As filed with the Securities and Exchange Commission on June 2, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-14736
SAATCHI & SAATCHI PLC
(Exact name of Registrant as specified in its charter)
ENGLAND AND WALES
(Jurisdiction of incorporation or organization)
83/89 WHITFIELD STREET
LONDON W1A 4XA, 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 10p 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: 222,946,716
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes(X) No(_)
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 (_) Item 18 (X)
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<PAGE>
TABLE OF CONTENTS
Page
PART I......................................................................
Item 1. Description of Business......................................2
Item 2. Description of Property.....................................16
Item 3. Legal Proceedings...........................................16
Item 4. Control of Registrant.......................................17
Item 5. Nature of Trading Market....................................18
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders 19
Item 7. Taxation....................................................19
Item 8. Selected Financial Data.....................................24
Item 9. Managements Discussion and Analysis of
Financial Condition and Results of Operations..............28
Item 9A. Quantitative and Qualitative Disclosures About
Market Risk...............................................39
Item 10. Directors and Executive Officers of Registrant..............40
Item 11. Compensation of Directors and Officers......................43
Item 12. Options to Purchase Securities from Registrant
or Subsidiaries............................................46
Item 13. Interest of Management in Certain Transactions..............58
PART II................................................................... 58
Item 14. Description of Securities to be Registered..................58
PART III.................................................................. 58
Item 15. Defaults Upon Senior Securities.............................58
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds..................58
PART IV................................................................... 58
Item 17. Financial Statements........................................58
Item 18. Financial Statements........................................58
Item 19. Financial Statements and Exhibits...........................59
<PAGE>
INTRODUCTION
Unless the context otherwise requires, the term the "Company," as used
herein shall mean Saatchi & Saatchi plc, which was formed as a private limited
company in England and Wales on January 26, 1990 under the Companies Act and was
re-registered as a public limited company on September 4, 1997 in connection
with the Demerger (as defined below). Unless the context otherwise requires, the
"Group" and the "Saatchi & Saatchi Group" mean the Company and its subsidiaries.
Unless the context otherwise requires, "Cordiant" shall mean Cordiant plc and
its subsidiaries in relation to the period prior to the Demerger and "CCG" or
"CCG Group" shall mean Cordiant Communications Group plc and its subsidiaries
after the Demerger. The term "Ordinary shares" refers to the Ordinary shares of
10p each of the Company, and the term "Cordiant Ordinary shares" refers to the
ordinary shares of 25p each of Cordiant. The term "Financial Statements" shall
mean the audited consolidated financial statements and notes thereto of Saatchi
& Saatchi plc as of December 31, 1998 and 1997 and for each of the years in the
three year period ended December 31, 1998 included elsewhere herein. The term
"Unaudited Pro Forma Financial Information for 1997" shall mean the unaudited
pro forma financial information for 1997 included in this Report.
The Company's financial statements appearing in this annual report are
expressed in pounds sterling ("L"). References to "US dollars" or "$" are to
United States dollars and references to "pounds sterling" ("L"), "pence" or "p"
are to UK currency. The noon buying rate in the City of New York for cable
transfers in foreign currencies as announced by the Federal Reserve Bank of New
York for customs purposes (the "Noon Buying Rate") on December 31, 1998 was
L1.00 to $1.66. Unless otherwise specified, translations into US dollars
contained herein are made at the Noon Buying Rate on December 31, 1998. The Noon
Buying Rate on May 12, 1999 was L1.00 to $1.62.
References in this document to the "Companies Act" are to the Companies Act
1985, as amended, of England and Wales 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Industry Background" 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--General", "Description of Business--Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the subheadings "Industry Background", "Year 2000 Compliance" and "Euro
Conversion." 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 general level of
advertising expenditures in the Group's markets referred to above, 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 United Kingdom), the ability of the Group and its
significant clients and suppliers to successfully implement timely Year 2000
solutions, the factors discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction", 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.
PART I
Item 1. Description of Business.
GENERAL
The businesses that comprise the Saatchi & Saatchi Group were transferred to
the Saatchi & Saatchi Group from Cordiant in connection with the Demerger. Prior
to the Demerger, Cordiant was the holding company for a group of advertising and
creative marketing communications businesses, the two largest of which were the
advertising networks, Saatchi & Saatchi ("S&S") and Bates Worldwide ("Bates
Worldwide").
Since its beginning in 1970, the Saatchi & Saatchi name has been synonymous
with highly creative, ground-breaking advertising. In 1975, the Saatchi &
Saatchi advertising agency was merged with Compton Partners Limited. During the
1980s, an international advertising network was formed, primarily through a
series of acquisitions which included Compton Communications, Inc. and
Dancer-Fitzgerald-Sample, Inc. In 1995, the S&S network was expanded to Latin
America through an equity investment in NAZCA S&S, which was increased to a
majority holding in early 1999. Investments have also been made in other
developing markets, including China, India and South Africa. As a result of
these developments, S&S is today a worldwide advertising network with 152
offices and affiliated agencies located in 92 countries.
In addition to the growth of its advertising businesses, a range of related
communications businesses were assembled by Cordiant during the 1980s. In 1985,
The Rowland Company, a US strategic communications firm, and Siegel & Gale, a US
corporate identity and simplified communications business, were acquired. Siegel
& Gale was subsequently sold by Saatchi & Saatchi in 1998 as it was no longer
part of the core business. In 1987, The Facilities Group Limited ("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, the Saatchi & Saatchi Group retained the
Rowland Company and a 70 percent shareholding in The Facilities Group with the
remainder held by CCG. These creative communications businesses have developed
during the 1990s by providing services to independent clients, S&S and Bates
Worldwide.
In 1988, Cordiant formed a single media buying operation in the UK called
Zenith Media Buying Services. This was created through the acquisition of Ray
Morgan & Partners which was merged with the media buying departments of
Cordiant's London advertising agencies. This was the first time a major agency
group had consolidated its media buying operations into a discrete unit. The
operation was renamed Zenith Media Worldwide ("Zenith") in 1991 and in 1992
extended its services to include media planning. Zenith has expanded its
operations internationally by opening offices in Europe in 1994 and in the US
and Asia Pacific in 1995. This expansion was achieved by combining and
rebranding the in-house media operations of S&S and Bates Worldwide. Following
the Demerger, the Saatchi & Saatchi Group and CCG each retained a 50 percent
shareholding in Zenith, which is accounted for as a joint venture.
From the late 1980s to the end of 1995, Cordiant's history was characterized
by a period of financial and management instability which had an adverse effect
on the businesses comprising the Saatchi & Saatchi Group. During the late 1980s,
poor trading conditions in the advertising industry, coupled with the
requirement to service debt incurred to fund a number of acquisitions
contributed to a serious decline in Cordiant's financial position. By 1990
Cordiant's accounts showed that financial liabilities had reached almost L700
million. As a result, during the early 1990s Cordiant embarked on a series of
refinancings and disposals culminating in a rights issue in November 1995. This
series of actions substantially eliminated Cordiant's net financial liabilities
and restored its financial stability.
Since the beginning of 1996, the management team of S&S has been
restructured with a number of internal and new appointments. In particular, in
1997, Kevin Roberts was appointed Chief Executive Officer of the S&S network. In
connection with the Demerger, Bob Seelert became Chief Executive Officer of the
Saatchi & Saatchi Group. As of December 31, 1998, Bob Seelert succeeded Charles
Scott as Chairman of the Company. As of January 1, 1999, Kevin Roberts became
Chief Executive Officer, Bill Cochrane became Finance Director and Wendy Smyth
took up the newly created Board position of Director of Corporate Affairs.
The Company's principal corporate offices are located at 83/89 Whitfield
Street, London W1A 4XA, England, telephone number 0171-436-4000.
THE DEMERGER AND CONTINUING ARRANGEMENTS WITH CCG
The Demerger
On April 21, 1997, the Board of Directors of Cordiant announced its decision
to recommend to its shareholders that they approve a spinoff or demerger of the
Saatchi & Saatchi Group from Cordiant (the "Demerger"). The Demerger was
motivated by the desire to allow each of the Saatchi & Saatchi Group and CCG to
stand on its own and to allow the advertising agencies of the Saatchi & Saatchi
Group and CCG, namely S&S and Bates Worldwide, to respond more quickly to client
needs and opportunities. The Demerger took effect on December 15, 1997 and, as
from the effective date of the Demerger (the "Effective Date"), CCG and the
Company have operated as separate public companies and neither CCG nor the
Company beneficially owns any shares of the other. As a result of the Demerger,
the Saatchi & Saatchi Group and CCG each own a 50 percent shareholding in
Zenith.
Relationship Between the Saatchi & Saatchi Group and CCG Following the Demerger
As a result of the Demerger, the Company and CCG 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 that became its subsidiaries as a result of the Demerger entered into
certain agreements and arrangements with CCG and Zenith in order to enable the
Demerger to be carried out, allocate responsibility for certain obligations,
provide for certain transitional arrangements and otherwise define their
relationship following the Demerger. The terms of these agreements and
arrangements are principally governed by the Demerger Agreement, dated September
30, 1997, between Cordiant, the Company and CCG (the "Demerger Agreement"), and
certain agreements required to be entered into pursuant to the Demerger
Agreement. The principal terms of these agreements and arrangements are
described below.
Guarantees
The Company has guaranteed, with effect from the Effective Date, all of the
obligations of Cordiant Property Holdings Limited, a member of CCG, as lessee
under certain leases of premises at Lansdowne House, Berkeley Square, London W1,
for a term expiring on June 16, 2013. The current annual base rent under these
leases amounts to L10.6 million per annum, subject to upwards-only rent reviews
in 2002/2003 and every five years thereafter. This property is not currently
occupied by any company in the Saatchi & Saatchi Group or CCG. All of this
property has been sublet, but for varying terms and at lower rents. There is
also an existing guarantee from CCG which will continue and CCG has agreed to
indemnify the Company against any liability under the Company's guarantee.
There are a number of existing guarantees by CCG in respect of obligations
of certain companies in the Saatchi & Saatchi Group, including guarantees in
respect of leases of premises at 375 Hudson Street, New York and certain
premises in London. These and certain other existing guarantees were not
released in connection with the Demerger. In the Demerger Agreement, the Company
agreed to give additional, or in some cases, substitute guarantees and to
indemnify CCG against any liability under its existing guarantees.
Bank Facilities
In connection with the Demerger, the Saatchi & Saatchi Group established new
banking arrangements under an Agreement dated September 30, 1997, among the
Company, various other members of the Saatchi & Saatchi Group, BNY Markets
Limited and Midland Bank Plc as Arrangers and certain banks and financial
institutions (the "Bank Facility Agreement"). The Bank Facility Agreement is
described in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In addition, Zenith entered into an agreement (the "Zenith Facility
Agreement") providing a L21.5 million secured reducing multi-currency revolving
credit facility (the "Zenith Facility"). The Company and CCG provided unlimited
guarantees to the lenders in respect of the Zenith Facility and agreed between
themselves that any liability under such guarantees is to be shared equally.
At December 31, 1998, the amount available under the Zenith Facility was
L20.5 million. This amount is required to be repaid as follows: L2 million in
each of 1999 and 2000 and L4 million in 2001, with the balance due in 2002. The
Zenith Facility will be reduced by an amount equal to 75 percent of the net
proceeds received (subject to a de minimis of $1.5 million per annum) on or
following a sale by Zenith of any subsidiary (or a material part of a business
of any subsidiary).
The Zenith Facility Agreement requires Zenith to comply with various
financial covenants relating to gross interest cover, maximum gross debt,
maximum gross borrowings and gross capital expenditure. It also contains
provisions whereby on the happening of certain specified events of default the
amount made available could be declared immediately due and payable. 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
and any change of control of Zenith.
Ownership and Operation of Zenith Media Worldwide
Zenith Shareholders' Agreement
The Company, CCG, Saatchi & Saatchi Holdings Limited ("Holdings") and
Zenith, with effect from the Effective Date, entered into a shareholders'
agreement (the "Zenith Shareholders' Agreement") to regulate the relationship
between CCG and Holdings as shareholders of Zenith. The Company is a party to
the Zenith Shareholders' Agreement in order to guarantee the obligations of
Holdings. The Zenith Shareholders' Agreement provides that Zenith will be
managed on a day to day basis by four executive Directors agreed upon by the
shareholders. Two non-executive Directors are appointed by agreement between the
shareholders. In addition, each shareholder has the right to appoint one further
non-executive Director.
Pursuant to the Zenith Shareholders' Agreement, the following matters
require the consent of both shareholders before they can be undertaken by
Zenith: alterations to the capital structure of Zenith; the annual business plan
of Zenith; and the entering into of contracts by Zenith which are not in the
ordinary course of its business or not on arm's-length terms.
An agreed percentage 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 by Zenith.
Each of Holdings and CCG owns 50 percent of the outstanding shares of
Zenith. The Zenith Shareholders' Agreement prohibits the transfer of shares in
Zenith except as described below. Transfers to third parties are permitted
either on the insolvency, or on a change of control, of the other shareholder.
Otherwise a shareholder is entitled to sell all of its shares to a third party
only if it has first offered to sell its shares to the other shareholder at a
specified price and the other shareholder has declined that offer. In those
circumstances, the sale to the third party must be at a price being not less
than that offered to the other shareholder. Any third party to whom shares are
transferred will be required to agree to be bound by the terms of the Zenith
Shareholders' Agreement as if it was an original party to that agreement.
The Zenith Shareholders' Agreement also contains options whereby one
shareholder is entitled to acquire all the Zenith shares of the other
shareholder in the event that:
1. the other shareholder becomes insolvent;
2. the other shareholder is the subject of 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
3. the other shareholder terminates the media services agreement to
which it is a party.
The price payable (a) on exercise of the option described in 1 above will be
based on the market value of the Zenith shares and (b) on exercise of the
options described in 2 and 3 above will be based on the net asset value of
Zenith. Each shareholder also charged its shares in Zenith to secure all
obligations under the bank facilities for such shareholder's group.
In the event that a dispute arises in relation to certain matters of
fundamental importance to the future of Zenith which cannot be resolved by
further negotiations between the shareholders then either shareholder will be
entitled to offer to acquire at any specified price all of the Zenith shares of
the other shareholder. The other shareholder will have the option either to
accept that offer and sell all of its Zenith shares at the specified price or to
purchase all of the Zenith shares of the other shareholder at the specified
price.
The Zenith Shareholders' Agreement also provides for the resolution of
potential conflicts between the clients of the shareholders and Zenith.
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.
Prior to the Demerger, Zenith shared office space and facilities such as
computer, payroll and accounting systems, as well as insurance and pension
arrangements with members of the Cordiant Group. These arrangements were
formalized on an arm's length basis with the relevant members of the Saatchi &
Saatchi Group and CCG, where appropriate, prior to the Demerger.
Both the Company and CCG have guaranteed the Zenith bank facility described
above.
Zenith Media Services Agreements
Pursuant to the Demerger Agreement, at the time the Zenith Shareholders'
Agreement was entered into, each of CCG and the Company 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, 2001 or
on any subsequent anniversary of that date provided either party has given to
the other not less than 12 months' written notice of such termination.
Ownership and Operation of The Facilities Group
The Company, CCG, Saatchi & Saatchi (Central Services) Limited ("SSCSL") and
The Facilities Group, with effect from the Effective Date, entered into a
shareholders' agreement ("The Facilities Group Agreement") to regulate the
relationship between CCG and SSCSL as shareholders of The Facilities Group. The
Company is a party to that agreement in order to guarantee the obligations of
SSCSL. SSCSL holds 70 percent of the outstanding shares of The Facilities Group
and CCG holds 30 percent. The Facilities Group Agreement provides that the day
to day management of The Facilities Group will be undertaken by three executive
Directors. CCG is entitled to appoint one of three executives and the Company is
entitled to appoint the other two.
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.
The Facilities Group Agreement prohibits the transfer of shares of The
Facilities Group except in the circumstances described in the agreement.
Transfers to third parties will be permitted either on the insolvency or on a
change of control of the other shareholder. Otherwise a shareholder will be
entitled to sell all of its shares to a third party only if it has first offered
to sell its shares to the other shareholder at a specified price and the other
shareholder has declined that offer. In those circumstances, the sale to the
third party must be at a price being not less than that offered to the other
shareholder. Any third party to whom shares are transferred will be required to
agree to the terms of The Facilities Group Agreement as if it were an original
party to that agreement.
The Facilities Group Agreement also contains options whereby one shareholder
is entitled to acquire all the shares of the other shareholder in the event
that:
1. the other shareholder becomes insolvent; or
2. the other shareholder suffers a change of control.
The price payable on exercise of these options will be based on the market
value of The Facilities Group shares.
The Facilities Group Agreement will remain in force until (i) either
shareholder acquires all of the shares in The Facilities Group held by the
other, (ii) an order is made or resolution is passed for the winding up of The
Facilities Group or (iii) a third party acquires all of the shares of The
Facilities Group.
Employee Benefit Plans
In the UK, Saatchi & Saatchi Group companies participate in the Cordiant
Group Pension Scheme, a UK defined benefit plan operated by CCG. The Demerger
Agreement provides for this participation to continue for a period of time
following the Demerger subject to Inland Revenue approval until the Company
establishes alternative arrangements.
CCG and the Saatchi & Saatchi Group have agreed that the Saatchi & Saatchi
Group's active members within the plan will be given the opportunity to transfer
to the Saatchi & Saatchi Group's new pension arrangements when they have been
established. The Demerger Agreement provides for a transfer payment of an amount
determined by the trustee of the plan on the advice of the actuary to be made to
the new pension arrangements in respect of the accrued rights under the plan of
those active members who request it.
Other Provisions of the Demerger Agreement
Operating Arrangements/Shared Premises and Services
The Demerger Agreement provides for the implementation of arrangements where
the two groups have operated local offices jointly and sets out the bases on
which these arrangements continue. Each agency is owned and managed by S&S, but
has been branded jointly as "Bates Saatchi & Saatchi Advertising."
Additionally, there continue to be a number of locations in which offices
leased by a member of the CCG Group are occupied by, or shared with, a member of
the Saatchi & Saatchi Group, or vice versa. The most significant of these
arrangements is a sublease by the Saatchi & Saatchi Group to Zenith of 55,000
square feet at 375 Hudson Street in New York.
Network Affiliates
Prior to the Demerger, there were over 40 affiliated agencies of S&S around
the world in which the Saatchi & Saatchi Group held only a minority interest or
no equity interest. Prior to the Demerger, the relationship with these
affiliates was in most cases governed by a "network membership agreement"
between the affiliate and Cordiant, on behalf of S&S. Under these agreements,
the affiliate was given the sole license to use the "Saatchi & Saatchi" name in
relation to advertising services in a specified territory and received certain
services and referrals of clients from S&S, in return for paying to Cordiant
fees based on income earned by the affiliate. In most cases, these agreements
provided for termination by either party on 3 months' notice.
Pursuant to the Demerger Agreement, the Saatchi & Saatchi Group and CCG are
endeavoring to obtain the agreement of the S&S affiliates to the novation of
their network membership agreements, so that the Company will succeed to all of
the rights and obligations of Cordiant under these agreements. To the extent
that such agreement was not obtained prior to the Effective Date, CCG continues
to hold these agreements for the benefit of the Saatchi & Saatchi Group pending
novation or termination and the Saatchi & Saatchi Group is responsible for
ensuring that all obligations of CCG thereunder are performed. Similar
arrangements exist in relation to agreements with Zenith affiliates.
Currently, a new Saatchi & Saatchi network membership agreement has been put
into place and during 1999 is being rolled out to the affiliated agencies.
Disputes
The Demerger Agreement sets out agreed procedures to be followed by CCG, the
Company and Zenith in seeking to resolve any dispute that may arise between any
of them under or in connection with the Demerger Agreement, other than disputes
arising under the Zenith Shareholders' Agreement.
ORGANIZATION AND SERVICES
The Saatchi & Saatchi Group's operations consist of advertising and other
creative marketing services including strategic communications, pre-production
services and media planning and buying. The Group's principal activities are
organized as follows:
Organization Activities
Advertising
S&S Advertising and creative marketing
services
Marketing communications services
Rowland Worldwide Strategic communications
The Facilities Group(1) Pre-production services in design,
print and television
Media services
Zenith Media Worldwide(2) Media planning and buying
- --------------------------------
(1) Owned 70 percent by the Group and 30 percent by CCG.
(2) Owned 50 percent by the Group and 50 percent by CCG.
Advertising
S&S is headquartered in New York and currently has 152 offices and
affiliated agencies located in 92 countries. It has a reputation for outstanding
creative ability and benefits from long-standing relationships with many
multinational clients. In 1998, advertising accounted for approximately 82
percent of the Saatchi & Saatchi Group's revenues.
Advertising services
S&S is principally involved in the creation of advertising and creative
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, S&S
supervises the production of materials necessary to implement that program.
These include film, video, print and electronic materials which are provided
externally.
S&S performs a strategic planning function which involves analysis of the
particular product, service, brand, company or organization against its
competitors and the market. This analysis includes the use of market research,
sociological and psychological studies as well as creative insight. S&S also
evaluates the choice of media to reach the desired market most efficiently and
monitors the effectiveness of the program. The advertising and marketing program
is devised within the limits imposed by the client's advertising budget. In the
case of global and regional campaigns, S&S plans and coordinates the
implementation of the program through its network of national agencies.
S&S is also involved in buying media space and time for its clients. This is
executed by Zenith, by S&S's in-house team or sourced from external suppliers.
<PAGE>
Clients
In 1998, S&S's ten largest clients accounted for approximately 51 percent of
the Saatchi & Saatchi Group's revenues. The two largest clients, Procter &
Gamble and Toyota, accounted for 13.3 percent and 17.8 percent, respectively, of
the Saatchi & Saatchi Group's revenues in 1998. In 1998, S&S served
approximately 43 clients in five or more countries. Details of S&S's largest
clients in 1998 and recent significant new business wins from existing and new
clients are set forth below:
<TABLE>
<CAPTION>
S&S Clients
Number of countries Year relationship
in which serviced first established
<S> <C> <C> <C>
Largest clients in 1998 American Home Products 35 1983
Astra/Merck 1 1994
Delta Airlines 17 1997
DuPont 23 1949
General Mills 1 1924
Hewlett-Packard 45 1974
Johnson & Johnson 36 1971
Procter & Gamble 65 1921
Toyota 31 1975
VISA 34 1990
</TABLE>
Business wins in 1998 include Adidas, Audi, Beck's, Benecol, Guinness, Honey Nut
Chex, Lycra, Oil of Olay, Provident, Physique, Rothmans, Safeguard, Sunny
Delight, Tag Heuer and VIAG Interkom. Business losses in 1998 included Camelot,
Campbell's, Danone and Schweppes.
Network expertise
The network includes a separately branded healthcare marketing agency called
Klemtner Advertising. In addition, S&S has established a number of teams to
develop a greater understanding of certain specialist sectors. These include
Saatchi & Saatchi Business Communications for business-to-business
communications, Saatchi & Saatchi Vision for interactive and three dimensional
media, Kid Connection for youth marketing, GMG for co-marketing and HealthCare
Connection for healthcare marketing.
The network has also developed a series of methodologies designed to improve
the agency's ability to understand consumer motivations. The Psychological Probe
is designed to improve the understanding of emotional factors which shape
consumer behavior. The Anthropological Probe is designed to understand the
cultural factors formed by the consumers' living environment. The Brand Resource
and Information Network, BRAIN, is a worldwide intranet allowing S&S to share
product and brand knowledge both internally and with clients.
Management believes that these areas of expertise provide the network with
enhanced opportunities to attract new business and to extend business from
existing clients.
Marketing Communications Services
Rowland Worldwide
Rowland Worldwide is the Saatchi & Saatchi Group's international strategic
communications consulting firm. Headquartered in New York, the Rowland Worldwide
network has five core operating centers in Brussels, Hong Kong, London, New York
and Sydney, with an additional nine owned offices and 25 affiliated offices.
Rowland's global network brings together for its clients strategic
communications capabilities, expertise and local market knowledge to influence
diverse and changing audiences worldwide. Rowland works with client companies to
build their reputations and their businesses through strategic
cross-disciplinary applications of communication techniques. These services
assist clients in marketing new or existing products, defining business
strategies, managing crises, addressing community issues and presenting
financial results and business strategies. Rowland Worldwide advises clients on
project-specific or long-term assignments. Its principal clients include Cadbury
Schweppes, Canon, DHL, Ducati, DuPont, European Space Agency, IBM, Johnson &
Johnson, Mobil, Procter & Gamble and Smirnoff.
The Facilities Group
Based in central London, The Facilities Group provides a comprehensive range
of technical and creative services in the areas of design, print, artwork, audio
visual, multimedia and television production. Its revenues are derived from both
S&S and CCG and a number of independent accounts. The business operates from a
single site and provides 24 hour coverage. This helps to reduce production times
and to add a high level of security to clients' projects.
As a result of the Demerger, the Saatchi & Saatchi Group has a 70 percent
shareholding in The Facilities Group with the remaining 30 percent held by CCG.
See "The Demerger and Continuing Arrangements with CCG--Ownership and Operation
of The Facilities Group."
Media Services
Zenith Media Worldwide
Zenith is a specialist media services and planning agency. It is
headquartered in London and has 51 offices in 28 countries across Europe, the US
and Asia Pacific with representative offices in a further 60 countries.
Zenith's services include researching media markets, forecasting media
trends and levels of expenditure, developing media buying strategies, planning,
negotiating and executing the details of buying programs, monitoring the media
to verify the execution of the buying program, researching the effectiveness of
the program and paying media owners. Zenith's Advertising Expenditure Forecasts,
which are published twice yearly, are regarded as authoritative by the
advertising industry.
Zenith provides its services to clients of S&S and Bates Worldwide. In
addition, in 1998 approximately 61% of its revenues were generated from Zenith's
own client list. Zenith's major direct clients include Alcatel, Bell Atlantic,
Bristol Myers, British Telecom, Campbell's, CIBA, Continental, Electrolux,
Ferragamo, HSBC, KFC and Lloyds TSB.
Zenith has made significant investment in its people, information technology
systems and proprietary software. Zenith's proprietary software helps to
differentiate it from its competitors and to allow it to deliver competitive
advantage to its clients. Zenith's systems, branded Zenith Optimization of
Media, ZOOM(TM), fall into three areas:
Infrastructure. Standardized hardware and software platforms, including
desk-to-desk e-mail, are used across the Zenith network.
Communication. Zenith uses internet communications incorporating password
protected web-sites to share and disseminate information both internally
and with clients.
Proprietary media systems. A number of proprietary media systems have been
branded and launched since 1996 to process, manipulate and analyze data
efficiently. Examples of these systems are ZOOM Wizard, which optimizes the
allocation of a client's budget by TV station and time of day; ZOOM
Optimiser, which generates TV spot schedules to maximize reach and
frequency; ZOOM Merlin, a portfolio optimization system which generates
multiple campaign schedules simultaneously; ZOOM Maps, which models
campaign and brand awareness; ZOOM Adweight, which helps determine targets
for effective advertising frequency levels; ZOOM Merc, which estimates
combined media net reach; and ZOOM Futures, which models estimated brand
sales from media and marketing campaigns.
As a result of the Demerger, the Saatchi & Saatchi Group and CCG each have a
50 percent shareholding in Zenith. The Company accounts for Zenith as a joint
venture. In addition, both the Saatchi & Saatchi Group and CCG entered into an
agreement in which they agree to use Zenith as their exclusive media services
supplier, subject to certain exceptions, until at least December 31, 2000. This
has been extended to at least December 31, 2001. Each media services agreement
introduced revised commercial terms for the purchase of media services from
Zenith. See "The Demerger and Continuing Arrangements with CCG--Ownership and
Operation of Zenith Media Worldwide."
<PAGE>
Geographic Coverage
The Saatchi & Saatchi Group serves clients in all of the world's major
advertising markets.
<TABLE>
<CAPTION>
Geographic Analysis of S&S Revenue in 1998
Percentage of the Group's Percentage of worldwide
ongoing revenue(1) advertising expenditure(2)
(%) (%)
-------------------------------- -------------------------------- ------------------------------------
<S> <C> <C>
United Kingdom................. 16.0 6.9
North America.................. 50.2 40.1
Continental Europe, Africa and 20.4 21.6
the Middle East................
Asia Pacific (exc. Japan)...... 13.2 10.8
Japan/Rest of World............ 0.2 20.6
--- ----
Total.......................... 100.0 100.0
-------------------------------- -------------------------------- ------------------------------------
(1) Ongoing revenue excludes revenue from disposed businesses.
(2) Source: Zenith Media Worldwide, Advertising Expenditure Forecasts, January
1999.
</TABLE>
In North America, the Saatchi & Saatchi Group's relative share is based on
S&S's relationships with a number of major US companies. The high share in the
UK reflects the strong position of S&S's London office on Charlotte Street. In
Continental Europe, Africa and the Middle East, the network's development is
broadly in line with the market, with significant contributions from France,
Germany and Italy. In Asia Pacific, the network receives significant
contributions from Australia, China (including Hong Kong), New Zealand and
Singapore. Nearly all national advertising markets are dominated by the major
worldwide advertising networks. The Japanese market is the exception as it is
dominated by domestic agencies with limited international presence. In the rest
of the world, the network is primarily represented by businesses with which it
has trading affiliations. Accordingly, these businesses are not included within
S&S's revenue.
For a more detailed breakdown of the Company's operations by geographic
area, see Note 32 in the Notes to the Financial Statements.
North America
S&S's main US advertising agency is Saatchi & Saatchi North America, Inc.
There are also a number of other units within the North American network such as
Cliff Freeman, Conill, Klemtner, Saatchi & Saatchi Business Communications,
Saatchi & Saatchi Canada, Taylor Tarpay, and GMG. Some of the representative
major clients of these businesses are American Home Products, Delta Air Lines,
DuPont, Eastman Kodak, General Mills, Hewlett-Packard, Johnson & Johnson,
Procter & Gamble and Toyota. In North America, S&S has its major offices in New
York and California in the US and Ontario in Canada. In addition there are a
number of field offices throughout the US.
In North America, the Rowland Worldwide network is represented by Rowland
Worldwide, Inc., which has offices in New York.
In North America, Zenith is headquartered in New York, and has offices in
California, Colorado, Illinois, Oregon and Texas.
United Kingdom
S&S is represented in the United Kingdom by Saatchi & Saatchi Group Ltd.
Some of the agency's representative major clients are the British Army,
Carlsberg, Hewlett-Packard, Lloyds TSB, Procter & Gamble, Toyota and Visa.
Other services in the United Kingdom are all based in London and are
comprised of the following: Albemarle Marketing Research Ltd., which provides
market research services; Rowland Worldwide; and The Facilities Group.
Zenith is headquartered in the United Kingdom and provides media services.
Rest of Europe, Middle East, Africa and Asia Pacific
S&S has international agencies (including affiliated agencies) located in 92
countries. The major owned international agencies are located in Australia,
China, France, Germany, Italy and New Zealand.
Rowland Worldwide has operations (including affiliated agencies) in 31
countries. Its owned offices are located in Australia, Belgium, China, Hungary,
Italy, Japan and Poland.
Zenith has operations (including media affiliates) in 28 countries,
including Australia, China, France, Germany, Italy and Spain.
ACQUISITIONS & DISPOSALS
Acquisitions
During 1996 the minority 47.4 percent of the share capital of Saatchi &
Saatchi Advertising SA in France was acquired. The acquisition was completed in
September 1996, but for accounting purposes the minority was treated as having
been acquired on January 1, 1996.
During the second half of 1996, Cordiant acquired 51 percent of a South
African agency, Saatchi & Saatchi Klerk & Barrett Holdings (Proprietary)
Limited, and bought out the minority interest in BSB Saatchi & Saatchi MC
Limited in Poland.
During 1998 the Group acquired the business and assets of GMG Marketing
Services, a U.S. based co-marketing company, increased its shareholding to 80%
in Sista Saatchi & Saatchi Advertising PVT Limited, a company based in India,
and acquired 51% of the share capital of Dialog-Team Fienhold Agentur fur
Dialog-Marketing GmbH, a company based in Germany.
In early 1999, the Company agreed to increase its equity investment in Nazca
Saatchi & Saatchi, Inc. from 50% to 75% and its voting rights from 37% to 75% in
return for a $7.0 million funding commitment.
Disposals
In 1998 the Group disposed of its interest in Siegel & Gale for $33.8
million (L20.3 million) which resulted in a profit on disposal of L8.6 million.
The closure and divestiture of businesses in Germany, Ireland, Norway and Spain,
together with the reduction of shareholding in South Africa, resulted in a loss
of L2.5 million.
PERSONNEL
As of May 1, 1999, the Group directly employed approximately 5,000 people
worldwide. The success of the Group's advertising and marketing services
businesses, like that of all other agencies, depends largely on the skill and
creativity of its personnel and their relationships with clients. The Company
believes that its relationship with its employees is good.
COMPETITION
The advertising industry is highly competitive at both an international and
local level. The Saatchi & Saatchi Group's principal competitors in the
advertising industry are the large multinational 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 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 the interpersonal
skill of the individuals managing client accounts. Normal practice in the
industry is for agency contracts to have a three month termination period.
Management believes that S&S is well positioned to compete in the
advertising industry. The Saatchi & Saatchi name is one of the strongest and
best known in advertising. Furthermore, the Group's advertising agencies have an
excellent creative record, having been ranked among the top three agencies by
creative awards won at the Cannes International Advertising Festival over the
last four years. Management also believes that the process of clients
consolidating their business in the advertising market will continue to offer
opportunities for S&S 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.
<PAGE>
Item 2. Description of Property.
The Saatchi & Saatchi Group leases all its premises except for one office
building located in France which it owns. The principal properties of the
Saatchi & Saatchi Group (all of which are used as offices) are as follows:
<TABLE>
<CAPTION>
Area Annual Base Next Rent Expiration
Location Sq. Ft. Rental-Millions Review Date of Lease
-------- ------- --------------- ----------- --------
<S> <C> <C> <C> <C>
375 Hudson Street(1) 456,000 $12.1 2003 2013
New York, New York
23 Howland Street(2) 133,000 L1.6 2003 2013
together with
80/84 Charlotte St.
London, England
3501 Sepulveda Boulevard 90,100 $3.3 January 2000 2006
Torrance, California
1960 East Grand Avenue 51,400 $1.1 N/A 2004
El Segundo, California
30 Boulevard Vital-Bouhot 34,900 N/A N/A N/A
Neuilly-sur-Seine, Paris
- --------------------------------
(1) In addition, the Company leases 293,000 square feet at an annual rental of
$7.7 million which is sublet to third parties at rates below those paid by it.
The expected shortfall in rental income from these third party subleases has
been fully reserved.
(2) At the last review date, April 1998, the landlord proposed a rental increase
that was unacceptable to the Company. An arbitrator has been appointed, but no
decision is expected until July 1999 at the earliest.
</TABLE>
At December 31, 1998 the Saatchi & Saatchi Group owned and leased properties
and fixtures (including furniture and equipment) which had a net book value of
L76.6 million ($127.2 million).
The Company considers its offices and other facilities to be in good
condition. However, it has surplus office space based on the needs of its
current business. At December 31, 1998, L45.3 million ($75.2 million) had been
reserved by the Group for potential costs of surplus space, primarily in New
York City. The 456,000 square feet leased at the 375 Hudson Street location
includes 55,000 square feet sublet to Zenith through 2005 at a current market
rate.
Item 3. Legal Proceedings.
In March 1992 Saatchi & Saatchi North America, Inc. ("SSNA"), a subsidiary
of the Company, disposed of the assets of its Lifestyle Marketing Group division
to Kaleidescope Holdings, Inc. (the "Purchaser"). In July 1992 International
Sports Marketing Inc. ("ISM") brought an action in the Circuit Court for Wayne
County, Michigan (the "Court") naming a number of defendants, including the
United States Olympic Committee ("USOC"), various individuals employed by or
associated with it and various advertising agencies and sports marketing
companies, including SSNA, alleging that the USOC had improperly withdrawn from
a program with ISM to produce commemorative olympic coins and that the
advertising and sports marketing defendants had tortiously interfered with this
program. In 1995 a default judgment was entered by the Court against a defendant
described as "Lifestyle Marketing Group." The total amount of the default
judgment (including interest to date) is approximately $33 million. In 1996,
after ISM's claim against SSNA had been dismissed on summary judgment, ISM filed
a supplemental action in the Court against, among others, SSNA and the
Purchaser, seeking to enforce against them the default judgment issued against
"Lifestyle Marketing Group." The Purchaser cross claimed against SSNA and others
for indemnity in the event that it was held liable to ISM. On February 11, 1998,
the Court issued an Opinion and Order holding that SSNA is liable to indemnify a
party which the Court referred to as "Lifestyle Marketing Group" or "Lifestyle
Marketing Group Inc." The Company has been advised by its US counsel that, in
its view, the Opinion and Order is based on palpable errors of fact and law.
SSNA moved for a rehearing in April 1998. No decision has been rendered as of
the date hereof.
Item 4. Control of Registrant.
The Company is not owned or controlled by any government or corporation.
The following table sets forth the number of Ordinary shares held by all
Directors and Executive Officers of the Company as a group as of May 1, 1999:
<TABLE>
<CAPTION>
Title of Class Identity of Person or Group Amount Owned Percent of Class
<S> <C> <C> <C>
Ordinary shares Directors and Executive Officers of 239,257 Less than one
the Company as a group percent
</TABLE>
The Company has also been notified of the following non-beneficial holdings
of ten percent or more of the issued Ordinary share capital of the Company as of
May 12, 1999:
<TABLE>
<CAPTION>
Title of Class Identity of Person or Group Amount Owned Percent of Class
<S> <C> <C> <C>
Ordinary shares Phildrew Nominees Ltd./ 38,010,401 16.98
PDFM Ltd
</TABLE>
<PAGE>
Item 5. Nature of Trading Market.
Prior to the Demerger, there was no public market for the Ordinary shares or
the ADSs. The Company's Ordinary shares are quoted on the London Stock Exchange
Limited (the "London Stock Exchange"). The table below sets forth, for the
periods 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.
<TABLE>
<CAPTION>
Pence Per Translated into
Ordinary Share US Dollars
High Low High Low
<S> <C> <C> <C> <C>
1997 Fourth Quarter..................... 113 109 1.89 1.82
(beginning December 15,
1997)
1998 First Quarter...................... 159 103 2.67 1.70
Second Quarter..................... 179 149 2.93 2.51
Third Quarter...................... 165 101 2.74 1.70
Fourth Quarter..................... 138 97 2.32 1.66
1999 First Quarter...................... 207 127 3.33 2.10
Second Quarter..................... 246 206 3.96 3.31
(through May 12, 1999)
</TABLE>
The Ordinary shares trade in the United States on the New York Stock
Exchange, Inc. (the "NYSE") 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.
<TABLE>
<CAPTION>
US Dollars per
ADS
-----------------------------------------------
High Low
<S> <C> <C> <C>
1997 Fourth Quarter................................... 9 7/16 8 3/4
(beginning December 15, 1997)
1998 First Quarter.................................... 13 7/8 7 15/16
Second Quarter................................... 14 13/16 12 1/8
Third Quarter.................................... 13 3/4 7 7/8
Fourth Quarter................................... 12 1/4 7 7/8
1999 First Quarter.................................... 16 7/8 10 1/8
Second Quarter................................... 19 7/16 16 1/8
(through May 12, 1999)
</TABLE>
At May 1, 1999, the Company had 223,779,108 Ordinary shares outstanding held
by approximately 12,800 registered shareholders (including nominees). At May 1,
1999, approximately 6,500 persons with United States addresses, owned
approximately 5,610,145 of the Company's ADSs (representing approximately 12.5%
of all outstanding Ordinary shares). In addition, as of May 1, 1999,
approximately 43 persons with United States addresses reflected on the Company's
share register owned approximately 605,045 Ordinary shares (representing
approximately 0.3% of all outstanding Ordinary shares). Thus, in total, on the
basis described above, the Company's ADS holders and direct holders of Ordinary
shares with United States addresses owned at May 1, 1999, approximately
28,655,770 Ordinary shares representing approximately 12.8% of all outstanding
Ordinary shares. The Company believes that, at May 1, 1999, approximately an
additional 14.9% of its outstanding Ordinary shares were beneficially owned by
US persons holding their shares through UK nominees, giving an aggregate US
holding of approximately 27.7%.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
There are no limitations on the rights of non-resident or foreign persons by
virtue of nationality to hold or vote the Ordinary shares imposed by the laws of
the United Kingdom or by the Articles except for certain restrictions imposed
from time to time by HM Treasury pursuant to legislation such as the United
Nations Act of 1946 and the Emergency Laws Act 1964, against the governments or
residents of certain countries. Article 157 of the Articles, provides, however,
that a member who has no registered address within the United Kingdom and has
not notified the Company in writing of an address within the United Kingdom for
the service of notice, shall not be entitled to receive notice from the Company.
There are currently no governmental laws, decrees or regulations restricting the
import or export of capital or affecting the remittance of dividends or other
payments to non-UK holders of Ordinary shares, except for restrictions of the
type referred to above.
Item 7. Taxation.
The following is a summary of certain UK tax consequences generally
applicable to a beneficial owner of 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 tax law
and practice as of the date of this filing and is subject to any changes
(possibly with retroactive effect) in US or UK tax law and practice (including
changes in the Convention) occurring after that date. As the following
discussion is only a general summary of certain UK and US federal income tax law
consequences (not including consequences under any other laws, including other
federal, state, local or foreign tax laws), 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. Certain holders (including, but not limited to, insurance companies,
tax-exempt organizations, financial institutions, persons subject to the
alternative minimum tax, dealers or traders in securities or currencies, persons
that have a "functional currency" other than the US dollar, persons that will
hold Ordinary shares (or ADSs) as a position in a "straddle" or as part of a
"hedging" or "conversion" transaction for US federal income tax purposes and
persons owning, directly or indirectly, ten percent or more of the voting shares
of the Company) may be subject to special rules not discussed below. Investors
should, therefore, consult their own tax advisers about their tax position in
relation to the Company including the particular tax consequences to them of
owning and disposing of Ordinary shares or ADSs.
The discussion of UK taxation of dividends and refunds of tax credits is
based on current UK tax law as potentially amended by the Finance Bill 1999. The
discussion assumes that the Finance Bill 1999 will be enacted as originally
drafted.
United Kingdom Taxation of Dividends and Refunds of Tax Credits
The Company
As a result of changes to UK tax legislation which came into force on April
6, 1999, the Company will not be liable to the UK Inland Revenue for advance
corporation tax in respect of dividends paid on or after April 6, 1999.
US Resident Shareholders
For 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 ADSs that are evidenced by such ADRs.
Tax Credits Under the Convention
Individual shareholders resident in the United Kingdom for tax purposes, who
receive dividends paid by the Company, will be entitled to a tax credit. The
amount of the tax credit associated with dividends has been reduced with effect
from April 6, 1999 and is currently one ninth of the cash dividend or 10 percent
of the aggregate of the cash dividend and the associated tax credit. An
individual Shareholder resident in the United Kingdom for tax purposes is
treated for UK income tax purposes as having taxable income equal to the sum of
the dividend paid to him and the tax credit in respect of his dividend. The tax
credit will be credited against the shareholder's income tax liability.
Shareholders whose liability to income tax is less than the amount of the tax
credit are generally no longer entitled to a refund in respect of the tax
credit.
Under the Convention, certain US Holders which are US corporations which do
not control, directly or indirectly, alone or together with associated
corporations, at least 10 percent of the voting shares of the Company or who are
US resident individuals were previously entitled to claim from the Inland
Revenue payment of the tax credit (a "Tax Credit Refund") to which a UK resident
individual would be entitled, subject to a withholding tax equal to 15 percent
of the aggregate value of the dividend and the tax credit. The effect of the
reduction in the amount of the tax credit associated with dividends paid by the
Company on or after April 6, 1999 will be that, for such US Holders, the amount
of the withholding tax will exceed the amount of the tax credit. As a result,
such US Holders will not be entitled to receive any payment in respect of the
tax credit for dividends paid on or after April 6, 1999.
A modified rule for Tax Credit Refunds, not addressed in this summary,
applies to US corporations controlling, directly or indirectly, alone or
together with associated corporations at least 10 percent of the voting shares
of the Company. Such corporations should consult their own tax advisors with
respect to the detailed application of the Convention to their own particular
circumstances and on the procedure for obtaining any Tax Credit Refunds to which
they may be entitled.
Unitary Tax States
Under Section 812 of the Income and Corporation Taxes Act 1988, the UK
Treasury has power to deny the payment of Tax Credit Refunds under the United
Kingdom's income tax conventions to certain corporations if such a corporation
or an associated company (as described in Section 812) has a qualifying presence
in a state which operates a unitary system of corporate taxation. These
provisions come into force only if the UK Treasury so determines by statutory
instrument. As of the date of this filing, no such determination has been made.
The UK authorities have indicated that any action could be implemented on a
retrospective basis, thereby applying to dividends paid before the date of
implementation.
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 or
ordinarily resident in the United Kingdom for UK income tax purposes, will not
normally be liable to UK taxation of capital gains realized 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 United Kingdom 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.
In the case of non-corporate US Holders who disposed, or are deemed to have
disposed, their ADRs or Ordinary shares, the maximum marginal US federal income
tax rate applicable to a capital gain will be lower than the maximum marginal US
federal income tax rate applicable to ordinary income if such US Holder's
holding period for such Ordinary shares (or ADSs held by or on behalf of the
Depositary in the form of ADRs) exceeds one year. The deductibility of capital
losses is subject to certain limitations.
US Holders who are neither resident nor ordinarily resident in the UK will
not normally be liable to UK tax on capital gains accruing to them on the
disposal or deemed disposal of Ordinary shares (or ADS), except where the
Ordinary shares (or ADS) are held in connection with a trade, profession or
vocation carried on in the UK through a branch or agency.
Subject to certain limitations, a US Holder that is liable, in the
exceptional case, for both UK tax (i.e., capital gains tax or UK corporation tax
on chargeable gains) and US tax on a gain on the disposal of Ordinary shares (or
ADSs held by or on behalf of the Depositary in the form of ADRs) generally will
be entitled to credit the UK tax against its US federal income tax liability in
respect of such gain, subject to the applicable limitations.
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 a 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). 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 "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 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 is only within the scope of IHT to
the extent of his UK situate assets. These will include Ordinary shares in the
Company which are registered in the United Kingdom. It is understood to be the
Inland Revenue's normal practice to treat ADRs representing shares in UK
companies as assets situated in the United Kingdom for IHT purposes.
The rules outlined above will, in many cases, be modified by the US-UK
Convention on Inheritance and Gift Taxes. In general, an individual who is
domiciled in the US for the purposes of that convention and who is not a UK
national will not be subject to IHT in relation to Ordinary shares in a UK
company or ADRs representing Ordinary shares in a UK company on death or on a
lifetime gift, provided that any gift or estate tax due in the USA is paid and
that the Ordinary shares or ADRs are not part of the business property of a
permanent establishment in the UK or part of the assets of a fixed UK base used
by the holder for the performance of services.
In the exceptional case where the Ordinary shares or ADRs are subject both
to IHT and to US federal gift or estate tax, the gift tax convention provides a
credits system designed to avoid double taxation.
United Kingdom Stamp Duty and Stamp Duty Reserve Tax
Transfers of Ordinary shares for a consideration
UK stamp duty is payable ad valorem on certain documents or instruments
conveying or transferring shares or securities (including Ordinary shares in the
Company) on sale and UK stamp duty reserve tax ("SDRT") is imposed on agreements
for the transfer of certain shares and securities (including Ordinary shares in
the Company) for a consideration in money or money's worth. In the case of stamp
duty, the charge is normally at the rate of L0.50 per L100 (or part of L100) of
the amount or value of the consideration given for the transfer and, in the case
of SDRT, 0.5 percent of such amount or value. 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
rate of stamp duty on instruments of transfer of Ordinary shares executed on or
after October 1, 1999 is amended to 0.5% of the amount or value of the
consideration. As a general matter, liabilities to stamp duty will be rounded up
to the nearest multiple of L5 in respect of documents executed on or after
October 1, 1999. 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 cancelled.
Consequently, transfers of, or agreements to transfer, Ordinary shares in
the Company will normally be subject to ad valorem stamp duty or SDRT,
respectively.
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 stamp duty charge is at the rate of L1.50 per L100 (or part of
L100) (1.5% for instruments of transfer executed on or after October 1, 1999)
or, in the case of SDRT, 1.5 percent:
(i) in the case of a transfer of Ordinary shares for consideration, of the
amount or value of the consideration for the transfer, and
(ii) in the case of a transfer of Ordinary shares other than for consideration
and in the case of the issue of an ADR in respect of Ordinary shares
hitherto held for another purpose, of the value of the Ordinary shares.
Transfers of Ordinary shares within the depositary arrangements
No UK stamp duty will be payable on an instrument transferring an ADR or on
a written agreement to transfer an ADR, provided that the instrument of transfer
or the agreement to transfer is executed and remains at all times outside the
UK. Where these conditions are not met, the transfer of, or agreement to
transfer, an ADR could, depending on the circumstances, give rise to a charge to
ad valorem stamp duty.
No SDRT will be payable in respect of an agreement to transfer an ADR
(whether made in or outside the UK).
Transfers of Ordinary shares out of ADS form
Where no sale is involved, a transfer of Ordinary shares by the Depositary
or its nominee to the holder of an ADR upon cancellation of the ADR is not
subject to any ad valorem stamp duty or SDRT, though it will generally be
subject to a fixed UK stamp duty of 50p per instrument of transfer. The amount
of the fixed duty will be increased to L5 in respect of documents executed on or
after October 1, 1999. 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 calculated by
reference to the amount or value of the consideration for the transfer.
Gifts of Ordinary shares
A transfer of Ordinary shares for no consideration whatsoever is not
chargeable to ad valorem stamp duty or SDRT, nor would it normally give rise to
the fixed stamp duty of 50p per instrument of transfer (L5 for documents
executed on or after October 1, 1999).
Item 8. Selected Financial Data.(3)
The following selected financial data as of and for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 have been derived from the consolidated
financial statements of the Company and the notes related thereto, which were
audited by KPMG Audit Plc. The consolidated financial statements as of December
31, 1998 and 1997 and for each of the years in the three-year period ended
December 31, 1998, and the report of KPMG Audit Plc thereon, are included
elsewhere herein.
Significant changes were made to the Company's capital structure as a result
of the Demerger. The selected financial data set forth below for periods prior
to the Demerger reflect the capital structure in place at that time, which was
appropriate historically to Cordiant. The capital position, finance charges and
tax liabilities included in such data do not reflect the Company's capital
position, finance charges and tax liabilities in respect of any of the periods
covered had the Company been an independently financed and managed group during
such periods, or any future period. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
- ------------------------
(3) The 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 39
to the Financial Statements. The per share data has been translated into
dollars per ADS where appropriate.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
US$(1) L L L L L
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
Amounts in Conformity with UK GAAP
Commission and fee income
Ongoing businesses 602.6 363.0 376.7 373.2 382.1 373.5
Sold and closed businesses 28.4 17.1 1.5 2.1 25.6 52.3
-------- -------- -------- ---------- -------- --------
Total 631.0 380.1 378.2 375.3 407.7 425.8
Profit (loss) before tax, and minority interests(2) 61.1 36.8 796.4 18.5 (32.7) 4.9
Net profit (loss) 41.5 25.0 787.6 13.6 (40.5) -
Net profit (loss) per Ordinary share - basic 0.19 11.3p 354.9p 6.1p (27.7)p -
(Basic and fully diluted)
Net profit (loss) per Ordinary share - diluted 0.19 11.2p 353.7p 6.1p (27.7)p -
Approximate Amounts in Conformity with US
US GAAP
Net profit (loss) 20.9 12.6 8.5 (5.2) (46.0) (17.0)
Net profit (loss) per Ordinary share-basic(3) 0.09 5.7p 3.8p (2.3)p (39.6)p (15.3)p
Net profit (loss) per Ordinary share-diluted 0.09 5.6p 3.8p (2.3)p (39.6)p (15.3)p
Net profit (loss) per ADS 0.45 28.5p 19.0p (11.5)p (157.3)p (59.7)p
Dividends
Per Ordinary share 0.02 1.4p - - - -
Per ADS 0.10 7.0p - - - -
December 31,
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
US$(1) L L L L L
(In millions)
CONSOLIDATED BALANCE SHEET DATA:
Amounts in Conformity with UK GAAP
Working capital deficiency (61.8) (37.2) (24.9) (1,061.2) (1,031.3) (917.7)
Total assets 644.7 388.4 429.5 712.3 741.0 734.6
Long term liabilities, including minority interests 276.1 166.3 200.8 185.0 233.8 358.2
Shareholders' deficiency (178.9) (107.8) (137.3) (1,036.7) (1,050.2) (1,047.7)
Approximate Amounts in Conformity with
US GAAP
Shareholders' deficiency (21.7) (13.1) (21.4) (1,028.8) (1,052.3) (1,016.4)
- ---------------------------------------
(1) These figures have been translated into US dollars at the Noon Buying Rate
on December 31, 1998 (L1.00 - $1.66).
(2) The profit (loss) before taxes and minority interests reflects: (a)Lnil
exceptional item in 1998, exceptional credit of L764.5 million in 1997,
exceptional costs of L16.3 million, L5.8 million and Lnil that were
incurred in 1996, 1995 and 1994 respectively; (b) a profit on disposal of
operations of L6.1 million, L4.3 million, L17.7 million and L1.3 million in
1998, 1997, 1996 and 1994, respectively; and (c) a loss on disposal of
operations of L24.9 million in 1995. Details for 1998, 1997 and 1996 are
set out in Note 5 to the Financial Statements).
(3) Adjusted for the bonus element of the 1995 rights issue where appropriate.
</TABLE>
<PAGE>
DIVIDENDS
In July 1998, the Company paid a dividend of 1.2 pence per Ordinary share in
respect of the year ended December 31, 1997. No dividends were paid by the Group
to parties outside of Cordiant between 1994 and 1997, except to minority
shareholders of subsidiaries.
The Company's Board of Directors has recommended the payment of a dividend
of 1.4 pence per Ordinary share in respect of the year ended December 31, 1998.
This was approved by the Company's shareholders at the Annual General Meeting on
May 19, 1999 and was paid on May 20, 1999.
The Directors make dividend determinations taking into account the Saatchi &
Saatchi Group's results of operations, investment requirements, cash flow after
repayment of debt and legal and contractual restrictions, if any.
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 United States. 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.
<TABLE>
<CAPTION>
Average* High Low Period End
<S> <C> <C> <C> <C>
1994 (December 31) ......................... 1.54 1.64 1.46 1.57
1995 (December 31) ......................... 1.58 1.64 1.53 1.55
1996 (December 31).......................... 1.57 1.71 1.49 1.71
1997 (December 31).......................... 1.64 1.70 1.58 1.64
1998 (December 31).......................... 1.66 1.72 1.61 1.66
- ---------------------------------------
* The average of the exchange rates on the last day of each month during the
period.
</TABLE>
The Noon Buying Rate for pounds sterling on May 12, 1999 was L1.00 = $1.62.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR 1997
Unaudited pro forma financial information for the Group for 1997 has been
included for illustrative purposes only. Owing to the significant changes which
were made to the Group's structure and financing arrangements to effect the
Demerger, the trading result and actual interest and taxation charges incurred
by the Group prior to the Demerger are not representative of the Group's
experience following the Demerger.
Pro forma information is presented to reflect the present structure and
financing arrangements of the Group, prepared on the basis set out below. The
pro forma financial information is unaudited and it does not necessarily reflect
the results of operations or financial position of the Company that would have
been achieved as of the dates indicated, nor is it necessarily indicative of the
future results of operations or future financial position of the Company. The
pro forma financial information has been prepared on the basis of UK GAAP.
Adjustments were made to reflect changes to the structure of the Group and
its financing arrangements, new trading arrangements with and revised financing
of Zenith and the cost of the Demerger, together with the related interest and
tax implications. In all cases, adjustments have been made as if the
arrangements in relation to the Demerger were in place from January 1, 1997.
Adjustments made were to:
o reduce operating profit to reflect the new trading terms for the
purchase of media services from Zenith, with an offsetting increase in
share of profits of the joint venture;
o eliminate inter-Group interest payable to CCG and Zenith and adjust
external interest to reflect the revised financing of the Company and
Zenith; and
o adjust the tax charge to reflect the above adjustments and the current
structure of the Group.
Summary information reflecting the adjustments made is set out below.
<TABLE>
<CAPTION>
Statutory
1997 audited Adjustments Pro forma
Lmillion Lmillion Lmillion
- ------------------------------------------ ------------------- ----------------- ----------------
<S> <C> <C> <C>
Revenue 378.2 (3.4) 374.8
Operating profit 29.7 (3.4) 26.3
Fundamental reorganization-demerger 764.5 (764.5) --
Net interest payable and similar items (3.0) (4.1) (7.1)
Profit before tax 796.4 (768.6) 27.8
Tax (8.2) - (8.2)
Profit for the period 788.2 (768.6) 19.6
- ------------------------------------------ ------------------- ----------------- ----------------
SHARE OF OPERATING PROFIT IN JOINT VENTURE 1997
Lmillion
- ------------------------------------------------------------------- -----------------
Share of Zenith's operating profit, historical basis 0.9
Effect of revising trading terms with Zenith 3.4
Pro forma basis 4.3
- ------------------------------------------------------------------- -----------------
</TABLE>
A subsidiary of the Company holds 50% of the ordinary share capital of
Zenith. The remaining 50% is held by CCG.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
The Saatchi & Saatchi Group's revenue is generated from commissions and fees
paid by clients. In each of the last three years between 40 percent and 45
percent of revenue was commission based and varied with the level of media and
production expenditure. The remainder was derived from fees which were project
or time based, as agreed with the client. With certain clients, an additional
element of remuneration can be earned by meeting certain performance criteria
set by the client. S&S generally has ongoing relationships with its clients
which last a number of years. In contrast, the majority of revenue from clients
of Rowland Worldwide and The Facilities Group is based on project specific
assignments although they often have 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 may be longer as revenue is not
normally recognized until advertisements have 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 client's initially projected
amounts.
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.
The majority of the Saatchi & Saatchi Group's net operating costs are staff
related which in each of the past three years equated to approximately 55
percent of revenue. When revenue growth is slow or declining in any particular
operating unit, the Saatchi & Saatchi Group 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.
S&S has offices and affiliated agencies in 92 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. The Group'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 the Group's tax charges arise. The Group
enters into foreign exchange forward contracts to hedge existing and
identifiable future foreign currency commitments. The effect of such contracts
is not material to the Company's financial condition or results of operations.
During 1998 the Group acquired the business and assets of GMG Marketing
Services, a U.S. based co-marketing company, increased its shareholding to 80%
in Sista Saatchi & Saatchi Advertising PVT Limited, a company based in India,
and acquired 51% of the share capital of Dialog-Team Fienhold Agentur fur
Dialog-Marketing GmbH, a company based in Germany.
In 1998 the Group disposed of its interest in Siegel & Gale for $33.8
million (L20.3 million) which resulted in a profit on disposal of L8.6 million.
Further, the Group closed or divested businesses in Germany, Ireland, Norway and
Spain and reduced its shareholding in South Africa.
As part of the Demerger, the Group entered into a new trading relationship
with Zenith, the commercial terms of which differ from the historical terms in
that such arrangements reflect arm's-length dealing between Zenith and the
Group. Further details of the impact of this revised relationship are set forth
in the Unaudited Pro Forma Financial Information included elsewhere in this
Report.
The Financial Statements have been prepared in conformity with UK GAAP which
differs in certain significant respects from US GAAP. See Note 39 in the Notes
to the Financial Statements for an explanation of these differences.
INDUSTRY BACKGROUND(4)
Zenith estimates that global advertising expenditure in the major media
(press, television, radio, cinema and outdoor) totaled $300 billion in 1998. The
developed economies of North America, Europe and Asia Pacific again accounted
for the vast majority of this expenditure, estimated by Zenith to have been 89%
in 1998.
Zenith estimates that the growth in global advertising expenditure at
current prices was approximately 3.9% in 1998. Zenith forecasts that the rate of
growth in 1999 will be approximately 4.2%.
- ------------------------
(4) Expenditure information in this section is based solely on estimates
published by Zenith in its Advertising Expenditure Forecasts, January 1999.
<PAGE>
RESULTS OF OPERATIONS
For the purposes of this section, references to "ongoing" and "underlying"
performance exclude exceptional items and disposed businesses. In "ongoing"
performance, the results of those businesses disposed of in the latter year have
been excluded from the comparative information. In "underlying" performance, the
effect of exchange rate movements is also eliminated.
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Revenue from Continuing Operations
Revenue increased by 0.5% to L380.1 million in 1998 from L378.2 million in
1997. Ongoing revenue was up 4.8% to L363.0 million from L346.3 million in 1997,
and on an underlying basis revenues increased by 9.3%. This increase reflected
both an improved level of business from existing clients and a number of new
business wins.
In the UK, revenue decreased by 5.2% to L58.2 million in 1998 from L61.4
million in 1997 primarily reflecting an unusually high level of nonrecurring
projects in 1997, some budget reductions and client losses, including Camelot,
Commercial Union and Walt Disney. On an ongoing basis the decrease was 2.0%.
In North America, revenue increased by 1.0% to L182.3 million in 1998 from
L180.5 million in 1997. Ongoing growth was 12.3%, while underlying growth was
14.0%. This reflects a continued improvement in the region's new business
activity and additional business awarded by existing clients.
Revenue in the Rest of Europe, Africa and the Middle East declined 10.5% to
L73.9 million in 1998 from L82.6 million in 1997, but reflected growth of 2.1%
on an ongoing basis and 5.0% on an underlying basis. In the major markets,
growth was strong in Germany (50%) and Spain (37%) and was good in Italy (9%).
France declined 10% due to an unusually strong level of one-off revenues in 1997
and the sale of a subsidiary at the start of 1998. The smaller markets (Austria,
Holland, Middle East and Eastern Europe) all grew. Belgium, Denmark and
Switzerland declined due to client losses.
In Asia Pacific, revenue decreased by 6.9% to L48.6 million in 1998 from
L52.2 million in 1997, but had underlying growth of 6.8%. Revenues in Greater
China increased by 18% and by 37% in China on its own. The rest of Asia Pacific
declined 1%. In the region, Australia and New Zealand represent 42% of revenues,
Greater China 40%, Singapore 12.5% and others 5.5%.
Operating Profits from Continuing Operations
Operating profit increased by 5.7% to L31.4 million in 1998 from L29.7
million in 1997. Ongoing operating profit increased 3.1% to L30.2 million in
1998 from L29.3 million in 1997. The improved revenue of the Group maintained
margins, as did the impact of companies closed, sold or divested during the
year.
In the UK, operating profit increased by 38.2% to L7.6 million in 1998 from
L5.5 million in 1997, reflecting a reduction in overheads, partially due to
costs reallocated to other regions and a reduction in personnel. On an ongoing
basis the growth was 33.0%.
In North America, operating profit decreased by 1.0% to L20.6 million in
1998 from L20.8 million in 1997. On an ongoing basis, profit increased by 7.1%
due to revenue growth plus a continued focus on improving margins. The
underlying growth was 8.5%.
In the Rest of Europe, Africa and the Middle East, operating profit
decreased by 11.3% to L4.7 million in 1998 from L5.3 million in 1997, as the
gains in the major markets were more than offset by the decline in France in
particular as well as reduction in the smaller markets. The ongoing decrease was
13.3% and the underlying decrease was 9.3%.
In Asia Pacific, there was an operating loss of L2.7 million in 1998
compared with an operating loss in 1997 of L1.0 million as the year saw
continued investment in China to service the needs of clients.
Operating Margins
In 1998, the Group's operating margin was 8.3%. In 1997, on a reported basis
it was 8.5% but on a pro forma basis determined as set forth in "Unaudited Pro
Forma Financial Information for 1997", the Group's operating margin would have
been 7.6%. The ongoing margin was 8.3% compared with 7.6% in 1997. The improved
revenue generation of the Group enhanced margins. The Group also benefited from
the increased focus on profitability within the S&S network. On a geographical
basis, ongoing operating margins were as follows:
1998 1997
------------- ------------
North America 11.3% 10.1%
UK 13.1% 9.1%
Rest of Europe, Africa and the Middle East 6.4% 7.5%
Asia Pacific (5.6)% (1.9)%
Total Group 8.3% 7.6%
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Revenue from Continuing Operations
Revenue increased by 0.8% to L378.2 million in 1997 from L375.3 million in
1996. Ongoing revenue was up 0.9% to L376.7 million from L373.2 million in 1996,
and on an underlying basis revenues increased by 8.7%. This increase reflected
both an improved level of business from existing clients and a number of new
business wins, most notably Delta Airlines at the start of 1997.
In the UK, revenue increased by 6.6% to L61.4 million in 1997 from L57.6
million in 1996 primarily reflecting growth in advertising expenditures by
existing clients.
In North America, revenue increased by 4.3% to L180.5 million in 1997 from
L173.1 million in 1996. Underlying growth was 9.7%. This represents a marked
improvement in performance compared to prior years and, despite the loss of Bell
Atlantic, reflected new business wins and additional business from existing
clients.
Revenue in the Rest of Europe, Africa and the Middle East declined 7.4% to
L82.6 million in 1997 from L89.2 million in 1996, but reflected an underlying
growth of 8.7% outperforming the estimated market growth of 5.3% in this region.
Increases on an underlying basis were achieved in Spain, up by 45.8%, France, up
by 20.0%, and Germany, up by 14.7%. Additionally, on an underlying basis,
Eastern Europe grew by 22.0% while Italy and the smaller markets were flat.
In Asia Pacific, revenue decreased slightly to L52.2 million in 1997 from
L53.3 million in 1996, but had underlying growth of 7.9%. Underlying revenues in
China increased by 56.5% while the rest of Asia was flat. Australia's underlying
revenue grew by 34.3%, but New Zealand declined by 17.5%, primarily due to
difficult market conditions.
Operating Profits from Continuing Operations
Operating profits were L7.0 million in 1996, which included L16.3 million of
exceptional items. Excluding this exceptional cost, operating profit increased
by 27.5% to L29.7 million in 1997 from L23.3 million in 1996. Ongoing operating
profit increased 20.9% to L30.6 million in 1997 from L25.3 million in 1996 and
was up by 34.2% on an underlying basis. This was due to the increased revenues
and the impact of cost controls. The operating results do not reflect the
revised commercial terms with Zenith which the Group has entered into as part of
the Demerger. The impact of these terms is reflected in the Unaudited Pro Forma
Financial Information included elsewhere in this Report.
In the UK, operating profit increased by 1.9% to L5.5 million in 1997 from
L5.4 million in 1996.
In North America, ongoing operating profit increased by 30.0% to L20.8
million in 1997 from L16.0 million in 1996. On an underlying basis, profit
increased by 37.7% due to revenue growth plus the impact of an increased focus
on the profitability of the business to improve margins commenced in 1996.
In the Rest of Europe, Africa and the Middle East, operating profit
increased by 47.2% to L5.3 million in 1997 from L3.6 million in 1996 reflecting
underlying revenue growth and cost control. The underlying increase was in
excess of 100%.
In Asia Pacific, there was an operating loss of L1.0 million in 1997
compared with an operating profit in 1996 of L0.3 million. The performance was
depressed primarily by the revenue erosion in New Zealand.
Operating Margins
In 1997, the Group's ongoing operating margins improved to 7.9% from 6.2% in
1996. The underlying margin was 8.1% compared with 6.8% in 1996. The improved
revenue generation of the Group enhanced margins. The Group also benefited from
the increased focus on profitability within the S&S network. On a geographical
basis, underlying operating margins from ongoing businesses were as follows:
1997 1996
----- ----
North America 11.5% 9.2%
UK 9.0% 9.4%
Rest of Europe, Africa and the Middle East 6.4% 4.0%
Asia Pacific (1.9)% 0.6%
Total Group 8.1% 6.8%
Joint Venture
The share of operating profit in the joint venture relates entirely to the
Group's investment in Zenith. In 1998 it reflects the revised commercial terms
with Zenith which the Group entered into as part of the Demerger. The figures
for 1997 and 1996 do not reflect the revised commercial terms. The share of
operating profit amounted to L3.6 million in 1998 compared to profits of L0.9
million in 1997 and L0.1 million in 1996.
Exceptional Items
To implement the Demerger, intergroup indebtedness between the Saatchi &
Saatchi Group and each of CCG and Zenith had to be eliminated and cross holding
investments transferred which resulted in a net exceptional gain of L764.5
million in 1997. During the year ended December 31, 1996 there were exceptional
operating expenses of L16.3 million, all of which arose in the first half. Of
this, L8.1 million related to the termination of the defined benefits pension
plan in the US. The balance of L8.2 million related to providing for excess
leasehold property arising from a review of space utilization in New York.
Disposals
In the year ended December 31, 1998, the Group disposed of its interest in
Siegel & Gale for $33.8 million (L20.3 million) which resulted in a profit
on disposal of L8.6 million. The closure and divestiture of businesses in
Germany, Ireland, Norway and Spain, together with the reduction of shareholding
in South Africa, resulted in a loss of L2.5 million.
In the year ended December 31, 1997, there was a gain of L4.3 million on
disposal of businesses. The profit on disposals of continuing operations for the
year ended December 31, 1996 was L17.7 million, of which L17.5 million arose in
the first half. Of this amount, L16.5 million related to the sale of the
remaining interest in Draft Direct (formerly Kobs & Draft Worldwide) ("KDW") and
the balance of L1.2 million reflected the receipt of additional proceeds from
disposals in prior periods.
Net Interest (Payable)/Receivable and Similar Items
Net interest payable and similar items were L4.6 million in the year ended
December 31, 1998. This amounted to L14.5 million in the year ended December 31,
1997 and L15.2 million in 1996. The net interest expense comprised the actual
interest paid by the Saatchi & Saatchi Group on external borrowings and in 1997
and 1996 on interest bearing loans that existed between the Saatchi & Saatchi
Group and CCG, reflecting the capital structure prior to the Demerger. The
borrowings and the corresponding interest charges in 1997 and 1996 do not
reflect the Group's capital position had it been an independently financed and
managed group during the period.
Taxation
The tax charge attributable to the Saatchi & Saatchi Group is based on the
aggregate of the tax charges of the companies which comprise the Saatchi &
Saatchi Group. The charge amounted to L10.3 million in the year ended December
31, 1998 compared to L8.2 million in the year ended December 31, 1997 and L4.5
million in 1996. The tax charges in 1997 and 1996 are not representative of the
tax charges that would have been incurred had the Group been separately
constituted throughout the periods.
Equity Minority Interests
Equity minority interests were L1.5 million in the year ended December 31,
1998 compared to L0.6 million in the year ended December 31, 1997 and L0.4
million in 1996.
Net Income
In the year ended December 31, 1998, net income was L25.0 million, compared
with income of L787.6 million in 1997 and L13.6 million in 1996. The results for
1997 and 1996 do not reflect the Saatchi & Saatchi Group's capital structure had
it been an independently financed and managed group during that period. See
"Selected Financial Data--Unaudited Pro Forma Financial Information for 1997"
included elsewhere in this Report.
Dividend
The Board recommended that a final dividend of 1.4p per Ordinary share
(1997: 1.2p) be paid on May 20, 1999 to shareholders on the register at April
23, 1999. This was approved at the Annual General Meeting on May 19, 1999. There
was no interim dividend.
YEAR 2000 COMPLIANCE
There has been widespread publicity about the difficulties which could be
encountered by computer systems when the date changes to the year 2000. The
"Year 2000" issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. As a result,
computer equipment, software and other devices with embedded technology that is
time-sensitive may not be able to distinguish between the year 1900 and the year
2000 and may encounter system failures. The Company recognizes the importance of
this issue and, in order to have its critical IT and non-IT systems compliant
before that date, projects are under way in its offices around the world to
implement the actions required to achieve readiness for the Year 2000.
The project is sponsored by the Chairman and directed by a Year 2000
Steering Committee which includes a further two executive Directors of the
Company. Regional Project Offices have been established to coordinate the
project and to guide each local Saatchi & Saatchi office to Year 2000 readiness.
The project is being effected in phases - inventory, strategy and
implementation, testing and rollout. In the Group's North American operations,
the inventory and strategy phases of the project have been completed and the
implementation, testing and rollout phase is well underway. In the Group's
operations elsewhere, the inventory and strategy phases have either been
completed or are nearing completion and the implementation phase has commenced.
It is currently anticipated that the Group's business critical systems will be
ready for the Year 2000 by the end of the third calendar quarter of 1999.
The Group is also working with suppliers and clients to minimize any
potential supply chain disruption and is in communication with critical
suppliers to gain assurance of an uninterrupted service in the event of a Year
2000 failure. The Group has received certification of Year 2000 compliance from
Donovan Data Systems Ltd, the supplier of media buying and financial
recordkeeping software used by the Group's largest offices.
The out-of-pocket costs incurred on the Year 2000 project to December 31,
1998 amounted to L0.4 million, and it is estimated that a further L1.1 million
will be required to complete the project. These costs include the modification,
testing and replacement of equipment to achieve Year 2000 compliance together
with consultants' fees. These costs will be funded from operating cash flows.
The majority of these costs will be funded by individual operations with the
remainder being borne centrally.
The Company believes that the area of greatest risk to the Group's
operations relates to significant third parties failing to remedy their Year
2000 issues in a timely manner. Many of these third parties are themselves
dependent on technology and a Year 2000 failure has therefore the potential to
disrupt the Group's workflow and internal process. If such a failure led to a
reduction in quality of service to our clients this could damage our reputation
and have a significant impact on the Group's results.
In view of these risks, contingency plans are being prepared for each of the
systems, services and processes deemed critical to the Company's operations.
These contingency plans will detail how to manage the effects of business
interruption, in particular during the actual transition from 1999 to 2000, and
will include plans for a short term alternative method of operation as well as a
recovery plan for returning to full service. The Company is targeting to
complete these contingency plans by October 31, 1999.
There can be no assurance that Year 2000 remediation by the Group or third
parties will be properly and timely completed, and failure to do so may have a
material adverse effect on the financial condition and results of operations of
the Group. The actual effect of the Year 2000 issue on the Group depends on
uncertainties, including, but not limited to, the following: (i) uncertainties
relating to the ability of the Group to identify and address Year 2000 issues
successfully and in a timely manner and at costs that are reasonably in line
with the Group's estimates; and (ii) the ability of the Group's clients,
vendors, suppliers and other service providers to identify and address
successfully their Year 2000 compliance issues.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "Euro"). The transition period for the
introduction of the Euro is between January 1, 1999 and June 30, 2002. The Group
has significant operations within the European Union.
In early 1998, the Company established a dedicated steering committee to
address the issues raised by the introduction of the Euro. The Company is making
all the necessary changes to its internal systems and the timing of the phasing
out of all uses of the existing currencies will comply with European Council
regulations and be coordinated to meet the requirements of our clients and
suppliers.
Since January 1, 1999, the Company has undertaken Euro contracts covering
foreign exchange forward contracts and swaps that arise from intercompany
transactions. The Company does not presently expect that introduction of the
Euro will result in any material increase in costs to the Company.
LIQUIDITY AND CAPITAL RESOURCES
General
Prior to the Demerger, the Saatchi & Saatchi Group's operations were
conducted substantially separately from those of other Cordiant operations.
However, the Saatchi & Saatchi Group was neither capitalized nor financed as an
independent group. Cordiant managed the Group's borrowings and cash resources
centrally. Cash generated or required by the Cordiant Group's businesses, was
either remitted to Cordiant by way of dividend or intercompany loan, or advanced
by Cordiant to the Saatchi & Saatchi Group's businesses by way of equity
contributions or intercompany loan at the direction of Cordiant's central
treasury function. The Saatchi & Saatchi Group's historical cash flows, in
respect of interest, taxes paid and financing are therefore not indicative of
the cash flows expected by the Saatchi & Saatchi Group as an independent group.
The Group's primary sources of liquidity following the Demerger are its cash
flow from operations and bank facilities.
Net Indebtedness
The Company has a capital structure consisting of senior debt and equity.
Senior debt consists primarily of a bank facility of up to $155.5 million, the
covenants and terms of which are governed by the Bank Facility Agreement. The
facility will mature in 2002 and has scheduled principal reductions of $18
million in 1999, $20 million in 2000 and $25 million in 2001.
The Bank Facility Agreement requires the Company to comply with certain
financial and other covenants relating to gross interest cover, total cash
cover, maximum gross debt and maximum gross borrowings. It also contains
provisions whereby, on the happening of certain specified events of default, the
amount made available could be declared immediately due and payable. These
events of default include breach of the above covenants and cross-default by
certain companies in the Saatchi & Saatchi Group in respect of indebtedness over
a specified amount or any change of control of the Company. The facility is
secured by guarantees from certain members of the Saatchi & Saatchi Group (or,
where guarantees are not possible, share charges over such companies) such that
at all times the aggregate of the revenues of those companies that have given
guarantees (or whose shares have been charged) will equal at least 60 percent of
the Saatchi & Saatchi Group's consolidated revenues. Fixed and floating charges
over the assets of the Company and certain of its subsidiaries and share pledges
over the shares owned by members of the Saatchi & Saatchi Group in various
subsidiaries have also been given.
The facilities are in part required for the cyclical working capital needs
of the Group and in part provide a margin to finance any unforeseen contingency.
Cyclical needs arise both during each month, derived from the media payment
cycles in each country, and through the year during periods of high advertising
activity. 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.
The table below sets out certain cash flow items for the three years ended
December 31, 1998 and extracted from the Financial Statements appearing
elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
(L million)
<S> <C> <C> <C>
Cash flow items
Cash flow from operating activities 38.7 52.5 37.9
Cash outflow from returns on
investments and servicing of finance (4.9) (16.2) (10.0)
Tax paid (4.5) (3.8) (0.3)
Cash outflow from capital
expenditure and financial investment (16.1) (15.7) (13.6)
Cash inflow/(outflow) from
acquisitions and disposals 11.2 161.5 (10.8)
Equity dividends paid (2.7) -- --
Management of liquid resources -- 17.1 --
------- -------- -------
Cash inflow before financing 21.7 195.4 3.2
Net cash outflow from financing (30.9) (204.3) (15.6)
------- --------- -------
Decrease in cash in the period (9.2) (8.9) (12.4)
===== ========= ========
</TABLE>
Cash Flows from Operating Activities
In the year ended December 31, 1998, cash generated by operations totaled
L38.7 million compared with L52.5 million and L37.9 million in 1997 and 1996,
respectively. In the year ended December 31, 1998, there was a working capital
inflow of L0.7 million, compared with an inflow of L19.7 million in 1997 and an
inflow of L12.1 million in 1996.
Payments in respect of unutilized real estate, which have been provided for
in prior years, were L7.2 million in the year ended December 31, 1998. Payments
in respect of unutilized real estate were L11.8 million in 1997 and L12.0
million in 1996. The Group expects these payments to reduce in future years.
They represent the future rent expense and related cost of leasehold property
(net of estimated sublease income) where the property is vacant or currently not
planned to be used for continuing operations. The majority of the Group's
surplus property is sublet, but generally at lower rents than the Group pays for
the space. The excess space has arisen mainly from a reduction in headcount
following the loss of certain clients and the restructuring of the Group's
businesses in prior years.
Cash Outflows from Returns on Investments and Servicing of Finance
Cash outflows from returns on investments and servicing of finance relate
principally to net interest expense. In the years ended December 31, 1998, 1997
and 1996, the cash outflows were L4.9 million, L16.2 million and L10.0 million,
respectively. The decrease in 1998 primarily reflected the capital structure
following the Demerger.
Tax Paid
Net tax payments were L4.5 million in the year ended December 31, 1998
compared to L3.8 million in 1997 and L0.3 million in 1996. In 1997 and 1996 the
tax paid was lower than the tax charge in the statement of operations because of
several non-recurring cash recoveries related to prior years.
Capital Expenditure and Financial Investment
In the year ended December 31, 1998, the Group invested L11.7 million in
capital expenditure net of proceeds from fixed asset disposals compared to L12.0
million in 1997 and L13.6 million in 1996. The level of capital expenditure for
all periods presented was lower than depreciation charged.
An employee trust purchased Ordinary shares in the Company at a cost of L5.6
million, of which L4.9 million was paid in 1998 and the balance was paid in
early 1999. The shares purchased by the Company will be used in the future to
satisfy options held by employees participating in Shareforce, an international
sharesave scheme, and to satisfy phantom options issued to a senior executive.
See "Options to Purchase Securities from Registrant or Subsidiaries--Employee
Share Schemes."
Acquisitions and Disposals
Payments in respect of acquisitions were L7.0 million in the year ended
December 31, 1998 compared to L7.9 million and L20.8 million in 1997 and 1996,
respectively. At December 31, 1998, the Group's estimated deferred consideration
in respect of past acquisitions is L1.5 million, which is fully accrued.
In the year ended December 31, 1998, the Group disposed of its interest in
Siegel & Gale for $33.8 million (L20.3 million) which resulted in a profit on
disposal of L8.6 million. The closure and divestiture of businesses in Germany,
Ireland, Norway and Spain, together with the reduction of shareholding in South
Africa, resulted in a loss of L2.5 million.
There were no material disposals in the year ended December 31, 1997.
Disposals of L9.5 million in 1996 primarily represented the cash proceeds from
the sale of the Group's remaining interest in KDW.
Management of Liquid Resources
In the year ended December 31, 1997, the Group disposed of its shares in
Interpublic Group of Companies Inc. ("IPG"), issued following the sale of KDW to
IPG in 1996. There were no movements in management of liquid resources in either
1998 or 1996.
Financing Activities
The Group's financing arrangements as presented in 1996 to 1997 reflect
Cordiant's financing arrangements and not the arrangements that took effect
following the Demerger.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
The Company does not speculate in derivative financial instruments.
Foreign Exchange
The Company publishes its consolidated financial statements in pounds
sterling. A substantial majority of the Company's profits are denominated in
foreign currencies, primarily the US dollar (68% of 1998 operating profit). As a
result, the Company is subject to foreign exchange risk due to the effects that
foreign currency movements have on the Company's translation of results. In
order to provide a partial hedge against these exposures, the majority of the
Group's borrowings and interest expense are denominated in foreign currencies
(primarily US Dollars). The Company estimates that a 10% movement in the US
dollar/pound exchange rate would lead to a change in operating profit of
approximately L2.3 million.
Trading foreign exchange exposures, where they arise, are hedged via the
spot and forward exchange markets.
Interest Rates
In order to reduce the Company's exposure to adverse interest movements, the
Company has entered into interest rate caps which protect the majority of core
borrowings. The Company's weighted average interest rate for 1998 was 7.1%. The
Company estimates that if the 1998 interest rates had been 1 percentage point
higher, the net interest expense would have increased by L0.5 million.
<PAGE>
Item 10. Directors and Executive Officers of Registrant.
Charles T. Scott resigned as Chairman of the Company on December 31, 1998.
The Directors and Executive Officers of the Company are set out below:
Name Position Age
Bill Cochrane * Finance Director 47
Susan W. Day Group Treasurer 43
Fiona M. Evans Company Secretary 33
Ian Irvine Non-Executive Director 62
Ken Olshan Non-Executive Director 66
Kevin J. Roberts * Director, Chief Executive Officer 49
Bob Seelert * Chairman 56
Wendy Smyth * Director of Corporate Affairs 45
Sir Peter Walters Non-Executive Director 68
David I. C. Weatherseed Deputy Finance Director 47
- ---------
* Member of the Executive Committee
Biographies
Executive Directors
Bill Cochrane. Mr. Cochrane has been a Director of the Company since September
1997 and became Finance Director with effect from January 1, 1999. He joined
Saatchi & Saatchi Advertising in the United States in May 1982 as Controller of
International Operations. He was promoted to Chief Financial Officer of Saatchi
& Saatchi North America in 1989 and to Chief Financial Officer of S&S in 1992.
Prior to joining S&S, he spent seven years at Arthur Andersen & Co., where he
qualified as a Certified Public Accountant.
Kevin J. Roberts. Mr. Roberts has been a Director of the Company since September
1997 and became Chief Executive Officer of the Company with effect from January
1, 1999. He joined S&S in May 1997 as Chief Executive Officer of Saatchi &
Saatchi Worldwide when he was appointed to the Board of Cordiant. He has
previously worked at Gillette Company and Procter & Gamble dealing with product
development and marketing. In 1982, he became President and Chief Executive
Officer of Pepsi-Cola, Middle East and was promoted in 1987 to President and
Chief Executive Officer of Pepsi-Cola, Canada. In 1989, he was appointed
Director and Chief Operating Officer of Lion Nathan Limited, a brewery group
listed on the New Zealand Stock Exchange. He is a Director of the New Zealand
Rugby Football Union and a Senior Fellow of the University of Waikato.
Bob Seelert. Mr. Seelert has been a Director of the Company since September 1997
and became Chairman with effect from January 1, 1999. He joined Cordiant as
Chief Executive Officer in July 1995 and was appointed to the Board of Directors
in August 1995. He served as Chief Executive Officer from the Demerger until
January 1999. From 1966 to 1989 he worked for General Foods Corporation where
from 1986 until 1989 he was President and Chief Executive Officer for the
Worldwide Coffee and International Foods division. He was President and Chief
Executive Officer of Topco Associates Inc. from 1989 to 1991 and President and
Chief Executive Officer of Kayser Roth Corporation from 1991 to 1994. He is a
non-executive director of The Stride Rite Corporation.
Wendy Smyth. Mrs. Smyth has been Director of Corporate Affairs with effect from
January 1, 1999. She was Finance Director from September 1997 until January
1999. She joined the Company in 1982 in the United States and was appointed
Regional Finance Director in 1984. She was the Finance Director of Saatchi &
Saatchi Advertising International from 1986 to 1989 and then became Finance
Director of Cordiant's Communications Division. In July 1991 she became Chief
Financial Officer of Cordiant and was appointed to the Board of Directors of
Cordiant in April 1993 as Finance Director.
Non-Executive Directors
Ian Irvine. Mr. Irvine has been a Director of the Company since May 1998. He is
currently Chairman of Capital Radio plc, Dawson International plc, Southern Star
Circle Ltd., a UK subsidiary of Southern Star (Australia), and Primetime plc. He
served as a director of Reed International Plc from 1987 to 1997 and was also
appointed chairman of Reed International Plc and co-chairman of Reed Elsevier
Plc.
Ken Olshan. Mr. Olshan was appointed a non-executive director of the Company on
January 1, 1998. Mr. Olshan was Chairman and Chief Executive Officer of Wells
Rich Greene BDDP, a New York based advertising agency, from 1990 to 1995. He is
currently a director of Footstar, Inc. and a private consultant.
Sir Peter Walters. Sir Peter Walters has been a Director of the Company since
September 1997. He is Chairman of SmithKline Beecham plc and Deputy Chairman of
EMI Group plc. From 1991 to 1994 he was Chairman of Midland Bank plc and is
currently Deputy Chairman of its parent, HSBC Holdings plc. He is Chancellor of
the Institute of Directors, Chairman of the Trustees of the Institute of
Economic Affairs, Chairman of the Trustees of the Police Foundation and a member
of the Advisory Board of the LEK Partnership. He was Managing Director of BP plc
from 1973 to 1980 and Executive Chairman from 1981 to 1990. He joined the Board
of Cordiant in January 1994.
Executive Officers
Susan W. Day. Ms. Day has been Group Treasurer of the Company since the
Demerger. Previously, she had been Treasurer of Cordiant Holdings, Inc. in New
York since 1989.
Fiona M. Evans. Ms. Evans joined Cordiant in 1996 as Deputy Company Secretary.
Prior to that she was Deputy Company Secretary at NBC Super Channel in 1997 and
was previously employed in the Company Secretarial department of Forte Plc from
1992 to 1996. She was appointed Company Secretary of the Company in 1997.
David I. C. Weatherseed. Mr. Weatherseed joined Cordiant in 1990 as Group
Controller. In 1997 he was appointed Deputy Finance Director of the Company.
Re-election of Directors
The Articles provide that at every Annual General Meeting of the Company any
Director appointed since the last Annual General Meeting and subsequently once
every three years are required to retire and may, if eligible, stand for
re-election.
Corporate Governance
From the time of the Demerger until the appointment of Mr. Irvine on May 1,
1998, the Group did not have three fully independent non-executive Directors. In
most other respects the Company has complied with the requirements of the
principles set out in Section 1 of the Combined Code annexed to the Listing
Rules of the London Stock Exchange.
An Audit Committee and a Remuneration Committee have been established by the
Board, both of which comprise exclusively non-executive Directors.
The main duties of the Audit Committee are to ensure that the financial
performance of the Saatchi & Saatchi Group is properly monitored and reported
on, to review the accounts and preliminary and interim results, to review the
reports from the auditors relating to the accounts, to monitor internal control
systems and to make recommendations to the Board concerning the appointment and
remuneration of the auditors.
The main duties of the Remuneration Committee are to determine the
remuneration, benefits and terms and conditions of employment of the executive
Directors and of the Group's most senior employees. It also deals with
nominations to the Board, for which the Chief Executive Officer also joins the
Remuneration Committee.
The Remuneration Committee gives full consideration to the principles set
out in Section 1 of the Combined Code annexed to the Listing Rules of the London
Stock Exchange, as the policy of the Company is to establish a remuneration
strategy which rewards individual performance and enhances shareholder value by
creating a greater community of interest between shareholders and employees.
<TABLE>
<CAPTION>
Directors Interests
Date of Beneficially owned Ordinary Equity
Appointment Ordinary shares share options Participation Rights
<S> <C> <C> <C> <C>
Bill Cochrane Sep 3, 1997 36,121 216,854 909,090
Ian Irvine May 1, 1998 0 0 0
Ken Olshan Jan 1, 1998 8,000 0 0
Kevin Roberts Sep 3, 1997 0 454,687 1,090,909
Bob Seelert* Sep 3, 1997 178,098 219,849 1,090,909
Wendy Smyth Sep 3, 1997 5,083 654,532 545,454
Sir Peter Walters Sep 3, 1997 5,000 0 0
- ---------------------
* In addition, Mr. Seelert has 1,527,363 phantom share options.
</TABLE>
The Directors' interests in the Company's share capital have not changed
since December 31, 1998. Other Directors holding office in the year ended
December 31, 1998 were Charles Scott, who resigned on December 31, 1998.
None of the Directors at any time during the period ended December 31, 1998
had any material interest in any contracts with the Company or any of its
subsidiaries. None of the Directors at any time during the period ended December
31, 1998 or subsequent to December 31, 1998 was interested in any debentures of
the Company or shares or debentures of the Company's subsidiaries.
Item 11. Compensation of Directors and Officers.
In 1998, the aggregate amount of compensation paid or accrued for all
Directors and Executive Officers as a group (11 persons) who served the Company
following the Demerger was L3,207,000. Such compensation was primarily in the
form of salaries and fees and included L391,000 set aside for pension plans.
Remuneration for senior executives is comprised of three elements: basic
salary and related benefits, annual bonus and a long-term incentive program. The
annual bonus paid is non-pensionable and depends on the attainment of certain
performance targets which are approved by the Remuneration and Nominations
Committee. The long-term incentive program is designed to align the interests of
senior executives with those of shareholders and to encourage senior executives
to remain with the Group.
The table below reports remuneration by the Company for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------------------------------
Salary Retirement
or fees and bonus Benefits contributions Total
L000 L000 L000 L000
----------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Executive Directors:
Bob Seelert 780 37 114 931
Bill Cochrane 313 14 3 330
Kevin Roberts 788 53 176 1,017
Wendy Smyth 215 14 21 250
Non-executive Directors:
Charles Scott 148 -- 54 202
Ian Irvine 21 -- -- 21
Kenneth Olshan 30 -- -- 30
Sir Peter Walters 30 -- -- 30
Executive Officers as a group 359 14 23 332
Total 2,684 132 391 3,207
</TABLE>
Details of the service agreements for the Directors of the Company are set
out below.
Bob Seelert
From the time of the Demerger until January 1, 1999, Mr. Seelert was
employed under a service agreement with the Company and Saatchi & Saatchi
Compton Worldwide Inc. dated September 30, 1997 as Chief Executive Officer of
Saatchi & Saatchi plc.
With effect from January 1, 1999, Mr. Seelert entered into a new service
agreement with the Company and Saatchi & Saatchi Compton Worldwide, Inc. to be
chairman of Saatchi & Saatchi plc. His salary was reduced from $750,000 to
$400,000, and he will no longer receive a bonus.
Mr. Seelert's service agreement may be terminated on 12 months' notice given
by either party to the other, provided that if there is a change of control of
the Company, and his employment is terminated by the Company within two years of
such change of control (other than for cause, death or disability or by his
resignation without good reason), Mr. Seelert is entitled to the payment of a
sum equivalent to two years' gross salary and benefits, including pension
contributions. Under the new service agreement, Mr. Seelert will work not less
than 122 days a year.
Under the service agreement, if Mr. Seelert terminates his employment by
reason of a material change in his duties or responsibilities, a reduction in
his benefits, a substantial relocation of his office or his non re-election to
the Board, he will be entitled to 12 months' gross basic salary and benefits,
subject to mitigation. If Mr. Seelert's employment is terminated by reason of
his death or disability he will be entitled to 12 months' gross basic salary and
benefits.
Mr. Seelert is entitled to certain other benefits in kind, including the
provision of a fully expensed automobile, medical, disability and life insurance
and travel allowances.
Mr. Seelert has an unfunded personal retirement benefit scheme involving
notional employer contributions at the rate of 5.5 percent of salary up to June
30, 1998 and thereafter 6.25 percent of salary, in each case every three months.
Interest accrues on these notional contributions at 8 percent per annum.
Details of the manner in which phantom share options, granted to Mr. Seelert
under his prior service agreement, were dealt with in connection with the
Demerger are set forth in "Options to Purchase Securities from Registrant or
Subsidiaries."
Wendy Smyth
Mrs. Smyth was employed as Finance Director under a service agreement with
the Company dated September 30, 1997. With effect from January 1, 1999, Mrs.
Smyth entered into a new service agreement with the Company as Director of
Corporate Affairs.
Mrs. Smyth is contracted to work for four days each week and her salary is
L145,000 per annum. Mrs. Smyth's service agreement may be terminated on 12
months' notice given by either party to the other. Under Mrs. Smyth's service
agreement, if there is a change of control of the Company and her employment is
terminated by the Company without notice within two years of such change of
control (other than for cause or disability), Mrs. Smyth is entitled to the
payment of a sum equivalent to two years' gross salary, target bonuses of 40
percent of gross salary per year and benefits, including pension contributions.
Mrs. Smyth is currently entitled to participate in annual discretionary
bonus arrangements based on revenues and earnings per share in the year in
question and calculated by reference to a bonus matrix which is determined each
year by the Remuneration Committee of the Board. For 1997, Mrs. Smyth's target
bonus was 40 percent of her gross basic salary. For 1998, the annual bonus was a
percentage of salary based on revenue and earnings of the Company.
In addition, Mrs. Smyth is entitled to certain other benefits in kind,
including the provision of an automobile allowance, medical, disability and life
insurance.
Mrs. Smyth is also a member of the Cordiant Group Pension Scheme. The amount
of the increase in pension during the year was L434, the accumulated total
amount as of December 31, 1998 in respect of the accrued benefit being L44,811
and the transfer value (less contributions by Mrs. Smyth of L7,250) of the
relevant increase in accrued benefit was L5,436.
Kevin Roberts
Mr. Roberts was employed as Chief Executive Officer of S&S under a service
agreement made in April 1997 with Saatchi & Saatchi North America, Inc. With
effect from January 1, 1999, Mr. Roberts is separately employed by Saatchi &
Saatchi North America, Inc. ("SSNA") and by the Company for his time spent in
the US and UK, respectively. Elsewhere his services to the Group are provided by
Red Rose Limited. These agreements may be terminated on 12 months' notice by
either party, provided that, if there is a change of control and his employment
is terminated without notice within two years of the change, other than for
cause, death or disability, he is entitled to two years gross salary, target
bonuses of 70% of gross salary and benefits which include pension contributions.
His salary during the year was increased from $700,000 to $800,000.
Mr. Roberts is entitled to participate in annual discretionary bonus
arrangements calculated by reference to revenue growth and margin targets of the
Company which will be determined each year by the Remuneration Committee. For
1998 his annual bonus was a percentage of salary based on the profitability of
S&S and the revenue and earnings of the Group.
In addition, Mr. Roberts is entitled to certain other benefits in kind,
including the provision of a fully expensed motor car, disability and life
insurance and travel allowances. He is also entitled to a supplemental pension
payment on June 1, 2000 of $549,982. He will also receive a proportion of this
supplemental pension payment if his employment ceases before that date by reason
of his death or disability or if his service agreement is terminated by SSNA
(other than for cause).
Bill Cochrane
With effect from January 1, 1999, Mr. Cochrane has entered into a new
contract with SSNA and is now Finance Director. His salary is $350,000 per
annum.
Mr. Cochrane's service agreement provides that he may terminate his
employment on 12 months' notice to SSNA. If SSNA terminates Mr. Cochrane's
employment for any reason other than for cause, or if his employment is
terminated by his death or disability, or if he ceases to be a Director of the
Company (other than due to his death, disability or resignation), he will be
entitled to a lump sum payment equal to 140 percent of his annual salary. If
there is a change of control of the Company and his employment is terminated by
the Company within two years of such change of control (other than for cause,
death or disability), Mr. Cochrane is entitled to the payment of a sum
equivalent to two years' gross salary, target bonuses and benefits, including
pension contributions. He is also entitled to the same payment if, within two
years of such change of control, he terminates his employment as a result of
material changes being made to his duties, responsibilities or position, a
reduction in his salary, a change of his place of work or substantially
increased travel requirements.
During 1998, Mr. Cochrane was entitled to participate in annual
discretionary bonus arrangements based on revenues and earnings per share in the
year in question and calculated by reference to a bonus matrix determined by the
Remuneration Committee. For 1998, Mr. Cochrane's target bonus was 40 percent of
his gross basic salary based on a combination of the revenue and profitability
of S&S and the revenue and earnings of the Company.
In addition, Mr. Cochrane is entitled to certain other benefits in kind,
including the provision of a fully expensed motor car, medical, disability and
life insurance.
The terms of an agreement dated May 1, 1984, under which Mr. Cochrane is
entitled to deferred compensation equal to $1,200,000 payable in five equal
annual installments that began on January 2, 1998, have been incorporated into
his service agreement. Mr. Cochrane is also a member of the SSNA 401k plan, and
$4,800 was contributed on his behalf in 1998.
If Mr. Cochrane ceases to be in full-time employment with SSNA on or after
his fifty-fifth birthday for any reason other than his death, he will be
entitled to receive an amount equal to the present value of the right to receive
$30,000 in cash on each of the first 10 anniversaries of the date on which he
ceases to be a full time employee. However, this entitlement will only apply if
he provides consultancy services to SSNA on an exclusive basis during such
period.
Non-Executive Directors
Sir Peter Walters
Sir Peter Walters was appointed as a non-executive Director of the Company
for a term lasting three years from the Effective Date under a letter of
appointment dated September 15, 1997. He is paid annual fees of L20,000 together
with allowances of L600 for each Board and Committee meeting attended in person
or L500 for each Board and Committee meeting attended by telephone and L250 per
calendar quarter for acting as Chairman of any Committee of the Board. He does
not participate in any incentive or benefit schemes of the Group.
Ken Olshan
Ken Olshan was appointed as a non-executive Director of the Company with
effect from January 1, 1998, under a letter of appointment dated September 17,
1997, for the same period and on the same terms as to fees as Sir Peter Walters.
Ian Irvine
Ian Irvine was appointed as a non-executive Director of the Company with
effect from May 1, 1998, under a letter of appointment dated March 17, 1998, for
the same period and on the same terms as to fees as Sir Peter Walters.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Employee Share Schemes
The Company has two employee share schemes, which came into effect upon the
consummation of the Demerger. They are the Saatchi & Saatchi Equity
Participation Plan (the "Equity Participation Plan" or "EPP") and the Saatchi &
Saatchi Performance Share Option Scheme (the "Performance Share Option Scheme").
Participants in the Equity Participation Plan are not eligible to be granted
options under the Performance Share Option Scheme. The schemes are being
operated in conjunction with the Saatchi & Saatchi Employee Benefit Trust (the
"Trust").
(a) The Saatchi & Saatchi Equity Participation Plan
The Equity Participation Plan is being operated in conjunction with the
Trust, the Trustee of which will, in exercising its discretion, take into
account the recommendations of the Remuneration and Nominations Committee.
Further details of the Trust are set out below. Employees and Executive
Directors of the Saatchi & Saatchi Group who are required to devote
substantially all their working time to the business of any company in the
Saatchi & Saatchi Group, will be eligible to participate in the Equity
Participation Plan.
Thirty-two employees and Directors currently participate in the EPP and cash
payments of L1,648,143 have been received, which, if maximum performance targets
are to be met, would give rise to an issue of 11,703,862 Ordinary shares. A
further grant was made on March 12, 1999 which would give rise to an issue of
700,000 Ordinary shares to seven individuals. Further awards will only be made
within the period of 42 days following the announcement of the Group'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.
With the exception of Directors of the Company, the number of Ordinary
shares that a participant may acquire will be determined by measuring the annual
growth in earnings per share ("EPS") of the Company over a three year period
("EPS Performance"). For the initial awards the base year for measuring EPS
Performance is 1997. The adjusted EPS figure used for that year is 6.74p,
calculated on the basis of the pro forma "headline earnings" using the Institute
of Investment Management and Research guidelines (although the Trustee has the
ability to adjust this figure if the Trustee considers it appropriate to exclude
certain items including 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 ten Ordinary shares. If EPS Performance is equal to or
greater than the Hurdle Rate then:
o 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;
o 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;
o 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 the Company over a three
year period ("TSR Performance") relative to the TSR of a group of major publicly
traded advertising groups (the "Comparator Group") over the same period. The
percentage of the award that vests will be determined by reference to the
ranking attained by the Company.
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.
If a participant ceases to be employed by a company in the Saatchi & Saatchi
Group 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 the Saatchi & Saatchi Group or because the business to which
his office or employment relates is transferred outside the Saatchi & Saatchi
Group, 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 the Company 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
results for the financial year ending in 1998 (the "1998 results") will be able
immediately following the determination to acquire:
(a) one third of the number of Ordinary shares so determined, if
cessation occurs on or before the announcement of the 1998 results;
(b) two thirds of the number of Ordinary shares so determined, if
cessation occurs after the announcement of the 1998 results but on or
before the announcement of the 1999 results; and
(c) all of the Ordinary shares so determined, if cessation occurs after
the announcement of the 1999 results.
Equivalent provisions will apply for participants who receive an award after
the announcement of the 1998 results.
However, if a participant ceases employment for other reasons, he will only
be entitled to receive 10 Ordinary shares, with the result that he will
effectively lose his initial investment.
In the event of a takeover of the Group prior to the announcement of the
Group's results for its financial year ending in 2000 (the "2000 results"), a
participant who received an award prior to the announcement of the 1998 results
will be entitled to acquire the number of Ordinary shares determined in
accordance with the following provisions:
(a) if the takeover occurs after the date of the award but before the
announcement of the 1998 results, the participant may acquire one
third of the maximum possible number of Ordinary shares;
(b) if the takeover occurs after the announcement of the 1998 results but
before the announcement of the Company's results for its financial
year ending in 1999 (the "1999 results"), the participant may
acquire:
(i) one third of the maximum possible number of Ordinary shares; plus
(ii) one third of the number of Ordinary shares which would have
vested if the EPS Performance (and, if appropriate, TSR
Performance) for the Company's 1998 financial year had been
achieved over the full three years of the performance measurement
period; and
(c) if the takeover occurs after the announcement of the 1999 results but
before the announcement of the 2000 results, the participant may
acquire:
(i) one third of the maximum possible number of Ordinary shares; plus
(ii) two thirds of the number of Ordinary shares which would have
vested if the EPS Performance (and, if appropriate, TSR
Performance) over the Company's two financial years 1998 and 1999
had been achieved over the full three years of the performance
measurement period.
Equivalent provisions will apply for participants who receive an award after the
announcement of the 1998 results.
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 the Company's
auditors that such adjustment is in their opinion fair and reasonable.
An aggregate of not more than 6 percent of the issued Ordinary share capital
of the Company from time to time may be issued or become issuable pursuant to
the Equity Participation Plan.
The Board will have 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 condition;
(b) the limit rules;
(c) the calculation of a participant's entitlement under the Equity
Participant Plan;
(d) the terms of the awards or the Ordinary shares received pursuant to
them; or
(e) the variation of share capital rule
to the advantage of participants without the prior approval of the
shareholders in general meeting (except for minor amendments to benefit the
administration of the Equity Participation Plan, to take account of a change in
legislation or to obtain or maintain favorable tax, exchange control or
regulatory treatment for participants or for the Company or for members of the
Saatchi & Saatchi Group).
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.
The benefits received under the Equity Participation Plan are not
pensionable.
The Trustee will invite no further participation in the Equity Participation
Plan after the third anniversary of the Effective Date and the Board may
terminate it any time, but the rights of existing participants will not thereby
be affected.
(b) The Saatchi & Saatchi Performance Share Option Scheme
The Performance Share Option Scheme will 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 Share Option Scheme may also
be operated by the Company, in which case references in this summary to the
Trust and the Trustee should be read as being references to the Company and the
Remuneration Committee as appropriate.
Employees and Executive Directors of the Saatchi & Saatchi Group who are
required to devote substantially all their working time to the business of any
company in the Saatchi & Saatchi Group will be eligible to participate in the
Performance Share Option Scheme. However, participants in the Equity
Participation Plan will not be eligible to be granted options under the
Performance Share Option Scheme.
Participants in the Performance Share Option Scheme will be selected at the
discretion of the Trustee.
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 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.
Fifty-four employees currently participate in the Performance Share Option
Scheme and waive remuneration over a three-year period of L726,000 and, if
maximum performance targets are met, this would give rise to an issue of
7,094,220 shares.
A further grant was made on March 12, 1999 to three individuals which would
give rise to an issue of 330,000 shares.
Normally options may only be granted by the Trustee during the period
commencing on, and ending 42 days after the announcement of the Group'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 150 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.
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 Share 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.
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.
If an option holder ceases to be employed by a company in the Saatchi &
Saatchi Group 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 the Saatchi & Saatchi Group or because the
business to which his office or employment relates is transferred outside the
Saatchi & Saatchi Group 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 Company announces its results for its financial year. The
performance formula will then be applied as if the EPS Performance had been
achieved over the full three years of the performance measurement period. An
option holder who was granted an option prior to the announcement of the 1998
results will be able immediately following such determination to exercise his
option in respect of:
(a) one third of the number of Ordinary shares so determined, if cessation
occurs on or before the announcement of the 1998 results;
(b) two thirds of the number of Ordinary shares so determined, if
cessation occurs on or before the announcement of the 1999 results;
and
(c) all of the Ordinary shares so determined, if cessation occurs after
the announcement of the 1999 results.
Equivalent provisions will apply for option holders who are granted options
after the announcement of the 1998 results.
However, if a participant ceases employment for other reasons, his option
will lapse.
In the event of a takeover of the Group prior to the announcement of the
2000 results, an option holder who was granted an option prior to the
announcement of the 1998 results will be entitled to exercise his option in
accordance with the following provisions:
(a) if the takeover occurs after the date of the award but before the
announcement of the 1998 results, the option holder may exercise his
option in respect of one third of the number of Ordinary shares under
option;
(b) If the takeover occurs after the announcement of the 1998 results but
before the announcement of the 1999 results, the option holder may
exercise his option in respect of:
(i) one third of the number of Ordinary shares under option; plus
(ii) one third of the number of Ordinary shares in respect of which
he could have exercised his option if the EPS Performance for
the Company's 1998 financial year had been achieved over the
full three years of the performance measurement period; and
(c) if the takeover occurs after the announcement of the 1999 results but
before the announcement of the 2000 results, the option holder may
exercise his option in respect of:
(i) one third of the number of Ordinary shares under option; plus
(ii) two thirds of the number of Ordinary shares in respect of which
he could have exercised his option if the EPS Performance over
the Company's two financial years 1998 and 1999 had been
achieved over the full three years of the performance
measurement period.
Equivalent provisions will apply for option holders who are granted options
after the announcement of the 1998 results.
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 the Company's auditors that in their
opinion the variation is fair and reasonable.
An aggregate of not more than 3.5 percent of the issued ordinary share
capital of the Company from time to time may be issued or become issuable
pursuant to the Performance Share Option Scheme.
The Board will have power to administer, interpret and, with the approval of
the Trustee, amend the Performance Share 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 share to be received
by option holders; or
(e) the rules governing the calculation of the option holder's
entitlements under the Performance Option Scheme
to the advantage of option holders without the prior approval of shareholders in
general meeting (except for minor amendments to benefit the administration of
the Performance Share Options 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 for members of the
Saatchi & Saatchi Group).
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.
The benefits received under the Performance Share Option Scheme are not
pensionable.
The Trustee will grant no further options under the Performance Share Option
Scheme after the third anniversary of the Effective Date and the Board may
terminate it at any time, but the rights of existing option holders will not
thereby be affected.
(c) The Saatchi & Saatchi Demerger Share Option Schemes (the "Demerger Schemes")
Cordiant had three executive share option schemes: the Performance Share
Option Scheme for executives resident throughout the world; the Executive Share
Option Scheme (the "Number 1 Scheme") primarily for executives not resident in
the UK; and the Executive Share Option Scheme Number 2 (the "Number 2 Scheme")
for executives resident in the UK.
Holders of executive options under the former Cordiant share option schemes
who are employed by the Saatchi & Saatchi Group agreed to cancel their former
Cordiant options in return for the grant of replacement options over Ordinary
shares. Each replacement option is over the same number of Ordinary shares and
has the same exercise price, exercise period and performance conditions as the
option over Cordiant shares which it replaced. For Cordiant employees who ceased
to be employed by Cordiant as a result of the Demerger, and employees of Zenith
and The Facilities Group who held executive options under the former Cordiant
share option schemes, the same principles applied except that their replacement
options were split 50/50 between options over CCG shares and options over
Ordinary shares.
Each Demerger Scheme mirrors, as far as practicable, the terms of the former
Cordiant share option scheme to which it relates. None of the Demerger Schemes
is approved by the Inland Revenue.
Cordiant's Save As You Earn, Sharesave 1995, was adopted for UK employees
and was approved by the Inland Revenue. Eligible employees were granted options
linked to a five year savings contract. The exercise price was fixed at 80% of
market value at the time of grant. Under Sharesave 1995, employees of the Group
who hold such options retain them but have been granted a parallel unapproved
option over Ordinary shares which will be exercisable with the accumulated
savings and interest/bonus under Sharesave 1995. Employees of Zenith and The
Facilities Group have parallel options split 50/50 between CCG Shares and
Ordinary shares.
No options can be granted under a Demerger Scheme other than to replace an
option which an option holder under one of the former Cordiant share option
schemes has agreed to cancel (or to run in parallel with an option under
Sharesave 1995).
(d) The Saatchi & Saatchi Employee Benefit Trust
The main purpose of the Trust is to operate the Equity Participation Plan
and the Performance Share Option Scheme. The Trustee makes awards (which may or
may not be in the form of options) under which participants are entitled to
acquire Ordinary shares. Alternatively, the Trustee may agree to deliver
Ordinary shares following the exercise of awards made by the Company.
The Trustee may purchase Ordinary shares in the market for the purpose of
awards made under the Equity Participation Plan and the Performance Share 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.
The Trustee will fund the acquisition of Ordinary shares through one or
more of the following:
(a) by non-recourse loan or loans from Saatchi & Saatchi Group companies;
(b) by contributions from Saatchi & Saatchi Group companies; or
(c) by payments from the participants in the Equity Participation Plan and
the Performance Share Option Scheme.
(e) The Zenith Executive Incentive Plan (the "Zenith Incentive Plan")
The Zenith Incentive Plan was established to enable participants to acquire
CCG Shares and 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 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 CCG 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 Ordinary shares as the number of CCG
Shares under the participant's CCG Option (the "Saatchi & Saatchi
Group 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 & Saatchi Group 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 &
Saatchi Group 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 & Saatchi Group 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 CCG
Shares or Ordinary shares while they are held within the Trust.
(f) Shareforce
During the year, the Company set up an international sharesave scheme called
Shareforce. Invitations were sent out to all worldwide employees in September
1998. Any employee who chose to participate in Shareforce opened an account with
an independent savings institution and agreed to save an amount between L5 and
L250 per month, or an equivalent amount in local currency, for a period of three
years.
The shares that will be used to satisfy the options are existing shares
purchased in the market by a Jersey-based employee benefit trust established by
the Company in 1998.
The following chart shows as of May 12, 1999 the total number of Ordinary
shares subject to outstanding options, the purchase price of the Ordinary shares
pursuant to the options and the expiration date of the options:
<TABLE>
<CAPTION>
Number of Purchase Expiration Date
Option Scheme Ordinary shares Price of Options
<S> <C> <C> <C>
Demerger Executive
(No. 2 Scheme) 718,001 108 p to 135 p June 2001-
April 2002
Demerger 5,037,395 73 p to 132 p May 2002-
Performance Share Dec. 2004
Option Scheme
Performance Share 7,424,220 110 p to Dec. 2004-
Option Scheme 190p March 2006
Sharesave 1995 767,145 64 p Dec. 2000
Shareforce 2,977,738 88 p to Dec. 2001-
90p May 2002
</TABLE>
As at May 12, 1999, there are awards over 12,403,862 shares under the Equity
Participation Plan which are exercisable between December 2000 and March 2006.
<PAGE>
As of May 12, 1999, the number of Ordinary shares subject to options,
excluding phantom options, granted to the Directors and Executive Officers of
the Company was as follows:
Name Number of Ordinary shares*
Bill Cochrane 1,125,944
Kevin J. Roberts 1,545,596
Bob Seelert 1,310,758
Wendy Smyth 1,199,986
* Includes 909,090, 1,090,909, 1,090,909 and 545,454, respectively,
attributable to options under the Equity Participation Plan for Bill
Cochrane, Kevin Roberts, Bob Seelert and Wendy Smyth, respectively. These
amounts represent the maximum number of Ordinary shares subject to such
options.
The table below describes the various share options awarded to the
Directors of the Company as of May 12, 1999.
<TABLE>
<CAPTION>
Executive Directors' Share Options
Exercuse
Scheme Date of Price per Subscription Total Exercise Period
grant Share number of shares exercise price
<S> <C> <C> <C> <C> <C> <C>
Bob Seelert Demerger Performance Aug 1995 95p 219,849 208,857 to Dec 2004
Phantom Options** Aug 1995 95p 487,131 462,774 to Dec 2004
Phantom Options** Apr 1996 130p 540,538 702,699 to Dec 2004
Phantom Options** Apr 1997 132p 499,694 659,596 Apr 2000-Dec 2004
--------- ---------
Total 1,747,212 2,033,926
Wendy Smyth Demerger Executive (No. 2) Jun 1991 135p 82,327 111,141 to Jun 2001
Demerger Executive (No. 2) Apr 1992 107p 68,605 73,407 to Apr 2002
Demerger Executive (No. Apr 1992 107p 68,605 73,407 to Apr 2002
2)*
Demerger Performance* May 1995 73p 67,498 49,274 May 2000-May 2002
Demerger Performance* Aug 1995 95p 67,497 64,122 Aug 2000-Aug 2002
Demerger Performance Apr 1996 130p 75,000 97,500 to Dec 2004
Demerger Performance* Apr 1996 130p 75,000 97,500 Apr 2001-Apr 2003
Demerger Performance Apr 1997 132p 75,000 99,000 Apr 2000-Dec 2004
Demerger Performance* Apr 1997 132p 75,000 99,000 Apr 2002-Dec 2004
------ -------
Total 654,532 764,351
Bill Cochrane Demerger Performance May 1995 73p 33,427 24,402 to May 2004
Demerger Performance Aug 1995 95p 33,427 31,756 to Dec. 2004
Demerger Performance Apr 1996 130p 37,500 48,750 to Dec. 2004
Demerger Performance* Apr 1996 130p 37,500 48,750 Apr 2001-Apr 2003
Demerger Performance Apr 1997 132p 37,500 49,500 Apr 2000-Dec. 2004
Demerger Performance* Apr 1997 132p 37,500 49,500 Apr 2002-Dec. 2004
------ --------
Total 216,854 252,658
Kevin J. Roberts Demerger Performance June 1997 124p 227,344 281,907 June 2000 to Dec 2004
Demerger Performance* June 1997 124p 227,343 281,905 June 2002 to Dec 2004
------- ----------
Total 454,687 563,812
- ------------------------------------------------------------------------------------------------------------
All exercise prices for the share option schemes have been rounded to the
nearest pence.
No Director exercised options under any of the share option schemes during the
period from January 1, 1999 through May 14, 1999.
* Denotes Super Options
** Denotes phantom options which track real options, paying cash rather than
converting into shares.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Directors' Equity Participation Plan Grants
Contribution
Date of Maximum Number paid
Scheme grant of Shares (L) Vesting Period
<S> <S> <C> <C> <C> <C>
R. Seelert Equity Participation Plan Dec 1997 1,090,909 150,000 Dec 2000 - Dec 2001
W. Cochrane Equity Participation Plan Dec 1997 909,090 125,000 Dec 2000 - Dec 2001
K. Roberts Equity Participation Plan Dec 1997 1,090,909 150,000 Dec 2000 - Dec 2001
W. Smyth Equity Participation Plan Dec 1997 545,454 75,000 Dec 2000 - Dec 2001
</TABLE>
Item 13. Interest of Management in Certain Transactions.
Except for the employment arrangements referred to in Item 10, neither the
Company nor any of its subsidiaries was a party to any material transaction, or
proposed transaction, in which any Director, any other executive officer, any
spouse or relative of any of the foregoing, or any relative of such spouse had
or was to have had a direct or indirect material interest. There are no
outstanding loans granted by any member of the Group to any of the Directors or
guarantees provided by any member of the Group for their benefit.
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds.
Not applicable.
PART IV
Item 17. Financial Statements.
The Company has elected to provide financial statements 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-54 herein are hereby
incorporated by reference into this Item 18.
(a) Independent Auditor's Report dated March 25, 1999.
(b) Consolidated statements of operations of the Company and subsidiaries
for years ended December 31, 1998, 1997 and 1996.
(c) Consolidated balance sheets of the Company and subsidiaries as of
December 31, 1998 and 1997.
(d) Consolidated statements of shareholders' deficiency and other share
capital, total recognized gains and losses and cash flows of the
Company and subsidiaries for the years ended December 31, 1998, 1997
and 1996.
Item 19. Financial Statements and Exhibits.
(a) Financial Statements
(1) Consolidated statements of operations of the Company and subsidiaries
for years ended December 31, 1998, 1997 and 1996. (Pages F-2 and F-3)
(2) Consolidated balance sheets of the Company and subsidiaries as of
December 31, 1998 and 1997. (Pages F-5 and F-6)
(3) Consolidated statements of shareholders' deficiency and other share
capital, total recognized gains and losses, and cash flows of the
Company and subsidiaries for years ended December 31, 1998, 1997 and
1996 (Pages F-7, F-8, F-9 and F-10)
(b) Exhibits
2.1 Upon the request of the Securities and Exchange Commission, the
Company hereby agrees to provide a list of subsidiaries of the
Company.
3.1 Consent of Independent Auditor.
<PAGE>
SIGNATURE
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.
SAATCHI & SAATCHI PLC
By: /s/ David I. C. Weatherseed
----------------------------
Name: David I. C. Weatherseed
Title: Deputy Finance Director
Date: June 2, 1999
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Shareholders of Saatchi & Saatchi plc:
We have audited the accompanying consolidated balance sheets of Saatchi &
Saatchi plc and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' deficiency, total
recognized gains and losses and cash flows for each of the years in the three
year period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saatchi & Saatchi
plc and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations for each of the years in the
three year period ended December 31, 1998 and shareholders' deficiency at
December 31, 1998 and 1997 to the extent summarized in note 39 to the
consolidated financial statements.
/s/ KPMG AUDIT PLC
-------------------------
KPMG AUDIT PLC
CHARTERED ACCOUNTANTS
REGISTERED AUDITOR
London, England
March 25, 1999
<PAGE>
<TABLE>
<CAPTION>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
Notes 1998 1997 1996
L million L million L million
<S> <C> <C> <C>
Turnover
Group and share of joint venture 2,606.9 2,469.6 2,528.7
Less: share of joint venture (716.0) (490.9) (578.3)
------- ------ ------
Group turnover 1,890.9 1,978.7 1,950.4
======= ======= =======
Commission and fee income
Ongoing businesses and share of joint venture 400.2 397.7 393.5
Disposed businesses 17.1 1.5 2.1
Less: share of joint venture (37.2) (21.0) (20.3)
----- ----- -----
Group revenue 380.1 378.2 375.3
Operating and administrative expenses 4/5 (334.7) (333.6) (354.0)
Depreciation and amortization (14.0) (14.9) (14.3)
----- ----- -----
Group operating profit 31.4 29.7 7.0
Share of operating profit in joint venture 3.6 0.9 0.1
Profit on disposal of businesses 3/5 6.1 4.3 17.7
---- ---- ----
Profit before interest and tax 41.1 34.9 24.8
Exceptional demerger reorganization item 5 - 764.5 -
---- ----- -----
41.1 799.4 24.8
Net interest (payable) receivable and similar items
Net dividends from CCG companies prior
to the demerger - 10.4 7.8
Joint venture 0.3 1.1 1.1
Other 7 (4.6) (14.5) (15.2)
----- ------ ------
Profit before taxation 36.8 796.4 18.5
Tax charge on profit 8 (10.3) (8.2) (4.5)
------ ----- -----
Profit after taxation 26.5 788.2 14.0
Minority interests (1.5) (0.6) (0.4)
----- ----- -----
Net income 25.0 787.6 13.6
Proposed dividend (3.1) (2.7) -
----- ----- ----
Retained profit 21.9 784.9 13.6
---- ----- ----
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Year ended December 31,
Notes 1998 1997 1996
L million L million L million
Earnings per Ordinary share 9
Basic 11.3p 354.9p 6.1p
Diluted 11.2p 353.7p 6.1p
All of the above figures relate to continuing operations.
</TABLE>
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
The net interest, taxation and earnings per share for the years ended December
31, 1997 and 1996 were significantly affected by the financing and taxation
profile of the Cordiant Group. In addition, operating profit in the years ended
December 31, 1997 and 1996 does not reflect the new trading arrangements with
Zenith. Accordingly, the amounts of those items included for those years are not
representative of those which arise following the Demerger.
In 1998 the Group disposed of its interest in Siegel & Gale for US$33.8
million (L20.3 million) which resulted in a profit on disposal of L8.6 million.
The closure and divestiture of businesses in Germany, Ireland, Norway and Spain,
together with the reduction of shareholding in South Africa, resulted in a loss
of L2.5 million.
There is no difference between the total reported results in the periods and
those on an historical cost basis.
See accompanying notes to consolidated financial statements.
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---- ----
Notes (Restated)
L million L million
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term deposits 30.8 57.5
Short-term investments
Shares - listed overseas 11 0.2 0.2
Accounts and other receivables,
prepayments and accrued income 12/13 238.9 258.4
Billable production 13 18.3 20.0
---- ----
Total current assets 288.2 336.1
----- -----
Investments:
Treasury stock 5.6 -
Other 7.0 4.0
--- -----
14 12.6 4.0
---- ---
Long-term receivables:
Accounts and other receivables, prepayments
and accrued income 12 4.5 5.0
Intangible assets net of amortization - goodwill 15 5.8 -
Properties, furniture, equipment and
motor vehicles 16 77.3 84.4
----- -----
Total assets 388.4 429.5
===== =====
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank loans and overdrafts 17 4.1 21.4
Accounts payable, other liabilities and
accrued expenses 18 313.1 333.8
Taxation and social security 12.7 10.8
------ -------
Total current liabilities 329.9 366.0
----- -----
</TABLE>
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---- ----
Notes (Restated)
L million L million
<S> <C> <C> <C>
Long-term liabilities:
Accounts payable, other liabilities and
accrued expenses 18 26.6 4.7
Investment in joint venture: 19
Share of gross assets (76.9) (51.7)
Share of gross liabilities 90.6 66.0
---- ----
13.7 14.3
---- ----
Property, pension and other provisions 20 51.6 74.9
Long-term debt 21 47.5 81.4
Taxation and other social security 23.4 23.3
Minority interests 3.5 2.2
------- -------
Total long-term liabilities 166.3 200.8
----- -----
Total liabilities 496.2 566.8
----- -----
Shareholders' deficiency
Share capital
Allotted, called up and fully paid:
222,946,716 Ordinary shares of 10p each
(1997: 221,926,993 - Ordinary shares of 10p
each) 22.3 22.2
Share premium 103.9 102.7
Shares to be issued 1.6 -
Accumulated deficit (235.6) (262.2)
------- -----
Shareholders' deficiency (107.8) (137.3)
------- -----
Total liabilities and shareholders' deficiency 388.4 429.5
===== =====
The consolidated balance sheet at December 31, 1997 has been restated following
the adoption of FRS10. See "Consolidated Statements of Shareholders' Deficiency
and Other Share Capital".
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
AND OTHER SHARE CAPITAL
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Accumu-
Shares lated Total
Share Share to be Merger Goodwill earnings shareholders'
Capital premium issued reserve reserves (deficit) deficiency
------- ------- ------ ------- -------- --------- ------------
L million L million L million L million L million L million L million
<S> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1996 22.2 102.7 - (124.9) (107.9) (942.3) (1,050.2)
Profit for the year - - - - - 13.6 13.6
Goodwill acquired
and written off - - - - (13.4) - (13.4)
Translation adjustment - - - - - 13.3 13.3
---------- ---------- --------- -------- --------- --------- -------------
At December 31, 1996 22.2 102.7 - (124.9) (121.3) (915.4) (1,036.7)
Profit for the year - - - - - 787.6 787.6
Proposed dividend - - - - - (2.7) (2.7)
Issues of Ordinary
shares net of expenses - - - 124.9 - - 124.9
Elimination of goodwill
reserves on disposals - - - - 0.2 - 0.2
Translation adjustment - - - - - (10.6) (10.6)
---------- ---------- --------- -------- --------- --------- -------------
At December 31, 1997 22.2 102.7 - - (121.1) (141.1) (137.3)
Prior year adjustment* - - - - 121.1 (121.1) -
---------- ---------- --------- -------- --------- --------- -------------
As restated 22.2 102.7 - - - (262.2) (137.3)
Issues of Ordinary
shares net of expenses 0.1 1.2 - - - - 1.3
Shares to be issued - - 1.6 - - - 1.6
Reversal of imputed
employment charge - - - - - 3.9 3.9
Elimination of goodwill
reserves on disposals - - - - - 0.6 0.6
Profit for the year - - - - - 25.0 25.0
Proposed dividend - - - - - (3.1) (3.1)
Translation adjustment - - - - - 0.2 0.2
========== ========== ========= ======== ========= ========= =============
At December 31, 1998 22.3 103.9 1.6 - - (235.6) (107.8)
========== ========== ========= ======== ========= ========= =============
*Following the adoption of FRS10, a prior year adjustment has been made to
transfer the goodwill written-off to the profit and loss account.
The profit and loss account includes L120.5 million (1997 restated: L121.1
million) of goodwill written-off against reserves.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED
GAINS AND LOSSES
Year ended
December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
L million L million L million
Profit for the year 25.0 787.6 13.6
Translation adjustment 0.2 (10.6) 13.3
----- ------ ----
Total gains recognized
for the year 25.2 777.0 26.9
==== ===== ====
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
Notes 1998 1997 1996
----- ---- ---- ----
L million L million L million
<S> <C> <C> <C> <C>
Net cash inflow from operating activities 28 38.7 52.5 37.9
Dividends received from joint ventures - - -
and associates
Returns on investments and servicing of
finance
Interest received 2.3 2.1 2.8
Interest paid and similar charges (7.1) (18.1) (12.6)
Interest element of finance lease
rentals payments - - (0.1)
Dividends paid to minorities (0.1) (0.2) (0.1)
----- ---- ----
Net cash outflow from returns on investments
and servicing of finance (4.9) (16.2) (10.0)
----- ----- -----
Taxation
UK tax paid (0.7) - -
Overseas tax paid (3.8) (3.8) (0.3)
----- ---- ----
Net tax paid (4.5) (3.8) (0.3)
----- ----- -----
Capital expenditure and financial investment
Purchase of tangible fixed assets (11.9) (12.0) (14.1)
Proceeds from sale of tangible fixed assets 0.2 - 0.5
Purchase of treasury stock by ESOP Trust (4.9) - -
Purchase of other fixed asset investments (0.1) (3.7) -
Proceeds from sale of other fixed
asset investments 0.6 - -
----- ----- ---
Net cash outflow from capital expenditure and
financial investment (16.1) (15.7) (13.6)
------ ----- -----
Acquisitions and disposals
Purchase of subsidiary undertakings 31 (7.0) (7.9) (20.8)
Cash acquired with subsidiaries 31 - - 0.5
Proceeds from sale of subsidiary undertakings 31 20.3 0.1 9.5
Cash in disposed subsidiary undertaking (1.2) - -
Demerging CCG/Zenith companies (0.9) 169.3 -
----- ----- ---
Net cash inflow (outflow) from
acquisitions and disposals 11.2 161.5 (10.8)
---- ----- -----
Dividends
Equity dividends paid (2.7) - -
----- ----- ---
Net cash inflow before use of liquid
resources and financing 21.7 178.3 3.2
Management of liquid resources
Disposal of current asset investments - 17.1 -
----- ---- ---
Cash inflow before financing 21.7 195.4 3.2
----- ----- ---
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Years ended December 31,
Notes 1998 1997 1996
----- ---- ---- ----
L million L million L million
Financing
Issued and to be issued share capital 2.9 - -
(Reduction)/increase in facilities (33.7) 0.2 (21.3)
utilized
Loans repaid to CCG/Zenith - (1,068.6) -
Loans drawn from CCG/Zenith - 864.2 5.7
Capital element of finance lease
rental payments (0.1) (0.1) -
----- ---- ---
Net cash outflow from financing (30.9) (204.3) (15.6)
------ ------- ------
Decrease in cash 29 (9.2) (8.9) (12.4)
===== ===== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAATCHI & SAATCHI PLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Preparation
The accounts are prepared in accordance with applicable accounting standards and
on the historical cost basis. During the year the Group has adopted new
accounting standards: FRS10 - "Goodwill and Intangible Assets", FRS11 -
"Impairment of Fixed Assets and Goodwill", and FRS14 - "Earnings per Share".
The consolidated financial statements for 1998 incorporate the financial
statements of Saatchi & Saatchi plc and all its subsidiary undertakings made up
to December 31, 1998.
The consolidated financial statements for 1997 were prepared on the following
basis:
In accordance with an agreement dated December 14, 1997 providing for the
demerger of the Saatchi & Saatchi group, Cordiant plc transferred its share in
its wholly owned subsidiary Saatchi & Saatchi Holdings Limited to Saatchi &
Saatchi plc. The consideration for this transfer was satisfied by the issue to
Cordiant plc shareholders of one Ordinary share of 10p each in Saatchi & Saatchi
plc, credited as fully paid, for each Ordinary share in Cordiant plc.
The consolidated accounts comprise the accounts of the Company and its
subsidiary undertakings (collectively the Group). The consolidated accounts were
prepared using merger accounting principles as if the companies, businesses and
assets comprising the Group had been part of the Group for the whole of 1997,
or, in the case of those companies, business and assets disposed of or acquired
by Cordiant plc during this period up to or from the date control passed, as
appropriate. This basis of accounting was adopted in order to show a true and
fair view.
As part of the demerger restructuring, some subsidiary undertakings were
themselves subject to reorganization prior to the transfer. Schedule 4A to the
Companies Act 1985 and FRS6 "Acquisitions and Mergers" required such transfers
to be accounted for using acquisition accounting principles. The effect of
applying acquisition accounting principles to these subsidiary undertakings and
businesses would have been to restate at fair value certain assets and
liabilities transferred and to recognize any resulting goodwill.
The Directors considered that applying acquisition accounting to any part of the
reorganization of the Group's businesses, with consequent adjustments to the
fair values of the related assets and liabilities, would have failed to give a
true and fair view of the Group's state of affairs and results for the
shareholders since they have had a continuing interest in the Group's business
both before and after demerger. Had this departure not been necessary the effect
on these accounts would have been to consolidate the accounts of the subsidiary
undertakings based on the fair values of the related assets at December 14, 1997
and to present the results of the Group for the period from December 14, 1997 to
December 31, 1997. Owing to the number and complexity of transactions involved,
it was not practicable to quantify the effect of this departure.
Note 2 - Principal Accounting Policies
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires the Company'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 consolidated
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.
(a) Income Recognition
Turnover represents gross billings to clients which are reduced by direct costs
of advertising and other related costs to arrive at commission and fee income.
Commission and fee income is recognized generally when work is billed to clients
and excludes sales taxes and intra group transactions. Billings are usually
rendered upon presentation date for media advertising and upon the completion of
radio, television and print production.
(b) Revenue
Revenue represents the fees and commissions, excluding sales taxes, from
services provided to clients, and is recognized generally when work is billed.
The two largest clients of the Group accounted for 31.1% of Group revenue in
1998 (1997:27.5%; 1996:26.3%).
(c) Property Provisions
Provision is made for the future rent expense and related costs of leasehold
property (net of estimated sublease income) where the property is vacant or
currently not planned to be used for continuing operations.
(d) 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 profit of the
year for which they are payable and the cost of providing defined benefits is
charged against the 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.
(e) 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.
(f) Goodwill
Purchased goodwill arising on acquisitions after January 1, 1998 including any
additional goodwill estimated to arise from future contingent capital payments,
is capitalized and amortized in the statement of operations over appropriate
periods of not more than twenty years.
Prior to January 1, 1998 goodwill in respect of acquisitions was written off
directly to reserves.
A charge is recognized in the Group's statement of operations in respect of any
permanent diminution in the value of acquisition goodwill. Goodwill written off
directly to reserves and not previously charged to the Group's statement and
operations is included in determining the profit or loss on disposal.
(g) Tangible fixed assets
Tangible fixed assets are stated at historical costs less accumulated
depreciation. Additions, improvements and major renewals are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred.
The cost of tangible fixed assets less estimated residual value is written off
by equal annual installments over the expected useful lives of the assets as
follows:
Freehold buildings and long leasehold properties 50 years
Furniture and equipment Between 4 and 10 years
Motor vehicles 4 years
(h) Investments
Except as stated below, fixed asset investments are shown at cost, less amounts
provided for any permanent diminution in value.
The Group's share of the profits less losses of joint ventures and associated
undertakings is included in the statement of operations and the Group's share of
the investment is shown in the consolidated balance sheet. The Group's share of
the profits less losses and net assets or liabilities is based on current
information produced by the undertakings, adjusted to conform with the
accounting policies of the Group.
(i) Billable Production
Billable production is valued at the lower of cost and net realizable value, and
comprises mainly outlays incurred on behalf of clients.
(j) Short-Term Investments
Short-term investments, including money market investments, are valued
individually at the lower of market value on date of receipt or net realizable
value at the balance sheet date. No credit is taken in the financial statements
for any increase in market value at the balance sheet date.
(k) Deferred Taxation
Deferred taxation is provided at anticipated tax rates on timing differences
arising from the inclusion of items on income and expenditure in taxation
computations in periods different from those in which they are included in the
consolidated financial statements, to the extent that it is probable that a
liability or asset will crystallize in the near future.
No provision is made for deferred tax on unremitted overseas earnings unless the
Company expects them to be remitted.
(l) Foreign Currencies
Statements of operations and cash flow statements in foreign currencies are
translated into sterling at the average rates during the year, with the year end
adjustment to closing rates being taken to reserves. Assets and liabilities in
foreign currencies are translated using the rates of exchange ruling at the
balance sheet date. Gains of losses on translation of the opening net assets of
overseas subsidiaries are taken to shareholders' deficiency. Exchange
differences arising from the retranslation of long-term foreign currency
borrowings used to finance foreign currency investments are also taken to
shareholders' deficiency. All other exchange differences are taken to the
statement of operations.
<PAGE>
Saatchi & Saatchi's principal trading currencies and the exchange rates used
against pounds sterling are as follows:
<TABLE>
<CAPTION>
Average Rate Closing Rates
------------ -------------
Year Ended December 31, December 31,
------------------------ ------------
1998 1997 1996 1998 1997
<S> <C> <C> <C> <C> <C>
US Dollar 1.66 1.64 1.56 1.66 1.65
French Franc 9.76 9.55 7.99 9.29 9.90
Deutschmark 2.91 2.84 2.35 2.77 2.96
Australian Dollar 2.64 2.21 2.00 2.71 2.52
Italian Lira 2,877 2,790 2,409 2,743 2,909
New Zealand Dollar 3.09 2.48 2.27 3.15 2.83
</TABLE>
Note 3 - Acquisitions, Disposals and Deferred Capital Payments(1)
(1) Where applicable in this Note translations from foreign currencies are made
at the rates at which the transactions were concluded.
Acquisitions
With effect from January 1996 Cordiant acquired the outstanding 47.4% of the
share capital of Saatchi & Saatchi Advertising SA in France. The acquisition was
completed in September 1996 for an initial consideration of L18.1 million
(including L2 million to settle a bank overdraft), with further cash payments
made of L3.3 million in 1997 and L2.6 million in 1998.
During 1996 Cordiant acquired a 51% interest in Saatchi & Saatchi Klerk &
Barrett Holdings (Proprietary) Limited, a company based in South Africa. The
total consideration for this acquisition was L1.3 million in cash and L1.2
million of goodwill arose on purchase.
These acquisitions were accounted for under the purchase method of accounting.
Accordingly, the statements of operations reflect the results of operations for
new subsidiaries since the dates of acquisition. Goodwill of L13.4 million was
written off against shareholders' deficiency at the dates of acquisition.
During 1998 the Group acquired the business and assets of GMG Marketing
Services, a US based co-marketing company for an initial consideration of L3.1
million and further deferred consideration due of L1.5 million in 2001,
dependent on performance.
In addition, the Group increased its shareholding to 80% in Sista Saatchi &
Saatchi Advertising PVT Limited, a company based in India for a cash payment of
L1.1 million.
Further the Group acquired 51% of the share capital of Dialog-Team Fienhold
Agentur fur Dialog-Marketing GmbH, a company based in Germany for a cash payment
of L0.2 million.
Goodwill arising on the 1998 acquisitions amounted to L6.0 million of which L0.2
million was charged to the statement of operations.
Disposals
The profit on disposal of businesses in 1996 of L17.7 million comprised L16.5
million from the disposal of the remaining interest in Draft Direct (formerly
Kobs & Draft Worldwide) and a receipt of L1.2 million from disposals in prior
years.
The 1997 profit on disposal of businesses arose from the profit on sale of the
IPG stock, issued to Saatchi & Saatchi, following the acquisition of Draft
Direct (formerly Kobs & Draft Worldwide) by IPG in 1996.
In 1998 the Group disposed of its interest in Siegel & Gale for US$33.8 million
(L20.3 million) which resulted in a profit on disposal of L8.6 million. The
closure and divestiture of businesses in Germany, Ireland, Norway and Spain,
together with the reduction of shareholding in South Africa, resulted in a loss
of L2.5 million.
Deferred Capital Payments
The Saatchi and Saatchi Group is committed to make certain capital payments in
the form of deferred consideration and to acquire certain minority interests in
subsidiary undertakings. Commitments totaling L1.5 million at December 31, 1998,
in respect of deferred consideration relating to the acquisition of GMG
Marketing Services has been accrued in the Group balance sheet. The Company
estimates that the total payments (including interest) that will be made are as
follows:
1998 1997
---- ----
L million L million
Due within 1 year - 2.4
Due within 2-5 years 1.5 -
--- ---
1.5 2.4
=== ===
<PAGE>
Note 4 - Operating and Administrative Expenses
Operating and administrative expenses from continuing operations included the
following:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
L million L million L million
<S> <C> <C> <C>
Staff and other associated costs (including
exceptional items) see Notes 5 and 6 212.0 201.4 210.7
Hire of plant and machinery - operating
leases (see Note 27) 0.9 1.1 1.2
Hire of other assets - leasehold property net
of sublease income (see Note 27) 21.3 22.1 25.2
Loss (profit) on sale of tangible fixed assets (0.2) - 0.2
Auditor's remuneration, including expenses 1.2 1.0 1.2
Auditor's remuneration, other than audit fees 0.2 0.1 0.4
Other administrative expenses, (including
exceptional items) - see Note 5 99.3 107.9 115.1
------ ----- -----
334.7 333.6 354.0
===== ===== =====
</TABLE>
Note 5 - Exceptional Operating and Non-Operating Items
Included in Operating and Administrative Expenses in Note 4 are the following
exceptional items:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
Operating items L million L million L million
<S> <C> <C> <C>
Property provisions - - 8.2
Termination of a defined benefits pension plan -
see Note 26 - - 8.1
-- -- ----
Total exceptional costs included in operating profit - - 16.3
== == ====
</TABLE>
Property provisions in 1996 arose from the decision to vacate surplus office
space with an estimated future net rental shortfall of L8.2 million.
The pension plan costs arose from a decision taken as part of the Cordiant
Group's efficiency program to terminate the defined benefits plan in the U.S.
The scheme was frozen at June 30, 1996 and terminated on December 31, 1996.
Year ended December 31,
1998 1997 1996
---- ---- ----
Non-operating items L million L million L million
Fundamental reorganization demerger - 764.5 -
Profit on disposal of continuing operations 6.1 4.3 17.7
--- ----- ----
Total profit outside operating profit 6.1 768.8 17.7
=== ===== ====
In 1998 the Group disposed of its interest in Siegel & Gale for US$33.8 million
(L20.3 million) which resulted in a profit on disposal of L8.6 million. The
closure and divestiture of businesses in Germany, Ireland, Norway and Spain,
together with the reduction of shareholding in South Africa, resulted in a loss
of L2.5 million.
In order to implement the Demerger in 1997, intergroup indebtedness between
Saatchi & Saatchi and CCG/Zenith had to be eliminated and cross holding
investments transferred. This was carried out predominantly by sale, settlement,
assignment and waiver and resulted in an exceptional gain of L770.6 million in
1997. This was partly offset by an additional property provision of L6.1
million, which arose as a result of the Demerger and represented the difference
between the rental payable by Saatchi & Saatchi and the amounts receivable from
Zenith for space sublet to them.
The 1997 profit on disposal of businesses arose from the profit on sale of the
IPG stock, issued to Saatchi & Saatchi, following the acquisition of Draft
Direct by IPG in 1996.
The profit on disposal of continuing operations in 1996 of L17.7 million
comprised of L16.5 million in respect of the disposal of the remaining interest
in KDW and the final payment of L1.2 million from Bozell in respect of the sale
of the business of the Detroit office of CME.
<PAGE>
<TABLE>
<CAPTION>
Note 6 - Employees
Year ended December 31,
1998 1997 1996
Average number of employees of the Company by geographic area:
<S> <C> <C> <C>
North America 1,847 1,870 1,675
United Kingdom 812 855 845
Continental Europe, Africa & Middle East 1,368 1,428 1,047
Asia Pacific 1,179 1,103 1,125
----- ----- -----
Average number of employees 5,206 5,256 4,692
===== ===== =====
L million L million L million
Salaries and related costs
Wages and salaries 185.1 178.5 178.3
Social security costs 15.7 15.8 17.0
Pension costs* 7.3 7.1 15.4
Equity Participation Plan Charge 3.9 - -
------ ----- -----
212.0 201.4 210.7
===== ===== =====
* The pension cost for the year was L7.3 million (1997: L7.1 million; 1996:
L15.4 million). The 1996 pension cost included L8.1 million to terminate
the defined benefits pension plan in the U.S. - see Note 26.
</TABLE>
<PAGE>
Note 7 - Net Interest (Payable) Receivable and Similar Items
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
L million L million L million
<S> <C> <C> <C>
External Interest
Interest payable and similar charges:
On bank loans, overdraft facilities and
other loans required to be repaid within
five years (6.2) (8.6) (9.8)
On capitalized leases and hire purchase - - (0.1)
Bank fees (0.7) (2.2) (1.0)
----- ----- -----
(6.9) (10.8) (10.9)
Interest receivable and similar items
Cash and deposits 2.3 2.3 2.6
Foreign Exchange - 1.4 -
Net interest payable to CCG and Zenith - ( 7.4) ( 6.9)
--- ------ ------
(4.6) (14.5) (15.2)
===== ====== ======
</TABLE>
The above finance charges for the years ended December 31, 1997 and 1996 were
not representative of the charges that are incurred by the Group following the
Demerger.
There is a gain of L1.4 million included in the net interest expense for the
year ended December 31, 1997, which is the recognition of exchange differences
arising on loans from subsidiaries to parent companies.
<PAGE>
Note 8 - Taxes on Income
Taxes on income were made up as follows:
Year ended December 31,
------------------------------------
1998 1997 1996
-------- -------- ------
L million L million L million
UK corporation tax at 31.0% (1997: 31.5%;
1996: 33.0%):
Currently payable 1.9 0.8 0.6
Deferred - 0.2 1.0
Relief for overseas tax (0.3) (0.4) -
----- ----- ---
1.6 0.6 1.6
Overseas taxation:
Currently payable 7.3 6.9 2.3
Deferred 0.1 0.1 (0.2)
Share of tax charge of associated
undertakings 1.3 0.6 0.8
--- --- ---
10.3 8.2 4.5
==== === ===
There was no tax effect of the operating and non-operating exceptional items in
1998 (1997: Lnil; 1996: Lnil).
The taxation charge represents the sum of the tax charges of the legal entities
forming part of the Group. These charges may have been affected by the surrender
of losses between the members of the Group and CCG. Consequently, and for other
similar reasons, the taxation charge in the years ended December 31, 1997 and
1996 are not representative of the taxation charge that will be incurred by the
Saatchi & Saatchi Group following the Demerger.
Profit/(loss) before taxation is analyzed as follows:
Year ended December 31,
1998 1997 1996
Lmillion Lmillion Lmillion
United Kingdom* 10.5 842.1 9.7
Overseas 26.3 (45.7) 8.8
---- ------ ---
36.8 796.4 18.5
==== ===== ====
* After payment of interest of L0.7 million (1997: L1.1 million interest;
1996:L2.9 million receipt).
The analysis of profit before taxation for 1997 is not considered to be
meaningful by the Directors, because of the exceptional Demerger reorganization
credit of L764.5 million which arose in the period.
At December 31, 1998 Saatchi & Saatchi had L315 million of operating loss
carryforwards expiring between 1999 and 2011. Additionally, Saatchi & Saatchi
had L7 million of operating loss carryforwards which had no expiration date. It
is possible that all or part of the operating loss carryforwards expiring
between 1999 and 2011 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 Saatchi & Saatchi Group within the tax jurisdiction where the
operating loss arose, and are not transferable between jurisdictions.
Note 9 - Earnings Per Ordinary Share
Basic earnings per share have been calculated using earnings of L25.0 million
(1997: L787.6 million; 1996: L13.6 million) and weighted average shares in issue
of 221.9 million shares (1997: 221.9 million shares; 1996: 221.8 million
shares). The number of shares in issue has been reduced, for both basic and
diluted earnings calculations, by the weighted average of the shares acquired by
the Sharesave Trust which has substantially waived its rights to dividends on
these shares. Diluted earnings per share have been calculated using the same
earnings on a weighted average of 224.1 million shares (1997: 222.7 million
shares; 1996: 221.8 million shares). This takes into account the exercise of
share options issued to Group employees and employees of Zenith, and
contingently issuable shares to the extent that conditions have been met, which
may be issued to Group employees and employees of Zenith, where these are
expected to dilute earnings.
The earnings per share for 1997 are based on the Directors' estimated weighted
average number of shares which would have been in issue for that year after
taking into account the share consolidation and assuming that the Company had at
all relevant times prior to the Demerger the same number of issued Ordinary
shares as Cordiant.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
pence per pence per pence per
L million share L million share L million share
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings 25.0 11.3 787.6 354.9 13.6 6.1
Profit on disposal of
businesses (6.1) (2.8)
Adjusted earnings 18.9 8.5
==== ===
</TABLE>
In the opinion of the Directors the additional earnings per share information
given above assists in understanding the performance of the Group.
Owing to the impact of interest and taxation on profit for the years ended
December 31, 1997 and 1996, which are not representative of the charges that
will be incurred by the Saatchi & Saatchi Group following the Demerger, earnings
per share in the years ended December 31, 1997 and 1996 are not indicative of
earnings per share following the Demerger.
Note 10 - Dividend
The Board has recommended a final dividend of 1.4p per Ordinary share (1997:
1.2p; 1996: nil) at a cost of L3.1 million. The final dividend is expected to be
paid on May 20, 1999 to shareholders on the register at April; 23, 1999. There
was no interim dividend.
Note 11 - Short-term Investments
Short-term investments comprised overseas listed investments of L0.2 million
(1997: L0.2 million) with an aggregate market value of L0.2 million (1997: L0.2
million).
Note 12 - Accounts and Other Receivables, Prepayments and Accrued Income
December 31,
1998 1997
L million L million
Due within one year
Trade receivables 206.8 213.1
Other receivables 9.8 23.3
Prepayments and accrued income 19.4 16.5
Amounts due from CCG - 5.1
Amounts due from joint venture 2.9 0.4
------ -----
238.9 258.4
===== =====
Due after one year
Other receivables 2.6 2.8
Prepayments and accrued income 1.9 2.2
--- ---
4.5 5.0
=== ===
Total prepayments and accrued income at December 31, 1998 amounted to L21.3
million (1997: L18.7 million).
<PAGE>
Note 13 - Valuation and Qualifying Accounts
---------------------------------
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning of costs and end of
Description period expenses Deductions* period
----------- -----------------------------------------------------------
L million L million L million L million
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts
(deducted from accounts receivable) 7.3 0.7 - 8.0
Allowance for non-recoverable
billable production (deducted from
billable production) 2.0 - - 2.0
Year ended December 31, 1997:
Allowance for doubtful accounts
(deducted from accounts receivable) 7.3 - - 7.3
Allowance for non-recoverable
billable production (deducted from
billable production) 2.2 - (0.2) 2.0
Year ended December 31, 1996:
Allowance for doubtful accounts
(deducted from accounts receivable) 7.8 - (0.5) 7.3
Allowance for non-recoverable
billable production (deducted from
billable production) 2.5 - (0.3) 2.2
</TABLE>
*Substantially represents amounts utilized against non-recoverable billable
production and bad debts arising during the periods.
Note 14 - Investments
<TABLE>
<CAPTION>
Associated Long term Works Treasury Investments
undertakings investments of art stock in CCG Total
L million L million L million L million L million L million
<S> <C> <C> <C> <C> <C> <C>
Cost
At January 1, 1997 2.3 9.0 - - 421.5 432.8
Translation adjustment 0.1 0.3 - - - 0.4
Disposals - (6.1) - - - (6.1)
Demerger additions
(disposals) - (2.4) 3.6 - (421.5) (420.3)
-------------- ------------- -------------- ------------- ------------- --------------
At December 31, 1997 2.4 0.8 3.6 - - 6.8
Translation adjustment - 0.1 - - - 0.1
Additions 0.1 - - 5.6 - 5.7
Transfers - 3.4 - - - 3.4
Disposals - - (0.6) - - (0.6)
============== ============= ============== ============= ============= ==============
At December 31, 1998 2.5 4.3 3.0 5.6 - 15.4
============== ============= ============== ============= ============= ==============
Provisions
At January 1, 1997 2.2 8.7 - - 309.4 320.3
Translation adjustment 0.1 0.3 - - - 0.4
Disposals - (6.1) - - - (6.1)
Demerger disposals - (2.4) - - (309.4) (311.8)
-------------- ------------- -------------- ------------- ------------- --------------
At December 31, 1997 2.3 0.5 - - - 2.8
Translation adjustment - - - - - -
-------------- ------------- -------------- ------------- ------------- --------------
At December 31, 1998 2.3 0.5 - - - 2.8
============== ============= ============== ============= ============= ==============
Net book value
At December 31, 1997 0.1 0.3 3.6 - - 4.0
============== ============= ============== ============= ============= ==============
At December 31, 1998 0.2 3.8 3.0 5.6 - 12.6
============== ============= ============== ============= ============= ==============
</TABLE>
Long term investments at December 31, 1998 include L0.3 million (1997: L0.3
million) of overseas listed investments with a market value of L0.4 million
(1997: L0.3 million).
At December 31, 1998, the Sharesave Trust had 4,000,000 Ordinary shares (1997:
nil) with a market value of L5.5 million (1997: nil).
<PAGE>
Note 15 - Intangible assets - Goodwill
L million
Cost
At January 1, 1998 -
Additions 6.0
==============
At January 31, 1998 6.0
==============
Amortization
At January 1, 1998 -
Charge for the year 0.2
==============
At January 31, 1998 0.2
==============
Net book value
At December 31, 1997 -
==============
At December 31, 1998 5.8
==============
Note 16 - Properties, Furniture, Equipment and Motor Vehicles
<TABLE>
<CAPTION>
Leasehold Leasehold Furniture
Freehold property property and Motor
property - long -short equipment vehicles Total
L million L million L million L million L million L million
<S> <C> <C> <C> <C> <C> <C>
Cost
At January 1, 1997 10.9 1.3 69.9 90.0 3.8 175.9
Translation adjustments (1.1) 0.1 1.3 (0.8) - (0.5)
Additions - 0.2 3.1 8.7 0.5 12.5
Disposals - (0.2) (0.5) (2.1) (0.8) (3.6)
-- - ----- ----- ----- ----- -----
At December 31, 1997 9.8 1.4 73.8 95.8 3.5 184.3
Translation adjustment 0.7 - (0.2) (0.2) - 0.3
Additions 0.1 - 2.1 9.4 0.3 11.9
Disposals - - (2.4) (8.4) (1.1) (11.9)
-- - -- - ----- ----- ----- ------
At December 31, 1998 10.6 1.4 73.3 96.6 2.7 184.6
==== === ==== ==== === =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Leasehold Leasehold Furniture
Freehold property property and Motor
property - long -short equipment vehicles Total
L million L million L million L million L million L million
<S> <C> <C> <C> <C> <C> <C>
Depreciation
At January 1, 1997 2.7 0.3 20.7 62.5 2.4 88.6
Translation adjustment (0.2) - 0.1 (0.7) 0.1 (0.7)
Charge for the year 0.2 0.1 3.7 10.3 0.6 14.9
Disposals - (0.1) (0.5) (1.6) (0.7) (2.9)
--- ----- ----- ----- ----- -----
At December 31, 1997 2.7 0.3 24.0 70.5 2.4 99.9
Translation adjustment 0.2 - - - - 0.2
Charge for the year 0.2 0.1 3.9 9.1 0.5 13.8
Disposals - - (0.5) (5.2) (0.9) (6.6)
--- ----- ----- ----- ----- -----
At December 31, 1998 3.1 0.4 27.4 74.4 2.0 107.3
=== === ==== ==== === =====
Net book value
At December 31, 1997 7.1 1.1 49.8 25.3 1.1 84.4
=== === ==== ==== === ====
At December 31, 1998 7.5 1.0 45.9 22.2 0.7 77.3
=== === ==== ==== === ====
Net book value of
assets held under
finance leases
included above
At December 31, 1997 - - - 0.2 - 0.2
=== === ==== ==== === ====
At December 31, 1998 - - - 0.2 - 0.2
=== === ==== ==== === ====
Net book value of land and buildings at December 31, 1998 was L54.4 million
(1997: L58.0 million).
Depreciation attributable to owned fixed assets was L13.5 million (1997: L14.7
million; 1996: L13.8 million) depreciation attributable to assets held under
finance leases was L0.3 million (1997: L0.2 million; 1996: L0.5 million).
</TABLE>
The Group had the following commitments in respect of capital expenditure on
properties, furniture and equipment:
December 31
1998 1997
---- ----
L million L million
Committed but not provided for 0.5 0.2
Note 17 - Bank Loans and Overdrafts
Balance at end Weighted average interest rate
of period on interest bearing debt
Year ended December 31, 1998
L million %
Bank loans and overdrafts 4.1 7.1
=== ===
Balance at end Weighted average interest rate
of period on interest bearing debt
Year ended December 31, 1997
L million %
Bank loans and overdrafts 21.4 7.3
==== ===
An amount of L0.6 million (1997: L7.2 million) included in bank loans and
overdrafts is secured by liens over assets.
<PAGE>
Note 18 - Accounts Payable, Other Liabilities and Accrued Expenses
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Due within Due after Due within Due after
one year one year one year one year
L million L million L million L million
<S> <C> <C> <C> <C>
Accounts payable 202.3 - 214.3 -
Payments on account 43.5 - 35.9 -
Finance leases 0.1 - 0.1 0.1
Amounts owed to CCG - - 15.4 -
Amounts owed to joint venture 3.6 - - -
Proposed dividend 3.1 - 2.7 -
Other payables 60.5 26.6 65.4 4.6
---- ---- ------ -----
313.1 26.6 333.8 4.7
===== ==== ======= =====
</TABLE>
An amount of L0.1 million (1997: L4.2 million) included in accounts payable is
secured by related trade receivables and cash balances. Liabilities under
finance leases are secured on the assets leased.
The Group is committed to make certain capital payments in the form of deferred
consideration for subsidiary undertakings. All such commitments totaling L1.5
million (1997: L2.4 million) have been accrued in the balance sheet. The
estimated total payments are set out in Note 3.
Note 19 - Investment in Joint Venture
The following table provides a further analysis of the Company's share of the
joint venture's net liabilities.
December 31,
-------------------------------------
1998 1997
L million L million
Share of assets
Share of fixed assets 1.6 1.8
Share of current assets 75.3 49.9
76.9 51.7
------------------- --------------
Share of Liabilities
Liabilities due within one year (90.5) (64.4)
Liabilities due after one year (0.1) (1.6)
(90.6) (66.0)
------------------- --------------
Total share of net liabilities (13.7) (14.3)
------------------- --------------
A subsidiary of Saatchi & Saatchi plc holds 50% of the ordinary share capital of
Zenith Media Holdings Ltd, a media planning and buying group. The remaining 50%
is held by CCG. Up to 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 20 - Property, Pension and Other Provisions
<TABLE>
<CAPTION>
Pensions and
similar employment
Property obligations Other Total
L million L million L million L million
<S> <C> <C> <C> <C>
At January 1, 1997 60.8 13.1 0.6 74.5
Translation adjustment 1.3 0.1 0.1 1.5
Transfers 2.3 - - 2.3
Charge to expense 6.1 2.9 0.9 9.9
Utilized (11.8) (0.8) (0.7) (13.3)
------ ----- ----- ------
At December 31, 1997 58.7 15.3 0.9 74.9
Translation adjustment (0.4) - 0.1 (0.3)
Transfers (6.8) (12.0) - (18.8)
Charge to expense 1.0 2.0 0.6 3.7
Utilized (7.2) (0.2) (0.4) (7.8)
----- ----- ----- -----
At December 31, 1998 45.3 5.1 1.2 51.6
==== === === ====
</TABLE>
Analysis of leasehold property provision by years
December 31,
---------------------------------
1998 1997
L million L million
Under one year 4.8 7.5
One to two years 3.6 6.4
Two to five years 11.5 13.9
Over five years 25.4 30.9
---- ----
45.3 58.7
==== ====
***
Note 21 - Long-Term Debt
Long term debt consisted of bank loans of L47.5 million at December 31, 1998
(1997: L81.4 million). Of the L47.5 million, L6.2 million includes bank loans
secured by charges over assets and L30.7 million (1997: L74.6 million) of the
long term debt is secured by guarantees from and charges over the assets of the
Company and a number of its subsidiaries.
The core banking facility contains certain covenants which relate principally to
interest cover. As of December 31, 1998 there had been no breaches of covenants
or other defaults under the agreement which have caused or are likely to cause
an early repayment of the debt to be enforced. The unamortized costs of the
banking facility at December 31, 1998 was L1.6 million (1997: L1.9 million).
At December 31, 1998 the Group had committed core banking facilities totaling
US$155.5 million (L93.7 million), of which L30.7 million were being utilized.
The core banking facility will be reduced in accordance with following schedule:
------------------------------------------------------------------------------
1999 2000 2001 2002
$18.0m $20.0m $25.0m the balance
- -------------------------------------------------------------------------------
Interest is payable on each advance under the facilities at a rate per annum
based on the aggregate of LIBOR and a margin of between 1.5% and 0.75% per annum
depending upon the financial ratios of the Company.
Note 22 - Guarantees and Contingent Liabilities
Guarantees given by Saatchi & Saatchi to third parties other than CCG or Zenith
amounted to L0.1 million (1997: L0.1 million).
In addition to those guarantees identified in Note 21, the Company has
guaranteed L1.4 million of outstanding borrowings of subsidiary undertakings.
The Company has jointly and severally with CCG provided unlimited guarantees to
the lenders, in respect of Zenith's L20.5 million bank facility agreement and
has guaranteed L3.7 million in borrowings of Bates Japan Limited, provided by
Yomiko Advertising, Inc. The Demerger Agreement provides for any liability under
these guarantees to be shared equally between CCG and the Company.
The Saatchi & Saatchi Group has guaranteed the following obligations of CCG. CCG
has agreed in the Demerger Agreement to indemnify the Group against any
liability under the Group's guarantees of CCG obligations.
The Company has guaranteed all of the obligations of Cordiant Property
Holdings Limited, a member of CCG, as tenant under certain leases of
premises at Lansdowne House, Berkeley Square, London for a term expiring on
June 16, 2013. The current base rent under these leases amounts to L10.6
million per annum, subject to upwards only rent reviews in 2002/2003 and
every five years thereafter. This property is not currently occupied by any
CCG company. All of this property has been sublet, but for varying terms
and at lower rents. There is also an existing guarantee from CCG which will
continue.
The Company's subsidiary, Saatchi & Saatchi Compton Worldwide, Inc. has
guaranteed all of the obligations of Bates Advertising USA, Inc., a member
of CCG, as tenant under certain leases of premises at 2010 Main Street,
Irvine, California for a term expiring on March 3, 2003. The base rent over
the remaining life of the lease totals $10.8 million. Of 73,000 rentable
square feet, 24,000 is currently occupied by a CCG company. The remaining
space has been sublet for varying terms and at lower rents.
There are a number of existing guarantees by CCG in respect of obligations
of certain companies in the Saatchi & Saatchi Group, including guarantees
in respect of leases of premises at 375 Hudson Street, New York and certain
premises in London. These and certain other existing guarantees were not
released in connection with the Demerger. In the Demerger Agreement, the
Company agreed to give additional, or in some cases substitute, guarantees
and to indemnify CCG against any liability under its existing guarantees.
In March 1992 Saatchi & Saatchi North America, Inc. ("SSNA"), a subsidiary of
Saatchi & Saatchi, disposed of the assets of its Lifestyle Marketing Group
division. In 1995 a default judgment was entered by the Wayne County, Michigan
Circuit Court against a party described as Lifestyle Marketing Group. The total
amount of the default judgment (including interest to date) is approximately $33
million. On February 11, 1998, this court issued an Opinion and Order holding
that SSNA is liable to indemnify a party which the Court referred to as
Lifestyle Marketing Group or Lifestyle Marketing Group Inc. Saatchi & Saatchi
has been advised by its U.S. counsel that, in its view, the Opinion and Order is
based on palpable errors of fact and law. SSNA was previously dismissed from
this lawsuit in March 1997 on summary judgment. SSNA is vigorously pursuing its
defenses to this action through a rehearing and/or appeal.
Note 23- Deferred Taxation
-----------------
December 31,
-----------------------------------
1998 1997
L million L million
Overseas deferred taxation liability (1.8) (1.7)
===== =====
There were no material deferred tax liabilities at December 31, 1998 (1997: nil)
in respect of accelerated capital allowances. No provision is made for tax that
would arise on the remittance of overseas earnings as the Company intends to
keep these earnings invested locally.
Unremitted earnings of subsidiaries which have been or are intended to be
permanently reinvested to meet media accreditation and working capital
requirements aggregated L35.2 million at December 31, 1998 (1997: L30.0
million).
<PAGE>
Under US GAAP temporary differences at the appropriate tax rate are as follows:
Assets (Liabilities)
---------------------------------------------
Year Ended December 31,
---------------------------------------------
1998 1997
---- ----
Deferred Tax Assets L million L million
Accrued property rental expense 22.4 29.9
Accrued compensation 10.6 9.2
Capital loss carryforwards 4.5 5.1
Operating loss carryforwards 136.4 139.8
Interest disallowed under Section
163(j) of the IRC 19.1 23.3
Difference in basis of intangible
assets 1.5 -
Other 4.7 5.4
------- --------
Total deferred tax assets 199.2 212.7
Valuation allowance (190.6) (202.2)
----- ------
Total deferred tax asset 8.6 10.5
Deferred Tax Liabilities
Accelerated depreciation on
tangible assets (8.1) (9.3)
Differences in basis of intangible
assets - (0.7)
Other (2.3) (2.2)
--- --------
Total deferred tax liability (10.4) (12.2)
-------- --------
Net deferred tax liability (1.8) ( 1.7)
======= =======
See Note 8 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 assets 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 in the period
to December 31, 1998 amounted to L11.6 million (1997: L123.1 million).
Note 24 - Taxation
--------
This largely represents corporation tax liabilities due to be paid in more than
one year from the date of the consolidated financial statements. Tax liabilities
due to be settled in less than one year are included under current liabilities.
Note 25 - Share Schemes
-------------
Employee share schemes
Cordiant had three executive schemes in existence prior to the Demerger.
Participants who were employed by the Saatchi & Saatchi Group were invited to
cancel their options in return for replacement options over Saatchi & Saatchi
shares. Replacement options are over the same number of Saatchi & Saatchi shares
and have the same exercise price, exercise period and performance conditions as
the old Cordiant options except that the more recent options all expire on
December 15, 2004. Options granted to participants in the Cordiant executive
schemes were issued at market value at time of grant. For Charles Scott,
Cordiant employees who ceased to be employed by Cordiant as a result of the
Demerger and employees of Zenith and The Facilities Group who held executive
options under the Cordiant schemes, the same principles apply except that their
replacement options have been split 50:50 between options over Saatchi & Saatchi
shares and options over CCG shares.
Prior to the Demerger, Cordiant had adopted a Save As You Earn Scheme, Sharesave
1995, for UK employees, which was approved by the Inland Revenue. Eligible
employees were granted options linked to a five year savings contract. The
exercise price was fixed at 80% of market value at the time of grant. Saatchi &
Saatchi Group employees holding these options were granted a parallel unapproved
option over Saatchi & Saatchi shares which will be exercisable with the
accumulated savings and interest/bonus under the Cordiant scheme. Employees of
Zenith and The Facilities Group have parallel options split 50:50 between
Saatchi & Saatchi shares and CCG shares.
Two new incentive schemes were introduced on Demerger, the Equity Participation
Plan and Performance Share Option Scheme. These schemes are described below.
Equity Participation Plan ("EPP")
32 employees currently participate in the EPP and cash payments of L1,648,143
have been received by the Company, which, if maximum performance targets are to
be met, would give rise to an issue of 11,703,862 shares.
Participants will be eligible to receive shares if EPS growth is higher than the
UK Retail Price Index plus 2% p.a. over a three year period. If growth is below
this hurdle rate participants will lose their investment. Participants other
than Directors will receive shares based on a scale of EPS growth up to a
maximum of eight times the number of shares that they could have acquired with
their original investment. To achieve the maximum allocation would require EPS
growth of 25% per annum.
One half of shares vesting will normally be receivable by participants after
three years with the remainder receivable after four years.
Awards to participants who are Directors of the Company will vest as to one half
on the basis of EPS growth as described above. The other half will be determined
on total shareholder return compared with a group of major publicly quoted
advertising groups. In that case, the maximum number of shares will vest only if
the Company is first or second of the comparator group.
Performance Share Option Scheme ("PSOS")
56 employees currently participate in the PSOS and are sacrificing remuneration
of L759,000 over a three year period which, if maximum performance targets are
to be met, would give rise to an issue of 7,424,220 shares. This sacrifice will
not be offset against the option price payable. Participants will be eligible to
exercise their options dependent on the performance of the Group over a three
year period. The PSOS has similar EPS-based growth performance criteria to the
EPP. One half of the eligible options may normally be exercisable after three
years and the remainder after four years.
Shareforce
In October 1998, a Company wide Save As You Earn scheme, Shareforce, was
introduced. Shareforce allows the Board to grant options to buy shares in the
Company to those employees who enter into a three year savings contract. The
price at which options may be offered is 85% of the market place.
<PAGE>
The number of Saatchi & Saatchi shares issuable under equity participation
rights or options outstanding are as follows:
<TABLE>
<CAPTION>
SAYE
and
Executive Shareforce
Equity Schemes Schemes
Participation Ordinary Ordinary
Rights Shares Shares
------------- --------- -----------
<S> <C> <C> <C>
At January 1, 1996 - 3,995,815 1,240,221
- ------------------------------------
Options issued during the year - 1,885,000 -
- ------------------------------------
Options exercised during the year - (13,721) (4,096)
- ------------------------------------
Options lapsed during the year - (195,520) (139,961)
- ------------------------------------
--------------- ------------------ -------------
At December 31, 1996 - 5,671,574 1,096,164
Options issued during the year - 2,459,687 -
Options exercised during the year - - -
Options lapsed during the year - (415,976) (123,435)
--------------- ------------------ -------------
Balance on demerger - 7,715,285 972,729
--------------- ------------------ -------------
Replacement options issued on - 7,715,285 972,729
demerger
Options issued during the period 11,876,362 7,590,000 -
Options exercised during the period - - -
Options lapsed during the period - - (34,199)
--------------- ------------------ -------------
At December 31, 1997 11,876,362 15,305,285 938,530
Options issued during the year 467,500 274,220 3,135,938
Options exercised during the year (10) (988,571) (31,142)
Options lapsed during the year (639,990) (558,002) (136,522)
--------------- ------------------ -------------
At December 31, 1998 11,703,862 14,032,932 3,906,804
--------------- ------------------ -------------
</TABLE>
<PAGE>
Options outstanding at December 31, 1998 under the Company's share option
schemes are shown below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Original Number of Exercise Exercisable Exercisable
Scheme date of shares price from to
grant
- ---------------------- ------------- ------------ ------------ ------------- -------------
Demerger Executive
Scheme (No. 1) Apr 1992* 77,863 107p Dec 1997 Apr 1999
- ---------------------- ------------- ------------ ------------ ------------- -------------
Demerger Executive Jun 1991 697,247 135p Dec 1997 Jun 2001
Scheme (No. 2) Apr 1992 147,502 107p Dec 1997 Apr 2002
Apr 1992* 192,263 107p Dec 1997 Apr 2002
Apr 1994 192,241 103p Dec 1997 Apr 2004
- ---------------------- ------------- ------------ ------------ ------------- -------------
Demerger May 1995 353,556 73p May 1998 Dec 2004
Performance May 1995* 177,423 73p May 2000 May 2002
Share Option Aug 1995 687,183 95p Aug 1998 Dec 2004
Scheme Aug 1995* 67,497 95p Aug 2000 Aug 2002
Apr 1996 707,500 130p Apr 1999 Dec 2004
Apr 1996* 848,750 130p Apr 2001 Apr 2003
Apr 1997 1,002,500 132p Apr 2000 Dec 2004
Apr 1997* 1,002,500 132p Apr 2002 Dec 2004
Jun 1997 227,344 124p Jun 2000 Dec 2004
Jun 1997* 227,343 124p Jun 2002 Dec 2004
- ---------------------- ------------- ------------- --------- ------------- ------------
Demerger Sharesave
Scheme Jun 1995 778,226 64p Jul 2000 Dec 2000
- ---------------------- ------------- ------------- --------- ------------- ------------
Performance Share
Option Scheme Dec 1997 7,150,000 110p Dec 2000 Dec 2004
May 1998 274,220 177p May 2001 May 2005
- ---------------------- ------------- ------------- ------------- ------------
- ---------------------- ------------- ------------- --------- ------------- ------------
Shareforce Oct 1998 3,102,440 90p Oct 2002 Apr 2003
Oct 1998 26,138 88p Oct 2002 Apr 2003
- ---------------------- ------------- ------------- --------- ------------- ------------
<FN>
The options marked * are super options.
</FN>
</TABLE>
The performance targets for options under the Executive Demerger Schemes are as
follows:
For ordinary options under the No. 1 and No. 2 Schemes there must have been an
increase in the Company's earnings per share over any three year period
following the date of the grant of at least 2% more than the increase in the
Retail Price Index over the same period.
For ordinary options under the Performance Scheme the condition is the same as
for the No. 1 and No. 2 Schemes except that 2% is replaced by 6%.
Super options under all three schemes cannot be exercised before the fifth
anniversary of the date of grant and only then if the growth in earnings per
share from the date of grant has been such as would place it in the top quartile
of the FTSE 100 companies ranked by reference to growth and earnings per share.
As at December 31, 1998, there are awards over 11,703,862 shares under the
Equity Participation Plan which are exercisable between December 2000 and
December 2004.
Shareforce
In countries where it was not possible to grant a share option, 337,360 share
appreciation rights were granted whereby upon exercise each participant will
receive a cash amount instead of shares.
Zenith Share scheme
The Company and CCG agreed an incentive scheme on Demerger for senior executives
of their jointly held company, Zenith. To participate, executives have to invest
in the scheme by cash payment or salary or bonus sacrifice. An award will
comprise an option over shares in CCG and the Company and/or a cash reward. A
participant's actual entitlement will be determined by measuring the growth in
Zenith's operating profit over a three year period.
On Demerger, options over 1,078,807 Saatchi & Saatchi shares were granted with
the same exercise price and period as for the Performance Share Option Scheme
above.
Note 26 - Post Retirement Benefits
------------------------
Group employees are members of a number of pension schemes throughout the world,
principally in the UK and the US. Group employees will continue to participate
in the Cordiant UK schemes following the Demerger, subject to Inland Revenue
approval, until alternative arrangements are established.
The majority of the schemes are externally funded and the assets are held in
separately administered trusts or are insured. None of the externally funded
schemes holds investments in, or has made loans to, the Company or any of its
subsidiaries.
The major schemes, which cover the majority of scheme members, are defined
contribution schemes.
The pension expense for each period was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
- -------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
L million L million L million
---------------- --------------- --------------
- ------------------------------------------- 0.6 0.5 10 0
Defined benefit schemes*
Defined contribution schemes 6.7 6.6 5.4
- -------------------------------------------- ---------------- --------------- -- --------------
7.3 7.1 15.4
- -------------------------------------------- ---------------- --------------- -- --------------
<FN>
* Includes an exceptional termination provision of L8.1 million in 1996.
</FN>
</TABLE>
Saatchi & Saatchi has only one UK defined benefit scheme with active membership,
the Cordiant Group Pension Scheme, details of which are given below.
In the U.S. Cordiant had only one funded defined benefit scheme, the Saatchi &
Saatchi Cash Balance Retirement Plan, details of which are given below. At the
last valuation date there was a current funding surplus of $0.3 million (L0.2
million). This scheme was frozen at June 30, 1996 and terminated on December 31,
1996. In addition to this there is a supplementary unfunded scheme to provide
certain guaranteed benefits to members of a former scheme who were transferred
to the main defined benefit scheme.
The pension expense on the defined benefit plans have been allocated to the
Company based on employee compensation levels as if the company participated in
a multi employer plan. The costs associated with the defined contribution plans
have been presented based on the actual amounts contributed by each Group
entity.
Set out below are the details of the most recent valuation of Cordiant's pension
schemes for the UK and US.
UK US (since closed)
Date of last actuarial valuation April 1, 1996 January 1, 1996
Market value of investments L 26.2 million L 24.4 million
Level of funding 108% 101%
Valuation method Attained age Projected unit credit
Main assumptions:
Investment return 9.0% 6.0%
Salary increases per annum 7.0% 5.5%
In the case of the Saatchi & Saatchi Cash Balance Retirement Plan for the period
January 1, 1996 through to June 30, 1996 the expected long-term rate of return
on assets was 9.0%. Following the decision to terminate the scheme, the assets
were realized and the resulting proceeds reinvested with an expected rate of
return of 6.0%
The Group has no material liabilities for post-retirement benefits other than
pensions.
Note 27 - Leases
------
The Company leases certain properties and equipment under operating leases.
Minimum payments for operating leases, before provisions for vacant property
(see Note 20), having initial or remaining noncancellable terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sublease
Minimum Rental Net
Years Ending Payments Income Payments
December 31, -------- ------ --------
L million L million L million
1999 30.4 5.6 24.8
2000 26.4 5.2 21.2
2001 25.2 5.3 19.9
2002 24.3 5.0 19.3
2003 25.6 4.5 21.1
Thereafter 183.4 12.0 171.4
----- ---- -----
Total minimum lease payments 315.3 37.6 277.7
===== ==== =====
</TABLE>
Total expense for all operating leases was:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
L million L million L million
Total operating lease expense 28.3 29.9 32.5
Sublease rental income (5.8) (6.7) (6.1)
----- ----- -----
Net property operating lease expense 22.5 23.2 26.4
==== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 28 - Reconciliation of Operating Profit to Operating Cash Flow
---------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
L million L million L million
Operating profit 31.4 29.7 7.0
Depreciation and amortization 14.0 14.9 14.3
Loss (profit) on sale of
tangible fixed assets (0.2) - 0.2
Decrease (increase) in
billable production 1.3 (0.3) 3.4
Decrease (increase) in
receivables 3.8 9.8 7.9
(Decrease) increase in
creditors (net of (4.4) 10.2 0.8
exceptional non cash items)
Exceptional non cash items
(see note 5) - - 16.3
Utilization of property
provisions (7.2) (11.8) (12.0)
----- ------ ------
Net cash inflow to
operating activities 38.7 52.5 37.9
==== ==== ====
</TABLE>
Note 29 - Reconciliation of Net Cash Flow to Movements in Net Debt
--------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
L million L million L million
<S> <C> <C> <C>
Decrease in cash in the period (9.2) (8.9) (12.4)
Cash (outflow)/inflow from decrease/
(increase) in debt and lease financing 33.8 (0.1) 15.6
---- ----- ----
Change in net debt resulting from cash flow 24.6 (9.0) 3.2
Net amounts repaid to CCG & Zenith - 204.4 -
Net debt repaid or forgiven as part of the
Demerger process - 855.1 -
Translation and non-cash movements - (0.3) 7.2
--- ----- ---
Movement in net debt in the period 24.6 1,050.2 10.4
Net debt at beginning of period (45.5) (1,095.7) (1,106.1)
------ ------- -------
Net debt at end of period (20.9) (45.5) (1,095.7)
====== ==== =======
</TABLE>
Note 30 - Analysis of Net Debt
--------------------
<TABLE>
<CAPTION>
Exchange and
At January 1, non-cash At December
1998 Cash flow Demerger movements 31, 1998
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year to December 31, 1998
Cash at Bank and in hand 57.5 (26.7) - - 30.8
Bank overdrafts (20.8) 17.5 - - (3.3)
External debt less than (0.6) (0.2) - - (0.8)
one year
External debt greater (81.4) 33.9 - - (47.5)
than one year
Finance leases (0.2) 0.1 - - (0.1)
- -
Net amounts due from CCG - - - - -
--- ------- -------- ---------- ------------
and Zenith
Total (45.5) 24.6 - - (20.9)
====== ====== ========= ========== =============
</TABLE>
<TABLE>
<CAPTION>
Exchange and
At January 1, non-cash At December
1997 Cash flow Demerger movements 31, 1997
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year to December 31, 1997
Cash at Bank and in hand 69.3 (9.4) - (2.4) 57.5
Bank overdrafts (20.8) 0.5 - (0.5) (20.8)
External debt less than - (0.6) - - (0.6)
one year
External debt greater
than one year (79.1) 0.4 - (2.7) (81.4)
Finance leases (0.3) 0.1 - - (0.2)
----------- --------- --------- ---------- ------------
Net amounts due from CCG (30.9) (9.0) - (5.6) (45.5)
and Zenith (1,064.8) 204.4 855.1 5.3 -
--------- --------- --------- ---------- ------------
Total (1,095.7) 195.4 855.1 (0.3) (45.5)
========= ====== ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Exchange and
At January 1, non-cash At December
1996 Cash flow Demerger movements 31, 1996
L million L million L million L million L million
<S> <C> <C> <C> <C> <C>
Year to December 31, 1996
Cash at Bank and in hand 86.1 (13.2) - (3.6) 69.3
Bank overdrafts (20.1) 0.8 - (1.5) (20.8)
External debt greater
than one year (107.3) 21.3 - 6.9 (79.1)
Finance leases (0.3) - - - (0.3)
--------- --------- ---------- ---------- ------------
(41.6) 8.9 - 1.8 (30.9)
Net amounts due from CCG
and Zenith (1,064.5) (5.7) - 5.4 (1,064.8)
--------- ----- ----------- --------- ------------
Total (1,106.1) 3.2 - 7.2 (1,095.7)
========= === =========== ========= ============
</TABLE>
Note 31 - Purchase and Sale of Subsidiary Undertakings
--------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1998 1997 1996
L million L million L million
<S> <C> <C> <C>
Net assets acquired
Tangible fixed assets 0.3 - 0.2
Work in progress - - 0.1
Debtors - 0.1 4.9
Cash at bank and in hand - - 0.5
Creditors relieved (acquired) 2.2 8.0 (5.8)
Minority shareholders' interest - - 10.7
------ ------ ----------
2.5 8.1 10.6
Property revaluation* - - 3.6
Goodwill 6.0 (0.2) 13.4
--- ------ ----------
8.5 7.9 27.6
=== ====== ==========
Satisfied by
Cash 7.0 7.9 20.8
Deferred consideration 1.5 - 5.5
Transfer from CCG - - 1.3
------ ------ -----
8.5 7.9 27.6
======= ======= =======
Net assets disposed of
Tangible fixed assets 5.3 - -
Investments (0.1) 12.5 0.8
Work in progress 0.4 - -
Debtors 12.8 0.2 3.0
Cash at bank and in hand 1.2 - -
Creditors (6.0) 0.2 (0.2)
Provisions for liabilities and charges 1.0 - -
------- ------- -------
14.6 12.9 3.6
Goodwill 0.7 - -
Profit on disposal 6.1 4.3 17.7
Minority interest (0.3) - -
----- ------- -------
21.1 17.2 21.3
==== ==== ======
Satisfied by
Cash 20.3 17.2 9.5
IPG shares - - 11.8
Deferred consideration 0.8 - -
----- ------ ------
21.1 17.2 21.3
==== ==== ====
</TABLE>
* Net of deferred tax provision.
The above assets and liabilities were acquired without any need to make
fair value adjustment.
The acquisitions and disposals are described in Note 3.
<PAGE>
Note 32 - Operations by Geographic Area
-----------------------------
<TABLE>
<CAPTION>
Continental
Europe,Africa &
Middle
United North East Asia Disposed
----
Kingdom America Pacific Subtotal Businesses Total
------- ------- ------- -------- ---------- -----
L million L million L million L million L million L million L million
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Commission and fee income 58.2 182.3 73.9 48.6 363.0 17.1 380.1
Trading and operating profit 7.6 20.6 4.7 (2.7) 30.2 1.2 31.4
Total assets employed 69.0 176.8 85.3 57.3 388.4 - 388.4
Net assets (liabilities)2 27.6 (60.1) (5.3) (31.9) (69.7) - (69.7)
Depreciation expense 3.4 6.7 2.0 1.7 13.8 - 13.8
Additions to properties, 3.0 4.6 2.1 2.2 11.9 - 11.9
furniture, etc.
Year ended December 31, 1997
Commission and fee income 61.4 180.5 82.6 52.2 376.7 1.5 378.2
Trading and operating profit 5.5 20.8 5.3 (1.0) 30.6 (0.9) 29.7
Total assets employed 73.7 192.5 84.5 78.8 429.5 - 429.5
Net assets (liabilities)2 44.1 (59.8) (19.0) (40.6) (75.3) - (75.3)
Depreciation expense 3.7 7.3 2.2 1.7 14.9 - 14.9
Additions to properties, 2.2 5.9 1.9 2.5 12.5 - 12.5
furniture, etc.
Year ended December 31, 1996
Commission and fee income 57.6 173.1 89.2 53.3 373.2 2.1 375.3
Trading profit 5.4 16.0 3.6 0.3 25.3 (2.0) 23.3
Exceptional operating items - (16.3) - - (16.3) - (16.3)
Operating profit 5.4 (0.3) 3.6 0.3 9.0 (2.0) 7.0
Total assets employed2 93.1 212.7 94.3 68.9 469.0 - 469.0
Net assets (liabilities)3 20.7 (69.6) (0.4) (0.8) (50.1) - (50.1)
Depreciation expense 4.0 6.3 2.3 1.7 14.3 - 14.3
Additions to properties, 2.7 5.2 2.1 2.4 12.4 - 12.4
furniture, etc.
2 Where applicable, total assets employed are shown before investments in CCG
and amounts due to/from CCG/Zenith.
3 Net assets (liabilities)are stated before financial items, investments in
subsidiaries, amounts due from CCG/Zenith, amounts owed to CCG/Zenith and
equity accounting for Zenith. Net financial items include cash at bank,
loan stock, bank overdrafts, other loans, obligations under finance leases
and hire purchase commitments.
</TABLE>
The geographic analysis of revenue, trading profit and net liabilities has been
prepared on a basis that reflects the management of the operations of the Group.
Management considers that there is only one business activity, namely
advertising and marketing services, and that is more appropriate to show a
geographic analysis of revenue than turnover. Revenue by geographic destination
is not materially different from revenue by geographic origin.
The Saatchi & Saatchi Group's customers are located throughout the world. During
1998, 1997 and 1996 two clients each accounted for more than 5% of the Group's
revenue. At December 31, 1998 and 1997, no account receivable from any customer
exceeded 5% of the Group's total assets.
Operating profit in 1997 and 1996 is stated after deducting net Cordiant Group
corporate costs attributable to the Saatchi & Saatchi Group in 1997 of L6.6
million and in 1996 of L7.4 million. Net corporate costs have been allocated to
the Saatchi & Saatchi Group, CCG and Zenith pro rata with the revenues of these
groups.
Note 33 - Transactions with Related Parties
---------------------------------
Net charges in the ordinary course of business with the joint venture, Zenith,
for media and production services together with other charges, amounted to L14.9
million for the year ended December 31, 1998 (1997: L13.6 million; 1996: L8.5
million). Balances with the joint venture are disclosed in notes 12 and 18
above, all of which are of a trading nature.
Prior to the Demerger in 1997, Saatchi & Saatchi had not operated as a separate
group, and consequently there were a number of related party transactions
between it and CCG, and between Saatchi & Saatchi Group, its joint venture,
Zenith and its associates. These include transactions relating to treasury,
insurance, taxation, information, systems support and other central services
supplied by CCG to Saatchi & Saatchi.
Cordiant net corporate costs for 1997 as allocated to Saatchi & Saatchi are
included in the analysis of profits as set out in note 32 above. Inter-company
interest charged to the Saatchi & Saatchi Group by CCG and Zenith is set out in
note 7 above.
Note 34 - Fair Value of Financial Instruments
-----------------------------------
Short-Term Investments - Short-term investments comprise L0.2 million (1997:
L0.2 million) of overseas listed investments which had a market value of L0.2
million (1997: L0.2 million). See note 11.
Net borrowings (excluding foreign exchange contracts) - The book value of cash,
short term deposits and short term borrowings approximate to their fair values
because of the short term maturity of these instruments. The fair value of long
term borrowings approximate their carrying value.
Foreign exchange forward contracts - Foreign exchange forward contracts are used
to hedge existing and identified future foreign currency commitments. At
December 31, 1998 and 1997, the Company had L51.7 million and L25.2 million,
respectively, of forward contracts outstanding, the fair value of which was not
materially different from the contracted amount in either year. Financial
instruments are only used to hedge underlying commercial exposures. Realized or
unrealized gains and losses on forward contracts which hedge firm third party
commitments are recognized in income in the same period as the underlying
transaction. The Company does not speculate in derivative financial instruments.
Interest Rate Caps - The Company entered into interest rate caps in December
1997 covering $70 million of its borrowings (1996: nil). The terms of these caps
are for between two and three years. The premiums are being amortized over the
relevant terms.
The counterparties to the Company's financial instruments are major
international financial institutions. It is Company practice to monitor the
financial standing of these counterparties on an on-going basis. The Company
does not anticipate any material adverse effect on its financial position
resulting from its involvement in the agreements, nor does it anticipate
non-performance by any of its counterparties.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Note 35 - Principal Subsidiaries and Joint Venture
----------------------------------------
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 subsidiaries and joint
venture are:
- --------------------------------------------------------------------------------
England Saatchi & Saatchi Group Ltd
The Facilities Group Ltd (70%)
Zenith Media Holdings Ltd (50% joint venture)
- --------------------------------------------------------------------------------
Australia Saatchi & Saatchi Advertising Pty Ltd
- --------------------------------------------------------------------------------
France Saatchi & Saatchi France SA
- --------------------------------------------------------------------------------
Germany Saatchi & Saatchi GmbH Werbeagentur GWA
- --------------------------------------------------------------------------------
Italy Saatchi & Saatchi SpA
- --------------------------------------------------------------------------------
New Zealand Saatchi & Saatchi Ltd
- --------------------------------------------------------------------------------
US
Klemtner Advertising, Inc.
Rowland Worldwide, Inc.
Saatchi & Saatchi North America, Inc.
- --------------------------------------------------------------------------------
In the opinion of the Directors, these subsidiary and joint venture undertakings
principally affected the results or the assets of the Group. In addition to the
companies shown in the above list the Group also holds investments in many other
subsidiary undertakings. A full list of subsidiary undertakings will be filed
with the Registrar of Companies.
Note 36 - Subsequent Event
----------------
In February 1999, the Company agreed to increase its equity investment in Nazca
Saatchi & Saatchi, Inc (Nazca) from 50% to 75% and its voting rights from 37% to
75% for a consideration of US $7.0 million. Nazca, which is based in Puerto Rico
has agencies in Brazil, Mexico, Puerto Rico and Venezuela and associates
throughout Latin America.
Note 37 - Nature of Business
------------------
The Company is a multi-national advertising and marketing services business. An
analysis of revenue and assets by geographic region is set out in Note 32 to the
statements.
Note 38 - 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. The statutory accounts for 1998 will be
filed following the Company's Annual General Meeting. The auditors have reported
on these accounts. Their reports were unqualified and did not contain statements
under Section 237(2) or (3) of that Act.
Note 39 - 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 summary of material adjustments to the profit and shareholders' deficiency
which would be required if US GAAP had been applied instead of UK GAAP as set
out below.
(a) Goodwill and US purchase accounting
Under US GAAP, goodwill and identifiable intangible assets acquired are
capitalized and amortized against income; intangible assets being
amortized over their economic lives which range from three to 20 years
and the remaining goodwill amortized over 40 years. For US GAAP
purposes, management 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 after ascribing fair values to all
tangible assets and liabilities acquired after January 1, 1998 is
capitalized and amortized over appropriate periods not exceeding 20
years. Goodwill arising on acquisitions prior to January 1, 1998, was
written off against reserves. On disposal of a subsidiary, under UK GAAP
the gain or loss on disposal is calculated after taking account of
goodwill not previously written off through the statement of operations.
Under US GAAP the gain or loss on disposal is calculated after taking
account of any related unamortized goodwill. A GAAP difference arises on
the disposal of entities acquired prior to January 1, 1998, being equal
to the difference between the full amount of goodwill written off to
reserves under UK GAAP and the amortization charged under US GAAP.
(b) 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. These increases are recognized when payable
under UK GAAP.
(c) Long-term property provisions
Under US GAAP, provisions for properties which are vacant or let at a
loss are provided on a discounted basis after allowing for estimated
subrental income, and amortization of the discount is charged to
interest expense. Currently under UK GAAP, provisions for properties
which are vacant or let at a loss are provided on an undiscounted basis,
after allowing for estimated subrental income. From January 1, 1999, the
Company will adopt FRS 12 which will recognize these provisions on a
discounted basis and will require restatement of earlier periods.
(d) Pensions
The Statement of Financial Accounting Standards ("SFAS") No. 88,
Employer's Accounting for Settlements and Curtailment of Defined Benefit
Plans and for Termination Benefits, specifies the accounting treatment
under US GAAP for circumstances in which there has been an irrevocable
transaction that relieves the employer of primary responsibility for a
pension benefit obligation and eliminates significant risk related to
the obligation and the assets used to effect the settlement. As a result
of the curtailment and termination of the US scheme during 1996, the
related termination liability was accrued in full under UK GAAP and the
additional US GAAP accrual was reversed. Additionally, under US GAAP,
the Company has previously recognized an additional minimum pension
liability for the US underfunded plan, representing the excess of the
accumulated benefit obligations over the plan's assets. As a result of
the curtailment and termination of the plan during 1996, the Company has
recorded the full termination liability under UK GAAP and the additional
US GAAP accrual has been reversed.
(e) Demerger related items
Under UK GAAP these items have been reflected in the profit and loss
account. Under US GAAP they are reflected as a direct adjustment to
equity.
(f) Dividends
Under UK GAAP Ordinary dividends proposed are provided 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.
(g) 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. 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 is in a tax loss carry forward
position and believes that the realization of its net deferred tax
assets at this time is not considered likely.
(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. The former Cordiant
outstanding options have been replaced by Saatchi & Saatchi options
which closely mirror those presented in respect of current employees who
have transferred to the Company on this basis. If the compensation cost
of the options had been determined based on the fair value at the grant
dates for 1998, 1997 and 1996 consistent with the method prescribed by
SFAS No. 123, the Company's US GAAP net profit (loss) and earnings
(loss) per share would have been adjusted to the revised amounts
indicated below
Year ended December 31
1998 1997 1996
- --------------------------------------------------------------------------------
Net profit (loss) in - as reported L12.6 L8.5 L(5.1)
L million
- revised L10.7 L8.2 L(5.4)
Earnings (loss) per - as reported 5.7p 3.8p (2.3)p
share in pence
- revised 4.5p 3.8p (2.4)p
- --------------------------------------------------------------------------------
The pro forma diluted earnings per share is the same as the revised
earnings per share figure presented above. The revised amounts were
determined based on employee share scheme awards in 1998, 1997, 1996 and
1995 only. Compensation cost is recognized over the expected life of the
option (i.e. between 3 1/2 and 6 1/2 years). The revised amounts for
compensation cost may not be indicative of the effects of 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 57.9p, 35.7p and
57.7p for options granted during the year ended December 31, 1998, 1997 and
1996, respectively. The fair values have been estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996 respectively; dividend
yields of 0% throughout, expected volatility of 32% for options issued in
1998 and 22% for those issued earlier, risk-free interest rates of 5.8%,
7.0% and 8.2% and expected lives of between 3 1/2 and 6 1/2 years.
(i) Treasury stock owned by Employee Share Option Plan (ESOP) Under UK GAAP,
treasury stock purchased by the ESOP is recorded as a fixed asset
investment at cost less amounts written off. Under US GAAP, treasury stock
is recorded at cost and deducted from shareholders' equity.
(j) Cash flows
The Group Statement of Cash Flow is prepared in accordance with Financial
Reporting Standard No. 1 `Cash Flow Statements' (`FRS 1'). Its objectives
and principles are similar to those set out in SFAS 95. The principle
difference between the standards relates to classification. Under FRS 1,
the Group presents its cash flows for: (a) operating activities; (b)
returns on investments and servicing of finance; (c) taxation; (d) capital
expenditure and financial investment; (e) acquisitions and disposals; (f)
management of liquid resources; and (g) financing. SFAS 95 requires only
three categories of cash flow activity: (a) operating; (b) investing; and
(c) financing. Cash flows from taxation and returns on investments and
servicing of finance shown under FRS 1 would, with the exception of
dividends paid, be included as operating activities under SFAS 95. The
payment of dividends would be included as a financing activity under SFAS
95. Movements in short term investments would be classified as an investing
activity under the SFAS 95 rather than the management of liquid resources
as shown under FRS 1. Amounts resulting from the demerging of CCG/Zenith
companies included in acquisitions and disposals would be presented as
financing. Changes in bank overdrafts are included within cash equivalents
under FRS 1 and would be considered a financing activity under SFAS 95.
Had bank overdrafts been shown as a financing activity in the Group
statement of cash flows the repayments would have been L48.4 million,
L204.8 million and L16.4 million in the years ended December 31, 1998, 1997
and 1996 respectively. The difference between the movement above and the
movement implied in note 29 is due entirely to foreign exchange.
(k) Investment in joint venture Under UK GAAP, the Company separately
identifies the joint venture's turnover, operating profit and interest on
the face of the profit and loss account and its share of the joint
venture's tax is separately disclosed in the notes to the financial
statements.
US GAAP requires the Company to calculate its share of the income of its
joint venture after excluding inter-company transactions and present such
amount net of income taxes in the Statement of Operations. Accordingly, the
following table sets out the selected operating data on a UK GAAP basis
adjusted for these presentation differences.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
L million L million L million
----------------------------- ------------------ ------------------- --------------
<S> <C> <C> <C>
Share of operating profit
(loss) in joint venture 2.4 0.6 (0.3)
Share of net interest
receivable from joint 0.2 0.8 0.7
venture
Profit on ordinary
activities before tax 38.5 795.8 17.7
Tax charge on profit on
ordinary activities 9.0 7.6 3.7
----------------------------- ------------------ ------------------- -------------------
Summary financial information in respect of Zenith is set out below:
Year ended December 31,
----------------------------------------------------------------------------------------
Consolidated summary profit 1998 1997 1996
& loss account L million L million L million
----------------------------- ----------------- ------------------ ------------------
Revenue 49.1 41.9 40.6
Operating profit 4.9 1.5 0.2
Profit on ordinary
activities before tax 5.3 3.7 2.3
Profit for the period 3.5 2.5 0.8
----------------------------- ------------------ ------------------- -------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
Consolidated summary statement of net liabilities 1998 1997
L million L million
---------------------------------------------------- ------------ ------------
<S> <C> <C>
Fixed assets 3.2 3.6
Current assets 150.7 99.8
Current liabilities (180.9) (128.7)
Other long term creditors and provisions (0.2) (3.2)
---------------------------------------------------- ------------- -------------
Net liabilities (27.2) (28.5)
---------------------------------------------------- ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------- ----------------------------------------------------
Effect on net earnings of differences 1998 1998 1997 1996
between US and UK GAAP $million* L million L million L million
Ref.:
--------------------------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Profit for the year in conformity 41.5 25.0 787.6 13.6
with UK GAAP
US GAAP adjustments
Amortization of goodwill and other (a) (10.1) (6.1) (6.2) (6.2)
intangibles in accordance with US
purchase accounting
Straight lining of property leases (b) (0.2) (0.1) (1.0) (2.4)
Increase (decrease) in long-term (c) (3.3) (2.0) 7.5 0.1
property provisions
Amortization of discount on property (c) (7.0) (4.2) (4.5) (4.3)
provisions
Pension settlements (d) - - - 1.8
Fundamental reorganization - Demerger (e) - - (764.5) -
Net dividends received from CCG (e) - - (10.4) (7.8)
companies prior to the Demerger
--------------------------------------- ----- ----------- ---------- ----------- ----------
Net profit applicable to Ordinary 20.9 12.6 8.5 (5.2)
shareholders in conformity with US
GAAP
--------------------------------------- ----- ----------- ---------- ----------- ----------
Net profit/(loss) applicable per $0.09 5.7p 3.8p (2.3)p
Ordinary share - basic
Average number of Ordinary shares (in 221.9 221.9 221.9 221.8
millions)
Net profit/(loss) per Ordinary share $0.09 5.6p 3.8p (2.3)p
- diluted
Average number of Ordinary shares - 224.1 224.1 222.6 221.8
diluted (in millions)**
--------------------------------------- ----- ----------- ---------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------- ---- ---------------------------------------
Cumulative effect on shareholder's deficiency of 1998 1998 1997
differences between US and UK GAAP $million* L million L million
--------------------------------------------------------- ---- ----------- ---------- -----------
<S> <C> <C> <C>
Equity shareholders' funds in conformity with UK GAAP (178.9) (107.8) (137.3)
US GAAP adjustments
Goodwill and US purchase accounting in respect of (a)
acquisitions and joint venture
Cost 287.3 173.1 183.5
Accumulated amortization (115.3) (69.5) (71.4)
Straight lining of property leases (b) (39.0) (23.5) (23.6)
Discount on property provisions (c) 28.2 17.0 23.4
Dividends (f) 5.1 3.1 2.7
Treasury stock owned by Employee Share Option Plan (i) (9.1) (5.5) -
--------------------------------------------------------- ---- ----------- ---------- -----------
Ordinary shareholders' deficiency in conformity with US GAAP
(21.7) (13.1) (22.7)
--------------------------------------------------------- ---- ----------- ---------- -----------
</TABLE>
*These figures have been translated at the closing rate on December 31, 1998
(L1: $1.66) for convenience purposes.
**The effect of potential ordinary shares (share options outstanding) for the
year ended December 31, 1996 is anti-dilutive. Accordingly, diluted loss per
share does not assume the exercise of share options outstanding.
Comprehensive Income
Comprehensive income which under US GAAP is required to be disclosed for the
first time in 1998, is defined as all changes in equity of a business enterprise
during a period, except investments by, and distributions to equity owners.
Accordingly, comprehensive income consists of net income and other items that
are reflected in stockholders' equity on the balance sheet and have been
excluded from the income statement. Such items of other comprehensive income
include foreign currency translation adjustments, and unrealised gains on
securities available for sale. December 31,
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------- -------------------------------------
Comprehensive Income 1998 1998 1997
$million* Lmillion Lmillion
- --------------------------------------------- -------------------------------------
<S> <C> <C> <C>
Net profit in accordance with US GAAP 20.9 12.6 8.5
Translation differences 0.3 0.2 (10.6)
Holding gain on securities available for sale 0.2 0.1 -
- ---------------------------------------------- ----------- ----------- -----------
21.4 12.9 (2.1)
---------------------------------------------- ----------- ----------- -----------
</TABLE>
(l) Prospective Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued
in June 1998. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring recognition of those instruments as assets and
liabilities and to measure them at fair value. While scheduled to be
effective for us in the year 2000, there is a proposal to delay the
implementation of the statement for one year. The Company has not completed
its analysis of the impact of this statement on the consolidated financial
statements.
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5
(SOP 98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP
98-1 requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated
useful life of the software. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. The Company is required
to adopt both new statements in the first quarter of 1999. The adoption of
these statements is not expected to have a material effect on the
consolidated financial statements.
<PAGE>
EXHIBIT INDEX
2.1 Upon the request of the Securities and Exchange Commission, the Company
hereby agrees to provide a list of subsidiaries of the Company.
3.1 Consent of Independent Auditor.
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the incorporation by reference in the Registration
Statement No. 333-64443 on Form S-8 of Saatchi & Saatchi plc of our report dated
March 25, 1999 relating to the consolidated balance sheets of Saatchi & Saatchi
plc as of December 31, 1998 and 1997 and the related consolidated statements of
operations, shareholders' deficiency, total recognized gains and losses and cash
flows for each of the years in the three-year period ended December 31, 1998
which report appears in the Annual Report on Form 20-F of Saatchi & Saatchi plc
for the year ended December 31, 1998.
/s/ KPMG AUDIT PLC
London, England
May 28, 1999
