As filed with the Securities and Exchange Commission on June 5, 2000
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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, 1999
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 New York Stock Exchange, Inc.
represented 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: 228,782,839
_____________
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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<PAGE>
PART I.........................................................................4
Item 1. Description of Business...............................................4
Item 2. Description of Property..............................................19
Item 3. Legal Proceedings....................................................19
Item 4. Control of Registrant................................................20
Item 5. Nature of Trading Markets............................................20
Item 6. Exchange Controls and Other Limitations Affecting Security Holders...21
Item 7. Taxation.............................................................21
Item 8. Selected Financial Data..............................................25
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................29
Item 9A. Quantitative and Qualitative Disclosures About Market Risk...........40
Item 10. Directors and Officers of Registrant.................................42
Item 11. Compensation of Directors and Officers...............................46
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.......48
Item 13. Interest of Management in Certain Contracts..........................66
PART II.......................................................................66
Item 14. Description of Securities to be Registered...........................66
PART III......................................................................66
Item 15. Defaults Upon Senior Securities......................................66
Item 16. Changes in Securities, Changes in
Security for Registered Securities and Use of Proceeds...............66
PART IV.......................................................................67
Item 17. Financial Statements.................................................67
Item 18. Financial Statements.................................................67
Item 19. Financial Statements and Exhibits....................................67
<PAGE>
INTRODUCTION
Unless the context otherwise requires, the following definitions shall
have the following meanings in this document:
"Company" shall mean Cordiant Communications Group plc.
"Consolidated Financial Statements" shall mean audited consolidated
financial statements and notes thereto of the Company as of December 31, 1999
and 1998 and for each of the years in the three year period ended December 31,
1999 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.
"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.
"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, 1999 was L1.00 to $1.61.
Unless otherwise specified, translations into US dollars contained herein are
made at the Noon Buying Rate on December 31, 1999. The Noon Buying Rate on May
16, 2000 was L1.00 to $1.50.
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 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.
<PAGE>
PART I
Item 1. Description of Business.
GENERAL
CCG is a global marketing communications group. The Group comprises:
Bates Worldwide, one of the largest advertising and marketing communications
networks in the world; Scholz & Friends, the largest multinational advertising
network headquartered in Germany; HP:ICM, event conference and exhibition
managers; an 80 percent shareholding in Diamond Ad Ltd, Korea's second largest
advertising agency; a 30 percent shareholding in The Facilities Group, a
pre-production agency; and a 50 percent 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 marketing communication
businesses which included Bates Worldwide..
The origins of Bates Worldwide date back to 1940 when Ted Bates &
Company was founded in New York by Theodore Bates and Rosser Reeves. Ted Bates &
Company grew rapidly in the 1960s and 1970s, developing a worldwide network
through acquisitions and organic growth. In 1964, Ted Bates and 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.
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. The operation was renamed Zenith Media
Worldwide in 1991 and in 1992 extended its services to include media planning.
Following the Demerger, CCG and Saatchi & Saatchi each retained a 50 percent
shareholding in Zenith, which is accounted for as a joint venture.
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 57 offices in 47 countries.
In December 1997, Saatchi & Saatchi was demerged from Cordiant, with
the remaining businesses renamed CCG. The Demerger was motivated by the desire
to allow CCG to stand on its own and to allow Bates Worldwide, to respond more
quickly to client needs and opportunities.
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 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.
In December 1999, CCG acquired 80 percent of Diamond Ad Ltd
("Diamond"), the second largest advertising agency in South Korea. Diamond was
previously the in-house agency for Hyundai Group, and Hyundai have retained a 20
percent interest in Diamond. The acquisition of Diamond significantly
strengthens CCG's position in South Korea, the world's 10th largest advertising
market, and further consolidates its relationship with Hyundai.
In March 2000, CCG completed the acquisition of Healthworld
Corporation ("Healthworld"), the third largest healthcare marketing agency in
the world. Healthworld provides multinational pharmaceutical clients with a wide
range of communication services including advertising and promotion, medical
education, contract sales, direct marketing, market research and interactive
services. Healthworld has become a new division of Bates Worldwide.
Also in March 2000, the Group consolidated its interactive businesses
into a new global brand named CCG.XM. CCG.XM offers clients digital marketing
and e-commerce consulting services and operates 12 offices worldwide.
The Group's principal corporate offices are located at 121-141
Westbourne Terrace, London W2 6JR, England, telephone number
011-44-20-7262-4343. Information about the Group can be found on the CCG
website, www.ccgww.com.
Strategic Objectives
At the time of the Demerger, the Group identified three key strategic
objectives: that by 2000 it would (i) increase the proportion of Group revenues
attributable to multinational clients to 40 percent, (ii) increase its business
in North America so that such region would account for 30 percent of the Group's
total revenues and (iii) increase its marketing services operations so that they
would account for 30 percent of the Group's total revenues.
These objectives were intermediate steps towards developing a business
profile designed to match the Group's best performing competitors in terms of
profitability and growth.
Having made significant progress toward its strategic objectives in
1999, new three-year objectives have been set: that by 2003 the Group will (i)
increase the proportion of Group revenues attributable to multinational clients
to 45 percent, (ii) increase its business in North America so that such region
will account for 40 percent of the Group's total revenues and (iii) increase its
marketing services so that they will account for 50 percent of the Group's total
revenues.
Multinational Business
CCG possesses a truly global advertising network. Bates Worldwide,
with 162 offices in over 75 countries, has both the global reach and local
creative expertise to provide the Group's clients with a global competitive
advantage. While the proportion of revenues coming from multinational clients
increased to 36 percent in 1999 from 33 percent in 1998, CCG's revenue
contribution from multinational clients remains below that of its major
competitors. Had the acquisitions of Diamond and Healthworld been completed on
January 1, 1999, the proportion of revenues coming from multinational clients
would have been 38 percent in 1999. The Company seeks to exploit opportunities
to build existing local client relationships into profitable regional and global
partnerships, and to attract new multinational clients by offering an integrated
service on a global basis.
North America
In 1999, revenue attributable to the Group's North American operations
represented 25 percent of total revenues, up from 24 percent in 1998. North
America has been the Group's best performing region in terms of improved
profitability in 1999.
Taking the industry as a whole, North America accounted for
approximately 37 percent(1) of worldwide advertising expenditure in 1999, with
an even greater proportion of global spending being controlled from the region.
With approximately 25 percent of the Group's revenues coming from North America,
CCG is currently under-represented in this important market. Had the
acquisitions of Diamond and Healthworld been completed on January 1, 1999, the
proportion of revenues coming from clients in North America would have been 27
percent. CCG intends to further build its operations in the region to 40 percent
of Group revenues by a combination of organic growth and value-enhancing
acquisitions. __________________
(1) Source: Merrill Lynch, Advertising/Marketing Global Industry Primer,
February 2000.
Marketing Services
Although, according to industry sources, approximately half1 of
worldwide advertising expenditure is 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 marketing services will grow more
rapidly than traditional media advertising over the next five years. CCG has
sought to capitalize on these trends 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. The development of 141 Worldwide has continued at
a considerable pace with a further 11 offices opening in 1999. The Group is
committed to rapidly developing its marketing services capabilities through the
expansion of 141 Worldwide as a separate brand within Bates Worldwide and via
strategic acquisitions. In 1999, marketing services represented 24 percent of
Group revenues, an increase of 2 percent over 1998, towards CCG's target of 50
percent by 2003. Had the acquisitions of Diamond and Healthworld been completed
on January 1, 1999, marketing services would have represented 33 percent of
Group revenues in 1999 on a proforma basis.
ORGANIZATION AND SERVICES
The Group's operations consist of advertising and other marketing
services including direct marketing, media services, sales promotion, production
services, interactive media and market research. In 1999, the Group's largest
five clients accounted for 23 percent of revenues. The two largest clients
accounted for 7 percent and 6 percent, respectively, of total revenues. The
Group's principal activities are organized as follows:
Organization Activities
Bates Worldwide Advertising and marketing communications
141 Worldwide Marketing services
Healthworld Healthcare marketing
CCG.XM Digital marketing
The Decision Shop Strategic marketing and research
The Campaign Palace Advertising and marketing communications
Scholz & Friends Advertising and marketing communications
Diamond(1) Advertising and marketing communications
HP:ICM Live communications
Zenith Media Worldwide(2) Media services
The Facilities Group(3) Production services
____________________
(1) Owned 80 percent by the Company, 20 percent by Hyundai Group
(2) Owned 50 percent by the Company, 50 percent by Saatchi & Saatchi
(3) Owned 30 percent by the Company, 70 percent by Saatchi & Saatchi
During 1999, advertising services accounted for 76 percent of CCG's
revenues and marketing services accounted for 24 percent, on a reported basis,
and 68 percent and 32 percent respectively on a pro forma basis.
Advertising and Marketing 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 marketing communications
network with 162 offices in 75 countries. Expanding from a base as an
international advertising network, Bates Worldwide employs the expertise of its
marketing services units to serve its clients, including 141 Worldwide, its
global marketing services business, Healthworld, the international healthcare
marketing network and CCG.XM, a global interactive and e-commerce business. In
1999, Bates Worldwide (including The Campaign Palace, 141 Worldwide and The
Decision Shop) accounted for 85 percent of CCG's revenues.
In today's media marketplace, consumers are at the center of the
communications landscape. Bates Worldwide's aim is to create marketing
communications driven by consumer insight which define distinct and compelling
brand propositions for its clients' products and services.
Bates Worldwide continued to win significant new business assignments
in 1999, with growth from many of its largest clients including Allied Domecq,
BAT, General Motors, HSBC, Hyundai, SEAT, Warner-Lambert and Wendy's.
Assignments from new clients included Baan, Bell South, ESPN, Mercedes, Sony and
TAP Pharmaceuticals. Two significant client losses in 1999 were Avis and EDS.
Bates Worldwide made a number of geographic in-fill acquisitions
during 1999. Acquisitions included Rodergas in Spain, Cronert in Sweden, the
acquisition and merger of LDV in Belgium with Bates Belgium and a 20 percent
interest in Bates PanGulf. The Group also took a majority stake in its Indian
affiliate.
Healthworld
Healthworld is an international healthcare marketing and contract
sales organization headquartered in New York. Acquired by CCG in March 2000, as
a new division of Bates Worldwide, Healthworld provides its pharmaceutical and
healthcare clients with a comprehensive range of integrated marketing services,
including professional and direct-to-consumer advertising and promotion,
contract sales, consulting, medical education, public relations, marketing
research, interactive multimedia and database marketing. Healthworld offers its
clients international capabilities through its operations in the United States,
France, Spain and the United Kingdom, and through Healthworld B.V., a worldwide
network of affiliated marketing and communications agencies in 14 countries.
Healthworld Strategic Solutions was recently formed to offer strategic
consulting services both in the United States and internationally. This new
division specializes in working with clients early in a product's life cycle,
providing both quantitative and qualitative analysis for brand development,
product positioning, new product assessment and promotional message development.
During 1999, Healthworld acquired Falk Communications, a healthcare
communications agency located in New York, which provides clients with medical
education, communications and promotional services. Looking ahead, Healthworld
is focusing on further expanding its medical education, public relations,
regulatory, and managed-care capabilities through both acquisitions and organic
growth.
CCG.XM
CCG.XM was launched in March 2000 as CCG's e-business consulting and
implementation firm. The newly unified brand joins the interactive resources of
Bates Worldwide and competes with both leading independent interactive agencies
and the e-commerce units of the major advertising networks. Headquartered in New
York, CCG.XM has 12 offices worldwide offering Internet-related services that
include strategic consulting, digital brand creation, web site development,
systems integration and online marketing.
Worldwide revenues totaled $15 million in 1999, and further growth is
expected in 2000. Although headquartered in New York, two-thirds of revenues are
earned outside the United States. Relationships with clients such as Compaq
(managed from CCG.XM's Singapore office), Unilever (Sydney), Warner-Lambert (New
York), and Cable & Wireless (London) testify to the geographic span of CCG.XM's
operations. The company plans expansion to new markets and continued development
of its strategic consultancy capabilities in 2000.
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.
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. The Media Palace further enhanced its reputation for
innovative and effective media planning in 1999, winning awards in a number of
categories for clients such as Daewoo, Nokia and KFC at Australia's Media
Federation Awards.
Scholz & Friends
Scholz & Friends is the largest German-based multinational network(2)
with 14 offices operating across Europe. Scholz & Friends provides clients with
a wide range of marketing communications including advertising, sales promotion,
public relations, direct marketing, design, consulting and interactive media.
Having previously owned 90 percent, CCG acquired the remaining 10 percent of
Scholz & Friends held by minority shareholders in January 2000. During 1999, the
network accounted for approximately 12 percent of CCG's revenue.
Scholz & Friends' most significant clients include German companies
such as DaimlerChrysler, Deutsche Telekom, Frankfurter Allgemeine Zeitung,
Lufthansa, Schwarkopf/Henkel and Tchibo.
During 1999, Scholz & Friends launched Scholz & Friends Literatur, a
sales literature specialist, and Plats, an agency focused on political and
government communications. Scholz & Friends also opened new offices in Paris,
Milan and Kiev.
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.
______________________
(2) Source: Advertising Age, Agency Report April 2000.
Diamond
Diamond was established in 1983 by the Hyundai Group to provide
Hyundai companies with a full range of advertising and marketing services. Other
industrial groups in Korea have followed a similar strategy and the three
largest agencies in Korea are each linked to one of the major industrial groups.
CCG acquired 80 percent of Diamond from Hyundai Group in December 1999, with
Hyundai retaining the remaining 20 percent. Hyundai has been a major client of
CCG for 15 years and after the acquisition is expected to be the Group's largest
global client.
Diamond is now the second largest advertising and marketing
communications agency in Korea. Headquartered in Seoul, the agency has branch
offices in Pusan (Korea), Los Angeles, Frankfurt and Beijing and employs over
500 staff worldwide.
Hyundai Group companies currently account for approximately 66 percent
of Diamond's business. Significant clients include Hyundai Motor, Kia Motors,
Hyundai Securities, Hyundai Electronics, Hyundai Engineering and Construction
and Hyundai Department Store Co Ltd. Diamond also has many non-Hyundai clients
in Korea including Onse Telecom, Keumkang Chemical, Crown Confectionery and Dong
Won Industries.
The Korean economy and advertising market continues to make good
progress and Diamond and its clients intend to capitalize on this growth.
Working in partnership with CCG, Diamond aims to further improve its strong
position in Korea by extending its range of services, deepening its
relationships with its existing major clients and aggressively targeting new
domestic and international clients.
Marketing Services
CCG has been developing a number of its marketing services as
separately branded operations. These businesses have potential higher margins
and faster 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 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 57 offices in 47
countries.
The network has over 250 clients worldwide, with over 60 percent of
revenues coming from multinational clients. Significant clients include 3M,
British American Tobacco, Coca Cola, Heineken, Nokia, Roche and Warner-Lambert.
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 and 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 50 percent of total Group revenues be derived from marketing services by
the year 2003. 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 includes repositioning projects for
multinational clients and their global brands. In all, The Decision Shop has
conducted over 100 brand positioning studies around the world using its
proprietary Brand Essence Programme technology.
In 1999, The Decision Shop consolidated its 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.
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.
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 Company, The Facilities Group and entities in the Saatchi &
Saatchi Group entered into a shareholders' agreement ("The Facilities Group
Agreement") to regulate the relationship between the Company and the Saatchi &
Saatchi Group as shareholders of The Facilities Group. 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.
Media Services
Zenith Media Worldwide
Zenith Media is a leading global media services agency with 69 offices
in 39 countries. Zenith provides clients with specialized media planning,
buying, evaluation and coordination, both in traditional and new media areas.
Zenith provides its services to clients of Bates Worldwide and S&S. In addition,
approximately 67 percent of its revenues were generated from Zenith's list of
direct clients in 1999.
During 1999, new operations were opened in Finland, Greece, India,
Norway, Portugal and Taiwan, and in Fort Lauderdale and Kansas City in the
United States.
Zenith Media is a leader in its sector and has in recent years
expanded its services to include stand-alone media operations in direct
response, interactive, sports marketing and funded programming. In the United
Kingdom, two new operations were established in 1999: Zed Media, delivering
media services to direct response advertisers and Zenith Interactive Solutions,
providing dedicated online media planning and buying resources and consultancy.
The Company, entities within the Saatchi & Saatchi Group and Zenith,
with effect from the effective date of the Demerger, entered into a
shareholders' agreement (the "Zenith Shareholders' Agreement") to regulate the
relationship between the Company and the Saatchi & Saatchi Group as shareholders
of Zenith.
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.
Zenith Media Services Agreements
CCG 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.
PERSONNEL
As of June 1, 2000, CCG employed approximately 7,645 people worldwide.
The success of CCG's advertising and media services businesses, like that of all
communication groups, depends largely on the skill and creativity of their
personnel and their relationships with clients. CCG believes that its
relationships with its employees are good.
ACQUISITIONS & DISPOSALS
Acquisitions
During 1999, CCG made the following acquisitions:
In December 1999, CCG acquired substantially all of the assets of
Interactive Edge, Inc., a New York corporation, Interactive Edge, Inc., a
Connecticut corporation and Interactive Edge, LLC, a Delaware limited liability
company, all of which were commonly owned by the sellers in the acquisition. The
purchase price for the acquisition included an initial payment of $6.1 million
paid by CCG through the issuance of CCG ADSs having a value of $5.5 million and
$600,000 in cash. The acquisition also provides for an additional contingent
payment in 2003 of up to a maximum of $18.9 million based on Interactive Edge
achieving certain revenues and operating margins for the three years ending
December 31, 2002. The contingent payment will be paid entirely through the
issuance of CCG ADSs. CCG has accrued an estimated total additional deferred
consideration payable in CCG ADRs of $18.5 million (L11.5 million).
In December 1999, CCG acquired an 80 percent interest in the share
capital of Diamond Ad Ltd. The initial consideration was L14.8 million plus the
assumption of approximately L12 million of debt, and further payments are due in
the years 2000, 2001, and 2002 based on a multiple of average operating profits
from 1999 to 2001, up to a maximum of L55 million.
In 1999, CCG increased its existing interests in Verdino Bates in
Argentina from 63 percent to 70 percent, Bates Poland Sp z.o.o. from 60 percent
to 100 percent and in Dr Puttner Bates Werebeagentur GmbH in Austria from 80
percent to 100 percent. The aggregate consideration paid in 1999 for these
transactions was L0.4 million.
Additionally, CCG acquired several small advertising and marketing
services companies in Sweden, Belgium, Spain, the UK, Germany, India, Romania
and Finland. The aggregate consideration paid in 1999 for these acquisitions was
L3.7 million in cash, and estimated total additional cash payments of L0.2
million have been accrued.
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.
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 and Friends GmbH acquired a further 33 percent
interest in Scholz and Friends Dresden GmbH, in Germany, increasing the Group's
effective holding of Scholz & Friends Dresden to 76.5 percent.
Disposals
CCG did not make any disposals in 1999.
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 National Research
Group, Inc. and its subsidiaries ("NRG"). See Note 2 in the Notes to
Consolidated Financial Statements.
GEOGRAPHIC COVERAGE
CCG serves clients in all of the world's major advertising markets.
Geographic analysis of CCG revenue in 1999
Percentage of
Percentage of worldwide major media
CCG revenue advertising expenditure(1)
( percent) ( percent)
------------------------------- ------------------ ---------------------------
UK 12.0 5.2
North America 24.7 44.5
Continental Europe 36.3 23.6
Asia Pacific and Latin America 27.0 26.7
Total 100.0 100.0
(1) Source: Zenith Media Worldwide, Advertising Expenditure Forecasts, December
1999.
CCG's global reach is reflected in its geographical revenue mix.
Taking the industry as a whole, North America accounts for
approximately 40 percent of worldwide advertising expenditure. With only 25
percent 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 a target of 40 percent of Group revenues set
for the year 2003. Continental Europe is CCG's largest region in terms of
revenue, representing approximately 36 percent of Group revenues. Asia Pacific
represents approximately 27 percent of Group revenues, with Australasia alone
representing approximately 15 percent of Group revenues. The acquisition of
Diamond is expected to further strengthen CCG's presence in Asia Pacific.
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 1999. 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 1999.
At December 31, 1999, CCG's owned and leased properties and fixtures
(including furniture and equipment) had a net book value of L21.8 million ($35.1
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, 1999, L22.3 million ($35.9 million) had been
reserved by the Group for potential costs of surplus space, primarily in London
and New York City.
The following outstanding property 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. Saatchi & Saatchi has agreed to give
additional, or in some cases substitute, guarantees and to indemnify CCG against
any liability in its preexisting guarantees.
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, 2000, the total number of
Ordinary Shares owned by the Directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Identity of
Title of Class Person or Group Amount Owned Percent of Class
<S> <C> <C> <C>
Ordinary Shares Directors and officers of the 161,705 0.06 percent
Company as a group
</TABLE>
There were no non-beneficial holdings of ten percent or more of the
issued Ordinary Share capital of the Company as of June 1, 2000.
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
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 193.0 155.5 3.08 2.49
Third Quarter 198.0 165.0 3.10 2.55
Fourth Quarter 302.0 172.0 4.88 2.80
2000 First Quarter 406.0 267.0 6.47 4.40
Second Quarter 386.5 280.0 6.17 4.24
(through May 16, 2000)
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 May 26, 2000, 4.50 percent of the outstanding Ordinary Shares, which are
represented by ADSs, were held in the US by 625 record holders and 0.13 percent
of the Ordinary Shares were held in the US by approximately 51 record holders.
CCG estimates that, as of May 26, 2000, an additional 15.22 percent of the
Ordinary Shares are owned beneficially by US persons giving an aggregate US
holding of 19.85 percent.
US dollars per
ADS
High Low
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
Third Quarter 15 1/2 12 3/4
Fourth Quarter 24 7/16 14
2000
First Quarter 32 3/8 22
Second Quarter 30 7/8 21 3/16
(through May 16, 2000)
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 Depositary 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 2000. The Chancellor of the Exchequer's Budget was
delivered on March 21, 2000, containing proposals for enactment in the Finance
Act 2000.
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 at the rate of 10 percent 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, with the tax credit rate of 10 percent, 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.
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
L231,000 (for chargeable transfers made on or after April 6, 1999). The March
2000 Budget has proposed that this should be increased to L234,000 as from April
6, 2000. 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 L231,000 (or L234,000) "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 percent on lifetime chargeable
transfers made more than seven years before the death and 40 percent 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.
The charge is normally at the rate of 0.5 percent of the amount or value of the
consideration given for the transfer (with rounding up, in the case of stamp
duty, to the nearest 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 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.
In the case of stamp duty, the charge is rounded up to the nearest multiple of
L5.
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 L5 per instrument of transfer. 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 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, 1999 and 1998 and for each
of the years in the three year period ended December 31, 1999, which have been
audited by KPMG Audit Plc, are included elsewhere herein. 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.
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 with respect to 1997 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."
<TABLE>
<CAPTION>
(In millions, except per share data)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1999 1999 1998 1997 1996 1995
US$(1) FIGURES SHOWN IN POUND STERLING
CONSOLIDATED INCOME STATEMENT DATA:(2)
Amounts in Accordance with UK GAAP
Commission and fee income
Continuing operations $544.0 335.8 301.8 736.1 754.9 761.1
---------- --------- --------- --------- ---------- ----------
Total $544.0 335.8 301.8 736.1 754.9 761.1
---------- --------- --------- --------- ---------- ----------
Profit (loss) before tax, and minority
interests-historically reported(3) $43.0 32.3 25.9 34.6 41.8 (22.6)
Adjustment for provisions(4) - - (1.2) (4.7) (7.0) (10.2)
---------- --------- --------- --------- ---------- ----------
Profit (loss) before tax, and minority interests-restated(3) $43.0 32.3 24.7 29.9 34.8 (32.9)
---------- --------- --------- --------- ---------- ----------
Net profit (loss) $24.9 18.6 13.8 10.4 17.2 (47.6)
---------- --------- --------- --------- ---------- ----------
Net profit (loss) per Cordiant Ordinary Share basic(2) $0.13 8.2p 6.2p 4.7p 3.9p (20.5)p
Net profit (loss) per Cordiant Ordinary Share diluted(3) $0.13 7.8p 6.2p 4.7p 3.9p (20.5)p
Approximate Amounts in Accordance with US GAAP
Profit/(loss) before change in accounting principles(4) (10.1) (6.3) 4.6 3.1 5.1 (43.8)
Cumulative effect of change in accounting principles(5) (24.0) (14.9)
------------------------------------------------------------------
Net profit/(loss) (34.1) (21.2) 4.6 3.1 5.1 (43.8)
------------------------------------------------------------------
Net profit/(loss) per Ordinary Share(2) $(0.15) (9.5)p 2.1p 1.4p 1.1p (15.0)p
------------------------------------------------------------------
Net profit/(loss) per ADS(2) $(0.77) (47.6)p 10.3p 7.0p 5.7p (74.9)p
---------- --------- --------- --------- ---------- ----------
Dividends including tax credit
Per Ordinary Share $0.07 4.5p 3.5p 3.0p 2.6p -
Per ADS $0.36 22.5p 17.5p 15.0p 13.0p -
</TABLE>
<TABLE>
(In millions)
December 31,
------------------------------------------------------------------
1999 1999 1998 1997 1996 1995
US$(1) FIGURES SHOWN IN POUND STERLING
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Amounts in Accordance with UK GAAP
Working capital asset (deficiency) 10.0 (6.2) 11.8 2.8 (59.8) (25.3)
Total assets 949.3 589.6 386.7 377.8 912.4 992.9
Long term liabilities, including minority interests 297.8 185.0 136.9 123.2 262.6 309.2
Shareholder's deficiency-historically reported (73.7) (45.8) (71.5) (85.7) (215.3) (224.9)
Adjustment for provisions(4) - - 7.6 8.8 27.5 34.6
----------- ---------- ---------- ---------- ---------- ----------
Shareholder's deficiency-restated (73.7) (45.8) (63.9) (76.9) (187.8) (190.3)
----------- ---------- ---------- ---------- ---------- ----------
Approximate Amounts in Accordance with US GAAP
------------------------------------------------------------------
Shareholders' funds/(deficiency) 33.2 20.6 26.6 20.2 24.6 6.8
------------------------------------------------------------------
</TABLE>
_________________
(1) These figures have been translated into US Dollars at the Noon Buying Rate
on December 31, 1999 (L1.00-$1.61).
(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, Lnil, L2.2 million, L16.5 million, and L20.3
million that were incurred in 1999, 1998, 1997, 1996, and 1995,
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) Due to a recent change in UK GAAP, CCG now discounts its property
provisions for the purposes of UK GAAP and has restated the results of
prior years as if this accounting had been in effect for those years. In
connection with this restatement, the Group determined that certain errors
had been made in the prior years in the determination of property
provisions and compensation expense under U.S. GAAP. As a result, prior
year amounts have been restated for the correction of those errors.
(5) During 1999, the Group reviewed its accounting for property provisions
under U.S. GAAP and determined that it is preerable under U.S. GAAP to
record property provisions on a gross basis rather than on a discounted
basis. The cumulative effect of this change in accounting policy for
periods through December 31, 1998 was a charge to profit under U.S. GAAP of
L14.9 million (6.6p per Ordinary Share).
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) (Pound Sterling million)
1995 -- --
1996 2.0 4.4
1997 1.2 2.7
1998 1.4 3.1
1999(1) 1.8 5.1
____________________
(1) If approved by the Company's shareholders, such dividend will be paid in
June 2000.
Under UK company law, the ability to pay a dividend is dependent on
whether the Company has distributable reserves. At December 31, 1999 the Company
had distributable reserves of L31.4 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
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
1999 1.62 1.68 1.55 1.61
____________________
* The average of the exchange rates on the last day of each month during the
period.
The Noon Buying Rate for pounds sterling on May 16, 2000 was L1.00 = $1.50.
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 34 and 45 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 in
conjunction with the client. Bates Worldwide, Scholz & Friends and Diamond
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 58 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 excludes the effect of exchange rate movements.
The prospective change to UK GAAP for the year ending December 31,
2000 and its anticipated impact is as follows:
(i) Financial Reporting Standard ("FRS") 16 (Current Tax) specifies
how current tax, in particular withholding tax and tax credits, should be
reflected in the financial statements. The Group's existing accounting
policies are consistent with FRS 16.
INDUSTRY BACKGROUND(4)
Zenith estimates that the outlook for advertising expenditures in
major media (television, print, radio, cinema and outdoor) is one of stable
growth to 2002.
Zenith estimates that worldwide major media advertising expenditure
grew by 4.9 percent in 1999. Looking forward, Zenith forecasts nominal growth of
6.4 percent in 2000, accelerating to 10.6 percent in 2001 and 6.0 percent in
2002.
__________________
(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, December 1999.
Conversion to the Euro
The Group has significant operations within the European Union. The
Group has not encountered any significant problems since the introduction of the
Euro on January 1, 1999 and the associated costs are not material.
LIQUIDITY AND CAPITAL RESOURCES
General
The Group's primary liquidity sources are cash flows generated from
its operations, the issuance of equity and its banking facilities. In November
1999, CCG refinanced the Group's core banking facilities with new committed
facilities. The new facilities are to be used to fund the Group's working
capital requirements and the acquisition of Diamond and for general corporate
purposes.
The capital structure consists of both senior debt and equity. At
December 31, 1999, the Group's senior debt consisted of the new bank facility
(the "Facility") of $250 million. The Facility provides, committed credit
facilities at a rate between 0.7-1.25 percent over LIBOR, depending upon the
Group's ability to achieve certain financial ratios. The Facility is divided
into two equal amounts; i) $125 million maturing in November 2000 with an option
to extend for one additional year, and ii) $125 million maturing in November
2004. The Facility requires the Group to comply with customary financial and
other covenants. It also contains provisions whereby, on the occurrence 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 Group in respect of
indebtedness over a specified amount or any change of control of the Company.
The Facility is secured by guarantees from the principal companies of the Group.
On December 31, 1999, CCG had drawings of $105 million, compared with
drawings of $60 million on December 31, 1998. The primary reason for the higher
drawings were the Group's requirements for acquisition financing during 1999 and
non-recurring capital expenditure relating to an office relocation in the US.
The undrawn element of CCG's facilities is required in part to fund
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 allowing the
agencies to buy media on behalf of their clients. Although 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.
In connection with the Demerger, Zenith entered into an agreement (the
"Zenith Facility Agreement") providing a L18.5 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, 1999 the amount outstanding under the Zenith Facility
was L5.4 million. These facilities amortize by L2 million in 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.
Cash Flows from Operating Activities
Cash generated from operating activities in 1999 was L50.0 million
compared with L19.8 million in 1998, an increase of L30.2 million. Of this
increase, L7.5 million is derived from increased operating profit. There was a
reduction in the payments in respect of unutilized property, which had been
provided for in prior years, for ongoing operations from L7.0 million in 1998 to
L4.8 million in 1999. 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 L20.5 million increase is
derived from an improved working capital position, which resulted in a working
capital inflow of L10.8 million in the year, compared to a net outflow from
working capital of L9.0 million in 1998, and increased depreciation charge of
L0.7 million.
In 1998, cash flow from operating activities increased compared to
1997, due to improved operating profits of L26.0 million, offset by a
deterioration in cash flow from working capital of L8.8 million. Payments in
respect of unutilized property, which had been provided for in previous years,
were L7.0 million in 1998 compared to L19.2 million for Cordiant in 1997.
Net Cash Outflows Arising from External Demerger Costs
In 1999, no material payments were made in relation to the Demerger.
In 1998, L8.2 million of external demerger costs incurred and accrued in the
previous year were paid. These payments were made primarily to external advisers
of the Group.
Cash Outflows from Returns on Investments and Servicing of Finance
In 1999, cash outflows from net interest expense and dividends to
minorities were L7.0 million compared to L4.9 million in 1998. Net interest paid
by the Group increased from L2.4 million to L6.0 million, largely due to the
payment of one-time fees in November 1999 relating to refinancing the bank
facilities. Dividends to minorities decreased from L2.5 million to L1.0 million
following the acquisition of the minority interest in Australia.
In 1998, consolidated cash outflows were L4.9 million, which showed a
decrease of L7.4 million over 1997, due to the refinancing that occurred in
connection with the Demerger.
Cash Flows from Investing Activities
In 1999, payments for the acquisition of tangible fixed assets, net of
receipts from disposals amounted to L18.3 million compared with L7.5 million in
1998. This increase was principally due to one-time refurbishment costs in
respect of a relocation in the United States.
In 1998, the L7.5 million net payments for acquisition of tangible
fixed assets reflected a decrease from L23.2 million in 1997 relating to the
Demerger.
In 1999, there was a cash inflow of L0.2 million from the acquisition
and disposal of miscellaneous investments compared with a net inflow of L0.1
million in 1998.
Payments for the acquisition of investments in subsidiary and
associated undertakings in 1999, net of cash in companies acquired was L22.2
million compared with L7.0 million in 1998. Additional acquisition costs were
met by the issue of shares with a market value of L3.4 million. Additional costs
of L51.4 million relating to deferred consideration relating to 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 1999 and
1998. A subsidiary, however, was reclassified during 1998 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.
Equity Dividends Paid
In 1999, a dividend to equity shareholders of L3.1 million was paid in
relation to 1998 profits. This compares with the dividend of L2.7 million paid
in 1998.
Cash Flows from Financing Activities
In 1999, shares were issued for cash value of L1.8 million (1998 -
L0.5 million) following the exercise of employee share options. The net draw
down of Group borrowing facilities was L25.2 million (1998 - L8.6 million) and
repayments of finance lease borrowings was L0.2 million (1998 - L0.2 million).
In 1999, the L25.2 million net draw down of loans consisted of loans
drawn of L90.9 million and repayments of L65.7 million representing the
refinancing of the Group's bank facilities during the year and the funding of
acquisitions made and capital expenditure incurred in 1999.
In 1998, shares were issued for cash value 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).
RESULTS OF OPERATIONS(5)
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,
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 1999, the Company has adopted the new accounting standards FRS
12 "Provisions, Contingent Liabilities and Contingent Assets", FRS 13
"Derivatives and other Financial Instruments", and FRS 15 "Tangible Fixed
Assets".
The only material impact of FRS 12, is that the Group's property
provisions will be discounted to the present value of future net lease
obligations. The recognition of this discount in this and subsequent years will
be included as a finance item within net interest payable and similar items.
Under US GAAP long term property provisions are made on a gross basis
for properties which are vacant and surplus to requirements after allowing for
estimated subrental. Such provisions were previously provided on a discounted
basis in the presentation of US GAAP data. As a result, prior year US GAAP data
has been revised to reflect the use of the gross basis.
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. FRS 13 disclosures are in Note 32 to the
Consolidated Financial Statements.
FRS 15 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.
____________________
(5) See Note 37 in the Notes to Consolidated Financial Statements for a summary
of differences between UK GAAP and US GAAP.
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Revenue
Group revenue increased by 11 percent to L335.8 million in 1999 from
L301.8 million in 1998. On an underlying basis, revenue increased by 10 percent.
In the UK revenues increased by 1 percent to L40.2 million which
represents 12 percent of Group revenues (1998: 13 percent). The restructuring of
Bates UK, as an integrated agency and management changes impeded revenue growth
in 1999.
In North America, revenues increased by 16 percent to L83.1 million.
On an underlying basis the increase was 13 percent. The region represented 25
percent of the Group's revenues (1998: 24 percent). The revenue growth reflected
net new business wins and increased spending from existing clients.
In Continental Europe, revenues increased by 12 percent and by 15
percent on an underlying basis. This region (which includes revenues derived
from Africa and India) represents 36 percent of the Group's revenues (1998: 36
percent). In Bates Europe, revenues increased by 13 percent on an underlying
basis reflecting growth in the existing businesses combined with in-fill
acquisitions. Scholz & Friends performed well with revenue growth of 18 percent
on an underlying basis reflecting net new business wins and increased spending
from existing clients.
Asia Pacific and Latin American revenues increased by 11 percent and
by 6 percent on an underlying basis. In 1999, this region accounted for 27
percent of the Group's revenues (1998: 27 percent). Australasian (Australia and
New Zealand) revenues (approximately 57 percent of Asia Pacific and Latin
American revenues) decreased by 2 percent on an underlying basis. This decline
reflected reduced spending by existing clients. Asia revenues (approximately 38
percent of Asia Pacific and Latin American revenue) increased by 9 percent on an
underlying basis. The increase reflected a mixture of growth from existing
businesses as economic growth resumed in the region and from acquisitions, net
of divestitures.
Operating Profit
Operating profit increased by 29 percent to L33.5 million in 1999 from
L26.0 million in 1998. On an underlying basis, operating profits increased by 29
percent.
In the UK, operating profits were down 2 percent to L4.4 million in
1999. This marginal decrease reflected increased costs associated with the
restructuring of Bates UK.
In North America, operating profit grew by 33 percent to L10.9 million
in 1999 (28 percent on an underlying basis). This profit growth was driven
principally by the increase in revenues and continued cost control.
In Continental Europe, operating profit increased by 24 percent to
L12.5 million in 1999. On an underlying basis the increase was 26 percent. In
Bates Europe, the increase of 34 percent on an underlying basis reflected the
successful integration of the recent acquisitions. In Scholz & Friends, the
increase of 17 percent on an underlying basis primarily reflected a strong
conversion of revenue gains into operating profit
In Asia Pacific and Latin America, operating profit increased by 78
percent to L5.7 million in 1999. On an underlying basis operating profit
increased by 79 percent. In Australasia, operating profit declined by 70 percent
on an underlying basis. This primarily reflected a combination of lower revenues
and investment costs in its interactive business. In Asia operating profits were
achieved, from losses in 1998, giving an operating margin 7.6 percent. This
improved performance reflected conversion of revenue growth into operating
profits from existing businesses combined with net acquisitions.
Operating Margins
The CCG operating margin was 10.0 percent in 1999, an increase from
8.6 percent in 1998.
On a geographic basis, operating margins were as follows:
1999 1998
percent percent
-------------- --------------
UK 10.9 11.3
North America 13.1 11.4
Continental Europe 10.3 9.3
Asia Pacific and Latin America 6.9 3.9
-------------- --------------
Group 10.0 8.6
-------------- --------------
Joint Ventures and Associates
The Group's share of operating profits, primarily from Zenith and
Newcomm, amounted to L4.9 million an increase of 88 percent over 1998. Of the
L2.3 million increase, 52 percent was due to the acquisition of Newcomm. The
remainder primarily was due to Zenith, which achieved revenue growth of 16
percent during 1999 combined with a continued improvement in profitability.
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 operations in 1997. "Ongoing" operations
refers to businesses that remain with the Group following the Demerger and the
disposal of other businesses and excludes Zenith.
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 North America revenues increased by 6 percent and on an underlying
basis by 7 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. 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 and Latin America revenues fell by 15 percent and by 1
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 and Latin America 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 North America 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 and Latin America 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
percent percent
UK 11.3 16.7
North America 11.4 9.3
Continental Europe 9.3 7.9
Asia Pacific and Latin America 3.9 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.
Exceptional Operating Items and Disposals
Exceptional operating expenses for CCG in 1999 and 1998 were Lnil and
Lnil respectively, and for Cordiant in 1997 were L2.2 million. 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.
Profits on businesses disposed of by CCG were Lnil and Lnil in 1999
and 1998 respectively, and for Cordiant were L20.8 million in 1997. 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 Kobs & Draft Worldwide.
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 amounted to L6.1
million in 1999 and L3.9 million in 1998. The interest expense for Cordiant was
L8.8 million in 1997. The increase in 1999 is due to increased interest rates
and a L1 million write-off of unamortized bank fees relating to the
post-Demerger facility. The write-off arose as a result of the refinancing of
the bank facility. The decrease in 1998 is a result of the Demerger and the
post-Demerger financing arrangements.
Despite a minimal overall average net debt position, CCG incurs a
substantial 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 1999 CCG's tax charge for the year was L10.6 million, representing
an effective tax rate of 32.8 percent. 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.
Since 87 percent of CCG's business is located outside the UK, the UK
is not the dominant tax regime for the Group.
The improvement in the Group's effective tax rate in 1999 was
principally due to the mix of international profits.
Equity Minority Interests
Equity minority interests from ongoing businesses were L3.1 million in
1999, L1.7 million in 1998 and L1.8 million in 1997. The increase in 1999 is
principally due to the improved profitability of the Scholz & Friends network,
which the Group owns 90 percent, and the acquisition in November 1999 of 80
percent of Diamond in South Korea. The decrease in 1998 reflects the purchase of
the 24.9 percent minority interest in The Communications Group.
Return Attributable to Shareholders
The Group's net profit for 1999 was L18.6 million, resulting in
earnings per share of 8.2p, and for 1998 was L13.8 million, resulting in
earnings per share of 6.2p.
Cordiant's net profit for 1997 was L10.3 million, resulting in
earnings per share of 2.3p in 1997. Excluding exceptional items the earnings per
share were 6.3p in 1998 and 5.1p in 1997. The earnings per share figures are
unadjusted for the share consolidation that took place as part of the Demerger.
A dividend of 1.8p per share has been recommended in respect of 1999.
The comparable 1998 figure was a net dividend of 1.4p. Earnings covered the
recommended dividend 3.6 times in 1999 and 4.4 times in 1998.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
Group policy relating to the use of financial instruments, including
types of instruments used and amounts invested, is determined by the Board. The
instruments used by the Group in the year under review are fixed and floating
rate borrowings, interest rate caps, forward foreign currency contracts and
foreign currency swaps. The main risks arising from the Group's financial
instruments are interest rate risks, liquidity risks and foreign currency risks.
The Group does not trade in derivatives and does not enter into transactions of
a speculative nature or unrelated to the Group's investment activities.
Derivatives are used only to manage the risks arising from the underlying
business activities.
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 1999 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.
The Group has significant and diverse investments in foreign
operations. The Group's balance sheet and profit and loss can therefore be
materially affected by movements in exchange rates. It is not the Group's policy
to manage net assets via balance sheet hedging, or to hedge international
profits. The Group seeks to mitigate the effect of currency exposures by
borrowing in the same currencies as the currencies in which it lends and by
using currency swaps to match the currencies in which it lends. In addition, the
Group uses forward exchange contracts to hedge known cross-currency cash flows.
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, 1999 was US$105 million.
The following sensitivity shows the impact on the reported value of
long term debt of an instantaneous 10 percent change in the foreign currency
rate between sterling and US Dollar from their levels at December 31, 1999, with
all other variables held constant.
<TABLE>
<CAPTION>
Impact of a + 10 Impact of a - 10
Fair value reported at percent movement percent movement
December 31, 1999 in exchange rate in exchange rate
Pound Sterling million Pound Sterling million Pound Sterling million
<S> <C> <C> <C>
Long term debt 65.2 (7.9) 7.9
</TABLE>
Interest Rates
The Group is exposed to interest rate fluctuations due to the floating
rate central bank facility borrowings. The majority of these floating rate
liabilities are denominated in sterling or US dollars. This exposure is managed
via interest rate caps denominated in both sterling and US dollars. The Group
aims to hold interest rate caps to cover the majority of its borrowings and with
a variety of maturities. The current interest rate caps mature between December
2000 and June 2002. The Group will renew these caps on maturity. The Group's
weighted average interest rate for 1999 was 6.7 percent. The Company estimates
that if the 1999 interest rates had been 1 percentage point higher, the net
interest expense would have increased by L0.4 million.
See Note 32 of the Consolidated Financial Statements for more
information on the Group's risk profile which has been provided in accordance
with FRS 13.
Item 10. Directors and Officers of Registrant.
The Directors and Executive Officers of CCG are as follows:
<TABLE>
<CAPTION>
Name Position Age
<S> <C> <C>
Michael Bungey Director and Chief Executive Officer of the Company and Chairman and 60
Chief Executive Officer, Bates Worldwide
Arthur D'Angelo Finance Director of the Company 48
Jean de Yturbe Director, Group President, Bates Worldwide 53
Peter M Schoning Director, Chairman and Chief Executive Officer, Scholz & Friends 54
Charles Scott Chairman of the Company 51
Ian Smith Director, Group President, Bates Worldwide 44
William Whitehead Director, Group President Bates Worldwide 54
Dudley Fishburn Non-executive Director 54
Professor Theodore Levitt Non-executive Director 75
Dr. Rolf Stomberg Non-executive Director 60
James Tyrrell Non-executive Director 59
David F. Ham Group Controller 34
Denise Williams Company Secretary 42
</TABLE>
Executive Directors
Charles Scott (51) Chairman: joined the Board as Finance Director in
January 1990. He was promoted to Chief Operating Officer in July 1991 and Chief
Executive Officer in April 1993. In January 1995 he was appointed Chief
Executive Officer and Acting Chairman, and in July 1995 was appointed Chairman.
He is a non-executive director of several companies.
Michael Bungey (60) Chief Executive Officer: became Chairman and Chief
Executive Officer of Bates Dorland and Bates Europe in 1988. 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 was appointed
to the Board as Chief Executive Officer of CCG in December 1997.
Arthur D'Angelo (48) Finance Director: joined Saatchi & Saatchi
Holdings USA in 1987 and joined Bates USA in April 1994 as Executive Vice
President and Chief Financial Officer. He was named Chief Financial Officer of
Bates North America later that year, and was appointed Chief Financial Officer
of Bates Worldwide in July 1995. He was appointed to the Board as Finance
Director in December 1997.
Jean de Yturbe (53) Director: appointed 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. He was appointed
to the Board in December 1997 and appointed a Group President for Bates
Worldwide in December 1999.
Peter Schoning (54) Director: joined Scholz & Friends in 1984 as
Managing Director. He was named Managing Partner in 1987. In 1993 he was
appointed Chief Executive Officer of Scholz & Friends, and since 1995 he has led
the agency as Chairman and Chief Executive Officer. He was appointed to the
Board in December 1997.
Ian Smith (44) Director: joined George Patterson Bates in 1989 and was
named General Manager and New Business Director in 1990. He became National
Client Services Director in 1993 and Managing Director in 1996. He as appointed
to the newly-created position of President, International, Bates Worldwide in
March 1998 and a Group President for Bates Worldwide in December 1999. He was
appointed to the Board in January 2000.
William Whitehead (54) Director: was named Executive Director of
Worldwide Client Services at Bates Worldwide and Regional Director of Latin
America for Bates Worldwide in May 1994. In December 1994 he was appointed Chief
Operating Officer for Bates North America. He became President and Chief
Operating Officer of Bates USA in September 1995. In July 1996 he became Chief
Executive Officer of Bates North America. He was appointed to the Board in
December 1997 and became a Group President for Bates Worldwide in December 1999.
Non-Executive Directors
Dudley Fishburn (54) Non-executive Director: is Associate Editor of
The Economist, Treasurer of the National Trust, Chairman of the Trustees of the
Open University, Chairman of HFC Bank plc, a director of Philip Morris Inc. and
a Trustee of the Prison Reform Trust. He was previously Member of Parliament for
Kensington and Executive Editor of The Economist. He was appointed to the Board
in May 1996.
Professor Theodore Levitt (75) Non-executive Director: is Edward W.
Carter Professor of Business Administration, Emeritus, of the Harvard Business
School, and formerly Editor of the Harvard Business Review. He serves on the
board of seven Sanford C. Bernstein Funds, is a retired director of eight New
York Stock Exchange companies, and author of numerous articles and books on
economics, management and marketing. Professor Levitt was appointed to the Board
in March 1990.
Dr Rolf Stomberg (60) Non-executive Director: worked for The British
Petroleum Company plc from 1970 to 1997 where he was Chief Executive Officer for
B.P. Oil International and a B.P. Group Managing Director. He is Chairman of
John Mowlem & Company PLC and serves on a number of UK and continental boards.
He is also a Visiting Professor at Imperial College Management School, London
and the Business School of Institut Francais du Petrole in Paris. He was
appointed to the Board in May 1998.
James Tyrrell (59) Non-executive Director: was Group Finance Director
of London International Group until November 1997, and executive director until
August 1998. Previously he was Group Finance Director of Abbey National Plc,
prior to which he was Managing Director of HMV Shops Limited. He was appointed
to the Board in May 1998.
Executive Officers
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.
Denise Williams joined the Company in March 1998 as Deputy Company
Secretary. Prior to that she was Group Secretary at Jacques Vert plc from 1992
to 1998. She was appointed Company Secretary in March 2000.
Re-election of Directors
The Articles of the Company provide that at the Annual General Meeting
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
The Board is committed to high standards of corporate governance and,
with the following exceptions, has complied with the continuing provisions as
set out in Section 1 of the Stock Exchange's Principles of Good Governance and
Code of Best Practice (the "Combined Code") throughout the year ended December
31, 1999:
(a) There was no senior independent non-executive director until Rolf
Stomberg was appointed to that position on March 4, 1999;
(b) The provisions of the Company's Articles of Association
concerning retirement of directors by rotation do not necessarily
ensure that all directors are required to stand for re-election
at least every three years. An amendment to the Articles so as to
comply with this requirement will be proposed at the Annual
General Meeting on June 13, 2000.
(c) The Board has not considered the reduction of executive
directors' contract periods to one year or less.
A separate Audit Committee and a Remuneration and Nominations
Committee exist, both of which are comprised solely of
non-executive directors. A Risk Management Committee was
established during 1999.
The Audit Committee was chaired during the year by James Tyrrell.
The main duties of the Audit Committee are to:
o Review, on behalf of the Board, the financial statements and
preliminary and interim results;
o Review the nature and scope of the external audit and the
findings of the external auditors;
o Monitor the adequacy of the Group's system of internal control;
o Review and 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 three occasions during 1999.
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 seven
occasions in 1999, is chaired by Dudley Fishburn.
The Risk Management Committee comprises a combination of
executive and non-executive directors. The Committee is chaired
by Charles Scott. The purpose of the Committee is to assist the
directors in discharging their responsibilities in respect of the
internal control aspects of the Combined Code. The main duties of
the Risk Management Committee are to:
o Establish a risk-based approach to maintaining a sound system
of internal control which is embedded in the business processes
of the Group;
o Review regular reports from management, focusing on an
assessment of the significant risks and the effectiveness of the
system of internal control in managing those risks;
o Undertake an annual assessment of the significant risks facing
the Group and the internal controls to manage those risks;
o Undertake an annual review for the purpose of making its public
statement on internal control; and
o Review and direct the risk management function.
The first meeting of the Committee took place in January 2000.
The following table lists, as of June 1, 2000, the Directors'
interests in Ordinary Shares, Ordinary Share Options and Equity Participation
Rights.
Directors' Interests
<TABLE>
<CAPTION>
Beneficially Owned Ordinary Share Equity Participation
Ordinary Shares Options Rights
<S> <C> <C> <C>
M. Bungey 55,990 647,020 890,110
A. D'Angelo 960 216,854 593,401
J. de Yturbe - 260,996 593,401
D. Fishburn - - -
T. Levitt 18,796 - -
P. Schoning - 132,426 593,401
C. Scott* 85,172 731,905 -
I. Smith - 35,000 415,382
R. Stomberg - - -
J. Tyrrell - - -
W. Whitehead 787 222,426 593,401
_________________
</TABLE>
*Includes spouse's interests
Item 11. Compensation of Directors and Officers.
In 1999, the aggregate amount of compensation paid or accrued for all
directors and executive officers as a group (13 persons) who served during the
year, was L4,262,000 ($6,904,440). Such compensation was mainly in the form of
salaries and fees and included L126,000 ($204,120) set aside for pension plans.
The table below reports remuneration by the Company for the year ended
December 31, 1999. The compensation for executive directors for 1999 was
approved by the Remuneration Committee.
<TABLE>
<CAPTION>
Salary Bonus As Long term Benefits in Pension Total
percentage Incentive kind(1) costs(2) remuneration
of salary plans
ALL FIGURES SHOWN IN POUND STERLING
'000 '000 % '000 '000 '000 '000
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December
31, 1999
-------------------------
Executive Directors
-------------------------
Michael Bungey (CEO) 480 449 94 14 81 56(3) 1080
-------------------------
Arthur D'Angelo 231 168 73 9 7 8 423
-------------------------
Jean de Yturbe 235 34 14 14 38 23 344
-------------------------
Alex Hamill 325 182 56 - - 3 510
-------------------------
Peter Schoning 269 557 207 28 10 - 864
-------------------------
Charles Scott (Chairman) 200 - - - 6 22 228
-------------------------
William Whitehead 340 194 57 9 36 3 582
-------------------------
Non-executive Directors
-------------------------
Dudley Fishburn 32 - - - - - 32
-------------------------
Professor Theodore 25 - - - - - 25
Levitt
-------------------------
Dr Rolf Stomberg 28 - - - - - 28
-------------------------
James Tyrrell 33 - - - - - 33
-------------------------
</TABLE>
(1) Benefits in kind typically include company car, pension, medical and life
insurance. Mr. Bungey, who is a UK citizen and has been relocated to the
US, received an annual travel allowance for flights between the US and the
UK for his wife and children.
(2) 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 L7,407
(1998: L7,055). The total annual accrued pension (including inflation) as
at December 31, 1999 was L85,185 (1998: L74,074). 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 L117,379 (1998: L106,464). The
pension figures quoted last year for Mr. Bungey were incorrect due to an
incorrect definition of pensionable salary. During the year, the ambiguity
was resolved and the figures quoted above for 1998 and 1999 have been
calculated based on the correct definition of pensionable salary.
(3) 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.
The basic salary for each director is determined by taking into
account an assessment of the director's experience, responsibility and market
value. Salaries are reviewed annually.
In addition to salary, all senior executives are eligible for an
annual performance-related bonus which is non-pensionable. The bonus is designed
to provide an incentive to achieve and exceed targets set by the Committee and
to ensure that annual remuneration varies in line with both corporate and
personal performance.
For the year ended December 31, 1999, the annual bonus paid to each
executive director was a percentage of salary based on (i) with respect to
Messrs. Bungey and D'Angelo, the performance of CCG; (ii) with respect to
Messrs. Hamill, Whitehead and de Yturbe, by reference to a combination of the
performance of CCG and the business that each director heads; and (iii) with
respect to Mr. Schoning, on the performance of Scholz & Friends.
For all executive directors, only basic salary is pensionable. Their pension
arrangements are as follows:
a) Mr. Bungey's period of pension accrual under the Cordiant Group Pension
Scheme ceased with effect from December 31, 1999 and he has subsequently,
with the consent of the Trustees, taken a transfer value of his benefits
under the Scheme into a private pension arrangement. He remains a member of
a small self-administered scheme to which the Company contributes 6 percent
of his salary plus L15,000 per annum.
b) Mr. D'Angelo is entitled to an annual pension contribution of $7,500 and is
also a member of the Bates Advertising USA Inc. 401k plan.
c) 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.
d) Mr. Scott receives a Company contribution equivalent to 10 percent of his
salary, which is paid into a personal pension scheme.
e) 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.
Service Agreements
With the exception of Peter Schoning, no executive director has a
service agreement containing a notice period exceeding one year.
Mr. Schoning has a service agreement with CCG in respect of his
directorship of the Company which may be terminated at any time on 12 months'
notice. His underlying contract with Scholz & Friends includes a notice period
of at least one year ending on a financial year end and may not be terminated
until December 2002.
With the exception of Mr. Schoning, if an executive director's service
agreement is terminated by the Company within two years of a change of control,
the executive is entitled to payment based on up to two years' remuneration.
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 contract. 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 on 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 of Association. 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 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. The
Shares Schemes expired in April 1994 and March 2000 respectively, although
existing options subsisting at the date of expiration remain exercisable in
accordance with the Share Schemes' terms.
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 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.
Options under the SAYE Schemes vest with effect from July 1, 2000. The
original options held by employees of Saatchi & Saatchi and The Facilities Group
vested during the year.
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."
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 Value at
December 31, 1998 1999 Cash Payment December 31, 1999
(VALUES SHOWN IN POUND STERLING)
Michael Bungey 42,726 14,245 28,481
Arthur D'Angelo 25,636 8,546 17,090
Jean de Yturbe 42,726 14,242 28,484
Peter Schoning 56,968 28,484 28,484
Ian Smith 20,443 10,222 10,221
William Whitehead 25,636 8,546 17,090
No awards were made under the schemes during 1999.
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.
In March 1999, a further award was made under the scheme over a
maximum of 80,029 shares. At December 31, 1999, there were 52 participants with
awards over a maximum of 11,114,749 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 42-month
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") is
entitled to acquire the number of Ordinary Shares determined in accordance with
the following provisions:
(a) If a takeover had occurred after the date of the award but before
the announcement of CCG's results for its financial year ended in
1998 (the "1998 results"), the participant would have acquired
one third of the maximum possible number of Ordinary Shares;
(b) If a takeover had occurred after the announcement of the 1998
results but before the announcement of CCG's results for its
financial year ended in 1999 (the "1999 results"), the
participant would have acquired:
(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
(c) if a 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 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 would have been able immediately following such determination
to acquire:
(a) one third of the number of Ordinary Shares so determined, if
cessation had occurred on or before the announcement of the 1998
results;
(b) two thirds of the number of Ordinary Shares so determined, if
cessation had occurred after the announcement of the 1998 results
but on or before the announcement of the 1999 results; and
will be entitled to receive all of the Ordinary Shares so determined, if
cessation occurs after the announcement of the 1999 results.
Equivalent provisions 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 a 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 be affected thereby.
(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.
Two new awards were made under the scheme during the year whereby a
total of 56 employees were invited to participate in the scheme. Options over
2,126,902 shares were issued subject to salary or bonus sacrifices amounting to
L319,971. At December 31, 1999, there were 118 participants holding options over
9,126,998 shares.
(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 is entitled to exercise his option in
accordance with the following provisions:
(a) if a takeover had occurred after the date of the award but before
the announcement of the 1998 results, the option holder would
have been able to exercise his option in respect of one third of
the number of Ordinary shares under option;
(b) if a takeover had occurred after the announcement of the 1998
results but before the announcement of the 1999 results, the
option holder would have been able to 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
(c) if a 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 apply for option holders 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 would have been 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 had occurred on or before the announcement of the 1998
results;
(b) two thirds of the number of Ordinary Shares so determined, if
cessation had occurred after the announcement of the 1998 results
but on or before the announcement of the 1999 results; and
will be able to exercise all of the Ordinary Shares so determined, if cessation
occurs after the announcement of the 1999 results.
Equivalent provisions apply for option holders 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 the 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
a 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 be affected
thereby.
(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.
(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.
During the year, two new invitations were made to participants in the
scheme resulting in options over a maximum of 61,646 Ordinary Shares.
The following chart shows as of June 1, 2000 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>
Exercisable
Grant -------------------------------- Option Number
Scheme Date Currently From To Price of Shares
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Executive No. 2 Scheme 18-Jun-91 Yes 18-Jun-94 18-Jun-01 134.828 142,973
Executive No. 2 Scheme 06-Sep-91 Yes 06-Sep-94 06-Sep-01 134.828 19,209
Executive No. 2 Scheme 10-Apr-92 Yes 10-Apr-97 10-Apr-02 107.498* 112,204
Demerger No. 2 Scheme 18-Jun-91 Yes 18-Jun-94 18-Jun-01 134.828 343,248
Demerger No. 2 Scheme 10-Apr-92 Yes 10-Apr-95 10-Apr-02 107.498 78,895
Demerger No. 2 Scheme 10-Apr-92 Yes 10-Apr-97 10-Apr-02 107.498* 6,174
Performance Option Scheme 03-May-95 Yes 03-May-98 03-May-05 73.113 257,775
Performance Option Scheme 11-Aug-95 Yes 11-Aug-98 11-Aug-05 94.892 257,774
Performance Option Scheme 19-Apr-96 Yes 19-Apr-99 19-Apr-06 130.000 365,000
Performance Option Scheme 19-Apr-96 No 19-Apr-01 19-Apr-03 130.000* 515,000
Performance Option Scheme 23-Apr-97 Yes 23-Apr-00 23-Apr-07 131.500 697,500
Performance Option Scheme 23-Apr-97 No 23-Apr-02 23-Apr-07 131.500* 667,500
Demerger Performance Scheme 03-May-95 Yes 03-May-98 16-Dec-04 73.113 41,462
Demerger Performance Scheme 03-May-95 No 03-May-00 03-May-02 73.113* 109,926
Demerger Performance Scheme 11-Aug-95 Yes 11-Aug-98 16-Dec-04 94.892 41,463
Demerger Performance Scheme 19-Apr-96 Yes 19-Apr-99 16-Dec-04 130.000 98,750
Demerger Performance Scheme 19-Apr-96 No 19-Apr-01 19-Apr-03 130.000* 248,750
Demerger Performance Scheme 23-Apr-97 Yes 23-Apr-00 16-Dec-04 131.500 188,750
Demerger Performance Scheme 23-Apr-97 No 23-Apr-02 16-Dec-04 131.500* 186,250
1995 SAYE Scheme 30-Jun-95 No 01-Jul-00 31-Dec-00 64.5p 840,012
Performance Share Option Scheme (PSOS) 18-Dec-97 No 18-Dec-00 18-Dec-04 105.000 5,772,791
Performance Share Option Scheme (PSOS) 14-May-98 No 14-May-01 14-May-05 123.500 1,051,963
Performance Share Option Scheme (PSOS) 11-Mar-99 No 11-Mar-02 11-Mar-06 164.500 1,682,641
Performance Share Option Scheme (PSOS) 11-Aug-99 No 11-Aug-02 11-Aug-06 176.500 155,805
Performance Share Option Scheme (PSOS) 09-Mar-00 No 09-Mar-03 09-Mar-07 358.500 1,330,497
Equity Participation Plan 18-Dec-97 No 18-Dec-00 18-Dec-04 105.000 10,757,802
Equity Participation Plan 11-Mar-99 No 11-Mar-02 11-Mar-06 105.000 80,029
Zenith Executive Incentive Plan 16-Dec-97 No 31-Dec-00 31-Dec-04 109.000 1,047,984
Zenith Executive Incentive Plan 13-Apr-99 No 13-Apr-01 13-Apr-05 160.500 61,646
Healthworld 1997 Stock Option Plan 21-Nov-97 Yes 02-Mar-00 21-Nov-04 129.000 373,131
Healthworld 1997 Stock Option Plan 21-Nov-97 Yes 02-Mar-00 21-Nov-07 130.000 811,861
Healthworld 1997 Stock Option Plan 21-Nov-97 Yes 02-Mar-00 21-Nov-07 143.000 108,305
Healthworld 1997 Stock Option Plan 26-Feb-98 Yes 02-Mar-00 26-Feb-05 216.000 325,667
Healthworld 1997 Stock Option Plan 26-Feb-98 Yes 02-Mar-00 26-Feb-08 217.000 73,626
Healthworld 1997 Stock Option Plan 26-Feb-98 Yes 02-Mar-00 26-Feb-03 238.000 31,503
Healthworld 1997 Stock Option Plan 26-Feb-98 Yes 02-Mar-00 26-Feb-03 239.000 11,809
Healthworld 1997 Stock Option Plan 23-Jul-98 Yes 02-Mar-00 23-Jul-08 218.000 162,457
Healthworld 1997 Stock Option Plan 24-Jul-98 Yes 02-Mar-00 24-Jul-05 216.000 75,802
Healthworld 1997 Stock Option Plan 23-Sep-98 Yes 02-Mar-00 23-Sep-05 174.000 108,305
Healthworld 1997 Stock Option Plan 15-Dec-98 Yes 02-Mar-00 15-Dec-08 155.000 78,224
Healthworld 1997 Stock Option Plan 15-Dec-98 Yes 02-Mar-00 15-Dec-08 156.000 300,114
Healthworld 1997 Stock Option Plan 19-Jan-99 Yes 02-Mar-00 19-Jan-06 198.000 10,830
Healthworld 1997 Stock Option Plan 26-Feb-99 Yes 02-Mar-00 26-Feb-06 209.000 182,644
Healthworld 1997 Stock Option Plan 19-Apr-99 Yes 02-Mar-00 19-Apr-06 173.000 8,664
Healthworld 1997 Stock Option Plan 27-May-99 Yes 02-Mar-00 27-May-09 189.000 10,829
Healthworld 1997 Stock Option Plan 26-Jul-99 Yes 02-Mar-00 26-Jul-09 167.000 216,609
Healthworld 1997 Stock Option Plan 03-Aug-99 Yes 02-Mar-00 03-Aug-09 180.000 119,132
Healthworld 1997 Stock Option Plan 15-Oct-99 Yes 02-Mar-00 15-Oct-06 213.000 17,328
Healthworld 1997 Stock Option Plan 08-Nov-99 No 08-Apr-01 08-Nov-09 252.000 866,440
----------
TOTAL OPTIONS 31,053,053
----------
</TABLE>
Options marked * are super options as defined on page 49. In the
case of the various demerger schemes, the date of grant shown is that of
the original option replaced under the demerger scheme.
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 26,136,926 1,291,543
Options exercised (1,641,720) (24,695)
Options granted 2,268,577 -
Option lapsed (949,564) (186,592)
---------------- --------------
At year end 25,814,219 1,080,256
================ ==============
As of June 1, 2000, the number of Ordinary Shares subject to options,
excluding phantom options, granted to the Directors and executive officers of
the Company was 2,375,350.
The table below describes the various share options awarded to the
Directors of the Company as of June 1, 2000.
<TABLE>
Executive Directors' Share Options
<CAPTION>
Original Date Exercise Number of Exercise
of Grant Price shares Period
<S> <C> <C> <C> <C>
M Bungey 03/05/1995 73 67,498 May 98-May 05
11/08/1995 95 67,497 Aug 98-Aug 05
18/06/1991 135 137,211 Jun 94-Jun 01
10/04/1992 107 74,814 Apr 97-Apr 02
19/04/1996 130 150,000 Apr 01-Apr 03
23/04/1997 131 75,000 Apr 02-Apr 04
23/04/1997 131 75,000 Apr 00-Apr 07
A D'Angelo 03/05/1995 73 33,427 May 98-May 05
11/08/1995 95 33,427 Aug 98-Aug 05
19/04/1996 130 37,500 Apr 99-Apr 06
19/04/1996 130 37,500 Apr 01-Apr 03
23/04/1997 131 37,500 Apr 02-Apr 04
23/04/1997 131 37,500 Apr 00-Apr 07
J de Yturbe 03/05/1995 73 40,498 May 98-May 05
11/08/1995 95 40,498 Aug 98-Aug 05
19/04/1996 130 45,000 Apr 99-Apr 06
19/04/1996 130 45,000 Apr 01-Apr 03
23/04/1997 131 45,000 Apr 02-Apr 04
23/04/1997 131 45,000 Apr 00-Apr 07
P Schoening 03/05/1995 73 21,213 May 98-May 05
11/08/1995 95 21,213 Aug 98-Aug 05
19/04/1996 130 17,500 Apr 99-Apr 06
19/04/1996 130 17,500 Apr 01-Apr 03
23/04/1997 131 27,500 Apr 02-Apr 04
23/04/1997 131 27,500 Apr 00-Apr 07
C Scott 03/05/1995 73 109,926 May 00-May 02
10/04/1992 107 68,605 Apr 95-Apr 02
10/04/1992 107 10,290 Apr 95-Apr 02
19/04/1996 130 150,000 Apr 01-Apr 03
23/04/1997 131 75,000 Apr 00-Dec 04
23/04/1997 131 75,000 Apr 02-Dec 04
18/06/1991 135 222,502 Jun 94-Jun 01
18/06/1991 135 20,582 Jun 94-Jun 01
I Smith 23/04/1997 131 17,500 Apr 02-Apr 04
23/04/1997 131 17,500 Apr 00-Apr 07
W Whitehead 03/05/1995 73 21,213 May 98-May 05
11/08/1995 95 21,213 Aug 98-Aug 05
19/04/1996 130 45,000 Apr 99-Apr 06
19/04/1996 130 45,000 Apr 01-Apr 03
23/04/1997 131 45,000 Apr 02-Apr 04
23/04/1997 131 45,000 Apr 00-Apr 07
</TABLE>
During 1999, the Ordinary Shares traded on the London Stock Exchange at a high
of 301.5p, a low of 107p and closed at 293p on December 31, 1999.
During the year, Arthur D'Angelo exercised options over 50,082 shares, Alex
Hamill exercised options over 54,884 shares and William Whitehead exercised
options over 13,721 shares, all at an option price of 107p.
Other than as disclosed above, no options were granted to, or exercised by,
serving directors during the year, and no options lapsed during the year in
respect of such directors.
Item 13. Interest of Management in Certain Contracts.
None.
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 1999 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-50 herein are
hereby incorporated by reference into this Item 18.
(a) Independent Auditor's Report dated March 7, 2000.
(b) Consolidated balance sheets of the Company and subsidiaries as at
December 31, 1999 and 1998.
(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, 1999,
1998 and 1997.
(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, 1999 and 1998. (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, 1999, 1998 and 1997. (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
1.1 Consent of Independent Auditor.
2.1 Loan Agreement for Facilities of up to $250,000,000 to Cordiant
Communications Group plc and others, arranged by The Bank of New
York and HSBC Investment Bank plc, dated November 8, 1999, as
amended February 15, 2000.
2.2 Agreement and Plan of Merger dated as of November 9, 1999, among
Cordiant Communications Group plc, Healthworld Acquisition Corp.
and Healthworld Corporation. (Incorporated by reference to
Exhibit 2(a) to the Company's Registration Statement on Form F-4
(File No. 333-96241).)
2.3 Amendment No. 1 to Agreement and Plan of Merger dated as of
February 3, 2000, among Cordiant Communications Group plc,
Healthworld Acquisition Corp. and Healthworld Corporation.
(Incorporated by reference to Exhibit 2(b) to the Company's
Registration Statement on Form F-4 (File No. 333.-96241).)
3.1 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 5, 2000
________________________
<PAGE>
CORDIANT COMMUNICATIONS GROUP AND SUBSIDIARIES
INDEPENDENT AUDITORS' 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 December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' deficiency and other share
capital, total recognized gains and losses and cash flows for each of the years
in the three year period ended December 31, 1999. 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 audits in accordance with generally accepted auditing standards
in the United Kingdom which are substantially equivalent to generally accepted
auditing standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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.
As discussed in Note 1 to the consolidated financial statements, the Company has
adopted Financial Reporting Standard 12 "Provisions, Contingent Liabilities and
Contingent Assets". As a result the Company has restated its results of
operations for the years ended December 31, 1997 and 1998 and shareholders'
deficiency at December 31, 1998.
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 December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, 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 of America. 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 December 31, 1999 and shareholders'
deficiency at December 31, 1999 and 1998 to the extent summarized in note 37 to
the consolidated financial statements. As more fuly described in note 37(a), the
reported amounts of net profit for each of the years in the two year period
ended December 31, 1998 and shareholders' funds at December 31, 1998 under
generally accepted accounting principles in the United States of America have
been restated for certain accounting errors. As also described in note 37(a),
the Company changed its accounting policy for property provisions under
generally accepted accounting principles in the United States of America.
/s/ KPMG AUDIT PLC
---------------------------
London, England CHARTERED ACCOUNTANTS
March 7, 2000 REGISTERED AUDITOR
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
December 31, 1999
Notes (Sterling Pound) million
--------- ----------------------
Group and share of joint ventures 2,070.9
Less: share of joint ventures (393.0)
----------------------
Group Turnover 1,677.9
======================
Group and share of joint ventures 351.3
Less: share of joint ventures (15.5)
----------------------
Commission and fee income 335.8
Operating and administration expenses 3 (291.9)
Depreciation (10.4)
----------------------
Operating profit 33.5
Share of operating profits:
Joint venture 2.9
Associated undertakings 2.0
---------------------
Profit before interest and taxation 38.4
--------------------------------------------------------------------------------
Net interest payable and
similar charges - other 8 (3.8)
Write-off of bank fees (1.0)
Provisions - imputed interest (1.3)
--------------------------------------------------------------------------------
Total net interest payable and similar charges (6.1)
---------------------
Profit before taxation 32.3
Taxation 9 (10.6)
---------------------
Profit after taxation 21.7
Minority interests (3.1)
---------------------
Net profit 18.6
Dividend proposed on equity shares (5.1)
---------------------
Profit retained for year 13.5
=====================
Net earnings per Ordinary Share
- Basic 10 8.2p
- Diluted 10 7.8p
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>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
December 31,
1998 Restated
Notes (pound) million
------------- ---------------
Group and share of joint ventures 1,847.4
Less: share of joint ventures (281.8)
---------------
Group Turnover 1,565.6
===============
Group and share of joint ventures 316.0
Less: share of joint ventures (14.2)
--------------
Commission and fee income 301.8
Operating and administration expenses 3 (266.1)
Depreciation (9.7)
--------------
Operating profit 26.0
Share of operating profits:
Joint venture 1.4
Associated undertakings 1.2
--------------
Profit before interest and taxation 28.6
-------------------------------------------------------------------------------
Net interest payable and
similar charges - other 8 (2.7)
Provisions - imputed interest (1.2)
--------------------------------------------------------------------------------
Total net interest payable
and similar charges (3.9)
--------------
Profit before taxation 24.7
Taxation 9 (9.2)
--------------
Profit after taxation 15.5
Minority interests (1.7)
--------------
Net profit 13.8
Dividend proposed on equity shares (3.1)
--------------
Profit retained for year 10.7
==============
Net earnings per Ordinary Share
- Basic 10 6.2p
- Diluted 10 6.2p
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>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year ended December 31, 1997
----------------------------------------------------
Ongoing Disposed
operations operations Total
Restated Restated Restated
Notes (pound)m (pound)m (pound)m
-------- ------------ ------------ -----------
<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)
Provisions - imputed interest (0.9) (3.8) (4.7)
------------------------------------------------------------------------------------------------------------------
Total net interest payable and similar charges 2.4 (16.1) (13.5)
------------ ------------ -----------
Profit (loss) before taxation (929.1) 959.0 29.9
Taxation 9 (8.1) (9.4) (17.5)
------------ ------------ -----------
Profit (loss) after taxation (937.2) 949.6 12.2
Minority interests (1.8) (0.2) (2.0)
------------ ------------ -----------
Net profit (loss) (939.0) 949.4 10.2
==============================
Dividend proposed on equity shares (2.7)
Dividend on demerger 120.7
-----------
Profit retained for year 128.2
===========
Net earnings per Cordiant Ordinary Share
- Basic 10 2.3p
- Diluted 10 2.3p
</TABLE>
To assist in the understanding of the Group the Company has classified the
results of CCG 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>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998
1999 Restated
Notes (pound)m (pound)m
--------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term deposits 80.0 62.3
Short-Term Investments 11 7.5 1.5
Accounts and other receivables, prepayments and accrued income 12/13 336.0 246.3
Billable production 13 20.7 15.4
-------------------------------
Total current assets 444.2 325.5
-------------------------------
Long-Term Investments 14 12.4 4.0
Long-term receivables:
Accounts and other receivables, prepayments and accrued income 12 20.1 18.3
Property and equipment, net 15 33.7 22.7
Goodwill 79.2 16.2
-------------------------------
Total assets 589.6 386.7
===============================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank loans, overdrafts and other loans 16 7.5 21.7
Accounts payable, other liabilities and accrued expenses 17 417.3 268.0
Taxation and social security 22 25.6 24.0
-------------------------------
Total current liabilities 450.4 313.7
-------------------------------
Long-term liabilities:
Accounts payable, other liabilities and accrued expenses 17 24.6 13.5
Provision for joint venture deficit 18 14.4 14.7
Property, pension and other provisions 18 40.6 43.6
Long-term debt 19 75.8 36.4
Deferred taxation 21 1.2 2.2
Taxation 22 22.8 23.9
Minority interests 5.6 2.6
-------------------------------
Total long-term liabilities 185.0 136.9
-------------------------------
Total liabilities 635.4 450.6
-------------------------------
Shareholders' deficiency:
Share capital
Allotted, called up and fully paid:
228,782,839 Ordinary Shares of 50p each (1998:
225,461,044 Ordinary Shares of 50p each) 23 114.4 112.7
Share premium 3.2 2.3
Merger reserve 3.4 -
Shares to be issued 1.4 1.3
Special reserve 25.7 25.7
Accumulated deficit (193.9) (205.9)
-------------------------------
Shareholders' deficiency (45.8) (63.9)
-------------------------------
Total liabilities and shareholders' deficiency 589.6 386.7
===============================
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CORDIANT COMMUNICATIONS GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
AND OTHER SHARE CAPITAL
<TABLE>
<CAPTION>
Years ended December 31, 1999, 1998 and 1997
Premiums
in Excess Shares Capital Accumulated Total
Share of Par *Merger to be Redemption **Special Goodwill Earnings Shareholders'
Capital Value reserve Issued Reserve Reserves Reserves (Deficit) Deficiency
(ALL VALUES GIVEN IN POUND STERLING)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1997 - as
previously stated 230.1 137.3 - - 86.5 - (235.6) (433.6) (215.3)
Prior year adjustment -
see note 1 - - - - - - - 27.6 27.6
-----------------------------------------------------------------------------------------------------
At December 31, 1998 -
as restated 230.1 137.3 - - 86.5 - (235.6) (406.0) (187.7)
Issues of Ordinary Shares
net of expenses 0.1 - - - - - - - 0.1
Net goodwill arising in year - - - - - - (1.7) - (1.7)
Elimination of goodwill
reserves on demerger - - - - - - 124.1 (124.1) -
Profit retained for the year - - - - - - - 128.2 128.2
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) (100.4) (76.9)
Issues of Ordinary Shares
net of expenses 1.7 2.3 - - - - - - 4.0
Transfer of Goodwill reserve - - - - - - 113.2 (113.2) -
Option payments for employee
share scheme - - - 1.3 - - - - 1.3
Goodwill arising on
acquisitions made in
previous periods - - - - - - - (2.2) (2.2)
Profit retained for
the period - - - - - - - 10.7 10.7
Reversal of imputed employee
share scheme cost - - - - - - - 0.9 0.9
Translation adjustment - - - - - - - (1.7) (1.7)
-----------------------------------------------------------------------------------------------------
At December 31, 1998 112.7 2.3 - 1.3 - 25.7 - (205.9) (63.9)
Issues of Ordinary Shares
net of expenses 1.7 0.9 3.4 - - - - - 6.0
Option payments for employee
share scheme - - - 0.1 - - - - 0.1
Goodwill arising on
acquisitions made
in previous periods - - - - - - - (3.1) (3.1)
Profit retained for the period - - - - - - - 13.5 13.5
Reversal of imputed employee
share scheme cost - - - - - - - 0.9 0.9
Translation adjustment - - - - - - - (1.0) (1.0)
-----------------------------------------------------------------------------------------------------
At December 31, 1999 114.4 3.2 3.4 1.4 - 25.7 - (193.9) (45.8)
=====================================================================================================
</TABLE>
As at December 31, 1999, the Accumulated Deficit included cumulative exchange
translation losses of (pound)29.7 million (1998: (pound)28.7 million;
1997:(pound)27.0 million). There is no tax effect of these movements.
* The creation of the merger reserve arose following the acquisition, by
issue of the Company's shares, of the Group's 100% interest in Interactive
Edge LLLC in the United States. Where equity shares are issued at a premium
in excess of par vlaue in consideration for such an acquisition, there is
relief from the requirement to credit the premium to "Premiums in Excess of
Par Value".
** 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.
<PAGE>
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
Year ended December 31,
-------------------------------------
1998 1997
1999 Restated Restated
ALL VALUES GIVEN IN STERLING POUND (m)
------------ ------------ -----------
Profit for the financial year 18.6 13.8 10.2
Translation adjustment (1.0) (1.7) (15.8)
------------ ------------ -----------
Total recognized gains and
losses relating to the
financial year 17.6 12.1 (5.6)
============ ============ ===========
See accompanying notes to the consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------------
Notes 1999 1998 1997
ALL VALUES IN POUND STERLING (m)
-------------- ------------- ----------
Ongoing operations 50.0 19.8 5.6
Disposed operations - - 56.1
-------------- ------------- ----------
Net cash inflow from
operating activities 27 50.0 19.8 61.7
-------------- ------------- ----------
Net cash outflow arising
from external Demerger costs - (8.2) (13.8)
Returns on investments
and servicing of finance
Interest received 1.5 1.9 5.3
Interest paid (5.7) (3.8) (13.6)
Interest element of finance
lease rental payments (0.1) (0.1) (0.1)
Bank fees (1.7) (0.4) (1.9)
Dividends paid to minorities (1.0) (2.5) (2.0)
-------------- ------------- ----------
Net cash outflow from returns
on investments and servicing
of finance (7.0) (4.9) (12.3)
-------------- ------------- ----------
Taxation
UK corporation tax paid (0.3) (0.7) -
Overseas tax paid (6.4) (7.6) (15.1)
-------------- ------------- ----------
Tax paid (6.7) (8.3) (15.1)
-------------- ------------- ----------
Capital expenditure and
financial investment
Purchase of tangible fixed assets (19.4) (8.7) (25.8)
Sale of tangible fixed assets 1.1 1.2 2.6
Purchase of other fixed asset
investments (0.5) - (0.5)
Sale of other fixed asset
investments 0.2 0.1 1.2
-------------- ------------- ----------
Net cash outflow from capital
expenditure and financial
investment (18.6) (7.4) (22.5)
-------------- ------------- ----------
Acquisitions and disposals
Purchase of subsidiary undertakings (23.6) (7.5) (9.3)
Purchase of associated undertakings (2.4) (0.2) -
Cash acquired with subsidiaries 3.8 0.7 0.6
Sale of subsidiary undertakings - - 41.6
Cash in businesses sold - (0.4) (1.1)
Cash in businesses demerged - - (43.4)
-------------- ------------- ----------
Net cash outflow from acquisitions
and disposals (22.2) (7.4) (11.6)
-------------- ------------- ----------
Dividends from associated
undertakings 0.8 0.2 -
Dividends from joint ventures 0.9 - -
Equity dividends paid (3.2) (2.7) (4.4)
-------------- ------------- ----------
Total net cash outflow before
financing (6.0) (18.9) (18.0)
============== ============= ==========
Financing activities
Issues of Ordinary Share capital 1.9 0.5 0.1
Net borrowings (loan repayments) 43.7 8.6 17.3
Capital element of finance
lease rental payments (0.1) (0.2) (0.3)
-------------- ------------- ----------
Net cash inflow from financing 45.5 8.9 17.1
-------------- ------------- ----------
Increase/(decrease) in cash 39.5 (10.0) (0.9)
============== ============= ==========
See accompanying notes to the consolidated financial statements.
<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. The following
principal accounting policies have been applied consistently in dealing with
items which are considered material in relation to the Group's financial
statements, except for the adoption of the following new accounting standards
FRS 12 "Provisions, Contingent Liabilities and Contingent Assets", FRS 13
"Derivatives and other Financial Instruments", and FRS 15 "Tangible Fixed
Assets". FRS 16 "Current Tax" will be adopted for the financial statements for
the year ended December 31, 2000.
CONSOLIDATION
The consolidated financial statements incorporate the financial statements of
Cordiant Communications Group plc and all its subsidiary undertakings made up to
December 31, 1999. 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 FRS 10 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:
Freehold and long leasehold properties: 50 years
Short leasehold properties with terms
of less than 50 years: Period of lease
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
The Group has adopted FRS 12 "Provisions, Contingent Liabilities and Contingent
Assets". In accordance with this standard, the Group's property provisions are
discounted to the present value of future net lease obligations 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. In order
to comply with FRS 12 in its primary set of accounts, prepared under UK GAAP, a
prior year adjustment was made in accordance with FRS 3 "Reporting Financial
Performance". The impact of the prior year adjustment is to restate the results
of prior years to those which would have arisen if the new standard has applied
in those years. The recognition of this change on the brought forward provision
has been treated as a restatement of opening reserves as at January 1, 1997 of
(pound)27.6 million. The periodic unwinding of the discount is treated as an
imputed interest charge and is disclosed under net financial items vacant or
currently not planned to be used for ongoing operations. The charge in 1999 is
(pound)1.3 million (1998: (pound)1.2 million; 1997: (pound)4.8 million).
FOREIGN CURRENCIES
The Group has adopted FRS 13 "Derivatives and Other Financial Instruments".
Refer to note 32 for all related disclosures. 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.
DERIVATIVES
Interest rate swaps
The net interest paid or received under interest rate swaps is recorded on an
accruals basis and included within net interest in the profit and loss account.
The notional amounts of interest rate swaps are recorded off balance sheet.
Interest rate caps
The Group manages interest rate exposure via interest rate caps, which are
accounted for on an accruals basis.
Forward exchange contracts
Forward exchange contracts are used by the Group to hedge known cross-currency
cash flows. These instruments are accounted for as hedges from the inception of
the contract. Where the instrument is used to hedge against future transactions,
gains and losses are recognised at the inception of the hedge in the profit and
loss account.
Exchange gains and losses
Gains and losses on revaluation and maturity of forward exchange contracts are
taken to the profit and loss account at the same time as the exposure that is
being hedged and are offset against the foreign exchange gains and losses on the
related financial assets and liabilities.
Gains or losses on translation of the opening net assets of overseas
subsidiaries and those arising from the retranslation of long-term foreign
currency borrowings used to finance foreign currency investments, are taken to
reserves.
All other exchange differences are taken to the profit and loss account.
If the underlying exposure changes, or ceases to exist, the contract is
terminated and the exchange gain or loss on termination is recognised in the
profit and loss account immediately.
Finance costs associated with debt issuances are charged to the profit and loss
account over the life of the issue.
The Group's principal trading currencies and the exchange rates used against
(pound) sterling are as follows:
AVERAGE RATE CLOSING RATE
--------------------------------------- ---------------------
1999 1998 1997 1999 1998
------------- ------------ ------------ ------------ --------
US Dollar 1.62 1.66 1.64 1.61 1.66
French Franc 9.97 9.77 9.55 10.55 9.29
Deutschmark 2.97 2.91 2.84 3.14 2.77
Australian Dollar 2.51 2.64 2.21 2.46 2.71
Spanish Peseta 253 247 240 268 236
Italian Lira 2,942 2,877 2,790 3,113 2,743
NOTE 2 - ACQUISITIONS, DISPOSALS AND CONTINGENT AND DEFERRED CAPITAL PAYMENTS*
Acquisitions
(a) 1999
In December 1999, CCG acquired substantially all of the assets of Interactive
Edge, Inc., a New York corporation, Interactive Edge, Inc., a Connecticut
corporation and Interactive Edge, LLC, a Delaware limited liability company, all
of which were commonly owned by the sellers in the acquisition. The purchase
price for the acquisition included an initial payment of $6.1 million paid by
CCG through the issuance of CCG ADSs having a value of $5.5 million and $600,000
in cash. The acquisition also provides for an additional contingent payment in
2003 of up to a maximum of $18.9 million based on Interactive Edge achieving
certain revenues and operating margins for the three years ending December 31,
2002. The contingent payment will be paid entirely through the issuance of CCG
ADSs. CCG has accrued an estimated total additional deferred consideration
payable in CCG ADRs of $18.5 million ((pound)11.5 million).
____________________
* Where applicable in this Note, translation from local currency is made at the
rates at which the transactions were concluded.
In December 1999, CCG acquired an 80% interest in the share capital of Diamond
Ad Ltd. The initial consideration was (pound)14.8 million and further payments
are due in the years 2000, 2001, and 2002 based on a multiple of average
operating profits in 1999 to 2001, to a maximum of (pound)82.1 million. As at
December 31, 1999 these further payments, based upon management's forecasts are
estimated at (pound)25.8 million.
In October 1999, the previous 63% holding in Verdino Bates SA in Argentina was
increased by the acquisition of an additional 7%, for (pound)nil consideration.
In November 1999, the previous 60% holding in Bates Poland Sp z.o.o. in Poland
was increased by the acquisition of an additional 40%, for (pound)0.1 million
consideration.
In November 1999, the previous 80% holding in Dr Puttner Bates Werebeagentur
GmbH in Austria was increased by the acquisition of the remaining 20%, for
(pound)0.3 million consideration.
During 1999, CCG acquired a 100% holding in Cronert in Sweden, 55% holding in
LdV in Belgium, 75% holding in Rodergas and Promopoma in Spain, 100% holding in
Blue Skies Ltd in United Kingdom, 50% holding in Appel Grafik GmbH in Germany,
100% holding in Bates Clarion in India, 51% holding in Bates Romania in Romania,
and 100% holding in Sarkka in Finland. The consideration paid in 1999 for all
these acquisitions was (pound)3.7 million in cash and estimated total additional
payments of (pound)0.2 million have been accrued.
(b) 1998
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.
Disposals
The profit (loss) on disposal of businesses is discussed by year below:
(a) 1999
No disposals took place in 1999.
(b) 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.
(c) 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, CCG 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).
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, 1999, the total contingent payments (including interest) that may
be made are as follows:
1999 1998
(pound)m (pound)m
------------ ------------
Due within 1 year 33.4 4.1
Due within years 2-5 18.0 6.4
------------ ------------
51.4 10.5
============ ============
Demerger
On December 14, 1997, Saatchi and Saatchi Holdings Limited was demerged from
Cordiant plc in accordance with the demerger agreement with the remaining
business renamed Cordiant Communications Group plc (CCG). As a result of the
demerger CCG and Saatchi and Saatchi Holdings Limited are separate publicly
traded companies and operate independently of each other.
NOTE 3 - OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses from continuing operations included the
following:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
(pound)m (pound)m (pound)m
-------------- ---------------- --------------
<S> <C> <C> <C>
Staff and associated costs (see note 7) 184.4 168.9 407.3
Hire of plant and machinery - operating leases (see note 26) 1.9 1.6 2.9
Hire of other assets - leasehold property net of sublease
income (see note 26) 18.7 17.2 47.7
Loss(profit) on sale of tangible fixed assets 0.1 (0.1) (0.8)
Goodwill written off - 0.2 2.2
Auditor's remuneration, including expenses 1.0 1.0 2.6
Auditor's remuneration, other than audit fees* 0.4 0.3 0.4
Other administrative expenses, including exceptional items 85.4 77.0 192.0
-------------- ---------------- --------------
291.9 266.1 654.3
============== ================ ==============
</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 CCG.
CCG made charitable donations in the United Kingdom of (pound)97,000 and
(pound)14,000 in the years ended December 31, 1999 and 1998, respectively.
Cordiant made charitable donations in the United Kingdom of (pound)58,000 in the
year ended December 31, 1997.
NOTE 4 - EXCEPTIONAL OPERATING ITEMS
Included in Operating and Administrative Expenses in Note 3 above are the
following exceptional items:
Total Total Ongoing Disposed Total
1999 1998 operations operations 1997
(pound)m (pound)m (pound)m (pound)m (pound)m
-------- -------- ---------- --------- --------
Goodwill written off - - 2.2 - 2.2
======== ======== ========== ========= ========
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 1999 and 1998 were considered by the
directors to be ongoing.
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 1999 Total 1998 operations operations Total 1997
(pound)m (pound)m (pound)m (pound)m (pound)m
--------------- ------------- ------------ ------------ -------------
<S> <C> <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.
NOTE 7 - EMPLOYEES
Average number of employees of CCG by geographic area:
Year ended December 31,
----------------------------------
1999 1998 1997
----------- ----------- ----------
UK 520 523 509
North America 941 882 914
Continental Europe 1,850 1,676 1,565
Asia Pacific and Latin America 1,842 1,823 1,672
----------- ----------- ----------
Ongoing operations 5,153 4,904 4,660
Disposed operations - - 5,938
----------- ----------- ----------
5,153 4,904 10,598
=========== =========== ==========
Total Total Ongoing Disposed Total
1999 1998 operation operations 1997
------------------------------------------------
ALL VALUES IN POUND STERLING (m)
------------------------------------------------
Wages and salaries 163.2 150.0 156.1 204.5 360.6
Social security costs 16.5 14.5 15.6 18.7 34.3
Pension costs - see Note 25 4.7 4.4 4.5 7.9 12.4
------ ------ ------ ------ ------
184.4 168.9 176.2 231.1 407.3
====== ====== ====== ====== ======
<PAGE>
NOTE 8 - NET INTEREST AND SIMILAR CHARGES
Year ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ---------
ALL VALUES IN POUND STERLING (m)
Interest payable and similar charges:
On bank loans, overdraft facilities
and other loans
required to be repaid within five years 4.9 3.6 13.4
On capitalized leases and hire purchase 0.1 0.1 0.1
On other loans - - 0.4
Bank fees 0.7 0.7 1.9
Foreign exchange 0.2 0.3 -
------- ------- ------
5.9 4.7 15.8
------- ------- ------
Interest receivable and similar items:
On cash and deposits (1.5) (1.7) (5.3)
Note interest - (0.1) (0.3)
Foreign exchange - - (1.4)
-------- ------- ------
(1.5) (1.8) (7.0)
-------- ------- ------
Group net interest payable 4.4 2.9 8.8
Net interest receivable
- Joint ventures (0.5) (0.1) -
- Associated undertakings (0.1) (0.1) -
-------- ------- ------
Net interest payable and similar items 3.8 2.7 8.8
======== ======= ======
NOTE 9 - TAXES ON INCOME
Taxes on income were made up as follows:
Year ended December 31,
-----------------------------------
1999 1998 1997
--------- -------- -------
ALL VALUES IN POUND STERLING (m)
UK corporation tax:
Currently payable 0.1 1.3 0.7
Relief for overseas tax (0.1) (0.1) (0.5)
Deferred - - 0.2
--------- --------- -------
- 1.2 0.4
Overseas taxation:
Currently payable 9.5 5.7 17.9
Deferred (0.7) 1.4 (0.8)
--------- --------- -------
Group taxation 8.8 8.3 17.5
Joint ventures 1.1 0.5 -
Associated undertakings 0.7 0.4 -
--------- --------- -------
Tax on ordinary activities 10.6 9.2 17.5
========= ========= =======
<PAGE>
The above charges reconcile as follows with the standard UK corporation tax
rates:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
---------------- -------------- --------------
ALL VALUES IN POUND STERLING (m)
<S> <C> <C> <C>
Tax charge in financial statements (10.6) (9.2) (17.5)
Tax charge on pre-tax profit at
30.25% (1998: 30.75%, 1997: 31.5%) 9.8 7.6 9.4
---------------- -------------- --------------
Difference (0.8) (1.6) (8.1)
================ ============== ==============
Deferred tax credits not available (0.4) 2.3 6.0
Permanent differences between expenditures
charged in arriving at income and
expenditures allowed for tax purposes:
UK (1.3) (1.8) 0.6
US (0.6) 0.1 (0.5)
Rest of World (0.8) (1.1) 0.7
Demerger - - (10.4)
Goodwill - - (0.7)
Unrelieved profit/(losses) 4.4 (1.3) 3.1
Difference between UK and overseas
standard tax rates (2.7) (1.8) (4.0)
Other items 0.6 2.0 (2.9)
---------------- -------------- --------------
Difference above (0.8) (1.6) (8.1)
================ ============== ==============
</TABLE>
The components of profit before taxation are as follows:
Year Ended December 31,
----------------------------------------------
1999 1998 1997
---------------- -------------- --------------
ALL VALUES IN POUND STERLING (m)
Domestic (UK) 3.1 3.0 (17.0)*
Foreign 29.2 21.7 51.6
---------------- -------------- --------------
32.3 24.7 34.6
================ ============== ==============
* The loss before taxation in the UK in 1997 incorporated (pound)26.5 million of
the fundamental reorganization expense of (pound)33.0 million (see note 6).
At December 31, 1999, the Group had (pound)108 million of operating loss
carryforwards expiring between 2000 and 2010. Additionally, the Group had
(pound)30 million of operating loss carryforwards, which had no expiration date.
It is possible that all or part of the operating loss carryforwards expiring
between 2000 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>
NOTE 10 - EARNINGS PER ORDINARY SHARE
Basic earnings per Ordinary Share has been calculated on earnings of (pound)18.6
million (1998: (pound)13.8 million, 1997: (pound)10.3 million) based on
226,583,809 shares (1998: 222,436,033 shares; 1997: 443,852,410 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, 1999 was 228,782,839 (1998: 225,461,044).
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. Diluted earnings per ordinary share have been based
on 239,578,425 shares (1998: 223,337,644 shares; 1997: 445,868,612).
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.
NOTE 11 - SHORT-TERM INVESTMENTS
Short-term investments comprised overseas unlisted investments of (pound)1.1
million and cash deposits of (pound)6.4 million. In 1998, overseas unlisted
investments of (pound)0.7 million and cash deposits of (pound)0.8 million.
NOTE 12 - ACCOUNTS AND OTHER RECEIVABLES, PREPAYMENTS AND ACCRUED INCOME
1999 1998
(pound)m (pound)m
------------------- ------------------
Due within one year:
Trade receivables (net of
allowances for doubtful debts) 303.4 212.8
Amounts due from joint ventures
and associated undertakings 1.2 1.1
Other receivables 12.0 9.9
Prepayments and accrued income 19.4 22.5
------------------- ------------------
336.0 246.3
=================== ==================
Due after one year:
Other receivables 3.2 4.7
Prepayments and accrued income 16.9 13.6
------------------- ------------------
20.1 18.3
=================== ==================
Reference should be made to Note 13 concerning the amounts of allowances for
doubtful debts for each of the years presented.
NOTE 13 - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions
beginning charged to Balance
of period costs and at end of
Description expenses Deductions* period
-----------
---------------- ----------------- ---------------- ----------------
ALL VALUES IN POUND STERLING (m)
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts (deducted
from accounts receivable) 7.5 3.7 - 11.2
Allowance for non-recoverable billable
production (deducted from billable production) 2.1 - (1.4) 0.7
------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Year ended December 31, 1998:
Allowance for doubtful accounts (deducted
from accounts receivable) 7.3 0.2 - 7.5
Allowance for non-recoverable billable
production (deducted from billable production) 3.2 - (1.1) 2.1
------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Year ended December 31, 1997:
Allowance for doubtful accounts (deducted
from accounts receivable) 18.0 - (10.7)** 7.3
Allowance for non-recoverable billable
production (deducted from billable 4.6 - (1.4)** 3.2
production)
------------------------------------------------- ---------------- ----------------- ---------------- ----------------
</TABLE>
* Substantially represents amounts utilized against specific nonrecoverable
billable production and bad debts arising during the periods.
** The deductions in 1997 include demerged allowances of (pound)8.1 million
for doubtful accounts and(pound)2.0 million for nonrecoverable billable
production.
NOTE 14 - LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
Associated undertakings
----------------------------------
Share of
tangible net Share of Long term
assets Goodwill Total investments Total
----------------- ---------------- ------------- ------------- ------------
ALL VALUES IN POUND STERLING (m)
<S> <C> <C> <C> <C> <C>
COST OR VALUATION
At beginning of year 3.1 - 3.1 0.8 4.0
Additions 0.2 7.4 7.6 0.5 8.1
Disposals - - - (0.1) (0.1)
Share of retained profit 0.4 - 0.4 - 0.4
----------------- ---------------- ------------- ------------- ------------
At end of year 3.7 7.5 11.2 1.2 12.4
================= ================ ============= ============= ============
</TABLE>
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>
NOTE 15 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Leasehold Leasehold Information
Freehold property property technology Furniture and Motor
property - long - short equipment other equipment vehicles Total
------------ ------------ -------------- --------------- ---------------- -------------- -------------
ALL VALUES IN POUND STERLING (m)
<S> <C> <C> <C> <C> <C> <C> <C>
COST
At beginning of year - 0.3 20.9 28.6 32.5 3.6 85.9
Translation adjustment - - - 0.6 - (0.1) 0.5
Additions - - 7.1 7.1 6.3 0.6 21.1
Companies acquired 1.4 - - 0.7 1.0 0.1 2.9
Disposals (0.3) - (10.8) (1.8) (12.5) (0.9) (26.3)
------------ ------------ -------------- --------------- ---------------- -------------- -------------
At end of year 0.8 0.3 17.2 35.2 27.3 3.3 84.1
------------ ------------ -------------- --------------- ---------------- -------------- -------------
DEPRECIATION
At beginning of year - 0.2 16.2 18.8 25.4 2.6 63.2
Translation adjustment - - 0.1 0.5 - - 0.6
Charge for the year - - 2.0 5.1 2.8 0.5 10.4
Disposals - - (10.6) (0.2) (12.3) (0.7) (23.8)
------------ ------------ -------------- --------------- ---------------- -------------- -------------
At end of year - 0.2 7.7 24.2 15.9 2.4 50.4
------------ ------------ -------------- --------------- ---------------- -------------- -------------
NET BOOK VALUE
At beginning of year - 0.1 4.7 9.8 7.1 1.0 22.7
============ ============ ============== =============== ================ ============== =============
At end of year 0.8 0.1 9.5 11.0 11.4 0.9 33.7
============ ============ ============== =============== ================ ============== =============
Net book value of assets
held under finance leases
included above
At beginning of year - - - 0.3 0.1 - 0.4
============ ============ ============== =============== ================ ============== =============
At end of year - - - 0.1 0.2 - 0.3
============ ============ ============== =============== ================ ============== =============
</TABLE>
Net book value of land and buildings at end of year was(pound)10.4 million
(1998:(pound)4.8 million).
Depreciation attributable to owned property and equipment was(pound)10.3 million
(1998:(pound)9.5 million); and depreciation attributable to assets held under
finance leases was(pound)0.1 million (1998:(pound)0.2 million).
At December 31, 1999 the commitments in respect of capital expenditure on
properties, furniture and equipment was (pound)0.4 million (1998: (pound)0.2
million).
<PAGE>
NOTE 16 - BANK LOANS, OVERDRAFTS AND OTHER LOANS
Balance at end of Weighted average
period interest rate
------------------- ---------------------
Year ended December 31, 1999
(pound)m %
------------------- ---------------------
Bank loans and overdrafts 7.5 7.9
=================== =====================
Year ended December 31, 1998
(pound)m %
------------------- ---------------------
Bank loans and overdrafts 21.7 6.1
=================== =====================
An amount of (pound)3.3 million (1998: (pound)2.0 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.
NOTE 17 - ACCOUNTS PAYABLE, OTHER LIABILITIES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------- --------------------------
Due Within Due After Due Within Due After
one year one year one year one year
ALL VALUES IN POUND STERLING (m)
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Accounts payable 293.2 - 185.0 -
Amounts payable: Associated companies and joint ventures 5.4 - 7.6 -
Payments on account 27.0 - 25.8 -
Finance leases 0.5 0.2 0.2 0.2
Proposed dividends - equity shareholders 5.1 - 3.1 -
Accruals and deferred income 69.0 - 31.9 0.7
Other payables 17.1 24.4 14.4 12.6
--------------- ------------- ------------- ------------
417.3 24.6 268.0 13.5
=============== ============= ============= ============
</TABLE>
An amount of (pound)5.3 million (December 31, 1998: (pound)3.5 million) is
included in accounts payable as secured by related trade receivables.
Liabilities under finance leases are secured on the assets leased.
<PAGE>
NOTE 18 - PROPERTY, PENSION AND OTHER PROVISIONS
<TABLE>
<CAPTION>
Pensions
and similar
Property employment Joint
Restated obligations Other Total ventures
ALL VALUES IN POUND STERLING (m)
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
GROSS PROVISION - PREVIOUSLY STATED
At beginning of year 33.2 17.2 0.8 51.2 14.7
Translation 0.2 0.5 - 0.7 -
Profit and loss account - (0.9) 0.7 (0.2) (0.3)
Utilized (4.8) - - 4.8 -
------------ ------------- ----------- ------------ ------------
At end of year 28.6 16.8 1.5 46.9 14.4
------------ ------------- ----------- ------------ ------------
DISCOUNT
At beginning of year (prior year adjustment -
see Note 1) 7.6 - - 7.6 -
Profit and loss account (1.3) - - (1.3) -
------------ ------------- ----------- ------------ ------------
At end of year 6.3 - - 6.3 -
------------ ------------- ----------- ------------ ------------
NET BOOK VALUE
At beginning of year 25.6 17.2 0.8 43.6 14.7
============ ============= =========== ============ ============
At end of year 22.3 16.8 1.5 40.6 14.4
============ ============= =========== ============ ============
</TABLE>
Property provisions relate to future payments on vacant properties and assigned
leases, and are analyzed by year as follows:
1999 1998
(pound)m (pound)m
----------- ------------
Under one year 3.6 4.5
One to two years 3.5 3.1
Two to five years 7.2 8.7
Over five years 8.0 9.3
----------- ------------
22.3 25.6
=========== ============
Provisions for joint venture deficit:
The Group share of net liabilities of Zenith and S&SBY is shown below.
1999 1998
(pound)m (pound)m
----------- ------------
Fixed assets 1.7 1.7
Current assets 84.4 81.9
----------- ------------
Share of gross assets 86.1 83.6
----------- ------------
Liabilities due within one year (99.9) (97.0)
Liabilities due after one year (0.6) (1.3)
----------- ------------
Share of gross liabilities (100.5) (98.3)
----------- ------------
Share of joint venture net liabilities (14.4) (14.7)
=========== ============
<PAGE>
NOTE 19 - LONG-TERM DEBT
1999 1998
(pound)m (pound)m
------------------ ----------------
Bank loans 75.8 36.4
================== ================
An amount of (pound)65.2 million (1998: (pound)36.4 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.
In November 1999, CCG refinanced the Group's core banking facilities, with new
committed facilities of US$250 million ((pound)155 million), which replaces its
existing core facilities. The Group's core banking facilities are to be used for
the acquisition of Diamond Ad Ltd, costs and expenses related to the Diamond Ad
Ltd and Healthworld Corporation Inc. (see Note 27) acquisitions, and for the
Group's ongoing working capital requirements.
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 Group complying with certain financial covenants.
At December 31, 1999, the Group's senior debt consisted of the new bank facility
(the "Facility") of $250 million. The Facility provides committed credit
facilities at a rate between 0.7-1.5 percent over LIBOR, depending upon the
Group's ability to achieve certain financial ratios. The Facility is divided
into two equal amounts; i) $125 million maturing in November 2000 with an option
to extend for one additional year, and ii) $125 million maturing in November
2004. The Facility requires the Group to comply with customary financial and
other covenants. It also contains provisions whereby, on the occurrence 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 Group in respect of
indebtedness over a specified amount or any change of control of the Company.
The Facility is secured by guarantees from the principal companies of the Group.
NOTE 20 - GUARANTEES AND CONTINGENT LIABILITIES
(pound)67.4 million (1998:(pound)37.6 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,
1999 amounted to (pound)147.3 million (1998: (pound)152.9 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
(pound)12.6 million (1998: (pound)27.3 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, 1999
were (pound)183.2 million (1998: (pound)189.5 million).
CCG and Saatchi & Saatchi have each guaranteed Zenith's bank facility of
(pound)18.5 million and have agreed between themselves to share equally any
liability arising therefrom. Borrowings drawn down under the Zenith facility at
December 31, 1999 were (pound)5.4 million (1998: (pound)5.1 million).
Other guarantees given by the Group to third parties amounted to (pound)6.0
million at December 31, 1999 (1998: (pound)4.9 million).
<PAGE>
At December 31, 1999, the Group had the following other commitments in respect
of capital expenditure and non-cancelable operating leases for the following
year:
1999 1998
(pound)m (pound)m
----------- ----------
Capital expenditure committed
but not provided for 0.4 0.2
=========== ==========
<TABLE>
<CAPTION>
Land and
buildings
Gross provisions Net Other 1999 1998
ALL VALUES IN POUND STERLING (m)
---------- ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-cancelable operating lease which expire:
Within one year 3.9 - 3.9 0.6 4.5 2.6
Within two to five years 8.4 (1.1) 7.3 1.0 8.3 9.2
Over five years 16.8 (2.5) 14.3 0.1 14.4 13.7
---------- ------------ ----------- ----------- ----------- ----------
29.1 (3.6) 25.5 1.7 27.2 25.5
========== ============ =========== =========== =========== ==========
</TABLE>
Of the above operating lease property commitments, an amount of (pound)10.2
million is recoverable from subtenants (1998: (pound)8.2 million).
NOTE 21 - DEFERRED TAXATION
1999 1998
(pound)m (pound)m
----------- ----------
Provisions for overseas deferred taxation 1.2 2.2
=========== ==========
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 (pound)69 million (1998: (pound)63 million).
<PAGE>
Under US GAAP temporary differences at the appropriate tax rate at December 31,
1999 and 1998 are as follows:
Asset/(liability)
----------------------------
1999 1998
(pound)m (pound)m
------------- --------------
DEFERRED TAX ASSET
Accrued property rental expense 7.1 7.9
Accrued compensation 5.6 4.7
Capital loss carryforwards 9.6 10.1
Operating loss carryforwards* 51.0 47.1
Other 8.6 9.2
------------- --------------
Total deferred tax assets 81.9 79.0
Valuation allowance (81.9) (79.0)
------------- --------------
Net deferred tax asset - -
============= ==============
DEFERRED TAX LIABILITIES
Other (1.2) (2.2)
------------- --------------
Net deferred tax liabilities (1.2) (2.2)
============= ==============
* 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 1999
amounted to an increase of (pound)2.9 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,
1999 1998
(pound)m (pound)m
--------------- -------------
Authorized share capital of the Company 150.5 150.5
=============== =============
Allotted, called up and fully paid:
228,782,839 Ordinary Shares of 50p each
(1998: 225,461,044 Ordinary Shares of 50p each) 114.4 112.7
=============== =============
During the year the Company issued 1.7 million Ordinary Shares of 50p each for
consideration of (pound)1.9 million pursuant to receipt of notices to exercise
options from employees of the Group. In addition, the Company issued 1.7 million
Ordinary Shares of 50p each for a total consideration of (pound)4.1 million in
respect of the acquisition of Interactive Edge LLC.
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, 1999 were as follows:
CCG Ordinary Shares: Year ended December 31,
1999 1998 1997
------------- ------------ -----------
At beginning of year 26,136,926 28,045,239 12,589,854
Options exercised during year (1,641,720) (499,877) (159,692)
Options issued during year 2,268,577 1,523,078 26,037,467
Options lapsed during year (949,564) (2,931,514) (1,064,485)
Options canceled during year - - (9,357,905)
------------- ------------- ------------
At end of year 25,814,219 26,136,926 28,045,239
============= ============= ============
Exercisable at end of year 1,714,021
============= ============= ============
Weighted average exercise price 114p
============= ============= ============
Changes in the number of CCG Ordinary Shares issuable under options outstanding
under Sharesave 1995 during the three year period ended December 31, 1999 were
as follows:
CCG Ordinary Shares: Year ended December 31,
1999 1998 1997
--------- --------- -----------
At beginning of year 1,291,543 1,624,662 1,963,435
Options exercised during year (24,695) (84,612) (13,211)
Options issued during year - - 196,117*
Options lapsed during year (186,592) (248,507) (325,562)
--------- ---------- -----------
At end of year 1,080,256 1,291,543 1,624,662
========= ========== ===========
Exercisable at end of year nil
========= ========== ===========
* 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>
Options outstanding at December 31, 1999 under the Company's share option
schemes are shown below:
Date of Number of Exercise Scheme
grant shares price Exercisable
---------------------------------- --------- ----------- --------- -------------
---------------------------------- --------- ----------- --------- -------------
Number 2 Scheme Jun 1991 155,869 134p To Jun 2001
Sep 1991 34,302 134p To Sep 2001
Apr 1992 112,204* 107p To Apr 2002
---------------------------------- --------- ---------- ------ ------------
Demerger Number 2 Scheme Jun 1991 343,248 134p To Jun 2001
Apr 1992 6,174* 107p To Apr 2002
---------------------------------- --------- ---------- ------ ------------
Sharesave Jun 1995 1,080,256 64p Jul 2000 to
Dec 2000
---------------------------------- --------- ---------- ------ ------------
Performance Option Scheme May 1995 257,775 73p To May 2005
Aug 1995 257,774 95p To Aug 2005
Apr 1996 365,000 130p To Apr 2006
Apr 1996 515,000* 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 41,462 73p To Dec 2004
May 1995 109,926* 73p May 2000 to
May 2002
Aug 1995 41,463 95p To Dec 2004
Apr 1996 98,750 130p To Dec 2004
Apr 1996 248,750* 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 5,962,254 105p Dec 2000 to
Dec 2004
May 1998 1,294,468 124p May 2001 to
May 2005
Mar 1999 1,714,471 164p Mar 2002 to
Mar 2006
Aug 1999 155,805 176p Dec 2001 to
Dec 2005
---------------------------------- --------- ---------- ------ ------------
Equity Participation Plan Dec 1997 11,034,720 105p Dec 2000 to
Dec 2004
Mar 1999 80,029 105p Mar 2002 to
Mar 2006
---------------------------------- --------- ---------- ------ -----------
Zenith Executive Incentive Plan Dec 1997 1,047,984 109p Dec 2000 to
Dec 2004
---------------------------------- --------- ---------- ------ -----------
Apr 1999 961,646 160p Apr 2002 to
Apr 2006
o Further details together with the performance targets for the above schemes
are set out on pages 47 to 64.
o The options marked * are super options.
o Exercise prices have been rounded to the nearest penny.
o 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>
NOTE 25 - POST RETIREMENT BENEFITS
The Group operates a number of pension schemes throughout the world.
o The majority of the schemes are externally funded and the assets are held
in separately administered trusts or are insured.
o None of the externally funded schemes holds investments in, or has made
loans to, the Company or any of its subsidiary undertakings.
o The major schemes, which cover the majority of scheme members, are defined
contribution schemes.
o 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 8% and salary increases of 6%, was carried out as
at 1 April 1999 when the actuarial value of investments in the scheme
were(pound)27.7 million and the level of funding was 91.2%. The deficit
will be funded by the Group over the remaining service lives of existing
employees. Employer's contributions to the scheme in 1999
were(pound)0.2million. Contributions and expense are based on
recommendations of a qualified actuary.
o 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 (1998: (pound)0.3 million). The
accumulated fund at December 31, 1999 was (pound)3.3 million (1998:
(pound)3.0 million) which is included in provisions for pensions and
similar employment obligations (note 18).
o The pension expense for the year was as follows:
1999 1998 1997
(pound)m (pound)m (pound)m
------------ --------------- ------------
Defined benefit schemes 0.2 0.3 1.4
Defined contribution schemes 4.5 4.1 11.0
------------ --------------- ------------
4.7 4.4 12.4
============ =============== ============
<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:
Sublease
Minimum Rental Net
Payments Income Payments
Years Ending December 31 pound)m (pound)m (pound)m
-------------------------- ------------------ ---------------- ------------
2000 30.8 9.5 21.3
2001 28.5 9.2 19.3
2002 26.4 9.0 17.4
2003 23.4 8.4 15.0
2004 21.2 9.0 12.2
Thereafter 159.1 83.0 76.1
------------------ ---------------- ------------
Total minimum lease payments 289.4 128.1 161.3
================== ================ =============
Total expense for all operating leases was:
Year ended December 31,
-------------------------------------------------
1999 1998 1997
Net operating lease expense (pound)m (pound)m (pound)m
------------------ ---------------- -------------
Total operating lease expense 24.8 21.8 65.2
Sublease rental income (4.2) (3.0) (14.6)
------------------ ---------------- -------------
Net operating lease expense 20.6 18.8 50.6
================= ================ ==============
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,
-------------------------------------------
1999 1998 1997
(pound)m (pound)m (pound)m
--------------- ------------- -------------
<S> <C> <C> <C>
Trading profit 33.5 26.0 55.6
Depreciation 10.4 9.7 26.2
Loss/(profit) on sale of tangible fixed assets 0.1 (0.1) (0.8)
(Increase)/decrease in billable production (4.7) 2.0 (5.5)
Increase in receivables (30.0) (1.4) (35.3)
Increase/(decrease) creditors 45.5 (9.6) 38.5
Utilization of property provisions (4.8) (7.0) (19.2)
Non-cash item - goodwill write-off - 0.2 2.2
--------------- ------------- -------------
Net cash inflow from operating activities 50.0 19.8 61.7
=============== ============= =============
</TABLE>
<PAGE>
Analysis of changes in net funds
<TABLE>
<CAPTION>
Exchange &
At Jan 1, Acquisitions non cash At Dec 31,
1999 Cash flows * movements 1999
ALL VALUES IN POUND STERLING (m)
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash at bank and in hand 62.3 16.0 - 1.7 80.0
Cash deposits - current asset investments 0.8 5.5 - 0.1 6.4
Bank overdrafts (21.2) 18.0 - - (3.2)
---------- ------------ ------------- ------------- ------------
Cash 41.9 39.5 - 1.8 83.2
---------- ------------ ------------- ------------- ------------
External debt due within one year (0.5) (2.0) (1.7) (0.1) (4.3)
External debt due after one year (36.4) (28.2) (10.2) (1.0) (75.8)
Finance leases (0.4) (0.3) - - (0.7)
---------- ------------ ------------- ------------- ------------
---------- ------------ ------------- ------------- ------------
Financing (37.3) (30.5) (11.9) (1.1) (80.8)
---------- ------------ ------------- ------------- ------------
Net funds 4.6 9.0 (11.9) 0.7 2.4
========== ============ ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
Acquisitions Exchange &
At Jan 1, and non cash At Dec 31,
1998 Cash flows disposals * movements 1998
ALL VALUES IN POUND STERLING (m)
---------- ------------ ------------- ------------- ------------
<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>
* Excluding cash and overdrafts
<TABLE>
<CAPTION>
Exchange &
At Jan 1, non cash At Dec 31,
1997 Cash flows Demerger movements 1997
ALL VALUES IN POUND STERLING (m)
---------- ----------- ------------- ------------- -------------
<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
========== ============ ============ ============= ============
</TABLE>
On December 14, 1997, the net assets of Saatchi & Saatchi and Zenith were
demerged. On demerger, they had net debt of (pound)41.2 million. Net cash
amounting to (pound)43.4 million is shown as an outflow in the cash flow
statement, external debt of (pound)84.6 million is included in the analysis of
movement in net debt above.
The effects of the acquisitions of subsidiaries in 1999
Owing to the timing of the acquisitions in the year ended December 31, 1999,
their results did not have a material impact on the Group's turnover and
operating profit for the year and they have consequently not been disclosed
separately on the face of the consolidated profit and loss.
The aggregate revenue and operating profit included in the Group's results for
the year ended December 31, 1999 in respect of acquisitions in the financial
year were (pound)9.6 million and (pound)2.6 million respectively.
<TABLE>
<CAPTION>
Acquisitions Acquisitions
(pound)m (pound)m
----------------- ----------------
<S> <C> <C> <C>
Goodwill capitalized 60.4 Loans and finance leases 11.9
Goodwill transferred to reserves 3.1 Creditors 68.1
Tangible fixed assets 2.9 Minorities 0.4
Work in progress 0.6 Cost of acquisitions
Debtors 70.4 - cash (net) 19.8
Current investments 4.4 - CCG shares issued 4.1
- accruals 37.5
----------------- ----------------
141.8 141.8
================= ================
</TABLE>
Goodwill of (pound)3.1 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.
The effects of the acquisitions and disposal of subsidiaries in 1998
<TABLE>
<CAPTION>
Acquisitions Disposals Acquisitions Disposals
(pound)m (pound)m (pound)m (pound)m
-------------- ----------- ------------- ---------
<S> <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>
The effects of the acquisition of Diamond Ad Ltd in 1999.
The following table sets out the book values of the identifiable assets and
liabilities of Diamond Ad Ltd acquired and their fair value to the Group:
<TABLE>
<CAPTION>
Accounting Provisional
Fair Value policy fair value
Book value adjustments alignment to Group
Notes (pound)m (pound)m (pound)m (pound)m
---------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible b 1.4 - (0.2) 1.2
Investments 0.4 - - 0.4
CURRENT ASSETS
Work in progress b 0.7 - (0.1) 0.6
Debtors a 100.3 (16.1) - 84.2
Investments b 4.6 - (0.2) 4.4
Cash 6.4 - - 6.4
----------- -------------- --------------- --------------
TOTAL ASSETS 113.8 (16.1) (0.5) 97.2
----------- -------------- --------------- --------------
CREDITORS
Creditors b (93.9) - (0.3) (94.2)
Provisions (2.0) - - (2.0)
Deferred tax b 5.1 - (5.1) -
----------- -------------- --------------- --------------
TOTAL LIABILITIES (90.8) - (5.4) (96.2)
----------- -------------- ------------------------------
NET ASSETS 23.0 (16.1) (5.9) 1.0
----------- -------------- ---------------
Minority interest (0.2)
Goodwill 41.4
--------------
42.2
==============
Satisfied by:
Consideration paid 16.4
Contingent earnout payments 25.8
--------------
Total consideration 42.2
==============
</TABLE>
Material adjustments necessary to restate the net assets of Diamond Ad Ltd in
accordance with the accounting policies of CCG and fair value adjustments:
a Fair value adjustment to debtors reflects the write off of a debtor balance
relating to the previous sale of a business by Diamond Ad Ltd, deemed to be
irrecoverable at the point of acquisition by CCG.
b Adjustments to align Diamond Ad Ltd accounting policies with those of CCG.
Net cash outflows in respect of the acquisition comprised:
1999
(pound)m
-------------
Cash consideration 16.4
Cash at bank and in hand acquired (6.4)
Bank overdrafts acquired 13.5
-------------
Total 23.5
=============
<PAGE>
The effects of the acquisition of Diamond Ad Ltd in 1999.
An amount of (pound)nil has been charged to the Group's profit and loss account
in respect of costs incurred in re-organising, restructuring and integrating the
acquisition in the period from effective date of acquisition of December 1 to
December 31, 1999.
Diamond Ad Ltd incurred a loss after taxation and minority interests of
(pound)14.0 million in the year ended December 31, 1999 (1998: (pound)6.0
million loss) after taking account of losses incurred by and on the disposal of
certain assets and businesses not acquired by CCG, of which a profit of
(pound)1.9 million arose in the period from December 1, 1999 to December 31,
1999. The unaudited summarized profit and loss account and unaudited statement
of total recognized gains and losses for the year from January 1, 1999 to
December 31, 1999, extracted from local management accounts, and shown under
Korean GAAP, and on the basis of the accounting policies of Diamond Ad Ltd prior
to the acquisition, are as follows:
PROFIT AND LOSS ACCOUNT 1999
(pound)m
--------------
TURNOVER 259.5
Cost of sales (234.1)
--------------
GROSS PROFIT 25.4
Other operating expenses (net) (37.4)
--------------
OPERATING LOSS (12.0)
Finance charges (net) (2.0)
--------------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (14.0)
Tax on loss on ordinary activities -
--------------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (14.0)
Minority interests -
--------------
LOSS FOR THE FINANCIAL YEAR (14.0)
==============
The profit and loss account above is stated after the losses incurred on the
disposal of assets prior the acquisition by CCG on December 13, 1999.
Statement of total recognized gains and losses
1999
(pound)m
--------------
Loss for the financial year
and total recognized gains and (14.0)
losses relating to the year ==============
<PAGE>
NOTE 28 - OPERATIONS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Asia Pacific
United North Continental and
Kingdom America Europe Latin America Total
(pound)m (pound)m (pound)m (pound)m (pound)m
------------ ------------ ------------ ---------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Commission and fee income 40.2 83.1 121.9 90.6 335.8
Operating profit 4.4 10.9 12.5 5.7 33.5
Total assets employed 40.7 123.7 111.5 313.7 589.6
Net liabilities (assets) before financial items 41.8 19.5 (6.8) (11.9) 42.6
Depreciation expense 1.6 2.8 3.0 3.0 10.4
Additions to properties, furniture, etc. 0.9 10.3 5.3 4.6 21.1
Year ended December 31, 1998:
Commission and fee income 39.8 71.8 108.4 81.8 301.8
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 financial items 48.4 10.6 (5.9) 12.8 65.9
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 financial items 73.1 20.1 (1.4) 12.5 104.3
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
</TABLE>
<PAGE>
ONGOING GEOGRAPHIC ANALYSIS
To enable a fuller understanding of the trading performance additional
geographic analysis of ongoing operations is provided below:
<TABLE>
<CAPTION>
Asia Pacific
United North Continental and
Kingdom America Europe Latin America Total
ALL VALUES IN POUND STERLING (m)
------------ ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Commission and fee income 40.2 83.1 121.9 90.6 335.8
Operating profit 4.4 10.9 12.5 5.7 33.5
Depreciation expense 1.6 2.8 3.0 3.0 10.4
Year ended December 31, 1998:
Commission and fee income 39.8 71.8 108.4 81.8 301.8
Operating profit 4.5 8.2 10.1 3.2 26.0
Depreciation expense 1.7 2.9 2.6 2.5 9.7
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>
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 1999, 1998 and
1997 no clients accounted for more than 10% of either CCG's ongoing revenue or
Cordiant's revenue.
Turnover between segments is not material.
Geographical analysis of Group share of joint ventures and associated
undertakings operating profits:
1999 1998
(pound)m (pound)m
------------- --------------
UK 3.7 2.2
Continental Europe - 0.1
Asia Pacific and Latin America 1.2 0.3
------------- --------------
4.9 2.6
============= ==============
<PAGE>
The following countries contribute individually to over 10% of Group Revenues:
<TABLE>
<CAPTION>
Revenue Long lived assets
--------------------------------------------------------- --------------------------------------
1999 1998 1997 1999 1998
(pound)m (pound)m (pound)m (pound)m (pound)m
------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
UK 40.2 39.8 101.1 3.2 4.0
US 79.4 67.9 245.1 12.1 3.9
Australia 48.7 48.7 70.7 4.3 4.6
Germany 43.7 36.3 40.5 3.4 1.3
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
</TABLE>
NOTE 29 - DIRECTORS' EMOLUMENTS
The total emoluments, pension costs and fees for the year ending December 31,
1999 were(pound)4,147,000 (1998: (pound)2,924,957) of which(pound)118,000 were
fees (1998:(pound)231,146).
The emoluments, excluding pension contributions, of the Chairman and highest
paid UK Director, were:
Year ended December 31, 1999
Charles Scott (Chairman and highest paid UK Director): (pound)226,000
Year ended December 31, 1998
Charles Scott (Chairman and highest paid UK Director): (pound)169,165
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,
1999 1998 1999 1998
---------------- -------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
M Bungey 55,990 55,990 1,537,130 1,537,130
A D'Angelo 960 960 810,255 860,337
J de Yturbe - - 854,397 854,397
D Fishburn - - - -
A Hamill(1) 1,669,562 2,949,562 867,255 922,139
T Levitt 18,796 18,796 - -
P M Schoning - - 725,827 725,827
C Scott(2) 85,172 85,172 731,905 731,905
R Stomberg - - - -
J Tyrrell - - - -
W Whitehead 787 787 815,827 829,548
---------------------------------- ---------------- -------------------- ------------------- ----------------
</TABLE>
(1) For disclosure purposes, Mr Hamill is deemed to be interested in all of the
1,669,562 shares held by TCG Employee Investment Pty Ltd. His beneficial
interest is limited to approximately 13.2% of the shares held by TCG
Employee Investment Pty Ltd at any given time. On 7 January 2000, TCG
Employee Investment Pty Ltd disposed of 563,468.
(2) Includes options and shares in spouse's name.
The directors' interests in the Company's share capital have not changed since
December 31, 1999.
NOTE 31 - RELATED PARTIES
During 1999, 1998 and 1997 transactions in the ordinary course of business with
associated companies were as follows:
1999 1998
(pound)m (pound)m
----------- ----------
Media services 182.1 214.0
Production 13.8 9.5
----------- ----------
195.9 223.5
=========== ==========
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 1999, 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 August 1999, the Group acquired a 100% interest in Bates Clarion in India,
for consideration of INR17.0 million ((pound)0.2 million). Bates Clarion was
previously an affiliate.
In November 1999, the Group acquired the remaining 20% interest in Dr Puttner
Bates, in Austria, for consideration of ATS5.8 million ((pound)0.3 million).
In November 1999, the Group acquired the remaining 40% interest in Bates Poland,
for consideration of POZ0.7 million ((pound)0.1 million).
In November 1999, the Group acquired a further 7% interest in Verdino Bates in
Argentina, for no consideration.
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
((pound)6.2 million).
In October 1998, the Group acquired a further 75% interest in Verdino Bates SA
or Argentina, for consideration of ARP2.3 million ((pound)1.4 million).
In March 1997, Cordiant made a deferred payment of (pound) 0.4 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 ((pound) 0.2 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 (pound) 0.3 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 (pound) 2.2 million is
payable in 2000.
During 1997 Cordiant made deferred payments totaling FFR31.3 million (pound)
Sterling 2.9 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
((pound)5.0 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 (pound) 8.0 million payable to certain of NRG's directors under the terms
of an agreement entered into in 1995.
NOTE 32 - DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Set out below is an outline of the objectives, policies and strategies pursued
by the Group in relation to financial instruments:
FINANCIAL INSTRUMENTS - GROUP POLICY
The Group finances its operations by a mixture of retained earnings, bank
borrowings and fixed rate long-term loans. The bank borrowings comprise
borrowings under the central US$250 million ((pound)155 million) bank facility
and other short-term bank overdraft borrowings. All bank borrowings incur
floating rates of interest.
Group policy relating to the use of financial instruments, including types of
instruments used and amounts invested, is determined by the Board. The
instruments used by the Group in the year under review are fixed and floating
rate borrowings, interest rate caps, forward foreign currency contracts and
foreign currency swaps. The main risks arising from the Group's financial
instruments are interest rate risks, liquidity risks and foreign currency risks.
The Group does not trade in derivatives and does not enter into transactions of
a speculative nature or unrelated to the Group's investment activities.
Derivatives are used only to manage the risks arising from the underlying
business activities.
INTEREST RATE RISK
The Group is exposed to interest rate fluctuations due to the floating rate
central bank facility borrowings. The majority of these floating rate
liabilities are denominated in sterling or US dollars. This exposure is managed
via interest rate caps denominated in both sterling and US dollars. The Group
aims to hold interest rate caps to cover the majority of its borrowings and with
a variety of maturities. The current interest rate caps mature between December
2000 and June 2002. The Group will renew these caps on maturity.
LIQUIDITY RISK
The Group's objective is to maintain a balance between continuity of financing
and flexibility through the use of borrowings with a range of maturities.
FOREIGN CURRENCY RISK
The Group has significant and diverse investments in foreign operations. The
Group's balance sheet and profit and loss can therefore be materially affected
by movements in exchange rates. It is not the Group's policy to manage net
assets via balance sheet hedging, or to hedge international profits. The Group
seeks to mitigate the effect of currency exposures by borrowing in the same
currencies as the currencies in which it lends and by using currency swaps to
match the currencies in which it lends.
The following numerical disclosures relate to the Group's financial assets and
financial liabilities as defined in FRS 13 "Derivatives and Other Financial
Instruments".
For the purpose of the disclosures, which follow in this note, short-term
debtors and creditors, which arise directly from the Group's operations, apart
from the currency disclosures, have been excluded as permitted under FRS 13. As
defined, short-term intergroup debtors, creditors, financing, pensions and other
post-retirement benefit assets and liabilities that fall within the scope of
SSAP24 are also excluded from the analysis. The disclosures therefore focus on
those financial instruments, which play a significant medium to long term role
in the financial risk profile of the Group. An analysis of the carrying value of
all financial assets and liabilities is given in the fair value table on page
F-44.
INTEREST RATE MANAGEMENT
Foreign exchange and interest rate exposures are managed centrally by the
Group's treasury operations based in London and New York. The Board determines
policies governing the use of financial instruments.
Interest rate management is undertaken to ensure that the majority of the
Group's borrowing requirements is protected from significant increases in
interest rates. Targets for minimum liquidity against committed banking
facilities are managed on a daily basis, and performance is regularly reported
to the Board.
Net interest paid or received on interest rate swaps is included in the profit
and loss account on an accruals basis.
As permitted by FRS13, the Group has not disclosed comparatives since this is
the first year that FRS 13 has been applied.
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.
INTEREST RATE PROFILE
The interest rate profile of the financial liabilities of the Group as at
December 31, 1999 was:
<TABLE>
<CAPTION>
Floating rate Fixed rate Financial liabilities
Total financial financial on which no
liabilities liabilities interest is paid
Currency ALL VALUES IN POUND STERLING (m)
------------------------- ----------------- ------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Sterling 49.6 49.6 - -
US dollars 28.1 16.2 - 11.9
Korean won 15.9 - 13.4 2.5
Other 8.5 4.2 0.7 3.6
----------------- ---------------- --------------------- ----------------------
Total 102.1 70.0 14.1 18.0
================= ================ ===================== ======================
</TABLE>
FIXED RATE FINANCIAL LIABILITIES Weighted average Weighted average
interest rate period to maturity
Currency % months
------------------------------------ ---------------- -------------------
Korean won 8.0 20
Other 11.6 37
---------------- -------------------
Total 8.1 20
================ ===================
The floating rate financial liabilities comprise bank borrowings bearing
interest at fixed rates in advance for periods ranging from one week to six
months by reference to LIBOR for the sterling and US dollar liabilities, or the
applicable inter-bank offer rates or prime lending rates for all other
liabilities.
The financial liabilities on which no interest is paid, are liabilities relating
to committed future acquisition payments due after one year. The weighted
average period to maturity of these liabilities is 28 months.
The Group is exposed to interest rate fluctuations on the above floating rate
bank borrowings. The interest rate exposure on the central borrowings is managed
via interest rate caps denominated in both sterling and US dollars. The Group
aims to hold interest rate caps to cover the majority of its borrowings and with
a variety of maturities. The current interest rate caps mature between December
2000 and June 2002. The Group will renew these caps on maturity.
The interest rate profile of the financial assets of the Group as at December
31, 1999 was:
<TABLE>
<CAPTION>
Financial assets
Floating rate Fixed rate on which no
Total financial assets financial assets interest is received
Currency (pound)m (pound)m (pound)m (pound)m
------------------------- ----------------- ------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Sterling 5.7 4.5 - 1.2
US dollars 14.9 14.9 - -
Korean won 1.8 - 1.8 -
Other 2.4 1.3 - 1.1
----------------- ------------------- --------------------- ----------------------
Total 24.8 20.7 1.8 2.3
================= =================== ===================== ======================
</TABLE>
FIXED RATE FINANCIAL ASSETS Weighted average Weighted average
interest rate period to maturity
Currency % months
----------------------------- -------------------- --------------------
Korean won 4.1 2
==================== ====================
The floating rate financial assets comprise primarily short-term money market
deposits bearing interest at rates fixed on an overnight basis by reference to
LIBOR for sterling and US dollar assets, or the applicable inter-bank reference
rates for all other financial assets. The remainder comprises loans to employees
and other third parties, on which interest is fixed quarterly on an arm's length
basis by reference to the appropriate interbank rate.
The financial assets on which no interest is paid comprise interest free loans
and fixed asset investments. The weighted average period to maturity of the
interest free loans is 12 months. There is no weighted average period to
maturity for the fixed asset investments since these are held on an ongoing
basis.
CURRENCY EXPOSURES
The Group's currency exposures, in other words, those transactional exposures
that give rise to the net currency gains and losses recognised in the profit and
loss account, comprise the financial assets and financial liabilities of the
Group which are not denominated in the functional currency of the individual
operating entity to the extent these are not matched. As at December 31, 1999,
after taking into account currency swaps and forward contracts, the Group had no
material currency exposures.
The Group enters into foreign currency contracts primarily for the purpose of
hedging the remaining known cross-currency cash flows. Certain other items,
which could materially impact the Group's profit and loss account if unhedged,
are also covered by foreign currency contracts. Foreign exchange contracts with
a total value of (pound)6.8 million were outstanding at December 31, 1999 (1998:
(pound)23.0 million). It is Group policy to hedge only known, certain exposures
and not to speculate on foreign currency movements.
MATURITY OF FINANCIAL LIABILITIES
The maturity profile of the Group's financial liabilities, excluding short-term
creditors as defined, at December 31, 1999 were as follows:
(pound)m
-------------------------------------------- --------------
Expiring within one year 7.8
Expiring within one to two years 6.0
Expiring within two to five years 88.2
Expiring after five years 0.1
--------------
102.1
==============
BORROWING FACILITIES
The Group has various borrowing facilities available to it. The undrawn
committed facilities available at December 31, 1999 in respect of which all
conditions precedent had been met at that date were as follows:
(pound)m
-------------------------------------------- --------------
Expiring within one year 70.7
Expiring within two to five years 19.4
--------------
90.1
==============
The Group had committed central bank facilities of (pound)155.3 million, of
which (pound)65.2 was drawn at December 31, 1999. Of these facilities,
(pound)77.6 million matures in one year and (pound)77.7 million matures in 5
years. This maturity profile is expected to provide the Group with sufficient
liquidity over the period of the facility.
Group borrowings outside the central bank facility are uncommitted borrowings,
and as such could become repayable on demand. A total of (pound)3.2 million of
such borrowings were outstanding at December 31, 1999. An allowance for
repayment of uncommitted borrowings is made on the central committed facility.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
Set out below is a comparison by category of the book values of the Group's
financial assets and liabilities as at December 31, 1999:
<TABLE>
<CAPTION>
Book values Fair values
(pound)m (pound)m
-------------------- ------------------
<S> <C> <C>
Primary instruments held to finance the Group's operations:
Short-term borrowings and current portion of long-term borrowings (7.5) (7.5)
Long-term borrowings (75.9) (75.9)
Cash deposits 21.0 21.0
Other financial liabilities (18.7) (18.7)
Other financial assets 3.8 3.8
----------------------------------------------------------------------------------------------- -----------------
Derivative instruments held to manage the interest rate and currency profile:
Interest rate caps - 0.4
------------------------------------------------------------------------- --------------------- -----------------
</TABLE>
Market values have been used to determine the fair value of swaps and forward
foreign exchange contracts, this analysis, however, provided an immaterial fair
value disclosure. The fair values of interest rate caps have been calculated
using indicative bank valuations of applicable contracts outstanding as at
December 31, 1999.
HEDGES
As detailed above, the Group had various interest rate and foreign exchange
hedging contracts outstanding at the year end in relation to underlying currency
and interest rate exposures. The Group had no material unrecognized gains or
losses on such hedges at either December 31, 1999 or December 31, 1998.
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) Subsequent to year
end the Group acquired the remaining 10%, refer note 34.
Korea Diamond Ad Ltd (80% 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.
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, except as disclosed below:
o As at December 31, 1999, one of the joint venture partners had sold its 31%
interest in SSBY Japan. However, at the date of signing CCG's accounts, the
Group was still negotiating with the remaining joint venture partner, as to the
final ownership structure. Consequently, CCG accounting for this company has not
been changed, and will be finalised once renegotiations with the remaining joint
venture partner have been concluded.
o On January 1, 2000, the Group acquired the remaining 10% in Scholz & Friends
Hamburg, for a total consideration of DEM9.0 million ((pound)2.9 million).
o On March 1, 2000, acquisition of 100% of Healthworld Corporation for
consideration of US$209.0 million ((pound)129.2 million), was approved by CCG
shareholders and CCG issued 39.4 million new Ordinary shares on March 3, 2000 to
Healthworld shareholders. Immediately after completion, Healthworld employees
also held exercisable options over 6.4 million CCG shares. This acquisition will
be accounted for using acquisition accounting.
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
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.
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,
including presentation of differences, that are applicable to the Group is set
out below:
(A) US GAAP information and change in accounting policy under US GAAP
As described in note 1, in 1999 for purposes of the UK GAAP consolidated
financial statements, the Group adopted FRS 12 "Provisions, Contingent
Liabilities and Contingent Assets" to account for property provisions. In
adopting FRS 12, the Group has restated its historical financial statements
prepared under UK GAAP to disclose the results of the prior years had FRS 12
been in effect for those years. In connection with this restatement, the Group
determined that certain errors had been made in prior years in the determination
of property provisions and compensation expense under US GAAP. As a result, the
financial statements undre US GAAP have been restated for all prior years. The
impact of these changes on the net profit and shareholders' funds under US GAAP
as previously reported as as follows:
Year ended December 31
Net profit under US GAAP -- Restated 1998 1997
---- ----
Lm Lm
-- --
Net profit applicable to Ordinary shareholders,
as previously reported 4.8 6.8
Adjustments to correct errors related to:
Property Provisions (0.9) (3.6)
Compensation expense 0.7 0.1
----- -----
Net profit attributable ot Ordinary shareholders,
as restated 4.6 3.1
===== =====
Earnings per share
Basic 2.1p 1.4p
Diluted 2.1p 1.4p
Year ended December 31,
Equity shareholders' funds - Restated
1998
----
Lm
--
Equity shareholders' funds, as previously reported 10.6
Adjustments to correct errors related to:
Property provisions 7.3
Compensation expense 0.7
-----
Equity shareholders' funds, as restated 18.6
=====
During 1999, the Group also reviewed its accounting policy for property
provisions under US GAAP and concluded that it is preferable under US GAAP to
record property provisions on a gross basis rather than on a discounted basis.
The cumulative effect of this change in accounting policy for periods through
December 31, 1998 was a charge to profit under US GAAP for the year ended
December 31, 1999 of L14.9 million (6.6p per Ordinary share). The pro forma
impact for the years ended December 31, 1998 and 1997, and as at December 31,
1998 assuming that this change had been applied retrovactively, is provided as
additional disclosure.
(B) 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.
<PAGE>
(C) GOODWILL AND US PURCHASE ACCOUNTING
Under US GAAP, goodwill (which excludes all contingent capital payments of
approximatedly L46.0 million in 1999 and approximately L5.8 million in 1998) and
identifiable intangible assets acquired are capitalized and amortized against
income; identified intangible assets acquired in business combinations which are
accounted for under the purchase method, are 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.
In the case of certain acquisitions, the allocation of the purchase price to
identifiable intangible assets is preliminary and is subject to change pending
the inalization of the allocation by the Company
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.
(D) 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.
(E) 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.
<PAGE>
(F) LONG TERM PROPERTY PROVISIONS
Under US GAAP, provisions are made on a gross basis for properties, which are
vacant and surplus to requirements after allowing for estimated sub-rental
income. Such provisions were previously provided on a discounted basis in the
presentation of US GAAP.
Under UK GAAP, the Group's property provisions are discounted using a risk free
rate to the present value of future net lease obligations and related costs of
leasehold property (net of estimated sublease income and certain risk factors)
where the space is vacant or currently not planned to be used for on-going
operations. The periodic unwinding of the discount is treated as an imputed
interest charge.
(G) 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.
(H) 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.
Year ended December 31,
-----------------------------
1998 1997
1999 Restated Restated
-----------------------------
Net (loss)/profit
in (pound) million - as reported (6.3) 7.7 4.3
- Proforma 13.6 7.7 3.0
Earnings per share
in pence Basic - as reported (2.8)p 3.5p 1.9p
Diluted - as reported (2.8)p 3.4p 1.9p
Basic - Proforma 6.0p 3.5p 1.4p
diluted - Proforma 5.7 3.4p 1.3p
If the compensation cost of the options had been determined based on the fair
value at the grant dates for 1999 and 1998 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 1999 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 62.8p, 34.8p and 33.6p for options granted during the year
ended December 31, 1999, 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 1999, 1998 and 1997, respectively; dividend yield
of nil and nil per cent, expected volatility of 33%, 26% and 22% in 1999, 1998
and 1997, respectively, risk-free interest rate of 4.7%, 5.8% and 6.9% and
expected lives of between 3.5 and 6.5 years.
(I) 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. Under US GAAP, capital expenditure and
financial investment and acquisitions and disposals are reported within
investing activities. Had bank overdrafts been shown as a financing activity in
the Consolidated Cash Flow Statement the overdrafts (drawn) repaid would have
been (pound)18 million and (pound)(13.4) million in the years ended December 31,
1999 and 1998 respectively. Under UK GAAP, short-term investments include
short-term money market deposits of L6.4 million in 1999 and L0.8 million in
1998 that would be classsified as cash equivalents under US GAAP.
(J) Joint ventures and associated undertakings
US GAAP requires the disclosure of summarized financial information for
investments in joint ventures and associated undertakings accounted for under
the equity method, as follows:
Joint Associated
Venture Undertakings
------- -------------
Commission and fee income 64.0 30.2
Operating profit 7.8 5.5
Net profit 1.3 4.2
Group share of operating profit 2.9 2.0
====== =======
Total current assets 172.4 33.2
Other assets 4.9 4.7
------- -------
177.3 37.9
======== ========
Total current liabilities 205.5 24.9
Other liabilities 2.4 1.9
Shareholders' funds (deficiency) (30.6) 11.1
-------- --------
177.3 37.9
======= ========
(K) Statement of comprehensive income
Under UK GAAP, the Company presents a statement of Total Recognized Gains and
Losses, which is equivalent to a Statement of Comprehensive Income under US
GAAP.
(L) PROSPECTIVE ACCOUNTING CHANGES
The US Financial Accounting Standards Board has issued SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and hedging activities. SFAS
133 requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
This statement, as amended, is effective for the Company's year ending December
31, 2001. The Company has not determined the effect of the adoption of SFAS 133.
The Company does not believe that the effect of the adoption of FRS 16 "Current
Taxation" for UK GAAP purposes in the year ending December 31, 2000 as described
in Note 1 will be material.
Effects on net earnings of differences between US and UK GAAP
<TABLE>
<CAPTION>
Year ended December 31,
Restated Restated
1999 1998 1997
Lm Lm Lm
<S> <C> <C> <C>
Profit for the year in conformity with UK GAAP 18.6 13.8 10.4
US GAAP Adjustments:
Amortization of goodwill and other intangibles (b) (7.3) (6.3) (9.5)
Straight lining of property leases (f) - - (1.0)
Compensation costs (d) (18.9) (1.0) (0.3)
Amortization of discount on property provisions (c) 1.3 (1.9) 3.5
------------- ------------- ------------
Net (loss)/profit applicable to Ordinary shareholders
in conformity with US GAAP before cumulative
effect of change in accounting principle (6.3) 4.6 3.1
======== ======== =======
Cumulative effect of change in accounting principle (14.9) - -
------------ --------- --------
Net (loss)/profit applicable to Ordinary shareholders
in conformity with US GAAP (21.2) 4.6 3.1
============= ============= ============
Net (loss)/profit per Ordinary share-basic (9.5)p 2.1p 1.4p
------------- ------------- ------------
Average number of Ordinary shares (in millions) 226.6 222.4 221.9
Net (loss)/profit per Ordinary share-diluted* (9.5)p 2.1p 1.4p
------------- ------------- ------------
Average number of Ordinary shares - diluted (in millions)*
239.6 233.3 222.9
</TABLE>
* Potential common stock equivalents have been excluded from the computation
of diluted net (loss)/profit per Ordinary share, because to do so would be
anti-dilutive for the 1999 information presented.
<PAGE>
Cumulative effect on shareholders' funds (deficiency) of differences between US
and UK GAAP
<TABLE>
<CAPTION>
1998
1999 Restated
Lm Lm
<S> <C> <C>
Equity shareholders' deficiency in conformity with UK GAAP (45.8) (63.9)
US GAAP adjustments
Dividends 5.1 3.1
Goodwill and US purchase accounting in respect of acquisitions
61.5 69.1
Earnouts in pre-1/1/98 goodwill 6.1 3.0
Discount on property provisions (6.3) 7.3
-------------- --------------
Equity shareholders' funds in conformity with US GAAP 20.6 18.6
============== ==============
</TABLE>
The following pro forma reconciliation to US GAAP is presented assuming that the
change in accounting policy for properly provisions, as described in note 37(a),
had been applied retroactively, with all prior periods restated.
<PAGE>
EFFECTS ON NET EARNINGS OF DIFFERENCES BETWEEN US AND UK GAAP
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997
1999 Restated Restated
(pound)m (pound)m (pound)m
------------ ------------ -----------
<S> <C> <C> <C>
Profit for the year in conformity with UK GAAP 18.6 13.8 10.4
US GAAP ADJUSTMENTS:
Amortization of goodwill and other intangibles (b) (7.3) (6.3) (9.5)
Straight lining of property leases (f) - - (1.0)
Compensation costs (d) (18.9) (1.0) (0.3)
Amortization of discount on property provisions (e) 1.3 1.2 4.7
------------ ------------ -----------
NET (LOSS)/PROFIT APPLICABLE TO ORDINARY SHAREHOLDERS
IN CONFORMITY WITH US GAAP (6.3) 7.7 4.3
============ ============ ===========
Net (loss)/profit per Ordinary Share - basic (2.8)p 3.5p 1.9p
Average number of Ordinary Shares (in millions) 226.6 222.4 221.8
Net (loss)/profit per Ordinary Share - diluted * (2.8)p 3.4p 1.9p
Average number of Ordinary Shares - diluted (in millions) * 226.6 223.3 221.8
</TABLE>
* Potential common stock equivalents have been excluded from the computation
of diluted net (loss)/profit per Ordinary share, because to do so would be
anti-dilutive for the 1999 information presented.
<TABLE>
<CAPTION>
CUMULATIVE EFFECT ON SHAREHOLDERS' FUNDS (DEFICIENCY) OF DIFFERENCES
BETWEEN US AND UK GAAP -- Pro Forma December 31,
------------------------
1998
1999 Restated
(pound)m (pound)m
------------ -----------
<S> <C> <C>
Equity shareholders' deficiency in conformity with UK GAAP (45.8) (63.9)
US GAAP ADJUSTMENTS:
Dividends (a) 5.1 3.1
Goodwill and US purchase accounting in respect of acquisitions (b) 61.5 69.1
Earnouts in pre 1/1/98 goodwill (b) 6.1 3.0
Discount on property provisions (e) (6.3) (7.6)
------------ -----------
EQUITY SHAREHOLDERS' FUNDS (DEFICIENCY) IN CONFORMITY WITH US GAAP 20.6 3.7
============ ===========
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Description
1.1 Consent of Independent Auditor
2.1 Loan Agreement for Facilities of up to $250,000,000 to Cordiant
Communications Group plc and others, arranged by The Bank of New
York and HSBC Investment Bank plc, dated November 8, 1999, as
amended February 15, 2000.
2.2 Agreement and Plan of Merger dated as of November 9, 1999, among
Cordiant Communications Group plc, Healthworld Acquisition Corp.
and Healthworld Corporation. (Incorporated by reference to
Exhibit 2(a) to the Company's Registration Statement on Form F-4
(File No. 333-96241).)
2.3 Amendment No. 1 to Agreement and Plan of Merger dated as of
February 3, 2000, among Cordiant Communications Group plc,
Healthworld Acquisition Corp. and Healthworld Corporation.
(Incorporated by reference to Exhibit 2(b) to the Company's
Registration Statement on Form F-4 (File No. 333.-96241).)
3.1 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.
