5p 15.0p 13.0p - -
December 31,
1998 1998 1997 1996 1995 1994
US$(1) L L L L L
---------------------------------------------------------------------
(In millions)
CONSOLIDATED BALANCE SHEET DATA:
Amounts in Accordance with UK GAAP
Working capital asset (deficiency) 19.6 11.8 2.8 (59.8) (25.3) (32.4)
Total assets 641.9 386.7 377.8 912.4 992.9 972.7
Long term liabilities, including 239.9 144.5 132.0 290.1 343.8 474.7
minority interests
Shareholder's deficiency (118.7) (71.5) (85.7) (215.3) (224.9) (355.5)
Approximate Amounts in Accordance
with US GAAP
Shareholder's funds (deficiency) 17.4 10.6 3.8 (0.4) (19.0) (99.4)
</TABLE>
- ------------
(1) These figures have been translated into US Dollars at the Noon Buying Rate
on December 31, 1998 (L1.00-$1.66).
(2) Per share and per ADS amounts have been adjusted to reflect the share
consolidation in connection with the Demerger.
(3) The profit (loss) before taxes and minority interests reflects: (a)
exceptional costs of Lnil, L2.2 million, L16.5 million, L20.3 million and
Lnil that were incurred in 1998, 1997, 1996, 1995 and 1994, respectively;
(b) a profit on disposal of operations of L20.8 million and L17.8 million
in 1997 and 1996 respectively; (c) costs relating to the fundamental
reorganization of the Group as a result of the Demerger of L33.0 million in
1997 (details of (b) and (c) are set out in Note 2 and 6 in the Notes to
Consolidated Financial Statements); and (d) a loss on disposal of
operations of L34.3 million in 1995. (4) Earnings per CCG Ordinary Share on
a fully diluted basis have not been disclosed as they are not materially
different.
DIVIDENDS
Dividends recommended by the Company's Board in respect of a
particular fiscal year are paid in the following fiscal year if approved by the
Company's shareholders. The Company has paid and proposed the following
dividends on the Ordinary Shares in respect of the years indicated:
Year Dividend per Ordinary Share Total Dividend Amount
(in pence) (L million)
1994 -- --
1995 -- --
1996 2.0 4.4
1997 1.2 2.7
1998(1) 1.4 3.1
- ------------
(1) If approved by the Company's shareholders, such dividend will be paid in
July 1999.
Under UK company law, the ability to pay a dividend is dependent on
whether the Company has distributable reserves. At December 31, 1998 the Company
had distributable reserves of L30.8 million.
The Directors make dividend determinations taking into account the CCG
Group's results of operations, investment requirements, cash flow after
repayment of debt and legal and contractual restrictions, if any. Consideration
is given to the declaration of foreign income dividends, if appropriate.
EXCHANGE RATES
Fluctuations in the exchange rate between the pound sterling and the
US dollar will affect the dollar equivalent of the pound sterling prices of the
Ordinary Shares on the London Stock Exchange and as a result, are likely to
affect the market price of the ADSs in the US. Such fluctuations will also
affect the dollar amounts received by holders of ADSs on conversion by the
Depositary of cash dividends paid in pounds sterling on the Ordinary Shares
represented by the ADSs.
The following table sets forth, for the periods indicated, the
average, high, low and period end Noon Buying Rates for pounds sterling
expressed in US dollars per L1.
Average* High Low Period End
1994........................... 1.54 1.64 1.46 1.57
1995........................... 1.58 1.64 1.53 1.55
1996........................... 1.57 1.71 1.49 1.71
1997........................... 1.64 1.70 1.58 1.64
1998........................... 1.66 1.72 1.61 1.66
- ------------
* The average of the exchange rates on the last day of each month during the
period.
The Noon Buying Rate for pounds sterling on June 18, 1999 was L1.00 = $1.59.
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
GENERAL
The information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" concerning the results of operations and
the financial condition of CCG refers to the Consolidated Financial Statements
included in this Form 20-F which are prepared in accordance with UK GAAP. UK
GAAP differs in certain significant respects from US GAAP. The Consolidated
Financial Statements contain a reconciliation of net profit (loss) and
shareholders' deficit to US GAAP. A discussion of the principal differences is
set out in Note 37 in the Notes to Consolidated Financial Statements.
CCG's ongoing revenue is generated from commissions and fees paid by
clients. In each of the last three years, between 35 and 55 percent of ongoing
revenue was commission based and varied with the level of media and production
expenditure. The remainder was derived from fees which were project or time
based, as agreed with the client. With certain clients, an additional element of
remuneration can be earned by meeting certain performance criteria set by the
client. Bates Worldwide and Scholz & Friends generally have ongoing
relationships with their clients which last a number of years. In contrast, the
majority of revenue from clients of HP:ICM is based on project specific
assignments, although there is often a relationship with the same client over
many years.
Revenue in any year is dependent primarily on the level of expenditure
by clients on existing assignments and to a lesser degree on business gains and
losses. When business is won or lost there is usually a delay of some months
before revenue is affected. This is primarily because it is usual in the
advertising industry for contracts to have a three month termination clause. In
the case of new commission based work the delay is longer as the agency is not
paid until the advertisement has appeared in the media. Additionally, the
revenues actually earned from new business wins may vary significantly from
revenues anticipated at the outset of any new business win because the level of
expenditure that a client ultimately determines is most appropriate can vary
significantly from the budgeted amounts.
The majority of CCG's net operating costs are staff related and over
the past three years the Group's staff cost to revenue ratio (including
temporary staff and freelancers) equated to approximately 60 percent. When
revenue growth is slow or declining in any particular operating unit, CCG is
able over time to reduce headcount, although this can result in severance costs.
Conversely, staffing can be increased to handle sustained periods of increased
business activity. The remainder of net operating costs relate to leased
properties, depreciation and other administrative costs.
The profitability of new business varies depending on the terms of
remuneration negotiated and on the nature of the assignment. In particular,
profitability depends on whether revenue is generated by increased spending on
existing assignments, new or existing clients or product categories and on the
number of offices involved in the assignment.
CCG has offices or affiliated agencies in over 70 countries and its
revenues and costs are denominated in a number of currencies. Consequently,
exchange rate movements between pounds sterling and several other currencies
have an impact on the operating result. CCG's costs are generally denominated in
the same currency as the associated revenue, thereby mitigating the impact of
exchange rate movements on operating profit. At the net profit level, the impact
of exchange rate movements is also affected by the currency in which debt is
denominated and the countries in which CCG's tax charges arise.
For the purpose of this section, references to "underlying"
performance refers to ongoing businesses and excludes the effect of exchange
rate movements.
As part of the Demerger, CCG entered into a new trading relationship
with Zenith, the commercial terms of which differ from the historical terms.
These new trading arrangements introduced revised commercial terms for the
purchase of media services from Zenith. See "Description of Business --
Corporate Developments."
Prospective changes to UK GAAP for the year ended December 31, 1999
and their anticipated impact are as follows:
(i) Financial Reporting Standard ("FRS") 12 (Provisions,
Contingent Liabilities and Contingent Assets) will be adopted by the
Group in the 1999 interim accounts. The only anticipated material
impact will be that the Group's property provisions will be discounted
to the present value of future net lease obligations. The recognition
of this discount in subsequent years will be included as a finance item
within net interest payable and similar items.
(ii) FRS 13 (Derivatives and other Financial Instruments)
requires the disclosure of certain information relating to financial
instruments and will be adopted in our 1999 full year accounts. FRS 13
has been introduced to allow users of financial statements to judge the
impact of financial instruments on the Group's risk profile, and
evaluate how such risks are managed.
(iii) FRS 15 (Tangible Fixed Assets) codifies existing
practice relating to the capitalization of costs as well as appropriate
depreciation and revaluation policies. The Group's existing accounting
policies are consistent with FRS 15.
INDUSTRY BACKGROUND(4)
Zenith estimates that the outlook is for advertising expenditures in
major media (television, print, radio, cinema and outdoor) is one of stable
growth to 2000.
Zenith estimates that worldwide major media advertising expenditure
grew by 3.9 percent in 1998. Looking forward, Zenith forecasts nominal growth of
4.2 percent in 1999 accelerating to 5.3 percent in 2000 and 5.8 percent in 2001.
- ------------
(4) Expenditure information in this section is based solely on estimates
published by Zenith Media Worldwide Ltd. (a wholly-owned subsidiary of
Zenith) in its Advertising Expenditure Forecasts, January 1999. YEAR 2000
COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process information because such
equipment recognizes a year only by the last two digits is commonly referred to
as the "Year 2000 issue." As the year 2000 approaches, such systems may be
unable to accurately process certain date-based information.
The Group has been conducting a wide-ranging Year 2000 compliance
program since mid-1997. CCG's Year 2000 compliance effort is coordinated
centrally by a project team and is focused on seeking 100 percent compliance for
business critical systems from a total of 84 business units of the Group,
including 44 majority owned units, 37 affiliates and 3 minority owned units. The
role of the central project team is to provide guidance and monitor progress.
Assessment, review and remediation plans are developed and implemented locally.
The Group's Year 2000 compliance program has six key stages with
respect to internal IT systems: inventory, impact assessment, compliance review,
corrective action, testing and implementation. CCG is focused on five categories
of internal IT systems: (i) desktop hardware, (ii) desktop software, (iii)
network operations systems (i.e., base operating software), (iv) business
critical applications (i.e., software products that directly affect the Group's
ability to serve its clients) and (v) communications devices. As at June 1,
1999, of the 84 units, 70 percent have reported full compliance in the areas
listed above. Of the 10 largest units (which together account for approximately
80 percent of the Group's revenues), six have reported 100 percent compliance;
the remaining four units expect to achieve 100 percent compliance no later than
October 1999 (and, in most cases, earlier).
With respect to internal non-IT systems (primarily systems in offices
and buildings), CCG is taking steps to certify Year 2000 compliance between
March and June 1999. The Group's major reporting units intend to finalize their
compliance certificates and report their findings to CCG by the end of June
1999. The Group will then ensure that any potential risks identified will be
closely monitored to ensure that any potential disruption to the operations is
minimized. In addition, the risk of an internal Year 2000 failure in Bates North
America, the Group's largest office, has been minimized by its move in March
1999 into new offices which have been certified to be Year 2000 compliant.
The Group intends to solicit Year 2000 compliance information from its
banks to ensure minimal risk of failure from a treasury perspective. The Group
has also solicited written confirmation of Year 2000 compliance from its
software suppliers and certain other key suppliers such as those supplying power
and media. Because the Group must rely on the information provided to it by
third parties and cannot verify the accuracy of such information, there remains
a risk that third parties will experience Year 2000 failures.
Year 2000 compliance is being achieved by a mixture of corrective
actions and the replacing and enhancing of existing systems. In many cases,
systems are being replaced within the normal capital replacement cycle. The
incremental cost to the Group of achieving Year 2000 compliance is estimated to
be L1.3 million, of which L0.7 million will be charged to the profit and loss
account as incurred and L0.6 million of systems enhancement will be capitalized.
These costs, as with all estimates, are subject to change as the project is
implemented.(5) All funds used in achieving Year 2000 compliance are expected to
come from the Group's working capital facilities.
- ----------------------
(5) Costs charged to the profit and loss account in 1998 are L100,000.
The Group's Year 2000 project is based upon a plan to have all of its
business critical systems compliant well before the end of 1999. Based upon the
work carried out so far, the group believes that once corrective action, testing
and implementation is complete, internal IT systems will not give rise to
significant operational problems as a result of the Year 2000 issue.
The Group believes that a reasonable worst case Year 2000 scenario
would involve (i) the failure of the systems of third parties such as utility
companies, resulting in a temporary equipment shutdown at the Group's operating
locations and (ii) the failure of the systems of major clients of the Group,
resulting in the temporary inability of the Group to collect payments from such
parties. In addition, the general effect of Year 2000 compliance failures in the
economy could adversely affect the Group. The amount of potential losses
resulting from the worst case scenario cannot be reasonably estimated at this
time. The project team expects to develop a contingency plan by December 1999 to
be followed in the event of a Year 2000 failure.
There can be no assurance that Year 2000 remediation by the Group or
third parties will be properly and timely completed, and failure to do so could
have a material adverse effect on the financial condition and results of
operations of the Group. The actual effect of the Year 2000 issue on the Group
depends on uncertainties, including, but not limited to, the following: (i)
uncertainties relating to the ability of the Group to identify and address Year
2000 issues successfully and in a timely manner and at costs that are reasonably
in line with the Group's estimates; and (ii) the ability of the Group's vendors,
suppliers, other service providers and customers to identify and address
successfully their Year 2000 compliance issues.
CONVERSION TO THE EURO
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 will be between January 1, 1999 and June 30, 2002. The
Group has significant operations within the European Union. A project team
considered the implications of the introduction of the Euro during 1998. The
areas covered by the team included client service, computer systems, accounting
and reporting, financing and treasury, legal, human resources and training. The
Group has not encountered any significant problems in preparing for the
introduction of the Euro. The Company believes that the use of the Euro will not
have a significant impact on the manner in which it conducts its business and
processes its business and accounting records.
LIQUIDITY AND CAPITAL RESOURCES
General
At the time of the Demerger, the capitalization and financing of the
Group changed. Prior to the Demerger, operations of CCG were run separately from
the parts of Cordiant that were demerged or sold. However, CCG's ongoing
operations were neither capitalized nor financed as an independent group. In
connection with the Demerger, the Group adopted a new capital structure that was
put in place on December 14, 1997.
The Group's primary liquidity sources are cash flow generated from
operations, the issuance of equity and its banking facilities.
The capital structure post-Demerger consists of senior debt and
equity. At December 31, 1998 the Group's senior debt consisted of a bank
facility (the "Facility") of $108.8 million and a bank guarantee facility of
$3.1 million. The Facility provides, among other things, committed revolving
credit facilities at a rate going forward between 0.75-1.5 per cent over LIBOR,
depending on results. The Facility reduced to $108.8 million in December 1998
and will continue to reduce at six-monthly intervals with a final maturity in
September 2002. The Bank Facility Agreement requires the Group to comply with
certain financial and other covenants relating to gross interest cover, total
cash cover and maximum gross debt. It also contains provisions whereby, on the
happening of certain specified events of default, the amount made available
could be declared immediately due and payable. These events of default include
breach of the above covenants and cross default by certain companies in the CCG
Group in respect of indebtedness over a specified amount or any change of
control of the Company. The Facility is secured by guarantees from certain
members of the CCG Group (or, where guarantees are not possible, share charges
over such companies) such that at all times, the aggregate of the revenues of
those companies that have given guarantees (or whose shares have been charged)
will equal at least 60 percent of the CCG Group's consolidated revenues. Fixed
and floating charges over the assets of the Company and certain of its UK
subsidiaries and share pledges over the shares owned by members of the CCG Group
in various subsidiaries have also been given.
On December 31, 1998, CCG had drawings of $60 million, compared with
drawings of $42 million on December 31, 1997. The primary reason for the higher
drawings were the payment of costs relating to the Demerger.
The undrawn element of CCG's facilities is required in part for CCG's
cyclical working capital needs and in part to allow CCG to finance any
contingency. Cyclical needs arise each month as a result of country specific
media payment cycles and from seasonal variations in advertising activity during
the year which affect CCG's cash position.
The Group has significant cash balances in its international
operations. These balances are required primarily to finance the working capital
cycles of the individual country operations and, in certain cases, to provide
the required level of working capital for media accreditation to allow the
agencies to buy media on behalf of their clients. While cash is often required
for local funding purposes, the Group has a policy of repatriating all available
cash to the center to maximize core liquidity.
Cash Flows from Operating Activities
Cash generated from operating activities in 1998 was L19.8 million
compared with L61.7 million in 1997, a reduction of L41.9 million. A total of
L56.1 million of the cash generated in 1997 was attributable to demerged
companies and the ongoing companies increased their operating cash flow by L14.2
million in 1998 over 1997. Of this increase, L3.8 million is derived from
increased operating profits, although the 1997 operating profit included a
non-cash exceptional expense of L2.2 million. There was a marginal reduction in
the payments in respect of unutilized property, which had been provided for in
prior years, for ongoing operations from L7.3 to L7.0 million. The payments in
respect of unutilized property in general represent the difference between the
payments being made by CCG relating to excess space and the income CCG receives
from subletting that space. The majority of the excess space arises from the
restructuring of the former Cordiant businesses in the early 1990s. The balance
of the L14.2 million increase is derived from improved working capital
management although there was still a working capital outflow of L8.8 million in
the year.
In 1997 a static level of operating profit of L24.1 million was offset
by a deterioration in cash flow from working capital of L2.3 million. Payments
in respect of unutilized property which had been provided for in previous years
were L19.2 million for Cordiant compared with L16.9 million in 1996. There was
an increased payment in 1997 because a premium was paid to terminate a lease
early.
Net Cash Outflows Arising from External Demerger Costs
In 1998, L8.2 million of external demerger costs incurred and accrued
in the previous year were paid. Payments in 1997 were L13.8 million, of which
L13.6 million were paid by the ongoing businesses. These payments were made
primarily to external advisers of the Group.
Cash Outflows from Returns on Investments and Servicing of Finance
In 1998, cash outflows from net interest expense and dividends to
minorities were L4.9 million compared to L12.3 million in 1997, L4.0 million of
which related to the ongoing companies. Net interest paid by the ongoing
companies increased from L2.2 million to L2.4 million and dividends to
minorities increased from L1.9 million to L2.5 million. Following the
acquisition of the minority interest in Australia, dividends to minorities are
expected to be lower in 1999.
In 1997, consolidated cash outflows were L12.3 which showed an
increase of L2.2 million over the previous year largely due to higher bank fees
paid under the 1995 facilities agreement.
Taxation
Tax payments in 1998 were L8.3 million compared with L15.1 million in
1997. The 1997 payment included L9.8 million for ongoing companies and L5.3
million for demerged companies, showing a reduction in payments for ongoing
companies in 1998 of L1.5 million.
In 1997, tax payments were lower than the tax charges in the statement
of operations due to nonrecurring recoveries relating to prior years.
Provisions for tax exist in respect of prior years. Payments of these
amounts may increase tax payments in future years to a greater amount than in
the statement of operations.
Cash Flows from Investing Activities
In 1998, payments for the acquisition of tangible fixed assets, net of
receipts from disposals amounted to L7.5 million compared with L23.2 million in
1997, of which L10.1 million related to ongoing companies.
In 1997, the L23.2 million net payments for acquisition of tangible
fixed assets reflected a slight decrease from L24.0 million in 1996.
In 1998, there was a cash inflow of L0.1 million from the acquisition
and disposal of miscellaneous other investments compared with a net inflow of
L0.7 million in 1997
Payments for the acquisition of investments in subsidiary and
associated undertakings in 1998, net of cash in companies acquired was L7.0
million compared with L8.7 million in 1997, of which only L0.8 million was
incurred by ongoing companies. Additional acquisition costs were met by the
issue of shares with a market value of L3.4 million and costs of L5.8 million
were accrued. Additional costs of L4.6 million relating to deferred
consideration for prior year acquisitions were also accrued during the year.
These accruals will result in cash payments in future years. See Note 2 to the
Consolidated Financial Statements.
There were no proceeds from the sale of subsidiaries during 1998 but a
subsidiary was reclassified as an investment in a joint venture following a
share restructuring resulting in an outflow in respect of net cash balances of
L0.4 million in its balance sheet. In 1997 net proceeds from disposals amounted
to L40.5 million due to the disposal of NRG and the sale of shares issued to
Cordiant when its interest in KDW was sold in 1996. Of this, L23.3 million for
the sale of NRG, was received by ongoing companies.
Equity Dividends Paid
In 1998, a dividend to equity shareholders of L2.7 million was paid
compared with the pre-Demerger dividend of L4.4 million paid in 1997 by
Cordiant.
Cash Flows from Financing Activities
In 1998, shares were issued for cash of L0.5 million (1997 - L0.1
million) following the exercise of employee share options. The net draw down of
Group borrowing facilities was L8.6 million (1997 - L17.3 million) and
repayments of finance lease borrowings was L0.2 million (1997 - L0.3 million).
In 1997, the L17.3 million net draw down of loans consisted of loans
drawn of L115.7 million and repayments of L98.4 million representing the new
financing arrangements put in place as part of the demerger.
RESULTS OF OPERATIONS(6)
As CCG has offices or affiliated agencies in over 70 countries, its
revenues and costs are denominated in a number of currencies. Consequently,
exchange rate movements between pounds sterling and several other currencies,
the most important being the US dollar and Australian dollar, have an impact on
the results of the Group. The Group's costs are generally denominated in the
same currency as the associated revenues, however, mitigating the impact of
exchange rate movements on operating profit.
During 1998, the Company has adopted the new standards on accounting
for goodwill, namely FRS 10 (Goodwill and Intangible Assets) and FRS 11
(Impairment of Fixed Assets and Goodwill). The impact of these standards is that
goodwill for acquisitions on or after January 1, 1998 has been capitalized on
the balance sheet as an intangible fixed asset. The Company believes that these
assets have an indefinite economic life, therefore, goodwill related to
acquisitions to date has not been amortized, but is subject to annual review for
impairment. Any subsequent acquisitions will be assessed on an individual basis
to determine the appropriate treatment of any related goodwill.
The Company has also adopted FRS 14 (Earnings per Share). The impact
of this standard is to change the method of calculating diluted earnings per
share. As in previous years, the Group also provides headline earnings per share
which excludes exceptional items. The basis of calculations of all earnings per
share figures is described in Note 10 to the Consolidated Financial Statements.
- ------------
(6) See Note 37 in the Notes to Consolidated Financial Statements for a summary
of differences between UK GAAP and US GAAP.
<PAGE>
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
To facilitate a more meaningful comparison, the 1998 trading results
are compared to the results of ongoing businesses in 1997.
Revenue
Revenue decreased by 2 percent to L301.8 million in 1998 from L308.2
million in 1997. On an underlying basis, revenue increased by 5 percent.
In the UK revenues increased by 2 percent to L39.8 million which
represents 13 percent of Group revenues (1997:13 percent). Lost revenue from
client losses in 1997 were more than replaced by a mixture of client wins and
expansion of existing client relationships.
In the Americas revenues increased by 9 percent and on an underlying
basis by 10 percent. The region represents 24 percent of the Group's revenues
(1997:22 percent). Approximately half of this increase is the result of
acquisitions of diversified services businesses in North America and an
acquisition in Argentina. The effect of these acquisitions will not be fully
reflected until 1999.
In Continental Europe revenues increased by 3 percent and by 7 percent
on an underlying basis. This region (which includes revenues derived from Africa
and the Middle East) represents 36 percent of the Group's revenues (1997:34
percent). In Bates Europe revenues increased by 5 percent on an underlying basis
primarily reflecting new business wins which impacted the second half of the
year. Scholz & Friends continued to perform well with underlying revenue growth
of 15 percent reflecting a strong performance in the Berlin office and expansion
and development of the international network.
Asia Pacific revenues fell by 17 percent and by 2 percent on an
underlying basis primarily due to economic conditions in South East Asia. In
1998 this region accounted for 27 percent of the Group's revenues (1997:31
percent). Australasian (Australia and New Zealand) revenues (approximately 63
percent of Asia Pacific revenues) were unchanged on an underlying basis.
Greater China (China, Hong Kong and Taiwan) reported revenue growth of
4 percent on an underlying basis. The worst affected South East Asian economies
represent 8 percent of Asia Pacific revenues and 2 percent of Group revenues. In
response to South East Asia's contraction in revenue the Group has taken
significant steps to rationalize costs, with overall staff levels in Asia being
reduced by 16 percent by the end of 1998.
Trading Profit Before Exceptional Items
Trading profit before exceptional items increased by 6 percent to
L26.0 million in 1998 from L24.6 million in 1997. On an underlying basis,
trading profits increased by 15 percent.
In the UK, trading profits were down 31 percent to L4.5 million in
1998. This anticipated decline reflects the impact of a number of non-recurring
projects on 1997 profits.
In the Americas trading profit grew by 30 percent to L8.2 million in
1998 (also 30 percent on an underlying basis). This growth reflected a
combination of new business, cost control and acquisitions. The latter
contributed approximately one third of the growth in underlying regional
profits.
In Continental Europe trading profit increased by 21 percent to L10.1
million in 1998. On an underlying basis the increase was 30 percent. In Bates
Europe the increase of 46 percent on an underlying basis reflected underlying
revenue increases in Germany, Italy and Spain primarily reflecting a significant
pan region account win and improved trading margins. In Scholz & Friends the
increase of 16 percent on an underlying basis reflected a strong conversion of
revenue gains in Berlin being partially offset by development costs related to
the international agencies.
In Asia Pacific trading profit declined by 9 percent to L3.2 million
in 1998. On an underlying basis trading profit increased by 20 percent. In
Australasia trading profit increased by 25 percent on an underlying basis. This
primarily reflected a tighter control of costs. In Asia trading losses reflected
the reduced revenue performance and associated restructuring costs.
Trading Margins Before Exceptional Items
Trading margin before exceptional items was 8.6 percent in 1998, an
increase from 8.0 percent in 1997.
On a geographic basis trading margins were as follows:
1998 1997
% %
UK 11.3 16.7
Americas 11.2 9.3
Continental Europe 9.3 7.9
Asia Pacific 4.0 3.6
--- ---
Group 8.6 8.0
Joint Ventures and Associates
CCG has joint ventures and associates in all four geographic regions.
The Group's share of operating profits, primarily from Zenith and The Facilities
Group, amounted to L2.6 million.
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Revenue
Consolidated revenue decreased by 2 percent to L736.1 million in 1997
from L754.9 million in 1996. On an underlying basis, revenue increased by 7
percent.
For the ongoing businesses revenue decreased by 6 percent and, on an
underlying basis, increased by 4 percent. The UK growth of only 3 percent was
disappointing and reflected a number of account losses and a transition period
in the management of Bates Dorland which impacted the ability to pitch new
business. On an underlying basis, Asia Pacific increased by 15 percent,
Australasia increased by 6 percent, China by 28 percent, and Japan by 86
percent. Malaysia and Thailand declined by a combined 9 percent. The revenue
performances in China and Japan reflected new accounts won and Malaysia and
Thailand reflected the economic conditions in those markets. Acquisitions
contributed 4 percent. The Americas was down 9 percent on an underlying basis
due to the loss of Miller Brewing, which had been a loss making account.
Excluding Miller Brewing, the Americas increased by 7 percent reflecting growth
from existing clients. Continental Europe increased 3 percent. Germany was up 7
percent, Italy up 29 percent, Spain up 1 percent, but Scandinavia was down 2
percent. There was a 1 percent contribution to revenue growth from acquisitions
in this region.
The businesses demerged into Saatchi & Saatchi increased revenue by 1
percent to L378.2 million in 1997 from L375.3 million in 1996. Continuing
Saatchi & Saatchi revenue was up 1 percent to L376.7 million from L373.2 million
in 1996, and, on a constant exchange rate basis, revenues increased by 9
percent. This increase reflected both an improved level of business from
existing clients and a number of new business wins, most notably Delta Airlines
at the start of the year. On a constant exchange rate basis, growth in all the
regions was between 7 percent and 10 percent.
Trading Profit Before Exceptional Items
Consolidated trading profit before exceptional items increased by 20
percent to L57.8 million in 1997 from L48.0 million in 1996. On an underlying
basis, trading profit before exceptional items increased by 40 percent.
For the ongoing businesses trading profit before exceptional items
increased by 14 percent and, on an underlying basis, increased by 33 percent.
The UK increased by 71 percent primarily due to a tighter control of costs and
an unusually high level of non-recurring revenues. Asia Pacific decreased by 26
percent to L3.5 million in 1997 from L4.7 million in 1996. On an underlying
basis, Asia Pacific declined by 21 percent. Australasia increased by 4 percent
on an underlying basis, but the performance elsewhere in Asia Pacific was
disappointing due to the economic crisis. The Americas increased by 58 percent
to L6.3 million in 1997 from L4.0 million in 1996. On an underlying basis,
profits increased 70 percent despite the fall in revenue. This reflected the
departure of two major loss making accounts and tighter cost management.
Continental Europe decreased by 9 percent to L8.3 million in 1997 from L9.1
million in 1996. On an underlying basis, Continental Europe showed growth of 24
percent, which outpaced the overall revenue growth and reflected the control of
costs.
Continuing Saatchi & Saatchi trading profit before exceptional items
increased by 28 percent to L29.7 million in 1997 from L23.3 million in 1996.
Continuing Saatchi & Saatchi trading profit before exceptional items was up 21
percent to L30.6 million from L25.3 million in 1996, and, on a constant exchange
rate basis, trading profit before exceptional items increased by 34 percent.
This increase reflected an improved level of business from existing clients and
a number of new business wins, most notably Delta Airlines at the start of the
year. On a constant exchange rate basis, the performance by region varied widely
with Asia Pacific moving into a loss of L1.0 million, the UK flat, the Americas
increasing by 38 percent and Continental Europe increasing by 132 percent.
Trading Margins Before Exceptional Items
The consolidated trading margin before exceptional items in 1997 was
7.9 percent, an increase from 6.4 percent in 1996. For the ongoing businesses
trading margins before exceptional items increased by 1.4 percentage points, a
21 percent improvement from 6.6 percent in 1996 to 8.0 percent in 1997,
primarily due to improved cost management. The UK achieved margins of 16.7
percent in 1997 against 10 percent in 1996, reflecting the level of spending by
particular clients and the tight control of costs. Margins in Asia Pacific
declined to 3.6 percent in 1997 from 5.1 percent in 1996. The Americas margins
nearly doubled to 9.3 percent in 1997 from 5.1 percent in 1996. The Continental
Europe margins increased to 7.9 percent in 1997 from 7.5 percent in 1996.
Overall the margin improvement was as the Company expected, but the UK and the
Americas were better than expected and Asia Pacific was worse than expected .
The improvement in trading margins before exceptional items occurred
for ongoing operations despite an adverse impact of 0.3 percent due to new
trading arrangements with Zenith.
The businesses demerged into Saatchi & Saatchi increased trading
margins before exceptional items to 7.9 percent in 1997 from 6.2 percent in
1996. For the continuing Saatchi & Saatchi businesses trading margin increased
to 8.1 percent in 1997 from 6.8 percent in 1996.
Joint Ventures and Associates
On a consolidated basis there were no material joint ventures or
associates. The Demerger resulted in Zenith becoming a joint venture interest
between CCG and Saatchi & Saatchi and CCG having a 30 percent associate interest
in The Facilities Group, a subsidiary of Saatchi & Saatchi.
Exceptional Operating Items and Disposals
Exceptional operating expenses for CCG in 1998 were Lnil, and for
Cordiant in 1997 and 1996 were L2.2 million, and L16.5 million, respectively. In
1997 the exceptional expense of L2.2 million reflected a provision against the
goodwill relating to ongoing operations in Indonesia, which was taken in view of
the economic uncertainty in that country. In 1996 the exceptional expenses of
L16.5 million included L0.2 million related to the closure of a US pension plan
in ongoing operations and L16.3 million which related to the demerged Saatchi &
Saatchi businesses. The L16.3 million comprised L8.1 million for the closure of
a US pension plan and L8.2 million for property provisions.
Profits on businesses disposed of by CCG were Lnil in 1998, and for
Cordiant were L20.8 million in 1997 and L17.8 million in 1996. In 1997 the
profit of L20.8 million included a profit of L16.5 million on the sale of NRG
and a L4.3 million profit on the sale of shares received as consideration when
Cordiant sold its interest in KDW. In 1996 the profit of L17.8 million related
primarily to the sale of Cordiant's interest in KDW.
In 1997 there were non-operating expenses of L33.0 million for
Cordiant due to the fundamental reorganization of the business to implement the
Demerger. The amounts payable in relation to the Demerger including advisors'
fees, temporary staff and other costs amounted to L20.2 million. The
reorganization of the Cordiant head office and its combination with the head
offices of Bates Worldwide and S&S to form the two successor operations cost
L6.7 million. The Demerger also resulted in an inter-group property provision of
L6.1 million. This represented the difference between the rent payable by
Saatchi & Saatchi and the amount receivable from Zenith for space sublet to
them.
Net Interest Expense and Similar Items
Net interest expense and similar items for CCG in 1998 amounted to
L2.7 million and for Cordiant were L8.8 million in 1997 and L7.5 million in
1996. The decrease in 1998 is a result of the Demerger and the new financing
arrangements related to the Demerger. For details, see "Liquidity and Capital
Resources General" earlier in this report. In 1997 the increase over 1996 was
due to a lower level of interest received and increased bank fees offset by a
foreign exchange gain.
Despite an overall average net cash position, CCG incurs a net
financing charge. This is primarily attributable to the geographic distribution
of cash and borrowing resulting from the need to maintain cash balances for
media accreditation and for local funding purposes and the inclusion of bank
fees and similar items in the net finance charge.
Taxation
In 1998 CCG's tax charge for the year was L9.2 million, representing
an effective tax rate of 35.5 percent. Excluding disposals, exceptional items
and demerger costs, Cordiant's effective tax rate was 35.7 percent in 1997 and
36.5 percent in 1996. Since 87 percent of CCG's business is located outside the
UK, the UK is not the dominant tax regime for the Group.
Direct comparison between the effective tax rate of CCG to Cordiant is
difficult as the two groups were structured differently both in terms of legal
entities and the geographical distribution of profits.
Equity Minority Interests
Equity minority interests from ongoing businesses were L1.7 million in
1998, L1.8 million in 1997 and L2.6 million in 1996. The decrease in 1998
reflects the purchase of the 24.9 percent minority interest in The
Communications Group. The decline in ongoing equity minority interests in 1997
reflected the impact of exchange rate movements and the poor trading of one
unit.
Return Attributable to Shareholders
The Group's net profit for 1998 was L15.0 million, resulting in
earnings per share of 6.7p.
Cordiant's net profit for 1997 and 1996 was L15.1 million and L24.2
million respectively, resulting in earnings per share of 3.4p in 1997 and 5.5p
in 1996. Excluding exceptional items the earnings per share were 6.6p in 1997
and 5.2p in 1996. The earnings per share figures are unadjusted for the share
consolidation that took place as part of the Demerger.
A dividend of 1.4p per share has been recommended in respect of 1998.
The comparable 1997 figure was a net dividend of 1.2p. Earnings covered the
recommended dividend 4.8 times in 1998.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
The Group does not speculate in derivative financial instruments.
Foreign Exchange
The Group publishes its consolidated financial statements in pounds
sterling. The Group's profits are spread over a variety of currencies with the
largest being the US dollar (32 percent of 1998 operating profit). As a result,
the Group is subject to foreign exchange risk due to the effects that foreign
currency movements have on the Group's translation of results.
Trading foreign exchange exposures, where they arise, are hedged via
the spot and forward exchange markets.
The Group's long term debt is denominated in US Dollars, and as such
is subject to foreign exchange risks due to currency movements. The debt at
December 31, 1998 was US$60 million.
The following sensitivity shows the impact on the reported value of
long term debt of an instantaneous 10% change in the foreign currency rate
between sterling and US Dollar from their levels at December 31, 1998, with all
other variables held constant.
Fair value Impact of a + 10% Impact of a - 10%
reported at movement in movement in
December 31, 1998 exchange rate exchange rate
L million L million L million
Long term debt 36.4 (3.3) 3.3
Interest Rates
In order to reduce the Group's exposure to adverse interest rate
movements, the Group has entered into interest rate caps which protect the
majority of core borrowings. The Group's weighted average interest rate for 1998
was 6.1%. The Company estimates that if the 1998 interest rates had been 1
percentage point higher, the net interest expense would have increased by
L0.3 million.
Item 10. Directors and Officers of Registrant.
The Directors and Executive Officers of CCG are as follows:
Name Position Age
Michael Bungey* Director and Chief Executive Officer of the 59
Company and Chairman and Chief Executive
Officer, Bates Worldwide
Arthur D'Angelo* Finance Director of the Company 47
Jean de Yturbe* Director, Chairman, Bates Europe 52
Alex Hamill* Director, Chief Executive Officer, Bates Asia 56
Pacific
Peter M Schoning* Director, Chairman and Chief Executive 53
Officer, Scholz & Friends
William Whitehead* Director, Chief Executive Officer, Bates North 53
America
Charles Scott Chairman of the Company 50
Dudley Fishburn Non-executive Director 53
Professor Theodore Non-executive Director 74
Levitt
James Tyrrell Non-executive Director 58
Dr. Rolf Stomberg Non-executive Director 59
Stuart Howard Deputy Finance Director, Treasurer and Company 37
Secretary
David F. Ham Group Controller 33
Stanley Bendelac* Chief Operating Officer, Bates Europe and 57
Chairman, Bates Latin America
Les Stern* Worldwide Planning Director, Bates Worldwide 51
John Fawcett* Worldwide Creative Director 49
Ian Smith* President, International, Bates Worldwide 43
Colin Hearn* Chairman and Chief Executive Officer, 141 48
Worldwide
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* Member of the Executive Committee
Executive Directors
Michael Bungey, Chief Executive Officer of the Company and Chairman
and Chief Executive Officer, Bates Worldwide. In 1971, Michael Bungey set up his
own agency, Michael Bungey & Partners. This was merged with Dorland Advertising
in 1984. In 1988 he became Chairman and Chief Executive Officer of Bates Dorland
and Bates Europe. He was appointed President and Chief Operating Officer of
Bates Worldwide in 1993, Chief Executive Officer in April 1994 and Chairman in
December 1994. He joined the Board of Cordiant in January 1995.
Arthur D'Angelo, Finance Director of the Company. Arthur D'Angelo
joined Saatchi & Saatchi Holdings USA in October 1987 as Tax Director and was
subsequently appointed President and Chief Executive Officer of Saatchi &
Saatchi Holdings USA. He joined Bates USA as Executive Vice President and Chief
Financial Officer in April 1994 and later that year was named Chief Financial
Officer of Bates North America. In July 1995 he was named Chief Financial
Officer of Bates Worldwide.
Jean de Yturbe, Chairman, Bates Europe. Jean de Yturbe was President
of HDM Europe from 1985 to 1990 and Chief Executive Officer of Eurocom
Advertising Worldwide from 1990 to 1992. He joined Bates in July 1993 as Chief
Executive Officer of Bates France and was named Chairman of Bates Europe in
January 1995.
Alex Hamill, Chief Executive Officer, Bates Asia Pacific. Alex Hamill
joined the Ted Bates group in 1968. In 1978 he was appointed General Manager of
George Patterson in Australia. In 1984 he was appointed Managing Director of
George Patterson's Sydney office and in 1987 Managing Director of George
Patterson Australia. In 1991 he was appointed Chairman and Chief Executive
Officer of George Patterson Bates and Regional Director for Bates Worldwide in
Asia-Pacific.
Peter M Schoning, Chairman and Chief Executive Officer, Scholz &
Friends. Prior to joining Scholz & Friends, Peter M Schoning worked in a variety
of advertising agencies in Munich, Paris and Hamburg, where he, most recently,
was a member of the Lintas management team. He joined Scholz & Friends in 1984
as Managing Director and was named Managing Partner in 1987. In 1993 he was
appointed Chief Executive Officer at the agency and since 1995 he has led the
agency as Chairman and Chief Executive Officer.
William Whitehead, Chief Executive Officer, Bates North America. Prior
to joining the Ted Bates group in 1971, Bill Whitehead worked for Foster
Advertising. In 1983 he joined Bates Canada and in 11 years with the agency held
a number of senior positions, most recently as Chairman and Chief Executive
Officer. In May 1994 he was named Executive Director of Worldwide Client
Services at Bates Worldwide and at the same time Regional Director of Latin
America for Bates Worldwide. In December 1994, he was appointed Chief Operating
Officer for Bates North America. In September 1995 he became President and Chief
Operating Officer of Bates USA. In July 1996 he became Chief Executive Officer
of Bates North America.
Charles Scott, Chairman of the Company. Charles Scott worked for Itel
Corporation before joining IMS International, Inc. in 1977 where he was Chief
Financial Officer from 1986 until joining Cordiant as Finance Director in
January 1990. He was promoted to Chief Operating Officer of Cordiant in July
1991 and Chief Executive Officer in April 1993. In January 1995, he was
appointed Chief Executive Officer and Acting Chairman. In July 1995 he was
appointed executive Chairman and in December 1997 he became non-executive
Chairman. He was also non-executive Chairman of Saatchi & Saatchi plc until
January 1, 1999. He is a non-executive director of adidas-Salomon AG and of
Joe's Developments Limited. In addition, he has been a director of Emcore
Corporation since February 1998 and of TBI plc since May 1998.
Non Executive Directors
Dudley Fishburn, Director. Dudley Fishburn has been a Member of
Parliament and Parliamentary Private Secretary at the Foreign Office and at the
Department of Trade and Industry. He is Associate Editor of The Economist,
Treasurer of the National Trust, Chairman of the Trustees of the Open
University, Chairman of HFC Bank plc and a Trustee of the Prison Reform Trust,
all of which are based in the UK. He is a non-executive director of Household
International, Inc., Euclidian plc and Philip Morris.
Professor Theodore Levitt, Director. Theodore Levitt is Edward W.
Carter Professor of Business Administration, Emeritus, of the Harvard University
Business School and serves on the board of Sandford C. Bernstein Funds, Inc. in
the US. He is also the author of numerous articles and books on economics,
management and marketing and was formerly Editor of the Harvard Business Review.
James Tyrrell, Director. James Tyrrell joined the Board in May 1998.
He was Group Finance Director of London International Group plc until November
1997 and an executive director there until August 1998. Previously he was Group
Finance Director of Abbey National Plc and Managing Director of HMV Shops
Limited. He is Chairman of Ferguson International PLC and a non-executive
director of Point Group Ltd.
Dr. Rolf Stomberg, Director. Rolf Stomberg joined the Board in May
1998. From 1970 to 1997, when he retired from the Main Board, he worked for The
British Petroleum Company plc where he was Chief Executive Officer for B.P. Oil
International and a B.P. Group Managing Director. He serves on a number of UK
and continental boards and is a Visiting Professor at Imperial College
Management School, London and the Business School of Institut Francais du
Petrole in Paris.
Executive Officers
Ian Smith is President, International, Bates Worldwide and a member of
the Executive Committee. He joined the George Patterson Bates agency in 1989 and
was named General Manager and New Business Director in 1990. In 1996, he was
appointed Managing Director of George Patterson Bates Australia.
Stuart Howard, Deputy Finance Director, Treasurer and Company
Secretary of the Company. Stuart Howard joined the Company on May 1, 1998 from
WPP where he was International Treasurer. From 1992 he was Group Finance
Director for Metrovideo and from 1990 to 1992 Deputy Finance Director at
McColls. Prior to that, he spent two years as Regional Controller at WPP and
four years with KPMG London. In 1998, he became Company Secretary of the
Company.
David F. Ham joined the Company in May 1996 as Manager of Group
Reporting. Prior to that he was Group Accountant at Alfred McAlpine plc from
1994 and spent six years at Coopers & Lybrand. In 1997, he was appointed Group
Controller of the Company.
Stanley Bendelac, Chief Operating Officer, Bates Europe and Chairman,
Bates Latin America. In 1971, Stanley Bendelac founded Delvico Bates, an
operating unit within CCG. In addition to his responsibilities on the Executive
Committee, he is currently Chairman and Chief Executive Officer of Grupo Bates
S.A., Spain.
Les Stern, Worldwide Planning Director, Bates Worldwide. Les Stern was
a graduate trainee at Procter & Gamble before embarking on an advertising career
that included spells at FCB, Saatchi & Saatchi and WCRS. He joined Bates Dorland
in 1990 as Executive Planning Director. Following secondment to Bates New York
he was made Worldwide Planning Director in 1994. Les Stern is also a member of
the Executive Committee.
John Fawcett, Worldwide Creative Director. John Fawcett began his
advertising career with George Patterson Bates, and has worked in various roles
around the world for Leo Burnett and J. Walter Thompson. He rejoined George
Patterson Bates as a creative group head and became the company's first National
Creative Director in March 1989. He was appointed as its Managing Director
Australia in June 1992 and Chief Executive Officer in July 1996. He is also
currently Chairman of the Bates Worldwide Creative Board.
Colin Hearn, Chairman and Chief Executive, 141 Worldwide. Colin Hearn
joined the Bates network in 1985 from Ogilvy & Mather. In addition to his duties
in respect of 141, he is responsible for two of Bates' largest global clients,
BAT and Allied Domecq. He was appointed to the Bates Worldwide Board in 1994 and
elected to the Executive Committee in 1998.
Re-election of Directors
The Articles of the Company provide that at the Annual General Meeting
in every year, one-third of the Directors for the time being, or if their number
is not three or a multiple of three then the number nearest to one-third, shall
retire from office, the Directors to retire in each year being those who have
been longest in office since their last election, but as between persons who
became Directors on the same day those to retire shall (unless they otherwise
agree among themselves) be determined by lot. A retiring Director shall be
eligible for re-election. Any Director not re-elected at the Annual General
Meeting shall retain office until the Meeting appoints another person in this
place, or if it does not appoint a replacement, until the end of the Meeting.
Corporate Governance
In June 1998, the Stock Exchange published the Principles of Good
Governance and the Code of Best Practice ("the Combined Code") which embraces
the work of the Cadbury, Greenbury and Hampel Committees and became effective in
respect of accounting periods ending on or after December 31, 1998. The Board
has taken note of the recommendations contained in the Combined Code and fully
endorses the general principles behind the recommendations made.
The Board has complied throughout the year with the provisions set out
in Section 1 of the Combined Code with the following exceptions:
o Paragraph B.2.2 of the Combined Code requires that the Remuneration
Committee consists exclusively of independent non-executive directors.
Charles Scott, who is not an independent director (as defined in the
Combined Code), was a member of the Committee during the period. In
line with his new role as executive chairman, Mr. Scott ceased to be a
member of the Committee with effect from January 1, 1999;
o No senior independent non-executive director was recognized during the
year. However, Rolf Stomberg was formally appointed to that position
on March 4, 1999;
o The Board has not considered setting as an objective the reduction of
service periods to one year or less;
o The provisions of the Company's Articles of Association concerning
retirement of Directors by rotation would not necessarily ensure that
all Directors are required to stand for re-election at least every
three years. The Board intends to implement procedures to ensure, so
far as practicable, that this is the case and will consider proposing
an amendment to the Articles in due course.
A separate Audit Committee and a Remuneration and Nominations
Committee exist, both of which are comprised solely of non-executive directors.
The Audit Committee was chaired during 1998 by Charles Scott. With
effect from January 1, 1999, chairmanship of the Committee passed to James
Tyrrell.
The main duties of the Audit Committee are to:
o Review, on behalf of the Board, the Group's financial statements,
preliminary and interim results;
o Review the nature and scope of the external audit and the findings of
the external auditors;
o Review, on behalf of the Board, the Group's systems of internal
control;
o Direct the internal audit function; and
o Make recommendations to the Board concerning the appointment and
remuneration of the external auditors.
The Audit Committee met on four occasions during 1998.
The principal functions of the Remuneration and Nominations Committee
are to determine on behalf of the Board and the shareholders the Company's broad
policy for executive remuneration and the remuneration packages of the executive
Directors and other senior executives. It also considers appointments to the
Board of Directors and makes recommendations in this respect to the Board.
The Committee, which met on six occasions in 1998, is chaired by
Dudley Fishburn.
The Executive Committee consists of the executive Directors, with the
exception of the Chairman, together with other senior executives of the Group.
The Executive Committee's purpose is to deal with day-to-day
operational issues and to improve the communications and coordination between
the Company and the principal operating divisions of the Group. The Committee
met on nine occasions in 1998.
The following table lists, as of June 1, 1999, the Directors'
interests in Ordinary Shares, Ordinary Share Options and Equity Participation
Rights.
Directors' Interests
Beneficially Owned Ordinary Share Equity Participation
Ordinary Shares Options Rights
A. D'Angelo 960 216,854 593,401
M. Bungey 55,990 647,020 890,110
D. Fishburn - - -
A. Hamill - 273,854 593,401
T. Levitt 18,796 - -
P. Schoning - 132,426 593,401
C. Scott* 85,172 731,905 -
R. Stomberg - - -
J. Tyrrell - - -
W. Whitehead 787 222,426 593,401
J. de Yturbe - 260,996 593,401
- --------------------
*Includes spouse's interests
Item 11. Compensation of Directors and Officers.
In 1998, the aggregate amount of compensation paid or accrued for all
Directors and executive officers as a group (19 persons) who served during the
year, was L4,915,057 ($8,158,994). Such compensation was mainly in the form of
salaries and fees and included L176,438 ($292,887) set aside for pension plans.
The table below reports remuneration by the Company for the year ended
December 31, 1998. The compensation for executive directors for 1998 was
approved by the Remuneration Committee.
<TABLE>
<CAPTION>
As Long Term
Salary Percentage Incentive Benefits Pension Total
and fees Bonus of Salary Plans in Kind(1) Costs(2) Remuneration
L000 L000 % L000 L000 L000 L000
----------- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Directors
Michael Bungey (CEO) 478(3) 120 25 14 89 52(4) 753
Arthur D'Angelo 213 48 23 9 7 8 285
Jean de Yturbe 212 48 23 14 32 20 326
Alex Hamill 323 48 15 - - 2 373
Peter M Schoning 270 232 86 - 10 - 512
William Whitehead 315 48 15 9 30 3 405
Non-executive Directors:
Charles Scott (Chairman) 165 - - - 4 4 173
Dudley Fishburn 31 - - - - - 31
Professor Theodore 28 - - - - - 28
Levitt
Dr. Rolf Stomberg(5) 19 - - - - - 19
James Tyrrell(5) 19 - - - - - 19
</TABLE>
- --------------------
(1) Benefits in kind include such items as company cars, medical insurance and
life insurance. Mr. Bungey, who is a UK citizen and who has been relocated
to the US, receives a sum equivalent to school fees in the UK for his
children and a travel allowance for flights between the US and UK for his
wife and children.
(2) The amounts for pension costs disclosed in the executive Directors'
remuneration are based on the cash cost to the employing company of defined
contribution schemes.
(3) Mr. Bungey's salary includes an amount of L29,919 as part of a tax
equalization scheme in respect of tax paid on his remuneration under US tax
law.
(4) Mr. Bungey was a member of the Cordiant Group Pension Scheme, a defined
benefit scheme, during the year. In addition to the amounts disclosed
above, the amount of the increase in pension during the year was
L4,337. The total annual accrued pension (including inflation) as at
December 31, 1998 was L57,160. The accrued benefit is that which
would be paid annually on retirement based on service to the end of the
year. The transfer value (net of members' contributions) of the relevant
increase in accrued benefit is L55,456.
(5) Appointed May 1, 1998.
Salaries are reviewed annually. In addition to salary, all senior
executives are eligible for an annual performance-related bonus that is
non-pensionable. For the year ended December 31, 1998 the annual bonus paid to
each executive Director was a percentage of salary based on, with respect to
Messrs. Bungey and D'Angelo, the performance of CCG and with respect to Messrs.
Hamill, de Yturbe and Whitehead, a combination of the performance of CCG and the
business that each director heads and with respect to Mr. Schoning, the
performance of Scholz and Friends.
For all executive Directors only base salary is pensionable; their
pension arrangements are as follows:
a) Mr. Bungey is a member of the Cordiant Group Pension Scheme. In
addition, CCG contributes 6 percent of his salary plus L15,000 per
annum to a self-administered fund.
b) Mr. Hamill is a member of the George Patterson 1993 Holding Board
Superannuation Plan.
c) Mr. D'Angelo is entitled to an annual pension contribution of $7,500
and in addition is a member of the Bates Advertising USA, Inc. 401k
plan.
d) Mr. Whitehead is a member of the Bates Advertising USA Inc. 401k plan
and is also entitled to a pension from the age of 60 from his previous
employer, Bates Canada Inc.
e) Mr. de Yturbe is not a member of any company pension scheme. However,
pursuant to French legislation, his salary is subject to state pension
scheme contributions, which are included in the table set forth above.
f) Mr. Scott received pension contributions from the Company at a rate of
14 percent of salary to March 31, 1998. From April 1, 1998, the fees
payable for his services included an equivalent amount. Under Mr.
Scott's new contract effective from January 1, 1999, the company
contributes 10 percent of his salary into a personal pension scheme.
Service Agreements
No executive Director has a service agreement containing a notice
period exceeding one year, except Mr. Schoning, whose notice period is at least
one year ending on a financial year end, and Mr. Hamill, whose contract is
terminable on two years' notice.
If the service agreements are terminated by the Company within two
years of a change of control, the Directors, with the exception of Mr. Hamill,
are entitled to payments based on up to two years' remuneration. On termination
for any reason, Mr. Hamill is entitled to consultancy fees payable from the date
of termination to his sixtieth birthday.
During 1998, Mr. Scott had parallel contracts as Chairman of both the
Company and Saatchi & Saatchi plc. He relinquished his directorship of the
latter with effect from December 31, 1998. The terms of his new service
agreement with the Company reflect his position as part-time executive Chairman.
The Committee has considered the notice periods and termination
arrangements in the light of the Combined Code and believes that it is
appropriate for the executive Directors to have service agreements on such terms
taking into account their seniority and value to the Company, and the changes
undergone by the Company in recent years.
The arrangements for termination of a senior executive's contract are
decided by the Remuneration and Nominations Committee after consultation with
the Group's Chief Executive Officer. In some cases the Remuneration and
Nominations Committee will recommend a clean break with the individual concerned
and a one-off payment will be made at the time of termination based on that
individual's contractual position. In other cases the Remuneration and
Nominations Committee will recommend that the contractual entitlement of the
individual be paid in installments following termination.
Non-executive Directors
The Board of Directors agrees the remuneration of non-executive
Directors for their services as members of the Board and its committees within
the limits imposed by the Company's Articles. The Board retains discretion to
approve additional payments for special services. The non-executive Directors do
not participate in any of the incentive or benefit schemes of the Group.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Share Schemes Prior to the Demerger and Demerger Schemes
The Cordiant share schemes consist of one savings related scheme
(described below) and two executive share option schemes, specifically the
Performance Share Option Scheme (the "Performance Scheme") and the Executive
Share Option Scheme No 2 (the "Executive Scheme" and, together with the
Performance Scheme, the "Share Schemes").
The Executive Scheme was approved by the Inland Revenue under the
terms of the Finance Act 1984 and was intended only for executives resident in
the UK. The Executive Scheme expired in April 1994 although existing options
subsisting at the date of expiration remain exercisable in accordance with its
terms. The Performance Scheme was adopted at the Extraordinary General Meeting
of Cordiant held on March 16, 1995 and was approved by the Inland Revenue on May
1, 1995. It was intended for executives resident throughout the world.
Options granted to participants in the Executive Scheme and the
Performance Scheme (which includes super options) were for Cordiant Ordinary
Shares at a price equivalent to the London Stock Exchange middle market
quotation on the day preceding the date of grant of the options.
The performance targets for options granted under the Performance
Scheme depend on whether the option is an ordinary option or a super option.
Ordinary options require the CCG Group's earnings per share to grow over three
years at between 2 percent and 6 percent more than the growth in the UK Retail
Price Index over the same period. Super options require growth in the CCG
Group's earnings per share which over a five year period would place it in the
top quartile of the FTSE 100 companies ranked by growth in earnings per share
over the same period.
No further options were granted under these schemes following the
Demerger. Holders of executive options employed by the Company retained their
options under the Share Schemes following the Demerger.
Holders of executive options under the Share Schemes employed by
Saatchi & Saatchi were invited to cancel their options in return for the grant
of replacement options over Saatchi Ordinary Shares. Each replacement option was
for the same number of Saatchi Ordinary Shares and has the same exercise price,
exercise period and performance conditions as the relevant existing option. The
intention was that the replacement options be, as far as practicable, equivalent
to the existing options. For Charles Scott, employees who ceased to be employed
as a result of the Demerger and employees of Zenith and The Facilities Group who
held executive options under the Share Schemes, the same principles applied
except that their replacement options were split 50/50 between options over
Ordinary Shares and options over Saatchi Ordinary Shares.
Cordiant's savings related share option scheme ("Sharesave 1995") was
adopted at Cordiant's Extraordinary General Meeting held on March 16, 1995.
Inland Revenue approval for Sharesave 1995 was obtained on May 15, 1995.
Eligible employees in the UK were invited to save a fixed amount per month for a
period of five years and applied for an option at a predetermined exercise
price. The exercise price was fixed at the date of invitation at a price which
was not less than the higher of a share's nominal value or 80 percent of its
market value at the time. When the option is exercised, the accumulated savings
and interest/bonus are used to pay the exercise price.
Under Sharesave 1995, employees of CCG retained their original number
of options without adjustment for the share consolidation pursuant to the
Demerger. Employees of Saatchi & Saatchi who held such options also retained
them but were granted parallel unapproved options over Saatchi Ordinary Shares
which are exercisable with the accumulated savings and interest/bonus under
Sharesave 1995. (Sharesave 1995, together with such parallel schemes being the
"SAYE Schemes") Employees of Zenith and The Facilities Group had their parallel
options split 50/50 between Ordinary Shares and Saatchi Ordinary Shares.
The replacement options described above were granted under schemes
(the "Demerger Schemes") which mirrored, as far as practicable, the terms of the
Share Schemes to which they related. None of the Demerger Schemes have been
approved by the Inland Revenue.
No options can be granted under a Demerger Scheme other than to
replace an option which an option holder under one of the Share Schemes has
agreed to cancel (or, in the case of the SAYE Schemes, to run in parallel with
an option under Sharesave 1995).
Ownership Schemes
Cordiant operated "ownership schemes" prior to the Demerger which
allocated "network shares" to key executives, the value of the network shares
increasing or decreasing in line with the network's performance against target.
These schemes have been replaced by the Equity Participation Plan and the
Performance Share Option Scheme. Accrued benefits up to the date of the Demerger
were frozen at 50 percent of the value at December 31, 1997 in respect of
participants in the Equity Participation Plan and the Performance Option Scheme
and will be paid to executives in future years in accordance with the terms of
the schemes.
Awards to Directors under the ownership schemes were valued as
follows:
Value at Crystallized 1998 Cash Value at
December 31, 1997 Value Payment December 31, 1998
M. Bungey 113,936 56,968 14,242 42,726
A. D'Angelo 68,361 34,181 8,545 25,636
J. de Yturbe 113,936 56,968 14,242 42,726
P.M. Schoning 113,936 56,968 --- 56,968
W. Whitehead 68,361 34,181 8,545 25,636
No awards were made under the schemes during 1998.
New CCG Share Schemes
(a) The Cordiant Communications Group Equity Participation Plan (the "Equity
Participation Plan")
The principal terms of the Equity Participation Plan are set out
below.
(i) Administration
The Equity Participation Plan is operated in conjunction with the
Cordiant Communications Group Employee Benefit Trust (the "Trust") which was
established at the same time as the Equity Participation Plan.
The Trustee of the Trust, in exercising its discretion, takes into
account the recommendations of the Remuneration Committee.
Further details of the Trust are set out below.
(ii) Eligibility
Employees and executive Directors of the Company, who are required to
devote substantially all their working time to the business of any company in
CCG, are eligible to participate in the Equity Participation Plan.
(iii) Participation in the Equity Participation Plan
The Trustee invites selected eligible employees and Directors to pay a
certain amount of money (not exceeding Ll50,000) to enable them to participate
in the Equity Participation Plan. The payment made by participants to the Trust,
which must be made within 120 days of the award being made, is non-refundable.
Normally, awards to participants will only be made within the period
of 42 days following the announcement of the Company's results for any period or
at any time if the Trustee determines that exceptional circumstances (such as
the recruitment of a senior employee or executive director) so warrant.
The maximum number of Ordinary Shares which participants may become
entitled to acquire will be eight times the number that could have been bought
with the original investment at market value on the day preceding the date of
award. The exact number of Ordinary Shares which may be acquired will be
determined by the performance formula described below.
No new awards were made under the Equity Participation Plan during the
year. At December 31, 1998, there were 52 participants with awards over a
maximum of 11,084,170 Ordinary Shares.
(iv) Performance Formula and number of shares vesting
With the exception of Directors of the Company, the number of Ordinary
Shares that a participant may acquire will be determined by measuring the growth
in earnings per share ("EPS") of CCG over a three year period ("EPS
Performance"). EPS will be the fully diluted EPS calculated on the basis of
"headline earnings" using the Institute of Investment Management and Research
guidelines (although the Trustee will have the ability to adjust this figure if
the Trustee considers it appropriate to exclude exceptional items, such as the
costs of the Demerger and other significant non-recurring items).
If EPS Performance is less than the annual percentage growth in the UK
Retail Price Index plus 2 percent (the "Hurdle Rate") then the participant will
be entitled to acquire 10 Ordinary Shares.
If EPS Performance is equal to or greater than the Hurdle Rate then:
(a) where EPS Performance is 5 percent per annum, 12.5 percent of the
award vests, which is the same number of Ordinary Shares which the
participant could have bought with his original investment;
(b) where EPS Performance is 15 percent per annum, 40 percent of the award
vests, so the participant will be entitled to acquire 3.2 times the
number of Ordinary Shares which he could have bought with his original
investment; and
(c) where EPS Performance is 25 percent per annum, all of the award vests,
so the participant will be entitled to acquire eight times the number
of Ordinary Shares which he could have bought with his original
investment.
The percentage of the award that vests for EPS Performance between 5
percent per annum and 15 percent per annum and for EPS Performance between 15
percent per annum and 25 percent per annum increases on a straight line basis.
For participants who are Directors of the Company, only one half of
their awards will vest based on EPS Performance. The other half of their awards
will vest based on the total shareholder return ("TSR") of CCG over a three year
period ("TSR Performance") relative to the TSR of a group of major publicly
traded advertising groups (the "Comparator Group") over the same period.
Initially the Comparator Group consisted of the following 10 groups: CCG, GGT
Group, Grey Advertising, Havas Advertising, Omnicom Group, Publicis, Saatchi &
Saatchi, The Interpublic Group of Companies, True North Communications and WPP
Group.
The percentage of the award that vests will be determined by reference
to the ranking attained by CCG as follows:
Percentage
of award
that vests
Ranking (%)
1ST or 2ND........................................... 100
3RD.................................................. 75
4TH.................................................. 50
5TH.................................................. 25
6TH.................................................. 18.75
7TH.................................................. 12.5
8TH.................................................. 9.375
9TH.................................................. 3.125
10TH................................................. nil
(v) Acquisition of Ordinary Shares
Once the performance formula has been applied and the number of
Ordinary Shares determined, a participant may acquire one half of the vested
number of Ordinary Shares. The remaining half may only be acquired after the
fourth anniversary of the date the award was made. Ordinary Shares cannot be
acquired after the seventh anniversary of the date of the award.
(vi) Takeover
In the event of a takeover of the Company prior to the announcement of
the CCG Group's results for its financial year ending in 2000 (the "2000
results"), a participant who received an award prior to the announcement of
CCG's results for its financial year ending in 1998 (the "1998 results") will be
entitled to acquire the number of Ordinary Shares determined in accordance with
the following provisions:
(a) If the takeover occurs after the announcement of the 1998 results but
before the announcement of CCG's results for its financial year ending
in 1999 (the "1999 results"), the participant may acquire:
(i) one third of the maximum possible number of Ordinary Shares; plus
(ii) one third of the number of Ordinary Shares which would have vested if
the EPS Performance (and, if appropriate, TSR Performance) for CCG's
1998 financial year had been achieved over the full three years of the
performance measurement period; and
(b) if the takeover occurs after the announcement of the 1999 results but
before the announcement of the 2000 results, the participant may
acquire:
(i) one third of the maximum possible number of Ordinary Shares; plus
(ii) two thirds of the number of CCG Shares which would have vested if the
EPS Performance (and, if appropriate, TSR Performance) over CCG's two
financial years 1998 and 1999 had been achieved over the full three
years of the performance measurement period.
Equivalent provisions will apply for participants who receive an award
after the announcement of the 1998 results.
(vii) Cessation of employment
If a participant ceases to be employed by CCG or a subsidiary of CCG
before the award vests because of injury, disability, ill health, death,
redundancy, retirement, because the company which employs him or with which he
holds office leaves CCG or because the business to which his office or
employment relates is transferred outside CCG, or other circumstances at the
Trustee's discretion, the participant will be entitled to acquire a proportion
of the maximum number of Ordinary Shares which would ultimately have been
receivable. For the purpose of determining the proportion of the award that
vests, the cessation of employment will be treated as occurring on the next day
on which CCG announces its results for its financial year. The Performance
Formula will then be applied as if the EPS Performance (and, if appropriate, the
TSR Performance) had been achieved over the full three years of the performance
measurement period.
A participant who was granted an award prior to the announcement of
the 1998 results will be able immediately following such determination to
acquire:
(a) one third of the number of Ordinary Shares so determined, if cessation
occurs on or before the announcement of the 1998 results;
(b) two thirds of the number of Ordinary Shares so determined, if
cessation occurs after the announcement of the 1998 results but on or
before the announcement of the 1999 results; and
(c) all of the Ordinary Shares so determined, if cessation occurs after
the announcement of the 1999 results.
Equivalent provisions will apply for participants who receive an award
after the announcement of the 1998 results.
However, if a participant ceases employment for other reasons, he will
only be entitled to receive 10 Ordinary Shares, with the result that he will
effectively lose his initial investment.
(viii) Variation of share capital
The rights of participants following any rights issue or
capitalization issue or other variation of share capital will be adjusted in
such manner as the Trustee may determine subject to written confirmation from
CCG's auditors that such adjustment is in their opinion fair and reasonable.
(ix) Limits on the Equity Participation Plan
The number of shares which may be issued or become issuable pursuant
to the Equity Participation Plan, when aggregated with the number of shares
which may be issued or become issuable under the Performance Share Option Scheme
may not exceed 9.5 percent of the issued share capital of the Company from time
to time.
(x) Amendments to the Scheme
The Board has the power to administer, interpret and, with the
concurrence of the Trustee, amend the provisions of the Equity Participation
Plan. However, no amendment may be made to provisions relating to:
(a) the eligibility conditions;
(b) the limit rules;
(c) the calculation of a participant's entitlement under the Equity
Participation Plan;
(d) the terms of the awards or the Ordinary Shares received pursuant to
them; or
(e) the variation of share capital rule
to the advantage of participants without the prior approval of the shareholders
in general meeting (except for minor amendments to benefit the administration of
the Equity Participation Plan, to take account of a change in legislation or to
obtain or maintain favorable tax, exchange control or regulatory treatment for
participants or for CCG or for subsidiaries of CCG).
No amendment to the limits mentioned above may be made without prior
approval of the shareholders. No amendment may be made which adversely affects a
participant's rights under an award made prior to the date of such amendment
without the participant's consent. (xi) Pension
The benefits received under the Equity Participation Plan are not
pensionable.
(xii) Termination
The Trustee will invite no further participation in the Equity
Participation Plan after December 15, 2000 and the Board may terminate it at any
time, but the rights of existing participants will not thereby be affected.
(b) The Cordiant Communications Group Performance Share Option Scheme (the
"Performance Option Scheme")
The principal terms of the Performance Option Scheme are set out
below.
(i) Administration
The Performance Option Scheme will normally be operated in conjunction
with the Trust. The Trustee will, in exercising its discretion, take into
account the recommendations of the Remuneration Committee.
However, the rules provide that the Performance Option Scheme may also
be operated by CCG, in which case references to the Trust and the Trustee in
this summary should be read as being references to CCG and the Remuneration
Committee as appropriate.
Further details of the Trust are set out below.
(ii) Eligibility
Employees and executive Directors of the Company who are required to
devote substantially all their working time to the business of any company in
CCG will be eligible to participate in the Performance Option Scheme. However,
participants in the Equity Participation Plan will not be eligible to be granted
options under the Performance Option Scheme.
Participants in the Performance Option Scheme are selected at the
discretion of the Trustee.
In May 1998, a further 15 employees were invited to participate in the
Performance Option Scheme. Options over 1,523,078 shares were issued subject to
salary or bonus sacrifices amounting to L171,000. At December 31, 1998, there
were 81 participants holding options over a maximum of 7,772,140 shares. None of
the Directors of the Company are members of the Scheme.
(iii) Exercise price
The exercise price for an option will be determined by the Trustee but
may not be less than the higher of the nominal value of an Ordinary Share (if
the option is an option to subscribe for an Ordinary Shares) and its market
value. Market value will be taken to be the middle market quotation of an
Ordinary Share on the dealing day of the London Stock Exchange immediately
preceding the date of grant as derived from the Daily Official List of the
London Stock Exchange.
(iv) Grant of options
Normally, options may only be granted by the Trustee within the period
of 42 days following the announcement of CCG's results for any period and at any
time if the Trustee determines that exceptional circumstances (such as the
recruitment of a senior employee or executive Director) so warrant.
Options will lapse unless the option holder agrees within 120 days of
the grant of the option to sacrifice an aggregate amount of salary and/or bonus
(not exceeding L50,000) over a period not exceeding three years equal to one
eleventh of the aggregate exercise price of the Ordinary Shares under option.
The amount so sacrificed is not offset against the exercise price payable.
(v) Performance Formula and number of shares vesting
The number of Ordinary Shares to be acquired on exercise will be
determined by measuring EPS Performance, as for the Equity Participation Plan.
The EPS Performance and the Hurdle Rate for the Performance Option Scheme will
be the same as for the Equity Participation Plan.
If EPS Performance is less than the Hurdle Rate then the option holder
will not be entitled to acquire any Ordinary Shares and the option will lapse.
If EPS Performance is equal to or greater than the Hurdle Rate then:
(a) where EPS Performance is 5 percent per annum, the option holder
may exercise his option in respect of 30 percent of the number of
Ordinary Shares under option;
(b) where EPS Performance is 15 percent per annum, the option holder
may exercise his option in respect of 65 percent of the number of
Ordinary Shares under option; and
(c) where EPS Performance is 25 percent per annum, the option holder
may exercise his option in full.
The percentage of Ordinary Shares over which the option holder may
exercise his option for EPS Performance between 5 percent per annum and 15
percent per annum and for EPS Performance between 15 percent per annum and 25
percent per annum increases on a straight line basis.
(vi) Exercise of options
Once the Performance Formula has been applied an option holder may
exercise his option over one half of the number of Ordinary Shares determined by
the Performance Formula. The remaining half may only be acquired after the
fourth anniversary of the date of grant.
Options may not be exercised in any event more than seven years after
the date of grant.
(vii) Takeover
In the event of a takeover of the Company prior to the announcement of
CCG's 2000 results, an option holder who was granted an option prior to the
announcement of CCG's 1998 results will be entitled to exercise his option in
accordance with the following provisions:
(a) if the takeover occurs after the announcement of the 1998 results but
before the announcement of the 1999 results, the option holder may
exercise his option in respect of:
(i) one third of the number of Ordinary Shares under option; plus
(ii) one third of the number of Ordinary Shares in respect of which he
could have exercised his option if the EPS Performance for the
CCG Group's 1998 financial year had been achieved over the full
three years of the performance measurement period; and
(b) if the takeover occurs after the announcement of the 1999 results but
before the announcement of the 2000 results, the option holder may
exercise his option in respect of:
(i) one third of the number of Ordinary Shares under option; plus
(ii) two thirds of the number of Ordinary Shares in respect of which
he could have exercised his option if the EPS Performance over
the CCG Group's two financial years 1998 and 1999 had been
achieved over the full three years of the performance measurement
period.
Equivalent provisions will apply for option holders who are granted
options after the announcement of the 1998 results.
(viii) Cessation of employment
If an option holder ceases to be employed by the Company or a
subsidiary of CCG before his option may be exercised because of injury,
disability, ill health, death, redundancy, retirement, because the company which
employs him or with which he holds office leaves CCG or because the business to
which his office or employment relates is transferred outside CCG, or other
circumstances at the Trustee's discretion, the option holder will be entitled to
exercise his option in respect of a proportion of the number of Ordinary Shares
under option. For the purpose of determining the number of Ordinary Shares in
respect of which the option holder may exercise his option, the cessation of
employment will be treated as occurring on the next day on which the CCG Group
announces its results for its financial year. The Performance Formula will then
be applied as if the EPS Performance had been achieved over the full three years
of the performance measurement period.
An option holder who was granted an option prior to the announcement
of the 1998 results will be able immediately following such determination to
exercise his option in respect of:
(a) one third of the number of Ordinary Shares so determined, if cessation
occurs on or before the announcement of the 1998 results;
(b) two thirds of the number of Ordinary Shares so determined, if
cessation occurs after the announcement of the 1998 results but on or
before the announcement of the 1999 results; and
(c) all of the Ordinary Shares so determined, if cessation occurs after
the announcement of the 1999 results.
Equivalent provisions will apply for option holders who are granted
options after the announcement of the 1998 results.
However, if a participant ceases employment for other reasons, his
option will lapse.
(ix) Variation of share capital
On a variation of the Company's share capital by way of capitalization
or rights issue, subdivision, consolidation or a reduction, the exercise price
and the number of shares comprised in an option can be varied at the discretion
of the Trustee subject to certification from CCG's auditors that in their
opinion the variation is fair and reasonable.
(x) Limits on the Performance Option Scheme
The number of shares which may be issued or become issuable pursuant
to the Performance Option Scheme, when aggregated with the number of shares
which may be issued or become issuable pursuant to the Equity Participation
Plan, may not exceed 9.5 percent of the issued Ordinary Share capital of the
Company from time to time.
(xi) Amendments to the Performance Option Scheme
The Board of Directors has power to administer, interpret and, with
the approval of the Trustee, amend the Performance Option Scheme. No amendment
may be made to provisions relating to:
(a) the eligibility conditions;
(b) the limit rules;
(c) the variation of share capital rule;
(d) the rules governing the terms of the options or shares to be received
by option holders; or
(e) the rules governing the calculation of the option holder's
entitlements under the Performance Option Scheme
to the advantage of option holders without the prior approval of shareholders in
general meeting (except for minor amendments to benefit the administration of
the Performance Option Scheme or to take account of a change in legislation or
to obtain or maintain favorable tax, exchange control or regulatory treatment
for option holders, the Company or subsidiaries of CCG).
No amendment may be made which adversely affects an option holder's
rights under options granted to him prior to the date of such amendment without
his consent.
(xii) Pension
The benefits received under the Performance Option Scheme are not
pensionable.
(xiii) Termination
The Trustee will grant no further options under the Performance Option
Scheme after December 15, 2000 and the Board of Directors may terminate it at
any time, but the rights of existing option holders will not thereby be
affected.
(c) The Cordiant Communications Group Employee Benefit Trust (the "Trust")
The Trust was established prior to the Effective Date. The principal
terms of the Trust are as set out below.
(i) The Trust is a discretionary employee benefit trust of which all
employees of CCG will be potential beneficiaries.
(ii) The trustee of the Trust (the "Trustee") is a corporate trustee.
Executive Directors of the Company will not be directors of, nor have
a direct or indirect interest in, the trustee company.
(iii)The main purpose of the Trust is to operate the Equity Participation
Plan and the Performance Option Scheme. Having considered
recommendations received from the Remuneration Committee, the Trustee
will make awards (which may or may not be in the form of options)
under which participants will be entitled to acquire Ordinary Shares.
Alternatively the Trustee may agree to deliver Ordinary Shares
following the exercise of awards made by CCG.
(iv) The Trustee may purchase Ordinary Shares in the market for the purpose
of awards made under the Equity Participation Plan and the Performance
Option Scheme. Alternatively, the Company may grant to the Trustee one
or more options to subscribe for Ordinary Shares. The exercise price
under such options will not be less than the middle market quotation
of Ordinary Shares as derived from the London Stock Exchange Daily
Official List for the dealing day preceding the date of grant.
(v) The Trustee is not permitted to purchase Ordinary Shares in the market
without prior shareholder approval if such purchase would result in
the Trust holding (excluding any Ordinary Shares which the Trustee
subscribed for) more than 5 percent of the Company.
(vi) The Trustee will fund the acquisition of Ordinary Shares through one
or more of the following:
(a) by non-recourse loan or loans from CCG companies:
(b) by contributions from CCG companies; and
(c) by payments from the participants in the Equity Participation
Plan and the Performance Option Scheme.
(vii) The Trustee is required to waive its right to any dividends on
Ordinary Shares while they are held within the Trust.
(d) The Zenith Executive Incentive Plan (the "Zenith Incentive Plan")
The Zenith Incentive Plan was established to enable participants to
acquire Ordinary Shares and Saatchi Ordinary Shares through the exercise of
options and/or in certain circumstances to be paid a cash bonus. The principal
terms of the Zenith Incentive Plan are set forth below:
The Zenith Incentive Plan is operated in conjunction with the Zenith
Employee Benefit Trust (the "Zenith Trust"), the Trustee of which (the
"Trustee") will, in exercising its discretion, take into account the
recommendations of the non-executive Directors of Zenith.
The Trustee can invite selected eligible employees and directors to
invest a certain amount of money (not exceeding L70,000) to enable them to
participate in the Zenith Incentive Plan. Awards will lapse unless such
investment is, at the discretion of the Trustee, either made by a payment to the
Trustee within 120 days of the award being made or is made by the participant
agreeing to sacrifice that amount of salary and/or bonus over a period not
exceeding three years. The investment is non-refundable and is not offset
against the exercise price payable.
The non-refundable investment to be provided by participants who wish
to participate in the Zenith Incentive Plan shall be one sixteenth of a
participant's maximum entitlement under the Zenith Incentive Plan. An award
comprises:
(a) an option over the same proportion of the total number of
Ordinary Shares available for the Zenith Incentive Plan as the
participant's maximum entitlement bears to L3.6 million being the
aggregate maximum entitlement for all participants available under the
Zenith Incentive Plan (the "CCG Option");
(b) an option over the same number of Saatchi Ordinary Shares
as the number of Ordinary Shares under the participant's CCG Option
(the "Saatchi Option"); and
(c) a contingent cash award of up to a participant's maximum
entitlement.
The exercise price for the CCG Option and the Saatchi Option is the
middle market quotation of the underlying shares on the day preceding the date
the options are granted.
The exact number of shares which may be acquired and/or the cash award
payable will be determined by the performance formula described below.
A participant's maximum entitlement will be reduced proportionately if
one month after the end of the third year of the performance period the FTSE 100
Index is lower than on the date the award was made. A participant's actual
entitlement will be determined by measuring the growth in operating profit (as
defined in the rules of the Zenith Incentive Plan) over a three year period,
with the base year being the year ending December 31, 1997 for the initial award
("Operating Profit Performance") as follows:
(a) If Operating Profit Performance is less than 5 percent per
annum, the award lapses;
(b) If Operating Profit Performance is 5 percent per annum a
participant's entitlement will be determined as 12.5 percent of his
maximum entitlement;
(c) if Operating Profit Performance is 15 percent per annum a
participant's entitlement will be determined as 40 percent of his
maximum entitlement; and
(d) if Operating Profit Performance is equal to or exceeds 25
percent per annum a participant's entitlement will be determined as
100 percent of the maximum entitlement.
A participant's entitlement in respect of Operating Profit Performance
between 5 percent per annum and 15 percent per annum and between 15 percent per
annum and 25 percent per annum increases on a straight line basis.
Awards will be satisfied so far as possible by the CCG Options and
Saatchi Options becoming exercisable to the same extent. The balance, if any, of
a participant's entitlement will be satisfied by the payment of cash by the
Zenith Trust or any company in the Zenith group.
Once the Performance Formula have been applied, the extent of vesting
of the CCG Option and the Saatchi Option determined and the cash sum, if any,
quantified, a participant will be entitled to receive one half of his
entitlement. The remaining half can only be acquired after the fourth
anniversary of the date the award was made. The award will lapse on the seventh
anniversary of the date of grant.
The Trustee will be required to waive its rights to any dividend on
Ordinary Shares or Saatchi Ordinary Shares while they are held within the Trust.
No new invitations were made to participate in the Zenith Incentive
Plan during 1998.
<PAGE>
The following chart shows as of June 1, 1999 the total number
of Ordinary Shares subject to outstanding options, the purchase price of the
Ordinary Shares pursuant to the options and the expiration date of the options:
<TABLE>
<CAPTION>
Exercise Number of
Scheme Date of Grant Price (p) Shares Exercisable
<S> <C> <C> <C> <C>
Executive No. 2 Scheme June 18, 1991 134 369,231 June 18, 2001
September 6, 1991 134 91,929 September 6, 2001
April 10, 1992 107 34,301 April 10, 2002
April 10, 1992 107 * 186,984 April 10, 2002
Demerger No. 2 Scheme June 18, 1991 134 343,248 June 18, 2001
April 10, 1992 107 78,895 April 10, 2002
April 10, 1992 107 * 6,174 April 10, 2002
Sharesave 1995 June 30, 1995 64 1,202,304 July 1, 2000 - December 31, 2000
Performance Option Scheme May 3, 1995 73 257,775 May 3, 2005
August 11, 1995 95 257,774 August 11, 2005
April 19, 1996 130 487,500 April 19, 2006
April 19, 1996 130 * 515,000 April 19, 2001 - April 19, 2003
April 23, 1997 131 722,500 April 23, 2000 - April 23, 2007
April 23, 1997 131 * 692,500 April 23, 2002 - April 23, 2004
Demerger Performance Option May 3, 1995 73 54,961 December 16, 2004
Scheme
May 3, 1995 73 * 109,926 May 3, 2000 - May 3, 2002
August 11, 1995 95 54,963 December 16, 2004
April 19, 1996 130 122,500 December 16, 2004
April 19, 1996 130 * 263,750 April 19, 2001 - April 19, 2003
April 23, 1997 131 195,000 April 23, 2000 - December 16, 2004
April 23, 1997 131 * 186,250 April 23, 2002 - April 23, 2004
Performance Share Option December 18, 1997 105 6,208,401 December 18, 2000 - December 18, 2004
Scheme (PSOS)
May 14, 1998 124 1,294,468 May 14, 2001 - May 14, 2005
March 11, 1999 165 1,868,580 March 11, 2002 - March 11, 2006
Equity Participation Plan December 18, 1997 105 11,034,720 December 18, 2000 - December 18, 2004
(EPP)
March 11, 1999 165 80,029 March 11, 2002 - March 11, 2006
Zenith Executive Incentive December 16, 1997 109 1,109,630 December 16, 2000 - December 16, 2004
Plan
</TABLE>
- ----------------------
Exercise prices have been rounded to the nearest pence.
Options marked * are super options as defined on pages 57 and 58.
In the case of the various demerger schemes, the date of grant shown is
that of the original option replaced under the demerger scheme.
<PAGE>
Changes in the number of Ordinary Shares issuable under options
outstanding under the Share Schemes, the Demerger Schemes, the Equity
Participation Plan, the Performance Option Scheme, the Zenith Scheme and
Sharesave 1995 during the financial year are as follows:
Executive Schemes Sharesave
Ordinary Shares Ordinary Shares
Balance at beginning of year 28,045,239 1,624,662
Options exercised (499,877) (84,612)
Options granted 1,523,078 -
Option lapsed (2,931,514) (248,507)
----------- ---------
At year end 26,136,926 1,291,543
========== =========
- ---------------------
As of June 1, 1999, the number of Ordinary Shares subject to options,
excluding phantom options, granted to the Directors and executive officers of
the Company was 9,197,238.
<PAGE>
The table below describes the various share options awarded to the
Directors of the Company as of June 1, 1999.
<TABLE>
<CAPTION>
Scheme Date of Grant Exercise Price(p) Number Shares Total Price Exercise Period
<S> <C> <C> <C> <C> <C>
C. Scott
Replacement Executive No. 2 06/18/1991 134 222,502 L298,153 To Jun 2001
Replacement Executive No. 2 06/18/1991 134 20,582 L27,580 To Jun 2001
Replacement Executive No. 2 04/10/1992 107 68,605 L73,407 To Apr 2002
Replacement Executive No. 2* 04/10/1992 107 10,290 L11,010 To Apr 2002
Replacement Performance* 05/03/1995 73 109,926 L80,246 May 2000-May 2002
Replacement Performance* 04/19/1996 130 150,000 L195,000 Apr 2001-Apr 2003
Replacement Performance 04/23/1997 131 75,000 L98,250 Apr 2002-Dec 2004
Replacement Performance* 04/23/1997 131 75,000 L98,250 Apr 2000-Dec 2004
J. de Yturbe
Performance Option Scheme 05/03/1995 73 40,498 L29,564 To May 2005
Performance Option Scheme 08/11/1995 94 40,498 L38,068 Aug 1998-Aug 2005
Performance Option Scheme 04/19/1996 130 45,000 L58,500 Apr 1999-Apr 2006
Performance Option Scheme* 04/19/1996 130 45,000 L58,500 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 45,000 L58,950 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 45,000 L58,950 Apr 2002-Apr 2007
W. Whitehead
Performance Option Scheme 05/03/1995 73 21,213 L15,485 To May 2005
Performance Option Scheme 08/11/1995 94 21,213 L19,940 Aug 1998-Aug 2005
Performance Option Scheme 04/19/1996 130 45,000 L58,500 Apr 1999-Apr 2006
Performance Option Scheme* 04/19/1996 130 45,000 L58,500 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 45,000 L58,950 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 45,000 L58,950 Apr 2002-Apr 2007
P. Schoning
Performance Option Scheme 05/03/1995 73 21,213 L15,485 To May 2005
Performance Option Scheme 08/11/1995 94 21,213 L19,940 Aug 1998-Aug 2005
Performance Option Scheme 04/19/1996 130 17,500 L22,750 Apr 1999-Apr 2006
Performance Option Scheme* 04/19/1996 130 17,500 L22,750 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 27,500 L36,025 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 27,500 L36,025 Apr 2002-Apr 2007
A. Hamill
Performance Option Scheme 05/03/1995 73 46,927 L34,257 To May 2005
Performance Option Scheme 08/11/1995 94 46,927 L44,111 Aug 1998-Aug 2005
Performance Option Scheme 04/19/1996 130 45,000 L58,500 Apr 1999-Apr 2006
Performance Option Scheme* 04/19/1996 130 45,000 L58,500 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 45,000 L58,950 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 45,000 L58,950 Apr 2002-Apr 2007
A. D'Angelo
Performance Option Scheme 05/03/1995 73 33,427 L24,402 To May 2005
Performance Option Scheme 08/11/1995 94 33,427 L31,421 Aug 1998-Aug 2005
Performance Option Scheme 04/19/1996 130 37,500 L48,750 Apr 1999-Apr 2006
Performance Option Scheme* 04/19/1996 130 37,500 L48,750 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 37,500 L49,125 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 37,500 L49,125 Apr 2002-Apr 2007
M. Bungey
Executive No. 2 Scheme 06/18/1991 134 137,211 L183,863 To Jun 2001
Executive No. 2 Scheme* 04/10/1992 107 74,814 L80,051 To Apr 2002
Performance Option Scheme 05/03/1995 73 67,498 L49,274 To May 2005
Performance Option Scheme 08/11/1995 94 67,497 L63,447 Aug 1998-Aug 2005
Performance Option Scheme* 04/19/1996 130 150,000 L195,000 Apr 2001-Apr 2003
Performance Option Scheme 04/23/1997 131 75,000 L98,250 Apr 2000-Apr 2007
Performance Option Scheme* 04/23/1997 131 75,000 L98,250 Apr 2002-Apr 2007
- ----------------------
During 1998, the Ordinary Shares traded on the London Stock Exchange at a high
of 136p, a low of 88.5p and closed at 107p on December 31, 1998.
All exercise prices for the share option schemes have been rounded down to the
nearest pence.
The options marked * are super options.
During the year, Charles Scott's spouse exercised options over 45,958 shares at
exercise prices of between 64.5p and 107.5p per share arising from her previous
employment with the Group. Other than disclosed above, no Directors exercised
options under any of the share option schemes during the year. A total of
159,279 options held by the above directors lapsed during the year.
</TABLE>
Item 13. Interest of Management in Certain Transactions.
Mr. Hamill is a director and shareholder of a trust company, which
held a 24.9 percent interest in the issued share capital of The Communications
Group. Mr. Hamill was personally entitled to 11.6 percent of the outstanding
units in the trust. In November 1998 the Group purchased the remaining 24.9
percent interest in The Communications Group. Mr. J. Fawcett and Mr. I. Smith
were entitled to 10.3 percent and 8.2 percent respectively of the outstanding
units in the trust.
PART II
Item 14. Description of Securities to be Registered.
Not Applicable.
PART III
Item 15. Defaults Upon Senior Securities.
None.
Item 16. Changes in Securities, Changes in
Security for Registered Securities and Use of Proceeds.
None.
PART IV
Item 17. Financial Statements.
The Company has elected to provide financial statements for 1998 and
the related information pursuant to Item 18.
Item 18. Financial Statements.
The Company's financial statements and the report thereon by its
Independent Auditor listed below and set forth on pages F-1 to F-51 herein are
hereby incorporated by reference into this Item 18.
(a) Independent Auditor's Report dated April 29, 1999.
(b) Consolidated balance sheets of the Company and subsidiaries as at
December 31, 1998 and 1997.
(c) Consolidated statements of operations, shareholders' deficiency and
other share capital, total recognized gains and losses and cash flows
of the Company and subsidiaries for the years ended December 31, 1998,
1997 and 1996.
(d) Notes to consolidated financial statements.
Item 19. Financial Statements and Exhibits.
(a) Financial Statements
(1) Consolidated balance sheets of the Company and subsidiaries as at
December 31, 1998 and 1997. (Page F-5)
(2) Consolidated statements of operations, shareholders' deficiency
and other share capital, total recognized gains and losses and
cash flows of the Company and subsidiaries for the years ended
December 31, 1998, 1997 and 1996. (Page F-2, F-3, F-4, F-6, F-7,
F-8)
(3) Notes to consolidated financial statements. (Pages F-9 to F-51)
(b) Exhibits
(1) Consent of Independent Auditor.
(3) Upon the request of the Securities and Exchange Commission, the
Company hereby agrees to provide the Commission with a list of
subsidiaries of Cordiant Communications Group plc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORDIANT COMMUNICATIONS GROUP PLC
By:/s/ David F. Ham
--------------------------
NAME: David F. Ham
TITLE: Group Controller
Date: June 29, 1999
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders of Cordiant Communications Group plc:
We have audited the accompanying balance sheets of Cordiant Communications Group
plc and subsidiaries as of 31 December 1997 and 1998, and the related
consolidated statements of operations, shareholders' deficiency and other share
capital, total recognised gains and losses and cash flows for each of the years
in the three year period ended 31 December 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom which are substantially equivalent to generally accepted
auditing standards in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cordiant
Communications Group plc and subsidiaries at 31 December 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended 31 December 1998, in conformity with generally accepted
accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations for each of the years in the
three year period ended 31 December 1998 and shareholders' deficiency at 31
December 1997 and 1998 to the extent summarised in note 37 to the consolidated
financial statements.
/s/ KPMG AUDIT PLC
London, England CHARTERED ACCOUNTANTS
29 April 1999 REGISTERED AUDITOR
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998
------------------------------
Total
Notes L million
Group and share of joint 1,847.4
ventures
Less: share of joint ventures (281.8)
-------
Group Turnover 1,565.6
-------
Group and share of joint 316.0
ventures
Less: share of joint ventures (14.2)
------
Commission and fee income 301.8
Operating and administration 3 (266.1)
expenses
Depreciation (9.7)
------
Operating profit 26.0
Share of operating profits:
Joint venture 1.4
Associated undertakings 1.2
--------
Profit before interest and 28.6
taxation
Net interest payable and 8 (2.7)
similar charges ---------
Profit before taxation 25.9
Taxation 9 (9.2)
---------
Profit after taxation 16.7
Minority interests (1.7)
---------
Net profit 15.0
Dividend proposed on equity shares (3.1)
---------
Profit retained for year 11.9
Net earnings per Ordinary Share ========
- - Basic 10 6.7p
- - Diluted 10 6.7p
There is no difference between the total reported results in the financial year
and that on an historical cost basis.
See accompanying notes to the consolidated financial statements.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------
Ongoing Disposed
operations operations Total
Notes L million L million L million
-----
<S> <C> <C> <C> <C>
Turnover 1,576.1 2,630.1 4,206.2
------- ------- -------
Commission and fee income 308.2 427.9 736.1
Operating and administration expenses 3 (276.2) (378.1) (654.3)
Depreciation (9.6) (16.6) (26.2)
---------- --------- ----------
Operating profit 22.4 33.2 55.6
Profit on disposal of businesses 2 16.5 4.3 20.8
Fundamental reorganization - demerger 6 (970.6) 937.6 (33.0)
-------- ------- ----------
Profit (loss) before interest and taxation (931.7) 975.1 43.4
Net interest payable and similar charges 8 3.5 (12.3) (8.8)
--------- --------- ----------
Profit (loss) before taxation (928.2) 962.8 34.6
Taxation 9 (8.1) (9.4) (17.5)
---------- --------- ---------
Profit (loss) after taxation (936.3) 953.4 17.1
Minority interests (1.8) (0.2) (2.0)
---------- --------- ----------
Net profit (loss) (938.1) 953.2 15.1
======= =======
Dividend proposed on equity shares (2.7)
Dividend on demerger 134.6
-------
Profit retained for year 147.0
=======
Net earnings per Cordiant Ordinary Share
- Basic 10 3.4p
- Diluted 10 3.4p
</TABLE>
To assist in the understanding of the Group the Company has classified the
results of Cordiant into ongoing and disposed operations.
There is no difference between the total reported results in the financial year
and that on an historical cost basis.
See accompanying notes to the consolidated financial statements.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1996
------------------------------------------------------------
Ongoing Disposed
operations operations Total
Notes L million L million L million
-----
<S> <C> <C> <C> <C>
Turnover 1,568.7 2,555.0 4,123.7
------- ------- -------
Commission and fee income 329.5 425.4 754.9
Operating and administration expenses 3 (298.4) (399.2) (697.6)
Depreciation (9.7) (16.1) (25.8)
----- ------ --------
Operating profit 21.4 10.1 31.5
Profit on disposal of businesses 2 - 17.8 17.8
---- ---- ----
Profit before interest and taxation 21.4 27.9 49.3
Net interest payable and similar charges 8 5.8 (13.3) (7.5)
--- ------ ---------
Profit before taxation 27.2 14.6 41.8
Taxation 9 (9.6) (5.2) (14.8)
----- ----- ---------
Profit after taxation 17.6 9.4 27.0
Minority interests (2.6) (0.2) (2.8)
----- ----- ---------
Net profit 15.0 9.2 24.2
==== ===
Dividend proposed on equity shares (4.4)
---------
Profit retained for year 19.8
=========
Net earnings per Cordiant Ordinary Share
- Basic 10 5.5p
- Diluted 10 5.4p
</TABLE>
To assist in the understanding of the Group the Company has classified the
results of Cordiant into ongoing and disposed operations.
There is no difference between the total reported results in the financial year
and that on an historical cost basis.
See accompanying notes to the consolidated financial statements.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
Notes 1998 1997
----- ---- ----
L million L million
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and short-term deposits 62.3 61.7
Short-Term Investments 11 1.5 0.2
Accounts and other receivables, prepayments and accrued
income 12/13 246.3 254.3
Billable production 13 15.4 18.1
------ ------
Total current assets 325.5 334.3
Long-Term Investments 14 4.0 3.5
Long-term receivables:
Accounts and other receivables, prepayments and accrued
income 12 18.3 15.5
Property and equipment 15 22.7 24.5
Goodwill 16.2 -
------- -------
Total assets 386.7 377.8
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank loans, overdrafts and other loans 16 21.7 8.4
Accounts payable, other liabilities and accrued expenses 17 268.0 301.5
Taxation and social security 22 24.0 21.6
----- -----
Total current liabilities 313.7 331.5
----- -----
Long-term liabilities:
Accounts payable, other liabilities and accrued expenses 17 13.5 1.6
Provision for joint venture deficit 18 14.7 14.3
Property, pension and other provisions 18 51.2 57.3
Long-term debt 19 36.4 28.4
Deferred taxation 21 2.2 0.5
Taxation 22 23.9 23.8
Minority interests 2.6 6.1
----- -----
Total long-term liabilities 144.5 132.0
----- -----
Total liabilities 458.2 463.5
----- -----
Shareholders' deficiency:
Share capital
Allotted, called up and fully paid:
225,461,044 Ordinary Shares of 50p each (1997:
221,926,993 Ordinary Shares of 50p each) 23 112.7 111.0
Share premium 2.3 -
Shares to be issued 1.3 -
Special reserve 25.7 25.7
Goodwill reserves - (113.2)
Accumulated deficit (213.5) (109.2)
------- -------
Shareholders' deficiency (71.5) (85.7)
------ ------
Total liabilities and shareholders' deficiency 386.7 377.8
===== =====
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
AND OTHER SHARE CAPITAL
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumu-
Premiums Shares Capital lated Total
Share in Excess to be Redemption *Special Goodwill Earnings Shareholders'
Capital of Par Value Issued Reserve Reserves Reserves (Deficit) Deficiency
L million L million L million L million L million L million L million L million
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1996 230.0 137.0 - 86.5 - (218.2) (460.2) (224.9)
Profit for the year - - - - - - 19.8 19.8
Shares issued net of 0.1 0.3 - - - - - 0.4
expenses
Goodwill acquired and - - - - - (17.4) - (17.4)
written off
Translation adjustment - - - - - - 6.8 6.8
------- ------- ------- ------- ------- ------- ------- -------
At December 31, 1996 230.1 137.3 - 86.5 - (235.6) (433.6) (215.3)
Issues of Ordinary shares 0.1 - - - - - - 0.1
net of expenses
Net goodwill arising in - - - - - (1.7) - (1.7)
year
Elimination of goodwill
reserves on demerger - - - - - 124.1 (124.1) -
Profit retained for the - - - - - - 147.0 147.0
year
Translation adjustment - - - - - - (15.8) (15.8)
*Reduction of capital (119.2) (137.3) - (86.5) 25.7 - 317.3 -
------- ------- ------- ------ ---- ------- ----- -------
At December 31, 1997 111.0 - - - 25.7 (113.2) (109.2) (85.7)
Issues of Ordinary shares 1.7 2.3 - - - - - 4.0
net of expenses
Transfer of Goodwill - - - - - 113.2 (113.2) -
reserve
Option payments for - - 1.3 - - - - 1.3
employee share scheme
Goodwill arising on
acquisitions made in - - - - - - (2.2) (2.2)
previous periods
Profit retained for the - - - - - - 11.9 11.9
period
Reversal of imputed
employee share scheme - - - - - - 0.9 0.9
cost
Translation adjustment - - - - - - (1.7) (1.7)
------- ------- ------- ------- ---- ------- ----- -----
At December 31, 1998 112.7 2.3 1.3 - 25.7 - (213.5) (71.5)
------- ------- ------- ------ ---- ------- ----- -------
As at December 31, 1998, the Accumulated Deficit included cumulative exchange translation losses of L28.7 million (1997:
L27.0 million; 1996: L11.2 million). There is no tax effect of these movements.
* Relates to the reduction of capital which took place as part of the demerger in 1997. The reserve is non-distributable other
than for the purposes of paying up shares in a bonus issue of fully paid shares.
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Profit for the financial year 15.0 15.1 24.2
Translation adjustment (1.7) (15.8) 6.8
----- ------ ----
Total gains (losses) recognized for the
financial year 13.3 (0.7) 31.0
==== ===== ====
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Ongoing operations 19.8 5.6 17.5
Disposed operations - 56.1 39.4
----- ----- -----
Net cash inflow from operating activities 27 19.8 61.7 56.9
---- ----- -----
Net cash outflow arising from external Demerger costs (8.2) (13.8) -
----- ------ ----
Returns on investments and servicing of finance
Interest received 1.9 5.3 7.3
Interest paid (including bank fees) (3.8) (13.6) (15.2)
Interest element of finance lease rental payments (0.1) (0.1) (0.1)
Dividends paid to minorities (2.5) (2.0) (1.2)
Bank fees (0.4) (1.9) (0.9)
----- ------- -------
Net cash outflow from returns on investments and
servicing of finance (4.9) (12.3) (10.1)
----- ------ ------
Taxation
UK corporation tax (paid) repaid 0.1
(0.7) -
Overseas tax paid (7.6) (15.1) (9.4)
----- ------- ------
Tax paid (8.3) (15.1) (9.3)
----- ------- ------
Capital expenditure and financial investment
Purchase of tangible fixed assets (8.7) (25.8) (26.9)
Sale of tangible fixed assets 1.2 2.6 2.9
Purchase of other fixed asset investments - (0.5) (0.9)
Sale of other fixed asset investments 0.1 1.2 0.1
--- ----- -----
Net cash outflow from capital expenditure and financial investment (7.4) (22.5) (24.8)
----- ------ ------
Acquisitions and disposals
Purchase of subsidiary undertakings (7.5) (9.3) (25.3)
Purchase of associated undertakings (0.2) - -
Cash acquired with subsidiaries 0.7 0.6 1.7
Sale of subsidiary undertakings - 41.6 9.9
Cash in businesses sold (0.4) (1.1) -
Cash in businesses demerged - (43.4) -
----- ------- ------
Net cash outflow from acquisitions and disposals (7.4) (11.6) (13.7)
----- ------ ------
Dividends from associated undertakings 0.2 - -
Equity dividends paid (2.7) (4.4) -
----- ----- ------
Total net cash outflow before financing (18.9) (18.0) (1.0)
------ ------ ------
Financing activities
Issues of Ordinary Share capital 0.5 0.1 -
Capital subscribed by minorities - - 0.2
Net borrowings (loan repayments) 8.6 17.3 (11.0)
Capital element of finance lease rental payments (0.2) (0.3) (0.4)
------ ------ -------
Net cash inflow (outflow) from financing 8.9 17.1 (11.2)
----- ----- ------
Decrease in cash (10.0) (0.9) (12.2)
====== ===== ======
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Accounting Policies
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Group's management (as is the case
with the management of all companies) 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.
The following paragraphs describe the significant accounting policies used in
preparing the consolidated financial statements.
Basis of Accounting
The financial statements have been prepared under the historical cost accounting
rules and in accordance with applicable accounting standards. FRS 12, FRS 13,
and FRS 15 will be adopted for the financial statements for the year ended
December 31, 1999.
Consolidation
The consolidated financial statements incorporate the financial statements of
Cordiant Communications Group plc and all its subsidiary undertakings made up to
December 31, 1998. All material intragroup transactions and balances have been
eliminated on consolidation.
Turnover
Turnover comprises amounts billed to clients, excluding sales taxes and
intragroup transactions. Billings are usually rendered upon presentation date
for media advertising and upon the completion of radio, television and print
production.
Revenue
Revenue represents the fees and commissions, excluding sales taxes, from
services provided to clients, and is recognized generally when work is billed.
Pension costs
Retirement benefits for employees of most companies in the Group are provided by
either defined contribution or defined benefit schemes which are funded by
contributions from Group companies and employees.
The Group's share of contributions to defined contribution schemes is charged
against profits of the year for which they are payable and the cost of providing
defined benefits is charged against profit, in accordance with the
recommendations of independent actuaries, in such a way as to provide for the
liabilities evenly over the remaining working lives of the employees.
Employee share schemes
Payments made by participants to acquire options under the Equity Participation
Plan are credited to capital as "Shares to be issued." The estimated cost of
awards is expensed as a charge to the profit and loss account on a straight line
basis over the period to which the performance criteria of the plan relate. In
compliance with UITF abstract 17: "Employee share schemes", the periodic charge
to the profit and loss account is credited to reserves. On exercise of options
under the plan the cost is transferred from reserves to share capital.
Leases
Where the Group enters into a lease which entails taking substantially all the
risks and rewards of ownership of an asset, the lease is treated as a finance
lease. The asset is recorded in the balance sheet as a tangible fixed asset and
is depreciated over the shorter of its estimated useful life and the lease term.
Future installments under such leases, net of finance charges, are included in
creditors. Rentals payable are apportioned between the finance element, which is
charged to the profit and loss account as interest, and the capital element,
which reduces the outstanding obligation for future installments.
All other leases are operating leases and the rental charges are taken to the
profit and loss account on a straight line basis over the life of the lease.
Goodwill
Purchased goodwill arising in respect of acquisitions before January 1, 1998
(including any additional goodwill estimated to arise from contingent capital
payments), when FRS10 was adopted, was written off to reserves in the year of
acquisition. A charge would be recognized in the Group's profit and loss account
in respect of any permanent diminution in the value of goodwill previously
written off to reserves. Goodwill written off directly to reserves and not
previously charged to the Group's profit and loss account is included in
determining the profit or loss on disposal of a subsidiary.
Purchased goodwill arising from acquisitions on and after January 1, 1998 has
been capitalized as an intangible fixed asset. The Directors are of the opinion
that the intangible fixed assets of the Group have an indefinite economic life
and as such the goodwill related to acquisitions to date is not amortized, but
is subject to annual review for impairment. This is due to the durability of the
Group's brand names, their ability to sustain long-term profitability and CCG's
commitment to develop and enhance their value. The acquisitions of the Group are
intended to enhance the long-term value of the Group's networks. The individual
circumstances of each subsequent acquisition the Group makes will be assessed to
determine the appropriate treatment of any related goodwill.
The financial statements depart from the specific requirement of companies
legislation to amortize goodwill over a finite period in order to give a true
and fair view. The Directors consider this to be necessary for the reasons given
above. Because of the indefinite life of these intangible assets, it is not
possible to quantify the impact of this departure.
Property and Equipment
Property and equipment are stated at historical cost less accumulated
depreciation. Additions, improvements and major renewals are capitalized.
Maintenance repairs and minor renewals are expensed as incurred. The cost of
property and equipment less the estimated residual value is written off by equal
annual installments over the expected useful lives of the assets as follows:
Long leasehold properties: 50 years
Short leasehold properties with terms of less than Period of lease
50 years:
Furniture and equipment: Between 4 and 10 years
Motor vehicles: 4 years
Joint ventures and associated undertakings
The Group's share of the profits less losses of all significant joint ventures
and associated undertakings is included in the Group profit and loss account on
a gross equity and equity accounting basis respectively. The carrying value of
significant joint ventures and associated undertakings in the Group balance
sheet is calculated by reference to the Group's equity in the net assets of such
undertakings.
Billable Production
Billable production is valued at the lower of cost and net realizable value, and
comprises mainly outlays incurred on behalf of clients.
Deferred taxation
Deferred taxation is provided at the anticipated tax rates on timing differences
arising from the inclusion of items of income and expenditure in taxation
computations in periods different from those in which they are included in the
financial statements, to the extent that it is probable that a liability or
asset will crystallize in the foreseeable future.
No provision is made for deferred tax on unremitted overseas earnings unless the
Group expects them to be remitted.
Property provisions
Provision is made on an undiscounted basis for the future rent expense and
related costs of leasehold property (net of estimated sublease income) where the
space is vacant or currently not planned to be used for ongoing operations.
Foreign currencies
Profit and loss accounts and cash flow statements in foreign currencies are
translated into sterling at the average rate during the year, with the year end
adjustment to closing rates being taken to reserves. Assets and liabilities in
foreign currencies are translated using the rates of exchange ruling at the
balance sheet date.
Gains or losses on translation of the opening net assets of overseas
subsidiaries are taken to reserves. Exchange differences arising from the
retranslation of long-term foreign currency borrowings used to finance foreign
currency investments are also taken to reserves. All other exchange differences
are taken to the profit and loss account.
The Group's principal trading currencies and the exchange rates used against
(pound) sterling are as follows:
Average rate Closing rate
------------ ------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
US Dollar 1.66 1.64 1.56 1.66 1.65
French Franc 9.77 9.55 7.99 9.29 9.90
Deutschmark 2.91 2.84 2.35 2.77 2.96
Australian Dollar 2.64 2.21 2.00 2.71 2.52
Spanish Peseta 247 240 198 236 251
Italian Lira 2,877 2,790 2,409 2,743 2,909
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 2 - Acquisitions, Disposals and Contingent and Deferred Capital Payments*
Acquisitions
In November 1998, the purchase of the remaining 24.9% of The Communications
Group Pty Ltd, the holding company of its Australian subsidiaries, previously
held by management, was completed. The acquisition was effective from July 1,
1998. The cost of acquisition was (pound)6.7 million, of which (pound)3.3
million was paid in cash and (pound)3.4 million by the issue of shares. The
agreement provides for a further payment in 2000 based on the profits for 1998
and 1999.
In July 1998, Bates Advertising USA, Inc. acquired the whole of the share
capital of The Criterion Group, Inc., renamed Bates Travel and Tourism, Inc..
The initial payment was US$1.9 million ((pound)l.2 million) and further payments
are due in the years 1999, 2000 and 2001 based on the average profits for the
preceding three years. Estimated total additional payments of US$4.3 million
((pound)2.6 million) have been accrued.
In October 1998, Bates Advertising USA, Inc. acquired the whole of the issued
share capital of Churchill Advertising Group, Inc. renamed Bates Churchill
Advertising Group, Inc., and Churchill Group, Inc., renamed Bates Churchill
Group, Inc.. The acquisition was effective from July 1, 1998. The initial
payment was US$1.3 million ((pound)0.8 million) and further payments are due in
the years 1999, 2000, 2001 and 2002 based on the average revenue of the 4 years
ended June 30, 2002. Estimated total additional payments of US$5.4 million
((pound)3.3 million) have been accrued.
In October 1998, the previous 10% holding in Verdino Bates SA in Argentina was
increased by the acquisition of an additional 80%. Subsequently Verdino Bates SA
acquired the whole of the share capital of Fernando Fernandez SA in exchange for
a 30% share of Verdino Bates SA with which it has been merged. The merged
company has been renamed Verdino Bates Fernando Fernandez SA. The capital
restructuring reduces CCG's holding to 63%. The initial payment for the
additional shares was (pound)1.4 million and this is adjustable based on average
profits for the years 1997-1999. Put and call options have been granted for an
additional 7% of the shares.
During 1998, CCG acquired 50.8% holding in EMC Starke & Gerlach GmbH in Germany,
51% holding in Kontoret As Reklamebyra in Norway and 100% holding in Not Just
Film in The Netherlands. The consideration paid in 1998 for all these
acquisitions was (pound)0.7 million in cash and with further consideration which
is not yet quantifiable.
- -----------------------
* Where applicable in this Note, translations from US dollars are made at the
rates at which the transactions were concluded.
<PAGE>
Disposals
The profit (loss) on disposal of businesses is discussed by year below:
(a) 1998
No disposals took place in 1998. The share capital of Bates Japan Ltd was
restructured during the year, converting it from a wholly-owned subsidiary to a
31% joint venture investment in the renamed Saatchi & Saatchi Bates Yomiko KKK.
No profit or loss arose as a result of this.
(b) The profit on disposal of businesses in 1997
The profit on disposal of businesses in 1997 of (pound)20.8 million arose from
the sale of NRG and the disposal of the Interpublic Group of Companies ("IPG")
shares received by Cordiant due to clauses in the sale agreement of KDW in 1995
(see (c) below).
In October 1997, Cordiant sold NRG for a gross cash consideration of $53.1
million ((pound)32.4 million). The gross consideration included $13.1 million
((pound)8.0 million) payable to certain of NRG's directors under terms of an
agreement entered into in 1995. Net assets disposed of were estimated at $7.5
million ((pound)4.6 million). After accounting for provisions totaling $5.4
million ((pound)3.3 million) for additional tax, professional fees and
determination of the disposed balance sheet, the profit on sale was $27.1
million ((pound)16.5 million).
(c) The profit on disposal of businesses in 1996
The profit on disposal of businesses in 1996 of (pound)17.8 million arose from
additional consideration received regarding the sale of KDW and further
consideration of (pound)1.3 million for disposals in prior years.
In 1995, shareholders approved the sale of KDW to its management. Consideration
was $13.7 million ((pound)8.8 million) in cash, $9.5 million ((pound)6.1
million) in the form of a 10 per cent subordinated loan note of the purchaser,
$4.0 million ((pound)2.5 million) in the form of redeemable preferred stock in
the purchaser and warrants to subscribe for shares of common stock in the
purchaser representing approximately 25% of the purchaser's fully diluted equity
share capital, exercisable at a price of $250,000 ((pound)161,000) in aggregate.
In 1996 KDW was sold to IPG and, as a result, Cordiant exercised its right to
take up the warrants and recognized a further gain of (pound)16.5 million. The
additional consideration received was $13.5 million ((pound)8.7 million) in cash
from the repayment of a loan note and redeemable preferred stock, and $18.5
million ((pound)11.9 million) in shares of IPG.
In July 1997, all the IPG shares were disposed of for consideration of $28.0
million ((pound)17.1 million) in cash resulting in a further gain on disposal
of(pound)4.3 million.
Contingent and Deferred Capital Payments
The Group may make capital payments in future years as a result of contracts
entered into to acquire additional interests in subsidiaries and associated
companies. Such payments are contingent on the levels of profits achieved by
those companies and may be partially paid by the issue of shares at the Group's
option. In addition, the Group is committed to pay certain deferred
consideration payments. CCG estimates that, at the rates of exchange ruling at
December 31, 1998, the total payments (including interest) that may be made are
as follows:
Contingent Deferred 1998 1997
Payments Payments Total Total
--------- -------- ----- -----
L million L million L million L million
Due within 1 year 4.1 - 4.1 0.1
Due within years 2-5 6.4 - 6.4 3.6
--- --- --- ---
10.5 - 10.5 3.7
==== === ==== ===
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 3 - Operating and Administrative Expenses
Operating and administrative expenses from continuing operations included the
following:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Staff and associated costs (see note 7) 168.9 407.3 426.4
Hire of plant and machinery - operating leases
(see note 26) 1.6 2.9 3.1
Hire of other assets - leasehold property net of
sublease income (see note 26) 17.2 47.7 48.3
(Profit) loss on sale of tangible fixed assets (0.1) (0.8) 0.2
Goodwill written off 0.2 2.2 -
Auditor's remuneration, including expenses 1.0 2.6 2.5
Auditor's remuneration, other than audit fees* 0.3 0.4 0.9
Other administrative expenses, including
exceptional items 77.0 192.0 216.2
------ ----- -----
266.1 654.3 697.6
===== ===== =====
</TABLE>
*In 1997 in addition to non-audit fees paid to our auditor shown above,
additional fees of (pound)6.8 million relating to work in respect of the
Demerger are included in the fundamental reorganization cost (see note 6). Work
performed primarily included due-diligence, work associated with the circular to
shareholders relating to the demerger and the listing particulars of Saatchi &
Saatchi, and advice on the fundamental reorganization of Cordiant.
CCG made charitable donations in the United Kingdom of (pound)14,000 in 1998 in
the year ended December 31, 1998. Cordiant made charitable donations in the
United Kingdom of (pound)58,000 and (pound)34,000 in the years ended December
31, 1997 and 1996, respectively.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 4 - Exceptional Operating Items
Included in Operating and Administrative Expenses in Note 3 above are the
following exceptional items:
<TABLE>
<CAPTION>
Total Ongoing Disposed Total Ongoing Disposed Total
1998 operations operations 1997 operations operations 1996
Lm Lm Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C> <C> <C>
Termination of a defined
benefits pension plan - - - - 0.2 8.1 8.3
Leasehold property
provisions - - - - - 8.2 8.2
Goodwill written off - 2.2 - 2.2 - - -
- 2.2 - 2.2 0.2 16.3 16.5
= === = === === ==== ====
</TABLE>
The pension plan costs arose from a decision taken as part of Cordiant's
efficiency program to terminate the defined benefits plan in the USA. The scheme
was frozen at June 30, 1996 and terminated on December 31, 1996.
The leasehold property provision arose from the decision to vacate surplus
office space with an estimated future net rental shortfall of (pound)8.2
million.
The goodwill written off relates to the Group's Indonesian subsidiary. The
decision was taken in view of the economic uncertainty in that country.
Note 5 - Discontinued Operations
All the Group's operations throughout 1998 were considered by the Directors to
be ongoing.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 6 - Fundamental Reorganization - Demerger
In order to implement the Demerger, inter-group debt and subsidiaries had to be
eliminated. This was carried out by sale, assignment, waiver or other means.
Surpluses and losses arising from these transactions are shown below.
<TABLE>
<CAPTION>
Ongoing Disposed
Total 1998 operations operations Total 1997
Lmillion Lmillion Lmillion Lmillion
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Surplus (loss) on inter-group debt - 875.0 (1,011.8) (136.8)
Surplus on transfer of subsidiaries - 72.7 64.1 136.8
Amounts payable in relation to the demerger - 16.3 3.9 20.2
Head office reorganization - 6.6 0.1 6.7
Inter-group property provisions - - 6.1 6.1
----- --------- ------- -------
Fundamental reorganization - demerger - 970.6 (937.6) 33.0
===== ===== ======= ====
</TABLE>
Amounts payable in relation to the Demerger include external advisors' fees,
temporary staff and other costs.
Property provisions, which have no cash impact, arose as a result of the
Demerger and represented the difference between rental payable by Saatchi &
Saatchi and the amounts receivable from Zenith for space sublet to them.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 7 - Employees
Average number of employees of CCG by geographic area:
Year ended
December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
UK 478 509 574
The Americas 933 914 1,096
Continental Europe 1,634 1,565 1,601
Asia Pacific 1,772 1,672 1,595
----- ----- -----
Ongoing operations 4,817 4,660 4,866
Disposed operations - 5,938 5,343
------ ----- -----
4,817 10,598 10,209
----- ------ ------
<TABLE>
<CAPTION>
Total Ongoing Disposed Total Ongoing Disposed Total
1998 operations operations 1997 operations operations 1996
Lm Lm Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C> <C> <C>
Wages and salaries 150.0 156.1 204.5 360.6 162.4 204.9 367.3
Social security costs 14.5 15.6 18.7 34.3 17.0 20.2 37.2
Pension costs - see note 25 4.4 4.5 7.9 12.4 5.7 16.2 21.9*
----- ----- ----- ----- ----- ----- -----
168.9 176.2 231.1 407.3 185.1 241.3 426.4
----- ----- ----- ----- ----- ----- -----
</TABLE>
* Included in the pension cost for 1996 of L21.9 million there was an
exceptional charge of L8.3 million to terminate the defined benefits
pension plan in the US (see note 4).
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 8 - Net Interest and Similar Charges
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Interest payable and similar charges:
On bank loans, overdraft facilities and other loans
required to be repaid within five years 3.6 13.4 13.1
On capitalized leases and hire purchase 0.1 0.1 0.1
On other loans - 0.4 0.4
Bank fees 0.7 1.9 1.1
Foreign exchange 0.3 - -
--- --- ----
4.7 15.8 14.7
--- ---- ----
Interest receivable and similar items:
On cash and deposits (1.7) (5.3) (6.5)
Note interest (0.1) (0.3) (0.7)
Foreign exchange - (1.4) -
------- ----- --
(1.8) (7.0) (7.2)
----- ----- -----
Group net interest payable 2.9 8.8 7.5
Net interest (receivable)/payable
- - Joint ventures (0.1) - -
- - Associated undertakings (0.1) - -
----- ------ ----
Net interest payable and similar items 2.7 8.8 7.5
=== === ===
</TABLE>
Note 9 - Taxes on Income
Taxes on income were made up as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
UK corporation tax:
ACT written off - - 1.1
Currently payable 1.3 0.7 1.1
Relief for overseas tax (0.1) (0.5) (0.6)
Deferred - 0.2 (0.5)
----- ----- -----
1.2 0.4 1.1
Overseas taxation:
Currently payable 5.7 17.9 13.1
Deferred 1.4 (0.8) 0.6
--- ----- ----
Group taxation 8.3 17.5 14.8
Joint ventures 0.5 - -
Associated undertakings 0.4 - -
--- ----- ----
Tax on ordinary activities 9.2 17.5 14.8
=== ==== ====
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
The above charges reconcile as follows with the standard UK corporation tax
rates:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Tax charge in financial statements (9.2) (17.5) (14.8)
Tax charge (credit) on pre-tax profit
(loss) at 31% (1997: 31.5%, 1996: 33%) 8.0 10.9 13.8
--- ------ -----
Difference (1.2) (6.6) (1.0)
===== ====== =====
Deferred tax credits not available 2.3 6.0 1.5
Permanent differences between
expenditures charged in arriving at
income and expenditures allowed for
tax purposes:
UK (1.4) 2.1 0.8
US 0.1 (0.5) 0.4
Rest of World (1.1) 0.7 (1.1)
Demerger - (10.4) -
Goodwill - (0.7) -
Unrelieved profit/(losses) (1.3) 3.1 1.4
Difference between UK and
overseas standard tax rates (1.8) (4.0) (2.3)
Irrecoverable ACT - - (1.1)
Other items 2.0 (2.9) (0.6)
--- ----- -----
Difference above (1.2) (6.6) (1.0)
===== ===== =====
</TABLE>
The components of income (loss) before taxation are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Domestic (UK) 4.2 (17.0)* 11.5
Foreign 21.7 51.6 30.3
---- ---- ----
25.9 34.6 41.8
==== ==== ====
* The loss before taxation in the UK in 1997 incorporated L26.5 million of the fundamental reorganization
expense of L33.0 million (see note 6).
</TABLE>
At December 31, 1998, the Group had (pound)91 million of operating loss
carryforwards expiring between 1999 and 2010. Additionally, the Group had
(pound)25 million of operating loss carryforwards which had no expiration date.
It is possible that all or part of the operating loss carryforwards expiring
between 1999 and 2010 may be restricted or eliminated under any of several
statutory/regulatory provisions or judicially-created doctrines. Moreover, the
operating loss carryforwards are generally only available to offset future
income of the Group within the tax jurisdiction where the operating loss arose,
and are not transferable between jurisdictions.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 10 - Earnings Per Ordinary Share
Basic earnings per Ordinary Share has been calculated on earnings of L15.0
million (1997: L15.1 million, 1996: L24.2 million) based on 222,436,033 shares
(1997: 443,852,410 shares; 1996: 443,615,772 shares) being the weighted average
number of Ordinary Shares in issue during the periods. The number of Ordinary
Shares in issue in 1997 has not been adjusted to reflect the Consolidation
following the Demerger. The Company believes that as the earnings for 1997
include the demerged businesses for substantially the whole year, the number of
Cordiant Ordinary Shares in issue in 1997 used to calculate earnings per
Cordiant Ordinary Share should remain unaltered. The number of Ordinary Shares
in issue at December 31, 1998 was 225,461,044 (1997: 221,926,993).
Share options outstanding under the employee share schemes are considered to be
common stock equivalents, and are included in the earnings per share calculation
only when they are dilutive.
Earnings per share on the nil distribution (earnings exclude any irrevocable
advance corporation tax (ACT) and any unrelieved overseas tax arising from the
payment or proposed payment of dividends) and fully diluted bases have not been
disclosed as they are not materially different.
Diluted earnings per ordinary share have been based on 223,337,644 shares (1997:
445,868,612 shares; 1996: 445,269,276).
Note 11 - Short-Term Investments
Short-term investments comprised overseas unlisted investments of (pound)0.7
million and cash deposits of (pound)0.8 million. In 1997, short-term investments
comprised overseas unlisted investments of (pound)0.2 million.
Note 12 - Accounts and Other Receivables, Prepayments and Accrued Income
<TABLE>
<CAPTION>
1998 1997
---- ----
L million L million
<S> <C> <C>
Due within one year:
Trade receivables (net of allowances for doubtful debts) 212.8 219.0
Amounts due from joint ventures and associated undertakings 1.1 0.4
Other receivables 9.9 16.5
Prepayments and accrued income 22.5 18.4
----- ----
246.3 254.3
===== =====
Due after one year:
Other receivables 16.7 14.8
Prepayments and accrued income 1.6 0.7
---- -----
18.3 15.5
==== ====
Reference should be made to Note 13 concerning the amounts of allowances for doubtful debts for each
of the years presented.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 13 - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at charged to
beginning costs and Balance
Description of period expenses Deductions* at end of period
----------- --------- --------- ----------- ----------------
L million L million L million L million
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts (deducted
from accounts receivable) L7.3 L0.2 L - L7.5
--- --- --- ---
Allowance for nonrecoverable billable
production (deducted from billable L3.2 L - L(1.1) L2.1
production) --- --- ----- ---
Year ended December 31, 1997:
Allowance for doubtful accounts (deducted
from accounts receivable) L18.0 L - L(10.7)** L7.3
---- --- ------ ---
Allowance for non-recoverable billable
production (deducted from billable L4.6 L - L(1.4)** L3.2
production) --- --- ----- ---
Year ended December 31, 1996:
Allowance for doubtful accounts (deducted
from accounts receivable) L20.0 L - L(2.0) L18.0
---- --- ----- ----
Allowance for nonrecoverable billable
production (deducted from billable
production) L 3.5 L1.1 L - L4.6
--- --- --- ---
* Substantially represents amounts utilized against specific nonrecoverable billable production and bad debts arising during
the periods.
** The deductions in 1997 include demerged allowances of L8.1 million for doubtful accounts and L2.0 million for
nonrecoverable billable production.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 14 - Long-Term Investments
<TABLE>
<CAPTION>
Associated undertakings
----------------------------------
Share of tangible Share of Long term
net assets Goodwill Total investments Total
---------- -------- ----- ----------- -----
Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C>
Cost or valuation
At beginning of year 2.4 - 2.4 3.6 6.0
Additions (0.1) 0.1 - 0.4 0.4
Disposals - - - (3.2) (3.2)
Share of retained profit 0.8 - 0.8 - 0.8
--- ----- --- ----- ---
At end of year 3.1 0.1 3.2 0.8 4.0
--- --- --- --- ---
Amounts written off
At beginning of year - - - 2.5 2.5
Disposals - - - (2.5) (2.5)
----- ----- ----- ----- -----
At end of year - - - - -
----- ----- ----- ----- ---
Net book value
At beginning of year 2.4 - 2.4 1.1 3.5
=== ===== === === ===
At end of year 3.1 0.1 3.2 0.8 4.0
=== === === === ===
</TABLE>
Long term investments include unlisted loan notes and redeemable preference
shares with a face value of approximately (pound)nil (1997: (pound)2.4 million)
issued by the purchasers of companies disposed of by the Group which were due on
various dates commencing in 1998 and which were fully provided.
The Group's investment in Zenith and Saatchi & Saatchi Bates Yomiko (S&SBY) are
joint ventures, and are represented by a net deficit and disclosed as a
provision (see Note 18).
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 15 - Property and Equipment
<TABLE>
<CAPTION>
Leasehold Leasehold Information
property property technology Furniture and
- long - short equipment other equipment Motor vehicles Total
------ ------- --------- --------------- -------------- -----
Lm Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C> <C>
Cost
At beginning of year 0.3 19.2 25.9 32.8 4.7 82.9
Translation adjustment - - (0.5) (0.2) - (0.7)
Additions - 1.6 5.2 1.9 0.3 9.0
Companies acquired - 0.7 0.5 0.8 - 2.0
Companies disposed of - - - (0.9) - (0.9)
Disposals - (0.6) (2.5) (1.9) (1.4) (6.4)
--- ----- ----- ----- ----- -----
At end of year 0.3 20.9 28.6 32.5 3.6 85.9
--- ---- ---- ---- --- ----
Depreciation
At beginning of year 0.2 13.8 17.1 24.3 3.0 58.4
Translation adjustment - - (0.3) (0.1) - (0.4)
Companies acquired - 0.5 0.3 0.5 - 1.3
Companies disposed of - - - (0.4) - (0.4)
Charge for the year - 2.3 4.5 2.2 0.7 9.7
Disposals - (0.4) (2.8) (1.1) (1.1) (5.4)
--- ----- ----- ----- ----- -----
At end of year 0.2 16.2 18.8 25.4 2.6 63.2
--- ---- ---- ---- --- ----
Net book value
At beginning of year 0.1 5.4 8.8 8.5 1.7 24.5
=== === === === === ====
At end of year 0.1 4.7 9.8 7.1 1.0 22.7
=== === === === === ====
Net book value of
assets held under
finance leases
included above
At beginning of year - - - - 0.1 0.1
===== ===== ===== ===== === ===
At end of year - - 0.3 0.1 - 0.4
===== ===== === === ===== ===
Net book value of land and buildings at end of year was L4.8 million (1997: L5.5 million).
Depreciation attributable to owned property and equipment was L9.5 million (1997: L25.9 million); and depreciation
attributable to assets held under finance leases was L0.2 million (1997: L0.3 million).
At December 31, 1998 the commitments in respect of capital expenditure on properties, furniture and equipment was
L0.2 million (1997: L0.5 million).
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 16 - Bank Loans, Overdrafts and Other Loans
Balance at end of Weighted average
period interest rate
Year ended December 31, 1998
L million %
--------- -
Bank loans and overdrafts 21.7 6.1
Other loans - -
---- --
21.7 6.1
==== ===
Year ended December 31, 1997
L million %
--------- -
Bank loans and overdrafts 7.8 4.8
Other loans 0.6 8.0
--- ---
8.4 5.0
=== ===
An amount of (pound)2.0 million (1997: (pound)4.6 million) included in bank
loans and overdrafts is secured by guarantees from and charges over the assets
of the Company and a number of its subsidiaries.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 17 - Accounts Payable, Other Liabilities and Accrued Expenses
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------ ---------------------------
Due Within Due After Due Within Due After
one year one year one year one year
-------- -------- -------- --------
L million L million L million L million
<S> <C> <C> <C> <C>
Accounts payable 185.0 - 194.2 -
Amounts payable: Associated companies and joint ventures 7.6 - 11.3 -
Payments on account 25.8 - 28.9 -
Finance leases 0.2 0.2 0.1 0.1
Proposed dividends - equity shareholders 3.1 - 2.7 -
Other payables 46.3 13.3 64.3 1.5
----- ---- --------- ---
268.0 13.5 301.5 1.6
===== ==== ========= ===
An amount of L3.5 million (December 31, 1997:L4.0 million) included in accounts payable is secured by related trade
receivables. Liabilities under finance leases are secured on the assets leased.
</TABLE>
Note 18 - Property, Pension and Other Provisions
<TABLE>
<CAPTION>
Pensions
and similar
employment Joint
Property obligations Other Total ventures
-------- ----------- ----- ----- --------
Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C>
At beginning of year 40.2 16.6 0.5 57.3 (14.3)
Company transferred to joint ventures - (0.2) - (0.2) (1.2)
Profit and loss account - 1.2 0.3 1.5 0.8
Utilized (7.0) (0.4) - (7.4) -
----- ----- --- ----- ---
At end of year 33.2 17.2 0.8 51.2 (14.7)
==== ==== === ==== ======
Property provisions relate to future payments on vacant properties and assigned leases, and are analyzed by year as follows:
</TABLE>
1998 1997
L million L million
Under one year 4.5 6.0
One to two years 3.3 5.0
Two to five years 10.3 9.6
Over five years 15.1 19.6
---- ----
33.2 40.2
==== ====
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Provisions for joint venture deficit:
The Group share of net liabilities of Zenith and S&SBY is shown below.
1998 1997
---- ----
Lm Lm
Fixed assets 1.7 1.8
Current assets 81.9 49.8
---- ----
Share of gross assets 83.6 51.6
---- ----
Liabilities due within one year (97.0) (64.3)
Liabilities due after one year (1.3) (1.6)
----- -----
Share of gross liabilities (98.3) (65.9)
------ ------
Share of joint venture net liabilities (14.7) (14.3)
====== ======
Note 19 - Long-Term Debt
1998 1997
---- ----
L million L million
Bank loans 36.4 25.2
Other loans - 3.2
--- -----
36.4 28.4
==== ====
An amount of (pound)36.4 million (1997:(pound)25.2 million) of the Group's
borrowings is secured by guarantees from and charges over the assets of the
Company and a number of its subsidiaries.
At December 31, 1998, the Group had committed core banking facilities totaling
(pound)65.6 million (1997:(pound)53.6 million) of which (pound)36.4 million
(1997:(pound)25.2 million) were being utilized. These facilities will be reduced
in accordance with the following schedule:
1999 2000 2001 2002
---- ---- ---- ----
US$m 6.0 15.0 20.0 the balance
Lm 3.6 9.1 12.1 the balance
Interest is payable on each advance under the facilities at a rate per annum
based on the aggregate of LIBOR and a margin of between 0.75% and 1.5% per annum
depending upon the ability of the Group to improve certain financial ratios.
The facilities agreement contains certain covenants relating to the financial
performance of the Group. As of December 31, 1998 there had been no breaches of
covenants or other defaults under the agreement which have caused or are likely
to cause an early repayment of the debt to be enforced.
In addition, the Group has various uncommitted facilities.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 20 - Guarantees and Contingent Liabilities
L37.6 million (1997: L29.7 million) of the Group's borrowings are secured by
guarantees from and charges over the assets of the Group.
The Company has also guaranteed the operating lease commitments (all relating to
leasehold property) of certain subsidiary undertakings. The leases are for
various periods up to the year 2013 and the total obligations at December 31,
1998 amounted to L152.9 million (1997:L163.4 million) and in addition the
Company has given other guarantees in respect of liabilities of subsidiary
undertakings incurred in the normal course of business amounting to L27.3
million (1997:L26.0 million).
Cordiant gave a number of guarantees in respect of obligations of Saatchi &
Saatchi companies which remain in force. Saatchi & Saatchi has undertaken to
indemnify CCG for any liability under these guarantees. They include guarantees
of operating lease commitments related to a leasehold property in New York. The
lease expires in the year 2013 and the total obligations at December 31, 1998
were L189.5 million (1997: L202.5 million).
CCG and Saatchi & Saatchi have each guaranteed Zenith's bank facility of L20.5
million and have agreed between themselves to share equally any liability
arising therefrom. Borrowings drawn down under the Zenith facility at December
31, 1998 were L5.1 million. There is no comparative as Zenith was a subsidiary
of Cordiant and did not have its own bank facility.
Other guarantees given by the Group to third parties amounted toL4.9 million at
December 31, 1998 (1997:L5.9 million).
On June 18, 1998, Miller Brewing Company ("Miller"), a former client of Bates
Worldwide, commenced an action in the United States District Court for the
Eastern District of Wisconsin against Bates Advertising USA, Inc. and Zenith
Media Services, Inc. (the "Defendants"). The suit seeks damages in an
unspecified amount, attorneys' costs and seeks equitable relief, as necessary,
to cause the Defendants to fulfill their alleged obligations to Miller. The
Company believes that the Defendants have meritorious defenses to the
allegations and intends to pursue them vigorously. The Directors believe that in
the event of the claimant being successful, the liability of the Group would be
limited to its self-insured retention of US$125,000.
At December 31, 1998, the Group had the following other commitments in respect
of capital expenditure and non-cancelable operating leases for the following
year:
1998 1997
L L
Capital expenditure committed but not
provided for 0.2 0.5
--------------------------------
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Land and
buildings
Gross provisions Net Other 1998 1997
Lm Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C> <C>
Non-cancelable operating
lease which expire:
Within one year 2.6 (0.8) 1.8 0.8 2.6 2.6
Within two to five years 9.7 (1.1) 8.6 0.6 9.2 7.6
Over five years 16.3 (2.6) 13.7 - 13.7 13.3
------------------------------------------------------------------------------------
28.6 (4.5) 24.1 1.4 25.5 23.5
====================================================================================
Of the above operating lease property commitments, an amount of L8.2 million is recoverable from
subtenants (1997: L8.1 million).
</TABLE>
Note 21 - Deferred Taxation
1998 1997
---- ----
L million L million
Provisions for UK deferred taxation - -
Provisions for overseas deferred taxation 2.2 0.5
--- ---
2.2 0.5
=== ===
The Group has no material deferred tax liabilities unprovided in respect of
accelerated capital allowances.
Unremitted earnings of subsidiaries which have been or are intended to be
permanently reinvested to meet media accreditation and working capital
requirements, exclusive of amounts which if remitted in the near future would
result in little or no tax by operation of relevant statutes normally in effect,
aggregated L63 million (1997: L67 million).
Under US GAAP temporary differences at the appropriate tax rate at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
--------------------
1998 1997
---- ----
L million L million
Deferred Tax Assets
- -------------------
<S> <C> <C>
Accrued property rental expense 7.9 7.8
Accrued compensation 4.7 5.2
Capital loss carryforwards 10.1 12.1
Operating loss carryforwards* 47.1 48.2
Interest disallowed under Section 163(j) of the IRC - -
Provision for notes receivable and other long term receivables - -
Other 9.2 13.1
----- ----
Total deferred tax assets 79.0 86.4
Valuation allowance (79.0) (85.8)
------ ------
Net deferred tax asset - 0.6
======= =====
</TABLE>
<TABLE>
<CAPTION>
Assets (Liabilities)
--------------------
1998 1997
---- ----
L million L million
Deferred Tax Liabilities
- ------------------------
<S> <C> <C>
Difference in basis of intangible assets - (0.4)
Other (2.2) (0.7)
----- -----
Total deferred tax liabilities (2.2) (1.1)
----- -----
Net deferred tax liability (2.2) (0.5)
===== =====
</TABLE>
* See Note 9 for a discussion of potential restrictions on operating loss
carryforwards.
There are no material differences between UK GAAP and US GAAP. A valuation
allowance is provided to reduce the deferred tax assets to a level which, based
on the weight of available evidence, will more likely than not be realized. The
net deferred asset reflects management's estimate of the amount which will be
realized based on this criteria.
The net change in the valuation allowance for deferred tax assets during 1998
amounted to a decrease of L6.8 million.
Note 22 - Taxation
This largely represents corporation tax liabilities due to be paid in more than
one year from the date of the financial statements. Tax liabilities due to be
settled in less than one year are included under current liabilities.
Note 23 - Share Capital
December 31,
-----------------------------
1998 1997
---- ----
L million L million
Authorized share capital of the Company 150.5 150.5
===== =====
Allotted, called up and fully paid:
225,461,044 Ordinary Shares of 50p each
(1997: 221,926,993 Ordinary Shares of 50p each) 112.7 111.0
===== =====
During the year the Company issued 600,000 Ordinary Shares of 50p each pursuant
to receipt of notices to exercise options from employees of the Group.
<PAGE>
Note 24 - Employee Share Schemes
Changes in the number of CCG Ordinary Shares issuable under options outstanding
under the Company's executive share option schemes during the three year period
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year ended
CCG Ordinary Shares: December 31,
---------------------------------------------------------------
1998 1997 1996
---- ---- ----
(Number of Shares)
<S> <C> <C> <C>
At beginning of year 28,045,239 12,589,854 10,190,722
Options issued during year 1,523,078 26,037,467 3,645,000
Options exercised during year (499,877) (159,692) (13,722)
Options lapsed during year (2,931,514) (1,064,485) (1,232,146)
Options canceled during year - (9,357,905) -
------------------ ----------- -----------
At end of year 26,136,926 28,045,239 12,589,854
========== ========== ==========
</TABLE>
Changes in the number of CCG Ordinary Shares issuable under options outstanding
under Sharesave 1995 during the three year period ended December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Year ended
CCG Ordinary Shares: December 31,
---------------------------------------------------------------
1998 1997 1996
---- ---- ----
(Number of Shares)
<S> <C> <C> <C>
At beginning of year 1,624,662 1,963,435 2,205,916
Options issued during year - 196,117* -
Options exercised during year (84,612) (13,211) (9,093)
Options lapsed during year (248,507) (325,562) (233,388)
--------- --------- ---------
At end of year 1,291,543 1,624,662 1,963,435
========= ========= =========
</TABLE>
* These are parallel options issued in connection with the Demerger and are not
reflected in the total options outstanding at the year end, as they will be
exercisable in lieu of, and not in addition to, the original options.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Options outstanding at December 31, 1998 under the Company's share option
schemes are shown below:
<TABLE>
<CAPTION>
Date of Number of Exercise
Scheme grant shares price Exercisable
- ------ ----- ------ ----- -----------
<S> <C> <C> <C> <C>
Number 1 Scheme Apr 1992 501,757* 107p To Apr 1999
Demerger Number 1 Scheme Apr 1992 20,925* 107p To Apr 1999
Number 2 Scheme Jun 1991 441,952 134p To Jun 2001
Sep 1991 107,022 134p To Sep 2001
Apr 1992 34,301 107p To Apr 2002
Apr 1992 258,676* 107p To Apr 2002
Demerger Number 2 Scheme Jun 1991 363,829 134p To Jun 2001
Apr 1992 78,895 107p To Apr 2002
Apr 1992 13,892* 107p To Apr 2002
Sharesave Jun 1995 1,291,543 64p Jul 2000 to Dec 2000
Performance Option Scheme May 1995 300,201 73p To May 2005
Aug 1995 550,905 95p To Aug 2005
Apr 1996 502,500 130p To Apr 2006
Apr 1996 560,000* 130p Apr 2001 to Apr 2003
Apr 1997 722,500 131p Apr 2000 to Apr 2007
Apr 1997 692,500* 131p Apr 2002 to Apr 2004
Demerger Performance Option Scheme May 1995 75,210 73p To Dec 2004
May 1995 109,926* 73p May 2000 to May 2002
Aug 1995 99,318 95p To Dec 2004
Apr 1996 122,500 130p To Dec 2004
Apr 1996 263,750* 130p Apr 2001 to Apr 2003
Apr 1997 195,000 131p Apr 2000 to Dec 2004
Apr 1997 186,250* 131p Apr 2002 to Apr 2004
Performance Share Option Scheme Dec 1997 6,427,199 105p Dec 2000 to Dec 2004
May 1998 1,344,941 124p May 2001 to May 2005
Equity Participation Plan Dec 1997 11,084,170 105p Dec 2000 to Dec 2004
Zenith Executive Incentive Plan Dec 1997 1,078,807 109p Dec 2000 to Dec 2004
</TABLE>
Further details together with the performance targets for the above
schemes are set out on pages 55 to 73. The options marked * are super
options.
Exercise prices have been rounded to the nearest penny.
In the case of the various demerger schemes, the date of grant shown is
that of the original option replaced under the demerger scheme.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 25 - Post Retirement Benefits
The Group operates a number of pension schemes throughout the world.
The majority of the schemes are externally funded and the assets are held
in separately administered trusts or are insured.
None of the externally funded schemes holds investments in, or has made
loans to, the Company or any of its subsidiary undertakings.
The major schemes, which cover the majority of scheme members, are defined
contribution schemes.
Following the Demerger, the Group has only one material defined benefit
scheme with active membership, the Cordiant Group Pension Scheme. This UK
scheme was closed to new members in 1990 with new employees after that date
joining a defined contribution scheme. Employees of Saatchi & Saatchi and
Zenith remain members of the scheme under transitional arrangements. The
latest actuarial valuation, based on the attained age method and assuming
an investment return of 9% and salary increases of 7%, was carried out as
at April 1, 1996 when the market value of investments of the scheme were
(pound)26.2 million and the level of funding was 108%. Employer's
contributions to the scheme in 1998 were (pound)0.3 million. Contributions
and expenses are based on recommendations of a qualified actuary.
In addition to pension schemes the Group operates an unfunded deferred
compensation plan under which salary sacrifices are deferred and accrue
interest until the accumulated benefit is fully withdrawn. The cost of this
during the year was (pound)0.3 million (1997: (pound)0.3 million). The
accumulated fund at December 31, 1998 was (pound)3.0 million (1997:
(pound)2.8 million) which is included in provisions for pensions and
similar employment obligations (note 18).
The pension expense for the year was as follows:
1998 1997 1996
---- ---- ----
L million L million L million
Defined benefit schemes 0.3 1.4 10.6
Defined contribution schemes 4.1 11.0 11.3
--- ---- ----
4.4 12.4 21.9
=== ==== ====
<PAGE>
Note 26 - Leases
The Group leases certain properties and equipment under operating leases.
Minimum payments for operating leases, before provisions for vacant property
(see Note 18), having initial or remaining non-cancelable terms in excess of one
year are as follows:
Years Ending Sublease
December 31 Minimum Rental Net
Payments Income Payments
-------- ------ --------
L million L million L million
1999 30.1 9.3 20.8
2000 27.6 9.4 18.2
2001 24.0 8.9 15.1
2002 22.4 8.7 13.7
2003 19.8 8.2 11.6
Thereafter 156.2 91.9 64.3
----- ---- ----
Total minimum lease payments 280.1 136.4 143.7
===== ===== =====
Total expense for all operating leases was:
Year ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
Total operating lease expense 21.8 65.2 65.7
Sublease rental income (3.0) (14.6) (14.3)
----- ------ ------
Net operating lease expense 18.8 50.6 51.4
==== ==== ====
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 27 - Consolidated Statements of Cash Flows - Supplemental Information
Reconciliation of Trading Profit to Net
Cash Flow from Operating Activities
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Trading profit 26.0 55.6 31.5
Depreciation 9.7 26.2 25.8
(Profit) loss on sale of tangible fixed assets (0.1) (0.8) 0.2
Decrease (increase) in billable production 2.0 (5.5) 3.5
(Increase) decrease in receivables (1.4) (35.3) 0.2
(Decrease) increase creditors (9.6) 38.5 12.6
Utilization of property and reorganization
provisions (7.0) (19.2) (16.9)
Non-cash item - goodwill write-off 0.2 2.2 -
---- ------ ------
Net cash inflow from operating
activities 19.8 61.7 56.9
==== ===== ====
</TABLE>
<PAGE>
Analysis of changes in net funds
<TABLE>
<CAPTION>
Acquisitions Exchange &
At Jan 1, and non cash At Dec 31,
1998 Cash flows disposals movements 1998
---- ---------- --------- --------- ----
Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C>
Cash at bank and in hand 61.7 2.6 - (2.0) 62.3
Cash deposits - current asset investments - 0.8 - - 0.8
Bank overdrafts (7.7) (13.4) - (0.1) (21.2)
----- ------ -- ----- ------
Cash 54.0 (10.0) - (2.1) 41.9
---- ------ -- ----- ----
External debt due within one year (0.7) 0.7 (0.5) - (0.5)
External debt due after one year (28.4) (9.3) 1.1 0.2 (36.4)
Finance leases (0.2) 0.2 - (0.4) (0.4)
----- --- -- ----- -----
Financing (29.3) (8.4) 0.6 (0.2) (37.3)
------ ----- --- ----- ------
Net funds 24.7 (18.4) 0.6 (2.3) 4.6
==== ====== === ===== ===
</TABLE>
<TABLE>
<CAPTION>
Exchange &
At Jan 1 non cash At Dec 31
1997 Cash flows Demerger movements 1997
---- ---------- -------- --------- ----
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Cash at bank and in hand 113.7 (41.6) - (10.4) 61.7
Bank overdrafts (47.8) 40.7 - (0.6) (7.7)
------- ----- ----- ------ ------
Cash 65.9 (0.9) - (11.0) 54.0
------ ------- ----- ------ -----
External debt due within 1 year (5.0) 3.2 0.6 0.5 (0.7)
External debt due after 1 year (88.9) (20.5) 83.8 (2.8) (28.4)
Finance leases (0.5) 0.3 0.2 (0.2) (0.2)
-------- ------ ----- ------- -------
Financing (94.4) (17.0) 84.6 (2.5) (29.3)
------- ------ ---- ------- ------
Net funds (28.5) (17.9) 84.6 (13.5) 24.7
======= ====== ==== ====== =====
On December 14, 1997, the net assets of Saatchi & Saatchi and Zenith were demerged. On demerger, they had net debt of
L41.2 million. Net cash amounting to L43.4 million is shown as an outflow in the cash flow statement, external debt of
L84.6 million is included in the analysis of movement in net debt above.
</TABLE>
<TABLE>
<CAPTION>
At Jan. 1, 1996 Cash flows Exchange At Dec. 31, 1996
--------------- ---------- -------- ----------------
L million L million L million L million
<S> <C> <C> <C> <C>
Cash at bank and in hand 134.5 (9.4) (11.4) 113.7
Overdrafts (48.2) (2.8) 3.2 (47.8)
------ ----- --- ------
Cash 86.3 (12.2) (8.2) 65.9
---- ------ ----- ----
External debt due within 1 year (0.8) (4.8) 0.6 (5.0)
External debt due after 1 year (113.7) 15.8 9.0 (88.9)
Finance leases (0.5) 0.1 (0.1) (0.5)
----- --- ----- -----
Financing (115.0) 11.1 9.5 (94.4)
------- ---- --- ------
Net funds (28.7) (1.1) 1.3 (28.5)
------ ----- --- ------
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
The effects of the acquisitions and disposal of subsidiaries in 1998
<TABLE>
<CAPTION>
Acquisitions Disposals Acquisitions Disposals
------------ --------- ------------ ---------
Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C>
Goodwill capitalized (net) 16.4 - Loans and finance leases 0.2 (0.8)
Goodwill transferred to reserves 4.6 (2.4) Creditors 9.0 (15.5)
Tangible fixed assets 0.7 (0.5) Provision for joint venture deficit - 1.0
Work in progress 0.6 (1.1) Minorities (0.7) -
Debtors 7.2 (13.3) Cost of acquisitions
Cash in companies disposed of - (0.4) - cash (net) 6.8 -
Cash received - 2.4 - CCG shares issued 3.4 -
- investments 0.4 -
- accruals 10.4 -
---- ------ ---- ---
29.5 (15.3) 29.5 (15.3)
==== ====== ==== ======
</TABLE>
The effects of disposals relate mainly to the reclassification of Bates Japan as
a joint venture following a capital restructuring during the year which created
neither a profit nor a loss. Goodwill of (pound)4.6 million has been written off
directly to reserves in respect of adjustments made to estimates of deferred
consideration on acquisitions made prior to January 1, 1998.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 28 - Operations by Geographic Area
<TABLE>
<CAPTION>
United The Continental Asia
Kingdom Americas Europe Pacific Total
------- -------- ------ ------- -----
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Commission and fee income 39.8 73.5 108.4 80.1 301.8
Trading profit 4.5 8.2 10.1 3.2 26.0
Exceptional operating expense - - - - -
Operating profit 4.5 8.2 10.1 3.2 26.0
Total assets employed 44.2 104.7 95.8 142.0 386.7
Net liabilities (assets) before 58.0 10.9 (5.9) 12.8 75.8
financial items
Depreciation expense 1.7 2.9 2.6 2.5 9.7
Additions to properties, furniture, etc. 2.0 1.6 3.2 2.2 9.0
Year ended December 31, 1997:
Commission and fee income 115.4 268.7 203.3 148.7 736.1
Trading profit 14.0 29.2 12.1 2.5 57.8
Exceptional operating expense - - - 2.2 2.2
Operating profit 14.0 29.2 12.1 0.3 55.6
Total assets employed 41.2 83.2 92.4 161.0 377.8
Net liabilities (assets) before 73.1 20.1 (1.4) 12.5 104.3
financial items
Depreciation expense 6.0 11.0 4.8 4.4 26.2
Additions to properties, furniture, etc. 4.4 8.3 4.5 7.5 24.7
Year ended December 31, 1996:
Commission and fee income 113.4 269.1 218.1 154.3 754.9
Trading profit 12.4 17.0 14.2 4.4 48.0
Exceptional operating expense - 16.5 - - 16.5
Operating profit 12.4 0.5 14.2 4.4 31.5
Total assets employed 135.4 316.2 213.6 247.2 912.4
Net liabilities before financial items 72.6 82.7 22.6 0.8 178.7
Depreciation expense 6.3 9.8 5.3 4.4 25.8
Additions to properties, furniture, etc. 6.3 6.7 4.8 6.2 24.0
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Ongoing geographic analysis
To enable a fuller understanding of the trading performance additional
geographic analysis of ongoing operations is provided below:
<TABLE>
<CAPTION>
United North Rest of Asia
Kingdom America Europe Pacific Total
------- ------- ------ ------- -----
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Commission and fee income 39.8 73.5 108.4 80.1 301.8
Trading profit 4.5 8.2 10.1 3.2 26.0
Exceptional operating expense - - - - -
Operating profit 4.5 8.2 10.1 3.2 26.0
Depreciation expense 1.7 2.9 2.6 2.5 9.7
</TABLE>
<TABLE>
<CAPTION>
United North Rest of Asia
Kingdom America Europe Pacific Total
------- ------- ------ ------- -----
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Commission and fee income 39.0 67.7 105.0 96.5 308.2
Trading profit 6.5 6.3 8.3 3.5 24.6
Exceptional operating expense - - - 2.2 2.2
Operating profit 6.5 6.3 8.3 1.3 22.4
Depreciation expense 1.8 2.8 2.4 2.6 9.6
</TABLE>
<TABLE>
<CAPTION>
United North Rest of Asia
Kingdom America Europe Pacific Total
------- ------- ------ ------- -----
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Commission and fee income 38.0 77.8 120.7 93.0 329.5
Trading profit 3.8 4.0 9.1 4.7 21.6
Exceptional operating expense - 0.2 - - 0.2
Operating profit 3.8 3.8 9.1 4.7 21.4
Depreciation expense 1.9 2.8 2.6 2.4 9.7
</TABLE>
The Directors consider that there is only one continuing business activity,
namely advertising and marketing services, and that it is more appropriate to
show a geographic analysis of revenue than turnover, which reflects the manner
in which the Directors manage the Group's operations. Revenue by geographic
destination is not materially different from revenue by geographic origin.
The Group's customers are located throughout the world. During 1998, 1997 and
1996 no clients accounted for more than 10% of either CCG's ongoing revenue or
Cordiant's revenue.
Turnover between segments is not material.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Geographical analysis of Group share of joint ventures and associated
undertakings operating profits:
1998
Lm
UK 2.2
The Americas -
Continental Europe 0.1
Asia Pacific 0.3
--------------------------
2.6
==========================
The following countries contribute individually to over 10% of Group Revenues:
<TABLE>
<CAPTION>
Revenue Long lived assets
1998 1997 1996 1998 1997
Lm Lm Lm Lm Lm
<S> <C> <C> <C> <C> <C>
UK 39.8 101.1 96.5 4.0 4.1
US 67.9 245.1 249.4 3.9 5.1
Australia 48.7 70.7 69.4 4.6 5.5
Germany 36.3 40.5 45.9 1.3 1.2
</TABLE>
Note 29 - Directors' emoluments
The total emoluments, pension costs and fees for the year ending December 31,
1998 were L2,924,957 (1997: L3,918,318) of which L231,146 were fees (1997:
L150,800).
The emoluments, excluding pension contributions, of the Chairman and highest
paid UK Director, were:
Year Ended December 31, 1998
- ----------------------------
Charles Scott (Chairman and highest paid UK Director): L169,165
Year ended December 31, 1997
- ----------------------------
Charles Scott (Chairman and highest paid UK Director): L864,115
<PAGE>
Note 30 - Directors' Interests
The interests of the Directors who were in office at the year end in the
Company's share capital appearing in the register maintained by the Company
pursuant to Section 325 of the Companies Act of 1985 were as set out below.
<TABLE>
<CAPTION>
Ordinary share options and equity
Beneficially owned ordinary shares participation rights
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
M Bungey 55,990 55,990 1,537,130 1,537,130
A D'Angelo 960 960 860,337 922,082
J de Yturbe - - 854,397 854,397
D Fishburn - - - -
A Hamill - - 922,139 990,744
T Levitt 18,796 18,796 - -
P M Schoning - - 725,827 725,827
C Scott(1) 85,172 39,214 731,905 787,583
R Stomberg - -* - -*
J Tyrrell - -* - -*
W Whitehead 787 787 829,548 848,757
(1) Includes options and shares in spouse's name.
* On appointment.
</TABLE>
With the exception of W Whitehead, who exercised options over, and sold, 13,721
shares on January 9, 1999, A D'Angelo, who exercised options over, and sold
50,082 shares on March 11, 1999 and A Hamill, who exercised options over, and
sold 54,884 on March 31, 1999, the Directors' interests in the Company's share
capital have not changed since December 31, 1998.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
Note 31 - Related Parties
During 1998 and 1997 transactions in the ordinary course of business with
associated companies were as follows:
1998 1997
---- ----
Lm Lm
Media services 214.0 30.1
Production 9.5 7.8
------ -- ---
223.5 37.9
===== ====
The year end balances with associated companies are disclosed in Notes 12 and
17.
Contracts of significance which were entered into by the Group during 1998 and
1997 in which the directors of a subsidiary company had a material interest,
details of which are given in Note 2, were as follows:
In November 1998, the Group acquired the remaining 24.9% interest in The
Communications Group in Australia, for initial consideration of A$16.9 million
(L6.2 million).
In October 1998, the Group acquired a further 75% interest in Verdino Bates SA
or Argentina, for consideration of ARP2.3 million (L1.4 million).
In March 1997, Cordiant made a deferred payment of L0.4 million relating to the
acquisition in 1996 of the minority interest in BSB Saatchi & Saatchi MC Limited
in Poland.
In July 1997, Cordiant acquired a 51% interest in the share capital of Grapple
Group 141 (Pty) Ltd for consideration of R1.8 million (L0.2 million).
In November 1997, Cordiant acquired a further 25% minority interest in the share
capital of X/M Harrow Pty Ltd in Australia. Estimated cash payments of A$0.6
million (L0.3 million) will be made in 2000.
In December 1997, Cordiant acquired a further 33% interest in Scholz & Friends
Dresden GmbH, in Germany. Deferred consideration of L2.2 million is payable in
2000.
During 1997 Cordiant made deferred payments totaling FFR31.3 million (L2.9
million) relating to the acquisition in 1996 of the minority interest in Saatchi
& Saatchi Advertising SA in France.
During 1997 Cordiant made deferred payments totaling Pts1,206 million (L5.0
million) relating to the acquisition in 1994 of the minority interest in Grupo
Bates SA in Spain.
In October 1997, Cordiant sold NRG. NRG provided services to the film industry.
Consideration of (pound)24.4 million was received which was after deducting a
fee of L8.0 million payable to certain of NRG's directors under the terms of an
agreement entered into in 1995.
Note 32 - Fair Value of Financial Instruments
Long-Term Investments - Long-term investments also included unlisted loan notes
and redeemable preference shares with a face value of approximately (pound)0.8
million (1997: L2.4 million) issued by the purchasers of companies disposed of
by Cordiant which are due on various dates. The Group has made full provision
for these financial instruments.
Net borrowings (excluding foreign exchange contracts) - The book value of cash,
short term deposits and short term borrowings approximate to their fair values
because of the short term maturity of these instruments. The fair value of long
term borrowings approximates to their carrying value at December 31, 1998.
Foreign exchange forward contracts - Foreign exchange forward contracts are used
to hedge existing and identified future foreign currency commitments. At
December 31, 1998 the Group had L23.0 million (1997: L18.3 million) of forward
contracts outstanding, the fair value was not material. Financial instruments
are only used to hedge underlying commercial exposures. Realized or unrealized
gains and losses on forward contracts, which hedge firm third party commitments,
are recognized in income in the same period as the underlying transaction. The
Group does not speculate in derivative financial instruments.
The counterparties to the Group's financial instruments are major international
financial institutions. It is Group practice to monitor the financial standing
of these counterparties on an on-going basis. The Group does not anticipate any
material adverse effect on its financial position resulting from its involvement
in the agreements, nor does it anticipate non-performance by any of its
counterparties.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Note 33 - Principal Subsidiaries
Except where otherwise indicated, the Company indirectly owned 100% of each
class of the issued shares of the subsidiary undertakings listed below. All
these subsidiary undertakings are advertising and marketing services companies.
The country of operation and registration of the principal subsidiary
undertakings were as follows:
England Bates Dorland Ltd.
The Facilities Group Ltd.
(30% Ordinary)
Zenith Media Holdings Ltd.
(50% Ordinary)
Australia The Communications Group Pty Ltd.
Denmark Bates Gruppen AS
Germany Scholz & Friends GmbH
(90% Ordinary)
Norway Bates Gruppen AS
Spain Grupo Bates SA
US Bates Advertising USA, Inc.
In the opinion of the Company, these undertakings principally affect the results
and assets of the Group. In addition to the companies shown above, the Group
also holds investments in other subsidiaries and associated undertakings. A full
list of subsidiaries, joint ventures and associated undertakings will be filed
with the Registrar of Companies.
The results of the Group were principally affected by the above companies
together with the Saatchi & Saatchi Group which was demerged from the Group on
December 14, 1997.
As provided for in the Zenith shareholders' agreement 75% of the distributable
profits of Zenith will be distributed to shareholders and divided between them
in part by reference to the proportions in which Zenith receives revenue from
clients of each shareholder. The remainder will be retained in Zenith.
Note 34 - Subsequent Events
There have been no material subsequent events.
Note 35 - Nature of Business
The Group is a multi-national advertising and marketing services business.
Ninety-eight percent of the Group's ongoing revenue is generated by its two
advertising networks. An analysis of revenue and assets by geographic region is
set out in Note 28 to the consolidated financial statements.
Note 36 - Companies Act 1985
The Consolidated Financial Statements do not constitute "statutory accounts"
within the meaning of the Companies Act 1985 of England and Wales for any of the
three years ended December 31, 1998. Statutory accounts for 1996 and 1997 have
been filed with the United Kingdom's Registrar of Companies; the statutory
accounts for 1998 will be filed following the Company's Annual General Meeting.
The auditor has reported on these accounts. Their reports were unqualified and
did not contain statements under Section 237(2) or (3) of that Act.
<PAGE>
Note 37 - United States Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in accordance with UK
generally accepted accounting principles (UK GAAP) which differ in certain
significant respects from US generally accepted accounting principles (US GAAP).
A description of the significant differences between UK GAAP and US GAAP that
are applicable to the Group is set out below:
(a) Dividends
Under UK GAAP, ordinary dividends proposed are provided for in the year in
respect of which they are recommended by the Board of Directors for approval by
the shareholders. Under US GAAP, such dividends are not provided for until
declared by the Board of Directors.
(b) Goodwill and US purchase accounting
Under US GAAP, goodwill (which excludes contingent capital payments) and
identifiable intangible assets acquired are capitalized and amortized against
income; intangible assets being amortized over their economic lives which range
from three to 20 years and the remaining goodwill amortized over 40 years. In
addition to systematic amortization, management also review on an annual basis
the carrying value of goodwill and identifiable intangibles for impairment by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
Under UK GAAP, purchased goodwill arising in respect of acquisitions before
January 1, 1998 (including any additional goodwill estimated to arise from
contingent capital payments), when FRS 10 was adopted, was written off to
reserves in the year of acquisition. A charge would be recognized in respect of
any permanent diminution in the value of goodwill previously written off
directly to reserves. Purchased goodwill arising from acquisitions on or after
January 1, 1998 has been capitalized as an intangible fixed asset and amortized
over its useful economic life. As the Directors are of the opinion that the
intangible fixed assets of the Group have an indefinite economic life, the
goodwill has not been amortized but is subject to annual review for impairment
by a comparison of the discounted future net cash flows expected to be generated
by the asset.
Under UK GAAP the gain or loss on disposal is calculated after taking account of
goodwill previously written off to reserves for acquisitions prior to January 1,
1998. Under US GAAP the gain or loss on disposal is calculated after taking
account of any related unamortized goodwill and intangible assets. For
acquisitions on or after January 1, 1998 the profit or loss on disposal under
both US and UK GAAP is calculated after taking account of unamortized goodwill
and intangible assets.
(c) Property leases
Under US GAAP, total rental payments, inclusive of increases in rental charges
specified in the lease, are recognized on a straight line basis over the term of
the lease. Under UK GAAP, these increases have been recognized when payable.
(d) Long-term property provisions
Under US GAAP, provisions for properties which are vacant and surplus to
requirements or let at a loss are provided on a discounted basis after allowing
for estimated subrental income, and amortization of the discount is charged to
interest expense.
Under UK GAAP, provision has been made on an undiscounted basis for the future
rent expense and related cost of leasehold property (net of estimated sublease
income) where the property is vacant or currently not planned to be used for
ongoing operations.
From 1999 the Company will be required under UK GAAP to discount property
provisions which cover a significant time period.
(e) Deferred taxation
UK GAAP requires that no provision for deferred taxation should be recorded if
there is reasonable evidence that such taxation will not be payable in the
foreseeable future. Deferred tax assets are only recognized when they are
expected to be recoverable without replacement by equivalent deferred tax
assets.
US GAAP requires full provision of deferred taxation liabilities and permits
deferred tax assets to be recognized if their realization is considered to be
more likely than not. There are no deferred taxation differences presented in
the reconciliation below because the Company has net deferred tax assets and
considers that it is more likely than not that they will not be recovered.
(f) Compensation costs
Under UK GAAP the Company does not recognize any compensation for certain
performance based share options. Under US GAAP compensation expense is recorded
for all performance based share options over the vesting period for the excess
of the market price of underlying shares over the exercise price.
(g) Employee share schemes
The Company has adopted SFAS 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
share option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS 123 had been applied. The Directors have elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
disclosure provisions of SFAS 123. Accordingly, compensation expense is recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Under SFAS 123 the calculation of the option value
is made using an acceptable pricing model to include certain expected
parameters.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net profit in(pound)million - as reported L4.8 L6.8 L6.9
- revised L4.8 L5.5 L6.5
Earnings per share which reflect Consolidation
Earnings per share in pence - as reported 2.2p 3.1p 3.1p
- as revised 2.2p 3.1p 2.9p
</TABLE>
If the compensation cost of the options had been determined based on the fair
value at the grant dates for 1998 and 1997 consistent with the method prescribed
by SFAS No. 123, the Company's US GAAP net profit and earnings per share would
have been adjusted to the revised amounts indicated above. The revised amounts
were determined based on employee share scheme awards in 1995 to 1998 only.
Compensation cost is recognized over the expected life of the option (i.e.
between 3.5 and 6.5 years). The revised amounts for compensation cost may not be
indicative of the effects on net earnings and earnings per share for future
years. Under SFAS No. 123, the weighted average fair value of each option grant
is estimated to be 34.8p and 33.6p for options granted during the year ended
December 31, 1998 and year ended December 31, 1997, respectively. The fair
values have been estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1998 and 1997
respectively; dividend yield of nil and nil per cent, expected volatility of 26%
and 22% in 1998 and 1997 respectively, risk-free interest rate of 5.8% and 6.9%
and expected lives of between 3.5 and 6.5 years.
(h) Cash flows
The Consolidated Cash Flow Statement is prepared in accordance with Financial
Reporting Standard No. 1 (revised) `Cash Flow Statements' ("FRS 1"). Its
objectives and principles are similar to those set out in SFAS 95. The principal
difference between the standards relates to classification. Under FRS 1, the
Group presents its cash flows for: (a) operating activities; (b) exceptional
non-operating items; (c) dividends from associated undertakings; (d) returns on
investments and servicing of finance; (e) taxation: (f) capital expenditure and
financial investment; (g) acquisition and disposals; (h) equity dividend paid;
and (i) financing. SFAS 95 requires only three categories of cash flow activity:
(a) operating; (b) investing; and (c) financing. Cash flows from exceptional
non-operating items, dividends from associated undertakings, returns on
investments and servicing of finance, and taxation shown under FRS 1 would be
included as operating activities under SFAS 95. The payment of dividends would
be included as a financing activity under SFAS 95. Changes in bank overdrafts
are included within cash equivalents under FRS 1 and would be considered a
financing activity under SFAS 95. Had bank overdrafts been shown as a financing
activity in the Consolidated Cash Flow Statement the overdrafts (drawn) repaid
would have been (pound)(13.4) million and (pound)(40.7) million in the years
ended December 31, 1998 and 1997 respectively. The repayment of (pound)40.7
million in 1997 includes overdrafts of (pound)23.4 million that were demerged.
(i) Pension
The Statement of Financial Accounting Standards ("SFAS") No. 88, Employers'
Accounting for Settlements and Curtailment of Defined Benefit Plans and for
Termination Benefits specifies the accounting treatment under US GAAP for
circumstances in which there has been an irrevocable transaction that relieves
the employer of primary responsibility for a pension benefit obligation and
eliminates significant risks related to the obligation and the assets used to
effect the settlement. As a result of the curtailment and termination of the US
scheme during 1996, the related termination liability was accrued in full under
UK GAAP and the additional US GAAP accrual was reversed. Additionally, under US
GAAP, CCG has previously recognized an additional minimum pension liability for
the US underfunded plan, representing the excess of accumulated benefit
obligations over the plan's assets. As result of the curtailment and termination
of the plan during 1996, Cordiant recorded the full termination liability under
UK GAAP and the additional US GAAP accrual was reversed.
(j) Newly adopted US accounting principles
The Group adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Required disclosures have been made in the Group's financial
statements in the statement of total recognized gains and losses and the
consolidated statements of shareholders deficiency and other share capital and
prior years information has been restated. The effect of adopting SFAS No. 130
was not material.
(k) Prospective accounting changes
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards of accounting
for these transactions. SFAS No. 133 is effective for the Company beginning on
July 1, 1999. The Company is currently assessing the effects of SFAS No. 133.
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------
Effects on net earnings of differences between US and 1998 1997 1996
UK GAAP Lm Lm Lm
-------------------------------------
<S> <C> <C> <C> <C>
Profit for the year in conformity with UK GAAP 15.0 15.1 24.2
US GAAP adjustments:
Amortization of goodwill and other intangibles (b) (6.3) (9.5) (9.5)
Straight lining of property leases (c) - (1.0) (2.4)
Change in long-term property provisions (d) (2.2) 2.5 (7.2)
Pension (i) - - 1.8
Compensation costs (f) (1.7) (0.3) -
----- ------- -----
Net profit applicable to Ordinary shareholders in conformity
with US GAAP 4.8 6.8 6.9
====== ===== =======
Net profit per Ordinary Share - basic 2.2p 3.1p 3.1p
Average number of Ordinary Shares (in millions)(1) 222.4 221.9 221.8
Net profit per Ordinary Share - diluted 2.2p 3.1p 3.1p
Average number of Ordinary Shares - diluted (in millions)(1) 223.3 222.9 222.7
===== ===== =====
(1) Average number of Ordinary Shares has been adjusted to reflect the Consolidation.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
-------------------------
Cumulative effect on shareholders' funds (deficiency) of 1998 1997
differences between US and UK GAAP Lm Lm
Equity shareholders' deficiency in conformity with UK GAAP
<S> <C> <C> <C>
(71.5) (85.7)
US GAAP adjustments:
Dividends (a) 3.1 2.7
Goodwill and US purchase accounting in respect of acquisitions (b) 64.0 76.9
Discount on property provisions (d) 7.6 9.9
Contingent capital payments (b) 7.4 -
----- -----
Equity shareholders' funds (deficiency) in conformity with US
GAAP 10.6 3.8
====== ======
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
EXHIBIT INDEX
2.1 Upon the request of the Securities and Exchange Commission, the Company
hereby agrees to provide a list of subsidiaries of the Company.
3.1 Consent of Independent Auditor.
Consent of the Independent Auditor
To the Board of Directors of
Cordiant Communications Group plc
We consent to the incorporation by reference in the Registration Statements No.
33-11622 and No. 33-41650, on Form S-8 of Cordiant plc filed with the Securities
and Exchange Commission on 29 January 1987 and 15 July 1991, respectively, and
of our report dated 29 April 1999 relating to the consolidated balance sheets of
Cordiant Communications Group plc and subsidiaries, and the related consolidated
statements of operation, shareholders' deficiency and other share capital, total
recognised gains and losses and cash flows for each of the years in the three
year period ended 31 December 1998, which report appears in the 31 December 1998
annual report on Form 20-F of Cordiant Communications Group plc.
/s/ KPMG Audit Plc
----------------------
KPMG Audit Plc
London, England Chartered Accountants
28 June 1999 Registered Auditor
