<PAGE>
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED TO SEEK YOUR OWN
FINANCIAL ADVICE FROM YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR
OTHER INDEPENDENT FINANCIAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES ACT
1986.
IF YOU HAVE SOLD OR OTHERWISE TRANSFERRED ALL OF YOUR SHARES IN WPP GROUP PLC,
PLEASE SEND THIS DOCUMENT AND THE ACCOMPANYING DOCUMENTS AT ONCE TO THE
PURCHASER OR TRANSFEREE OR TO THE STOCKBROKER, BANK OR OTHER AGENT THROUGH WHOM
THE SALE OR TRANSFER WAS EFFECTED FOR TRANSMISSION TO THE PURCHASER OR
TRANSFEREE.
A copy of this document, which comprises listing particulars, has been prepared
in accordance with the Listing Rules of the UK Listing Authority made under
section 142 of the Financial Services Act 1986 and has been delivered to the
Registrar of Companies in England and Wales for registration as required by
section 149 of that Act.
Application has been made to the UK Listing Authority for the Consideration
Shares to be admitted to the Official List and to the London Stock Exchange for
the Consideration Shares to be admitted to trading on its market for listed
securities. It is expected that Admission will become effective and that
dealings on the London Stock Exchange will commence at 8.00 am (London time) on
the Effective Date.
--------------------------------------------------------------------------------
WPP GROUP PLC
LISTING PARTICULARS
RELATING TO THE MERGER WITH
YOUNG & RUBICAM INC.
AND
THE ISSUE OF UP TO 433,710,712 ORDINARY SHARES OF 10 PENCE EACH IN WPP GROUP
PLC
SPONSORED BY
GOLDMAN SACHS INTERNATIONAL
AND
MERRILL LYNCH INTERNATIONAL
---------------------------------------------------------
Goldman Sachs International and Merrill Lynch International, each of which is
regulated in the United Kingdom by The Securities and Futures Authority Limited,
are acting exclusively for WPP Group plc and for no-one else in connection with
the Merger and will not be responsible to anyone other than WPP Group plc for
providing the protections afforded to customers of Goldman Sachs International
and Merrill Lynch International respectively or for providing advice in relation
to the Merger.
The distribution of this document in jurisdictions other than the United Kingdom
may be restricted by law and therefore persons into whose possession this
document comes should inform themselves about and observe such restrictions. Any
failure to comply with these restrictions may constitute a violation of the
securities laws of any such jurisdiction.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I MERGER OF WPP WITH YOUNG & RUBICAM.......................... 3
1. Introduction................................................ 3
2. Summary of the Merger....................................... 3
3. Sale restrictions........................................... 5
4. Y&R's business.............................................. 6
5. Strategic and financial reasons for the Merger.............. 6
6. Enlarged WPP Group board and headquarters................... 9
7. Dividends and dividend policy............................... 9
8. Accounting treatment and reporting.......................... 10
9. Current trading and prospects............................... 10
10. Extraordinary General Meeting............................... 10
11. Listing and dealing......................................... 10
12. Risk factors relating to the Merger......................... 11
13. Forward-looking statements may prove inaccurate............. 12
14. Nature of financial information............................. 13
PART II INFORMATION RELATING TO WPP................................. 14
1. Business description of WPP................................. 14
2. Extraction of financial information......................... 14
3. Financial information on WPP................................ 15
4. Unaudited interim results for the six months ended 30 June
2000........................................................ 52
PART III INFORMATION RELATING TO YOUNG & RUBICAM..................... 71
1. Business description of Y&R................................. 71
2. Extraction of financial information......................... 71
3. Financial information on Y&R................................ 72
4. Unaudited interim results for the six months ended 30 June
2000........................................................ 95
5. Unaudited restatements of Young & Rubicam's financial
information under UK GAAP................................... 101
6. Letter from PricewaterhouseCoopers LLP...................... 111
PART IV PRO FORMA FINANCIAL INFORMATION............................. 113
1. Pro forma financial information on WPP and Y&R.............. 113
2. Letter from Arthur Andersen................................. 121
PART V TERMS OF THE MERGER AND REGULATORY MATTERS.................. 123
Section A: Summary of the terms of the Merger...................... 123
Section B: Summary of the terms of the no-sale agreements.......... 130
Section C: General regulatory matters.............................. 132
PART VI ADDITIONAL INFORMATION...................................... 134
1. Responsibility.............................................. 134
2. Incorporation............................................... 134
3. Share capital............................................... 134
4. Memorandum and Articles of Association of WPP............... 137
5. WPP Share Schemes and details of outstanding options and
awards under the WPP Share Schemes and Y&R stock option
plans....................................................... 142
6. Principal subsidiary undertakings and associated
undertakings................................................ 149
7. Directors, Proposed Directors and Y&R Directors............. 150
8. Interests of the Directors and the Proposed Directors....... 157
9. Material contracts.......................................... 160
10. Litigation.................................................. 162
11. Principal establishments.................................... 163
12. United Kingdom taxation..................................... 163
13. Working capital............................................. 164
14. General..................................................... 164
15. Documents available for inspection.......................... 164
DEFINITIONS........................................................... 166
</TABLE>
2
<PAGE>
PART I
MERGER OF WPP WITH YOUNG & RUBICAM
1. INTRODUCTION
On 12 May 2000, the boards of WPP and Y&R announced that they had reached
agreement on the terms of a proposed merger of the two companies.
The Merger is subject to a number of conditions, including approval by WPP
Share Owners and Y&R Share Owners at their respective general meetings. In
addition, the Merger is conditional on a number of regulatory and other
consents and confirmations in the European Union and certain other
jurisdictions. The Merger is expected to be completed on 3 October 2000
assuming that the various approvals and regulatory consents are received by
such date.
The Board of Y&R has unanimously approved the Merger Agreement and has
recommended that Y&R Share Owners vote in favour of the Merger. The Board
of WPP has unanimously approved the Merger Agreement and has recommended
that WPP Share Owners vote in favour of the Merger.
2. SUMMARY OF THE MERGER
2.1 STRUCTURE
The Merger is to be effected by a statutory merger under Delaware law
whereby York II Merger Corp (a Delaware corporation and an indirect
wholly-owned subsidiary of WPP), will be merged with and into Y&R and Y&R
will become an indirect wholly-owned subsidiary of WPP in accordance with
the terms of the Merger Agreement.
WPP Ordinary Shares will continue to be traded on the London Stock Exchange
and WPP ADSs will remain listed on the Nasdaq. Following completion of the
Merger, WPP will indirectly own all of the Y&R Common Shares.
2.2 TERMS OF THE MERGER
Under the terms of the Merger, Y&R Share Owners (other than WPP, Y&R or
any of their respective subsidiaries) will be entitled to receive, for
each Y&R Common Share held, 0.835 of a WPP ADS (each ADS representing five
WPP Ordinary Shares). Each Y&R Share Owner may elect to receive five new
WPP Ordinary Shares in lieu of each WPP ADS he would otherwise be entitled
to receive.
Each Y&R Share Owner who would otherwise have been entitled to receive a
fraction of a WPP ADS or a WPP Ordinary Share will receive, in lieu
thereof, cash (without interest) equal to his proportionate interest in the
net proceeds of sale of the WPP Ordinary Shares representing the aggregate
of the fractional entitlements which Y&R Share Owners would be entitled to
receive pursuant to the terms of the Merger.
Upon the Merger becoming effective, each outstanding Y&R Stock Option will
convert into an option to acquire 4.175 new WPP Ordinary Shares, if the
option holder is primarily resident or employed in Europe, or into an
option to acquire 0.835 of a WPP ADS in all other cases. As at 21 August
2000 (the latest practicable date prior to the publication of this
document) there were 23,293,354 Y&R Stock Options outstanding.
In addition, upon the Merger becoming effective, the Y&R Convertible Notes
will become convertible into 0.835 of a WPP ADS for each Y&R Common Share
into which they were convertible prior to the Merger.
Accordingly, it is expected that completion of the Merger will require the
issue of up to approximately 433,710,712 new WPP Ordinary Shares (including
new WPP Ordinary Shares to be issued on the exercise of the Y&R Stock
Options, the conversion of the Y&R Convertible Notes and as deferred
consideration for previous Y&R acquisitions). On the basis of a price of
L8.45 for each WPP Ordinary Share (based on the closing middle market price
on 11 May 2000, the last business day prior to the announcement of the
Merger), the Merger values the entire fully diluted share capital of Y&R at
approximately L3.6 billion.
Immediately following the Merger becoming effective, the interests of WPP's
existing Share Owners are expected to represent approximately two thirds
and those of Y&R Share Owners and option holders one third of the enlarged
fully diluted issued share capital of WPP.
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<PAGE>
Further details of the Merger, including the principal terms of the Merger
Agreement and the conditions to the implementation of the Merger, are set
out in Section A of Part V of this document.
2.3 SHARE OWNER APPROVALS AND OTHER CONDITIONS
(a) WPP Share Owner approval
The Merger is conditional upon the passing, at the Extraordinary
General Meeting which has been convened for 29 September 2000, of
ordinary resolutions to approve the Merger, to increase the
authorised share capital of WPP, to authorise the Directors to allot
new WPP Ordinary Shares and to approve the appointment of four new
directors who have been designated by Y&R to the Board of WPP. A
special resolution will also be proposed to disapply the statutory
pre-emption rights contained in Section 89(1) of the Companies Act in
respect of the allotment for cash of equity securities of up to an
aggregate nominal amount of L7,662,089 which (after taking account of
certain obligations to be assumed by WPP under the terms of the
Merger Agreement requiring the allotment of WPP Ordinary Shares for
cash) will represent approximately 5% of the expected enlarged issued
share capital of WPP on completion of the Merger. In addition, a
further ordinary resolution will be proposed to increase the limit on
the aggregate annual remuneration which may be paid to non-executive
Directors under WPP's Articles of Association from L250,000 to
L450,000 and a further ordinary resolution will be proposed to enable
the Company to provide any special remuneration to a non-executive
Director, for any special or extra services requested by the Company,
in the form of WPP Ordinary Shares (by means of a right to acquire
those shares in lieu of cash, at a price no less than the nominal
amount of such shares). Approval of the Merger and related matters is
not conditional upon the passing of any of the last three
resolutions.
(b) Y&R Share Owner approval
The Merger is conditional upon approval by the holders of a majority
of the voting rights of the Y&R Common Shares.
A special meeting of Y&R Share Owners has been convened for
28 September 2000, at which Y&R Share Owners will be asked to approve
and adopt the Merger Agreement.
(c) Regulatory consents
The Merger is conditional on certain regulatory consents and
clearances, further details of which are set out in Section C of Part
V of this document.
(d) Other conditions
The Merger is also conditional on the satisfaction or waiver of
certain other conditions including the admission of the Consideration
Shares to the Official List and admission of the Consideration Shares
to trading by the London Stock Exchange. Further details are set out
in Section A of Part V of this document.
2.4 CONSENTS AND TIMING
The Merger is conditional on obtaining certain specified consents, waivers
and clearances. Application has been made to the European Commission and
other relevant national authorities for the necessary consents and
clearances, further details of which are set out in Section C of Part V of
this document. The European Commission issued its clearance decision for
the Merger on 24 August 2000.
Subject to these consents, waivers, clearances and share owner approvals
being obtained, the Merger is expected to be completed on 3 October 2000.
2.5 TERMINATION
The Merger Agreement may be terminated prior to the Effective Date:
(a) by mutual consent of WPP and Y&R;
(b) by either party if:
(i) the Merger has not been completed by 11 February 2001 (the
"Long Stop Date") provided that this right shall not be
exercisable by a party whose failure to comply in
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<PAGE>
any material respect with its obligations resulted in the
failure to complete the Merger by the Long Stop Date;
(ii) a governmental entity prohibits the Merger but only if the
terminating party has used commercially reasonable efforts to
prevent such prohibition and the prohibition is not due to a
material breach of the Merger Agreement by that party; or
(iii) the relevant share owner approvals of WPP or Y&R are not
obtained;
(c) by one party if:
(i) the directors of the other party withdraw or adversely modify
their recommendation to share owners to vote in favour of the
Merger;
(ii) the directors of the other party recommend an alternative
proposal or offer to their share owners; or
(iii) any representation or warranty of the other party is
inaccurate, or the other party is in breach of any of its
obligations contained in the Merger Agreement, and the breach
is not remedied within 20 business days following written
notice of the breach, and such inaccuracy or breach would
result in any condition in the Merger Agreement not being
satisfied by the Long Stop Date.
Further details regarding termination are set out in paragraph 7 of
Section A of Part V of this document.
2.6 TERMINATION PAYMENTS
Y&R will be entitled to receive a US$25 million fee from WPP if the Merger
Agreement is terminated because WPP's share owners vote against the
Merger. The termination fee payable by WPP to Y&R will be increased to
US$75 million if:
(a) the Merger Agreement is terminated by Y&R after WPP's Board has
withdrawn or adversely modified its favourable recommendation of the
Merger to its share owners at a time when an alternative acquisition
proposal or offer for WPP is pending;
(b) WPP or its Board recommends an alternative acquisition proposal to
its share owners; or
(c) an alternative acquisition, proposal or offer for WPP is made or is
publicly announced and the Merger Agreement is subsequently
terminated:
(i) by WPP or Y&R, because the necessary approval of WPP's share
owners at the EGM is not obtained; or
(ii) by WPP, because the Merger is not consummated by the Long Stop
Date, except that no fee will be payable to Y&R if the
necessary approval of Y&R Share Owners has not then been
obtained for any reason other than as a result of a breach by
WPP; or
(iii) by Y&R, because any representation or warranty of WPP
contained in the Merger Agreement is inaccurate or WPP breaches
any of its obligations contained in the Merger Agreement and
such breach is not remedied within 20 business days following
written notice of the breach from Y&R and such inaccuracy or
breach would result in any condition of the Merger Agreement
not being satisfied by the Long Stop Date;
AND, in any such case, within nine months after the Merger Agreement
is terminated, WPP enters into an agreement in respect of any
alternative proposal or an alternative transaction is completed.
WPP will be entitled to receive from Y&R a fee of US$25 million if the
Merger Agreement is terminated because Y&R Share Owners vote against the
Merger Agreement. An increased fee of US$175 million will be payable by Y&R
to WPP if circumstances similar to those described in (a) to (c) above
arise in relation to Y&R.
Further details regarding termination payments are set out in paragraph 8
of Section A of Part V.
3. SALE RESTRICTIONS
Contemporaneously with the execution of the Merger Agreement, WPP entered
into no-sale agreements with sixteen senior executives of Y&R, including
Mr Thomas D. Bell Jr., Y&R's
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<PAGE>
chairman and chief executive officer, Mr Michael J. Dolan, the chief
executive officer of Y&R following completion of the Merger, Edward H.
Vick, worldwide chairman and chief executive officer of Y&R Advertising
and Mr Peter A. Georgescu, former chairman and chief executive of Y&R.
Under these agreements, these senior executives and Mr Georgescu have
agreed not to sell a total of approximately six million of their Y&R
Common Shares and/or the shares received from the exercise of their Y&R
Stock Options (and, following completion of the Merger, the WPP Ordinary
Shares and options which they will receive under the terms of the Merger
in exchange for those shares and options) for a one year period ending on
11 May 2001.
Further details regarding the no-sale agreements are set out in Section B
of Part V of this document.
4. Y&R'S BUSINESS
Y&R is one of the world's leading global communications services groups.
The Y&R Group comprises a network of agencies in the fields of
advertising, media investment management, information and consultancy,
public relations and public affairs, branding and identity, healthcare and
specialist communications. Y&R has over 300 offices in over 70 countries
around the world. For the year ended 31 December 1999, the Y&R Group had
worldwide billings of US$8.53 billion. Set out below is a summary of some
of the key areas of the Y&R Group's business.
Young & Rubicam Advertising is a leading full-service consumer advertising
agency, offering expertise in consumer research, strategic and creative
development, and media buying and planning. In addition to agency networks
in a number of countries, Young & Rubicam Advertising is represented in the
Asia Pacific region by Dentsu, Young & Rubicam, a series of joint ventures
with Dentsu, Inc. of Japan, in which Y&R is the majority partner (owning at
least 66% of each joint venture) except in Japan, the Philippines and
India.
The Media Edge is a leading full-service global media business, and The
Digital Edge, formed in 1999, specialises in planning and buying for
internet media, electronic commerce and other fledgling technologies and
digital media.
Y&R 2.1 is a new type of advertising agency, dedicated to integrating
on-line and off-line marketing communications in support of brands around
the world.
The Bravo Group and Kang & Lee are full-service advertising agencies in the
United States devoted to creating communications targeted at fast-growing
multicultural groups. Bravo's focus is on Hispanic Americans, Kang & Lee's
on Asian Americans.
Impiric is a global, full-service consulting and communications firm that
provides strategic, customer-centred solutions to business problems.
Impiric works closely with KnowledgeBase Marketing, another recently
acquired Y&R company.
Y&R's diversified communications group includes Burson-Marsteller, the
world's largest public relations and public affairs firm, Landor
Associates, one of the world's leading branding consultancies and strategic
design firms, Cohn & Wolfe, a public relations and public affairs firm and
Sudler & Hennessey, an international healthcare communications agency. Most
recently, Y&R acquired Robinson Lerer & Montgomery, a leader in the field
of strategic communications.
In the area of internet marketing, Y&R has made considerable investments
including Luminant Worldwide Corporation, a key player in the interactive
services arena, Harris Interactive, a leader in on-line market research,
and Digital Convergence, MediaPlex and iWeb, creators of new internet
vehicles that deliver marketing messages and content to consumers.
5. STRATEGIC AND FINANCIAL REASONS FOR THE MERGER
5.1 WPP and Y&R believe that the enlarged WPP Group will be better positioned
to become the world's premier provider of communications services and that
it will be capable of achieving a faster rate of organic growth and hence
greater long-term share owner value than could be achieved by either of the
groups remaining separate.
The WPP Directors believe that the principal strategic and financial
reasons for the Merger are as follows:
Firstly, the philosophy and cultures of the two organisations are very
similar. Y&R was one of the first communications services groups to
formulate and implement a consistent approach to the integration of
advertising and marketing services for clients. Since the 1960's, Y&R has
developed
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its integrated approach both organically and by acquiring leading marketing
brands such as Burson-Marsteller, Cohn & Wolfe, Wunderman Cato, Johnson,
Landor Associates and Sudler & Hennessey, amongst others. Similarly, since
it was founded in 1985, WPP has developed a strategy aimed at adding value
to clients, share owners and employees through the integration of
advertising and marketing services. Other groups claim a similar approach
but, to the knowledge of WPP and Y&R, few have been able to implement it so
successfully.
Secondly, both WPP and Y&R share a number of major clients including Ford
Motor Company, Philip Morris, Sears and Mattel. Within the enlarged WPP
Group client conflicts will be managed more effectively through separate
operating brands so that clients will be assured of confidentiality.
Thirdly, both WPP and Y&R complement one another in providing alternative
operating brands in the areas of advertising, media investment management,
information and consultancy, public relations and public affairs, branding
and identity, healthcare and specialist communications and in the internet
sector. In information and consultancy, Y&R's BrandAsset Valuator and
investment in internet based market research will provide the enlarged WPP
Group with additional opportunities.
Fourthly, the Merger will strengthen the enlarged WPP Group geographically,
particularly in North America and Continental Europe. In addition, Asia
Pacific offers an interesting opportunity where Y&R has a series of
important joint ventures with Dentsu, the world's largest advertising
agency. The enlarged WPP Group will have the number one or two position in
the following major geographic regions, based on WPP and Y&R's gross income
for their respective financial years ended 31 December 1999:
<TABLE>
<S> <C>
- North America
- United Kingdom
- Continental Europe
- Asia Pacific
- Latin America
- Africa and Middle East
</TABLE>
Finally, the Merger offers opportunities in terms of enhanced revenue
growth and cost synergies. Whilst the WPP Board feels that it is
inadvisable to estimate revenue growth at this stage, the Directors believe
that there will be considerable potential for such growth as a result of
enhanced operational capabilities and the opportunity to co-ordinate
approaches on global, regional and national accounts. On the cost side,
pre-tax annual operating cost savings of US$30 million are expected to be
achieved by the end of 2001 (see paragraph 12.3 of Part I of this document
for certain risk factors in relation to this estimate). These savings are
expected to result from the elimination of certain central cost
duplications and by co-ordinating certain common activities including,
amongst others, financial planning, budgeting, reporting and control, tax
and treasury management, activities relating to mergers and acquisitions,
investor relations, human resources, property, procurement, information
technology and practice development. The Directors believe that the Merger
will be accretive to WPP's earnings in the first full year following
completion of the Merger.
5.2 The services of the enlarged WPP Group and its highly complementary
portfolio of leading operating brands are listed below:
(a) ADVERTISING--development of marketing and branding campaigns, and
production and design of advertisements
- WPP: Ogilvy and Mather Worldwide, J. Walter Thompson Company and
Conquest
- Y&R: Young & Rubicam Advertising, Dentsu, Young & Rubicam and Y&R
2.1
(b) MEDIA INVESTMENT MANAGEMENT--planning and purchasing time and/or
space in various media, including broadcast and cable television,
radio, newspapers, magazines, billboards and the internet
- WPP: MindShare
- Y&R: The Media Edge and The Digital Edge
(c) INFORMATION AND CONSULTANCY--conducting consumer, media, corporate
communications and policy research, advertising research,
pre-testing, tracking and
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evaluation of advertising and promotions design and management of
international market studies and new product development and testing
- WPP: Research International, Millward Brown, Kantar Media Research,
Center Partners, IMRB International, Winona Group and Goldfarb
Consultants and "BRANDZ," an advanced diagnostic and predictive
proprietary research tool
- Y&R: "BrandAsset-Registered Trademark- Valuator," a proprietary
diagnostic and predictive proprietary research tool
(d) PUBLIC RELATIONS AND PUBLIC AFFAIRS--providing advice and services
with respect to corporate, financial and marketing communications,
government lobbying, crisis management and public affairs
- WPP: Hill and Knowlton, Ogilvy Public Relations Worldwide,
Alexander Ogilvy, Timmons & Company, The Wexler Group and Buchanan
Communications
- Y&R: Burson-Marsteller, Cohn & Wolfe and Robinson Lerer &
Montgomery
(e) CONSUMER RELATIONSHIP MANAGEMENT--planning, designing and
implementing direct marketing and sales promotions, including direct
mail and direct response television advertising, telemarketing and
database and online marketing
- WPP: OgilvyOne Worldwide
- Y&R: impiric (formerly Wunderman Cato Johnson) and KnowledgeBase
Marketing
(f) BRANDING AND IDENTITY, HEALTHCARE AND SPECIALIST
COMMUNICATIONS--providing services with respect to brand and
corporate identity, package design, retail design and branded
environments, verbal branding and corporate literature
- WPP: Enterprise IG, Brand Union, Coley Porter Bell
- Y&R: Landor Associates
and also providing marketing and communications services in the
healthcare area
- WPP: CommonHealth
- Y&R: Sudler & Hennessey
5.3 In addition to the services and operating brands referred to above, both
WPP and Y&R have recognised the potential of the internet for fuelling
growth in the communications services industry and, together the enlarged
WPP Group, will have one of the industry's broadest portfolio of internet
investments. The following table identifies companies operating in various
internet sectors in which the WPP Group or Y&R Group have recently made
investments:
<TABLE>
<CAPTION>
WPP Y&R
------------------------------------------------------------- --------------------------------------------------------
COMPANY SECTOR SHAREHOLDING COMPANY SECTOR
------- ------ ------------ ------- ------
<S> <C> <C> <C> <C>
Syzygy Web development 34.26% KnowledgeBase Marketing Database marketing/CRM
Concept! Web development 17.70% Luminant Internet professional services
Net King Portal 16.67% Digital Convergence Internet media targeting
e-Rewards Loyalty 19.40% Mediaplex Internet advertising technology
TWIi B-2-B sports content 19.48% Harris Interactive Internet research
Intraspect Knowledge management 7.65% Cyber Dialogue Internet marketing
Visible World Video personalisation 6.28% Naviant Targeted internet advertising
Big Words College-based e-commerce 3.71% iWeb Internet advertising technology
Red Sheriff Internet research 5.00% Streampipe Internet broadcasting
Roundarch e-commerce consulting 19.90% eMotion Digital asset management
Metapack e-fulfillment 4.99% Gamut Interactive Smartcard technology
Imagine e-CRM 2.00%
Deckchair Online travel 7.96%
Inferentia Spa e-business consulting 4.00%
Advertising.com New media advertising 1.30%
<CAPTION>
Y&R
--------------------- -------------
COMPANY SHAREHOLDING
------- ------------
<S> <C>
Syzygy 100%
Concept! 20.62%
Net King 5.88%
e-Rewards 0.71%
TWIi 4.17%
Intraspect 12.45%
Visible World 5.37%
Big Words 18.30%
Red Sheriff 23.81%
Roundarch 10.50%
Metapack 5.51%
Imagine
Deckchair
Inferentia Spa
Advertising.com
</TABLE>
The WPP Directors believe that these investments will afford the enlarged
WPP Group significant opportunities to provide services to existing clients
of the enlarged WPP Group and to establish relationships with the relevant
partners in these investments.
The WPP Directors also believe that the enlarged WPP Group will be well
positioned to benefit substantially from:
- competition-driven increased spending on branding;
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- providing services to dot-coms building their brands;
- providing services to traditional clients building internet operations;
and
- providing services to internet-related companies needing help with their
internet strategy.
6. ENLARGED WPP GROUP BOARD AND HEADQUARTERS
Following completion of the Merger, the number of Directors of WPP will be
sixteen, twelve of whom will be existing directors of WPP (eight of whom
will be non-executive Directors) and four of whom will be designated by
Y&R (three of whom will be non-executive Directors). In addition, prior to
30 June 2001, Y&R will be entitled to appoint a further non-executive
Director to the board of WPP, who is neither a US resident nor a US
citizen.
Sir Martin Sorrell, the current group chief executive of WPP, will continue
to be the group chief executive of the Company. Mr. Michael Dolan will be
chief executive officer of Y&R. Short biographies of the Directors and the
Proposed Directors of the Company are set out in paragraph 7.3 of Part VI.
The Directors of WPP following the Merger will be:
<TABLE>
<CAPTION>
DIRECTOR OFFICE
-------- ------
<S> <C>
Hamish Maxwell Chairman, Non-Executive Director
Sir Martin Sorrell Group Chief Executive
Paul Richardson Group Finance Director
Brian Brooks Chief Human Resources Officer
Eric Salama Group Director of Strategy
Jeremy Bullmore Non-Executive Director
Esther Dyson Non-Executive Director
Masao Inagaki Non-Executive Director
John Jackson Non-Executive Director
Christopher Mackenzie Non-Executive Director
Stanley Morten Non-Executive Director
John Quelch Non-Executive Director
Michael J. Dolan* Chief Executive Officer of Y&R
F. Warren Hellman* Non-Executive Director
Michael H. Jordan* Non-Executive Director
Sir Christopher Lewinton* Non-Executive Director
</TABLE>
* The Proposed Directors are those marked with an asterisk.
A transition committee (which is not a committee of the Board of WPP) has
been established under the terms of the Merger Agreement and will be
maintained for one year after the Effective Date. The committee will
initially be comprised of Mr. Thomas D. Bell, Jr, who will be chairman of
the committee, Mr. Michael J. Dolan, Sir Martin Sorrell and Mr. Paul
Richardson. This committee will be responsible for overseeing the
transition as Y&R becomes part of the enlarged WPP Group. It will not be
responsible for controlling the operations of the business of WPP and Y&R.
WPP's headquarters will continue to be in London. The headquarters of Y&R's
agencies will continue to be located in the United States after completion
of the Merger.
7. DIVIDENDS AND DIVIDEND POLICY
It is expected that half yearly dividends will continue to be paid on WPP
Ordinary Shares in July and November in each year. The level of future WPP
dividends will be dependent upon WPP's earnings, financial condition and
other factors affecting its businesses. However, the payment of a dividend
in any period cannot be guaranteed and is ultimately within the discretion
of the Board of WPP.
Holders of WPP Ordinary Shares receive dividends in pounds sterling. The
Depositary will convert into US dollars any cash dividend paid by WPP on
the WPP Ordinary Shares, unless it is not reasonable, because of
governmental regulation or otherwise, for the Depositary to effect the
conversion into US dollars. The Depositary will distribute those US
dollars, after deducting its fees and expenses, to holders of WPP ADSs.
9
<PAGE>
The Consideration Shares will rank PARI PASSU in all respects with the
existing WPP Ordinary Shares except that they will not rank for the interim
dividend payable in respect of the year ending 31 December 2000 or for any
other dividend the record date of which falls prior to the Effective Date.
8. ACCOUNTING TREATMENT AND REPORTING
WPP will account for the Merger using the acquisition method of accounting
under UK GAAP in accordance with FRS 6 ``Acquisitions and Mergers". This
results in pro forma goodwill of approximately L3,964.3 million (as
sourced from the pro-forma information in Part IV) based on the closing
mid-market price of WPP Ordinary Shares of L9.65 on 30 June 2000 and
73.2 million Y&R Common Shares and 23.6 million Y&R Stock Options in issue
as at 30 June 2000. This also assumes that 404 million new WPP Ordinary
Shares will have been issued in connection with the Merger. In calculating
the number of new WPP Ordinary Shares to be issued, no account has been
taken of (i) any Y&R Common Shares issued since 30 June 2000; (ii) any Y&R
Stock Options granted since 30 June 2000; (iii) any WPP Ordinary Shares to
be issued in respect of the Y&R Convertible Notes or (iv) any new WPP
Ordinary Shares that will have to be issued as consideration for certain
previous acquisitions by Y&R. The actual goodwill arising as a result of
the Merger will be based on the closing mid-market price of WPP Ordinary
Shares and the number of Y&R Common Shares and Y&R Stock Options in issue
at the Effective Date.
Goodwill arising on the transaction has been assumed to have an indefinite
useful economic life and will therefore not be amortised. Goodwill assumed
to have an indefinite useful economic life is subject to an annual
impairment review conducted in accordance with FRS 11 ``Impairment of Fixed
Assets and Goodwill".
The financial year end of WPP will continue to be 31 December in each year.
The consolidated accounts of WPP will be published in sterling and will be
prepared in accordance with UK GAAP, with a reconciliation of certain
financial information to US GAAP. WPP plans to introduce quarterly earnings
reporting during 2002.
9. CURRENT TRADING AND PROSPECTS
As shown in the interim results, the WPP Group's performance during the
six months ended 30 June 2000 continued to improve with strong underlying
revenue growth and with gains in market share in all geographical regions.
Indications are that for the latter half of 2000, these trends will
continue. Industry projections for advertising market growth in 2001 look
only marginally lower than 2000 and projections for non-advertising
marketing services continue to predict growth at a fast rate.
Although market conditions are good, plans, budgets and forecasts of
revenues will continue to be made on a conservative basis and considerable
attention continues to focus on operating profit growth, improving
operating margins and the enlarged WPP Group's staff cost to revenue
ratios.
10. EXTRAORDINARY GENERAL MEETING
An Extraordinary General Meeting has been convened for 10.00 am on
29 September 2000 at which the resolutions set out in the Notice of
Extraordinary General Meeting incorporated in the Circular accompanying
this document will be proposed.
An explanation of the resolutions to be proposed at the Extraordinary
General Meeting and the action to be taken at the Extraordinary General
Meeting are set out in the Circular.
11. LISTING AND DEALING
Application has been made to the UK Listing Authority for the
Consideration Shares to be admitted to the Official List and to the London
Stock Exchange for the Consideration Shares to be admitted to trading on
the London Stock Exchange's market for listed securities. The WPP ADSs
representing the Consideration Shares will be listed on the Nasdaq. It is
expected that Admission will become effective and that dealings on the
London Stock Exchange will commence at 8.00 am (London time) on the
Effective Date. It is a condition to the Merger becoming effective that
Admission becomes effective.
10
<PAGE>
12. RISK FACTORS RELATING TO THE MERGER
12.1 THE PERFORMANCE OF THE ENLARGED WPP GROUP WILL BE AFFECTED BY ITS ABILITY
TO RETAIN KEY PERSONNEL.
The employees of both the WPP Group and the Y&R Group are important and
the performance of the enlarged WPP Group will be affected by its ability
to retain these employees after completion of the Merger.
Other than the 22 senior executives and other key employees who have
entered, or are to enter, into employment agreements with Y&R, personnel of
Y&R are generally not subject to employment contracts and therefore may
terminate their employment at any time. Furthermore, those 22 individuals
entering into new employment agreements may voluntarily terminate their
employment at any time, although in doing so they would forfeit their
rights under such employment agreements to receive salary, bonuses and
other benefits.
Upon completion of the Merger, all outstanding Y&R Stock Options, other
than those received by employees in Y&R's annual stock option grant for
this year and those granted after 11 May 2000, will become fully vested and
immediately exercisable for WPP Ordinary Shares or WPP ADSs. Y&R employees,
other than a group of senior Y&R executives who have agreed not to sell
two-thirds of their stock and options for one year ending 11 May 2001, will
be free to sell the WPP Ordinary Shares or WPP ADSs they receive upon
exercise of these options. In addition, under Y&R's change in control
severance plan and under the employment agreements entered into (or to be
entered into) by the 22 senior executives and other key employees of Y&R,
senior and key employees of Y&R will be entitled to receive severance
payments if their employment is terminated by Y&R without cause, or if they
terminate their employment for good reason after completion of the Merger.
If the enlarged WPP Group is unable to retain Y&R's and WPP's senior
executives and key employees, or fails to attract qualified personnel to
replace any employees who leave, the business of the enlarged WPP Group may
be materially and adversely affected.
12.2 EXISTING CLIENTS MAY BE LOST AS A RESULT OF THE MERGER.
The performance of the enlarged WPP Group will be affected by its ability
to retain the existing clients of WPP and Y&R and attract new clients. The
ability to retain existing clients and attract new clients may, in some
cases, be limited by clients' policies on conflicts of interest. These
policies can in some cases prevent one agency and, in limited
circumstances, different agencies under the same holding company, from
performing similar services for competing products or companies. Although
WPP and Y&R do not believe that clients will terminate relationships where
conflicts exist, those conflicts could result in clients terminating their
relationship with the agencies of the enlarged WPP Group or reducing the
projects for which they retain those agencies. Moreover, because of the
enlarged WPP Group's larger number of clients, there could be a greater
likelihood of conflict with potential new clients in the future. If the
enlarged WPP Group fails to maintain existing clients or attract new
clients, its business may be materially and adversely affected.
12.3 THE COST SAVINGS AND OTHER BENEFITS EXPECTED FROM THE MERGER MAY NOT BE
REALISED.
It is expected that the Merger will result in cost savings and other
benefits to the enlarged WPP Group. In that regard, estimated pre-tax
annual operating savings of US$30 million are expected to be achieved by
the end of 2001. It is also expected that the Merger will result in the
benefits described in paragraph 5 above. However, this cost saving
estimate is inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of WPP and Y&R. There
can be no assurances that the enlarged WPP Group will achieve these cost
savings. The enlarged WPP Group's ability to successfully realise these
cost savings and benefits and the timing of this realisation may be
affected by a variety of factors, including:
- its broad geographic areas of operations and the resulting potential
complexity of implementing cost savings;
- the failure to fully develop or carry out its cost savings implementation
plans; and
- unexpected events, including major changes in the advertising, marketing
and communication services industries.
11
<PAGE>
If the cost savings or benefits expected are not realised or are delayed,
the market price of the WPP Ordinary Shares and WPP ADSs could be adversely
affected.
12.4 THE MARKET PRICE OF WPP ORDINARY SHARES AND WPP ADSS MAY BE SUBJECT TO
DOWNWARD PRESSURE FOR A PERIOD OF TIME AS A RESULT OF SALES BY Y&R SHARE
OWNERS.
In connection with the Merger, Y&R Share Owners may sell a significant
number of the WPP ADSs or WPP Ordinary Shares they will receive in the
Merger. These sales could adversely affect the market price of the WPP
Ordinary Shares and WPP ADSs for a period of time after completion of the
Merger. Y&R Share Owners who may sell shares in connection with the Merger
include:
- some U.S. mutual funds, state pension funds and other investors who are
not permitted to hold equity securities of non-U.S. companies;
- mutual funds and other investors who hold shares of Y&R because it is
included in the S&P 500 Index; WPP Ordinary Shares are not included in
that index; and
- employees of Y&R who hold Y&R Common Shares, vested options and options
vesting upon the completion of the Merger. As at 21 August 2000 (the last
practicable date prior to the publication of this document) these
employees held options to acquire 23,293,354 Y&R Common Shares.
13. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document and the accompanying Circular contain forward-looking
statements about WPP, Y&R and the enlarged WPP Group which are intended to
be covered by the safe harbor for "forward-looking statements" provided by
the US Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements that are not historical facts and include
financial projections and estimates and their underlying assumptions;
statements regarding plans, objectives and expectations with respect to
future operations, products and services; and statements regarding future
performance. Forward-looking statements are generally identified by the
words "expects", "anticipates", "believes", "intends", "estimates" and
similar expressions. Forward-looking statements may need to be updated to
comply with the Company's continuing obligations under the Listing Rules.
The forward-looking statements in this document and the accompanying
Circular are subject to various risks and uncertainties, most of which are
difficult to predict and generally beyond the control of WPP and Y&R.
Accordingly, actual results may differ materially from those expressed in,
or implied by, the forward-looking statements. The risks and uncertainties
to which forward-looking statements are subject include:
- those under "Risk factors relating to the Merger" referred to in
paragraph 12 of Part I of this document;
- those discussed or identified in public filings of WPP and Y&R with the
SEC;
- risks and uncertainties with respect to WPP and Y&R's expectations
regarding:
- the timing and completion of the Merger,
- the value of the Merger consideration,
- growth and expansion opportunities,
- market positions,
- the conduct of worldwide operations,
- earnings improvements,
- cost savings,
- revenue growth,
- other benefits anticipated from the Merger,
- gains and losses of clients and client business and projects,
- changes in the marketing and communications budgets of clients,
- changes in management or ownership of clients, and
- retention of, and ability to attract, qualified employees;
12
<PAGE>
- the effects of:
- foreign exchange rate fluctuations,
- regional, national and international economic conditions, including
changes in interest rates and the performance of the financial markets,
- changes in industry rates of compensation,
- changes in regional, national and international laws,
- regulations and taxes,
- changes in competition and pricing environments,
- the occurrence of natural disasters,
- regional, national and international market and industry conditions,
and
- regional, national and international political conditions.
The actual results, performance or achievement by WPP, Y&R or the enlarged
WPP Group could differ significantly from those expressed in or implied by
any forward-looking statements. Accordingly, no assurance can be given that
any of the events anticipated by the forward-looking statements will occur
or, if they do, what impact they will have on the results of operations and
financial conditions of WPP, Y&R or the enlarged WPP Group following the
Merger.
14. NATURE OF FINANCIAL INFORMATION
All financial information in this Part I is extracted without material
adjustment from the financial information set out in Parts II, III and IV
of this document. WPP Share Owners should read the whole document and not
just rely on key or summarised information. Except as otherwise indicated,
all currency conversions between US dollars and sterling have been made at
the closing rate at 30 June 2000 of US$1.5166:L1, at 31 December 1999 of
US$1.6182:L1, at 31 December 1998 of US$1.6638:L1 and at 31 December 1997
of US$1.6454:L1.
13
<PAGE>
PART II
INFORMATION RELATING TO WPP
1. BUSINESS DESCRIPTION OF WPP
WPP Group plc is one of the leading communications services companies in
the world. Through its 70 operating companies, it provides clients with
advertising, media investment management, information and consultancy,
public relations and public affairs, branding and identity, healthcare and
specialist communications services. WPP operating companies include
Ogilvy & Mather Worldwide, J. Walter Thompson, Conquest, MindShare,
Research International, Millward Brown, Hill and Knowlton, Ogilvy Public
Relations Worldwide, CommonHealth and Enterprise IG. WPP is a member of
Business Week's Global 1000, the Forbes International 800, the
FTSE-Eurotop 300, the United Kingdom's FTSE 100 companies and the MSCI.
The Company aims to provide clients, both national and international, with
a comprehensive and, as required, integrated range of communications
services of the highest quality, strategically and tactically.
The WPP Group employs 39,000 people (including associates) in 950 offices
in 92 countries. Clients include more than 300 of the Fortune 500 and over
one-half of the Nasdaq 100. In the year ended 31 December 1999, WPP had
annual turnover (gross billings) of US$15.1 billion (L9.34 billion),
revenues of US$3.5 billion (L2.2 billion) and pre-tax profits of US$413
million (L255 million). As at 31 December 1999 net assets were US$529
million (L327 million).
2. EXTRACTION OF FINANCIAL INFORMATION
The financial information contained in Section 3 below for the three years
ended 31 December 1999, 1998 and 1997 has been extracted, without material
adjustment, from the audited consolidated financial statements of WPP for
the three years then ended prepared in accordance with UK GAAP and as
presented in WPP's Annual Report for the year ended 31 December 1999 filed
with the SEC on Form 20-F. The financial information contained in Section
3 below does not constitute statutory accounts within the meaning of
Section 240 of the Companies Act. WPP's auditors made reports under
Section 235 of the Companies Act on the financial statements for each of
the three years ended 31 December 1999, 1998 and 1997 (each of which
received an unqualified opinion and did not contain a statement under
Section 237(2) or (3) of the Companies Act) which have been delivered to
the Registrar of Companies in England and Wales. Arthur Andersen,
Chartered Accountants and Registered Auditors, of 1 Surrey Street, London,
WC2R 2PS were the auditors of WPP in respect of these financial periods.
References in this Part II to "Group" are to the WPP Group.
14
<PAGE>
3. FINANCIAL INFORMATION ON WPP
3.1 CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
-------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
TURNOVER (GROSS BILLINGS)............................... (1) 9,345.9 8,000.1 7,287.3
Cost of sales........................................... (7,173.3) (6,081.7) (5,540.6)
-------- -------- --------
REVENUE................................................. (1) 2,172.6 1,918.4 1,746.7
Direct costs............................................ (317.3) (285.9) (278.0)
-------- -------- --------
GROSS PROFIT............................................ 1,855.3 1,632.5 1,468.7
Operating costs......................................... (2) (1,591.8) (1,403.4) (1,273.8)
-------- -------- --------
OPERATING PROFIT........................................ 263.5 229.1 194.9
Income from associates.................................. 27.3 16.1 10.6
-------- -------- --------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION.............................................. (1) 290.8 245.2 205.5
Net interest payable and similar charges................ (4) (35.4) (32.4) (28.1)
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION........... 255.4 212.8 177.4
Taxation on profit on ordinary activities............... (5) (76.6) (67.0) (56.7)
-------- -------- --------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION............ 178.8 145.8 120.7
Minority interests...................................... (6.0) (5.5) (4.7)
PROFIT ATTRIBUTABLE TO ORDINARY SHARE OWNERS............ 172.8 140.3 116.0
Ordinary dividends...................................... (6) (24.0) (19.6) (15.7)
-------- -------- --------
RETAINED PROFIT FOR THE YEAR............................ 148.8 120.7 100.3
======== ======== ========
EARNINGS PER SHARE...................................... (7)
Basic earnings per ordinary share....................... 22.9P 19.1p 15.8p
Diluted earnings per ordinary share..................... 22.5P 18.8p 15.7p
======== ======== ========
ORDINARY DIVIDEND PER SHARE............................. (6)
Interim dividend........................................ 1.0P 0.84p 0.7p
Final dividend.......................................... 2.1P 1.72p 1.43p
======== ======== ========
EARNINGS PER ADS
Basic earnings per ADS.................................. 114.5P 95.5p 79.0p
Diluted earnings per ADS................................ 112.5P 94.0p 78.5p
======== ======== ========
ORDINARY DIVIDEND PER ADS
Interim................................................. 5.0P 4.2p 3.5p
Final................................................... 10.5P 8.6p 7.2p
======== ======== ========
</TABLE>
No operations with a material impact on the Group's results were acquired or
discontinued. There is no material difference between the results disclosed in
the profit and loss account and the historical cost profit as defined by FRS 3.
Comparative figures in the profit and loss account have been restated following
a change in the ratio of ordinary shares per ADS from ten ordinary shares per
ADS to five ordinary shares per ADS.
The accompanying notes form an integral part of this profit and loss account.
15
<PAGE>
3.2 CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
-------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES................... (9) 348.5 256.0 283.0
Dividends received from associates.......................... 4.3 3.4 2.8
Return on investments and servicing of finance.............. (10) (37.1) (28.7) (30.5)
United Kingdom and overseas tax paid........................ (58.4) (59.0) (54.0)
Capital expenditure and financial investment................ (10) (80.5) (82.1) (45.8)
Acquisition payments........................................ (10) (202.2) (115.5) (68.5)
Equity dividends paid....................................... (21.1) (16.6) (13.5)
------ ------ ------
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING.................. (46.5) (42.5) 73.5
Net cash inflow/(outflow) from financing.................... (10) 270.0 78.1 (142.3)
------ ------ ------
Increase/(decrease) in cash and overdrafts for the year..... 223.5 35.6 (68.8)
Translation difference...................................... (0.6) 0.9 (13.8)
Balance of cash and overdrafts at beginning of year......... 328.5 292.0 374.6
------ ------ ------
BALANCE OF CASH AND OVERDRAFTS AT END OF YEAR............... 551.4 328.5 292.0
====== ====== ======
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS:
INCREASE/(DECREASE) IN CASH AND OVERDRAFTS FOR THE YEAR..... 223.5 35.6 (68.8)
Cash (inflow)/outflow from (increase)/decrease in debt
financing................................................. (258.0) (95.2) 126.1
Other movements............................................. (1.7) (0.9) (1.0)
Translation difference...................................... (6.2) 0.1 (20.8)
------ ------ ------
MOVEMENT IN NET FUNDS IN THE YEAR........................... (42.4) (60.4) 35.5
------ ------ ------
NET FUNDS AT BEGINNING OF YEAR.............................. (8) 134.3 194.7 159.2
------ ------ ------
NET FUNDS AT END OF YEAR.................................... (8) 91.9 134.3 194.7
====== ====== ======
</TABLE>
The accompanying notes form an integral part of this cashflow statement.
3.3 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
-------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
Profit for the financial year............................... 172.8 140.3 116.0
Exchange adjustments on foreign currency net investments.... (23) (31.2) 4.0 (40.1)
----- ----- -----
TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR...... 141.6 144.3 75.9
===== ===== =====
</TABLE>
The accompanying notes form an integral part of this statement of total
recognised gains and losses.
16
<PAGE>
3.4 CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
-------- -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets
Corporate brands...................................... (12) 350.0 350.0 350.0
Goodwill.............................................. (12) 410.3 158.0 --
Tangible assets......................................... (13) 196.7 166.7 143.5
Investments............................................. (14) 356.9 268.2 70.5
-------- -------- --------
1,313.9 942.9 564.0
-------- -------- --------
CURRENT ASSETS
Stocks and work in progress............................. (15) 113.5 107.3 99.7
Debtors................................................. (16) 1,040.4 893.1 827.6
Debtors within working capital facility:................ (17)
Gross debts........................................... 345.7 294.5 335.2
Non-returnable proceeds............................... (214.1) (209.2) (211.7)
-------- -------- --------
131.6 85.3 123.5
Cash at bank and in hand................................ 607.0 423.9 364.5
1,892.5 1,509.6 1,415.3
CREDITORS: amounts falling due within one year.......... (18) (2,148.0) (1,777.3) (1,701.6)
NET CURRENT LIABILITIES................................. (255.5) (267.7) (286.3)
TOTAL ASSETS LESS CURRENT LIABILITIES................... 1,058.4 675.2 277.7
CREDITORS: amounts falling due after more than one
year.................................................. (19) (652.5) (401.5) (221.5)
PROVISIONS FOR LIABILITIES AND CHARGES.................. (20) (79.2) (77.9) (74.5)
-------- -------- --------
NET ASSETS/(LIABILITIES)................................ 326.7 195.8 (18.3)
======== ======== ========
CAPITAL AND RESERVES
Called up share capital................................. (22) 77.5 76.6 73.6
Share premium account................................... 602.9 562.9 421.6
Goodwill write-off reserve.............................. -- -- (1,160.4)
Other reserves.......................................... (1.9) 28.5 78.4
Profit and loss account................................. (360.3) (480.3) 561.6
-------- -------- --------
EQUITY SHARE OWNERS' FUNDS.............................. 318.2 187.7 (25.2)
Minority interests...................................... 8.5 8.1 6.9
-------- -------- --------
TOTAL CAPITAL EMPLOYED.................................. 326.7 195.8 (18.3)
======== ======== ========
</TABLE>
The accompanying notes form an integral part of this balance sheet.
17
<PAGE>
3.5 CONSOLIDATED STATEMENT OF SHARE OWNERS' FUNDS
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997:
<TABLE>
<CAPTION>
ORDINARY SHARE GOODWILL PROFIT
SHARE PREMIUM WRITE-OFF OTHER AND LOSS
CAPITAL ACCOUNT RESERVE RESERVES ACCOUNT TOTAL
-------- -------- --------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Balance at 1 January 1997.............. 74.1 416.5 (1,068.8) 117.8 482.7 22.3
1997 MOVEMENTS
Ordinary shares issued................. 0.2 5.1 -- -- (2.9) 2.4
Write-off of goodwill arising on
consolidation in the year............ -- -- (91.6) -- -- (91.6)
Currency translation movement.......... -- -- -- (40.1) -- (40.1)
Retained profit for the financial
year................................. -- -- -- -- 100.3 100.3
Share buy-backs........................ (0.7) -- -- 0.7 (18.5) (18.5)
---- ----- -------- ----- -------- -----
Balance at 31 December 1997............ 73.6 421.6 (1,160.4) 78.4 561.6 (25.2)
1998 MOVEMENTS
Ordinary shares issued in respect of
acquisitions......................... 3.1 129.6 -- -- (27.3) 105.4
Other ordinary shares issued........... 0.5 11.7 -- -- (8.1) 4.1
Transfers between reserves............. -- -- 1,160.4 (54.5) (1,105.9) --
Currency translation movement.......... -- -- -- 4.0 -- 4.0
Retained profit for the financial
year................................. -- -- -- -- 120.7 120.7
Share buy-backs........................ (0.6) -- -- 0.6 (21.3) (21.3)
---- ----- -------- ----- -------- -----
Balance at 31 December 1998............ 76.6 562.9 -- 28.5 (480.3) 187.7
1999 MOVEMENTS
Ordinary shares issued................. 0.9 40.0 -- 0.8 (28.8) 12.9
Currency translation movement.......... -- -- -- (31.2) -- (31.2)
Retained profit for the financial
year................................. -- -- -- -- 148.8 148.8
---- ----- -------- ----- -------- -----
Balance at 31 December 1999............ 77.5 602.9 -- (1.9) (360.3) 318.2
==== ===== ======== ===== ======== =====
</TABLE>
Other reserves at 31 December 1999 comprise: currency translation deficit
L124.5 million (1998: L93.3 million, 1997: L97.3 million), revaluation reserve
Lnil (1998: Lnil, 1997: L175.0 million), capital redemption reserve
L1.3 million (1998: L1.3 million, 1997: L0.7 million) and merger reserve
L121.3 million (1998: L120.5 million, 1997: Lnil).
3.6 STATEMENT OF ACCOUNTING POLICIES
The financial statements have been prepared in accordance with applicable
accounting standards in the United Kingdom. A summary of the Group's principal
accounting policies, which have been applied consistently throughout the year
and the preceding periods (except as disclosed in accounting policy 14), is set
out below.
1 BASIS OF ACCOUNTING AND PRESENTATION OF FINANCIAL STATEMENTS
The financial statements are prepared under the historical cost convention.
2 BASIS OF CONSOLIDATION
The consolidated financial statements include the results of the Company and all
its subsidiary undertakings made up to the same accounting date. The results of
subsidiary undertakings acquired or disposed of during the year are included or
excluded from the profit and loss account from the effective date of acquisition
or disposal.
18
<PAGE>
3.6 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
3 GOODWILL AND INTANGIBLE FIXED ASSETS
Intangible fixed assets comprise goodwill and certain acquired separable
corporate brand names.
Goodwill represents the excess of the fair value attributed to investments in
businesses or subsidiary undertakings over the fair value of the underlying net
assets at the date of their acquisition. In accordance with FRS 10, for
acquisitions made on or after 1 January 1998 goodwill has been capitalised as an
intangible asset. Goodwill arising on acquisitions prior to that date was
written off to reserves in accordance with the accounting standard then in
force. On disposal or closure of a business, the attributable amount of goodwill
previously written off to reserves is included in determining the profit or loss
on disposal.
The Directors are of the opinion that the goodwill and intangible assets of the
Group have an infinite economic life because of the institutional nature of the
corporate brand names, their proven ability to maintain market leadership and
profitable operations over long periods of time and WPP's commitment to develop
and enhance their value. The carrying value of intangible assets will continue
to be reviewed annually for impairment and adjusted to the recoverable amount if
required.
The financial statements depart from the specific requirement of companies
legislation to amortise goodwill over a finite period in order to give a true
and fair view. The Directors consider this to be necessary for the reasons given
above. Because of the infinite life of these intangible assets, it is not
possible to quantify its impact.
4 TANGIBLE FIXED ASSETS
Tangible fixed assets are shown at cost less accumulated depreciation.
Depreciation is provided at rates calculated to write off the cost or valuation
less estimated residual value of each asset on a straight-line basis over its
estimated useful life, as follows:
Freehold buildings -- 2% per annum
Leasehold land and buildings -- over the term of the lease
Fixtures, fittings and equipment -- 10%-33% per annum
Computer equipment -- 33% per annum
5 INVESTMENTS
Except as stated below, fixed asset investments are shown at cost less provision
for diminution in value.
The Group's share of the profits less losses of associated undertakings is
included in the consolidated profit and loss account and the investments are
shown in the Group balance sheet at the Group's share of the net assets. The
Group's share of the profits less losses and net assets is based on current
information produced by the undertakings, adjusted to conform with the
accounting policies of the Group.
6 STOCKS AND WORK IN PROGRESS
Work in progress is valued at cost or on a percentage of completion basis. Cost
comprises outlays incurred on behalf of clients and an appropriate proportion of
direct costs and overheads on incomplete assignments. Provision is made for
irrecoverable costs where appropriate. Stocks are stated at the lower of cost
and net realisable value, and are valued on a first in first out basis.
7 DEBTORS
Debtors are stated net of provisions for bad and doubtful debts.
8 TAXATION
Corporate taxes are payable on taxable profits at current rates. Deferred
taxation is calculated under the liability method and provision is made for all
timing differences which are expected to reverse, at the rates of tax expected
to be in force at the time of the reversal.
19
<PAGE>
3.6 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
9 INCENTIVE PLANS
The Group's share based incentive plans are accounted for in accordance with
Urgent Issues Task Force ("UITF") Abstract 17 "Employee Share Schemes". The cost
of shares acquired by the Group's ESOP trusts or the fair market value of the
shares at the date of the grant, less any consideration to be received from the
employee, is charged to the Group's profit and loss account over the period to
which the employee's performance relates. Where awards are contingent upon
future events (other than continued employment) an assessment of the likelihood
of these conditions being achieved is made at the end of each reporting period
and an appropriate accrual made.
10 PENSION COSTS
The charge to the profit and loss account in respect of defined benefit pension
schemes is the estimated regular cost of providing the benefits accrued in the
year, adjusted to reflect variations from that cost. The regular cost is
calculated to achieve a substantially level percentage of the current and
expected future pensionable payroll. Variations from regular costs are allocated
to the profit and loss account over a period approximating to the scheme
members' average remaining service lives. For defined contribution schemes,
contributions are charged to the profit and loss account as incurred.
11 OPERATING LEASES
Operating lease rentals are charged to the profit and loss account on a
systematic basis. Any premium or discount on the acquisition of a lease is
spread over the life of the lease.
12 TURNOVER, COST OF SALES AND REVENUE
Turnover comprises the gross amounts billed to clients in respect of
commission-based income together with the total of other fees earned. Cost of
sales comprises media payments and production costs. Revenue comprises
commission and fees earned in respect of turnover. Turnover and revenue are
stated exclusive of VAT, sales taxes and trade discounts.
13 TRANSLATION OF FOREIGN CURRENCIES
Foreign currency transactions arising from normal trading activities are
recorded in local currency at current exchange rates. Monetary assets and
liabilities denominated in foreign currencies at the year-end are translated at
the year-end exchange rate. Foreign currency gains and losses are credited or
charged to the profit and loss account as they arise. The profit and loss
accounts of overseas subsidiary undertakings are translated into pounds sterling
at average exchange rates and the year-end net investments in these companies
are translated at year-end exchange rates. Exchange differences arising from
retranslation at year-end exchange rates of the opening net investments and
results for the year are dealt with as movements in reserves.
14 CHANGES IN ACCOUNTING POLICIES
The Group adopted FRS 12 (Provisions, Contingent Liabilities and Contingent
Assets) and FRS 13 (Derivatives and Other Financial Instruments) during the year
and 31 December 1999. There has been no material impact on the financial
statements as a result of the adoption of these new standards.
The Group adopted FRS 9 (Associates and Joint Ventures), FRS 10 (Goodwill and
Intangible Assets), FRS 11 (Impairment of Fixed Assets and Goodwill) and FRS 14
(Earnings Per Share) during the year ended 31 December 1998.
Other than the introduction of FRS 10 (Goodwill and Intangible Assets) and FRS
11 (Impairment of Fixed Assets and Goodwill), as disclosed in accounting policy
3, a number of other Financial Reporting Standards were implemented during the
year. The principal effect of these on the Group was as follows:
FRS 9 (ASSOCIATES AND JOINT VENTURES)
The impact of FRS 9 is to change the presentation of income from associates
within the profit and loss account. This is now excluded from operating profit
and shown as a separate line before profit on ordinary activities before
interest and taxation.
20
<PAGE>
3.6 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
FRS 14 (EARNINGS PER SHARE)
The impact of FRS 14 is to change the method of calculation of basic and fully
diluted earnings per share (EPS). The main impact of this is that certain shares
held by the Employee Share Ownership Plan (ESOP) are now excluded from the
weighted average number of shares.
15 REVENUE RECOGNITION
ADVERTISING AND MEDIA INVESTMENT MANAGEMENT
Revenue is typically derived from commissions on media placements and fees for
advertising services. Traditionally, the Company's advertising clients were
charged a standard commission on their total media and production expenditure.
In recent years, however, this frequently has tended to become a matter of
individual negotiation. Compensation may therefore consist of varied
arrangements involving commissions, fees, incentive-based compensation or a
combination of the three, as agreed upon with each client.
Revenue is recognised when the service is performed, in accordance with the
terms of the contractual arrangements. Incentive-based compensation typically
comprises both quantitative and qualitative elements; on the element related to
quantitative targets revenue is recognised when the quantitative targets have
been achieved; on the element related to qualitative targets revenue is
recognised when the incentive is received.
PUBLIC RELATIONS & PUBLIC AFFAIRS AND BRANDING & IDENTITY, HEALTHCARE AND
SPECIALIST COMMUNICATIONS
Revenue is typically derived from retainer fees and services to be performed
subject to specific agreement. Revenue is recognised when the service is
performed, in accordance with the terms of the contractual arrangement, using
the percentage of completion method for fee based projects. Revenue is
recognised on long-term contracts, if the final outcome can be assessed with
reasonable certainty, by including in the profit and loss account revenue and
related costs as contract activity progresses.
INFORMATION & CONSULTANCY
Revenue is recognised as costs are incurred on each market research contract on
a percentage of completion basis. Costs, including an appropriate proportion of
overheads relating to contracts in progress at the balance sheet date, are
carried forward in work in progress. Losses are recognised as soon as they are
foreseen.
21
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION
1 SEGMENT INFORMATION
The Group is one of the leading worldwide communications services organisations
offering national and multinational clients a comprehensive range of
communications services. These services include advertising and media investment
management, information and consultancy, public relations and public affairs,
and branding and identity, healthcare and specialist communications. The Group
derives a substantial proportion of its revenue and operating income from North
America, the United Kingdom and Continental Europe and the Group's performance
has historically been linked with the economic performance of these regions.
Contributions by geographical area were as follows:
<TABLE>
<CAPTION>
1999 CHANGE 1998 CHANGE 1997
-------- -------- -------- -------- --------
LM % LM % LM
<S> <C> <C> <C> <C> <C>
TURNOVER
United Kingdom.................. 1,133.7 25.7 902.1 11.5 809.0
United States................... 4,021.3 13.8 3,534.9 11.9 3,159.7
Continental Europe.............. 2,230.2 21.1 1,841.2 19.6 1,539.0
Canada, Asia Pacific, Latin
America, Africa & Middle
East.......................... 1,960.7 13.9 1,721.9 (3.2) 1,779.6
------- ---- ------- ----- -------
9,345.9 16.8 8,000.1 9.8 7,287.3
======= ==== ======= ===== =======
REVENUE
United Kingdom.................. 434.7 10.5 393.5 17.8 334.0
United States................... 915.2 19.7 764.4 9.1 700.8
Continental Europe.............. 426.2 7.6 396.0 17.8 336.2
Canada, Asia Pacific, Latin
America, Africa & Middle
East.......................... 396.5 8.8 364.5 (3.0) 375.7
------- ---- ------- ----- -------
2,172.6 13.3 1,918.4 9.8 1,746.7
======= ==== ======= ===== =======
PBIT(1)
United Kingdom.................. 51.5 22.0 42.2 27.9 33.0
United States................... 139.0 24.6 111.6 26.2 88.4
Continental Europe.............. 55.8 1.5 55.0 37.2 40.1
Canada, Asia Pacific, Latin
America, Africa & Middle
East.......................... 44.5 22.3 36.4 (17.3) 44.0
------- ---- ------- ----- -------
290.8 18.6 245.2 19.3 205.5
======= ==== ======= ===== =======
--------------
</TABLE>
NOTE:
(1) PBIT: Profit on ordinary activities before interest and
taxation.
There is no significant cross-border trading.
22
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
1 SEGMENT INFORMATION (CONTINUED)
Contributions by operating sector were as follows:
<TABLE>
<CAPTION>
1999 CHANGE 1998 CHANGE 1997
-------- -------- -------- -------- --------
LM % LM % LM
<S> <C> <C> <C> <C> <C>
TURNOVER
Advertising, media investment
management.................... 7,690.1 16.8 6,582.5 7.6 6,115.8
Information & consultancy....... 425.5 8.6 391.9 31.6 297.7
Public relations & public
affairs....................... 199.1 20.9 164.7 44.0 114.4
Branding & identity, healthcare
and specialist
communications................ 1,031.2 19.8 861.0 13.4 759.4
------- ---- ------- ----- -------
9,345.9 16.8 8,000.1 9.8 7,287.3
======= ==== ======= ===== =======
REVENUE
Advertising, media investment
management.................... 1,013.1 6.5 951.3 4.1 914.1
Information & consultancy....... 419.7 14.3 367.2 23.3 297.7
Public relations & public
affairs....................... 178.9 32.7 134.8 17.8 114.4
Branding & identity, healthcare
and specialist
communications................ 560.9 20.6 465.1 10.6 420.5
------- ---- ------- ----- -------
2,172.6 13.3 1,918.4 9.8 1,746.7
======= ==== ======= ===== =======
PBIT(1)
Advertising, media investment
management.................... 155.9 10.3 141.3 7.1 131.9
Information & consultancy....... 42.1 7.1 39.3 51.7 25.9
Public relations & public
affairs....................... 23.9 52.2 15.7 70.7 9.2
Branding & identity, healthcare
and specialist
communications................ 68.9 40.9 48.9 27.0 38.5
------- ---- ------- ----- -------
290.8 18.6 245.2 19.3 205.5
======= ==== ======= ===== =======
--------------
</TABLE>
NOTE:
(1) PBIT: Profit on ordinary activities before interest and
taxation.
23
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
2 OPERATING COSTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Total staff costs (note 3).................................. 1,091.3 952.9 877.8
Establishment costs......................................... 158.3 142.4 133.9
Other operating expenses (net).............................. 341.3 307.2 262.0
Loss on sale of tangible fixed assets....................... 0.9 0.9 0.1
------- ------- -------
1,591.8 1,403.4 1,273.8
======= ======= =======
OPERATING EXPENSES INCLUDE:
Depreciation................................................ 42.2 33.7 29.1
Operating lease rentals:
Property (excluding real estate taxes)...................... 83.1 72.5 71.9
Plant and machinery......................................... 19.6 16.4 15.0
------- ------- -------
Auditors' remuneration: 102.7 88.9 86.9
------- ------- -------
Audit fees
-- Arthur Andersen.......................................... 2.4 2.0 1.8
-- other.................................................... 0.3 0.3 0.2
------- ------- -------
2.7 2.3 2.0
------- ------- -------
Fees in respect of other advisory work...................... 3.7 2.8 2.4
======= ======= =======
</TABLE>
Fees paid to the auditors in respect of other advisory work include advice to
the Group on taxation, acquisitions and, in 1999, on the implementation and
structuring of "LEAP" ("Leadership Equity Acquisition Plan").
MINIMUM COMMITTED ANNUAL RENTALS
Amounts payable (net of taxes) in 2000 under the foregoing leases will be as
follows:
<TABLE>
<CAPTION>
PLANT AND MACHINERY PROPERTY
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
In respect of operating leases which expire:
-- within one year..................................... 4.7 5.1 3.9 4.8 7.0 6.5
-- within two to five years............................ 15.9 13.2 10.9 24.7 20.4 15.0
-- after five years.................................... 1.5 0.2 0.6 65.8 49.2 49.8
---- ---- ---- ---- ---- ----
22.1 18.5 15.4 95.3 76.6 71.3
==== ==== ==== ==== ==== ====
</TABLE>
Future minimum annual amounts payable (net of taxes) under lease commitments in
existence at 31 December 1999 are as follows:
<TABLE>
<CAPTION>
MINIMUM LESS
RENTAL SUB-LET NET
PAYMENTS RENTALS PAYMENT
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Year ended 31 December
2000........................................................ 117.4 (8.6) 108.8
2001........................................................ 107.9 (6.9) 101.0
2002........................................................ 100.3 (6.5) 93.8
2003........................................................ 88.2 (6.1) 82.1
2004........................................................ 83.1 (6.0) 77.1
Later years (to 2010)....................................... 290.1 (21.0) 269.1
----- ----- -----
787.0 (55.1) 731.9
===== ===== =====
</TABLE>
24
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
3 OUR PEOPLE
Our staff numbers averaged 27,711 against 25,589 in 1998, up 8.3%, including
acquisitions. Their geographical distribution was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
NUMBER NUMBER NUMBER
-------- -------- --------
<S> <C> <C> <C>
United Kingdom.............................................. 4,439 3,973 3,625
United States............................................... 8,033 7,082 6,571
Continental Europe.......................................... 5,650 4,922 4,291
Canada, Asia Pacific, Latin America, Africa &
Middle East............................................... 9,589 9,612 8,422
------ ------ ------
27,711 25,589 22,909
====== ====== ======
</TABLE>
At the end of 1999 staff numbers were 29,168 compared with 26,184 in 1998.
Total staff costs were made up as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Wages and salaries.......................................... 763.6 666.4 615.4
Payments and provisions charged under short- and long-term
incentive plans........................................... 71.3 58.6 56.8
Social security costs....................................... 86.3 76.7 70.4
Other pension costs......................................... 27.7 20.7 20.2
Other staff costs........................................... 142.4 130.5 115.0
------- ------ ------
1,091.3 952.9 877.8
======= ====== ======
STAFF COST TO REVENUE RATIO................................. 50.2% 49.7% 50.3%
</TABLE>
Directors' emoluments are disclosed in note 24.
4 NET INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
On bank loans and overdrafts, and other loans
-- repayable within five years, by instalments.............. 3.7 2.0 1.2
-- repayable within five years, not by instalments.......... 16.0 21.1 23.8
-- on all other loans (including corporate bond)............ 14.1 6.9 1.4
Interest payable............................................ 33.8 30.0 26.4
Interest receivable......................................... (10.4) (10.8) (10.3)
Net interest payable........................................ 23.4 19.2 16.1
Charges in respect of working capital facilities............ 12.0 13.2 12.0
----- ----- -----
35.4 32.4 28.1
===== ===== =====
</TABLE>
Net interest payable increased to L23.4 million from L19.2 million, reflecting
the increased level of acquisitions and share repurchases during the year ended
31 December 1999.
Interest on the majority of the Group's borrowings, other than the USA bond, is
payable at a margin of between 0.20% and 0.55% over relevant LIBOR depending on
certain covenant conditions being met and, for a significant proportion of
borrowings, is hedged to January 2003 at US dollar LIBOR rates of 6.25% or less
(excluding margin costs).
The majority of the Group's long-term debt is represented by $300 million of USA
bonds at a weighted average interest rate of 6.71%. Average borrowings under the
$500 million Syndicated Revolving Credit Facility amounted to $228 million at an
average interest rate of 6.1% (1998: 5.7%, 1997: 6.2%) inclusive of margin.
25
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
4 NET INTEREST PAYABLE AND SIMILAR CHARGES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Group entered into various types of US dollar interest rate contracts in
managing its interest rate risk, as below. The rates below exclude margin costs.
<TABLE>
<CAPTION>
1999 1998 1997
SWAPS ----------- ---------- ----------
<S> <C> <C> <C>
Notional principal amount.............................. $ 350M $ 350m $ 350m
Average pay rate....................................... 6.17% 5.84% 5.84%
Average receive rate................................... LIBOR LIBOR LIBOR
Average term........................................... 5 MONTHS 6 months 6 months
Latest maturity date................................... JAN 2003 Jan 2003 Jan 2003
</TABLE>
The Group enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. Under the swap agreements
the Group agrees with other parties to exchange, at specified intervals, the
difference between the fixed strike rate and prevailing relevant floating US
dollar LIBOR calculated by reference to the agreed notional principal amount.
The differential paid or received by the Group on the swap agreements is
charged/(credited) to interest expense in the year to which it relates.
The term of such instruments is not greater than the term of the debt being
hedged and any anticipated refinancing or extension of the debt.
The Group is exposed to credit-related losses in the event of non-performance by
counterparties to financial instruments, but it does not expect any
counterparties to fail to meet their obligations given the Group's policy of
selecting only counterparties with high credit ratings.
Other than the above, the Group has no significant utilisation of derivative
financial instruments.
The fair value of derivatives is disclosed in note 21. The Group's policy on
derivatives and financial instruments is discussed in the Operating and
financial review on pages 25 and 26 of the 31 December 1999 audited financial
statements.
5 TAX ON PROFIT ON ORDINARY ACTIVITIES
The tax charge is based on the profit for the year and comprises:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Corporation tax at 30.25% (1998: 31.0%, 1997: 31.5%)........ 12.4 12.9 6.1
Deferred taxation........................................... (0.7) -- (2.6)
Overseas taxation........................................... 56.5 51.4 52.0
Tax on profits of associate companies....................... 8.1 6.8 3.9
Write-back of previously written-off ACT.................... -- (4.1) (2.7)
Advance corporation tax written off......................... 0.3 -- --
---- ---- ----
76.6 67.0 56.7
==== ==== ====
Effective tax rate on profit before tax..................... 30.0% 31.5% 32.0%
</TABLE>
26
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
5 TAX ON PROFIT ON ORDINARY ACTIVITIES (CONTINUED)
Reconciliation of the Group's tax to the United Kingdom statutory tax rate:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Tax on pre-tax income at statutory rates of 30.25%.......... 77.3 66.0 55.9
(1998 31.0% and 1997: 31.5%)
Effects of:
Permanent differences between expenditures charged in
arriving at income and expenditures allowed for tax
purposes.................................................. (3.4) 4.3 2.6
Utilisation of tax losses brought forward................... (4.7) (5.6) (4.1)
Unused tax losses carried forward........................... 6.3 4.6 3.8
Differences between UK and overseas statutory standard
tax rates................................................. 0.8 1.8 1.2
Write-back of previously written-off ACT.................... -- (4.1) (2.7)
Advance corporation tax written off......................... 0.3 -- --
---- ---- ----
Tax on profit on ordinary activities........................ 76.6 67.0 56.7
</TABLE>
6 ORDINARY DIVIDENDS
<TABLE>
<CAPTION>
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
PENCE PER SHARE LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Interim dividend paid............................. 1.0P 0.84p 0.70p 7.8 6.2 5.2
Final dividend proposed........................... 2.1P 1.72p 1.43p 16.2 13.4 10.5
--- ---- ---- ---- ---- ----
3.1P 2.56p 2.13p 24.0 19.6 15.7
=== ==== ==== ==== ==== ====
</TABLE>
No ACT is payable in respect of the 1998 final dividend and the 1999 dividends,
owing to the abolition of ACT with effect from April 1999.
7 EARNINGS PER ORDINARY SHARE
Basic and diluted earnings per share have been calculated in accordance with FRS
14 "Earnings per Share".
Basic earnings per share have been calculated using earnings of L172.8 million
(1998: L140.3 million, 1997: L116.0 million) and weighted average shares in
issue during 1999 of 753,324,054 shares (1998: 735,700,122 shares, 1997:
732,426,990 shares).
Diluted earnings per share have been calculated using earnings of
L172.8 million (1998: L140.3 million, 1997: L116.0 million) on a weighted
average of 768,691,993 shares (1998: 746,939,733 shares, 1997: 738,922,627
shares). This takes into account the exercise of employee share options where
these are expected to dilute earnings.
Basic and diluted earnings per ADS have been calculated using the same method as
for earnings per share, multiplied by a factor of five. The comparative figures
have been restated following a change in the ratio of ordinary shares per ADS
from 10 ordinary shares per ADS to five ordinary shares per ADS.
27
<PAGE>
3.7 Notes to the WPP financial information (continued)
8 SOURCES OF FINANCE
The following table is a supplementary disclosure to the consolidated cash flow
statement, summarising the equity and debt financing of the Group, and changes
during the year:
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
SHARES DEBT SHARES DEBT SHARES DEBT
-------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
ANALYSIS OF CHANGES IN FINANCING
Beginning of year............................. 639.5 194.2 495.2 97.3 490.6 215.4
Shares issued in respect of acquisitions...... -- -- 132.7 -- -- --
Other issues of share capital................. 40.9 -- 12.2 -- 5.3 --
Shares bought back and cancelled.............. -- -- (0.6) -- (0.7) --
Repayment of bank loans....................... -- -- -- -- -- (18.5)
Increase/(reduction) in drawings on bank
loans....................................... -- 258.0 -- 97.3 -- (106.4)
Amortisation/(payment) of financing costs
included in net debt........................ -- 1.7 -- (1.2) -- (0.2)
Exchange adjustments on long-term borrowings.. -- 5.6 -- 0.8 -- 7.0
----- ----- ----- ----- ----- ------
End of year................................... 680.4 459.5 639.5 194.2 495.2 97.3
</TABLE>
The above table excludes bank overdrafts which fall within cash for the purposes
of the consolidated cash flow statement.
SHARES
At 31 December 1999, the Company's share base was entirely composed of ordinary
equity share capital and share premium of L680.4 million (1998: L639.5 million,
1997: L495.2 million).
DEBT
USA BOND The Group has in issue US$200 million of 6.625% Notes due 2005 and
US$100 million of 6.875% Notes due 2008.
REVOLVING CREDIT FACILITY The Group's debt is also funded by a $500 million
syndicated Revolving Credit Facility dated July 1998. The facility is due to
expire in July 2002. The Group's syndicated borrowings drawn down under the
agreement averaged $228 million during the year ended 31 December 1999.
REVOLVING FACILITY AGREEMENT During 1999, the Group entered into a further
Revolving Facility Agreement for US$150 million. This facility has a 364-day
maturity.
Borrowings under the Revolving Credit Facility and the Revolving Facility
Agreement are governed by certain financial covenants based on the results and
financial position of the Group.
The following table is an analysis of net funds with debt analysed by year of
repayment:
<TABLE>
<CAPTION>
CHANGE CHANGE
1999 IN YEAR 1998 IN YEAR 1997
-------- -------- -------- -------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
DEBT
Within one year..................................... (92.7) (92.7) -- 9.3 (9.3)
Between one and two years........................... -- -- -- -- --
Between two and five years.......................... (183.1) (168.0) (15.1) 71.9 (87.0)
Over five years--by instalments..................... (183.7) (4.6) (179.1) (178.1) (1.0)
------ ------ ------ ------ -----
DEBT FINANCING UNDER THE CREDIT FACILITY AGREEMENT
AND FROM UNSECURED LOAN NOTES..................... (459.5) (265.3) (194.2) (96.9) (97.3)
Short-term overdrafts--within one year.............. (55.6) 39.8 (95.4) (22.9) (72.5)
Cash at bank and in hand............................ 607.0 183.1 423.9 59.4 364.5
------ ------ ------ ------ -----
NET FUNDS........................................... 91.9 (42.4) 134.3 (60.4) 194.7
------ ------ ------ ------ -----
</TABLE>
28
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
8 SOURCES OF FINANCE (CONTINUED)
Analysis of fixed and floating rate debt by currency:
<TABLE>
<CAPTION>
FIXED FLOATING PERIOD
CURRENCY LM RATE1 BASIS (MONTHS)(1)
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
US$.................................................. 401.7(2) 6.42 % n/a 52
US$.................................................. 136.6 n/a LIBOR n/a
L.................................................... 132.0 n/a LIBOR n/a
Other................................................ 3.3 n/a various n/a
-----
673.6
</TABLE>
--------------
NOTES:
(1) Weighted average.
(2) Including drawings on working capital facility as described in note 17.
9 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
OPERATING PROFIT............................................ 263.5 229.1 194.9
Depreciation charge (note 13)............................... 42.2 33.7 29.1
Decrease/(increase) in working capital and provisions....... 41.9 (7.7) 58.9
Loss on sale of tangible fixed assets....................... 0.9 0.9 0.1
----- ----- -----
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 348.5 256.0 283.0
</TABLE>
The following table analyses the changes in working capital and provisions that
have contributed to the net cash inflow from operating activities in the
consolidated cash flow statement:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
CHANGES IN WORKING CAPITAL AND PROVISIONS
(Increase)/decrease in stocks and work in progress.......... (1.5) 0.2 (2.5)
(Increase)/decrease in debtors.............................. (165.3) 23.9 (66.3)
Increase/(decrease) in creditors--short term................ 155.4 (29.2) 120.0
--long term..................... 43.2 (7.9) 6.9
Increase in provisions...................................... 10.1 5.3 0.8
------ ----- -----
DECREASE/(INCREASE) IN WORKING CAPITAL AND PROVISIONS....... 41.9 (7.7) 58.9
</TABLE>
29
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
10 ANALYSIS OF NON-OPERATING CASH FLOWS
The following tables analyse the items included within the main cash flow
headings on page 16:
<TABLE>
<CAPTION>
1998 1997
1999 LM LM
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest and similar charges paid........................... (42.0) (36.8) (39.9)
Interest received........................................... 9.3 10.6 10.6
Dividends paid to minorities................................ (4.4) (2.5) (1.2)
------ ------ ------
NET CASH OUTFLOW............................................ (37.1) (28.7) (30.5)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (note 13)................. (64.6) (51.6) (36.3)
Purchase of own shares by ESOP trust (note 14).............. (17.9) (33.3) (12.7)
Proceeds from sale of tangible fixed assets................. 2.0 2.8 3.2
------ ------ ------
NET CASH OUTFLOW............................................ (80.5) (82.1) (45.8)
ACQUISITION PAYMENTS
Cash consideration for acquisitions......................... (242.2) (111.8) (51.3)
Less cash acquired.......................................... 51.8 6.1 0.1
NET PURCHASE OF OTHER INVESTMENTS........................... (11.8) (9.8) (17.3)
------ ------ ------
(202.2) (115.5) (68.5)
FINANCING ACTIVITIES
Net repayment of bank loans................................. -- -- (18.5)
Increase/(reduction) in drawings on bank loans.............. 258.0 (81.4) (106.4)
Share buy-backs............................................. -- (21.3) (18.5)
Financing costs............................................. -- (2.3) (1.3)
Proceeds from issue of shares............................... 12.0 4.3 2.4
Proceeds from issue of bond................................. -- 178.8 --
------ ------ ------
NET CASH INFLOW/(OUTFLOW)................................... 270.0 78.1 (142.3)
====== ====== ======
</TABLE>
11 SEGMENT INFORMATION
Assets by geographical area were as follows:
<TABLE>
<CAPTION>
NON-INTEREST BEARING
TOTAL ASSETS EMPLOYED ASSETS/(LIABILITIES)
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
United Kingdom.......................... 624.6 436.9 356.0 143.2 54.0 31.2
United States........................... 962.4 623.4 515.8 (324.0) (359.9) (420.5)
Continental Europe...................... 714.7 621.2 489.0 144.4 95.6 61.9
Canada, Asia Pacific, Latin America,
Africa & Middle East.................. 904.7 771.0 618.5 271.2 271.8 114.4
------- ------- ------- ------ ------ ------
3,206.4 2,452.5 1,979.3 234.8 61.5 (213.0)
======= ======= =======
NET INTEREST BEARING FUNDS.............. 91.9 134.3 194.7
------ ------ ------
NET ASSETS/(LIABILITIES) IN THE
CONSOLIDATED BALANCE SHEET............ 326.7 195.8 (18.3)
====== ====== ======
</TABLE>
30
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
11 SEGMENT INFORMATION (CONTINUED)
Assets by operating sector were as follows:
<TABLE>
<CAPTION>
NON-INTEREST BEARING
TOTAL ASSETS EMPLOYED ASSETS/(LIABILITIES)
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Advertising, media investment
management............................ 1,850.8 1,616.0 1,461.7 (259.3) (139.2) (212.2)
Information & consultancy............... 455.0 294.8 157.7 173.5 71.8 (11.3)
Public relations & public affairs....... 247.7 167.8 81.4 121.4 68.3 11.7
Branding & identity, healthcare and
specialist communications............. 652.9 373.9 278.5 199.2 60.6 (1.2)
------- ------- ------- ------ ------ ------
3,206.4 2,452.5 1,979.3 234.8 61.5 (213.0)
======= ======= =======
Net interest bearing funds.............. 91.9 134.3 194.7
------ ------ ------
NET ASSETS/(LIABILITIES) IN THE
CONSOLIDATED BALANCE SHEET............ 326.7 195.8 (18.3)
====== ====== ======
</TABLE>
Certain items, including the valuation of corporate brand names, have been
allocated within the above analyses on the basis of the revenue of the
subsidiary undertakings to which they relate.
12 INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Corporate brand names....................................... 350.0 350.0 350.0
</TABLE>
Corporate brand names represent J. Walter Thompson, Hill and Knowlton and
Ogilvy & Mather Worldwide. These assets are carried at historical cost in
accordance with the Group's accounting policy for intangible fixed assets.
<TABLE>
<CAPTION>
GOODWILL LM
-------- --------
<S> <C>
1 January 1998.............................................. --
Additions................................................... 158.0
-----
31 December 1998............................................ 158.0
Additions................................................... 252.3
-----
31 DECEMBER 1999............................................ 410.3
</TABLE>
Additions represent goodwill arising on the acquisition of subsidiary
undertakings. Goodwill arising on the acquisition of associate undertakings is
shown within fixed asset investments in note 14.
31
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
13 TANGIBLE FIXED ASSETS
The movements in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
LAND AND BUILDINGS
-------------------- FIXTURES,
SHORT FITTINGS AND COMPUTER
FREEHOLD LEASEHOLD EQUIPMENT EQUIPMENT TOTAL
-------- --------- ------------ --------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
Cost:
1 January 1998............................. 12.0 113.1 82.5 107.9 315.5
Additions.................................. 0.1 13.3 13.4 24.8 51.6
New acquisitions........................... 0.1 2.4 5.5 4.3 12.3
Disposals.................................. (0.6) (2.6) (2.6) (6.3) (12.1)
Exchange adjustments....................... -- (1.3) (0.5) 0.9 (0.9)
---- ----- ----- ----- -----
31 December 1998........................... 11.6 124.9 98.3 131.6 366.4
Additions.................................. 0.3 13.0 15.3 36.0 64.6
New acquisitions........................... 0.4 5.0 7.7 5.3 18.4
Disposals.................................. -- (2.8) (3.0) (7.7) (13.5)
Exchange adjustments....................... 0.1 1.5 0.6 (1.0) 1.2
---- ----- ----- ----- -----
31 DECEMBER 1999........................... 12.4 141.6 118.9 164.2 437.1
==== ===== ===== ===== =====
Depreciation:
1 January 1998............................. 2.4 45.8 51.6 72.2 172.0
New acquisitions........................... -- 1.7 0.5 0.4 2.6
Charge..................................... 0.7 5.1 11.4 16.5 33.7
Disposals.................................. -- (1.5) (1.6) (5.3) (8.4)
Exchange adjustments....................... (0.3) (0.2) -- 0.3 (0.2)
---- ----- ----- ----- -----
31 December 1998........................... 2.8 50.9 61.9 84.1 199.7
New acquisitions........................... 0.1 2.2 3.5 2.4 8.2
Charge..................................... 0.3 8.7 11.8 21.4 42.2
Disposals.................................. -- (1.9) (2.0) (6.7) (10.6)
Exchange adjustments....................... 0.1 1.0 0.4 (0.6) 0.9
---- ----- ----- ----- -----
31 DECEMBER 1999........................... 3.3 60.9 75.6 100.6 240.4
==== ===== ===== ===== =====
Net book value:
31 DECEMBER 1999........................... 9.1 80.7 43.3 63.6 196.7
31 December 1998........................... 8.8 74.0 36.4 47.5 166.7
---- ----- ----- ----- -----
1 January 1998............................. 9.6 67.3 30.9 35.7 143.5
==== ===== ===== ===== =====
</TABLE>
Leased assets (other than leasehold property) included above have a net book
value of L3.1 million (1998: L2.3 million, 1997: L1.8 million).
At the end of the year, capital commitments contracted, but not provided for
were:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Capital commitments......................................... 1.4 0.6 2.2
=== === ===
</TABLE>
32
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
14 FIXED ASSET INVESTMENTS
The following are included in the net book value of fixed asset investments:
<TABLE>
<CAPTION>
GOODWILL
ON
ASSOCIATE ASSOCIATE OWN OTHER
UNDERTAKINGS UNDERTAKINGS SHARES INVESTMENTS TOTAL
------------ ------------ -------- ----------- --------
LM LM LM LM LM
<S> <C> <C> <C> <C> <C>
1 January 1998.......................... 22.7 -- 27.0 20.8 70.5
Additions............................... 52.4 -- 33.3 13.7 99.4
Goodwill arising on acquisition of new
associates............................ -- 90.6 -- -- 90.6
Share of profits after tax of associate
undertakings.......................... 9.3 -- -- -- 9.3
Dividends and other movements........... (8.0) -- -- 2.5 (5.5)
Exchange adjustments.................... 10.0 -- -- -- 10.0
Disposals............................... -- -- (2.2) (3.9) (6.1)
----- ----- ---- ---- -----
31 December 1998........................ 86.4 90.6 58.1 33.1 268.2
Additions............................... 2.6 -- 17.9 19.2 39.7
Goodwill arising on acquisition of new
associates............................ -- 40.5 -- -- 40.5
Share of profits after tax of associate
undertakings.......................... 19.2 -- -- -- 19.2
Dividends and other movements........... (6.3) -- -- (1.5) (7.8)
Exchange adjustments.................... 7.6 -- -- -- 7.6
Disposals............................... (2.3) -- (4.7) (3.5) (10.5)
----- ----- ---- ---- -----
31 DECEMBER 1999........................ 107.2 131.1 71.3 47.3 356.9
===== ===== ==== ==== =====
</TABLE>
The Group's principal associate undertakings include:
<TABLE>
<CAPTION>
COUNTRY OF
% CONTROLLED INCORPORATION
------------ --------------
<S> <C> <C>
Asatsu-DK................................................... 20.0 Japan
Batey Ads (Pte) Limited..................................... 30.0 Singapore
Chime Communications PLC.................................... 29.9 United Kingdom
High Co S.A.(1)............................................. 30.0 France
IBOPE Group................................................. 31.0 Brazil
Ogilvy & Mather Rightford Pty Limited....................... 40.0 South Africa
Singleton, Ogilvy & Mather (Holdings) Pty Limited........... 40.7 Australia
</TABLE>
--------------
NOTE:
1 acquired in 1999
The Company's holdings of own shares are stated at cost and represent purchases
by the Employee Share Option Plan ("ESOP") trust of shares in WPP Group plc for
the purpose of funding certain of the Group's long-term incentive plan
liabilities.
The trustees of the ESOP purchase the Company's ordinary shares in the open
market using funds provided by the Company. The Company also has an obligation
to make regular contributions to the ESOP to enable it to meet its
administrative costs.
The number and market value of the ordinary shares of the Company held by the
ESOP at 31 December 1999 was 27,888,766, (1998: 25,532,484, 1997: 16,456,119)
and L273.6 million (1998: L93.4 million, 1997: L44.3 million) respectively.
The market value of the Group's shares in its principal listed associate
undertakings at 31 December 1999 was as follows: Asatsu-DK--L419.6 million,
Chime Communications PLC--L61.6 million, High Co S.A.--L28.7 million. The
Group's investments in its principal associate undertakings are represented by
ordinary shares.
33
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
14 FIXED ASSET INVESTMENTS (CONTINUED)
Other investments include a UK listed investment of L24.3 million (1998:
L19.9 million, 1997: L14.3 million). This represents an interest of 18.1% (1998:
17.9%, 1997: 13.7%) in the ordinary share capital of Tempus Group PLC, Europe's
second largest independent media buyer.
15 STOCKS AND WORK IN PROGRESS
The following are included in the net book value of stocks and work in progress:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Work in progress............................................ 110.4 104.5 97.0
Stocks...................................................... 3.1 2.8 2.7
----- ----- ----
113.5 107.3 99.7
===== ===== ====
</TABLE>
16 DEBTORS
The following are included in debtors:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade debtors outside working capital facility.............. 770.0 678.9 633.9
VAT and sales taxes recoverable............................. 13.5 4.0 7.2
Corporate income taxes recoverable.......................... 8.7 9.9 6.5
Other debtors............................................... 143.4 126.5 103.3
Prepayments and accrued income.............................. 64.3 46.8 53.5
------- ----- -----
999.9 866.1 804.4
======= ===== =====
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Other debtors............................................... 34.7 20.5 18.9
Prepayments and accrued income.............................. 5.8 6.5 4.3
------- ----- -----
40.5 27.0 23.2
------- ----- -----
1,040.4 893.1 827.6
======= ===== =====
</TABLE>
MOVEMENTS ON BAD DEBT PROVISIONS WERE AS FOLLOWS:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Balance at beginning of year................................ 16.5 15.6 14.7
Charged/(credited):
To costs and expenses..................................... 4.0 4.6 6.6
Exchange adjustments...................................... (0.1) (0.4) (0.5)
Other....................................................... (3.8) (3.3) (5.2)
----- ----- -----
Balance at end of year...................................... 16.6 16.5 15.6
===== ===== =====
</TABLE>
The allowance for doubtful debts is equivalent to 1.8% (1998: 2.1%, 1997: 2.0%)
of gross trade accounts receivable.
34
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
17 DEBTORS WITHIN WORKING CAPITAL FACILITY
The following are included in debtors within the Group's working capital
facilities:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Gross debts................................................. 345.7 294.5 335.2
Non-returnable proceeds..................................... (214.1) (209.2) (211.7)
------ ------ ------
131.6 85.3 123.5
====== ====== ======
</TABLE>
Within the Group's overall working capital facilities, certain trade debts have
been assigned as security against the advance of cash. This security is
represented by the assignment of a pool of trade debts, held by one of the
Group's subsidiaries, to a trust for the benefit of the providers of this
working capital facility. The financing provided against this pool takes into
account, inter alia, the risks that may be attached to individual debtors and
the expected collection period.
The Group is not obliged (and does not intend) to support any credit-related
losses arising from the assigned debts against which cash has been advanced. The
providers of the finance have confirmed in writing that, in the event of default
in payment by a debtor, they will only seek repayment of cash advanced from the
remainder of the pool of debts in which they hold an interest, and that
repayment will not be sought from the Group in any other way.
18 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
The following are included in creditors falling due within one year:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Bank loans and overdrafts (note 8).......................... 148.3 95.4 81.8
Trade creditors............................................. 1,315.0 1,102.4 1,113.0
Corporate income taxes payable.............................. 34.6 50.0 49.2
Other taxation and social security.......................... 68.9 52.0 58.5
Dividends proposed.......................................... 16.2 13.4 10.5
Payments due to vendors (note 23)........................... 41.2 14.3 9.1
Other creditors and accruals................................ 398.0 338.7 282.2
Deferred income............................................. 125.8 111.1 97.3
------- ------- -------
2,148.0 1,777.3 1,701.6
======= ======= =======
</TABLE>
Bank loans and overdrafts include overdrafts of L55.6 million (1998:
L95.4 million, 1997: L72.5 million).
19 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
The following are included in creditors falling due after more than one year:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Bank loans (note 8)......................................... 366.8 194.2 88.0
Corporate income taxes payable.............................. 122.9 91.3 75.3
Payments due to vendors (note 23)........................... 131.2 83.6 25.3
Other creditors and accruals................................ 31.6 32.4 32.9
----- ----- -----
652.5 401.5 221.5
===== ===== =====
</TABLE>
35
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
20 PROVISIONS FOR LIABILITIES, CHARGES AND CONTINGENT LIABILITIES
The movement in the year on provisions comprises:
<TABLE>
<CAPTION>
PENSION LONG-TERM
DEFERRED AND INCENTIVE
TAXATION OTHER PLANS TOTAL
-------- -------- --------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
1 January 1998........................................... 8.4 43.3 22.8 74.5
Charged to the profit and loss account................... 0.4 5.8 11.2 17.4
New acquisitions......................................... -- 0.2 -- 0.2
Utilised................................................. (0.9) (4.0) (12.2) (17.1)
Transfers................................................ 0.7 1.3 -- 2.0
Exchange adjustments..................................... 0.1 0.8 -- 0.9
---- ---- ----- -----
31 December 1998......................................... 8.7 47.4 21.8 77.9
(Credited)/charged to the profit and loss account........ (0.7) 7.3 15.2 21.8
New acquisitions......................................... -- 0.8 -- 0.8
Utilised................................................. (0.6) (4.4) (14.4) (19.4)
Transfers................................................ (2.5) 2.6 -- 0.1
Exchange adjustments..................................... (0.2) (1.8) -- (2.0)
---- ---- ----- -----
31 DECEMBER 1999......................................... 4.7 51.9 22.6 79.2
==== ==== ===== =====
</TABLE>
DEFERRED TAXATION
Deferred tax has been provided to the extent that the directors have concluded
that it is probable that liabilities will crystallise. No provision is made for
tax that would arise on the remittance of overseas earnings. There is no
material unprovided deferred tax at 31 December 1999.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------- --------
LM LM LM
<S> <C> <C> <C>
Deferred tax assets:
-- Unutilised tax losses.................................... 7.7 13.3 24.6
-- Deferred compensation.................................... 32.2 29.0 28.4
-- Acquisition related provisions (principally property,
working capital and staff-related liabilities)........... 5.4 8.8 9.0
-- Advance corporation tax written off...................... 0.3 -- 4.1
-- Other.................................................... 7.8 7.6 5.3
-------------- ---- ----
53.4 58.7 71.4
-------------- ---- ----
Less:
-- Provision against deferred tax assets.................... 30.8 36.1 55.5
Deferred tax liabilities:
-- Accelerated capital allowances........................... 5.2 5.6 5.5
-- Interest receivable...................................... 17.2 16.1 10.9
-- Other.................................................... 4.9 9.6 7.9
Temporary timing differences................................ 27.3 31.3 24.3
-------------- ---- ----
4.7 8.7 8.4
============== ==== ====
</TABLE>
The provision against deferred tax assets represents a provision for uncertainty
as to the realisation of the Group's deferred tax assets. The net decrease in
the year in the total provision was L5.3 million (1998: L19.4 million, 1997:
L10.9 million).
Unutilised tax losses include tax losses arising in the US. These losses do not
expire for more than 10 years. UK losses may be carried forward for an
indefinite period. The life of losses carried forward in other international
jurisdictions varies according to local tax laws. Deferred tax liabilities and
assets attributable to different tax jurisdictions have not been offset.
36
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
20 PROVISIONS FOR LIABILITIES, CHARGES AND CONTINGENT LIABILITIES (CONTINUED)
PENSION PROVISIONS AND PENSION ARRANGEMENTS
Companies within the Group operate a large number of pension schemes, the forms
and benefits of which vary with conditions and practices in the countries
concerned. The schemes are administered by trustees and, in most cases, are
independent of the Group.
Pension and other provisions relate primarily to unfunded pension costs which
are provided for in the Group's balance sheet, and arise mainly in the United
States and Continental Europe.
The Group's pension costs are analysed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
Defined contribution schemes................................ 21.4 14.7 13.2
Defined benefit schemes..................................... 6.4 5.9 7.0
---- ---- ----
27.8 20.6 20.2
==== ==== ====
</TABLE>
Where defined benefit schemes exist the pension cost is assessed in accordance
with the advice of qualified actuaries using the projected unit credit and
attained age methods. The latest actuarial assessments of the schemes were
undertaken within the last three years.
Actuarial valuations in aggregate over the last three years are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
PER PER PER
ANNUM ANNUM ANNUM
------------ ------------ ------------
<S> <C> <C> <C>
ASSUMPTIONS
Return on plan assets................................... 9% 9% 9%
Salary increases........................................ 2-8% 3-8% 5-8%
Pension increases....................................... 3-6% 3-6% 3-6%
ASSESSMENTS
Market value of plan assets at year-end................. L176M L129m L128m
Value of assets to benefits ratio....................... 100% 102% 100%
</TABLE>
OTHER PROVISIONS
Long-term incentive plans are operated by certain of the Group's subsidiaries,
the provision representing accrued compensation to 31 December 1999 that may
become payable after more than one year, as described in the Compensation
committee report on pages 90 to 95 of the 31 December 1999 audited financial
statements.
CONTINGENT LIABILITIES
The Company and various of its subsidiaries are, from time to time, parties to
legal proceedings and claims which arise in the ordinary course of business. The
directors do not anticipate that the outcome of these proceedings and claims
will have a material adverse effect on the Group's financial position or on the
results of its operations.
21 FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivatives, based on the amount that would be receivable or
(payable) if the Group had sought to enter into such transactions, based on
quoted market prices where possible, was as follows:
<TABLE>
<CAPTION>
31 MARCH 2000 31 DECEMBER 1999 31 DECEMBER 1998
SWAPS SWAPS SWAPS
------------- ---------------- ----------------
LM LM LM
<S> <C> <C> <C>
Fair value................................... 3.7 2.1 (6.9)
Book value................................... nil nil nil
</TABLE>
37
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
21 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
NON-DERIVATIVE FINANCIAL INSTRUMENTS
The Group estimates that the aggregate fair value of non-derivative financial
instruments at 31 December 1999 does not differ materially from their aggregate
carrying values recorded in the consolidated balance sheet.
The Group has used the methods and assumptions detailed below to estimate the
fair values of the Group's financial instruments.
Cash, accounts receivable, accounts payable, overdrafts and short-term
borrowings considered to approximate to fair value because of the short maturity
of such instruments.
Long term borrowings--fair value at 31 December 1999 L171.7 million, based on
estimates received from the Group's external advisors. Considerable judgement is
required in interpreting market data to develop the estimates of fair value,
and, accordingly, the estimates are not necessarily indicative of the amounts
that could be realised in a current market exchange.
22 AUTHORISED AND ISSUED SHARE CAPITAL
<TABLE>
<CAPTION>
1999 1998 1997
NUMBER 1999 NUMBER 1998 NUMBER 1997
-------- -------- -------- -------- -------- --------
M LM M LM M LM
<S> <C> <C> <C> <C> <C> <C>
AUTHORISED:
Ordinary shares of 10p each................... 1,250 125.0 1,250 125.0 1,000 100.0
ISSUED:
Ordinary shares of 10p each................... 774.5 77.5 766.5 76.6 736.3 73.6
</TABLE>
SHARE OPTIONS
As at 31 December 1999, unexercised options totalling 26,647,209 have been
granted under the WPP Executive Share Option Scheme as follows:
<TABLE>
<CAPTION>
NUMBER OF ORDINARY EXERCISE PRICE
SHARES UNDER OPTION PER SHARE (L) EXERCISE DATES
------------------- -------------- ----------------
<S> <C> <C>
7,012......................................... 5.430 1995--2000
19,549......................................... 3.970 1995--2000
92,751......................................... 1.330 1996--2001
164,339......................................... 0.560 1997--2002
116,052......................................... 0.295 1995--2002
85,387......................................... 1.020 1996--2003
38,657......................................... 1.150 1997--2004
2,203,028........................................ 1.190 1997--2004
1,181,193........................................ 1.080 1998--2005
4,471,445........................................ 1.540 1998--2005
1,216,829........................................ 2.140 1999--2006
4,441,626........................................ 2.335 1999--2006
37,014......................................... 2.535 2000--2007
5,011,830........................................ 2.835 2000--2007
25,110......................................... 3.030 2001--2008
4,904,852........................................ 2.930 2001--2008
51,100......................................... 3.270 2001--2008
430,484......................................... 5.185 2002--2009
2,148,951........................................ 5.700 2002--2009
</TABLE>
38
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
22 AUTHORISED AND ISSUED SHARE CAPITAL (CONTINUED)
As at 31 December 1999, unexercised options totalling 6,293,625 have been
granted under the WPP Worldwide Share Ownership Programme as follows:
<TABLE>
<CAPTION>
NUMBER OF ORDINARY EXERCISE PRICE
SHARES UNDER OPTION PER SHARE (L) EXERCISE DATES
------------------- -------------- ----------------
<S> <C> <C>
1,955,925........................................ 2.695 2000--2007
2,498,625........................................ 3.030 2001--2008
1,839,075........................................ 5.315 2002--2009
</TABLE>
On 21 March 2000 a further grant was made of 317,008 options at L10.77. On
31 May 2000 a further grant was made of 1,261,475 options at L7.79.
The aggregate status of the WPP Share Option Schemes during 1999 was as follows:
MOVEMENT ON OPTIONS GRANTED
<TABLE>
<CAPTION>
1 JANUARY 31 DECEMBER
1999 GRANTED EXERCISED LAPSED 1999
NUMBER NUMBER NUMBER NUMBER NUMBER
--------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
37,685,730..... 4,452,090 8,067,860 1,129,126 32,940,834
</TABLE>
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES EXERCISE PRICE CONTRACTUAL LIFE
L L MONTHS
--------------------- ---------------- ----------------
<S> <C> <C>
0.295-5.70..... 2.74 89
</TABLE>
The weighted average fair value of options granted in the year calculated using
the Black-Scholes model, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fair value............................................... 134.0P 71.5p 64.5p
Weighted average assumptions:
Risk-free interest rate................................ 5.23% 5.84% 6.15%
Expected life (months)................................. 36 36 36
Expected volatility.................................... 28% 25% 24%
Dividend yield......................................... 0.6% 0.6% 0.9%
</TABLE>
Options are issued at an exercise price equal to market value on the date of
grant.
The weighted average fair value of the awards made under the Leadership Equity
Acquisition Program ("LEAP"), calculated using the Black-Scholes model, were as
follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Fair value.................................................. 233.8p
Weighted average assumptions:
Risk-free interest rate................................... 5.23%
Expected life (months).................................... 60
Expected volatility....................................... 28%
Dividend yield............................................ 0.6%
</TABLE>
39
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
23 ACQUISITIONS AND DISPOSALS
Goodwill arising on acquisitions in the year was calculated as follows:
<TABLE>
<CAPTION>
BOOK
VALUE OF FAIR
CASH OTHER VALUE FAIR COST OF
ACQUIRED ASSETS ADJUSTMENTS VALUE ACQUISITION GOODWILL
-------- ---------- ----------- -------- ----------- --------
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
IntelliQuest Information Group,
Inc............................. 44.4 (3.4) (1.6) 39.4 67.5 28.1
Other............................. 7.4 (2.0) (20.9) (15.5) 249.2 264.7
---- ---- ----- ----- ----- -----
51.8 (5.4) (22.5) 23.9 316.7 292.8
==== ==== ===== ===== ===== =====
</TABLE>
The Group made a number of acquisitions during 1999 across several operational
sectors and geographic markets.
Total goodwill of L292.8 million arising during the year includes
L252.3 million in respect of the acquisition of subsidiary undertakings and
L40.5 million in respect of associate undertakings. Included in these amounts
are L220.5 million of cash paid and L96.2 million of additional future
anticipated payments to vendors, based on the directors' best estimates of
future obligations, which are dependent on future performance of the interests
acquired. Cash paid to vendors in respect of consideration accrued in prior
years amounted to L21.7 million.
INTELLIQUEST INFORMATION GROUP, INC.
During the year, the Group acquired IntelliQuest Information Group, Inc, a
leading US provider of information services for technology companies. Total fair
value adjustments of L1.6 million primarily related to additional tax
liabilities.
OTHER
Fair value adjustments of L20.9 million arising on other acquisitions include
L6.8 million of additional tax liabilities and L14.1 million of other
liabilities.
Acquisitions during 1999 did not have a significant impact on the Group's
results for the year, nor were there any material disposals.
24 DIRECTORS' REMUNERATION AND INTERESTS
The compensation of all executive directors is determined by the Compensation
committee of the Board ("the Compensation committee") which is comprised wholly
of independent non-executive directors. The Compensation committee is advised by
independent executive remuneration consultants on all aspects of executive
compensation as well as by the director of human resources.
The compensation of the Chairman and other non-executive directors is determined
by the Board, which is similarly advised by independent executive remuneration
consultants and the director of human resources.
40
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
Remuneration of the directors was as follows:
1999
<TABLE>
<CAPTION>
SHORT-TERM
INCENTIVE
PLANS LONG-TERM PENSION
SALARY OTHER (ANNUAL INCENTIVE PLANS(3) CONTRIBUTIONS
AND FEES BENEFITS BONUS)(1) TOTAL ------------------ -------------
LOCATION L000 L000 L000 L000 TOTAL L000 TOTAL L000
CHAIRMAN -------- -------- -------- ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
H Maxwell........................... USA 102 -- -- 102 -- --
EXECUTIVE DIRECTORS
M S Sorrell......................... UK 761 23 540 1,324(2) -- 324
B J Brooks.......................... USA 176 3 88 267 904 26
P W G Richardson.................... UK 214 22 113 349 2,844 21
E R Salama.......................... UK 161 21 83 265 1,094 16
G C Sampson(6)...................... UK 73 6 3 82 17 --
NON-EXECUTIVE DIRECTORS(6)
J J D Bullmore(4)................... UK 71 11 -- 82 -- --
E Dyson(5).......................... USA 13 -- -- 13 -- --
M Inagaki........................... Japan -- -- -- -- -- --
J B H Jackson....................... UK 25 -- -- 25 -- --
S W Morten.......................... USA 29 -- -- 29 -- --
J A Quelch.......................... UK 23 32 -- 55 -- --
J Smilow............................ USA 25 -- -- 25 -- --
------ ---- ---- -------- ------ ----
TOTAL REMUNERATION 1,673 118 827 2,618 4,859 387
------ ---- ---- -------- ------ ----
</TABLE>
------------------
NOTES:
(1) Amounts included in short-term incentive plans represent bonuses in
respect of 1999 performance, paid in 2000.
(2) The amount of salary and fees comprises the fees payable under the UK
Agreement with JMS and the salary payable under the US Agreement referred
to on page 92 of the 31 December 1999 audited financial statements. In
1999, as in previous years, JMS discharged all relevant UK national
insurances costs attributable to the provision of the services of
Sir Martin Sorrell under the UK Agreement. The salary and pension
contribution payable under the US Agreement converted into L sterling at
$1.6178 : L1. The salary and fees were increased with effect from
1 September 1999.
(3) The amounts represent gains realised on the exercise of share options
and, where relevant, payments under the Performance Share Plan.
(4) J J D Bullmore has a consulting arrangement with the Company in addition
to his fee as a non-executive Director.
(5) Appointed 28 June 1999.
(6) C Mackenzie and S Heyer were appointed after the year end in March 2000
and in May 2000 respectively and
G C Sampson retired in May 2000.
41
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
1998
<TABLE>
<CAPTION>
SHORT-TERM
INCENTIVE
PLANS LONG-TERM PENSION
SALARY OTHER (ANNUAL INCENTIVE PLANS(4) CONTRIBUTIONS
AND FEES BENEFITS BONUS)(1) TOTAL ------------------ -------------
LOCATION L000 L000 L000 L000 TOTAL L000 TOTAL L000
CHAIRMAN -------- -------- -------- ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
H Maxwell........................... USA 100 -- -- 100 -- --
EXECUTIVE DIRECTORS.................
M S Sorrell(3)...................... UK 712 23 605 1,340(2) -- 315
B J Brooks.......................... USA 172 2 95 269 188 21
P W G Richardson.................... UK 180 22 99 301 107 18
E R Salama.......................... UK 150 19 90 259 126 15
G C Sampson......................... UK 70 7 5 82 -- --
NON-EXECUTIVE DIRECTORS
J J D Bullmore(5)................... UK 77 18 -- 95 -- --
M Inagaki(6)........................ Japan 5 -- -- 5 -- --
J B H Jackson....................... UK 20 -- -- 20 -- --
S W Morten.......................... USA 21 -- -- 21 -- --
J A Quelch(5)....................... USA 33 44 -- 77 -- --
J Smilow(7)......................... USA 15 -- -- 15 -- --
Other resigned in 1998.............. -- -- -- -- -- -- --
----- --- --- ------- ----- ---
TOTAL REMUNERATION.................. 1,555 135 894 2,584 421 369
----- --- --- ------- ----- ---
</TABLE>
------------------
NOTES:
(1) Amounts included in short-term incentive plans represent bonuses in
respect of 1998 performance, paid in 1999.
(2) The amount of salary and fees comprises the fees payable under the UK
Agreement with JMS and the salary payable under the US Agreement referred
to on page 88 of the 31 December 1998 audited financial statements. In
1998, as in previous years, JMS discharged all relevant UK national
insurances costs attributable to the provision of the services of
M S Sorrell under the UK Agreement. The salary and pension contribution
payable under the US Agreement has been converted into L sterling at
$1.6574 to L1.
(3) The performance conditions for the final tranches of the Capital
Investment Plan and the Notional Share Award Plan respectively were met on
4 June 1998. The value of these Plans is not shown in the above table as
the ultimate value will depend on the share price in September 1999.
(4) This amount represents a payment under the Performance Share Plan.
(5) Messrs. Bullmore and Quelch have consulting arrangements with the
Company in addition to their respective fees as non-executive Directors.
Following his appointment as Dean to the London Business School on 1 July
1998, Mr. Quelch has ceased to carry out additional consultancy services.
(6) Appointed 14 September 1998.
(7) Appointed 23 April 1998.
42
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
1997
<TABLE>
<CAPTION>
SHORT-TERM
INCENTIVE LONG-TERM PENSION
PLANS INCENTIVE PLANS CONTRIBUTIONS
SALARY OTHER (ANNUAL --------------- -------------
AND FEES BENEFITS BONUS)(1) TOTAL 1997 TOTAL 1997 TOTAL
LOCATION L000 L000 L000 L000 L000 L000
-------- -------- -------- ---------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHAIRMAN
H Maxwell(7)........................... UK/USA 100 -- -- 100 -- --
EXECUTIVE DIRECTORS
M S Sorrell............................ UK/USA 717 23 609 1,349(2) 1,219(3) 316
B J Brooks............................. USA 153 3 84 240 831(4) 14
P W G Richardson(8).................... UK 180 21 90 291 87(5) 18
E R Salama............................. UK 140 13 82 235 47(5) 14
G C Sampson(9)......................... UK 69 7 -- 76 -- --
NON-EXECUTIVE DIRECTORS
J J D Bullmore(6)...................... UK 78 18 -- 96 -- --
J B H Jackson.......................... UK 20 -- -- 20 -- --
Sir Paul Judge(10)..................... UK 10 -- -- 10 -- --
S W Morten............................. USA 21 -- -- 21 -- --
J A Quelch(6).......................... USA 65 33 -- 98 -- --
----- --- --- ------- --------- ---
TOTAL REMUNERATION..................... 1,553 118 865 2,536 2,184 362
----- --- --- ------- --------- ---
</TABLE>
------------------
NOTES:
(1) Amounts included in short-term incentive plans represent bonuses in
respect of 1997 performance, paid in 1998.
(2) The amount of salary and fees comprises the fees payable under the UK
Agreement with JMS and the salary payable under the US Agreement referred
to on page 90 of the 31 December 1997 audited financial statements. In
1997, as in previous years, JMS discharged all relevant UK national
insurances costs attributable to the provision of the services of
M S Sorrell under the UK Agreement. The salary and pension contribution
payable under the US Agreement has been converted into L sterling at
$1.6381 to L1.
(3) The amount of L1.219 million is in respect of phantom options granted in
relation to 1993. In addition the performance requirements were satisfied
on 18 March 1997 in respect of the second tranche of the Capital
Investment Plan and the first tranche of the Notional Share Award Plan
(see page 90 of the 31 December 1997 audited financial statements). The
value of these tranches was L3.1 million and L1.5 million respectively
(265.5p per share on 18 March 1997). These amounts are not shown in the
above table as the ultimate value will depend on the share price in
September 1999.
(4) This amount represents a payment under the performance share plan of
L131,702 and the gain on the exercise of share options of L699,163.
(5) This amount represents a payment under the performance share plan.
(6) Messrs. Bullmore and Quelch have consulting arrangements with the
Company in addition to their respective fees as non-executive directors.
(7) Appointed 1 October 1996.
(8) Appointed 5 December 1996.
(9) Appointed 15 July 1996.
(10) Retired 30 June 1997.
43
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
OTHER LONG-TERM INCENTIVE PLAN AWARDS(1)
Long-term incentive plan awards granted to directors are as follows: (continued)
1999
<TABLE>
<CAPTION>
GRANTED/ AT GRANTED/
AT 1 JAN (LAPSED) VESTED 31 DEC (LAPSED) VESTED AT 10 MAY
1999 1999 1999 1999 2000(4) 2000 2000
--------- --------- -------- --------- -------- -------- ---------
PLAN(1) NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
-------- --------- --------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks........... PSP 73,933 -- (36,966) 36,967 122 (18,544) 18,545
PSP 60,864 -- -- 60,864 (883) (29,991) 29,990
PSP 46,728 -- -- 46,728 -- -- 46,728
PSP -- 50,623 -- 50,623 -- -- 50,623
PSP -- -- -- -- 32,185 -- 32,185
LEAP -- 272,600 -- 272,600 -- -- 272,600
P W G Richardson..... PSP 42,172 -- (21,086) 21,086 68 (10,577) 10,577
PSP 67,925 -- -- 67,925 (985) (33,470) 33,470
PSP 55,513 -- -- 55,513 -- -- 55,513
PSP -- 65,944 -- 65,944 -- -- 65,944
PSP -- -- -- -- 36,765 -- 36,765
LEAP -- 299,030 -- 299,030 -- -- 299,030
E R Salama........... PSP 49,438 -- (24,719) 24,719 80 (12,399) 12,400
PSP 56,604 -- -- 56,604 (820) (27,892) 27,892
PSP 46,261 -- -- 46,261 -- -- 46,261
PSP -- 48,359 -- 48,359 -- -- 48,359
PSP -- -- -- -- 26,961 -- 26,961
LEAP -- 272,645 -- 272,645 -- -- 272,645
M S Sorrell(3)....... -- 6,445,912 -- -- 6,445,912 -- -- 6,445,912
PSP -- 219,812 -- 219,812 -- -- 219,812
PSP -- -- -- -- 137,255 -- 137,255
LEAP -- 5,369,070 -- 5,369,070 -- -- 5,369,070
<CAPTION>
PRICE
PAR
SHARE OF
VESTED
UNITS ON
VALUATION
PERFORMANCE PERIOD DATE(2)
----------------------- ---------
<S> <C> <C>
B J Brooks........... 1 Jan 1996-31 Dec 1998 365.8p
1 Jan 1997-31 Dec 1999 981.0p
1 Jan 1998-31 Dec 2000 n/a
1 Jan 1999-31 Dec 2001 n/a
1 Jan 2000-31 Dec 2002 n/a
1 Jan 1999-31 Dec 2003 n/a
P W G Richardson..... 1 Jan 1996-31 Dec 1998 365.8p
1 Jan 1997-31 Dec 1999 981.0p
1 Jan 1998-31 Dec 2000 n/a
1 Jan 1999-31 Dec 2001 n/a
1 Jan 2000-31 Dec 2002 n/a
1 Jan 1999-31 Dec 2003 n/a
E R Salama........... 1 Jan 1996-31 Dec 1998 365.8p
1 Jan 1997-31 Dec 1999 981.0p
1 Jan 1998-31 Dec 2000 n/a
1 Jan 1999-31 Dec 2001 n/a
1 Jan 2000-31 Dec 2002 n/a
1 Jan 1999-31 Dec 2003 n/a
M S Sorrell(3)....... n/a n/a
1 Jan 1999-31 Dec 2001 n/a
1 Jan 2000-31 Dec 2002 n/a
1 Jan 1999-31 Dec 2003 n/a
</TABLE>
------------------
NOTES:
(1) The long-term incentive plans operated by the Company consist of the
Performance Share Plans (PSP) and the Leadership Equity Acquisition Plan
(LEAP). Details of the PSP and LEAP can be found on page 91 of the
31 December 1999 audited financial statements. The number of shares shown
for LEAP represents the maximum number of Matching Shares which is capable
of vesting at the end of the performance period, if the performance
requirement is satisfied to the fullest extent and subject to the
retention of WPP Investment shares until the end of the Investment period
which expires in September 2004. The number of Sir Martin Sorrell's
Matching Shares includes those attributable to JMS. The 6,445,912 shares
referred to in note 3 are not awarded under either the PSP or LEAP.
(2) Valuation date is 31 December at the end of the relevant performance
period.
(3) The 6,445,912 shares represent the number of shares, or cash equivalent
of shares which vest under the Capital Investment Plan (CIP) and the
Notional Share Award Plan (NSAP). Details of these two plans are set out
on page 92 of the 31 December 1999 audited financial statements. The
performance conditions were satisfied under the CIP and NSAP before these
plans were due to mature in September 1999. Each plan has been extended
until September 2004, subject to good leaver and change of control
provisions, when the awards vest. Consequently their value cannot be
established until that time. Under arrangements made with Sir Martin
Sorrell relating to the payment on his behalf of US withholding tax under
the Capital Investment Plan and pension payments made under the US
Agreement, WPP Group USA Inc. has made payments of which the maximum
amount outstanding during the year was $552,543 and which remained
outstanding at 31 December 1999.
(4) Includes dividends received in respect of vested restricted stock which
have been reinvested in the acquisition of further ordinary shares.
44
<PAGE>
3.7 Notes to the WPP financial information (continued)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
OTHER LONG-TERM INCENTIVE PLAN AWARDS(1)
Long-term incentive plan awards granted to directors are as follows: (continued)
1998
<TABLE>
<CAPTION>
GRANTED/ AT 31
AT 1 JAN (LAPSED) VESTED DEC GRANTED VESTED AT 6 MAY
1998 1998 1998 1998 1999 1999 1999
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
--------- --------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
B J Brooks........... 48,869 -- 48,869 -- -- -- --
73,933 -- -- 73,933 -- 36,966 36,966
60,864 -- -- 60,864 -- -- 60,864
-- 46,728 -- 46,728 -- -- 46,728
P W G Richardson..... 32,265 -- 32,265 -- -- -- --
42,172 -- -- 42,172 -- 21,086 21,086
67,925 -- -- 67,925 -- -- 67,925
-- 55,513 -- 55,513 -- -- 55,513
E R Salama........... 17,559 -- 17,559 -- -- -- --
49,438 -- -- 49,438 -- 24,719 24,719
56,604 -- -- 56,604 -- -- 56,604
-- 46,261 -- 46,261 -- -- 46,261
M S Sorrell(3)....... 6,445,912 -- -- 6,445,912 -- -- 6,445,912
<CAPTION>
PRICE PER
SHARE OF
VESTED
UNITS ON
VALUATION
PERFORMANCE PERIOD DATE(2)
-------------------------------- ---------
<S> <C> <C>
B J Brooks........... 1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 365.8p
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
P W G Richardson..... 1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 365.8p
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
E R Salama........... 1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 365.8p
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
M S Sorrell(3)....... 4 Sep 1994 - 4 Sep 1999 n/a
</TABLE>
------------------
NOTES:
(1) All awards shown on this table, except the 6,445,912 shares referred to
in note 3, were made under the Performance Share Plan, details of which
can be found on page 87 of the 31 December 1998 audited financial
statements.
(2) Valuation date is 31 December at the end of the relevant performance
period.
(3) The 6,445,912 shares represent the maximum number of shares, or cash
equivalent of shares which could vest, under the Capital Investment Plan
and the Notional Share Award Plan. Details of these two Plans which expire
in September 1999 are set out on page 88 of the 31 December 1998 audited
financial statements. All shares and awards, must be retained until
September 1999 and consequently their value cannot be established until
that time. As of 6 May 1999, the performance conditions in respect of all
four tranches of the Capital Investment Plan and all three tranches of the
Notional Share Award Plan had been satisfied. Under arrangements made with
M S Sorrell relating to the payment on his behalf of US withholding tax
under the Capital Investment Plan and pension payments made under the US
Agreement, WPP Group USA Inc. has made payments of which the maximum
amount outstanding during the year was $500,967 and which remained
outstanding at 31 December 1998.
45
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
OTHER LONG-TERM INCENTIVE PLAN AWARDS(1)
Long-term incentive plan awards granted to directors are as follows: (continued)
1997
<TABLE>
<CAPTION>
GRANTED/ AT 31
AT 1 JAN (LAPSED) VESTED DEC GRANTED VESTED AT 6 MAY
1997 1997 1997 1997 1998 1998 1998
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
--------- --------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
B J Brooks........... 72,000 -- 72,000 -- -- -- --
48,869 -- -- 48,869 -- 48,869 --
73,933 -- -- 73,933 -- -- 73,933
-- 60,864 -- 60,864 -- -- 60,864
-- -- -- -- 46,728 -- 46,728
P W G Richardson..... 45,370 -- 45,370 -- -- -- --
32,265 -- -- 32,265 -- 32,265 --
42,172 -- -- 42,172 -- -- 42,172
-- 67,925 -- 67,925 -- -- 67,925
-- -- -- 55,513 -- 55,513
E R Salama........... 17,559 -- -- 17,559 -- 17,559 --
49,438 -- -- 49,438 -- -- 49,438
-- 56,604 -- 56,604 -- -- 56,604
-- -- -- -- 46,261 -- 46,261
M S Sorrell(3)....... 386,420 -- 386,420 -- -- -- --
6,445,912 -- -- 6,445,912 -- -- 6,445,912
<CAPTION>
PRICE PER
SHARE OF
VESTED
UNITS ON
VALUATION
PERFORMANCE PERIOD DATE(2)
-------------------------------- ---------
<S> <C> <C>
B J Brooks........... 1 Jan 1994 - 31 Dec 1996 254.0p
1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 n/a
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
P W G Richardson..... 1 Jan 1994 - 31 Dec 1996 254.0p
1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 n/a
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
E R Salama........... 1 Jan 1995 - 31 Dec 1997 269.5p
1 Jan 1996 - 31 Dec 1998 n/a
1 Jan 1997 - 31 Dec 1999 n/a
1 Jan 1998 - 31 Dec 2000 n/a
M S Sorrell(3)....... 1 Jan 1994 - 31 Dec 1996 254.0p
4 Sep 1994 - 4 Sep 1999 n/a
</TABLE>
------------------
NOTES:
(1) All awards shown on this table, except the 6,445,912 shares referred to
in note 3, were made under the Performance Share Plan (formerly
performance unit plan), details of which can be found on page 88 of the
31 December 1997 audited financial statements.
(2) Valuation date is 31 December at the end of the relevant performance
period.
(3) The award of 386,420 performance shares represents entitlement to the
cash equivalent of the market value of the equivalent number of ordinary
shares at the date of vesting. The 6,445,912 shares represent the maximum
number of shares, or cash equivalent of shares which could vest, assuming
that all of the criteria specified were met under the Capital Investment
Plan and the Notional Share Award Plan. Details of these two Plans are set
out on page 90 of the 31 December 1997 audited financial statements. Any
such shares and awards in respect of which the criteria are met, must be
retained until September 1999 and consequently their value cannot be
established until that time. As of 6 May 1998, the performance conditions
in respect of the first three tranches of the Capital Investment Plan and
the first two tranches of the Notional Share Award Plan had been
satisfied. In view of the retention requirements referred to above the
number of shares, or cash equivalent of shares, for which the performance
conditions have been satisfied by 6 May 1998 has not been shown in the
above table. Under arrangements made with M S Sorrell relating to the
payment on his behalf of US withholding tax under the Capital Investment
Plan and pension payments made under US Agreement, WPP Group USA, Inc has
made payments of which the maximum amount outstanding during the year was
$453,568 and which remained outstanding at 31 December 1997.
46
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
ORDINARY SHARES
Directors' interests in the Company's share capital, all of which were
beneficial, were as follows: (continued)
1999
<TABLE>
<CAPTION>
SHARES ACQUIRED OTHER SHARES ACQUIRED
THROUGH LONG- INTERESTS THROUGH LONG-
AT 1 JAN TERM INCENTIVE AS AT TERM INCENTIVE
1999 OR PLAN AWARDS IN 31 DEC 1999 PLAN AWARDS IN
DATE OF 1999(1) INC. SHARES 2000
APPOINTMENT ------------------- PURCHASED AT 31 DEC --------------------
IF LATER VESTED (SOLD) IN 1999(2) 1999(1) VESTED (SOLD)(1)
----------- -------- -------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
B J Brooks....................... 381,705 36,966 (22,186) (49,697) 346,788 48,535 (33,540)
J J D Bullmore................... 20,065 -- -- -- 20,065 -- --
E Dyson.......................... -- -- -- -- -- -- --
M Inagaki(4)..................... -- -- -- -- -- -- --
J B H Jackson.................... 12,500 -- -- -- 12,500 -- --
C Mackenzie...................... -- -- -- -- -- -- --
H Maxwell........................ 35,000 -- -- -- 35,000 -- --
S W Morten....................... 20,000 -- -- -- 20,000 -- --
J A Quelch....................... 10,000 -- -- -- 10,000 -- --
P W G Richardson................. 375,644 21,086 (3,086) (62,468) 331,176 44,047 (44,047)
E R Salama....................... 483,910 24,719 (9,719) (89,733) 409,177 40,291 (19,892)
G C Sampson...................... 554,313 -- -- -- 554,313 -- --
J E Smilow....................... 100,000 -- -- -- 100,000 -- --
M S Sorrell(2)................... 13,093,414 -- -- 200,000 13,293,414 -- --
<CAPTION>
OTHER INTERESTS
ACQUIRED
(DISPOSED OF)
SINCE 31 DEC AT 10 MAY
1999 2000
--------------- ----------
<S> <C> <C>
B J Brooks....................... -- 361,783
J J D Bullmore................... -- 20,065
E Dyson.......................... -- --
M Inagaki(4)..................... -- --
J B H Jackson.................... -- 12,500
C Mackenzie...................... 10,000 10,000
H Maxwell........................ -- 35,000
S W Morten....................... -- 20,000
J A Quelch....................... -- 10,000
P W G Richardson................. -- 331,176
E R Salama....................... -- 429,576
G C Sampson...................... -- 554,313
J E Smilow....................... -- 100,000
M S Sorrell(2)................... -- 13,293,414
</TABLE>
------------------
NOTES:
(1) Further details of long-term incentive plans are given in note 1 on page
86 of the 31 December 1999 audited financial statements.
(2) Interests include exercisable but unexercised options. In the case of
Sir Martin Sorrell interests include 1,571,190 and 577,391 unexercised
phantom options granted in 1993 and 1994 respectively as referred to on
page 92 of the 31 December 1999 audited financial statements, 4,691,392
shares in respect of the Capital Investment Plan and 1,754,520 shares in
respect of the Notional Share Award Plan.
(3) Each of the executive Directors has a technical interest as an employee
and potential beneficiary in one of the Company's ESOPs in shares in the
Company held under the relevant ESOP. At 31 December 1999, the Company's
ESOPs held in total 27,888,766 shares in the Company (1998; 25,532,484
shares).
(4) Mr. M Inagaki is a director and chairman of Asatsu-DK Inc, which at 10
May 2000 was interested in 31,295,646 WPP Ordinary Shares representing
4.02% of the issued share capital of the Company.
(5) Save as disclosed above and in the report of the Compensation committee,
no Director had any interest in any contract of significance with the
Group during the year.
47
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
ORDINARY SHARES
Directors' interests in the Company's share capital, all of which were
beneficial, were as follows: (continued)
1998
<TABLE>
<CAPTION>
OTHER SHARES ACQUIRED
SHARES ACQUIRED INTERESTS THROUGH LONG-
AT 1 JAN THROUGH LONG-TERM AS AT TERM INCENTIVE
1998 INCENTIVE PLAN 31 DEC 1998 PLAN AWARDS IN
OR DATE OF AWARDS IN 1998(2) INC. SHARES 1999
APPOINTMENT -------------------- PURCHASED AT 31 DEC --------------------
IF LATER VESTED (SOLD) IN 1998(1) 1998(1) VESTED (SOLD)(2)
----------- --------- -------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
B J Brooks..................... 307,858 48,869 (43,989) 68,967 381,705 36,966 (22,186)
J J D Bullmore................. 20,065 -- -- -- 20,065 -- --
M Inagaki(5)................... -- -- -- -- -- -- --
J B H Jackson.................. 12,500 -- -- -- 12,500 -- --
H Maxwell...................... 35,000 -- -- -- 35,000 -- --
S W Morten..................... 20,000 -- -- -- 20,000 -- --
J A Quelch..................... 10,000 -- -- -- 10,000 -- --
P W G Richardson............... 316,176 32,265 (5,265) 32,468 375,644 21,086 (3,086)
E R Salama..................... 375,442 17,559 -- 90,909 483,910 24,719 (9,719)
G C Sampson.................... 550,000 -- -- 4,313 554,313 -- --
J E Smilow..................... 100,000 -- -- -- 100,000 -- --
M S Sorrell.................... 9,578,038 3,515,376 -- -- 13,093,414 -- --
<CAPTION>
OTHER INTERESTS
ACQUIRED
(DISPOSED OF)
SINCE 31 DEC AT 6 MAY
1998(3) 1999(1)
--------------- ----------
<S> <C> <C>
B J Brooks..................... -- 396,485
J J D Bullmore................. -- 20,065
M Inagaki(5)................... -- --
J B H Jackson.................. -- 12,500
H Maxwell...................... -- 35,000
S W Morten..................... -- 20,000
J A Quelch..................... -- 10,000
P W G Richardson............... -- 393,644
E R Salama..................... (89,733) 409,177
G C Sampson.................... -- 554,313
J E Smilow..................... -- 100,000
M S Sorrell.................... -- 13,093,414
</TABLE>
------------------
NOTES:
(1) Interests include exercisable but unexercised options, in the case of
M S Sorrell this includes interest or rights in 1,571,190 and 577,391
unexercised phantom options granted in 1993 and 1994 respectively as
referred to on page 88 of the 31 December 1998 audited financial
statements, 4,691,392 shares in respect of all four tranches of the
Capital Investment Plan and 1,754,520 shares in respect of all three
tranches of the Notional Share Award Plan, in respect of which, in each
case the performance had been satisfied prior to 31 December 1998.
(2) Further details of the long-term incentive plan are given in note 3 on
page 87 of the 31 December 1998 audited financial statements.
(3) Each of the executive Directors has a technical interest as an employee
and potential beneficiary in one of the Company's three ESOPs in shares in
the Company held under the relevant ESOP. At 31 December 1998, the
Company's ESOPs held in total 25,532,484 shares in the Company (1997:
16,456,119 shares).
(4) Mr M Inagaki is a director and chairman of Asatsu-DK Inc, which at
6 May 1999 was interested in 31,295,646 shares representing 4.1% of the
issued share capital of the Company.
(5) Save as disclosed above and in the report of the Compensation committee
in the 31 December 1998 audited financial statements, no Director had any
interest in any contract of significance with the Group during the year.
48
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
ORDINARY SHARES
Directors' interests in the Company's share capital, all of which were
beneficial, were as follows: (continued)
1997
<TABLE>
<CAPTION>
SHARES ACQUIRED
THROUGH LONG- OTHER INTERESTS SHARES ACQUIRED
AT 1 JAN TERM INCENTIVE AS AT THROUGH LONG-
1997 PLAN AWARDS IN 31 DEC 1997 TERM INCENTIVE
OR DATE OF 1997(1) INC. SHARES PLAN AWARDS IN 1998
APPOINTMENT -------------------- PURCHASED AT 31 DEC --------------------
IF LATER VESTED (SOLD) IN 1997(1) 1997 VESTED (SOLD)
----------- --------- -------- --------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
B J Brooks................. 139,858 428,048 (260,048) -- 307,858 48,869 (43,989)
J J D Bullmore............. 20,065 -- -- -- 20,065 -- --
J B H Jackson.............. 12,500 -- -- -- 12,500 -- --
H Maxwell.................. 35,000 -- -- -- 35,000 -- --
S W Morten................. 20,000 -- -- -- 20,000 -- --
J E Quelch................. 10,000 -- -- -- 10,000 -- --
P W G Richardson........... -- 25,000 -- 291,176 316,176 32,265 (5,265)
E R Salama................. 298,215 -- -- 77,227 375,442 17,559 --
G C Sampson................ 550,000 -- -- 550,000 -- --
J E Smilow................. 100,000 -- -- -- 100,000 -- --
M S Sorrell................ 4,012,501 386,420 -- 5,179,117 9,578,038 -- --
<CAPTION>
OTHER INTERESTS
ACQUIRED SINCE AT 6 MAY
31 DEC 1997(2) 1998
--------------- ------------
<S> <C> <C>
B J Brooks................. -- 312,738
J J D Bullmore............. -- 20,065
J B H Jackson.............. -- 12,500
H Maxwell.................. -- 35,000
S W Morten................. -- 20,000
J E Quelch................. -- 10,000
P W G Richardson........... -- 343,176
E R Salama................. -- 393,001
G C Sampson................ 4,313 554,313
J E Smilow................. -- 100,000
M S Sorrell................ 1,757,688 11,335,726
</TABLE>
------------------
NOTES:
(1) In the case of Messrs. Richardson and Salama, this represents their
respective interests in 291,176 and 67,227 unexercised options granted
under the WPP Executive Share Option Scheme or under an ESOP in previous
periods and which had become exercisable prior to 31 December 1997. These
interests are not included in the first column showing interests at
1 January 1997, but are referred to in the table of Directors' interests
in share options on page 84 of the 31 December 1997 audited financial
statements. In the case of Mr. Salama this also includes 10,000 shares
purchased during 1997, in the case of M S Sorrell this includes 100,000
shares purchased during 1997; interest or rights in 1,571,190 and 577,391
unexercised phantom options granted in 1993 and 1994 respectively, as
referred to on page 90 of the 31 December 1997 audited financial
statements; 2,345,696 shares for the first two tranches of the Capital
Investment Plan and 584,840 shares in respect of the first tranche of the
Notional Share Award Plan, in respect of which, in each case, the
performance conditions had been satisfied prior to 31 December 1997.
(2) Represents in the case of Mr. Sampson, his interest in unexercised
options granted under the WPP Executive Share Option Scheme in previous
periods and which became exercisable in April 1998. In the case of M
S Sorrell his interest in 1,172,848 shares for the third tranche of the
Capital Investment Plan and 584,840 shares for the second tranche of the
Notional Share Award Plan in respect of which, in each case, the
performance conditions were satisfied on 1 May 1998.
(3) Each of the executive Directors has a technical interest as an employee
and potential beneficiary in one of the Company's three ESOPs in shares in
the Company held under the relevant ESOP. At 31 December 1997 the
Company's ESOPs held in total 16,456,119 shares in the Company (1996:
13,748,628 shares).
(4) Save as disclosed above and in the Compensation committee report, no
Director had any interest in any contract of significance with the Group
during the year.
49
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
SHARE OPTIONS(1)
Outstanding options granted to the directors are as follows:
1999
<TABLE>
<CAPTION>
GRANTED/ EXERCISED/ EXERCISED/
AT 1 JAN (LASPED) REALISED RETAINED AT 31 DEC EXERCISED AT 10 MAY
1999 1999 1999 1999 1999 2000 2000
-------- -------- ---------- ---------- --------- --------- ---------
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER COMMENCEMENT
-------- -------- ---------- ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks............... 68,967 -- (49,697) (19,270) -- -- -- Dec 1998
P W G Richardson......... 100,000 -- (30,000) (70,000) -- -- -- Jan 1996
102,941 -- -- (102,941) -- -- -- Oct 1996
88,235 -- -- (88,235) -- -- -- Sep 1997
32,468 -- (32,468) -- -- -- -- Sep 1998
24,497 -- (24,497) -- -- -- -- Sep 1999
E R Salama............... 67,227 -- (16,121) (51,106) -- -- -- Sep 1997
90,909 -- (73,612) (17,297) -- -- -- Sep 1998
G C Sampson.............. 4,313 -- -- (4,313) -- -- -- Apr 1998
<CAPTION>
MARKET
PRICE PER
EXERCISE SHARE ON
EXERCISE DATE PRICE PER DATE OF
EXPIRY SHARE EXERCISE
------------- --------- ---------
<S> <C> <C> <C>
B J Brooks............... Dec 2005 158.0p 553.0
P W G Richardson......... Jan 2000 40.0p 760.5
Oct 2003 102.0p 750.5
Sep 2004 119.0p 750.5
Sep 2005 154.0p 760.5
Sep 2006 233.5p 760.5
E R Salama............... Sep 2004 119.0p 499.5
Sep 2005 154.0p 499.5
G C Sampson.............. Apr 2005 108.0p 499.5
</TABLE>
------------------
NOTES:
(1) Share options were granted under the WPP Executive Share Option Plan or
under an ESOP in which Directors and other executives participate. These
options were granted at the market price at the time of grant.
(2) 2,196,190 phantom options were granted to JMS in relation to 1993 at at
base price of 52.5p per share, exercisable between April 1996 and April
2003 and 577,391 in relation to 1994 at a base price of 115p per share,
exercisable in March 2004. In 1997, JMS exercised 625,000 phantom options
granted in relation to 1993. This leaves 1,571,190 unexercised phantom
options granted in relation to 1993. JMS has indicated that it does not
intend to exercise the 1993 phantom options until March 2003, subject to
good leaver and change of control provisions.
(3) The closing share price at 31 December 1999 was 981.0p and the share
price during the year ranged between 359.0p and 996.0p.
SHARE OPTIONS(2)
Outstanding options granted to the directors are as follows:
1998
<TABLE>
<CAPTION>
GRANTED/ EXERCISED/ EXERCISED/
AT 1 JAN (LAPSED) REALISED RETAINED AT 31 DEC EXERCISED AT 6 MAY
1998 1998 1998 1998 1998 1999 1999
-------- -------- ---------- ---------- --------- --------- ---------
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER(1) COMMENCMENT
-------- -------- ---------- ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks............. 68,967 -- -- -- 68,967 -- 68,967 Dec 1998
P W G Richardson....... 100,000 -- -- -- 100,000 -- 100,000 Jan 1996
102,941 -- -- -- 102,941 -- 102,941 Oct 1996
88,235 -- -- -- 88,235 -- 88,235 Sep 1997
32,468 -- -- -- 32,468 -- 32,468 Sep 1998
24,497 -- -- -- 24,497 -- 24,497 Sep 1999
E R Salama............. 67,227 -- -- -- 67,227 (67,227) -- Sep 1997
90,909 -- -- -- 90,909 (90,909) -- Sep 1998
G C Sampson............ 4,313 -- -- -- 4,313 (4,313) -- Apr 1998
<CAPTION>
MARKET
PRICE PER
EXERICSE SHARE ON
EXERCISE DATE PRICE PER DATE OF
EXPIRY SHARE EXERCISE
------------- --------- ---------
<S> <C> <C> <C>
B J Brooks............. Dec 2005 158.0p n/a
P W G Richardson....... Jan 2000 40.0p n/a
Oct 2003 102.0p n/a
Sep 2004 119.0p n/a
Sep 2005 154.0p n/a
Sep 2006 233.5p n/a
E R Salama............. Sep 2004 119.0p 499.5p
Sep 2005 154.0p 499.5p
G C Sampson............ Apr 2005 108.0p 499.5p
</TABLE>
------------------
NOTES:
(1) As at 6 May 1999 all of Mr Brook's 68,967 options were exercisable but
unexercised, as were 323,644 of Mr Richardsons's options.
(2) Share options were granted under the WPP Executive Share Option Scheme
or under an ESOP in which Directors and other executives participate.
These options were granted at the market price at the time of grant.
(3) 2,196,190 phanton options were granted to JMS in relation to 1993 at a
base price of 52.5p per share, exercisable between April 1996 and April
2003 and 577,391 in relation to 1994 at a base price of 115p per share,
exercisable between September 1999 and April 2004. In 1997, JMS exercised
625,000 phanton options granted in relation to 1993. This leaves 1,571,190
unexercised phanton options granted in relation to 1993.
(4) The closing share price at 31 December 1998 was 365.9p and the share
price during the year ranged between 200.0p and 470.0p.
50
<PAGE>
3.7 NOTES TO THE WPP FINANCIAL INFORMATION (CONTINUED)
24 DIRECTORS' REMUNERATION AND INTERESTS (CONTINUED)
SHARE OPTIONS(2)
Outstanding options granted to the directors are as follows: (continued)
1997
<TABLE>
<CAPTION>
AT 31 DEC
EXERCISED EXERCISED 1997
GRANTED/ AND AND AND
AT 1 JAN (LAPSED) REALISED RETAINED 6 MAY
1997 1997 1997 1997 1998 EXERCISE DATES EXERCISE
-------- --------- --------- --------- --------- -------------- PRICE PER
NUMBER NUMBER NUMBER NUMBER NUMBER COMMENCEMENT EXPIRY SHARE
-------- --------- --------- --------- --------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks................ 229,331 -- 154,331 75,000 -- Sep 1996 Sep 2003 102.0p
180,717 -- 105,717 75,000 Sep 1997 Sep 2004 119.0p
68,967 -- -- -- 68,967 Dec 1998 Dec 2005 158.0p
P W G Richardson.......... 100,000 -- -- -- 100,000 Jan 1996 Jan 2000 40.0p
102,941 -- -- -- 102,941 Sep 1996 Sep 2003 102.0p
88,235 -- -- -- 88,235 Sep 1997 Sep 2004 119.0p
32,468 -- -- -- 32,468 Sep 1998 Sep 2005 154.0p
24,497 -- -- -- 24,497 Sep 1999 Sep 2006 233.5p
E R Salama................ 67,227 -- -- -- 67,227 Sep 1997 Sep 2004 119.0p
90,909 -- -- -- 90,909 Sep 1998 Sep 2005 154.0p
G C Sampson............... 4,313 -- -- -- 4,313 Apr 1998 Apr 2005 108.0p
<CAPTION>
MARKET
PRICE PER
SHARE ON
DATE OF
EXERCISE
---------
<S> <C>
B J Brooks................ 280.0p
280.0p
n/a
P W G Richardson.......... n/a
n/a
n/a
n/a
n/a
E R Salama................ n/a
n/a
G C Sampson............... n/a
</TABLE>
------------------
NOTES:
(1) Share options were granted under the WPP Executive Share Option Scheme
or under an ESOP in which directors and other senior executives
participate. These options were granted at the market price at the time of
grant.
(2) 2,196,190 phantom options were granted to JMS in relation to 1993 at a
base price of 52.5p per share, exercisable between April 1996 and April
2003 and 577,391 in relation to 1994 at a base price of 115p per share,
exercisable between September 1999 and April 2004. On 21 April 1997, JMS
exercised 625,000 phantom options granted in relation to 1993 at a price
of 247.5p resulting in a payment after deduction of the base price of
52.5p of L1,218,750. This leaves 1,571,190 unexercised phantom options
granted in relation to 1993.
(3) The closing share price at 31 December 1997 was 269.5p and the share
price during the year ranged between 236.5p and 292p.
(4) Share options existing prior to 8 April 1993, and their exercise prices,
have been adjusted to reflect the impact of the rights issue which
occurred on that date.
51
<PAGE>
4. UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following is an extract from the text of the WPP unaudited interim
announcement which was published on 14 August 2000.
``WPP
2000 INTERIM RESULTS
REVENUE UP ALMOST 19% TO L1.209 BILLION
PROFIT BEFORE TAX UP OVER 22% TO L137.7 MILLION AGAINST L112.6 MILLION
DILUTED EARNINGS PER SHARE UP OVER 22% TO 12.0P FROM 9.8P
INTERIM ORDINARY DIVIDEND UP 20% TO 1.2P PER SHARE
- REVENUE UP ALMOST 19% TO L1.209 BILLION AND UP ALMOST 18% IN CONSTANT
CURRENCIES
- PROFIT BEFORE INTEREST AND TAX UP ALMOST 25% TO L160.7 MILLION AND UP OVER 25%
IN CONSTANT CURRENCIES
- OPERATING MARGIN UP 0.6 MARGIN POINTS AND 0.7 MARGIN POINTS IN CONSTANT
CURRENCIES IN LINE WITH OBJECTIVES
- PROFIT BEFORE TAX UP OVER 22% TO L137.7 MILLION AND UP OVER 23% IN CONSTANT
CURRENCIES
- DILUTED EARNINGS PER SHARE UP OVER 22% TO 12.0P FROM 9.8P AND UP OVER 23% IN
CONSTANT CURRENCIES
- INTERIM ORDINARY DIVIDEND UP 20% TO 1.2P PER SHARE
- NET NEW BUSINESS BILLINGS OF OVER L1.1 BILLION ($1.7 BILLION) UP 13% OVER
L1.0 BILLION ($1.5 BILLION) IN COMPARABLE PERIOD
SUMMARY OF RESULTS
The Board of WPP Group plc announces its results for the six months ended 30
June 2000, which show significant continued improvement.
Turnover was up 27% to L5.7 billion in the first six months of 2000.
Reportable revenue was up almost 19% at L1.209 billion. On a constant currency
basis revenue was up almost 18%. Excluding acquisitions constant currency
revenue was up over 15%.
Profit before interest and tax was up almost 25% to L160.7 million from
L128.9 million and up over 25% in constant currencies.
Reported operating margins rose by 0.6 margin points to 13.3% from 12.7% in line
with the Group's financial objectives. In constant currencies the operating
margin grew by 0.7 margin points. Reported operating costs rose by over 18% and
rose by over 17% in constant currencies.
The Group's staff cost to gross margin ratio excluding variable compensation
fell to 55.9% from 56.4%. On a like-for-like basis the average number of people
in the Group was 30,601 in the first half of the year, compared to 28,719 in
1999, an increase of 6.6%. The total number of people in the Group at the half
year end was 31,416 against 27,334 in 1999.
Net interest payable and similar charges increased to L23.0 million from
L16.3 million, reflecting improved profitability more than offset by the impact
of increased interest rates, share repurchases and acquisitions.
Reported profit before tax rose by over 22% to L137.7 million from
L112.6 million. In constant currency pre-tax profits rose by over 23%.
The tax rate on profit on ordinary activities fell to 30% from 31% last year.
Diluted earnings per share were up over 22% at 12.0p, and were up over 23% in
constant currencies.
The Board recommends an increase of 20% in the interim ordinary dividend to 1.2p
per share. The record date for this interim dividend is 15 September 2000,
payable on 20 November 2000.
52
<PAGE>
Further details of WPP's financial performance are provided in Appendix I below
MERGER WITH YOUNG & RUBICAM INC ("Y&R")
On 12 May, 2000 it was announced that the Boards of WPP and Y&R had reached
agreement to merge by means of an all-share offer by WPP for Y&R. The terms were
0.835 WPP American Depositary shares or 4.175 WPP ordinary shares for every Y&R
share.
WPP's offer valued Y&R at L3.1 billion ($4.7 billion) on the day of the
announcement. The Hart-Scott-Rodino waiting period has expired without request
for further information and listing particulars, notice of the necessary WPP
Extraordinary General Meeting and proxy documents will be dispatched to WPP and
Y&R Share Owners in due course. It is anticipated that both sets of share owners
will vote on the transaction towards the end of September with closing shortly
thereafter.
REVIEW OF OPERATIONS
REVENUE BY REGION
The pattern of revenue growth differed regionally. The table below gives details
of the proportion of revenue and revenue growth (on a constant currency basis)
by region for the first six months of 2000.
<TABLE>
<CAPTION>
REVENUE AS A % REVENUE GROWTH%
REGION OF TOTAL GROUP 00/99
------ -------------- ---------------
<S> <C> <C>
North America................................ 45.8 18.5
United Kingdom............................... 19.4 10.8
Continental Europe........................... 18.1 19.8
Asia Pacific, Latin America, Africa & Middle
East....................................... 16.7 23.7
---- ----
TOTAL GROUP.................................. 100 17.9
==== ====
</TABLE>
As can be seen, North America, UK and Continental Europe continued to grow
strongly. Strong recovery continued in Asia Pacific and Latin America.
Net new business billings of almost L1.1 billion ($1.7 billion) were won in the
first half of the year, 13% up on L1.0 billion ($1.5 billion) in the comparable
period last year.
REVENUE BY COMMUNICATIONS SERVICES SECTOR AND BRAND
The pattern of revenue growth varied by communications services sector and
company brand. The table below gives details of the proportion of revenue and
revenue growth by communications services sector (on a constant currency basis)
for the first six months of 2000.
<TABLE>
<CAPTION>
COMMUNICATIONS REVENUE AS A REVENUE GROWTH%
SERVICES % OF TOTAL GROUP 00/99
-------------- ---------------- ---------------
<S> <C> <C>
Advertising and media investment
management................................ 46.0 15.8
Information and consultancy................. 19.8 24.4
Public relations and public affairs*........ 10.1 44.3
Branding and identity, healthcare and
specialist communications................. 24.1 8.6**
---- ------
TOTAL GROUP................................. 100 17.9
==== ======
</TABLE>
------------------
* The revenue figures submitted to the O'Dwyer Report reflect some public
relations income which is included here in advertising and media
investment management and branding and identity, healthcare and specialist
communications. Total public relations and public affairs revenues grew
almost 40% to $227 million.
** Gross profit up over 22% on a like-for-like basis.
ADVERTISING AND MEDIA INVESTMENT MANAGEMENT
On a constant currency basis, combined revenue at Ogilvy (including Cole & Weber
and OgilvyOne), J Walter Thompson Company, Conquest and MindShare rose by almost
22%, whilst operating margins continued to improve.
53
<PAGE>
Ogilvy, J Walter Thompson Company, Conquest and MindShare generated net new
business billings of L900 million ($1.4 billion), 27% up on that achieved in the
first six months of 1999.
INFORMATION AND CONSULTANCY
The Group's information and consultancy businesses continued their growth, with
revenues increasing by over 24%, operating profit up over 27% and as a result
improving operating margins.
PUBLIC RELATIONS AND PUBLIC AFFAIRS
The Group's public relations and public affairs revenues showed significant
continued growth, rising over 44%, with operating margins at almost 16% well
beyond previous objectives. Hill and Knowlton's revenues rose 29% and the
company continued to improve its operating margins significantly. Ogilvy Public
Relations Worldwide's revenues rose by almost 85%, also with significant
improvement in its operating margin.
BRANDING AND IDENTITY, HEALTHCARE AND SPECIALIST COMMUNICATIONS
The Group's branding and identity, healthcare and specialist communications
revenues grew by almost 9% over last year with gross margin, a more accurate
indicator of top-line growth, up over 22% on a like-for-like basis and operating
margins improving. Particularly good performance was registered by several
companies in this sector in the first half, including in promotion and direct
marketing by RTCdirect, Einson Freeman, Perspectives, OgilvyOne and A Eicoff &
Company; in branding and identity by Enterprise IG, Scott Stern, Coley Porter
Bell and Banner McBride; in healthcare by Shire Hall Group; and in other
specialist marketing services by The Henley Centre, JWT Specialized
Communications, P.Four Consultancy and Management Ventures.
CASH FLOW BALANCE SHEET
A summary of the Group's cash flow statement and balance sheet and notes as at
30 June 2000 are provided in Appendices I and II.
Improved profitability has continued to have a positive effect on the Group's
balance sheet. In the first half of 2000, operating profit was L147 million,
depreciation L25 million, interest paid L22 million, tax paid L32 million and
other cash inflows L13 million. This resulted in net cash generation of
L131 million for the first six months of 2000, compared to L102 million in the
comparable period last year. The Group invested L30 million in capital
expenditure, L116 million in cash acquisition payments and investments and
L46 million in share repurchases and dividends, a total outflow of
L192 million.
For the twelve months ended 30 June 2000 the net cash generation was
L265 million which was invested in capital expenditure of L72 million, cash
acquisition payments and investments of L272 million and share repurchases and
dividends of L82 million, a total expenditure of L426 million. Net debt averaged
L325 million for the first half of 2000 versus L189 million for the same period
last year. On 30 June 2000 net bank borrowings were L292 million against
L52 million on 30 June 1999.
The Board continues to examine ways of deploying its substantial cash flow of
almost L240 million per annum to enhance share owner value particularly given
that interest cover is almost seven times. Cash flow and interest cover will be
further improved by the proposed all-equity acquisition of Y&R. As necessary
capital expenditure normally approximates to 1-1.2x the depreciation charge, the
Company has concentrated on examining possible acquisitions or returning excess
capital to share owners in the form of dividends or share buy-backs.
In the first half of 2000, acquisitions have been completed in advertising and
media investment management in China, Israel, Italy, the Middle East,
Netherlands, Puerto Rico and Spain; in information and consultancy in Denmark
and Sweden; in public relations and public affairs in Poland and the United
States; and in branding and identity, healthcare and specialist
communications--in branding and identity in Australia, Singapore and the United
States; in direct in Australia, Canada, Poland, Spain and the United Kingdom;
and in interactive in Canada, Mexico and the United Sates.
In addition to increasing the interim dividend by 20% to L9.3 million or 1.2p
per share, the Company has continued its rolling share buy-back programme in the
first half of the year by repurchasing 4.8 million shares at an average price of
L9.57 per share and total cost of L46 million. The Company's objective
54
<PAGE>
remains to buy-back approximately L100 million--L150 million of shares each
year, equivalent to 1-2% of the ordinary share capital.
WPP.COM
The new economy continues to have a significant impact on wpp.com. Despite the
recent correction of stock market valuations of internet businesses on both
sides of the Atlantic, web revenues continue to grow strongly. In particular,
traditional brands have increased their efforts and their expenditure as they
come to terms with the challenges and opportunities offered by the new
technologies. Work with traditional clients and with some of their spin-offs
continues to provide much of the growth in our interactive business. Demand from
traditional clients has allowed us to be selective in choosing the start-ups we
work with and to pick those that we feel are well funded with a compelling
offer.
Narrowly defined web revenues for the half year--confined to web based work and
excluding off-line expenditure for on-line brands--grew to over $90 million.
This is well above budget and compares favourably with over $30 million for the
same period in 1999. These figures exclude the operations of companies such as
Syzygy, Concept! and Roundarch in which we own minority interests. Particularly
strong performances were recorded by OgilvyInteractive, digital@jwt, Research
International and Millward Brown Interactive. Operating margins for these
businesses are similar to, or better than, those of WPP as a whole.
Off-line work for internet start-ups and "clicks and mortar" operations
continued to develop strongly in all regions. Particularly strong growth was
recorded at Ogilvy, AlexanderOgilvy, J Walter Thompson Company, Blanc & Otus and
Enterprise IG. A notable feature has been the growth of business-to-business
clients who now account for over half of our work in this area. While there has
been considerable "churn" amongst start-ups, demand continues to exceed supply
and we have been able to maintain or increase fee levels. As we suspected, it is
growing increasingly difficult to isolate web- related revenues given that much
of the work for clients involves the total integration of their web and
traditional activities. We estimate that these more broadly defined web
revenues--including off-line spending by on-line brands--have grown by 30% in
the first half of the year to over 15% of total revenues.
We have continued to invest in a range of start-ups in order to better
understand developments and the capabilities we need to develop and widen the
offer we can make to clients. Investments in the first half have been made in
Inferentia (Italy's leading e-commerce and web consulting company), Metapack (in
e-fulfilment and logistics), Advertising.com (a leader in targeting on-line
media), Imagine (e-crm), Intraspect (knowledge management software), Red Sheriff
(web traffic measurement and the dominant provider in Australia), Spydre (a
Latin American incubator) and BigWords (the US leader in targeting 18-24 year
olds for content and e-commerce).
In addition, a number of acquisitions have been made of companies with strong
technology and web capabilities to strengthen our core operating brands.
CLIENT DEVELOPMENTS IN THE FIRST HALF OF 2000
At the end of the half year, the Group worked with over 60 major national or
multi-national clients in three or more functions. This reflects the increasing
opportunities for co-ordination between activities both nationally and
internationally. The Group also works with well over 100 clients in 6 or more
countries. The Group now serves more than 300 of the Fortune 500 and
approximately half of the NASDAQ 100. Including associates the Group currently
employs over 39,000 people in 950 offices in 92 countries.
The Group estimates that more than 20% of new assignments in the first half of
the year were generated through the joint development of opportunities by two or
more Group companies.
CURRENT PROGRESS AND FUTURE PROSPECTS
The Group's performance has continued to improve in the first half of 2000.
The Company is firing on all cylinders, gaining market share in all geographic
regions including the United States, United Kingdom, Continental Europe, Asia
Pacific and Latin America.
Functionally, advertising and media investment management have accelerated their
top-line growth rates, whilst continuing to improve their operating profits and
margins. Information and consultancy, public relations and public affairs,
branding and identity, healthcare and specialist communications have
55
<PAGE>
continued to improve operating profits and operating margins at higher levels of
revenue and gross margin growth.
Underlying revenue trends are sound with the Group growing faster than the
market and therefore increasing market share. Prospects for the latter half of
2000 look equally good (early indications are that July revenues are up over 20%
on a constant currency basis) and industry projections for advertising market
growth in 2001 look only slightly lower than 2000 in the range of 5-6%.
Marketing services expenditures will continue to grow at a faster rate.
Continual concerns about stock market valuations and economic over-heating on
both sides of the Atlantic are balanced by the focus of governments on fiscal
restraint and the independence of central banks in controlling interest rate
policies.
Although market conditions are good, plans, budgets and forecasts of revenues
will continue to be made on a conservative basis and considerable attention is
still being focused on achieving margin and staff cost to revenue or gross
margin targets. Continued progress is being made in these areas. For example, on
a comparable basis, the combined operating margins of Ogilvy, J Walter Thompson
Company and MindShare rose to 15.6% from 14.6% in the first half of 2000
compared to the same period in 1999.
In addition to influencing absolute levels of cost, the initiatives taken by the
parent company in the areas of human resources, property, procurement,
information technology and practice development continue to improve the
flexibility of the Group's cost base.
This will become increasingly important if and when economic activity stalls.
Over the last five years fixed staff and property costs have fallen from 56.7%
to 51.8% of revenue.
The Group continues to improve co-operation and co-ordination between companies
in order to add value to our clients' businesses and our people's careers, an
objective which has been specifically built into short-term incentive plans.
Particular emphasis and success has been achieved in the areas of media
investment management, healthcare, privatisation, new technologies, new markets,
retailing, internal communications, hi-tech, financial services and media and
entertainment.
The Group continues to concentrate on its objectives of improving operating
profits by 15-20% per annum; improving operating margins by 1 margin point per
annum or more depending on revenue growth; improving staff cost to revenue or
gross margin ratios by 0.6 margin points per annum or more depending on revenue
growth; converting 20-33 1/3% of incremental revenue to profit and growing
revenue faster than industry averages and encouraging co-operation between Group
companies.
In addition to introducing greater flexibility into its cost structure, the
Group is competitively well positioned to weather any economic uncertainty
because of its stronger financial position, its geographic spread, its
consistent new business record and its competitive strength in information and
consultancy, public relations and public affairs, identity and branding,
healthcare and specialist communications--particularly as clients decide to
spend an increasing proportion of their marketing budgets on "below-the-line"
activities.
56
<PAGE>
APPENDIX I
UNAUDITED CONSOLIDATION INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE, 2000
<TABLE>
<CAPTION>
SIX SIX
MONTHS MONTHS CONSTANT
ENDED ENDED CURRENCY
30 JUNE 30 JUNE +/(-) YEAR ENDED
NOTES 2000 1999 +/(-) (NOTE 3) 31 DECEMBER 1999
-------- -------- -------- -------- -------- ----------------
LM LM % % LM
<S> <C> <C> <C> <C> <C> <C>
Turnover (gross billings)..................... 5,655.9 4,445.1 +27.2% +26.2% 9,345.9
------- ------- ----- ----- --------
Revenue....................................... 4 1,209.1 1,017.3 +18.9% +17.9% 2,172.6
------- ------- ----- ----- --------
Gross profit.................................. 1,071.1 861.2 +24.4% +23.5% 1,855.3
Operating costs............................... (924.6) (740.6) -24.8% -23.8% (1,591.8)
------- ------- ----- ----- --------
Operating profit.............................. 146.5 120.6 +21.5% +21.8% 263.5
Income from associates........................ 14.2 8.3 +71.1% +76.7% 27.3
Profit on ordinary activities before interest
and taxation................................ 160.7 128.9 +24.7% +25.3% 290.8
Net interest payable and similar charges...... (23.0) (16.3) -41.1% -39.0% (35.4)
------- ------- ----- ----- --------
Profit on ordinary activities before
taxation.................................... 137.7 112.6 +22.3% +23.2% 255.4
Tax on profit on ordinary activities.......... 5 (41.3) (34.9) -18.3% -19.2% (76.6)
------- ------- ----- ----- --------
Profit on ordinary activities after
taxation.................................... 96.4 77.7 +24.1% +25.0% 178.8
Minority interests............................ (3.3) (2.4) -37.5% -37.5% (6.0)
------- ------- ----- ----- --------
Profit attributable to ordinary share
owners...................................... 93.1 75.3 +23.6% +24.6% 172.8
Ordinary dividends............................ 6 (9.3) (7.8) +19.2% +21.3% (24.0)
------- ------- ----- ----- --------
Retained profit for the period................ 83.8 67.5 +24.1% +25.0% 148.8
======= ======= ===== ===== ========
PBIT margin*.................................. 13.3% 12.7% +0.6% +0.7% 13.4%
------- ------- ----- ----- --------
EARNINGS PER SHARE
Basic earnings per ordinary share............. 7 12.3p 10.0p +23.0% +23.8% 22.9p
Diluted earnings per ordinary share........... 7 12.0p 9.8p +22.4% +23.5% 22.5p
------- ------- ----- ----- --------
Ordinary dividend per share --interim......... 6 1.2p 1.0p +20.0% +20.0% 1.0p
--final............. -- -- -- -- 2.1p
------- ------- ----- ----- --------
EARNINGS PER ADS**
Basic earnings per ADS........................ $ 0.97 $ 0.81 +19.8% +19.8% $ 1.85
Diluted earnings per ADS...................... $ 0.94 $ 0.80 +17.5% +19.0% $ 1.82
ORDINARY DIVIDEND PER ADS**
Interim..................................... 9.4 CENTS 8.1 CENTS +16.0% +16.0% 8.1 CENTS
Final....................................... -- -- -- -- 17.0 CENTS
======= ======= ===== ===== ========
</TABLE>
------------------
* PBIT: Profit on ordinary activities before interest and taxation.
** These figures have been translated for convenience purposes only, using
the profit and loss exchange rate shown in note 3. The comparative figures
have been restated following a change in the ratio of ordinary shares per
ADS from 10 ordinary shares per ADS to 5 ordinary shares per ADS.
The accompanying notes form an integral part of this profit and loss account.
57
<PAGE>
WPP GROUP PLC
UNAUDITED SUMMARY INTERIM CONSOLIDATED CASH FLOW STATEMENT
FOR THE PERIOD ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED SIX MONTHS ENDED 31 DECEMBER
30 JUNE 2000 30 JUNE 1999 1999
---------------- ---------------- --------------
LM LM LM
<S> <C> <C> <C>
RECONCILIATION OF OPERATING PROFIT TO NET
CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES:
Operating profit......................... 146.5 120.6 263.5
Depreciation charge...................... 24.8 19.7 42.2
Movements in working capital and
provisions............................. (309.0) (202.9) 42.8
------ ------ ------
Net cash (outflow)/inflow from operating
activities............................. (137.7) (62.6) 348.5
Dividends received from associates....... 3.2 1.8 4.3
Returns on investments and servicing of
finance................................ (23.9) (13.9) (37.1)
United Kingdom and overseas tax paid..... (31.5) (31.6) (58.4)
Purchase of tangible fixed assets........ (29.9) (22.1) (64.6)
Purchase of own shares by ESOP Trust..... (46.2) (4.1) (17.9)
Other movements.......................... 3.2 1.6 2.0
------ ------ ------
Capital expenditure and financial
investment............................. (72.9) (24.6) (80.5)
Cash consideration for acquisitions...... (97.8) (57.3) (242.2)
Less cash acquired....................... 2.0 3.3 51.8
Net purchase of other investments........ (20.3) -- (11.8)
Total acquisitions....................... (116.1) (54.0) (202.2)
Equity dividends paid.................... -- -- (21.1)
------ ------ ------
Net cash outflow before financing........ (378.9) (184.9) (46.5)
Increase in drawings on bank loans....... 100.3 42.3 258.0
Proceeds from issue of shares............ 8.2 4.0 12.0
------ ------ ------
Net cash inflow from financing............. 108.5 46.3 270.0
------ ------ ------
(Decrease)/increase in cash and
overdrafts for the period.............. (270.4) (138.6) 223.5
Translation difference................... 8.0 6.8 (0.6)
Balance of cash and overdrafts at
beginning of period.................... 551.4 328.5 328.5
------ ------ ------
Balance of cash and overdrafts at end of
period................................. 289.0 196.7 551.4
------ ------ ------
RECONCILIATION OF NET CASH FLOW TO
MOVEMENT IN NET (DEBT)/FUNDS:
(Decrease)/increase in cash and
overdrafts for the period.............. (270.4) (138.6) 223.5
Cash inflow from debt financing.......... (100.3) (42.3) (258.0)
Other movements.......................... (0.8) (0.7) (1.7)
Translation difference................... (12.4) (5.1) (6.2)
------ ------ ------
Movement of net funds in the period...... (383.9) (186.7) (42.4)
Net funds at beginning of period......... 91.9 134.3 134.3
Net (debt)/funds at end of period (note
11)...................................... (292.0) (52.4) 91.9
====== ====== ======
</TABLE>
The accompanying notes form an integral part of this cash flow statement.
58
<PAGE>
WPP GROUP PLC
UNAUDITED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2000
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 1 DECEMBER
2000 1999 1999
NOTES LM LM LM
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets:
Corporate brands................................... 350.0 350.0 350.0
Goodwill........................................... 8 511.0 204.1 410.3
Tangible assets...................................... 211.1 178.1 196.7
Investments.......................................... 8 448.9 290.7 356.9
-------- -------- --------
1,521.0 1,022.9 1,313.9
CURRENT ASSETS
Stocks and work in progress.......................... 198.1 140.2 113.5
Debtors.............................................. 1,336.3 1,058.0 1,040.4
Debtors within working capital facility:
Gross debts........................................ 396.3 326.0 345.7
Non-returnable proceeds............................ (228.1) (219.5) (214.1)
-------- -------- --------
168.2 106.5 131.6
Cash at bank and in hand............................. 395.9 302.7 607.0
-------- -------- --------
2,098.5 1,607.4 1,892.5
CREDITORS: amounts falling due within one year....... 9 (2,404.2) (1,846.6) (2,148.0)
-------- -------- --------
NET CURRENT LIABILITIES.............................. (305.7) (239.2) (255.5)
-------- -------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES................ 1,215.3 783.7 1,058.4
CREDITORS: amounts falling due after more than one
year............................................... 10 (754.9) (468.6) (652.5)
PROVISIONS FOR LIABILITIES AND CHARGES............... (75.7) (80.0) (79.2)
-------- -------- --------
NET ASSETS........................................... 384.7 235.1 326.7
-------- -------- --------
CAPITAL AND RESERVES
Share capital........................................ 77.9 77.0 77.5
Reserves............................................. 296.6 149.6 240.7
-------- -------- --------
SHARE OWNERS' FUNDS.................................. 374.5 226.6 318.2
Minority interests................................... 10.2 8.5 8.5
-------- -------- --------
TOTAL CAPITAL EMPLOYED............................... 384.7 235.1 326.7
-------- -------- --------
</TABLE>
The accompanying notes form an integral part of this balance sheet.
59
<PAGE>
WPP GROUP PLC
UNAUDITED RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHARE OWNERS' FUNDS
FOR THE PERIOD ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 30 JUNE 1999 31 DECEMBER 1999
---------------- ---------------- ----------------
LM LM LM
<S> <C> <C> <C>
Profit for the period..................... 93.1 75.3 172.8
Ordinary dividends payable................ (9.3) (7.8) (24.0)
----- ----- -----
83.8 67.5 148.8
Exchange adjustments on foreign currency
net investments......................... (36.1) (33.4) (31.2)
Other movements........................... 8.6 4.8 12.9
----- ----- -----
Net additions to share owners' funds...... 56.3 38.9 130.5
Opening share owners' funds............... 318.2 187.7 187.7
----- ----- -----
Closing share owners' funds............... 374.5 226.6 318.2
----- ----- -----
</TABLE>
UNAUDITED STATEMENT OF CONSOLIDATED RECOGNISED GAINS AND LOSSES
FOR THE PERIOD ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 30 JUNE 1999 31 DECEMBER 1999
---------------- ---------------- ----------------
LM LM LM
<S> <C> <C> <C>
Profit for the period..................... 93.1 75.3 172.8
Exchange adjustments on foreign currency
net investments......................... (36.1) (33.4) (31.2)
----- ----- -----
Total recognised gains.................... 57.0 41.9 141.6
----- ----- -----
</TABLE>
60
<PAGE>
WPP GROUP PLC
NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF ACCOUNTING
The consolidated interim financial statements are prepared under the historical
cost convention.
2. ACCOUNTING POLICIES
The consolidated interim financial statements comply with relevant accounting
standards and have been prepared using accounting policies set out on pages 56
and 57 of the Group's 1999 Annual Report and Accounts.
The policies set out in the 1999 Annual Report and Accounts are in accordance
with accounting principles generally accepted in the United Kingdom (UK GAAP).
3. CURRENCY CONVERSION
The 2000 unaudited interim consolidated profit and loss account is prepared
using, among other currencies, an average exchange rate of US$ 1.5700 to the
pound (period ended 30 June, 1999: US$1.6197; year ended 31 December, 1999
US$1.6178). The balance sheet as at 30 June, 2000 has been prepared using the
exchange rate on that day of US$ 1.5166 to the pound (30 June, 1999: US$1.5763;
31 December, 1999: US$1.6182).
The constant currency percentage changes shown on the face of the profit and
loss account have been calculated by applying 2000 exchange rates to the results
for 1999 and 2000.
4. SEGMENTAL ANALYSIS
Reported contributions by geographical area were as follows:
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
REVENUE
United Kingdom.............................................. 234.9 212.0 434.7
United States............................................... 531.6 432.4 915.2
Continental Europe.......................................... 218.7 199.1 426.2
Canada, Asia Pacific, Latin America, Africa & Middle East... 223.9 173.8 396.5
------- ------- -------
1,209.1 1,017.3 2,172.6
======= ======= =======
PBIT(1)
United Kingdom.............................................. 28.1 25.2 51.5
United States............................................... 86.3 68.0 139.0
Continental Europe.......................................... 28.1 25.0 55.8
Canada, Asia Pacific, Latin America, Africa & Middle East... 18.2 10.7 44.5
------- ------- -------
160.7 128.9 290.8
======= ======= =======
</TABLE>
61
<PAGE>
4. SEGMENTAL ANALYSIS (CONTINUED)
Reported contributions by operating sector were as follows:
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
REVENUE
Advertising & media investment management................... 556.6 477.2 1,013.1
Information & consultancy................................... 239.5 191.9 419.7
Public relations & public affairs........................... 121.7 82.8 178.9
Branding & identity, healthcare and specialist
communications............................................ 291.3 265.4 560.9
------- ------- -------
1,209.1 1,017.3 2,172.6
======= ======= =======
PBIT(1)
Advertising & media investment management................... 84.5 69.2 155.9
Information & consultancy................................... 22.5 18.0 42.1
Public relations & public affairs........................... 18.7 11.6 23.9
Branding & identity, healthcare and specialist
communications............................................ 35.0 30.1 68.9
------- ------- -------
160.7 128.9 290.8
======= ======= =======
</TABLE>
------------------
NOTE:
(1) PBIT: Profit on ordinary activities before interest and taxation.
5. TAXATION
The Group tax rate on profit on ordinary activities before taxation is 30% (30
June, 1999: 31%; year ended 31 December, 1999: 30%). The tax charge relates
mainly to overseas operations, except for L5.8 million in respect of UK
corporation tax and L3.1 million in respect of associated companies.
6. INTERIM DIVIDEND
An interim dividend of 1.2p (1999: 1.0p) per ordinary share has been declared by
the Board. This is expected to be paid on 20 November 2000 to share owners on
the register at 15 September 2000.
7. EARNINGS PER SHARE
Basic and diluted earnings per share have been calculated in accordance with
FRS 14 "Earnings per share".
(a) Basic earnings per share have been calculated using earnings of
L93.1 million (30 June, 1999: L75.3 million; year ended 31 December, 1999:
L172.8 million) and weighted average shares in issue during the six months
to 30 June, 2000 of 757,499,254 shares (30 June, 1999: 752,798,633 shares;
year ended 31 December, 1999: 753,324,054 shares).
(b) Diluted earnings per share have been calculated using earnings of
L93.1 million (30 June, 1999: L75.3 million; year ended 31 December, 1999:
L172.8 million) on a weighted average of 775,155,818 shares (30 June, 1999:
768,181,423 shares; year ended 31 December, 1999: 768,691,993 shares). This
takes into account the exercise of employee share options where these are
expected to dilute earnings.
(c) At 30 June, 2000 there were 778,921,600 ordinary shares in issue.
8. GOODWILL
Total goodwill of L117.4 million arising during the period includes
L100.7 million in respect of acquisitions of subsidiary undertakings. In
addition, investments include L16.7 million of goodwill in respect of associate
undertakings acquired during the period.
Cash paid in respect of these acquisitions was L97.8 million (30 June 1999:
L57.3 million and 31 December, 1999: L242.2 million). Future anticipated
payments to vendors totalled L179.5 million
62
<PAGE>
8. GOODWILL (CONTINUED)
(30 June 1999: L97.2 million; 31 December 1999: L172.4 million), based on the
directors' best estimates of future obligations, which are dependent on future
performance of the interests acquired.
These acquisitions do not have a significant impact on the Group's results for
the six months to 30 June 2000.
9. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
The following are included in creditors falling due within one year:
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
Bank loans and overdrafts................................... 230.8 105.9 148.3
Trade creditors............................................. 1,416.7 1,160.5 1,315.0
Corporate income tax payable................................ 37.8 58.7 34.6
Deferred income............................................. 137.5 103.6 125.8
Payments due to vendors (note 8)............................ 52.6 6.1 41.2
Other creditors and accruals................................ 528.8 411.8 483.1
------- ------- -------
2,404.2 1,846.6 2,148.0
======= ======= =======
</TABLE>
Overdraft balances included within bank loans and overdrafts amount to
L106.9 million (30 June 1999: L105.9 million; 31 December 1999: L55.6 million).
10. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
The following are included in creditors falling due after more than one year:
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
Corporate bond and bank loans............................... 457.1 249.2 366.8
Corporate income taxes payable.............................. 125.9 99.2 122.9
Payments due to vendors (note 8)............................ 126.9 91.1 131.2
Other creditors and accruals................................ 45.0 29.1 31.6
------- ------- -------
754.9 468.6 652.5
======= ======= =======
</TABLE>
The corporate bond, bank loans and overdrafts included within short and long
term creditors fall due for repayment as follows:
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
Within one year............................................. 230.8 105.9 148.3
Between 1 and 2 years....................................... -- -- --
Between 2 and 5 years....................................... 261.0 60.8 183.1
Over 5 years................................................ 196.1 188.4 183.7
------- ------- -------
687.9 355.1 515.1
======= ======= =======
</TABLE>
63
<PAGE>
11. NET (DEBT)/FUNDS
<TABLE>
<CAPTION>
30 JUNE 30 JUNE 31 DECEMBER
2000 1999 1999
-------- -------- -----------
LM LM LM
<S> <C> <C> <C>
Cash at bank and in hand.................................... 395.9 302.7 607.0
Bank loans and overdrafts due within one year (note 9)...... (230.8) (105.9) (148.3)
Corporate bond and loans due after one year (note 10)....... (457.1) (249.2) (366.8)
------- ------- -------
Net (debt) / funds.......................................... (292.0) (52.4) 91.9
======= ======= =======
</TABLE>
12. POST BALANCE SHEET EVENT
Since 30 June 2000, the Group has entered into a further Revolving Credit
Facility for US$700 million. This facility has a 364 day maturity. Under this
agreement the Group has the ability to draw funds for a period of up to 3 years
from the date of the agreement. This facility is subject to share owners'
approval.
Borrowings under the Revolving Credit Facility are governed by certain financial
covenants based on the results and financial position of the Group.
13. STATUTORY INFORMATION AND AUDIT REVIEW
The results for the six months to 30 June 2000 and 1999 do not constitute
statutory accounts. The statutory accounts for the year ended 31 December 1999
received an unqualified auditors' report and have been filed with the Registrar
of Companies. The interim financial statements are unaudited but have been
reviewed by the auditors and their report to the directors is set out below.
64
<PAGE>
INDEPENDENT REVIEW REPORT TO WPP GROUP PLC
INTRODUCTION
We have been instructed by the company to review the financial information set
out on pages 11 to 20(1) and we have read the other information contained in the
interim report and considered whether it contains any apparent misstatements or
material inconsistencies with the financial information.
DIRECTORS' RESPONSIBILITIES
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority and applicable United Kingdom
accounting standards. The Listing Rules require that the accounting policies and
presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes, and
the reasons for them, are disclosed.
REVIEW WORK PERFORMED
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued in the United Kingdom by the Auditing Practices Board and with our
profession's ethical guidance. A review consists principally of making enquiries
of group management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with Auditing
Standards and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the financial information.
REVIEW CONCLUSION
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2000.
Arthur Andersen
Chartered Accountants
London
--------------
(1) These page references refer to the interim announcement dated 14 August
2000. These pages have been reproduced in this document on pages 57 to 64.
65
<PAGE>
ILLUSTRATIVE UNAUDITED PRO FORMA WPP/Y&R
CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
WPP UK GAAP UK GAAP
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
REVENUE..................................................... 1,209.1 600.8 1,809.9
------- ------ --------
Gross profit................................................ 1,071.1 600.8 1,671.9
Operating costs............................................. (924.6) (524.1) (1,448.7)
------- ------ --------
OPERATING PROFIT PRE EXCEPTIONAL CHARGE..................... 146.5 76.7 223.2
Exceptional operating charge................................ -- (36.7) (36.7)
------- ------ --------
Operating profit............................................ 146.5 40.0 186.5
Income from associates...................................... 14.2 2.4 16.6
------- ------ --------
Profit on ordinary activities before interest and
taxation.................................................. 160.7 42.4 203.1
------- ------ --------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST, TAX AND
EXCEPTIONAL CHARGE........................................ 160.7 79.1 239.8
Net interest payable and similar charges.................... (23.0) (5.2) (28.2)
------- ------ --------
Profit on ordinary activities before taxation............... 137.7 37.2 174.9
Tax on profit on ordinary activities........................ (41.3) (28.9) (70.2)
Exceptional tax credit arising on exercised stock options... -- 18.1 18.1
------- ------ --------
Profit on ordinary activities after taxation................ 96.4 26.4 122.8
Minority interests.......................................... (3.3) (0.9) (4.2)
------- ------ --------
Profit attributable to ordinary share owners................ 93.1 25.5 118.6
======= ====== ========
PBIT* margin................................................ 13.3% 13.2% 13.2%
------- ------ --------
EARNINGS PER SHARE
Diluted earnings per ordinary share......................... 12.0p n/a 10.6p
Diluted earnings per ordinary share pre exceptional items... 12.0p n/a 12.2p
======= ====== ========
</TABLE>
--------------
* PBIT: Profit on ordinary activities before interest and taxation, excluding
exceptional operating charge.
66
<PAGE>
Notes to the unaudited pro forma financial information
1. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED WPP GROUP PLC
The following unaudited pro forma profit and loss account for the six months 30
June 1999 and 2000 (the "Unaudited pro forma Financial Information") for WPP
Group plc have been prepared for illustrative purposes only to show the effects
of the combination with Y&R as if it had occurred at 1 January 1999 for the six
months ended 30 June 1999 and 1 January 2000 for the six months ended 30
June 2000. Because of its nature, the Unaudited pro forma Financial Information
may not give a true picture of the financial position of WPP Group plc. It has
been prepared in accordance with the Listing Rules.
The financial information for Y&R for the six months ended 30 June 1999 and 2000
is based on the unaudited results extracted from Y&R's form 10-Q filed with the
SEC on 3 August 2000, prepared in accordance with US GAAP adjusted to reflect
WPP's accounting policies under UK GAAP
2. RECLASSIFICATIONS
Reclassifications have been made to Y&R's historical financial information
presented under US GAAP to conform to WPP's presentation and disclosed
accounting policies under UK GAAP. None of these reclassifications impact net
profit.
The reclassification that impacts the profit and loss account is:
EQUITY ACCOUNTING
In accordance with UK GAAP, the investor's share of operating profit or loss of
associated undertakings and joint ventures is shown separately on the face of
the profit and loss account and the investor's share of the taxation charge of
associated undertakings and joint ventures is included within the taxation
charge shown in the profit and loss account. Under US GAAP, net after-tax
profits or losses are included in the income statement as a single line item.
3. US TO UK GAAP ADJUSTMENTS
Accounting principles generally accepted in the UK differ in certain material
respects from those generally accepted in the US. The differences which are
material to restating the historical consolidated financial information of Y&R
to conform to WPP's disclosed accounting policies under UK GAAP are set out
below.
(A) GOODWILL
In accordance with UK GAAP and FRS 10 "Goodwill and Intangible Assets," goodwill
resulting from acquisitions made by Y&R on or after 1 January 1998 has been
capitalised as an intangible asset. Under WPP's disclosed accounting policy this
goodwill has an indefinite life and as a result no amortisation has been
provided. Under UK GAAP, goodwill assumed to have an indefinite life is subject
to an annual impairment review in accordance with FRS 11 "Impairment of Fixed
Assets and Goodwill".
Under US GAAP, goodwill resulting from a business combination accounted for as a
purchase is amortised over its estimated useful life, not to exceed 40 years.
Additionally, Y&R's management evaluates the carrying value of Y&R's tangible
and intangible assets each year, or whenever events or circumstances indicate
that these assets may be impaired. Intangible assets are determined to be
impaired if the future anticipated undiscounted cash flows arising from the use
of the intangible assets are less than their carrying value. If an impairment is
deemed to have occurred, the asset is written down to its fair value. The impact
of this adjustment is to increase operating profit by $10.9m (L6.9m).
(B) NON-OPERATING ITEMS
For the six months to 30 June 2000 in accordance with US GAAP, Y&R recognised
gains largely relating to the sale of certain assets and rights known as Y&R
TeamSpace in exchange for an ownership interest in eMotion Inc. and other net
gains on investing activities largely relating to additional consideration
received from Luminant. Under UK GAAP, these gains would be included in the
statement of total recognised gains and losses which has not been separately
presented. The impact of this adjustment is to reduce profit on ordinary
activities by $12.2m (L7.8m).
67
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
3. US TO UK GAAP ADJUSTMENTS (CONTINUED)
(C) DEFERRED TAXES
Under UK GAAP, deferred tax assets are accounted for only to the extent that it
is considered probable that a liability or asset will crystallise in the
foreseeable future. Under US GAAP, deferred taxes are accounted for on all
timing differences and a valuation allowance is established in respect of those
deferred tax assets where it is more likely than not that some portion will
remain unrealised. This reduces the tax charge in the profit and loss account by
$28.4m (L18.1m) under UK GAAP.
(D) TREASURY STOCK
Under UK GAAP, if repurchased Treasury stock is used for the purpose of
satisfying the Company's obligation upon exercise of stock options issued to
employees, the Company should record as an operating cost, the excess of the
cost of repurchasing the treasury stock over the proceeds received from
employees on exercising stock options. Under US GAAP, this is recorded as a
reduction in equity. For the six months ended 30 June 2000, under UK GAAP, this
results in a charge of $57.6 (L36.7m) million which has been reflected as an
operating exceptional item within this restatement. For prior years, the
difference between the proceeds on exercise of employee share options less the
cost of satisfying these options is not material.
4. SEGMENTAL INFORMATION
The tables below present unaudited pro forma segment information, including Y&R
segments presented to conform with the segments as reported by WPP and to UK
GAAP. "PBIT" means profit on ordinary activities before interest and taxation,
excluding exceptional operating charge.
INFORMATION BY DISCIPLINE
<TABLE>
<CAPTION>
REVENUE BY DISCIPLINE--POUND
STERLING INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
LM WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
Advertising & media investment management................... 556.6 274.3 830.9
Information & consultancy................................... 239.5 -- 239.5
Public relations & public affairs........................... 121.7 125.4 247.1
Branding & identity, healthcare and specialist
communications............................................ 291.3 201.1 492.4
------- ----- -------
1,209.1 600.8 1,809.9
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PBIT* BY DISCIPLINE--POUND
STERLING INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
LM WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
Advertising & media investment management................... 84.5 43.7 128.2
Information & consultancy................................... 22.5 -- 22.5
Public relations & public affairs........................... 18.7 17.4 36.1
Branding & identity, healthcare and specialist
communications............................................ 35.0 18.0 53.0
------- ----- -------
160.7 79.1 239.8
======= ===== =======
</TABLE>
--------------
* PBIT: Profit on ordinary activities before interest and taxation,
excluding exceptional operating charge.
68
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
4. SEGMENTAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REVENUE BY DISCIPLINE--U.S.
DOLLAR INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
$M WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
Advertising & media investment management................... 873.8 430.7 1,304.5
Information & consultancy................................... 376.0 -- 376.0
Public relations & public affairs........................... 191.1 196.9 388.0
Branding & identity, healthcare and specialist
communications............................................ 457.3 315.7 773.0
------- ----- -------
1,898.2 943.3 2,841.5
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PBIT* BY DISCIPLINE--U.S. DOLLAR
INFORMATION
---------------------------------
SIX MONTHS ENDED 30 JUNE 2000
---------------------------------
Y&R COMBINED
$M WPP UK GAAP UK GAAP
-- --------- --------- ---------
<S> <C> <C> <C>
Advertising & media investment management................... 132.8 68.7 201.5
Information & consultancy................................... 35.3 -- 35.3
Public relations & public affairs........................... 29.3 27.4 56.7
Branding & identity, healthcare and specialist
communications............................................ 54.9 28.2 83.1
------- ----- -------
252.3 124.3 376.6
======= ===== =======
</TABLE>
--------------
* PBIT: Profit on ordinary activities before interest and taxation,
excluding exceptional operating charge.
INFORMATION BY GEOGRAPHY
<TABLE>
<CAPTION>
REVENUE BY GEOGRAPHY--POUND
STERLING INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
LM WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
North America............................................... 553.6 331.2 884.8
UK.......................................................... 234.9 55.1 290.0
Continental Europe.......................................... 218.7 134.9 353.6
Asia Pacific, Latin America, Africa & Middle East........... 201.9 79.6 281.5
------- ----- -------
1,209.1 600.8 1,809.9
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PBIT* BY GEOGRAPHY--POUND
STERLING INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
LM WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
North America............................................... 88.1 55.6 143.7
UK.......................................................... 28.1 -0.2 27.9
Continental Europe.......................................... 28.1 16.7 44.8
Asia Pacific, Latin America, Africa & Middle East........... 16.4 7.0 23.4
------- ----- -------
160.7 79.1 239.8
======= ===== =======
</TABLE>
--------------
* PBIT: Profit on ordinary activities before interest and taxation,
excluding exceptional operating charge.
69
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
4. SEGMENTAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REVENUE BY GEOGRAPHY--U.S.
DOLLAR INFORMATION
------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------
Y&R COMBINED
$M WPP UK GAAP UK GAAP
-- -------- -------- --------
<S> <C> <C> <C>
North America............................................... 869.2 520.1 1,389.3
UK.......................................................... 368.7 86.5 455.2
Continental Europe.......................................... 343.3 211.8 555.1
Asia Pacific, Latin America, Africa & Middle East........... 317.0 124.9 441.9
------- ----- -------
1,898.2 943.3 2,841.5
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PBIT* BY GEOGRAPHY--U.S. DOLLAR
INFORMATION
---------------------------------
SIX MONTHS ENDED 30 JUNE 2000
---------------------------------
Y&R COMBINED
$M WPP UK GAAP UK GAAP
-- --------- --------- ---------
<S> <C> <C> <C>
North America............................................... 138.3 87.4 225.7
UK.......................................................... 44.2 -0.3 43.9
Continental Europe.......................................... 44.1 26.2 70.3
Asia Pacific, Latin America, Africa & Middle East........... 25.7 11.0 36.7
------- ----- -------
252.3 124.3 376.6
======= ===== =======
</TABLE>
--------------
* PBIT: Profit on ordinary activities before interest and taxation,
excluding exceptional operating charge.
5. TRANSLATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
Solely for convenience, the unaudited pro forma information is shown in both
pounds sterling and US dollars using the approximate average rate for the
periods for the profit and loss account (2000: $1.57 = L1, 1999: $1.6197 = L1).
6. DILUTED EARNINGS
The number of shares used in the calculation of unaudited pro forma earnings per
share are based on the average weighted number of WPP shares during the
respective periods aggregated with the weighted average number of Y&R shares
during the respective period, multiplied by 4.175 to reflect the exchange ratio.
Diluted earnings per share takes into account the exercise of WPP employee share
options where these are expected to be diluted, aggregated with the number of
Y&R options expected to dilute, multiplied by 4.175 to reflect the exchange rate
into WPP new shares. The 30 June 2000 calculation also includes the dilutive
impact of the Y&R convertible loan stock.
<TABLE>
<CAPTION>
DILUTED NUMBER OF SHARES (MILLION)
------------------------------------
SIX MONTHS ENDED 30 JUNE 2000
------------------------------------
WPP Y&R PRO FORMA
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average............................................ 775.2 86.4 n/a
Multiplication factor....................................... n/a 4.175 n/a
Weighted average, new WPP shares............................ 775.2 360.7 1,135.9
</TABLE>
Unaudited pro forma diluted earnings per share have been calculated using
unaudited pro forma earnings of L120.1m which includes L1.5m in respect of the
Y&R convertible loan stock in 2000.
Unaudited pro forma diluted earnings per share pre exceptional items has been
calculated using earnings of L138.7m which reflect the removal of the Y&R
exceptional operating charge in respect of Treasury Stock and the Y&R
exceptional tax credits arising on the exercise of stock options."
70
<PAGE>
PART III
INFORMATION RELATING TO YOUNG & RUBICAM
1. BUSINESS DESCRIPTION OF Y&R
Y&R provides communications services to approximately 5,500 client
accounts, including a number of large multinational organisations such as
AT&T, Citibank, Colgate-Palmolive, Ford, Philip Morris and Sony. Y&R
provides clients with creative services and extensive research capabilities
and operates through recognised market leaders, including:
- Young & Rubicam Advertising (full-service advertising);
- Dentsu, Young & Rubicam (full-service advertising in the Asia/Pacific
region);
- Y&R 2.1 (full-service on-line and off-line advertising and marketing
services);
- The Bravo Group and Kang & Lee (multi-cultural marketing and
communications);
- impiric (customer relationship management, direct marketing and sales
promotion);
- KnowledgeBase Marketing (customer relationship marketing);
- Brand Dialogue (digital interactive branding and digital commerce);
- The Media Edge (media planning, buying and placement services);
- The Digital Edge (internet media planning, buying and placement
services);
- Burson-Marsteller (perception management and public relations);
- Cohn & Wolfe (full-service public relations);
- Robinson Lerer & Montgomery (strategic corporate public relations);
- Landor Associates (branding consultation and design services); and
- Sudler & Hennessey (healthcare communications).
Y&R is a Delaware corporation founded over 75 years ago. Y&R's executive
offices are located at 285 Madison Avenue, New York, New York 10017.
2. EXTRACTION OF FINANCIAL INFORMATION
The financial information on Y&R set out in Section 3 below has been
extracted without material adjustment from the audited financial statements
contained in Y&R's annual reports filed on Form 10-K with the SEC for each
of the two years ended 31 December 1999 and 1998. On 15 May 1998, Y&R
closed an initial public offering of its common stock with the New York
Stock Exchange. The 1998 Form 10-K includes audited financial statements
for the year ended 31 December 1997. The financial information has been
prepared in accordance with US GAAP. PricewaterhouseCoopers LLP have issued
independent accountants' reports on Y&R's consolidated financial statements
for the three years ended 31 December 1999, 1998 and 1997 that are required
to be included in Y&R's annual report filed on Form 10-K under the US
Securities Exchange Act of 1934. Each such report was unqualified.
Additionally, the financial information for the half years ended 30 June
2000 and 30 June 1999 on Y&R set out in Section 3 below has been extracted
without material adjustment from the unaudited financial statements filed
on Form 10-Q with the SEC. References in Sections 1 to 5 of this Part III
to ``Directors" shall be construed as a reference to the Y&R Directors.
71
<PAGE>
3. FINANCIAL INFORMATION ON Y&R
3.1 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED 31 DECEMBER 1999, 1998
AND 1997
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues............................................... $1,717,186 $1,522,464 $1,382,740
Compensation expense, including employee benefits...... 994,119 903,948 836,150
General and administrative expenses.................... 514,981 455,578 463,936
Other operating charges................................ -- 234,449 11,925
---------- ---------- ----------
Operating expenses..................................... 1,509,100 1,593,975 1,312,011
---------- ---------- ----------
Operating profit (loss)................................ 208,086 (71,511) 70,729
Interest income........................................ 9,221 8,315 8,454
Interest expense....................................... (24,069) (26,001) (42,879)
---------- ---------- ----------
Net interest expense................................... (14,848) (17,686) (34,425)
Other income........................................... 84,982 2,220 --
---------- ---------- ----------
Income (loss) before income taxes...................... 278,220 (86,997) 36,304
Income tax provision (benefit)......................... 111,288 (2,644) 58,290
---------- ---------- ----------
166,932 (84,353) (21,986)
Equity in net income of unconsolidated affiliates...... 4,509 4,707 342
Minority interest in net income of consolidated
companies............................................ (4,342) (1,989) (2,294)
---------- ---------- ----------
Income (loss) before extraordinary charge.............. 167,099 (81,635) (23,938)
Extraordinary charge for early retirement of debt, net
of tax............................................... -- (4,433) --
---------- ---------- ----------
Net income (loss)...................................... $ 167,099 $ (86,068) $ (23,938)
========== ========== ==========
Earnings (loss) per share:
Basic:
Income (loss) before extraordinary charge............ $ 2.43 $ (1.34) $ (0.51)
Extraordinary charge................................. -- (0.08) --
---------- ---------- ----------
Net income (loss).................................... $ 2.43 $ (1.42) $ (0.51)
========== ========== ==========
Diluted:
Income (loss) before extraordinary charge............ $ 2.02 $ (1.34) $ (0.51)
Extraordinary charge................................. -- (0.08) --
---------- ---------- ----------
Net income (loss).................................... $ 2.02 $ (1.42) $ (0.51)
========== ========== ==========
Weighted average shares outstanding
Basic................................................ 68,688,848 60,673,994 46,949,355
========== ========== ==========
Diluted.............................................. 82,871,725 60,673,994 46,949,355
========== ========== ==========
</TABLE>
72
<PAGE>
3.2 CONSOLIDATED BALANCE SHEETS AS AT 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
31 DECEMBER
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 144,517 $ 122,138 $ 160,263
Accounts receivable, net of allowance for doubtful
accounts of $25,012, $17,938 and $14,125 at 31 December
1999, 31 December 1998 and 31 December 1997,
respectively............................................ 1,031,445 835,284 790,342
Costs billable to clients................................. 76,982 55,187 60,267
Other receivables......................................... 43,138 37,177 35,218
Deferred tax benefits..................................... 50,302 46,803 32,832
Prepaid expenses and other current assets................. 27,803 25,979 17,989
---------- ---------- ----------
Total Current Assets.................................... 1,374,187 1,122,568 1,096,911
---------- ---------- ----------
NONCURRENT ASSETS
Property, leasehold improvements and equipment at cost,
net of accumulated depreciation and amortisation of
$248,112, $231,655 and $224,951 at 31 December 1999,
31 December 1998 and 31 December 1997, respectively..... 194,569 150,413 125,014
Deferred income taxes..................................... 34,875 158,510 124,192
Intangibles, net of accumulated amortisation of $91,285,
$87,283 and $82,889 at 31 December 1999, 31 December
1998 and 31 December 1997, respectively................. 353,860 121,005 118,303
Equity in net assets of and advances to unconsolidated
affiliates.............................................. 36,001 38,397 26,393
Investments in equity securities.......................... 366,590 -- --
Other noncurrent assets................................... 54,199 44,226 46,994
---------- ---------- ----------
Total Assets............................................ $2,414,281 $1,635,119 $1,537,807
========== ========== ==========
CURRENT LIABILITIES
Accounts payable.......................................... $1,206,385 $ 886,632 $ 755,020
Accrued expenses and other current liabilities............ 226,006 202,433 232,023
Accrued payroll and bonuses............................... 78,531 77,078 65,458
Advance billings.......................................... 132,130 121,992 106,918
Accrued taxes on income................................... 24,844 19,290 29,665
Short-term debt........................................... 31,710 32,031 13,996
---------- ---------- ----------
Total Current Liabilities............................... 1,699,606 1,339,456 1,203,080
---------- ---------- ----------
NONCURRENT LIABILITIES
Long-term debt............................................ 127,568 31,894 337,055
Deferred compensation..................................... 31,328 30,635 31,077
Other noncurrent liabilities.............................. 117,405 113,064 112,851
Minority Interests.......................................... 14,194 4,573 6,987
Commitments and Contingencies
---------- ---------- ----------
MANDATORILY REDEEMABLE EQUITY SECURITIES
Common stock, par value $.01 per share; authorised--
250,000,000 shares; issued and outstanding--0 shares at
31 December 1999 and 1998 and 50,658,180 shares at
31 December 1997........................................ -- -- 508,471
STOCKHOLDERS' EQUITY
Money Market Preferred Stock--cumulative variable
dividend: liquidating value of $115 per share, one-tenth
of one vote per share, authorised--50,000 shares, issued
and outstanding--87 shares.............................. -- -- --
Cumulative Participating Junior Preferred Stock--minimum
$1.00 dividend, liquidating value of $1.00 per share,
100 votes per share, authorised--2,500,000 shares,
issued and outstanding--0 shares........................ -- -- --
Common stock--par value $.01 per share; authorised--
250,000,000 shares, issued and outstanding-- 72,950,004
shares, 66,374,569 shares and 11,086,950 shares at
31 December 1999, 31 December 1998 and 31 December 1997,
respectively (excluding 2,471 shares, 3,976,941 shares
and 1,115,160 shares in treasury)....................... 730 704 111
Capital surplus........................................... 908,969 934,676 23,613
Accumulated deficit....................................... (596,470) (758,292) (522,866)
Unrealised appreciation in equity securities.............. 144,977 -- --
Cumulative translation adjustment......................... (33,092) (10,810) (16,577)
Pension liability adjustment.............................. (817) (1,210) (706)
---------- ---------- ----------
424,297 165,068 (516,425)
Common stock in treasury, at cost......................... (117) (49,571) (8,550)
Unearned compensation--Restricted Stock................... -- -- (136,739)
---------- ---------- ----------
Total Stockholders' Equity.............................. 424,180 115,497 (661,714)
---------- ---------- ----------
Total Liabilities and Stockholders' Equity.............. $2,414,281 $1,635,119 $1,537,807
========== ========== ==========
</TABLE>
73
<PAGE>
3.3 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON OTHER
COMMON CAPITAL ACCUMULATED STOCK IN RESTRICTED COMPREHENSIVE
STOCK SURPLUS DEFICIT TREASURY STOCK INCOME TOTAL
--------- --------- ------------- --------- ---------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 31 DECEMBER 1996..... $111 $ 106,825 $(498,928) $ -- $ (85,000) $ (3,041) $(480,033)
==== ========= ========= ========= ========= ======== =========
Net loss........................ -- -- (23,938) -- -- -- (23,938)
Foreign currency translation
adjustments................... -- -- -- -- -- (14,255) (14,255)
Minimum pension liability
adjustments................... -- -- -- -- -- 13 13
---- --------- --------- --------- --------- -------- ---------
Comprehensive income (loss)..... (23,938) (14,242) (38,180)
Common stock issued............. -- 1,501 -- -- -- -- 1,501
Purchase of treasury shares..... -- -- -- (8,550) -- -- (8,550)
Unearned compensation--
restricted stock.............. -- 51,739 -- -- (51,739) -- --
Common stock options exercised.. 44 8,711 -- -- -- -- 8,755
Accretion of mandatorily
redeemable equity
securities.................... (44) (145,163) -- -- -- -- (145,207)
---- --------- --------- --------- --------- -------- ---------
BALANCE AT 31 DECEMBER 1997..... $111 $ 23,613 $(522,866) $ (8,550) $(136,739) $(17,283) $(661,714)
==== ========= ========= ========= ========= ======== =========
Net loss........................ -- -- (86,068) -- -- -- (86,068)
Foreign currency translation
adjustments................... -- -- -- -- -- 5,767 5,767
Minimum pension liability
adjustments................... -- -- -- -- -- (504) (504)
---- --------- --------- --------- --------- -------- ---------
Comprehensive income (loss)..... -- -- (86,068) -- -- 5,263 (80,805)
Issuance of restricted stock.... -- 94,039 -- -- 136,739 -- 230,778
Common stock options exercised
and other..................... 17 1,134 -- 19,935 -- -- 21,086
Purchase of treasury shares..... -- -- -- (60,956) -- -- (60,956)
Issuance of common stock in
initial public offering, net
of expenses................... 69 158,568 -- -- -- -- 158,637
Accretion of mandatorily
redeemable equity
securities.................... (3) (137,942) (149,358) -- -- -- (287,303)
Conversion of mandatorily
redeemable equity
securities.................... 510 795,264 -- -- -- -- 795,774
---- --------- --------- --------- --------- -------- ---------
BALANCE AT 31 DECEMBER 1998..... $704 $ 934,676 $(758,292) $ (49,571) $ -- $(12,020) $ 115,497
==== ========= ========= ========= ========= ======== =========
Net income...................... -- -- 167,099 -- -- -- 167,099
Foreign currency translation
adjustments................... -- -- -- -- -- (22,282) (22,282)
Unrealised appreciation in
equity securities, net of
$92,690 of deferred income
taxes......................... -- -- -- -- -- 144,977 144,977
Minimum pension liability
adjustments................... -- -- -- -- -- 393 393
---- --------- --------- --------- --------- -------- ---------
Comprehensive income (loss)..... -- -- 167,099 -- -- 123,088 290,187
Common stock options exercised.. 26 (69,771) -- 153,962 -- -- 84,217
Purchase of treasury shares..... -- -- -- (146,028) -- -- (146,028)
Common stock issued in
acquisitions.................. -- 44,064 -- 41,520 -- -- 85,584
Dividends paid.................. -- -- (5,277) -- -- -- (5,277)
---- --------- --------- --------- --------- -------- ---------
BALANCE AT 31 DECEMBER 1999..... $730 $ 908,969 $(596,470) $ (117) $ -- $111,068 $ 424,180
==== ========= ========= ========= ========= ======== =========
</TABLE>
74
<PAGE>
3.4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 1999,
1998 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 167,099 $ (86,068) $ (23,938)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortisation............................. 71,217 60,610 56,721
Other non-cash operating charges.......................... -- 234,449 11,925
Other non-cash income..................................... (84,982) (2,200) --
Extraordinary charge for early retirement of debt, net of
tax..................................................... -- 4,433 --
Deferred income tax expense (benefit)..................... 73,341 (38,664) (384)
Equity in net income of unconsolidated affiliates......... (4,509) (4,707) (342)
Dividends from unconsolidated affiliates.................. 3,714 3,467 2,728
Minority interest in net income of consolidated
companies............................................... 4,342 1,989 2,294
Change in assets and liabilities, excluding effects from
acquisitions, dispositions and foreign exchange:
Accounts receivables...................................... (138,036) (29,398) 42,144
Costs billable to clients................................. (12,900) 5,418 15,834
Other receivables......................................... (2,885) (2,346) 13,930
Prepaid expenses and other assets......................... 13,083 (6,702) 269
Accounts payable.......................................... 232,277 72,216 109,205
Accrued expenses and other current liabilities............ (9,590) (29,374) (15,368)
Accrued payroll and bonuses............................... (1,900) 8,869 2,179
Advance billings.......................................... 10,139 15,074 (39,881)
Accrued taxes on income................................... 4,246 (10,652) 19,352
Deferred compensation..................................... 926 3,234 13,052
Other..................................................... 1,346 (4,033) 14,791
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 326,928 $ 195,615 $ 224,511
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, leasehold improvements and
equipment............................................... $ (86,174) $ (76,378) $ (51,899)
Acquisitions, net of cash acquired........................ (154,715) (17,423) (11,281)
Investments in equity securities.......................... (61,364) (7,072) (5,640)
Proceeds from investing activities........................ 978 1,190 1,678
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... $(301,275) $ (99,683) $ (67,142)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.............................. $ 107,590 $ 225,834 $ 226,770
Repayments of long-term debt.............................. (10,421) (524,883) (105,870)
Net proceeds from short-term debt......................... 30,318 71,997 20,103
Net proceeds from issuance of common stock in initial
public offering......................................... -- 158,637 --
Common stock issued....................................... 35,940 7,995 10,390
Purchase of treasury shares............................... (146,028) (60,956) (1,500)
Dividends paid............................................ (5,277) -- --
Payment of deferred compensation.......................... (1,356) (3,535) (1,118)
Recapitalisation payments................................. -- -- (247,789)
Net payment of installment notes.......................... (399) (8,883) --
Other financing activities................................ (1,802) (2,448) 347
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... $ 8,565 $(136,242) $ (98,667)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (11,839) 2,185 (8,619)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 22,379 (38,125) 50,083
Cash and cash equivalents, beginning of period.............. 122,138 160,263 110,180
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 144,517 $ 122,138 $ 160,263
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 24,108 $ 29,439 $ 39,986
========= ========= =========
Income taxes paid......................................... $ 29,655 $ 36,288 $ 25,020
========= ========= =========
NON-CASH INVESTING ACTIVITY:
Common stock issued in acquisitions....................... $ 85,584 $ -- $ 1,126
========= ========= =========
</TABLE>
75
<PAGE>
3.5 Notes to the Y&R historical financial information
1--DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Young & Rubicam is a global marketing communications company which
offers clients integrated services in the creation and production of
advertising, strategic media planning and buying, direct marketing and customer
relationship management, perception management and public relations, branding
consultancy and design services, and healthcare communications. Young & Rubicam
operates through wholly owned subsidiaries, joint ventures and non-equity
affiliations worldwide. Operations cover the major geographic regions of North
America, Europe, Latin America, the Far East, Australia, New Zealand, the Middle
East and Africa.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Young & Rubicam and its majority owned subsidiaries. The
equity in net income attributable to minority share owner interests are shown
separately in the consolidated balance sheets and consolidated statements of
operations. Investments in entities owned 20% or more but less than majority
owned and not otherwise controlled by Young & Rubicam are accounted for under
the equity method. All significant intercompany transactions are eliminated.
CASH EQUIVALENTS: Young & Rubicam considers all highly liquid instruments with
an initial maturity of three months or less to be cash equivalents at the time
of purchase. Young & Rubicam records book overdrafts in accounts payable.
Accounts payable included $88.6 million and $51.8 million of book overdrafts as
of 31 December 1999 and 1998, respectively.
REVENUE RECOGNITION: Substantially all revenues are derived from commissions
for placement of advertisements in various media and from fees for manpower and
for production of advertisements and other marketing and communications
services. Commission revenue is recognised when media is placed and when labor
and production costs are billed. Fee revenue is recognised when services are
rendered.
COSTS BILLABLE TO CLIENTS: Costs billable to clients consist principally of
costs incurred in providing communication services to clients. Such amounts are
generally billed to clients when manpower is used, when costs are incurred for
production and when print production is completed.
DEPRECIATION AND AMORTISATION: Depreciation charges are computed using the
straight-line method over the estimated useful life of the respective asset up
to 25 years. Leasehold improvements are amortised on a straight-line basis over
the lesser of the term of the related lease or the estimated useful life of
these assets.
INTANGIBLES: Intangibles, including goodwill, are carried at cost less
accumulated amortisation which is being provided on a straight line basis over
the economic lives of the respective assets with a maximum life of 40 years.
Each year, the intangibles are written down if, and to the extent they are
determined to be impaired. Intangibles are determined to be impaired if the
future anticipated undiscounted cash flows arising from the use of the
intangibles is less than the net unamortised cost of the intangibles.
INCOME TAXES: In accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax basis of assets and liabilities and are measured by applying enacted
tax rates and laws to taxable years in which such differences are expected to
reverse. Young & Rubicam's practice is to provide currently for taxes that will
be payable upon remittance of foreign earnings of subsidiaries and affiliates to
the extent that such earnings are not considered to be reinvested indefinitely.
STOCK-BASED COMPENSATION: SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to account for employee stock options or
similar equity instruments using a fair value approach. However, it also allows
an entity to continue to measure compensation costs using the method prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Young & Rubicam has elected to continue to account for
such plans under the provisions of APB Opinion No. 25 and has included, in
Note 15, the required SFAS No. 123 pro forma
76
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
1--DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
disclosures of net income (loss) and earnings (loss) per share as if the fair
value-based method of accounting had been applied.
TREASURY STOCK: Young & Rubicam accounts for treasury share purchases at cost.
The reissuance of treasury shares is accounted for at the average cost. Gains or
losses on the reissuance of treasury shares are accounted for as capital
surplus.
FOREIGN CURRENCY TRANSLATION: Young & Rubicam's financial statements were
prepared in accordance with the requirements of SFAS No. 52, "Foreign Currency
Translation." Under this method, net foreign currency transaction gains of
$0.5 million and net losses of $1.3 million were recorded in 1999 and 1997,
respectively. Net losses in 1998 were immaterial.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments are used by
Young & Rubicam principally in the management of its interest rate and foreign
currency exposures. Young & Rubicam does not hold or issue derivative financial
instruments for trading purposes. Gains and losses on hedges of existing assets
and liabilities are included in the carrying amounts of those assets and
liabilities and are ultimately recognised in income as part of those carrying
amounts. Gains and losses related to hedges of firm commitments are also
deferred and included in the basis of the transaction when it is completed.
INVESTMENTS IN EQUITY SECURITIES: Young & Rubicam accounts for its investments
in publicly traded equity securities under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with SFAS No. 115,
unrealised gains on securities owned by Young & Rubicam, which are classified as
available-for-sale securities, are carried net of tax as a separate component of
stockholders' equity under the consolidated balance sheet caption "Unrealised
appreciation in equity securities." Unrealised appreciation in equity securities
included in stockholder's equity at 31 December 1999, was $145.0 million, net of
$92.7 million of related income taxes. Investments which are not publicly traded
are accounted for at cost.
CONCENTRATIONS OF CREDIT RISK: Young & Rubicam's clients are engaged in various
businesses located primarily in North America, Europe, Latin America and the
Asia/Pacific region. Young & Rubicam performs ongoing credit evaluations of its
clients. Allowances for credit losses are maintained at levels considered
adequate by management. Young & Rubicam invests its excess cash in deposits with
major banks and in money market securities. These securities typically mature
within 90 days and are highly rated instruments. Young & Rubicam's top 10
clients accounted for approximately 37%, 36% and 31% of consolidated revenues in
1999, 1998 and 1997, respectively. Young & Rubicam's largest client accounted
for approximately 13%, 10% and 10% of consolidated revenues for the years ended
31 December 1999, 1998 and 1997, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, the FASB issued Statement
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133", which delays implementation of
SFAS No. 133 until fiscal years beginning after 15 June 2000. We do not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
our financial condition.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years'
financial statements to conform to the 1999 presentation.
77
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
2--EARNINGS PER SHARE
Basic earnings (loss) per share are calculated by dividing net income (loss) by
the weighted average shares of common stock outstanding during the years ended
31 December 1999, 1998 and 1997. Diluted earnings per share reflect the dilutive
effect of stock options, primarily stock options granted to employees under
stock-based compensation plans, and other dilutive securities.
Shares used in computing basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic--weighted average shares......................... 68,688,848 60,673,994 46,949,355
Effect of dilutive securities.......................... 14,182,877 -- --
---------- ---------- ----------
Diluted--weighted average shares....................... 82,871,725 60,673,994 46,949,355
========== ========== ==========
</TABLE>
In the years ended 31 December 1998 and 1997, basic and diluted weighted average
shares used in the calculation were the same since the inclusion of the effect
of stock options on loss per share would have been antidilutive.
In computing basic loss per share for the year ended 31 December 1997, Young &
Rubicam's 11.1 million shares of restricted stock were excluded from the
weighted average number of common shares outstanding. Such shares vested upon
the consummation of Young & Rubicam's initial public offering on 15 May 1998, a
condition which was not satisfied at 31 December 1997 (see note 3).
3--INITIAL PUBLIC OFFERING
On 15 May 1998,Young & Rubicam closed an initial public offering of its common
stock (the "Offering"). An aggregate of 19,090,000 shares of Young & Rubicam's
common stock was offered to the public, of which 6,912,730 shares were sold by
Young & Rubicam and 12,177,270 shares were sold by certain selling share owners.
Young & Rubicam used the net proceeds of $158.6 million, together with
$155 million of borrowings under a new credit facility to repay all of the
outstanding borrowings under its then existing $700 million senior secured
credit facility.
The completion of the Offering gave rise to non-recurring, non-cash, pre-tax
compensation charges of $234.4 million, or $169.8 million net of the related tax
benefit, from the vesting of an aggregate of 9,231,105 shares of restricted
stock allocated to employees as of the date of the completion of the Offering.
These charges have been reflected as other operating charges in Young &
Rubicam's consolidated statement of operations for the year ended 31 December
1998. Young & Rubicam redeemed the remaining 1,855,845 shares of restricted
stock held in the restricted stock trust upon the consummation of the Offering.
4--COMMON STOCK DIVIDEND
On 6 April 1998, the Board of Directors declared a stock dividend of 14 shares
of common stock payable for each share of common stock outstanding, which became
effective and was paid on 11 May 1998. Young & Rubicam's historical financial
statements have been presented to give retroactive effect to this stock
dividend.
78
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
5--EQUITY IN NET ASSETS OF UNCONSOLIDATED AFFILIATES
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY
OWNERSHIP IN NET IN NET IN NET IN NET IN NET IN NET
AFFILIATE INTEREST ASSETS INCOME ASSETS INCOME ASSETS INCOME
--------- ----------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Dentsu, Y&R Partnerships..... 15%-50% $20,816 $ 2,354 $27,790 $ 2,389 $17,510 $ 2,587
Eco S.A...................... 40% 2,249 231 2,085 (75) 2,206 96
Cresswell, Munsell, Fultz &
Zirbel..................... 33% 2,210 151 2,183 500 1,922 508
Team Holdings................ 25% 4,078 -- -- -- -- --
National Public Relations.... 22% 749 167 527 (19) 647 98
Other........................ 50% or less 5,899 1,606 5,812 1,912 4,108 (2,947)
------- ------- ------- ------- ------- -------
$36,001 $ 4,509 $38,397 $ 4,707 $26,393 $ 342
======= ======= ======= ======= ======= =======
</TABLE>
Effective 2 August 1999, the ownership and management structure of Dentsu,
Young & Rubicam ("DY&R") was amended. The agreement resulted in Young & Rubicam
acquiring majority ownership in and operational control of all DY&R companies
throughout principal markets in Asia, with the exception of Japan. In Japan,
Dentsu has acquired a majority share. Effective August 2, 1999, Young & Rubicam
commenced consolidating the results of DY&R for those markets where it holds a
majority ownership interest. For periods prior to 2 August 1999, the financial
information reflects the DY&R partnerships in which Young & Rubicam held a
minority equity ownership interest.
The summarised unaudited financial information below represents an aggregation
of Young & Rubicam's unconsolidated affiliates.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
EARNINGS DATA
Revenues.................................................. $241,183 $218,973 $207,668
Operating profit.......................................... 27,557 22,320 13,768
Net income................................................ 15,189 15,424 4,347
BALANCE SHEET DATA
Current assets............................................ $276,183 $317,916 $321,372
Noncurrent assets......................................... 52,658 60,624 40,147
Current liabilities....................................... 234,441 266,090 287,101
Noncurrent liabilities.................................... 22,308 17,023 13,215
Equity.................................................... 72,092 95,427 61,203
</TABLE>
6--INVESTMENTS IN EQUITY SECURITIES
On 21 September 1999, Young & Rubicam contributed $15 million and certain net
assets of its Brand Dialogue operations (the "Brand Dialogue Contributed
Assets") in exchange for an ownership interest in Luminant Worldwide Corporation
("Luminant"), an internet and e-commerce services firm that provides strategic
consulting, content development and systems integration capabilities to its
clients. Young & Rubicam recognised a net after-tax gain of approximately
$42 million on the sale of the Brand Dialogue Contributed Assets in the third
quarter of 1999. Young & Rubicam accounts for its investment in Luminant equity
securities at fair value under SFAS No. 115. Since September 1999, the value of
these equity securities has appreciated significantly. However, the value of the
equity securities may fluctuate based on the volatility of Luminant's stock
price and other general market conditions. We have classified the Luminant
securities as available-for-sale securities. At 31 December 1999, the cost basis
of these securities was $91.5 million. The securities are carried at their fair
value of $306.5 million and are included in other investments on the balance
sheet. The difference between cost and fair value of $215.0 million is carried
net of $83.9 million of related income taxes as a separate component of
79
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
6--INVESTMENTS IN EQUITY SECURITIES (CONTINUED)
stockholders' equity under the consolidated balance sheet caption "Unrealised
appreciation in equity securities." Under the terms of the contribution
agreement between Luminant and Young & Rubicam, Young & Rubicam recorded a net
after-tax gain of approximately $9 million in the fourth quarter of 1999
reflecting the realisation of contingent consideration as a result of achieving
certain revenue and operating profit performance targets of the Brand Dialogue
Contributed Assets, and is eligible to receive, in 2000, future contingent
consideration from Luminant, in the form of cash and/or non-voting shares of
Luminant common stock, at Luminant discretion, based on the consolidated
performance of Luminant for the first six months of 2000.
During 1999, Young & Rubicam also made strategic investments in marketable
equity securities of certain other entities for an aggregate cost of
approximately $45 million and also received certain marketable equity securities
in exchange for services rendered. Young & Rubicam accounts for its investments
in equity securities with readily determinable fair values under SFAS No. 115.
At 31 December 1999, all equity securities covered by SFAS No. 115 were
designated as available-for-sale. Accordingly, these securities are stated at
fair value, with unrealised holding gains, net of taxes, reported in a separate
component of share owners' equity. Such equity securities at 31 December 1999,
excluding Luminant, had an aggregate cost basis of $14.7 million. These
securities are carried at their fair value of $37.3 million and are included in
investments in equity securities on the balance sheet. Differences between cost
and fair value of $22.6 million are carried net of $8.8 million of related
income tax as a separate component of stockholders' equity under the
consolidated balance sheet caption "Unrealised appreciation in equity
securities."
When readily determinable fair values are not available, marketable securities
are carried on the balance sheet at cost, except in cases where it is determined
that a decline in the estimated fair value of the investment is other than
temporary. At 31 December 1999, the carrying value of such cost investments was
$22.8 million, which includes our investment in DigitalConvergence.com Inc. of
approximately $20 million.
7--ACQUISITIONS
Effective 2 August 1999, the ownership and management structure of DY&R was
amended. The agreement resulted in Young & Rubicam acquiring majority ownership
in and operational control of all DY&R companies throughout principal markets in
Asia, with the exception of Japan, Philippines and India. In Japan, Philippines
and India Dentsu has acquired a majority share. Effective 2 August 1999, Young &
Rubicam commenced consolidating the results of DY&R for those markets where it
holds a majority ownership interest. Young & Rubicam paid approximately
$6 million for the incremental ownership interest and will pay $4 million in the
first quarter of 2001. This transaction has been accounted for under the
purchase method of accounting for business combinations. A preliminary
allocation of the cost to acquire the additional interest in DY&R has been made
based upon the fair value of DY&R's net assets.
On 21 May 1999, Young & Rubicam acquired KnowledgeBase Marketing Inc. (``KBM"),
a provider of database and analytical services, in a stock and cash transaction
valued at approximately $175 million. This transaction has been accounted for
under the purchase method of accounting for business combinations. A preliminary
allocation of the cost to acquire KBM has been made based upon the fair value of
KBM's net assets.
Also during 1999, Young & Rubicam acquired The Direct Impact Company, a company
specialising in grassroots issues management; Rainey, Kelly, Campbell, Roalfe, a
London-based advertising agency; a majority ownership interest in The Banner
Corporation, a European marketing and communications firm specialising in the
technology sector, and made several other acquisitions and equity investments
for which the aggregate purchase price was approximately $80 million. All of
these acquisitions were accounted for under the purchase method of accounting,
and a preliminary allocation of the costs to acquire these entities has been
made based on the fair value of the net assets.
During 1998 and 1997, Young & Rubicam acquired full or partial interests in
certain domestic and international entities and obtained additional interests in
certain partially owned entities for an aggregate purchase price of
$17.6 million and $14.7 million, respectively. In 1998, acquisitions included
Young &
80
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
7--ACQUISITIONS (CONTINUED)
Rubicam's purchase of a multi-cultural advertising agency and certain other
assets located in the United States. In 1997, Young & Rubicam acquired an
additional 37.5% equity interest in the DY&R companies in Australia and New
Zealand. In consideration for this additional equity interest, Young & Rubicam
contributed to Dentsu 12.5% of its equity interest in its advertising and direct
marketing agencies in Australia and New Zealand. All of these acquisitions were
accounted for under the purchase method of accounting. During 1997, Young &
Rubicam also recorded $11.9 million in other operating charges for certain asset
impairment writedowns.
Certain acquisitions completed in 1999 and prior years require payments in
future years if certain results are achieved by the companies that were
acquired. Formulas for these contingent future payments differ from acquisition
to acquisition. Contingent future payments are not expected to be material to
Young & Rubicam's results of operations or financial position.
8--PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment are recorded at cost and are
comprised of the following:
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
---------------------
USEFUL LIVES 1999 1998
---------------------------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and buildings................ 20-25 years $ 31,038 $ 29,706
Furniture, fixtures and 3-10 years
equipment....................... 303,853 252,673
Shorter of 10 years or life of
Leasehold improvements............ lease 104,235 93,797
Automobiles....................... 3-5 years 3,555 5,892
-------- --------
442,681 382,068
-------- --------
Less--Accumulated depreciation and
amortisation.................... 248,112 231,655
-------- --------
$194,569 $150,413
======== ========
</TABLE>
During 1999, 1998 and 1997, depreciation expense amounted to $53.6 million,
$49.2 million and $47.6 million, respectively.
9--INCOME TAXES
Income (loss) before income taxes consisted of the amounts shown below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.................................................... $191,920 $(127,325) $12,304
Foreign..................................................... 86,300 40,328 24,000
-------- --------- -------
Total....................................................... $278,220 $ (86,997) $36,304
======== ========= =======
</TABLE>
81
<PAGE>
3.5 Notes to the Y&R historical financial information (continued)
9--INCOME TAXES (CONTINUED)
The following summarises the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal................................................... $ 3,365 $ 3,938 $18,195
State and local........................................... 1,110 3,512 4,220
Foreign................................................... 33,472 28,570 36,259
-------- -------- -------
37,947 36,020 58,674
-------- -------- -------
DEFERRED:
Federal................................................... 67,707 (28,126) 7,547
State and local........................................... 5,551 (6,415) 2,472
Foreign................................................... 83 (4,123) (10,403)
-------- -------- -------
73,341 (38,664) (384)
-------- -------- -------
Total..................................................... $111,288 $ (2,644) $58,290
======== ======== =======
</TABLE>
Young & Rubicam's effective income tax rate varied from the statutory federal
income tax rate as a result of the following factors:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% (35.0)% 35.0%
Effect of Y&R's initial public offering..................... -- 32.1 --
State and local income taxes, net of federal tax effect..... 2.4 (6.3) 17.1
Foreign subsidiaries' tax rate differential................. 1.9 7.2 107.2
Nondeductible goodwill amortisation......................... 0.8 0.7 8.5
Other, net.................................................. (0.1) (1.7) (7.2)
---- ----- -----
Consolidated effective tax rate............................. 40.0% (3.0)% 160.6%
==== ===== =====
</TABLE>
Young & Rubicam's share of the undistributed earnings of foreign subsidiaries
not included in its consolidated Federal income tax return that could be subject
to additional income taxes if remitted was approximately $102.9 million and
$59.1 million at 31 December 1999 and 1998, respectively. No provision has been
recorded for the United States in respect of foreign taxes that could result
from the remittance of such undistributed earnings since the earnings are
permanently reinvested outside the United States and it is not practicable to
estimate the amount of such taxes. Withholding taxes of approximately
$5.1 million and $8.1 million would be payable upon remittance of all previously
unremitted earnings at 31 December 1999 and 1998, respectively.
82
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
9--INCOME TAXES (CONTINUED)
The components of Young & Rubicam's net deferred income tax assets are:
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Allowance for doubtful accounts............................. $ 4,633 $ 4,274
Net operating loss carryforwards............................ 54,624 45,126
Deferred compensation....................................... 2,424 2,424
--------- --------
61,681 51,824
Valuation allowance......................................... (11,379) (5,021)
--------- --------
Current portion............................................. 50,302 46,803
--------- --------
Investments in equity securities............................ (116,260) --
Deferred compensation....................................... 47,721 53,501
Depreciable and amortisable assets.......................... 23,461 30,417
Long-term leases............................................ 7,154 7,377
Other noncurrent items...................................... 20,900 15,235
Net operating loss carryforwards............................ 57,526 65,300
Tax credit carryforwards.................................... 3,658 3,658
--------- --------
44,160 175,488
Valuation allowance......................................... (9,285) (16,978)
--------- --------
Noncurrent portion.......................................... 34,875 158,510
--------- --------
Net deferred income tax assets.............................. $ 85,177 $205,313
========= ========
</TABLE>
Young & Rubicam's net deferred income tax assets arise from temporary
differences which represent the cumulative deductible or taxable amounts
recorded in the financial statements in different years than recognised in the
tax returns. The majority of the temporary differences result from expenses
accrued for financial reporting purposes which are not deductible for tax
purposes until actually paid and net operating losses.
The net operating loss (``NOL") carryforwards represent the benefit recorded for
federal, state and local, and foreign NOLs. At 31 December 1999 and 1998, Young
& Rubicam had approximately $251.3 million and $258.3 million, respectively, of
NOL carryforwards for US tax purposes which expire in the year 2018 and
approximately $111.9 million and $91.4 million, respectively, of NOL
carryforwards for foreign tax purposes with carryforward periods ranging from
one year to an indefinite time. At 31 December 1999 and 1998, Young & Rubicam
had approximately $3.4 million and $3.2 million, respectively, of alternative
minimum tax credits which are not subject to expiration and $0.4 million of
foreign tax credits which expire in the year 2001.
Furthermore, Young & Rubicam, under its stock option plans, has a significant
number of non-qualified stock options issued to employees that remain
outstanding at 31 December 1999. These options, if exercised, would create
additional tax deductions that would further reduce Young & Rubicam's domestic
and international taxable income. The tax deduction has no impact on Young &
Rubicam's consolidated results of operations in accordance with APB Opinion
No. 25, except for payroll taxes imposed by certain taxing jurisdictions upon
exercise. It is impractical to quantify the future deduction as it is dependent
upon, among other factors, the fair market value of Young & Rubicam stock at the
time of exercise.
Young & Rubicam is required to provide a valuation allowance against deferred
income tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realised. Valuation allowances of $20.7 million
and $22.0 million were recorded at 31 December 1999 and 1998, respectively. The
valuation allowances represent a provision for uncertainty as to the realisation
of certain deferred tax assets, including NOL carryforwards in certain
jurisdictions. Young & Rubicam has concluded that based upon expected future
results, it is more likely than not that the net deferred tax asset balance will
be realised.
83
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
10--WORLDWIDE OPERATIONS
Young & Rubicam's wholly owned and partially owned businesses and affiliates
operate in the global marketing and communications operating segment. These
businesses provide marketing and communications services to clients on an
integrated basis, where appropriate, through several worldwide, regional and
national networks and brands. Young & Rubicam's financial information by
geographic area for the years ended 31 December 1999, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
UNITED STATES EUROPE OTHER TOTAL
------------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999
Revenues..................................... $ 899,750 $582,267 $235,169 $1,717,186
Total assets................................. 1,393,600 638,649 382,032 2,414,281
1998
Revenues..................................... $ 775,700 $532,404 $214,360 $1,522,464
Total assets................................. 844,070 589,128 201,921 1,635,119
1997
Revenues..................................... $ 661,367 $472,225 $249,148 $1,382,740
Total assets................................. 697,250 582,424 258,133 1,537,807
</TABLE>
11--EMPLOYEE BENEFITS
Young & Rubicam provides retirement benefits for their US full-time employees
primarily through a defined benefit pension plan ("the Plan"). Contributions to
the Plan are based upon current costs and prior service costs which are
actuarially computed, with the latter being amortised over the average remaining
service period.
During 1999, there were no contributions made to the Plan. Total contributions
to the Plan made in 1998 were $10.0 million. Pursuant to an agreement with the
Pension Benefit Guaranty Corporation, Young & Rubicam has also agreed to make
contributions to the Plan in an amount required to cause the credit balance at
the end of each Plan year to be at least equal to $12.5 million plus interest.
Young & Rubicam is not required to make any payment that would not be deductible
under Internal Revenue Code section 404. Young & Rubicam's credit balance
maintenance requirement terminates when Young & Rubicam's indebtedness obtains
specified rating levels (or, if there are no such ratings from certain major
ratings agencies, when Young & Rubicam meets a fixed charge coverage ratio
test), but in no event earlier than 31 December 2001. In addition, such credit
balance maintenance requirements terminate if the Plan's unfunded benefit
liabilities are zero at the end of two consecutive Plan years.
Y&R also contributes to government mandated plans and maintains various
noncontributory retirement plans at certain foreign subsidiaries, some of which
are considered to be defined benefit plans for accounting purposes. Plans are
funded in accordance with the laws of the countries where the plans are in
effect and, in accordance with such local statutory requirements, may have no
plan assets.
A summary of the components of net periodic pension cost for the defined benefit
plans are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- ------------------------------ ------------------------------
US NON-US TOTAL US NON-US TOTAL US NON-US TOTAL
-------- --------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service costs for benefits
earned during the period.... $ 4,265 $ 229 $ 4,494 $ 3,801 $254 $ 4,055 $ 2,671 $ 306 $ 2,977
Interest costs on projected
benefit obligation.......... 9,151 677 9,828 9,151 598 9,749 8,804 639 9,443
Expected return on plan
assets...................... (11,125) -- (11,125) (10,263) -- (10,263) (9,281) -- (9,281)
Amortisation of prior service
costs....................... (411) -- (411) (411) -- (411) (411) -- (411)
Amortisation of transitional
(asset)/ obligation......... (61) 117 56 (61) 112 51 (61) 114 53
Recognised actuarial
loss/(income)............... 2,150 28 2,178 1,910 (8) 1,902 1,057 2 1,059
-------- ------ -------- -------- ---- -------- ------- ------ -------
Net periodic pension cost of
the plans................... $ 3,969 $1,051 $ 5,020 $ 4,127 $956 $ 5,083 $ 2,779 $1,061 $ 3,840
======== ====== ======== ======== ==== ======== ======= ====== =======
</TABLE>
84
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
11--EMPLOYEE BENEFITS (CONTINUED)
Changes in the benefit obligation and plan assets are as follows:
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
US NON-US TOTAL US NON-US TOTAL
--------- -------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year............................... $138,416 $11,526 $149,942 $130,036 $ 9,080 $139,116
Service costs........................ 4,265 229 4,494 3,801 254 4,055
Interest costs....................... 9,151 677 9,828 9,151 598 9,749
Foreign currency exchange rate
(gain)/ loss....................... -- (1,595) (1,595) -- 796 796
Actuarial (gain)/loss................ (12,399) (352) (12,751) 6,958 984 7,942
Benefits paid........................ (11,709) (211) (11,920) (11,530) (186) (11,716)
-------- ------- -------- -------- -------- --------
Benefit obligation at end of year.... 127,724 10,274 137,998 138,416 11,526 149,942
-------- ------- -------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year, primarily fixed
income and equity securities....... 139,200 -- 139,200 129,421 -- 129,421
Actual return on plan assets......... 18,861 -- 18,861 11,309 -- 11,309
Company contributions................ -- 211 211 10,000 186 10,186
Benefits paid........................ (11,709) (211) (11,920) (11,530) (186) (11,716)
-------- ------- -------- -------- -------- --------
Fair value of plan assets at end of
year............................... 146,352 -- 146,352 139,200 -- 139,200
-------- ------- -------- -------- -------- --------
Funded status........................ 18,628 (10,274) 8,354 784 (11,526) (10,742)
Unrecognised net transition (asset)/
obligation......................... (42) 401 359 (103) 581 478
Unrecognised prior service benefit... (1,720) -- (1,720) (2,131) -- (2,131)
Unrecognised net (gain)/loss......... (1,931) 741 (1,190) 20,354 1,242 21,596
Additional liability................. -- (817) (817) -- (1,210) (1,210)
-------- ------- -------- -------- -------- --------
Prepaid (accrued) pension costs for
defined benefit plans.............. $ 14,935 $(9,949) $ 4,986 $ 18,904 $(10,913) $ 7,991
======== ======= ======== ======== ======== ========
</TABLE>
Assumptions used were:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ---------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF 31 DECEMBER US NON-US US NON-US US NON-US
---------------------------------------------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Discount and settlement rate..................... 8.3% 6.0% 7.0% 6.0% 7.25% 6.5%-7.0%
Rate of increase in compensation levels.......... 7.6% 2.5% 5.0% 2.5% 5.0% 3.0%
Expected long-term rate of return on assets...... 9.0% N/A 9.0% N/A 9.0% N/A
</TABLE>
Young & Rubicam recorded liabilities of $0.8 million and $1.2 million at
31 December 1999 and 1998, respectively, for the portion of its unfunded pension
liabilities that had not been recognised as expense with corresponding
adjustments to equity.
Contributions to foreign defined contribution plans were $9.9 million,
$9.0 million and $8.4 million in 1999, 1998 and 1997, respectively.
Young & Rubicam also has an employee savings plan that qualifies as a deferred
salary arrangement under section 401(k) of the Internal Revenue Code. Under the
plan, participating US employees may defer a portion of their pre-tax earnings
up to the Internal Revenue Service annual contribution limit. Young & Rubicam
currently matches 100% of each employee's contribution up to a maximum of 5% of
the employee's earnings up to $160,000. Amounts expensed by Young & Rubicam for
its contributions to the plan were $9.1 million, $8.4 million and $7.8 million
in 1999, 1998 and 1997, respectively.
At 31 December 1999 and 1998, other noncurrent liabilities include
$10.2 million and $8.6 million, respectively, relating to postretirement and
postemployment benefits other than pensions.
85
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
11--EMPLOYEE BENEFITS (CONTINUED)
Young & Rubicam maintains certain deferred cash incentive plans which are either
tied to operating performance or contractual deferred compensation agreements.
The costs of these compensation plans were expensed over the applicable service
period. At 31 December 1999 and 1998, Young & Rubicam recorded deferred
compensation liabilities of $31.3 million and $30.6 million, respectively.
12--DEBT
Young & Rubicam's short-term debt consists principally of advances under bank
lines of credit and generally bears interest at prevailing market rates.
Young & Rubicam's short-term debt of $31.7 million and $32.0 million include
short-term portions of long-term debt of $2.0 million and $0.5 million at
31 December 1999 and 1998, respectively.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
--------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Unsecured revolving credit facilities....................... $123,500 $31,460
Capital lease obligations................................... 2,197 34
Other borrowings............................................ 3,821 862
-------- -------
129,518 32,356
Less--Current portion....................................... 1,950 462
-------- -------
$127,568 $31,894
======== =======
</TABLE>
On 30 June 1999, Young & Rubicam increased its borrowing capacity by entering
into a $200 million 364-day unsecured revolving credit facility. On 15 May 1998,
Young & Rubicam entered into a $400 million, five-year unsecured multicurrency
revolving credit facility and used the net proceeds from the Offering together
with $155 million of borrowings under this credit facility to repay all
outstanding borrowings outstanding under its then existing $700 million senior
secured credit facility. Approximately $7.3 million of unamortised deferred
financing costs related to the replaced credit facility were charged to expense
and have been reflected as an extraordinary charge, net of an applicable tax
benefit of approximately $2.8 million, in Young & Rubicam's consolidated
statement of operations for the year ended 31 December 1998. Amounts due under
the credit facility are required to be repaid on 15 May 2003. Young & Rubicam is
required to pay varying rates of interest on outstanding borrowings, generally
based on LIBOR plus an applicable margin ranging from 0.275% to 0.70%, depending
on the leverage ratio, or the Federal Funds Rate plus 0.5%. Young & Rubicam is
also required to pay a facility fee ranging from 0.10% to 0.20% and, if the
outstanding advances exceed 50% of the aggregate facility, a utilisation fee
will be charged ranging from 0.075% to 0.125%. In 1999 and 1998, the total
facility fees under the credit facilities were $0.6 million and $0.4 million,
respectively. Our credit facilities contain financial and operating restrictions
and covenant requirements, including maximum leverage ratio and minimum interest
coverage requirements, and permit the payment of cash dividends except in the
event of a continuing default under the credit agreements.
At 31 December 1999, the current portion of long-term debt includes installment
notes payable to management investors of $0.7 million. At 31 December 1998,
short-term and long-term debt includes installment notes payable to management
investors of $0.7 million and $0.4 million, respectively.
The weighted-average interest rate on outstanding debt was 5.71% for the year
ended 31 December 1999. The weighted-average interest rate on outstanding debt,
including the effect of interest rate swap contracts, was 6.27% for the year
ended 31 December 1998. At 31 December 1998, Young & Rubicam had interest rate
protection agreements with respect to $31.5 million of its indebtedness. During
the first quarter of 1999, all interest rate protection agreements to which we
were party either matured or were retired. Accordingly, at 31 December 1999, we
had no such agreements outstanding.
At 31 December 1999 and 1998, Young & Rubicam had $760 million and
$543 million, respectively, in availability under its commercial lines of credit
($635 million and $435 million, respectively, in the United States and
$125 million and $108 million, respectively, outside the United States). Unused
commercial lines of credit at 31 December 1999 and 1998 were $600 million and
$480 million, respectively. Young &
86
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
12--DEBT (CONTINUED)
Rubicam has no obligation to pay commitment fees on our current credit
facilities. During 1998, Young & Rubicam paid commitment fees of approximately
$0.1 million on the unused portion of the replaced credit facility.
13--FAIR VALUE OF FINANCIAL INSTRUMENTS AND HEDGING ACTIVITY
At 31 December 1999 and 1998, the carrying value of Young & Rubicam's financial
instruments approximated fair value in all material respects.
At 31 December 1999, Young & Rubicam had $159.3 million in outstanding
indebtedness as compared to $63.9 million at 31 December 1998, consisting
primarily of floating rate debt. For floating rate debt, interest rate changes
generally do not affect the fair market value but do impact future earnings and
cash flows, assuming other factors are held constant. Based on outstanding
indebtedness as of 31 December 1999 the annual after-tax earnings impact
resulting from a one-percentage point increase or decrease in interest rates
would be approximately $1.0 million, holding other variables constant.
Young & Rubicam enters into forward foreign exchange contracts to hedge certain
assets and liabilities which are recorded in a currency different from that in
which they settle. The purpose of these contracts is almost exclusively to hedge
intercompany transactions. Gains and losses on these contracts generally offset
losses and gains on the related foreign currency denominated intercompany
transactions. The gains and losses on these positions are deferred and included
in the basis of the transaction upon settlement. The terms of these contracts
are generally a one-month maturity. At 31 December 1999, Young & Rubicam had
contracts for the sale of $26.1 million and the purchase of $11.9 million of
foreign currencies at fixed rates, compared to contracts for the sale of
$19.4 million and the purchase of $6.1 million of foreign currencies at fixed
rates at 31 December 1998.
At 31 December 1998, Young & Rubicam had entered into interest rate protection
agreements with respect to $31.5 million of its indebtedness. The fair value
approximated the notional amount at 31 December 1998. During the first quarter
of 1999, all interest rate protection agreements to which we were party either
matured or were retired. Accordingly, at 31 December 1999, we had no such
agreements outstanding.
Management believes that any losses resulting from market risk would not have a
material adverse impact on the consolidated financial position, results of
operations or cash flows of Young & Rubicam.
87
<PAGE>
3.5 Notes to the Y&R historical financial information (continued)
14--EQUITY
The following schedule summarises the changes in the number of outstanding
shares of common stock and treasury stock:
<TABLE>
<CAPTION>
COMMON COMMON STOCK
STOCK IN TREASURY
---------- ------------
<S> <C> <C>
BALANCE 1 JANUARY 1997...................................... 58,469,280 --
---------- ----------
Issued...................................................... 4,391,010 --
Repurchased................................................. (1,115,160) 1,115,160
---------- ----------
BALANCE 31 DECEMBER 1997.................................... 61,745,130 1,115,160
---------- ----------
Issued--Offering............................................ 6,912,730 --
Issued--Option Exercises.................................... 2,178,436 (1,599,946)
Restricted Stock Redeemed................................... (1,855,845) 1,855,845
Repurchased................................................. (2,605,882) 2,605,882
---------- ----------
BALANCE 31 DECEMBER 1998.................................... 66,374,569 3,976,941
---------- ----------
Issued--Option Exercises.................................... 7,927,665 (5,326,700)
Issued--Acquisitions........................................ 2,149,951 (2,149,951)
Repurchased................................................. (3,502,181) 3,502,181
---------- ----------
BALANCE 31 DECEMBER 1999.................................... 72,950,004 2,471
========== ==========
</TABLE>
In 1997, payments of $247.8 million were made to US-based equity holders for
options and other equity holdings tendered in connection with Young & Rubicam's
recapitalisation in 1996 (the "Recapitalisation").
In connection with the consummation of the Recapitalisation, Young & Rubicam
created a class of preferred stock designated as Money Market Preferred Stock
(the "Money Market Preferred"). The Money Market Preferred carries a variable
rate dividend and is redeemable at Young & Rubicam's election for $115.00 per
share following the fifth anniversary of the issuance thereof. At 31 December
1999 and 1998, 50,000 shares of Money Market Preferred were authorised and 87
shares were issued and outstanding.
15--OPTIONS
The Young & Rubicam Inc. 1997 Incentive Compensation Plan (the "ICP") provides
for grants of stock options, stock appreciation rights ("SARS"), restricted
stock, deferred stock, other stock-related awards, and performance or annual
incentive awards that may be settled in cash, stock or other property
("Awards"). Under the ICP, the total number of shares of Y&R common stock
reserved and available for delivery to participants in connection with Awards is
19,125,000, plus the number of shares of Y&R common stock subject to awards
under pre-existing plans that become available (generally due to cancellation or
forfeiture) after the effective date of the ICP; provided, however, that the
total number of shares of Y&R common stock with respect to which incentive stock
options may be granted shall not exceed 1,000,000. Any shares of Y&R Common
Stock delivered under the ICP may consist of authorised and unissued shares or
treasury shares.
The Board of Directors is authorised to grant stock options, including incentive
stock options, non-qualified stock options, and SARS entitling the participant
to receive the excess of the fair market value of a share of common stock on the
date of exercise over the grant price of the SAR. The exercise price per share
subject to an option and the grant price of a SAR is determined by the Board of
Directors, but must not be less than the fair market value of a share of common
stock on the date of grant. The maximum term of each option or SAR, the times at
which each option or SAR will be exercisable, and provisions requiring
forfeiture of unexercised options or SARS at or following termination of
employment generally is fixed by the Board of Directors, except no option or SAR
may have a term exceeding ten years.
Generally, options granted prior to 1999 under the ICP become exercisable over a
three-year vesting period beginning on the third anniversary of the date of
grant and expire ten years from the date of grant.
88
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
15--OPTIONS (CONTINUED)
The three-year vesting period for options granted in 1999 generally begins on
the first anniversary of the date of grant. However, the Board of Directors may,
at its discretion, accelerate the exercisability, the lapsing of restrictions,
or the expiration of deferral or vesting periods of any award, and such
accelerated exercisability, lapse, expiration and vesting shall occur
automatically in the case of a "change in control" of Young & Rubicam except to
the extent otherwise provided in the award agreement. In addition, the Board of
Directors may provide that the performance goals relating to any
performance-based awards will be deemed to have been met upon the occurrence of
any change in control.
At the closing of the Recapitalisation in 1996, the Board of Directors granted
the Rollover Options, which were immediately vested and exercisable. Each
Rollover Option has an exercise price of $1.92 per share, with certain limited
exceptions outside the United States. Of the Rollover Options, 50% have a term
of five years and the remaining 50% have a term of seven years.
At the closing of the Recapitalisation, the Board of Directors also granted to
employees options to purchase 5,200,590 shares of Y&R common stock at $7.67 per
share and, in 1997, additional options to purchase 1,891,200 shares of Y&R
common stock at $7.67 per share (the "Additional Options"). As a result of the
granting of the Additional Options in 1997, Young & Rubicam recognised a
compensation charge of $1.3 million reflecting the difference between the
estimated fair market value of Y&R Common Stock on the date of grant and the
exercise price of the Additional Options. All options granted to employees in
connection with the Recapitalisation were pursuant to and are governed by the
stock option plan in existence prior to the effective date of the ICP.
Additionally, at the closing of the Recapitalisation, Y&R granted to Hellman &
Friedman Capital Partners III, L.P. (``HFCP") and certain other investors
options to purchase 2,598,105 shares of Y&R common stock at $7.67 per share
which were exercisable immediately and expire on the seventh anniversary of the
closing. Substantially all of the HFCP options were exercised in 1999.
Young & Rubicam has adopted SFAS No. 123 (see Note 1). In accordance with the
provisions of SFAS No. 123, Young & Rubicam applies APB Opinion No. 25, and
related interpretations, in accounting for its plans. If Young & Rubicam had
elected to recognise compensation expense based upon the fair value at the grant
date for awards under its plans consistent with the methodology prescribed by
SFAS No. 123, Young & Rubicam's net income in 1999 would be decreased by
$8.3 million and the net income per common share would be decreased by $0.12 and
$0.10, for basic and diluted earnings per share, respectively. Y&R's net loss
would be increased by $7.8 million and $6.3 million for the years ended
31 December 1998 and 1997, respectively, and the net basic and diluted loss per
common share would be increased by $0.13 for each of the years ended
31 December 1998 and 1997.
These SFAS No. 123 pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortised to
expense over the vesting period, and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
period ended 31 December 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Expected term............................ 4 years 6 years 10 years
Risk-free rate........................... 5.22%-6.23% 4.26%-5.84% 5.59%-7.12%
Dividend yield........................... 0.26% 0% 0%
Expected volatility...................... 28.60% 24.90% 0%
</TABLE>
Since Y&R's common stock was publicly traded for the first time in 1998 as a
result of the offering, we did not have sufficient historical information to
make a reasonable assumption as to the expected volatility of our common stock
price in the future. As a result, the assumption in the table above reflects the
expected volatility of stock prices of entities similar to Y&R. In addition, the
decrease in the expected term of options for 1998 as compared to 1997 is due to
the creation of an active, liquid market for Y&R's common stock resulting from
the Offering.
The weighted-average fair value and weighted-average exercise price of options
granted on and subsequent to the Recapitalisation for which the exercise price
equals the fair value of Y&R Common Stock on
89
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
15--OPTIONS (CONTINUED)
the grant date was $12.30 and $38.76 in 1999, respectively, $7.80 and $22.59 in
1998, respectively, and $5.28 and $12.33 in 1997, respectively.
In 1997, Young & Rubicam granted options to certain executives at exercise
prices below the fair value of Y&R common stock on the date of grant. The
weighted-average fair value and weighted-average exercise price of these options
was $6.76 and $7.67 in 1997, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
weighted-average fair value of traded options, which have no vesting
restrictions and are fully transferable. Because Young & Rubicam's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Transactions involving options are summarised as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- ----------
<S> <C> <C>
1 JANUARY 1997............................................. 24,622,260 $ 3.76
---------- ------
Granted.................................................... 11,469,150 11.56
Exercised.................................................. (4,250,790) 2.19
Cancelled.................................................. (827,415) 4.50
---------- ------
31 DECEMBER 1997........................................... 31,013,205 6.84
---------- ------
Granted.................................................... 2,472,933 22.59
Exercised.................................................. (2,178,436) 3.10
Cancelled.................................................. (1,230,060) 10.81
---------- ------
31 DECEMBER 1998........................................... 30,077,642 8.23
---------- ------
Granted.................................................... 4,414,179 38.76
Exercised.................................................. (7,927,665) 4.54
Cancelled.................................................. (2,228,060) 13.65
---------- ------
31 DECEMBER 1999........................................... 24,336,096 $14.47
========== ======
</TABLE>
At 31 December 1999, 1998 and 1997, Young & Rubicam had exercisable options of
8,494,699, 14,963,354, and 17,242,995, respectively.
The following information is as of 31 December 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.92................................... 6,083,314 3.11 $ 1.92 6,083,314 $ 1.92
$7.67................................... 4,322,980 6.24 7.67 2,221,361 7.67
$12.00-$15.00........................... 8,312,700 8.10 12.40 103,650 12.59
$25.00-$31.00........................... 1,420,223 8.94 28.55 86,374 30.22
$37.00-$49.00........................... 4,196,879 9.47 38.98 -- --
---------- ---- ------ --------- ------
TOTAL AT 31 DECEMBER 1999................. 24,336,096 6.81 $14.47 8,494,699 $ 3.84
========== ==== ====== ========= ======
</TABLE>
16--LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES
Young & Rubicam is involved in various legal proceedings incident to the
ordinary course of business. Young & Rubicam's practice is to attempt to
minimise potential liabilities through insurance coverage
90
<PAGE>
3.5 NOTES TO THE Y&R HISTORICAL FINANCIAL INFORMATION (CONTINUED)
16--LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
and/or indemnification provisions in its agreements with clients and others.
Young & Rubicam believes that the outcome of all pending legal proceedings and
unasserted claims in the aggregate will not have a material adverse effect on
its results of operations, consolidated financial position or liquidity.
At 31 December 1999, Young & Rubicam was committed under operating leases,
principally for office space. Certain leases contain renewal options calling for
increased rentals. Others contain certain escalation clauses relating to taxes
and other operating expenses.
Net rental expense was $85.1 million, $75.5 million, and $74.4 million in 1999,
1998 and 1997, respectively. Future minimum rental commitments as of
31 December 1999 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
2000........................................................ $61,831
2001........................................................ 56,600
2002........................................................ 50,672
2003........................................................ 42,891
2004........................................................ 38,092
Thereafter.................................................. 93,014
</TABLE>
Young & Rubicam had outstanding guarantees of $4.5 million and $8.6 million at
31 December 1999 and 1998, respectively, primarily in support of credit lines of
unconsolidated affiliates.
17--SUBSEQUENT EVENTS (UNAUDITED)
On 20 January 2000, Young & Rubicam completed the placement of $287.5 million of
3% convertible subordinated notes due 15 January 2005, which includes
$37.5 million of notes issued pursuant to the exercise by the initial purchasers
of their over-allotment option. At the option of the holder, the notes are
convertible into shares of Y&R's Common Stock at a conversion price of $73.36
per share, subject to adjustment. Young & Rubicam used the net proceeds of the
offering to repay outstanding debt under Young & Rubicam's existing bank credit
facilities and to fund operations.
In January 2000, Young & Rubicam contributed cash and certain assets and rights
known as Y&R TeamSpace, a proprietary software tool, to eMotion Inc., a firm
that provides digital media management solutions that facilitate the creative
workflow, sale, distribution and management of media rich broadband content, in
exchange for an ownership interest in eMotion Inc. Young & Rubicam expects to
record a gain in the first quarter of 2000 in connection with this transaction.
In the first quarter of 2000, Young & Rubicam acquired 100% of Robinson Lerer &
Montgomery, LLC and also made strategic investments in certain other entities.
Cash payments made in connection with these transactions amounted to
approximately $45 million.
91
<PAGE>
3.6 UNAUDITED DIRECTORS' REMUNERATION AND INTERESTS FOR THE THREE YEARS ENDED
31 DECEMBER
1999, 1998 AND 1997
The following unaudited information relating to Directors' remuneration and
interests for those Y&R directors who are proposed Directors of WPP if the
merger proceeds has been prepared solely for the purpose of disclosure within
these Listing Particulars. Such information has been extracted from proxy
statements filed by Y&R with the SEC and underlying accounting records
maintained by Y&R. For all periods presented the information is unaudited.
REMUNERATION OF THE Y&R DIRECTORS WHO ARE PROPOSED TO BECOME WPP DIRECTORS WAS
AS FOLLOWS:
<TABLE>
<CAPTION>
SALARY OTHER SHORT-TERM LONG-TERM PENSION
AND FEES BENEFITS INCENTIVE PLANS TOTAL INCENTIVE PLANS CONTRIBUTION
NAME LOCATION ($000) ($000) ($000) ($000) ($000)(2) ($000)
---- --------- --------- -------- --------------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
M. Dolan........................ USA $550.0 $22.7 $405.0 $977.7 $ 0.0 $4.8
W. Hellman...................... USA $ 50.0(1) -- -- -- -- --
M. Jordan....................... USA $ 0.0 -- -- -- -- --
C. Lewinton..................... UK $ 80.0(1) -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SALARY OTHER SHORT-TERM LONG-TERM PENSION
NAME LOCATION AND FEES BENEFITS INCENTIVE PLANS TOTAL INCENTIVE PLANS CONTRIBUTION
---- --------- --------- -------- --------------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
M. Dolan........................ USA $550.0 $21.1 $300.0 $871.1 $116.1 $4.8
W. Hellman...................... USA $ 0.0 -- -- -- -- --
M. Jordan....................... USA $ 0.0 -- -- -- -- --
C. Lewinton..................... UK $ 0.0 -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SALARY OTHER SHORT-TERM LONG-TERM PENSION
NAME LOCATION AND FEES BENEFITS INCENTIVE PLANS TOTAL INCENTIVE PLANS CONTRIBUTION
---- --------- --------- -------- --------------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
M. Dolan........................ USA $500.0 $15.4 $198.0 $713.4 $555.0 $4.8
W. Hellman...................... USA $ 0.0 -- -- -- -- --
M. Jordan....................... USA $ 0.0 -- -- -- -- --
C. Lewinton..................... UK $ 0.0 -- -- -- -- --
</TABLE>
------------------
NOTES:
(1) Deferred into Directors Deferred Compensation Plan.
(2) There were no long-term incentive bonus plans in place for the year
ended 31 December 1999.
92
<PAGE>
3.6 UNAUDITED DIRECTORS' REMUNERATION AND INTERESTS FOR THE THREE YEARS ENDED
31 DECEMBER
1999, 1998 AND 1997 (CONTINUED)
INTERESTS IN Y&R SHARES (ALL OF WHICH WERE BENEFICIAL) WERE AS FOLLOWS:
<TABLE>
<CAPTION>
GRANTED
(SOLD)
AT 1 JAN 1999 VESTED AT 31 DEC
NAME PLAN 1999 (1) 1999 1999
---- ---------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1999
M. Dolan...................... Restricted Stock - Vest at IPO 260,865 (61,926) -- 198,939
Restricted Stock - Mandatory
Deferral 45,000 73 -- 45,073
Restricted Stock - Partnership
board 9,420 -- 9,420
W. Hellman.................... Directors Deferred Comp Plan 1,167 2 -- 1,169
M. Jordan..................... -- -- -- --
C. Lewinton................... Directors Deferred Comp Plan 1,868 3 -- 1,871
</TABLE>
------------------
NOTE:
(1) Stock granted includes dividends, in the form of additional shares on
existing shareholdings.
<TABLE>
<CAPTION>
AT 1 JAN GRANTED VESTED AT 31 DEC
NAME PLAN 1998 (LAPSED) 1998 1998
---- ----------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1998
M. Dolan...................... Restricted Stock - Vest at IPO 260,865 -- -- 260,865
Restricted Stock - Mandatory
Deferral 45,000 -- -- 45,000
Restricted Stock - Partnership
board -- 9,420 -- 9,420
W. Hellman.................... n/a n/a n/a n/a n/a
M. Jordan..................... n/a n/a n/a n/a n/a
C. Lewinton................... n/a n/a n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
AT 1 JAN GRANTED VESTED AT 31 DEC
NAME PLAN 1997 (LAPSED) 1997 1997
---- ---------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1997
M. Dolan...................... Restricted Stock - Vest at IPO 260,865 -- -- 260,865
Restricted Stock - Mandatory
Deferred -- 45,000 -- 45,000
W. Hellman.................... n/a n/a n/a n/a n/a
M. Jordan..................... n/a n/a n/a n/a n/a
C. Lewinton................... n/a n/a n/a n/a n/a
</TABLE>
93
<PAGE>
3.6 UNAUDITED DIRECTORS' REMUNERATION AND INTERESTS FOR THE THREE YEARS ENDED
31 DECEMBER
1999, 1998 AND 1997 (CONTINUED)
Outstanding options:
<TABLE>
<CAPTION>
EXERCISED/ EXERCISED EXERCISE DATE EXERCISE
AT 1 JAN GRANTED REALISED RETAINED AT 31 DEC --------------------------- PRICE PER
NAME 1999 (LAPSED) 1999 1999 1999 COMMENCEMENT EXPIRY SHARE
---- -------- -------- ---------- --------- --------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
M. Dolan...................... 104,340 -- -- -- 104,340 12-Dec-96 12-Dec-06 7.6700
78,270 -- -- -- 78,270 12-Dec-99 12-Dec-06 7.6700
78,255 -- -- -- 78,255 12-Dec-01 12-Dec-06 7.6700
50,000 -- -- -- 50,000 31-Dec-00 17-Dec-07 12.3300
50,000 -- -- -- 50,000 31-Dec-01 17-Dec-07 12.3300
50,000 -- -- -- 50,000 31-Dec-02 17-Dec-07 12.3300
66,666 -- -- 66,666 25-May-00 25-May-09 37.2500
66,667 -- -- 66,667 25-May-01 25-May-09 37.2500
66,667 -- -- 66,667 25-May-02 25-May-09 37.2500
W. Hellman.................... -- -- -- -- -- -- -- --
M. Jordan..................... -- -- -- -- -- -- -- --
C. Lewinton................... -- -- -- -- -- -- -- --
<CAPTION>
MARKET PRICE
PER SHARE ON
NAME DATE OF EXERCISE
---- ----------------
<S> <C>
1999
M. Dolan...................... n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
W. Hellman.................... n/a
M. Jordan..................... n/a
C. Lewinton................... n/a
</TABLE>
<TABLE>
<CAPTION>
EXERCISED/ EXERCISED EXERCISE DATE EXERCISE
AT 1 JAN GRANTED REALISED RETAINED AT 31 DEC --------------------------- PRICE PER
NAME 1998 (LAPSED) 1998 1998 1998 COMMENCEMENT EXPIRY SHARE
---- -------- -------- ---------- --------- --------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
M. Dolan...................... 104,340 -- -- -- 104,340 12-Dec-96 12-Dec-06 7.6700
78,270 -- -- -- 78,270 12-Dec-99 12-Dec-06 7.6700
78,255 -- -- -- 78,255 12-Dec-01 12-Dec-06 7.6700
50,000 -- -- -- 50,000 31-Dec-00 17-Dec-07 12.3300
50,000 -- -- -- 50,000 31-Dec-01 17-Dec-07 12.3300
50,000 -- -- -- 50,000 31-Dec-02 17-Dec-07 12.3300
W. Hellman.................... -- -- -- -- -- -- -- --
M. Jordan..................... -- -- -- -- -- -- -- --
C. Lewinton................... -- -- -- -- -- -- -- --
<CAPTION>
MARKET PRICE
PER SHARE ON
NAME DATE OF EXERCISE
---- ----------------
<S> <C>
1998
M. Dolan...................... n/a
n/a
n/a
n/a
n/a
n/a
W. Hellman.................... n/a
M. Jordan..................... n/a
C. Lewinton................... n/a
</TABLE>
<TABLE>
<CAPTION>
EXERCISED/ EXERCISED EXERCISE DATE EXERCISE
AT 1 JAN GRANTED REALISED RETAINED AT 31 DEC --------------------------- PRICE PER
NAME 1997 (LAPSED) 1997 1997 1997 COMMENCEMENT EXPIRY SHARE
---- -------- -------- ---------- --------- --------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
M. Dolan...................... 104,340 -- -- -- 104,340 12-Dec-96 12-Dec-06 7.6700
78,270 -- -- -- 78,270 12-Dec-99 12-Dec-06 7.6700
78,255 -- -- -- 78,255 12-Dec-01 12-Dec-06 7.6700
50,000 -- -- 50,000 31-Dec-00 17-Dec-07 12.3300
50,000 -- -- 50,000 31-Dec-01 17-Dec-07 12.3300
50,000 -- -- 50,000 31-Dec-02 17-Dec-07 12.3300
W. Hellman.................... -- -- -- -- -- -- -- --
M. Jordan..................... -- -- -- -- -- -- -- --
C. Lewinton................... -- -- -- -- -- -- -- --
<CAPTION>
MARKET PRICE
PER SHARE ON
NAME DATE OF EXERCISE
---- ----------------
<S> <C>
1997
M. Dolan...................... n/a
n/a
n/a
n/a
n/a
n/a
W. Hellman.................... n/a
M. Jordan..................... n/a
C. Lewinton................... n/a
</TABLE>
94
<PAGE>
4. UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2000
The financial information contained in this section for Young & Rubicam has been
extracted without material adjustment from the unaudited interim financial
statement filed on Form 10-Q with the SEC for the six months ended 30
June 2000.
4.1 YOUNG & RUBICAM CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30 JUNE
---------------------------
2000 1999
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 943,291 $ 798,234
Compensation expense, including employee benefits........... 556,445 474,034
General and administrative expenses......................... 277,288 236,808
---------- ----------
Operating expenses.......................................... 833,733 710,842
---------- ----------
Operating profit............................................ 109,558 87,392
Interest expense, net....................................... (8,119) (4,445)
Other income................................................ 12,155 --
---------- ----------
Income before income taxes.................................. 113,594 82,947
Income tax provision........................................ 45,438 34,008
---------- ----------
68,156 48,939
Equity in net income of unconsolidated affiliates........... 2,247 1,652
Minority interest in net income of consolidated
subsidiaries.............................................. (1,348) (305)
---------- ----------
Net income.................................................. $ 69,055 $ 50,286
========== ==========
Earnings per share:
Basic..................................................... $ 0.95 $ 0.75
========== ==========
Diluted................................................... $ 0.83 $ 0.61
========== ==========
Weighted average shares outstanding (Note 2):
Basic..................................................... 72,627,811 66,912,004
========== ==========
Diluted................................................... 86,388,529 82,047,778
========== ==========
</TABLE>
95
<PAGE>
4.2 YOUNG & RUBICAM CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
30 JUNE 31 DECEMBER
2000 1999
----------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 173,256 $ 144,517
Accounts receivable, net of allowance for doubtful
accounts of $24,223 and $25,012 at 30 June, 2000 and 31
December, 1999, respectively............................ 1,008,933 1,031,445
Costs billable to clients................................. 115,014 76,982
Other receivables......................................... 41,994 43,138
Deferred income taxes..................................... 50,566 50,302
Prepaid expenses and other current assets................. 29,250 27,803
---------- ----------
Total Current Assets.................................... 1,419,013 1,374,187
---------- ----------
NONCURRENT ASSETS
Property, leasehold improvements and equipment at cost,
net of accumulated depreciation and amortization of
$263,824 and $248,112 at 30 June, 2000 and 31 December,
1999, respectively...................................... 189,362 194,569
Deferred income taxes..................................... 149,287 34,875
Intangibles, net of accumulated amortization of $98,627
and $91,285 at
30 June, 2000 and 31 December, 1999, respectively....... 371,873 353,860
Equity in net assets of and advances to unconsolidated
affiliates.............................................. 35,067 36,001
Investments in equity securities.......................... 151,884 366,590
Other noncurrent assets................................... 48,283 54,199
---------- ----------
Total Assets............................................ $2,364,769 $2,414,281
========== ==========
CURRENT LIABILITIES
Accounts payable.......................................... $1,201,938 $1,206,385
Accrued expenses and other current liabilities............ 217,853 226,006
Accrued payroll and bonuses............................... 53,779 78,531
Advance billings.......................................... 134,400 132,130
Accrued taxes on income................................... 15,286 24,844
Short-term debt........................................... 41,933 31,710
---------- ----------
Total Current Liabilities............................... 1,665,189 1,699,606
---------- ----------
NONCURRENT LIABILITIES
Long-term debt............................................ 297,920 127,568
Deferred compensation..................................... 31,957 31,328
Other noncurrent liabilities.............................. 104,390 117,405
Minority Interests.......................................... 14,681 14,194
Commitments and Contingencies...............................
---------- ----------
STOCKHOLDERS' EQUITY
Money Market Preferred Stock--cumulative variable
dividend; liquidating value of $115 per share; one-tenth
of one vote per share; authorized--50,000 shares; issued
and outstanding--87 shares.............................. --
Cumulative Participating Junior Preferred Stock--minimum
$1.00 dividend; liquidating value of $1.00 per share;
100 votes per share; authorized--2,500,000 shares;
issued and outstanding--0 shares........................ --
Common stock--par value $.01 per share;
authorized--250,000,000 shares; issued and
outstanding--73,160,024 shares and 72,950,004 shares at
30 June, 2000 and 31 December, 1999, respectively
(excluding 192,684 shares and 2,471 shares in
treasury)............................................... 734 730
Capital surplus........................................... 872,870 908,969
Accumulated deficit....................................... (530,994) (596,470)
Net unrealized (depreciation) appreciation in equity
securities, net of tax.................................. (27,792) 144,977
Cumulative translation adjustment......................... (53,915) (33,092)
Pension liability adjustment.............................. (817) (817)
---------- ----------
260,086 424,297
Common stock in treasury, at cost......................... (9,454) (117)
---------- ----------
Total Stockholders' Equity.............................. 250,632 424,180
---------- ----------
Total Liabilities and Stockholders' Equity.............. $2,364,769 $2,414,281
========== ==========
</TABLE>
96
<PAGE>
4.3 YOUNG & RUBICAM CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30 JUNE
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 69,055 $ 50,286
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 42,209 32,465
Other income.............................................. (12,155) --
Deferred income tax expense............................... 28,662 24,049
Equity in net income of unconsolidated affiliates......... (2,247) (1,652)
Dividends from unconsolidated affiliates.................. 418 1,181
Minority interest in net income of consolidated
companies............................................... 1,348 305
Change in assets and liabilities, excluding effects from
acquisitions, dispositions and foreign exchange:
Accounts receivable....................................... (8,212) (7,967)
Costs billable to clients................................. (36,364) (33,194)
Other receivables......................................... (2,381) (304)
Prepaid expenses and other assets......................... (3,079) (3,681)
Accounts payable.......................................... 3,902 23,858
Accrued expenses and other current liabilities............ (1,090) (20,074)
Accrued payroll and bonuses............................... (19,143) (30,382)
Advance billings.......................................... 2,270 (8,324)
Accrued taxes on income................................... (8,762) (1,687)
Deferred compensation..................................... 954 1,090
Other..................................................... (10,870) (9,074)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 44,515 $ 16,895
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, leasehold improvements and
equipment............................................... $ (27,061) $ (32,516)
Acquisitions, net of cash acquired........................ (48,550) (102,659)
Investments in equity securities.......................... (35,438) (11,558)
Proceeds from investing activities........................ 4,070 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... $(106,979) $(146,733)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from convertible subordinated notes.......... $ 282,469 $ --
Proceeds from other long-term debt........................ 8,143 189,955
Repayments of long-term debt.............................. (124,666) (5,109)
Net proceeds from short-term debt......................... 32,013 (28,330)
Common stock issued....................................... 8,616 8,351
Purchase of treasury shares............................... (90,296) (67,810)
Dividends paid............................................ (3,578) (1,752)
Payment of deferred compensation.......................... (3,456) (1,356)
Other financing activities................................ (1,285) (1,001)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... $ 107,960 $ 92,948
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (16,757) (5,676)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 28,739 (42,566)
Cash and cash equivalents, beginning of period.............. 144,517 122,138
--------- ---------
Cash and cash equivalents, end of period.................... $ 173,256 $ 79,572
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 1,943 $ 7,479
========= =========
Income taxes paid......................................... $ 19,601 $ 14,208
========= =========
NONCASH INVESTING ACTIVITY:
Common stock issued in acquisitions....................... $ 2,310 $ 83,700
========= =========
</TABLE>
97
<PAGE>
4.4 NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION
1--DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
BUSINESS: Young & Rubicam is a global communications company which offers
clients integrated services in the creation and production of advertising,
strategic media planning and buying, direct marketing and customer relationship
management, perception management and public relations, branding consultancy and
design services, and healthcare communications. Y&R operates through wholly
owned subsidiaries, joint ventures and non-equity affiliations worldwide.
Operations cover the major geographic regions of North America, Europe, Latin
America, the Far East, Australia, New Zealand, the Middle East and Africa.
CONSOLIDATION: The accompanying unaudited consolidated condensed financial
statements of Y&R have been prepared pursuant to the rules and regulations of
the SEC. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited consolidated condensed financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in Y&R's Annual Report on Form 10-K for the year ended 31
December 1999. In the opinion of management, the accompanying financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results for the periods presented.
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2000 presentation.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the full year.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2--EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average shares of common stock outstanding during the six months ended 30 June
2000 and 1999. Diluted earnings per share for the six months ended 30 June 2000
and 1999 are calculated as net income adjusted for after-tax interest expense on
our 3% Convertible Subordinated Notes in 2000, divided by weighted average
shares of common stock outstanding, adjusted for the dilutive effect of stock
options, primarily stock options granted to employees under stock-based
compensation plans, the convertible subordinated notes and other dilutive
securities.
Shares used in computing basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30 JUNE
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic--weighted average shares.............................. 72,627,811 66,912,004
Dilutive effect of stock options............................ 10,241,271 15,135,774
Dilutive effect of convertible notes........................ 3,519,447 --
---------- ----------
Diluted--weighted average shares............................ 86,388,529 82,047,778
========== ==========
</TABLE>
98
<PAGE>
4.4 NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION (CONTINUED)
3--COMPREHENSIVE INCOME
The following table sets forth total comprehensive income (loss) and its
components:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30 JUNE
--------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $ 69,055 $50,286
Unrealised depreciation in equity securities, net of tax:
Unrealised depreciation arising during period............. (171,615) --
Less: Reclassification adjustment for gains included in
net income.............................................. (1,154) --
--------- -------
Net unrealised depreciation in equity securities, net of
tax..................................................... (172,769) --
Foreign currency translation adjustment..................... (20,823) (14,546)
--------- -------
Total comprehensive income.................................. $(124,537) $35,740
========= =======
</TABLE>
4--INVESTMENTS IN EQUITY SECURITIES
At 30 June 2000, all equity securities covered under Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115") were designated as
available-for-sale. In accordance with SFAS No. 115, these securities are
reported at fair value, adjusted for any other-than-temporary declines in value.
Such equity securities at 30 June 2000 had an aggregate cost basis of
$122.5 million and included certain equity securities received as additional
consideration in the first half of 2000 as a result of achieving revenue and
operating profit performance targets of the Brand Dialogue assets contributed to
Luminant Worldwide Corporation in 1999. These securities are carried at their
fair value of $77.0 million and are included in investments in equity securities
on the balance sheet. Differences between cost and fair value of $45.5 million
are carried net of $17.7 million of related income tax benefit as a separate
component of stockholders' equity under the balance sheet caption "Net
unrealised (depreciation) appreciation in equity securities."
In January 2000, Y&R contributed cash and certain assets and rights known as Y&R
TeamSpace, a proprietary software tool, to eMotion Inc. ("eMotion"), a firm that
provides digital media management solutions that facilitate the creative
workflow, sale, distribution and management of media rich broadband content, in
exchange for an ownership interest in eMotion. The equity securities received in
connection with this transaction are carried on the balance sheet at net cost,
as readily determinable fair values are not available. At 30 June 2000, the
carrying value of this cost investment was $14.3 million. In addition, Y&R
recorded a gain on the contribution of Y&R TeamSpace to eMotion in the first
quarter of 2000 totaling approximately $7.6 million.
Also during the first half of 2000, Y&R invested an additional $29.0 million in
equity securities that are carried on the balance sheet at cost. These cost
investments include Y&R's investment in Naviant Inc., a leading provider of
precision marketing solutions to web advertisers, web publishers and consumer
marketers of approximately $15.0 million.
Under certain investment agreements, Y&R is eligible to share with the
respective entities a portion of revenues, if any, generated from the use or
referral by Y&R or its clients of the respective entity's products or services.
In certain instances, Y&R may also be required to make payments pursuant to
minimum revenue guarantees over a specified period. While Y&R cannot reasonably
estimate the amount, if any, that could be earned or become payable under such
agreements, such amounts are not expected to be material to Y&R's consolidated
results of operations, financial position or cash flow. To date no commission
fee revenue has been earned or recognised. During the quarter ended 30 June 2000
revenue guarantee amounts totaling $1.0 million have been paid under such
arrangements.
5--ACQUISITIONS
During the first half of 2000, Y&R acquired all outstanding membership interests
in Robinson Lerer & Montgomery, LLC ("RLM"), a leading public relations and
strategy consulting firm in a cash and stock transaction, and also made several
other acquisitions. All of these acquisitions were accounted for under
99
<PAGE>
4.4 NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION (CONTINUED)
5--ACQUISITIONS (CONTINUED)
the purchase method of accounting and a preliminary allocation of the costs to
acquire these entities has been made based on the fair value of the net assets
acquired. Certain acquisitions may require Y&R to pay incremental amounts as
additional consideration in future years, based on the operating results
achieved by the companies that were acquired. The aggregate purchase price of
acquisitions completed in the first six months of 2000, including any amounts
paid under existing contingent consideration obligations, amounted to
approximately $57 million.
6--LONG-TERM DEBT
Y&R's long-term debt is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Unsecured revolving credit facilities....................... $ 7,564 $123,500
3% Convertible subordinated notes........................... 287,500 --
Capital lease obligations................................... 1,479 2,197
Other borrowings............................................ 3,249 4,500
-------- --------
299,792 130,197
Less--Current portion....................................... 1,872 2,629
-------- --------
$297,920 $127,568
======== ========
</TABLE>
Interest expense was $12.2 million for the six months ended 30 June 2000
compared to interest expense of $9.1 million for the six months ended 30 June
1999.
On 20 January 2000, Y&R completed the placement of $287.5 million of 3%
Convertible Subordinated Notes due 15 January 2005. At the option of the holder,
the notes are convertible into shares of our common stock at a conversion price
of $73.36 per share, subject to adjustment, beginning 90 days following the
issuance of the notes. The notes may be redeemed at Y&R's option on or after
20 January 2003. Additionally, under certain circumstances, holders of the notes
may have the right to require Y&R to repurchase the notes. Interest on the notes
is payable on 15 January and 15 July of each year, beginning on 15 July 2000.
The notes are unsecured obligations of Y&R and are subordinated in right of
payment to all senior indebtedness and liabilities of subsidiaries of Y&R. Y&R
used the net proceeds of the offering to repay outstanding debt under our
existing bank credit facilities and to fund operations, acquisitions, investment
activity and share repurchases.
7--CASH DIVIDEND
On 15 June 2000 and 15 March 2000, Y&R paid quarterly cash dividends of $0.025
per common share to all stockholders of record as of 1 June 2000 and 1 March
2000, respectively.
8--SUBSEQUENT EVENTS
On 29 June 2000, Y&R announced that it had agreed to acquire The Partners, a
leading UK design agency and corporate identity specialist. The transaction was
completed in July 2000.
100
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP
Young & Rubicam's historical financial information has been prepared in
accordance with US GAAP. The main differences between the accounting policies
adopted by Y&R under US GAAP and those adopted by WPP under UK GAAP relate to
the amortisation of goodwill, equity accounting, the measurement of compensation
in connection with share awards, the recognition of gains on the disposal of
fixed assets in exchange for an equity interest in another entity, the carrying
value of listed equity securities, the timing of recognition of contingent
consideration, the treatment of treasury stock used to satisfy employee share
options and deferred taxation. Additionally the US GAAP figures include
reclassifications of cash equivalents and various other balance sheet items
presented in the Y&R audited historical financial statements to conform with
WPP's presentation format and accounting policies, which are described more
fully in Note 1 below.
The following tables show the impact of the unaudited UK GAAP adjustments on the
Young & Rubicam audited financial statements (as conformed to WPP presentation
format) for the three years ended 31 December 1999, 1998 and 1997, and on the
Y&R unaudited financial statments (as conformed to WPP presentation format) for
the six months ended 30 June 2000, to restate these figures in accordance with
WPP's disclosed accounting policies under UK GAAP.
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
31 DECEMBER 1999 UNDER UK GAAP
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ --------------- ----------- -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
Turnover (gross billings).............. -- 8,530.9 (a) 8,530.9 5,273.1
Cost of Sales.......................... -- (6,813.7)(a) (6,813.7) (4,211.7)
======== ===== ======== ======== ========
Revenue................................ 1,717.2 -- 1,717.2 1,061.4
Operating Costs........................ (1,509.1) 15.2 (b) (1,493.9) (923.4)
-------- ----- -------- -------- --------
Operating Profit....................... 208.1 15.2 (b) 223.3 138.0
Non-operating exceptional item......... 85.0 (85.0)(d) -- --
Income from associates................. -- 10.6 (i) -- 10.6 6.6
-------- ----- -------- -------- --------
Profit on ordinary activities before
interest & taxation.................. 293.1 10.6 (69.8) 233.9 144.6
Net interest payable & similar
charges.............................. (14.9) -- (14.9) (9.2)
-------- ----- -------- -------- --------
Profit on ordinary activities before
taxation............................. 278.2 10.6 (69.8) 219.0 135.4
Taxation on profit on ordinary
activities before exceptional
items................................ (111.3) (42.4)(viii)
(6.1)(i) 78.0 (g) (81.8) (50.6)
Exceptional tax credit on exercised
stock options........................ -- 42.4 (viii) -- 42.4 26.2
-------- ----- -------- -------- --------
Tax on profit on ordinary activities... (111.3) (6.1) 78.0 (39.4) (24.4)
-------- ----- -------- -------- --------
Profit on ordinary activities after
taxation............................. 166.9 4.5 8.2 179.6 111.0
Equity in net income of unconsolidated
affiliates........................... 4.5 (4.5)(i) -- -- --
Minority interests..................... (4.3) -- (4.3) (2.7)
-------- ----- -------- -------- --------
Profit attributable to ordinary share
owners............................... 167.1 -- 8.2 175.3 108.3
-------- ----- -------- -------- --------
Ordinary dividends..................... (5.3) -- (5.3) (3.3)
-------- ----- -------- -------- --------
Retained profit for the year........... 161.8 8.2 170.0 105.0
======== ===== ======== ======== ========
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
101
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE YEARS ENDED
31 DECEMBER 1998 AND 1997 UNDER UK GAAP
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED US
TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ -------------- ------------ -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
Turnover (gross billings)..................... -- 7,707.5 (a) 7,707.5 4,640.0
Cost of Sales................................. -- (6,185.0)(a) (6,185.0) (3,723.4)
======== ====== ======== ======== ========
Revenue....................................... 1,522.5 -- 1,522.5 916.6
Operating Costs............................... (1,594.0) 234.4 11.4 (b) (1,348.2) (811.7)
Operating exceptional item: IPO charge........ -- (234.4) 143.7 (c) (90.7) (54.6)
-------- ------ -------- -------- --------
Operating Profit/(loss)....................... (71.5) -- 155.1 (b)(c) 83.6 50.3
Non-operating exceptional item................ -- -- -- --
Income from associates........................ -- 9.1 (i) -- 9.1 5.5
-------- ------ -------- -------- --------
Profit/(loss) on ordinary activities before
interest & taxation......................... (71.5) 9.1 155.1 92.7 55.8
Net interest payable & similar charges........ (15.5) (7.3)(ii) -- (22.8) (13.7)
-------- ------ -------- -------- --------
Profit on ordinary activities before
taxation.................................... (87.0) 1.8 155.1 69.9 42.1
Taxation on profit on ordinary activities..... 2.6 2.9 (ii)
(4.4)(i) (37.4)(g) (36.3) (21.9)
-------- ------ -------- -------- --------
Tax on profit on ordinary activities.......... 2.6 (1.5) (37.4) (36.3) (21.9)
Profit/(loss) on ordinary activities after
taxation.................................... (84.4) 0.3 117.7 33.6 20.2
Equity in net income of unconsolidated
affiliates.................................. 4.7 (4.7)(i) -- -- --
Extraordinary charge for early retirement of
debt, net of tax............................ (4.4) 4.4 (ii) -- -- --
Minority interests............................ (2.0) -- (2.0) (1.2)
-------- ------ -------- -------- --------
Profit/(loss) attributable to ordinary share
owners...................................... (86.1) -- 117.7 31.6 19.0
-------- ------ -------- -------- --------
Ordinary dividends............................ -- -- -- --
-------- ------ -------- -------- --------
Retained profit/(loss) for the year........... (86.1) -- 117.7 31.6 19.0
======== ====== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED US
TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ -------------- ------------ -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
Turnover (gross billings).................... -- 7,115.0 (a) 7,115.0 4,340.4
Cost of Sales................................ -- (5,732.3)(a) (5,732.3) (3,496.9)
======== ===== ======== ======== ========
Revenue...................................... 1,382.7 -- 1,382.7 843.5
Operating Costs.............................. (1,312.0) 21.0 (b) (1,291.0) (787.6)
Operating exceptional item: IPO charge....... -- -- -- --
-------- -------- -------- --------
Operating Profit............................. 70.7 21.0 (b) 91.7 55.9
Non-operating exceptional item............... -- -- -- --
Income from associates....................... -- 4.1 (i) -- 4.1 2.5
-------- ----- -------- -------- --------
Profit on ordinary activities before interest
& taxation................................. 70.7 4.1 21.0 95.8 58.4
Net interest payable & similar charges....... (34.4) -- (34.4) (21.0)
-------- ----- -------- -------- --------
Profit on ordinary activities before
taxation................................... 36.3 4.1 21.0 61.4 37.4
Taxation on profit on ordinary activities
before exceptional items................... (58.3) (3.8)(i) 5.0 (g) (57.1) (34.8)
Exceptional tax credit on exercised stock
options.................................... -- -- -- --
-------- ----- -------- -------- --------
Tax on profit on ordinary activities......... (58.3) (3.8)(i) 5.0 (57.1) (34.8)
-------- ----- -------- -------- --------
Profit/(loss) on ordinary activities after
taxation................................... (22.0) 0.3 26.0 4.3 2.6
Equity in net income of unconsolidated
affiliates................................. 0.3 (0.3)(i) -- -- --
Minority interests........................... (2.3) -- (2.3) (1.4)
-------- ----- -------- -------- --------
Profit/(loss) attributable to ordinary share
owners..................................... (24.0) -- 26.0 2.0 1.2
-------- -------- -------- --------
Ordinary dividends........................... -- -- -- --
-------- ----- -------- -------- --------
Retained profit/(loss) for the year.......... (24.0) -- 26.0 2.0 1.2
======== ===== ======== ======== ========
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
102
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE 6 MONTH PERIOD ENDED
30 JUNE 2000 UNDER UK GAAP
<TABLE>
<CAPTION>
2000
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ --------------- ----------- -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
Turnover (gross billings).............. -- 4,244.3 (a) 4,244.3 2,703.4
Cost of Sales.......................... -- (3,301.0)(a) (3,301.0) (2,102.6)
======== ======= ========= ======== ========
Revenue................................ 943.3 -- 943.3 600.8
Operating Costs........................ (833.7) 10.9 (b) (822.8) (524.1)
Operating exceptional item............. -- (57.6)(i) (57.6) (36.7)
-------- ------- --------- -------- --------
Operating Profit....................... 109.6 (46.7) 62.9 40.0
Non-operating exceptional item......... 12.2 (12.2)(d) -- --
Income from associates................. -- 3.8 (i) 3.8 2.4
-------- ------- --------- -------- --------
Profit/(loss) on ordinary activities
before interest & taxation........... 121.8 3.8 (58.9) 66.7 42.4
Net interest payable & similar
charges.............................. (8.1) (8.1) (5.2)
-------- ------- --------- -------- --------
Profit on ordinary activities before
taxation............................. 113.7 3.8 (58.9) 58.6 37.2
Taxation on profit on ordinary
activities before exceptional
items................................ (45.4) (28.2)(viii)
(1.6)(i) 29.9 (45.3) (28.9)
Exceptional tax credit on exercised
stock options........................ -- 28.2 (viii) -- 28.2 18.1
-------- ------- --------- -------- --------
Tax on profit on ordinary activities... (45.4) (1.6) 29.9 (17.1) (10.8)
-------- ------- --------- -------- --------
Profit on ordinary activities after
taxation............................. 68.3 2.2 (29.0) 41.5 26.4
Equity in net income of unconsolidated
affiliates........................... 2.2 (2.2)(i) -- -- --
Minority interests..................... (1.3) (1.3) (0.9)
-------- ------- --------- -------- --------
Profit attributable to ordinary share
owners............................... 69.2 -- (29.0) 40.2 25.5
-------- ------- --------- -------- --------
Ordinary dividends..................... (3.6) (3.6) (2.3)
-------- ------- --------- -------- --------
Retained profit for the year........... 65.6 -- (29.0) 36.6 23.2
-------- ------- --------- -------- --------
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
103
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
CONSOLIDATED STATEMENTS OF NET ASSETS AS AT
31 DECEMBER 1999 UNDER UK GAAP
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ --------------- ----------- -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
FIXED ASSETS
Intangible assets......................
-- Goodwill............................ 353.9 (3.0)(iii) (91.9)(b)
45.4 (e) 304.4 188.1
Tangible fixed assets.................. 194.6 3.0 (iii) -- 197.6 122.1
Investments in associated
undertakings......................... 36.0 -- 36.0 22.2
Other investments...................... 366.6 (237.7)(f) 128.9 79.7
Other assets........................... 89.1 (89.1)(iv) -- -- --
-------- -------- -------- -------- --------
1,040.2 (89.1) (284.2) 666.9 412.1
-------- -------- -------- -------- --------
CURRENT ASSETS
Stocks & work in progress.............. 77.0 -- 77.0 47.6
Debtors................................ 1,152.6 13.3 (v)
-- 89.1 (iv) (85.1)(g) 1,169.9 723.0
Cash at bank & in hand................. 144.5 (13.3)(v) -- 131.2 81.1
-------- -------- -------- -------- --------
1,374.1 89.1 (85.1) 1,378.1 851.7
-------- -------- -------- -------- --------
CREDITORS: amounts falling due within
one year............................. (1,699.6) 0.8 (h) (1,698.8) (1,049.8)
Net current liabilities................ (325.5) 89.1 (84.3) (320.7) (198.1)
-------- -------- -------- -------- --------
Total assets less current
liabilities.......................... 714.7 0.0 (368.5) 346.2 214.0
-------- -------- -------- -------- --------
CREDITORS: amounts falling due after
more than one year................... (276.3) 11.8 (vi) (45.4)(e) -- --
-- 8.8 (g) (301.1) (186.1)
PROVISIONS FOR LIABILITIES AND
CHARGES.............................. (11.8)(vi) -- (11.8) (7.3)
-------- -------- -------- -------- --------
NET ASSETS............................. 438.4 -- (405.1) 33.3 20.6
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
104
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
CONSOLIDATED STATEMENTS OF NET ASSETS/LIABILITIES AS AT
31 DECEMBER 1998 AND 1997 UNDER UK GAAP
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------- --------------- ----------- -------------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
FIXED ASSETS
Intangible assets......................
-- Goodwill............................ 121.0 (106.0)(b) 15.0 9.0
Tangible fixed assets.................. 150.4 -- 150.4 90.4
Investments in associated
undertakings......................... 38.4 -- 38.4 23.1
Other investments...................... -- 49.6 (vii) -- 49.6 29.8
Other assets........................... 202.7 (202.7)(iv) -- -- --
-------- -------- -------- -------- --------
512.5 (153.1) (106.0) 253.4 152.3
-------- -------- -------- -------- --------
CURRENT ASSETS
Stocks & work in progress.............. 55.2 -- 55.2 33.2
Debtors................................ 945.3 6.0 (v)
-- 202.7 (iv) (205.3)(g) 948.7 570.2
Cash at bank & in hand................. 122.1 (6.0)(v) -- 116.1 69.8
-------- -------- -------- -------- --------
1,122.6 202.7 (205.3) 1,120.0 673.2
-------- -------- -------- -------- --------
CREDITORS: amounts falling due within
one year............................. (1,339.5) 2.3 (vi) 1.2 (h) (1,336.0) (803.0)
Net current liabilities................ (216.9) 205.0 (204.1) (216.0) (129.8)
-------- -------- -------- -------- --------
Total assets less current
liabilities.......................... 295.6 51.9 (310.1) 37.4 22.5
-------- -------- -------- -------- --------
CREDITORS: amounts falling due after
more than one year................... (175.6) 9.4 (vi) 8.1 (g) (158.1) (95.0)
PROVISIONS FOR LIABILITIES AND
CHARGES.............................. -- (11.7)(vi) -- (11.7) (7.0)
-------- -------- -------- -------- --------
NET ASSETS/(LIABILITIES)............... 120.0 49.6 (302.0) (132.4) (79.5)
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------- --------------- ----------- -------------------------
US$ MIL US$ MIL US$ MIL UKL MIL
FIXED ASSETS
Intangible assets......................
-- Goodwill............................ 118.3 (118.3)(b) -- --
Tangible fixed assets.................. 125.0 -- 125.0 76
Investments in associated
undertakings......................... 26.4 -- 26.4 16.0
Other investments...................... 0 8.6 (vii) -- 8.6 5.2
Other assets........................... 171.2 (171.2)(iv) -- -- --
-------- -------- -------- -------- --------
440.9 (162.6) (118.3) 160.0 97.2
-------- -------- -------- -------- --------
CURRENT ASSETS
Stocks & work in progress.............. 60.3 -- 60.3 36.6
Debtors................................ 876.3 11.4 (v)
-- 171.2 (iv) (157.1)(g) 901.8 548.1
Cash at bank & in hand................. 160.3 (11.4)(v) -- 148.9 90.5
-------- -------- -------- -------- --------
1,096.9 171.2 (157.1) 1,111.0 675.2
-------- -------- -------- -------- --------
CREDITORS: amounts falling due within
one year............................. (1,203.0) 0.8 (vi) 0.7 (h) (1,201.5) (730.2)
Net current liabilities................ (106.1) 172.0 (156.4) (90.5) (55.5)
-------- -------- -------- -------- --------
Total assets less current
liabilities.......................... 334.8 9.4 (274.7) 69.5 42.2
-------- -------- -------- -------- --------
CREDITORS: amounts falling due after
more than one year................... (481.1) 6.9 (e) (474.2) (288.2)
PROVISIONS FOR LIABILITIES AND
CHARGES.............................. -- (0.8)(vi) -- (0.8) (0.5)
-------- -------- -------- -------- --------
NET ASSETS/(LIABILITIES)............... (146.3) 8.6 (267.8) (405.5) (246.5)
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
105
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
CONSOLIDATED STATEMENTS OF NET ASSETS AS AT
30 JUNE 2000 UNDER UK GAAP
<TABLE>
<CAPTION>
2000
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
US TO UK
RECLASSIFICATIONS ADJUSTMENTS
US GAAP (NOTE 1) (NOTE 2) UK GAAP
------------ --------------- ----------- -----------------------
US$ MIL US$ MIL US$ MIL US$ MIL UKL MIL
FIXED ASSETS
Intangible assets...................... 371.9 (4.2)(iii) (73.6)(b)
Goodwill............................. 86.8 (e) 380.9 251.2
Tangible fixed assets.................. 189.4 4.2 (iii) -- 193.6 127.7
Investments in associated
undertakings......................... 35.1 -- -- 35.1 23.1
Other investments...................... 151.9 9.5 (vii) 45.6 (f) 207.0 136.5
Other assets........................... 197.6 (197.6)(iv) -- -- --
-------- -------- -------- -------- --------
945.9 (188.1) 58.8 816.6 538.5
-------- -------- -------- -------- --------
CURRENT ASSETS
Stocks & work in progress.............. 115.0 -- -- 115.0 75.8
Debtors................................ 1,130.7 13.8 (v) (199.9)(g)
197.6 (iv) 1,142.2 753.1
Cash at bank & in hand................. 173.3 (13.8)(v) -- 159.5 105.2
-------- -------- -------- -------- --------
1,419.0 197.6 (199.9) 1,416.7 934.1
-------- -------- -------- -------- --------
CREDITORS: amounts falling due within
one year............................. (1,665.2) 0.5(vi) 0.8 (h) (1,663.9) (1,097.1)
-------- -------- -------- -------- --------
Net current liabilities................ (246.2) 198.1 (199.1) (247.2) (163.0)
-------- -------- -------- -------- --------
Total assets less current
liabilities.......................... 699.7 10.0 (140.3) 569.4 375.5
-------- -------- -------- -------- --------
CREDITORS: amounts falling due after
more than one year................... (434.3) 10.2 (vi) (86.8)(e)
9.7 (g)
(501.2) (330.5)
PROVISIONS FOR LIABILITIES AND
CHARGES.............................. -- (10.7)(vi) -- (10.7) (7.1)
-------- -------- -------- -------- --------
NET ASSETS............................. 265.4 9.5 (217.4) 57.5 37.9
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to the unaudited restatements are an integral part of
these statements.
106
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP
(CONTINUED)
NOTES TO THE UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM FINANCIAL INFORMATION
UNDER UK GAAP
NOTE 1--RECLASSIFICATIONS
Reclassifications have been made to the Y&R historical financial information
presented under US GAAP to conform to WPP's presentation and disclosed
accounting policies under UK GAAP. None of these reclassifications impact net
income or net assets/liabilities except as described in (vii) below.
These reclassifications include the following items:
(I) EQUITY ACCOUNTING
In accordance with UK GAAP, the investor's share of operating profit or
loss of associated undertakings and joint ventures is shown separately on
the face of the profit and loss account and the investor's share of the
taxation charge of associated undertakings and joint ventures is included
within the taxation charge shown in the profit and loss account. Under US
GAAP, net after-tax profits or losses are included in the income statement
as a single line item.
(II) EARLY RETIREMENT OF DEBT
For 1998, a net-of-tax charge of $4.4 million relating to early retirement
of debt has been reclassified with the gross amount of $7.3 million
included in net interest payable and similar charges and the corresponding
tax benefit of $2.9 million included in taxation on profit on ordinary
activities.
(III) INTANGIBLE FIXED ASSETS
In 1999, certain intangible fixed assets have been reclassified as tangible
fixed assets in accordance with WPP's disclosed accounting policies.
(IV) DEBTORS
Deferred income taxes and other noncurrent assets have been reclassified
under debtors within current assets to conform with WPP's balance sheet
presentation under UK GAAP.
(V) CASH
Financial instruments with an initial maturity of up to three months have
been reclassified from cash and cash equivalents to other current assets,
included within debtors.
(VI) PENSION LIABILITIES
Pension liabilities have been reclassified from creditors: amounts falling
due within one year and creditors: amounts falling due after more than one
year to provisions for liabilities and charges.
(VII) TREASURY STOCK
Under US GAAP when a company acquires its own shares (treasury stock) the
cost of the shares acquired is shown as a reduction from capital. Under
WPP's presentation, such shares are shown within investments included
within fixed assets.
(VIII) EXCEPTIONAL TAX CREDIT ON EXERCISED STOCK OPTIONS
For UK GAAP presentation purposes within this restatement, the cash benefit
for tax purposes relating to stock options exercised has been separately
presented as an exceptional tax credit.
107
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
NOTES TO THE UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM FINANCIAL INFORMATION
UNDER UK GAAP (CONTINUED)
NOTE 2--US TO UK GAAP ADJUSTMENTS
Accounting principles generally accepted in the UK differ in certain material
respects from those generally accepted in the US. The differences which are
material to restating the historical consolidated financial statements of Y&R to
conform to WPP's disclosed accounting policies under UK GAAP are set out below.
(A) TURNOVER (GROSS BILLINGS) AND COST OF SALES
In accordance with the presentation adopted by WPP, turnover (gross billings)
comprises the gross amounts billed to clients in respect of commission-based
income together with the total of other fees earned. Cost of sales comprises
media payments and production costs. Such amounts have not been included in the
historical audited financial statements of Y&R and have been extracted from
unaudited underlying accounting records for the purposes of this restatement.
(B) GOODWILL
In accordance with U.K. GAAP and FRS 10 "Goodwill and Intangible Assets,"
goodwill resulting from acquisitions made by Y&R on or after 1 January 1998 has
been capitalised as an intangible asset. Under WPP's disclosed accounting policy
this goodwill has an indefinite life and as a result no amortisation has been
provided. Under UK GAAP, goodwill assumed to have an indefinite life is subject
to an annual impairment review in accordance with FRS 11 "Impairment of Fixed
Assets and Goodwill."
Goodwill resulting from acquisitions made by Young & Rubicam before
1 January 1998 has been fully written off against equity share owners' funds
(which is not shown in the consolidated statements of net assets/liabilities),
in accordance with the then preferred treatment adopted by WPP under UK GAAP.
Under US GAAP, goodwill resulting from a business combination accounted for as a
purchase is amortised over its estimated useful life, not to exceed 40 years.
Additionally, Young & Rubicam's management evaluates the carrying value of
Young & Rubicam's tangible and intangible assets each year, or whenever events
or circumstances indicate that these assets may be impaired. Intangible assets
are determined to be impaired if the future anticipated undiscounted cash flows
arising from the use of the intangible assets are less than their carrying
value. If an impairment is deemed to have occurred, the asset is written down to
its fair value.
(C) INITIAL PUBLIC OFFERING
Under UK GAAP, in accordance with UITF 17 "Employee Share Schemes," the
measurement of compensation expense in connection with share awards takes place
at the time an award is made. Under US GAAP, in accordance with APB Opinion 25
"Accounting for Stock Issued to Employees," a new and later measurement date of
compensation can be triggered by certain events. In 1998, Y&R completed an
initial public offering of shares of its common stock. The completion of the
offering gave rise to non-recurring, non-cash, pre-tax compensation charges
under US GAAP of $234.4 million. The charges principally represent the fair
value, on the date of the offering, of restricted stock granted to employees,
the vesting of which was accelerated upon completion of the offering, creating a
new measurement date under APB 25. Under UK GAAP, in accordance with UITF 17,
the measurement value of the compensation charge would be $90.7 million,
reflecting the fair value of the shares at the time the initial award of shares
was made.
108
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
NOTES TO THE UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM FINANCIAL INFORMATION
UNDER UK GAAP (CONTINUED)
NOTE 2--US TO UK GAAP ADJUSTMENTS (CONTINUED)
(D) NON-OPERATING EXCEPTIONAL ITEMS
In 1999, in accordance with US GAAP, Young & Rubicam recognised a gain on the
sale of certain assets of Brand Dialogue in exchange for a minority ownership
interest in Luminant and additional consideration received in the fourth quarter
of 1999 as a result of achieving revenue and operating profit performance
targets of the Brand Dialogue assets. For the six months to 30 June 2000, Y&R
recognised further gains largely relating to (a) additional consideration
received in relation to Brand Dialogue and (b) the sale of certain assets and
rights known as Y&R Teamspace in exchange for an operating interest in eMotion
Inc. Under UK GAAP, these gains would be included in the statement of total
recognised gains and losses which has not been separately presented within this
restatement.
(E) CONTINGENT CONSIDERATION
In accordance with UK GAAP and WPP's disclosed accounting policy, a reasonable
estimate of contingent consideration payable under acquisition contracts has
been reflected in cost of assets acquired. Under US GAAP, contingent
consideration is not recognised until the outcome of the contingency is
determined beyond a reasonable doubt.
(F) MARKETABLE INVESTMENTS
In accordance with UK GAAP and WPP's disclosed accounting policy, marketable
investments that represent an interest of less than 20% are stated at cost less
provision for diminution in value. Under US GAAP, where such investments are
listed investments and are "available for sale," they are marked to market and
any resulting unrealised gain or loss is recorded in equity share owners' funds
(which is not shown in the consolidated statements of net assets/liabilities).
(G) DEFERRED TAXES
Under UK GAAP, deferred tax assets are accounted for only to the extent that it
is considered probable that a liability or asset will crystallise in the
foreseeable future. Under US GAAP, deferred taxes are accounted for on all
timing differences and a valuation allowance is established in respect of those
deferred tax assets where it is more likely than not that some portion will
remain unrealised.
(H) PENSION LIABILITY
Under US GAAP Y&R recognised an additional pension liability through
shareholders' equity. An adjustment made to eliminate this liability has been
made as it is not applicable under UK GAAP.
(I) TREASURY STOCK
Under UK GAAP, if repurchased Treasury stock is used for the purpose of
satisfying the Company's obligation upon exercise of stock options issued to
employees, the Company should record as an operating cost, the excess of the
cost of repurchasing the treasury stock over the proceeds from employees on
exercising stock options. Under US GAAP, this difference is recorded as a
reduction of shareholders' equity. For the six months ended 30 June 2000, under
UK GAAP, this results in a charge of $57.6 million which has been reflected as
an operating exceptional item within this restatement. For prior
109
<PAGE>
5. UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM'S FINANCIAL INFORMATION UNDER UK
GAAP (CONTINUED)
NOTES TO THE UNAUDITED RESTATEMENTS OF YOUNG & RUBICAM FINANCIAL INFORMATION
UNDER UK GAAP (CONTINUED)
NOTE 2--US TO UK GAAP ADJUSTMENTS (CONTINUED)
years, the difference between the proceeds on exercise of employee share options
and the cost of satisfying these options is not material.
NOTE 3--TRANSLATION OF Y&R CONSOLIDATED FINANCIAL STATEMENTS
Young & Rubicam presents its financial statements in U.S. dollars. Solely for
convenience, the results of Young & Rubicam, as adjusted and restated to conform
with WPP's disclosed accounting policies under UK GAAP, have been translated
into pounds sterling using the approximate average rate for the period for the
profit and loss account (30 June 2000: $1.57=L1, 1999: $1.6178=L1, 1998:
$1.6574=L1 and 1997: $1.6381=L1) and the rate in effect on 31 December for the
balance sheet date (30 June 2000: $1.5166=L1, 1999: $1.6182=L1, 1998:
$1.6638=L1, 1997: $1.6454=L1).
These translations should not be construed as a representation that the US
dollar amounts actually represent, or could be converted into, pounds sterling
at the rates indicated.
110
<PAGE>
6. LETTER FROM PRICEWATERHOUSECOOPERS LLP
The Directors and Proposed Directors
WPP Group plc
27 Farm Street
London W1J 5RJ
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
25 August 2000
Ladies and Gentlemen
WPP GROUP PLC ("THE COMPANY")
We report on the unaudited restatements, under United Kingdom Generally Accepted
Accounting Principles ("UK GAAP") as applied in the financial statements of the
Company ("the UK GAAP restatements"), of the Young & Rubicam Inc ("Y&R")
consolidated profit and loss accounts for the six months ended 30 June 2000 and
for each of the three years ended 31 December 1999 and of its consolidated
statements of net assets/liabilities at 30 June 2000 and at 31 December 1999,
1998 and 1997 prepared under US Generally Accepted Accounting Principles ("US
GAAP") as applied in the financial statements of Y&R. The UK GAAP restatements
are set out in Section 5 of Part III of the Listing Particulars dated
25 August 2000 issued by the Company.
RESPONSIBILITY
It is the responsibility solely of the Directors and Proposed Directors of the
Company to prepare the UK GAAP restatements in accordance with paragraph 12.11
of the Listing Rules of the UK Listing Authority ("the Listing Rules"). It is
our responsibility to form an opinion, as required by the Listing Rules, on the
UK GAAP restatements and to report our opinion to you.
The UK GAAP restatements incorporate significant adjustments to the historical
consolidated financial statements of Y&R. The historical consolidated financial
statements of Y&R for the six months ended 30 June 2000 and for each of the
three years ended 31 December 1999, prepared under US GAAP, are the
responsibility of the management of Y&R. We do not accept responsibility for any
interim financial statements that were not publicly reported upon by us or for
the source documents supporting the adjustments or for any reports previously
issued by us on the historical annual consolidated financial statements beyond
that owed to those to whom any reports were addressed by us at the dates of
their issue.
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the UK Auditing Practices Board. Our work, which
was substantially less in scope than an audit, consisted primarily of comparing
the reconciliation with source documents, considering the evidence supporting
the adjustments, making enquiries of the managements of Y&R and the Company to
establish the accounting policies which were applied in the preparation of the
UK GAAP restatements and discussing the UK GAAP restatements with the Directors
and Proposed Directors of the Company and with the Company's auditors.
111
<PAGE>
6. LETTER FROM PRICEWATERHOUSECOOPERS LLP (CONTINUED)
OPINION
In our opinion the adjustments made are those appropriate for the purpose of
presenting the unaudited restated consolidated profit and loss accounts of Y&R
for the six months ended 30 June 2000 and for each of the three years ended
31 December 1999 and the unaudited restated consolidated statements of net
assets/liabilities at 30 June 2000 and at 31 December 1999, 1998 and 1997 on the
basis consistent in all material respects with the disclosed accounting policies
of the Company under UK GAAP and the UK GAAP restatements have been properly
compiled on the basis stated.
PricewaterhouseCoopers LLP
New York, New York USA
112
<PAGE>
PART IV
PRO FORMA FINANCIAL INFORMATION
1: PRO FORMA FINANCIAL INFORMATION ON WPP AND Y&R
INTRODUCTION
The following unaudited pro forma consolidated profit and loss accounts and net
asset statement (the "pro forma financial information") have been prepared to
illustrate the effects on the profit and loss account and net asset position of
the enlarged WPP Group as if the Merger had occurred, in the case of the pro
forma profit and loss account information, at the beginning of each period
presented and at 30 June 2000 in the case of the unaudited pro forma statement
of net assets.
The enlarged WPP Group will account for the Merger using the acquisition method
of accounting under UK GAAP in accordance with Financial Reporting Standard 6
"Acquisitions and Mergers". The unaudited pro forma financial information has
been prepared on this basis (see note 1 to the pro forma financial information
below).
The pro forma profit and loss account for the six months ended 30 June 2000
combines the unaudited historical profit and loss accounts of WPP and Y&R for
the six months then ended. The pro forma statement of net assets combines the
historical unaudited net assets of WPP and Y&R as at 30 June 2000.
The pro forma profit and loss account for the year ended 31 December 1999
combines the historical profit and loss accounts of WPP and Y&R for the year
ended 31 December 1999.
The financial information for WPP for the six months ended 30 June 2000 has been
extracted without material adjustment from the unaudited interim results set out
in Section 4 of Part II of this document. The financial information for Y&R for
the six months ended 30 June 2000 has been extracted without material adjustment
from the unaudited restatement under UK GAAP as set out in Section 5 of
Part III of this document.
The financial information for WPP for the year ended 31 December 1999 has been
extracted without material adjustment from the audited historical results set
out in Section 3 of Part II of this document. The financial information for Y&R
for the year ended 31 December 1999 has been extracted without material
adjustment from the unaudited restatement under UK GAAP as set out in Section 5
of Part III of this document.
No adjustments have been made to take account of any transactions other than as
described in this section. In particular no account has been taken of any
potential cost savings or other synergies that could result from the Merger.
No adjustments have been made to take account of trading results or changes in
financial position of WPP or Y&R after 30 June 2000 for the pro forma financial
information prepared to 30 June 2000 or of trading results or changes in
financial position of WPP or Y&R after 31 December 1999 for the unaudited pro
forma financial information prepared to 31 December 1999.
In respect of the pro forma profit and loss accounts the unaudited pro forma
adjustments made are expected to have a continuing impact on the enlarged WPP
Group.
THE UNAUDITED PRO FORMA FINANCIAL INFORMATION HAS BEEN PREPARED FOR ILLUSTRATIVE
PURPOSES ONLY. BECAUSE OF ITS NATURE, IT MAY NOT GIVE A TRUE PICTURE OF WPP'S
RESULTS OR FINANCIAL POSITION, NOR OF THE PROFITS OR NET ASSETS WHICH WOULD HAVE
BEEN REPORTED IF THE MERGER HAD OCCURRED ON THE DATES ASSUMED.
113
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
ADJUSTMENT
WPP Y&R PRO FORMA
----------- ----------- -----------
SIX MONTHS ENDED 30 JUNE 2000 L L L
----------------------------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
TURNOVER (GROSS BILLINGS)............................. 5,655.9 2,703.4 8,359.3
Cost of Sales......................................... (4,446.8) (2,102.6) (6,549.4)
-------- -------- ---------
REVENUE............................................... 1,209.1 600.8 1,809.9
Direct Costs.......................................... (138.0) -- (138.0)
-------- -------- ---------
GROSS PROFIT.......................................... 1,071.1 600.8 1,671.9
Operating costs....................................... (924.6) (524.1) (1,448.7)
OPERATING PROFIT BEFORE EXCEPTIONAL CHARGE............ 146.5 76.7 223.2
Exceptional operating charge.......................... -- (36.7) (36.7)
-------- -------- ---------
OPERATING PROFIT...................................... 146.5 40.0 186.5
Income from associates................................ 14.2 2.4 16.6
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION............................................. 160.7 42.4 203.1
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST, TAX AND
EXCEPTIONAL CHARGE................................... 160.7 79.1 239.8
Net interest payable and similar charges.............. (23.0) (5.2) (28.2)
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION......... 137.7 37.2 174.9
Tax on profit on ordinary activities before
exceptional item..................................... (41.3) (28.9) (70.2)
Exceptional tax credit arising on exercised stock
options.............................................. -- 18.1 18.1
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION.......... 96.4 26.4 122.8
Minority interests.................................... (3.3) (0.9) (4.2)
-------- -------- ---------
PROFIT ATTRIBUTABLE TO ORDINARY SHARE OWNERS.......... 93.1 25.5 118.6
======== ======== =========
EARNINGS PER SHARE
Basic earnings per ordinary share..................... 12.3p 35.1p 11.2p
Diluted earnings before exceptional items per ordinary
share................................................ 12.0p 52.8p 12.2p
Diluted earnings per ordinary share................... 12.0p 31.2p 10.6p
EARNINGS PER ADS
Basic earnings per ADS................................ 61.5p n/a 56.0p
Diluted earnings before exceptional items per ADS..... 60.0p n/a 61.0p
Diluted earnings per ADS.............................. 60.0p n/a 53.0p
</TABLE>
The notes to the unaudited pro forma financial information are an integral part
of this statement.
114
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
ADJUSTMENT
WPP Y&R PRO FORMA
----------- ----------- -----------
YEAR ENDED 31 DECEMBER 1999 L L L
--------------------------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
TURNOVER (GROSS BILLINGS)............................. 9,345.9 5,273.1 14,619.0
Cost of Sales......................................... (7,173.3) (4,211.7) (11,385.0)
-------- -------- ---------
REVENUE............................................... 2,172.6 1,061.4 3,234.0
Direct Costs.......................................... (317.3) -- (317.3)
-------- -------- ---------
GROSS PROFIT.......................................... 1,855.3 1,061.4 2,916.7
Operating Costs....................................... (1,591.8) (923.4) (2,515.2)
-------- -------- ---------
OPERATING PROFIT...................................... 263.5 138.0 401.5
Income from Associates................................ 27.3 6.6 33.9
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION............................................. 290.8 144.6 435.4
Net interest payable and similar charges.............. (35.4) (9.2) (44.6)
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION......... 255.4 135.4 390.8
Tax on profit on ordinary activities before
exceptional item..................................... (76.6) (50.6) (127.2)
Exceptional tax credit arising on exercised stock
options.............................................. -- 26.2 26.2
TAX ON PROFIT ON ORDINARY ACTIVITIES.................. (76.6) (24.4) (101.0)
-------- -------- ---------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION.......... 178.8 111.0 289.8
Minority interests.................................... (6.0) (2.7) (8.7)
-------- -------- ---------
PROFIT ATTRIBUTABLE TO ORDINARY SHARE OWNERS.......... 172.8 108.3 281.1
======== ======== =========
EARNINGS PER SHARE
Basic earnings per ordinary share..................... 22.9p 157.6p 27.0p
Diluted earnings before exceptional tax credit per
ordinary share....................................... 22.5p 99.0p 22.9p
Diluted earnings per ordinary share................... 22.5p 130.6p 25.2p
EARNINGS PER ADS
Basic earnings per ADS................................ 114.5p n/a 135.0p
Diluted earnings before exceptional tax credit per
ADS.................................................. 112.5p n/a 114.5p
Diluted earnings per ADS.............................. 112.5p n/a 126.0p
</TABLE>
The notes to the unaudited pro forma financial information are an integral part
of this statement.
115
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF NET ASSETS AT 30 JUNE 2000
<TABLE>
<CAPTION>
ADJUSTMENT PRO FORMA
WPP Y&R ADJUSTMENTS PRO FORMA
-------- ---------- ----------- ---------
L L L L
-------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets
Corporate brands............................... 350.0 -- -- 350.0
Goodwill--existing............................. 511.0 251.2 (251.2) 511.0
Goodwill--resulting from the transaction....... -- -- 3,964.3 3,964.3
Tangible assets.................................. 211.1 127.7 30.9 369.7
Investments...................................... 448.9 159.6 (36.2) 572.3
-------- -------- -------- --------
1,521.0 538.5 3,707.8 5,767.3
CURRENT ASSETS
Stocks and work in progress...................... 198.1 75.8 -- 273.9
Debtors.......................................... 1,336.3 753.1 -- 2,089.4
Debtors within working capital facility:
Gross debts.................................... 396.3 -- -- 396.3
Non-returnable proceeds........................ (228.1) -- -- (228.1)
-------- -------- -------- --------
168.2 -- -- 168.2
Cash at bank and in hand......................... 395.9 105.2 218.1 719.2
-------- -------- -------- --------
2,098.5 934.1 218.1 3,250.7
Creditors: amounts falling due within one year... (2,404.2) (1,097.1) (92.7) (3,594.0)
Net current (liabilities)/assets................. (305.7) (163.0) 125.4 (343.3)
Total assets less current liabilities............ 1,215.3 375.5 3,833.2 5,424.0
Creditors: amounts falling due after more than
one year....................................... (754.9) (330.5) -- (1,085.4)
Provisions for liabilities and charges........... (75.7) (7.1) -- (82.8)
-------- -------- -------- --------
Net assets....................................... 384.7 37.9 3,833.2 4,255.8
======== ======== ======== ========
</TABLE>
The notes to the unaudited pro forma financial information are an integral part
of this statement.
116
<PAGE>
Notes to the unaudited pro forma financial information
1. UNAUDITED PRO FORMA ACQUISITION ADJUSTMENTS
UNAUDITED PRO FORMA PROFIT AND LOSS ACCOUNT
Other than the incorporation of the Y&R results (as restated under UK GAAP),
there are no pro forma adjustments required to arrive at the unaudited pro forma
profit and loss acount for the enlarged group.
UNAUDITED PRO FORMA NET ASSET STATEMENT
The Unaudited Pro Forma Financial Information records the merger as being
accounted for as an acquisition with the excess of the fair value of the
consideration over the fair value of net assets acquired being allocated to
goodwill.
The Unaudited Pro Forma Financial Information assumes that WPP will issue 4.175
WPP Ordinary Shares, equivalent to 0.835 of a WPP ADS, in exchange for each Y&R
Common Share. The total purchase price assumed is based upon the WPP closing
middle market quotation on 30 June 2000 of L9.65 and 73.2 million Y&R Common
Shares and 23.6 million Y&R Stock Options multiplied by the exchange ratio of
4.175. This also assumes that 404 million new WPP Ordinary Shares will have been
issued in connection with the Merger. In calculating the number of new WPP
Ordinary Shares to be issued, no account has been taken of (i) any Y&R Common
Shares issued since 30 June 2000; (ii) any Y&R Stock Options granted since
30 June 2000; (iii) any WPP Ordinary Shares to be issued in respect of the Y&R
Convertible Notes or (iv) any new WPP Ordinary Shares that will have to be
issued as consideration for certain previous acquisitions by Y&R.
Estimated professional fees of L55.6 million (primarily legal, investment
bankers' and accountants' fees) and stamp duty of L37.1 million related to the
acquisition are assumed to be accounted for as acquisition costs and share issue
costs, respectively. These transaction costs of L92.7 million are expected to be
paid on completion and as a result have been accrued in the pro forma net assets
statement (creditors: amounts falling due within one year).
A preliminary allocation of the purchase price has been performed for purposes
of the Unaudited Pro Forma Financial Information based on initial appraisal
estimates and other valuation studies which are in process and which WPP
believes are reasonable. The final allocation is subject to completion of these
studies, which is expected to be within the next twelve months. It is expected
that as a result of these studies further adjustments may be required in
particular in relation to taxation and other balance sheet accounts. A summary
is shown below:
<TABLE>
<CAPTION>
30 JUNE 2000
L
-------------
(IN MILLIONS)
<S> <C>
Share consideration (L40.4 million share capital; L3,821.0
million share premium).................................... 3,898.5
Professional fees........................................... 55.6
Total purchase consideration................................ 3,954.1
Less: Fair value of net liabilities acquired (see below).... 228.3
Proceeds on exercise of Y&R options (a)..................... (218.1)
-------
Goodwill.................................................... 3,964.3
-------
</TABLE>
Goodwill arising on the transaction has been assumed to have an indefinite
useful economic life and has therefore not been amortised. Goodwill assumed to
have an indefinite life is subject to an annual impairment review conducted in
accordance with FRS 11 "Impairment of Fixed Assets and Goodwill."
Explanation of goodwill adjustments:
(a) Proceeds from the assumed exercise of 21,459,668 Y&R options
outstanding at 30 June 2000 which are or become exercisable as a
result of the Merger.
117
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
1. UNAUDITED PRO FORMA ACQUISITION ADJUSTMENTS (CONTINUED)
Fair value adjustments relate to intangible fixed assets, tangible fixed assets,
fixed asset investments and the proceeds from the exercise of Y&R stock options.
<TABLE>
<CAPTION>
30 JUNE 2000
L
-------------
(IN MILLIONS)
<S> <C>
Book value of net assets in accordance with UK GAAP......... 37.9
Fair value adjustments:
Elimination of existing goodwill (a)........................ (251.2)
Revaluation of 285 Madison Avenue (b)....................... 30.9
Revaluation of listed investments (c)....................... (30.0)
Elimination of Treasury Stock (d)........................... (6.2)
Minority interest........................................... (9.7)
------
Fair value of net liabilities acquired...................... (228.3)
------
</TABLE>
Explanation of fair value adjustments:
(a) Eliminates the existing Y&R goodwill which will be assumed in the WPP
goodwill arising as a result of the Merger.
(b) Revalues the freehold office owned by Y&R at 285 Madison Avenue to
the estimated fair market value.
(c) Revalues the listed investments held by Y&R to their fair market
value based upon the market price at 30 June 2000.
(d) Eliminates treasury stock held as an asset in the balance sheet which
will be cancelled on completion under the terms of the Merger
Agreement.
2. EARNINGS PER SHARE
Unaudited pro forma earnings per share is calculated based on the weighted
average number of shares outstanding during the period, adjusted as if the
merger had taken place at the beginning of the period.
The weighted average number of shares is calculated using the average weighted
number of WPP shares during the respective periods aggregated with the weighted
average number of Y&R shares during the respective periods, multiplied by 4.175,
the number of WPP ordinary shares underlying the exchange ratio.
Diluted earnings per share takes into account the exercise of WPP employee share
options where these are expected to be dilutive, aggregated with the number of
Y&R options expected to be dilutive, multiplied by 4.175, the number of WPP
ordinary shares underlying the exchange ratio. The number of shares used in the
30 June 2000 calculation of pro forma number of shares also includes the
dilutive impact of the Y&R 3% convertible notes.
<TABLE>
<CAPTION>
BASIC NUMBER OF SHARES (MILLION)
---------------------------------------------------------------------
SIX MONTHS ENDED 30 JUNE 2000 YEAR ENDED 31 DECEMBER 1999
--------------------------------- ---------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
-------- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average................... 757.5 72.6 n/a 753.3 68.7 n/a
Multiplication Factor.............. n/a 4.175 n/a n/a 4.175 n/a
Weighted average, new WPP shares... 757.5 303.1 1,060.6 753.3 286.8 1,040.1
</TABLE>
118
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
2. EARNINGS PER SHARE (CONTINUED)
Unaudited pro forma basic earnings per share have been calculated using
unaudited pro forma earnings of L118.6 million for the six months ended 30 June
2000 and unaudited pro forma earnings of L281.1 million for the year ended
31 December 1999.
<TABLE>
<CAPTION>
DILUTED NUMBER OF SHARES (MILLION)
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 31 DECEMBER 1999
--------------------------------- ---------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
-------- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average.......................... 775.2 86.4 n/a 768.7 82.9 n/a
Multiplication factor..................... n/a 4.175 n/a n/a 4.175 n/a
Weighted average, new WPP shares.......... 775.2 360.7 1,135.9 768.7 346.1 1,114.8
</TABLE>
Unaudited pro forma diluted earnings per share have been calculated using
unaudited pro forma earnings of L120.1 million for the six months ended 30 June
2000 (which includes L1.5 million in respect of the elimination of interest
arising on the Y&R convertible loan stock in 2000) and unaudited pro forma
earnings of L281.1 million for the year ended 31 December 1999.
Unaudited pro forma diluted earnings before exceptional items per ordinary share
have been calculated using earnings of L138.7 million for the six months ended
30 June 2000 and L254.9 million for the year ended 31 December 1999 which
reflect the removal of the Y&R exceptional operating charge in respect of
Treasury Stock (for the six months ended 30 June 2000 only) and the Y&R
exceptional tax credits arising on the exercise of stock options.
Basic and diluted earnings per ADS have been calculated as detailed above,
multiplied by a factor of 5.
3. SEGMENTAL INFORMATION
The tables below present unaudited pro forma segment information, including Y&R
segments presented to conform with the segments as reported by WPP and with UK
GAAP.
Contribution by Operating Sector:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER 1999
---------------------------------------------------------------------------------------
REVENUE PBIT(1)
------------------------------------------ ------------------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
L MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Advertising & media investment
management.......................... 1,013.1 512.5 1,525.6 155.9 84.6 240.5
Information & consultancy............. 419.7 -- 419.7 42.1 -- 42.1
Public relations & public affairs..... 178.9 195.7 374.6 23.9 18.1 42.0
Branding & identity, healthcare and
specialist communications........... 560.9 353.2 914.1 68.9 41.9 110.8
------------ ------------ ------------ ------------ ------------ ------------
2,172.6 1,061.4 3,234.0 290.8 144.6 435.4
============ ============ ============ ============ ============ ============
</TABLE>
Contribution by Geographical Area:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER 1999
---------------------------------------------------------------------------------------
REVENUE PBIT(1)
------------------------------------------ ------------------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
L MILLIONS
<S> <C> <C> <C> <C> <C> <C>
North America......................... 954.0 579.6 1,533.6 141.7 81.4 223.1
United Kingdom........................ 434.7 94.8 529.5 51.5 6.8 58.3
Continental Europe.................... 426.2 265.1 691.3 55.8 37.2 93.0
Asia Pacific, Latin America, Africa &
Middle East......................... 357.7 121.9 479.6 41.8 19.2 61.0
------------ ------------ ------------ ------------ ------------ ------------
2,172.6 1,061.4 3,234.0 290.8 144.6 435.4
============ ============ ============ ============ ============ ============
</TABLE>
------------------
NOTE:
(1) "PBIT" = profit on ordinary activities before interest, taxation and
exceptional items.
119
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
3. SEGMENTAL INFORMATION (CONTINUED)
Contribution by Operating Sector
<TABLE>
<CAPTION>
SIX MONTHS ENDED 30 JUNE 2000
-------------------------------------------------------------------------------
REVENUE PBIT(1)
---------------------------------------- ------------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
------------ ---------- ------------ ---------- ---------- ----------
L MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Advertising & media investment
management........................... 556.6 274.3 830.9 84.5 43.7 128.2
Information & consultancy.............. 239.5 -- 239.5 22.5 -- 22.5
Public relations & public affairs...... 121.7 125.4 247.1 18.7 17.4 36.1
Branding & identity, healthcare and
specialist communications............ 291.3 201.1 492.4 35.0 18.0 53.0
------------ ---------- ------------ ---------- --------- ----------
1,209.1 600.8 1,809.9 160.7 79.1 239.8
============ ========== ============ ========== ========= ==========
</TABLE>
Contribution by Geographical Area
<TABLE>
<CAPTION>
SIX MONTHS ENDED 30 JUNE 2000
-------------------------------------------------------------------------------
REVENUE PBIT(1)
---------------------------------------- ------------------------------------
ADJUSTMENT ADJUSTMENT
WPP Y&R PRO FORMA WPP Y&R PRO FORMA
------------ ---------- ------------ ---------- ---------- ----------
L MILLIONS
<S> <C> <C> <C> <C> <C> <C>
North America.......................... 553.6 331.2 884.8 88.1 55.6 143.7
UK..................................... 234.9 55.1 290.0 28.1 -0.2 27.9
Continental Europe..................... 218.7 134.9 353.6 28.1 16.7 44.8
Asia Pacific, Latin America, Africa &
Middle East.......................... 201.9 79.6 281.5 16.4 7.0 23.4
------------ ---------- ------------ ---------- --------- ----------
1,209.1 600.8 1,809.9 160.7 79.1 239.8
============ ========== ============ ========== ========= ==========
</TABLE>
------------------
NOTE:
(1) "PBIT" = profit on ordinary activities before interest, taxation and
exceptional items.
120
<PAGE>
2: LETTER FROM ARTHUR ANDERSEN
[LOGO]
ARTHUR ANDERSEN
1 Surrey Street
London
WC2R 2PS
25 August 2000
The Directors and Proposed Directors
WPP Group plc
27 Farm Street
London
W1J 5RJ
Goldman Sachs International
Peterborough Court
133 Fleet Street
London
EC4A 2BB
Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Dear Sirs
We report on the pro forma financial information ("the pro forma financial
information") set out in Section 1 of Part IV of the Listing Particulars dated
25 August 2000 issued by WPP Group plc, which has been prepared, for
illustrative purposes only, to provide information about how the proposed merger
of WPP Group plc with Young & Rubicam Inc. might have affected the financial
information presented.
RESPONSIBILITIES
It is the responsibility solely of the Directors and Proposed Directors of WPP
Group plc to prepare the pro forma financial information in accordance with
paragraph 12.29 of the Listing Rules of the UK Listing Authority ("the Listing
Rules").
It is our responsibility to form an opinion, as required by the Listing Rules,
on the pro forma financial information and to report our opinion to you. We do
not accept any responsibility for any reports previously given by us on any
financial information used in the compilation of the pro forma financial
information beyond that owed to those to whom those reports were addressed by us
at the dates of their issue.
<TABLE>
<S> <C> <C>
Offices in: London Authorised by the A list of partners is
Birmingham Institute of available at
Bristol Cambridge Croydon Chartered Accountants in 1 Surrey Street
Edinburgh Glasgow Leeds England London WC2R 2PS
Manchester Newcastle and Wales to carry on (principal place of
Nottingham investment business)
Reading St Albans St business
Helier
</TABLE>
121
<PAGE>
[LOGO]
2: LETTER FROM ARTHUR ANDERSEN (CONTINUED)
BASIS OF OPINION
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards and Bulletin 1998/8 "Reporting on pro forma financial
information pursuant to the Listing Rules" issued by the Auditing Practices
Board. Our work, which involved no independent examination of any of the
underlying financial information, consisted primarily of comparing the
unadjusted financial information with the source documents, considering the
evidence supporting the adjustments and discussing the pro forma financial
information with the Directors and Proposed Directors of WPP Group plc.
Our work has not been carried out in accordance with auditing standards
generally accepted in the United States of America and accordingly should not be
relied upon as if it had been carried out in accordance with those standards.
OPINION
In our opinion:
1. the pro forma financial information has been properly compiled on the
basis stated;
2. such basis is consistent with the accounting policies of WPP Group plc;
and
3. the adjustments are appropriate for the purposes of the pro forma
financial information as disclosed pursuant to paragraph 12.29 of the
Listing Rules.
Yours faithfully
ARTHUR ANDERSEN
122
<PAGE>
PART V
TERMS OF THE MERGER AND REGULATORY MATTERS
SECTION A: SUMMARY OF THE TERMS OF THE MERGER
1. TERMS
1.1 The Merger will be effected by a statutory merger under Delaware general
corporate law whereby York II Merger Corp (a Delaware corporation and an
indirect wholly-owned subsidiary of WPP), will be merged with and into Y&R
and Y&R, as the surviving entity, will become an indirect wholly-owned
subsidiary of WPP in accordance with the terms of the Merger Agreement.
1.2 The Merger will become effective and be completed when Y&R and York
II Merger Corp file a certificate of merger with the Secretary of State of
the State of Delaware or at a later time, if so specified in the
certificate of merger. It is expected that the Merger will become effective
on the same day as the closing of the Merger, which will take place either
as soon as practicable after the conditions described in the Merger
Agreement have been satisfied or waived or on another date agreed upon by
WPP and Y&R.
1.3 At the time the Merger becomes effective:
(i) each Y&R Common Share will be cancelled and converted into a right
to receive 0.835 of a WPP ADS (each holder of Y&R Common Shares may
elect to receive WPP Ordinary Shares instead of all or a portion of
the WPP ADSs the holder is otherwise entitled to receive); and
(ii) each outstanding Y&R Stock Option will be converted into an option
to purchase WPP ADSs or WPP Ordinary Shares as described in paragraph
1.5 of this Section A.
If, before the completion of the Merger, a stock split, a share
combination, stock dividend, recapitalisation or redenomination of share
capital or other similar transaction causes a change to the number of
outstanding Y&R Common Shares or WPP Ordinary Shares, or the number of WPP
Ordinary Shares represented by a WPP ADS changes, the number of WPP ADSs or
WPP Ordinary Shares, as the case may be, into which a Y&R Common Share will
be converted under the terms of the Merger, will be appropriately adjusted.
1.4 Each WPP ADS represents five WPP Ordinary Shares and Y&R Share Owners will
receive 0.835 of a WPP ADS in exchange for each Y&R Common Share they own
at the Effective Date. Y&R Share Owners will have the right to elect to
receive WPP Ordinary Shares instead of all or a proportion of the WPP ADSs
they are otherwise entitled to receive. Y&R Share Owners who would
otherwise have been entitled to receive a fraction of a WPP ADS or WPP
Ordinary Share will receive, in lieu thereof, a payment in cash (without
interest) equal to their proportionate interest in the net proceeds from
the sale of the WPP Ordinary Shares representing the aggregate of such
fractional entitlements which such Y&R Share Owners would be entitled to
receive pursuant to the terms of the Merger.
1.5 Upon the Merger becoming effective, all Y&R Stock Options held by a person
whose primary place of residence or employment with Y&R is in Europe will
be converted into options to acquire WPP Ordinary Shares. All other options
will be converted into options to acquire WPP ADSs.
Each Y&R Stock Option will remain subject to the terms of the Y&R stock
option plan under which it was issued, except that after the Merger becomes
effective, Y&R Stock Options that are converted into options to acquire WPP
Ordinary Shares will be exercisable for 4.175 WPP Ordinary Shares for each
Y&R Common Share subject to that option before the Merger and all other
options will be exercisable for 0.835 of a WPP ADS for each Y&R Common
Share subject to that option before the Merger.
The exercise price per WPP Ordinary Share or WPP ADS, as applicable, for
each of these options will be the exercise price per Y&R Common Share
applicable to that option before completion of the Merger divided by 4.175,
if the option is exercisable for WPP Ordinary Shares, or 0.835, if the
option is exercisable for WPP ADSs.
123
<PAGE>
Notwithstanding the foregoing, the number of WPP Ordinary Shares or WPP
ADSs, as applicable, and the exercise price per WPP Ordinary Share or WPP
ADS applicable to any Y&R Stock Option intended to be an "incentive stock
option," as defined in section 422 of the US Code, will be adjusted as
required by that section of the US Code.
1.6 Y&R Share Owners who receive WPP ADSs (or WPP Ordinary Shares) will be
entitled to receive all dividends and distributions payable on the WPP
Ordinary Shares represented by such WPP ADSs (or those WPP Ordinary Shares)
except for the interim dividend payable in respect of the year ending
31 December 2000 and any other dividend the record date of which falls
prior to the Effective Date.
1.7 Under the terms of the Merger, the Y&R Convertible Notes will become
convertible into 0.835 of a WPP ADS for each Y&R Common Share into which
the Y&R Convertible Notes are convertible prior to completion of the
Merger.
2. SHARE OWNER APPROVALS AND OTHER CONDITIONS
2.1 WPP and Y&R will not implement the Merger pursuant to the Merger Agreement
unless certain conditions are satisfied or waived. These include:
(a) the Merger being duly approved by holders of a majority of the
outstanding Y&R Common Shares;
(b) the resolutions to approve the Merger, increase WPP's ordinary share
capital, grant the WPP Board authority to allot shares and to appoint
the Proposed Directors being duly passed by WPP Share Owners at the
EGM;
(c) the UK Listing Authority having agreed to admit to the Official List,
and the London Stock Exchange having agreed to admit to trading on
its market for listed securities, the Consideration Shares and
Admission having become effective;
(d) the waiting period (and any extension thereof) applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, having expired or been terminated;
(e) the Registration Statement on Form F-4 of WPP (the "F-4 Registration
Statement") having become effective under the US Securities Act of
1933, as amended, no stop order suspending the effectiveness of the
F-4 Registration Statement being in effect, no stop order proceedings
having been threatened or initiated by the SEC and not concluded or
withdrawn and all US State securities approvals required to
consummate the Merger having been received;
(f) WPP or Y&R having received in respect of the Merger and any matters
arising therefrom:
(i) confirmation by way of decision from the European Commission
under Council Regulation EEC 4064/89 (as amended) (the "Merger
Regulation"), in accordance with Article 6(1)(b), 8(2) or
10(6), and/or from any national authority within the European
Community to whom the Merger (or any part of it) is referred
pursuant to Article 9(3) of the Merger Regulation, that the
Merger and any matters arising therefrom are compatible with
the common market insofar as the Merger constitutes a
concentration with a Community dimension within the scope of
the Merger Regulation and insofar as the Merger (or any part of
it) is referred to any national competent authority, that the
Merger is granted clearance by that national competent
authority;
(ii) necessary approvals under competition regulations of
jurisdictions outside the United States and the European Union;
and
(iii) all other consents, approvals, declarations and authorisations
of other governmental entities, which if not obtained before
completion of the Merger would have a Material Adverse Effect
on WPP or Y&R on an individual basis or make the Merger
illegal.
(g) any approvals, confirmations, declarations, decisions and/or consents
required for the purpose of the conditions specified in paragraphs
(c) to (f) above containing no terms, conditions or restrictions
relating or applying to, or requiring changes in, or limitations on,
124
<PAGE>
the operation of any asset or business of WPP or Y&R or any of their
respective subsidiaries and which term, condition or restriction
individually or in the aggregate would reasonably be expected to have
a Material Adverse Effect on WPP and Y&R taken together after giving
effect to the Merger; and
(h) there not being any law, judgment or order (whether temporary,
preliminary or permanent) enacted by a governmental entity which
restrains, enjoins or otherwise prohibits the completion of the
Merger or that would materially frustrate the express intent and
purposes of the Merger Agreement and no governmental entity having
instituted any proceedings that would have a Material Adverse Effect
on WPP and Y&R taken together after
completion of the Merger.
2.2 The obligation of WPP to complete the Merger is subject to the
satisfaction, or waiver by WPP, prior to the Effective Date, of the
following additional conditions:
(a) each of the representations and warranties of Y&R contained in the
Merger Agreement being true and correct in all material respects when
the Merger Agreement was entered into and as at the Effective Date as
if such representations and warranties were repeated as at such date
(except, in each case, to the extent any such representation or
warranty expressly speaks as of an earlier date only), provided that
this condition insofar as it relates to representations and
warranties (other than the representation and warranty in respect of
the authorised and issued share capital of Y&R) will be deemed
satisfied so long as any failures of such representations and
warranties to be true and correct, taken together (but disregarding
any materiality qualification in the representations and warranties),
would not reasonably be expected to have a Material Adverse Effect on
Y&R measured prior to the Merger, and WPP having received a
certificate signed by an executive officer of Y&R to such effect;
(b) Y&R having performed all material obligations required to be
performed by it under the Merger Agreement at or prior to the
Effective Date and WPP having received a certificate signed by an
executive officer of Y&R to such effect;
(c) WPP having received an opinion from its US counsel, Fried, Frank,
Harris, Shriver & Jacobson, substantially to the effect that, on the
basis of the facts, representations and assumptions set forth in that
opinion:
(i) the Merger will be treated for US federal income tax purposes
as a reorganisation within the meaning of section 368 of the US
Code;
(ii) WPP shall be treated as a corporation under section 367(a) of
the US Code with respect to each transfer of property pursuant
to the Merger;
(iii) no gain or loss will be recognised by Y&R Share Owners who
exchange Y&R Common Shares solely for WPP Ordinary Shares or
WPP ADSs pursuant to the Merger, except with respect to cash
received instead of fractional entitlement to those
shares; and
(iv) each of WPP, Y&R, York Merger Corp and York II Merger Corp will
be a party to the reorganisation within the meaning of section
368 of the US Code.
2.3 The obligations of Y&R to complete the Merger are subject to the
satisfaction, or waiver by Y&R, prior to the Effective Date of conditions
substantially similar MUTATIS MUTANDIS to the conditions described in
paragraph 2.2 (a) and (b). In addition, the obligations of Y&R to complete
the Merger are subject to the following additional conditions:
(a) Y&R having received an opinion from its US counsel, Wachtell, Lipton,
Rosen & Katz, substantially to the effect that, on the basis of the
facts, representations and assumptions set forth in that opinion:
(i) the Merger will be treated for US federal income tax purposes
as a reorganisation within the meaning of section 368 of the US
Code;
(ii) WPP shall be treated as a corporation under section 367(a) of
the US Code with respect to each transfer of property pursuant
to the Merger;
125
<PAGE>
(iii) no gain or loss will be recognised by Y&R Share Owners who
exchange Y&R Common Shares solely for WPP Ordinary Shares or
WPP ADSs pursuant to the Merger, except with respect to cash
received instead of fractional entitlements to those shares;
and
(iv) each of WPP, Y&R, York Merger Corp and York II Merger Corp will
be a party to the reorganisation within the meaning of section
368 of the US Code; and
(b) the resolutions numbered 2 to 5 in the notice convening the EGM,
relating to the election to the Board of WPP of those directors
designated by Y&R, having been approved by WPP Share Owners at the
EGM.
A description of certain of the regulatory consents referred to above is
set out in Section C of this Part V.
3. CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties by Y&R and WPP regarding, among other things, due organisation,
good standing and qualification; capital structure; corporate authority to
enter into the contemplated transactions and lack of conflicts with
corporate governance documents, contracts, laws and governmental filings;
SEC reports and financial statements; litigation and liabilities; absence
of certain changes or events; brokers and finders; employee benefit plans;
labour and employment matters; licences; intellectual property; continuity
of business; compliance with laws; non-competition provisions in certain
contracts; joint ventures and tax matters. Y&R has also represented that
it has taken or will take all actions appropriate and necessary to ensure
that provisions of the Delaware general corporation law limiting business
combinations will not apply to the Merger Agreement, the Merger and any
other transaction contemplated by the Merger Agreement.
4. DIRECTORS, MANAGEMENT AND EMPLOYEES OF WPP FOLLOWING THE MERGER
4.1 BOARD OF DIRECTORS OF WPP
(a) Following completion of the Merger, the Board of WPP is to consist of
sixteen Directors, twelve of whom will be designated by WPP (eight of
whom will be non-executive Directors) and four of whom will be
designated by Y&R (three of whom will be non-executive Directors).
WPP has agreed to procure the resignation of two current Directors of
WPP who are not to continue as Directors. In addition, prior to
30 June 2001, Y&R will be entitled to appoint a further non-executive
Director to the board of WPP, who is neither a US resident nor a US
citizen.
(b) Pursuant to the Merger Agreement, certain senior employees of Y&R
have or are to enter into employment agreements, which are effective
from the Effective Date, and no-sale agreements. The employment
agreements will supercede the senior employees' existing contracts of
employment, if any, and their rights under Y&R's change of control
severance plan.
Further details of the no-sale agreements are set out in Section B of this
Part V.
4.2 Y&R EMPLOYEES
(a) For a period of at least twelve months following the Effective Date,
Y&R employees remaining employed by Y&R will be entitled to receive
salary, incentive compensation and other employee benefits except
stock-based benefits and compensation which in the aggregate are
substantially comparable to those currently provided by Y&R,
including any payments made under the Y&R year 2000 annual bonus
programme.
(b) For a period of at least twelve months following the Effective Date,
grants of stock-based benefits and compensation to Y&R employees will
be made in accordance with procedures and criteria that are
substantially similar to those applicable to similarly situated
employees of WPP.
126
<PAGE>
(c) In addition WPP has agreed to honour the terms of:
(i) each existing employment, change of control, severance and
termination agreement between Y&R and any Y&R director, officer
or employee; and
(ii) all obligations pursuant to outstanding restoration plans,
equity-based plans, programmes or agreements, bonus plans or
programmes, bonus deferral plans, vested and accrued benefits
under any employee benefit plan, programme or arrangement of
Y&R and similar employment, compensation and benefit
arrangements and agreements in effect on the Effective Date, in
each case only to the extent the obligation is legally binding
on Y&R or any of its subsidiaries.
4.3 TRANSITION COMMITTEE
Pursuant to the terms of the Merger Agreement, a committee will be
maintained for one year from the Effective Date, initially comprising
Mr Thomas D. Bell Jr. who will be chairman, Mr Michael J. Dolan,
Sir Martin Sorrell and Mr Paul Richardson. The transition committee will
not be a committee of the Board of WPP and will not be responsible for
controlling the operations of the business of WPP or Y&R. During this
period, approval by a majority of the members of the transition committee
will be required for (i) combining any of the material businesses of the
Y&R Group with those of the WPP Group, (ii) transferring any of the
material businesses of the Y&R Group to the WPP Group or (iii) offering
any employee of the Y&R Group employment in the WPP Group. If WPP breaches
any of these provisions and fails to cure such breach within 30 days after
receiving notice, the Y&R employees who are a party to the no-sale
agreements will have the right during the 30 day period thereafter to
terminate the no-sale restrictions affecting their Y&R Common Shares.
5. CHANGES TO ARTICLES OF ASSOCIATION OF WPP
Under the terms of the Merger Agreement, WPP is required to propose
resolutions to be approved by WPP Share Owners at the annual general
meeting of WPP to be held in 2001 designed to give WPP ADS holders the
ability to attend, vote and speak at general meetings and appoint proxies.
6. INDEMNIFICATION AND INSURANCE
Pursuant to the terms of the Merger Agreement, WPP has agreed that after
the Effective Date, all rights to indemnification and limitations on
liability existing under the Y&R certificate of incorporation and by-laws
in favour of directors and officers of Y&R, or under an agreement in
effect at the date of the Merger Agreement between any such director or
officer of Y&R or its subsidiaries, with respect to actions or omissions
by them on or prior to the Effective Date, will continue in full force and
effect and WPP will, for a period of six years after the Effective Date,
procure directors' and officers' liability insurance with respect to acts
or omissions occurring prior to the Effective Date, covering each person
currently covered by Y&R's directors' and officers' liability insurance on
terms and in amounts no less favourable than those currently in effect.
WPP has agreed, to the extent permitted by law, for six years after the
Effective Date to indemnify persons who were directors or officers of Y&R
or its subsidiaries before the Effective Date for liabilities they incur
as a result of their acting in those capacities.
7. TERMINATION OF THE MERGER AGREEMENT
7.1 The Merger Agreement may be terminated at any time before the Effective
Date, whether before or after approval by Y&R Share Owners and WPP Share
Owners, by the mutual written consent of Y&R and WPP.
7.2 The Merger Agreement may also be terminated by either Y&R or WPP at any
time before the Effective Date if:
(a) the Merger has not been completed by the Long Stop Date provided that
this right shall not be exercisable by a party whose failure to
comply in any material respect with its obligations resulted in the
failure to complete the Merger by the Long Stop Date;
127
<PAGE>
(b) any court order or law permanently prohibiting consummation of the
Merger has become final and non-appealable unless the company seeking
to terminate did not use commercially reasonable efforts to prevent
the order or law;
(c) the approval of Y&R Share Owners required by the Merger Agreement has
not been obtained; or
(d) the approval of WPP Share Owners required by the Merger Agreement has
not been obtained.
7.3 The Merger Agreement may be terminated at any time before the Effective
Date, whether before or after approval by Y&R Share Owners, by Y&R if:
(a) the Board of WPP has withdrawn or adversely modified its approval or
recommendation of the Merger to WPP Share Owners;
(b) WPP or the Board of WPP has recommended an alternative proposal or
offer to WPP Share Owners; or
(c) any representation or warranty of WPP contained in the Merger
Agreement is inaccurate, or WPP breaches any of the obligations
contained in the Merger Agreement, and the breach is not remedied
within 20 business days following written notice from Y&R, and such
breach or inaccuracy would result in any condition of the Merger
Agreement not being satisfied by the Long Stop Date.
7.4 The Merger Agreement may be terminated at any time before the Effective
Date, whether before or after approval by WPP Share Owners, by WPP if:
(a) the Board of Y&R has withdrawn or adversely modified its approval or
recommendation of the Merger to Y&R Share Owners;
(b) Y&R or the Board of Y&R has recommended an alternative proposal or
offer to Y&R Share Owners; or
(c) any representation or warranty of Y&R contained in the Merger
Agreement is inaccurate, or Y&R breaches any of its obligations
contained in the Merger Agreement, and the breach is not remedied
within 20 business days following written notice from WPP, and such
breach or inaccuracy would result in any condition of the Merger
Agreement not being satisfied by the Long Stop Date.
8. TERMINATION PAYMENTS
8.1 Y&R has agreed to pay WPP a termination fee of US$175 million if the
Merger Agreement is terminated:
(a) by WPP after Y&R's Directors withdraw or adversely modify their
favourable recommendation of the Merger to the Y&R Share Owners at a
time when an alternative acquisition proposal or offer for Y&R is
pending;
(b) by WPP after Y&R's Directors recommend an alternative acquisition
proposal or offer to Y&R Share Owners; or
(c) an alternative acquisition proposal or offer for Y&R is made or is
publicly announced and the Merger Agreement is subsequently
terminated:
(i) by Y&R or WPP because the necessary approval of Y&R Share
Owners is not obtained or;
(ii) by Y&R because the Merger is not consummated by the Long Stop
Date, except that no fee will be payable to WPP if the
necessary approval of WPP Share Owners has not then been
obtained, for any reason other than as a result of a breach by
Y&R; or
(iii) by WPP because any representation or warranty of Y&R contained
in the Merger Agreement is inaccurate or Y&R breaches any of
its obligations contained in the Merger Agreement, and such
breach is not remedied within 20 business days following
written notice from WPP, and such breach or inaccuracy would
result in any condition to the Merger Agreement not being
satisfied by the Long Stop Date;
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and, in any such case within nine months after the Merger Agreement
is terminated, Y&R enters into an agreement in respect of any
alternative proposal, or an alternative transaction is completed.
8.2 Y&R has also agreed to pay WPP a termination fee of US$25 million under
circumstances in which no US$175 million fee is payable if either Y&R or
WPP terminates the Merger because Y&R Share Owners do not approve the
Merger.
8.3 WPP has agreed to pay Y&R a termination fee of US$75 million if the Merger
Agreement is terminated:--
(a) by Y&R after the WPP Directors withdraw or adversely modify their
favourable recommendation of the Merger to the WPP Share Owners at a
time when an alternative acquisition proposal or offer for WPP is
pending;
(b) by Y&R after the WPP Directors recommend an alternative acquisition
proposal or offer to WPP Share Owners; or
(c) an alternative acquisition proposal or offer for WPP is made or is
publicly announced and the Merger Agreement is subsequently
terminated:
(i) by WPP or Y&R because the necessary approval of WPP Share
Owners is not obtained; or
(ii) by WPP because the Merger is not consummated by the Long Stop
Date, except that no fee will be payable to Y&R if the
necessary approval of Y&R Share Owners has not then been
obtained, for any reason other than as a result of a breach by
WPP; or
(iii) by Y&R because any representation or warranty of WPP contained
in the Merger Agreement is inaccurate or WPP breaches any of
its obligations contained in the Merger Agreement, and such
breach is not remedied within 20 business days following
written notice from Y&R, and such breach or inaccuracy would
result in any condition to the Merger Agreement not being
satisfied by the Long Stop Date;
and, in any such case, within nine months after the Merger Agreement
is terminated, WPP enters into an agreement in respect of any
alternative proposal or an alternative transaction is completed.
8.4 WPP has also agreed to pay Y&R a termination fee of US$25 million under
circumstances in which no US$75 million fee is payable if either Y&R or WPP
terminates the Merger because WPP Share Owners do not approve the Merger.
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SECTION B: SUMMARY OF THE TERMS OF THE NO-SALE AGREEMENTS
Contemporaneously with the execution of the Merger Agreement, WPP entered
into no-sale agreements with sixteen senior executives of Y&R, including
Mr. Thomas D. Bell Jr., Y&R's chairman and chief executive officer and
Mr. Michael J. Dolan a vice chairman of Y&R and its president and chief
operating officer, Edward H. Vick, Worldwide chairman and chief executive
officer of Y&R Advertising and Mr. Peter A. Georgescu, Y&R's former
chairman and chief executive officer. Under these agreements, these senior
executives and Mr. Georgescu have agreed not to sell a total of
approximately six million of their Y&R Common Shares and/or the shares
received from the exercise of their Y&R Stock Options (and, following
completion of the Merger, the WPP Ordinary Shares and/or stock options they
will receive under the terms of the Merger in exchange for these shares and
options) for the one year period ending 11 May 2001. A summary of the terms
of these agreements is set out below.
1. RESTRICTIONS ON THE TRANSFER OF SHARES
1.1 Each of the senior executives that executed a no-sale agreement has agreed
not to sell two-thirds of the total number of his Y&R Common Shares (and
the WPP Ordinary Shares he will receive under the terms of the Merger in
exchange for those shares) during the one year period ending on 11 May
2001. For the purposes of these agreements, each senior executive's total
number of Y&R Common Shares is comprised of:
(a) the number of Y&R Common Shares owned by him on 11 May 2000, plus
(b) the number of Y&R Common Shares he is entitled to if he exercised all
Y&R Stock Options (whether vested or unvested) held by him on 11 May
2000.
1.2 Mr. Georgescu has agreed not to sell 200,000 Y&R Common Shares before
completion of the Merger. After completion of the Merger and until 11 May
2001, Mr. Georgescu will not sell the number of WPP ADSs or WPP Ordinary
Shares held by him that have an aggregate value of US$10 million at the
time the Merger is completed.
1.3 Under the no-sale agreements, other than the agreement with
Mr. Georgescu, the limitations on the sale of shares will cease to apply to
that senior executive if:
(a) Y&R or, after the effective time of the Merger, WPP terminates the
employment of that senior executive without cause;
(b) that senior executive terminates his or her employment for good
reason; or
(c) that senior executive dies or becomes disabled.
1.4 Under the no-sale agreements, including the agreement with Mr. Georgescu,
the limitations on the sale of shares will cease to apply if WPP violates
any of the provisions contained in the Merger Agreement relating to the
Transition Committee and does not remedy that violation within 30 business
days after receiving notice from a Y&R representative on that committee.
1.5 Under the no-sale agreements, termination of employment for "cause" means:
(a) the senior executive's wilful and continued failure to substantially
perform his or her duties as in effect before 11 May 2000 if this
failure continues after Y&R has given notice to the senior executive,
or
(b) the senior executive's wilful engagement in misconduct which
materially injures Y&R.
1.6 Under the no-sale agreements, termination of employment for "good reason"
means:
(a) the assignment of any duties inconsistent with or the reduction of
responsibilities associated with the senior executive's position with
Y&R immediately prior to the execution of the Merger Agreement;
(b) a reduction of the senior executive's base salary;
(c) a change in the senior executive's principal work location of more
than fifty miles;
(d) the failure of Y&R to pay any current or deferred compensation within
seven days of the due date;
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(e) the failure of Y&R to continue any benefit plans, or to provide the
number of paid vacation days to which the senior executive was
entitled immediately prior to the execution of the Merger Agreement;
(f) the material reduction of benefits under any benefit plans to which
the senior executive was entitled immediately prior to the execution
of the Merger Agreement; or
(g) the failure of Y&R to afford annual bonus and long-term incentive
compensation opportunities equal to those opportunities available
immediately prior to the execution of the Merger Agreement.
2. NON-COMPETITION PROVISIONS OF THE NO-SALE AGREEMENTS
Each of the no-sale agreements provide that so long as that senior
executive is employed by Y&R and following termination for any reason, that
senior executive will not:
(a) for one year, work for any competitor of Y&R on the account of any
Y&R client with whom the senior executive had a direct relationship
or as to which the senior executive had a significant involvement at
any time during the two years prior to termination;
(b) for one year, if the senior executive's responsibilities are of a
corporate nature and do not principally involve client service, work
for a principal competitor of Y&R in a similar corporate function;
(c) for one year, if the senior executive's responsibilities are of a
client service related nature, work for a competitor of Y&R on the
account of any substantial competitor of any client for which the
senior executive had substantial responsibility during the two years
prior to termination or work directly for a competitor of these
clients;
(d) for one year, solicit or hire any employee of Y&R; and
(e) at any time, disclose any confidential information of Y&R and its
clients.
These non-compete provisions are not contained in the no-sale agreement
entered into with Mr. Georgescu.
3. DAMAGES AND EXPENSES
3.1 Y&R and WPP's sole remedy for a breach of these no-sale agreements is to
seek specific performance of the covenants contained in these agreements,
including a court order requiring the breaching party to purchase a number
of shares sold or transferred in violation of these agreements. Under no
circumstances will the individuals who executed these agreements be
responsible for any monetary damages.
3.2 Under these agreements, WPP must pay all legal fees and expenses
reasonably incurred by these individuals in connection with any proceedings
regarding the sale restriction provisions of these agreements so long as
there is a reasonable basis for the claims asserted by these individuals
and those claims were asserted in good faith. These individuals are obliged
to return any fees or expenses that were advanced plus interest if it is
judicially determined that there was no good faith basis to assert any of
these claims.
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SECTION C: GENERAL REGULATORY MATTERS
1. EUROPEAN UNION
WPP and Y&R each conducts business in Member States of the EU. Council
Regulation (EEC) 4064/89 (as amended) (the "Merger Regulation") requires
notification to and approval by the European Commission of certain mergers
or acquisitions involving parties with aggregate worldwide sales and
individual EU sales exceeding certain thresholds.
WPP and Y&R filed a merger notification with the European Commission on
24 July 2000 and the European Commission issued its clearance decision on
24 August 2000.
2. THE ANTITRUST DIVISION AND FEDERAL TRADE COMMISSION OF THE UNITED STATES
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), as amended, and the rules promulgated thereunder, the Merger
may not be completed unless WPP and Y&R have notified and furnished
information relating to their operations and the markets in which they
operate to the US Federal Trade Commission ("FTC") and the Antitrust
Division of the US Department of Justice ("DoJ"), and certain waiting
period requirements have either expired or the Merger is granted early
termination. On 20 June 2000, WPP and Y&R each filed a pre-merger
notification and report form under the HSR Act with the FTC and DoJ. The
HSR waiting period expired on 20 July 2000. At any time before or after
the consummation of the Merger, the DoJ or the FTC could take any action
under the antitrust laws that it deems necessary or desirable in the
public interest, including seeking to enjoin the completion of the Merger
or seeking the divestiture of substantial assets of Y&R or WPP.
WPP and Y&R believe that neither the FTC nor the DoJ should challenge the
Merger. There can be no assurance however that a challenge to the Merger on
antitrust grounds will not be made, or, if a challenge is made, what the
result will be.
3. MERGER CONTROL LAWS IN OTHER JURISDICTIONS
WPP and Y&R operate in a number of jurisdictions where other regulatory
filings or approvals are required or appropriate in connection with the
Merger. WPP and Y&R have completed the process of reviewing whether
filings or approvals material to WPP and Y&R are required. Following this
review, notification was found to be required in Argentina, Australia,
Hungary, Poland, South Africa and Brazil.
In Argentina, the relevant filing, including the related documentation, was
made on 18 July 2000, and the authorities have up to 45 working days after
approval of the documentation included in the filing to issue a resolution
with respect to the Merger, although a resolution may be issued sooner. The
documentation included in the filing was approved on 17 August, 2000.
In Australia, the relevant filing was made with the Foreign Investment
Review Board on 21 July 2000, and approval of the Merger was granted on
16 August 2000 by the Board.
In Hungary, the relevant filing was made on 4 August 2000, and the
authorities have a maximum of 90 days within which to conduct an initial
investigation (although this period can be extended by a further 60 days).
The Hungarian authorities have indicated that they may issue a decision
prior to the expiry of the 90 day initial investigation period.
In Poland, the relevant filing was made on 14 June 2000. As the relevant
authorities did not respond within the period allowed for investigation,
the Merger can be completed.
In South Africa, the relevant filing was made on 28 June 2000, and the
authorities have up to 30 days within which to conduct an initial
investigation (although this period can be extended by a further 60 days).
If the relevant authorities have not responded within this period, the
Merger can be completed.
In Brazil, the relevant filing was made on 2 June 2000. There is no minimum
investigation period, and the Merger can be completed before approval has
been received.
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4. GENERAL
It is possible that one or more of the regulatory approvals required to
complete the Merger will not be obtained on a timely basis. In addition,
it is possible that any of the governmental or regulatory entities with
which filings are made may seek, as conditions for granting approval to
the Merger, various regulatory concessions. It is possible that WPP and
Y&R will be unable to satisfy or comply with such conditions, or be unable
to cause their respective subsidiaries to satisfy or comply with any such
conditions or that compliance or non-compliance will have adverse
consequences for WPP after completion of the Merger.
Under the Merger Agreement, WPP and Y&R have each agreed to use their
reasonable best efforts to complete the Merger, including to gain clearance
from antitrust and competition authorities and obtain other required
approvals. For that purpose, WPP has also agreed to offer to take and to
accept, to the extent consistent with its obligation to use reasonable best
efforts, any actions, conditions, terms or restrictions necessary to obtain
any regulatory approval, unless those conditions, terms and restrictions in
the aggregate would have a Material Adverse Effect on WPP and Y&R taken
together. Also, neither company is required to agree to any action,
condition, term or restriction unless that agreement is subject to
completion of the Merger. Although WPP and Y&R do not expect any regulatory
authority to raise significant objections to the Merger, WPP and Y&R cannot
be certain that all required regulatory approvals will be obtained or that
these approvals will not contain terms, conditions or restrictions that
would be detrimental to the enlarged WPP Group after the Merger.
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PART VI
ADDITIONAL INFORMATION
1. RESPONSIBILITY
The Directors, whose names are set out in paragraph 7.1 of this Part VI,
and the Proposed Directors, whose names are set out in paragraph 7.2 of
this Part VI, accept responsibility for the information contained in this
document. To the best of the knowledge and belief of the Directors and the
Proposed Directors (who have taken all reasonable care to ensure that such
is the case), the information contained in this document is in accordance
with the facts and does not omit anything likely to affect the import of
such information.
2. INCORPORATION
2.1 The Company was incorporated in England and Wales on 1 March 1971 under
the Companies Acts 1948 to 1967 as a limited company with registered number
1003653 and the name Wire and Plastic Products Limited. It was
re-registered on 18 August 1981 as a public limited company under the
Companies Acts 1948 to 1980. The name of the Company was changed to WPP
Group plc on 26th February 1986. WPP operates under the Companies Act and
the regulations made under that Act.
2.2 WPP's registered office is Pennypot Industrial Estate, Hythe, Kent
CT21 6PE and its head office is 27 Farm Street, London W1J 5RJ.
3. SHARE CAPITAL
3.1 The share capital of WPP at the close of business on 23 August 2000 (the
latest practicable date prior to the publication of this document) is and
immediately following completion of the Merger (assuming no further issues
of shares by WPP after 23 August 2000 and prior to completion of the
Merger, other than the issue of up to 433,710,712 Consideration Shares)
will be as follows:
<TABLE>
<CAPTION>
AUTHORISED ISSUED AND FULLY PAID
----------------------------- --------------------------------------
NUMBER AMOUNT NUMBER AMOUNT
------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
BEFORE THE MERGER
WPP Ordinary Shares of 10p each.. 1,250,000,000 L125,000,000 778,963,425 L77,896,342.5
AFTER THE MERGER
WPP Ordinary Shares of 10p each.. 1,750,000,000 L175,000,000 1,212,674,137 L121,267,413.7
</TABLE>
Details of the outstanding options and awards over WPP Ordinary Shares are
set out in paragraphs 5.2, 5.3, 8.2 and 8.3 of this Part VI.
3.2 The following is a summary of the changes in the issued share capital of
WPP which have occurred between 23 August 1997 and 23 August 2000 (the
latest practicable date prior to the publication of this document):
(a) The following share options have been exercised during this period:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
WPP ORDINARY
DATE RANGE OF EXERCISE PRICES SHARES ISSUED
---- ------------------------ --------------------
<S> <C> <C>
September 1997 to August 1998 L0.295 to L1.33 4,994,376
September 1998 to August 1999 L0.295 to L5.37 5,026,327
September 1999 to 23 August 2000 L0.295 to L5.43 8,870,085
</TABLE>
(b) The following share repurchases have been completed during this
period:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
RANGE OF PRICES WPP ORDINARY
DATE PAID PER SHARE SHARES REPURCHASED
---- ---------------------- --------------------
<S> <C> <C>
September 1997 to August 1998 L2.48 to L4.016 7,452,000
September 1998 to 23 August 2000 L3.65 to L3.70 515,000
</TABLE>
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(c) On 19 September 1997, WPP entered into an agreement for the
acquisition of Cockpit Holdings Limited. Part of the deferred
consideration for this acquisition was satisfied by WPP issuing, to
the vendors of Cockpit Holdings Limited, 41,986 WPP Ordinary Shares
on 9 June 2000 at an issue price of L3.00 per WPP Ordinary Share.
(d) On 14 September 1998 (and in accordance with the terms of the
agreement dated 3 August 1998 details of which are set out in
paragraph 9.1(c) below), 31,295,646 WPP Ordinary Shares were issued
and allotted to Asatsu-DK, Inc at a price of L4.24 per WPP Ordinary
Share.
(e) On 18 August 1999, WPP entered into an agreement for the acquisition
of The Shire Hall Group Limited. Part of the deferred consideration
for this acquisition was satisfied by WPP issuing 35,982 WPP Ordinary
Shares at an issue price of L9.20 per WPP Ordinary Share to some of
the vendors of The Shire Hall Group Limited.
3.3 Save as disclosed in paragraph 3.2 above and paragraphs 5.2, 5.3, 8.1, 8.2
and 8.3 below of this Part VI:
(a) no share or loan capital of WPP or any of its subsidiaries has within
the three years preceding the date of this document (other than
intra-group issues by wholly-owned subsidiaries) been issued or
agreed to be issued (other than (i) to satisfy deferred consideration
payments of up to a maximum aggregate amount of L60 m under various
acquisition agreements previously entered into by WPP or its
subsidiaries; (ii) to satisfy deferred consideration payments due in
respect of previous Y&R acquisitions; (iii) to satisfy entitlements
upon conversion of the Y&R Convertible Notes; and (iv) in connection
with the Merger) or is now proposed to be issued fully or partly
paid, either for cash or for a consideration other than cash to any
person;
(b) no commissions, discounts, brokerages or other special terms have
been granted by WPP or any of its subsidiaries within the three years
immediately preceding the date of this document in connection with
the issue or sale of any share or loan capital of any such company;
and
(c) neither WPP nor any of its subsidiaries has granted any options over
its share or loan capital which remain outstanding or has agreed,
conditionally or unconditionally, to grant any such options.
3.4 The provisions of section 89(1) of the Companies Act (which, to the extent
not disapplied pursuant to section 95 of the Companies Act) confer on
shareholders rights of pre-emption in respect of the allotment of equity
securities (as defined in section 94 of the Companies Act) (which are, or
are to be, paid up in cash) which apply to the authorised but unissued
share capital of WPP except to the extent disapplied by the resolutions
referred to in paragraphs 3.5 and 3.6 below. Section 89(1) of the Companies
Act will apply to the allotment of part of the Consideration Shares which
are to be issued pursuant to the Merger and accordingly will be disapplied
by virtue of the resolution referred to in paragraph 3.6(c) below.
3.5 By resolutions passed at the annual general meeting of WPP held on 26 June
2000:
(a) the Directors of WPP were generally authorised, pursuant to section
80 of the Companies Act, to allot relevant securities (as defined in
that section) up to a maximum aggregate nominal value of L25,693,103,
such authority to expire on 25 June 2005;
(b) the Directors of WPP were given power to allot equity securities (as
defined in section 94 of the Companies Act) for cash provided that
such power, which was expressed to expire on 25 June 2005, was
limited to the allotment of equity securities in connection with a
rights issue and otherwise up to a maximum aggregate nominal amount
of L3,892,894; and
(c) the Directors of WPP were given authority to issue new WPP Ordinary
Shares to JMS to satisfy its entitlement under the Notional Share
Award Plan, the phantom options and the Leadership Equity Acquisition
Plan as an alternative to cash sums due to JMS under these schemes.
3.6 By resolutions to be proposed at the Extraordinary General Meeting it is
proposed that:
(a) the authorised share capital of the Company will be increased from
L125,000,000 to L175,000,000 by the creation of an additional
500,000,000 new WPP Ordinary Shares of 10p each;
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<PAGE>
(b) the Directors be authorised to allot relevant securities (as defined
in the Companies Act) up to a maximum nominal amount of L73,271,363,
such authority to expire on the date five years after the passing of
the resolution; and
(c) the Directors be given power to allot equity securities for cash as
if section 89(1) of the Companies Act did not apply to such allotment
but that such authority be limited to the allotment of equity
securities up to an aggregate nominal amount of L7,622,089 and will
expire on 28 September 2005.
The authorities, referred to in paragraph 3.6(b) and 3.6(c) above,
will be in addition to the authority conferred by paragraph 3.5(c)
above but will revoke the other authorities granted to the Directors
at the annual general meeting referred to in paragraph 3.5 above.
3.7 Save in connection with the Merger (including the conversion of the Y&R
Convertible Notes), the exercise of options under the WPP Share Schemes,
the exercise of any Y&R Stock Options and the implementation of the
deferred consideration payments referred to in paragraph 3.3(a) above, the
Directors have no present intention to allot WPP Ordinary Shares.
3.8 It is expected that Admission will become effective and that dealings on
the London Stock Exchange will commence at 8.00 am on the Effective Date.
Promptly after the Effective Date, the Exchange Agent will send each Y&R
Share Owner (other than WPP, Y&R or any of their respective subsidiaries)
holding certificates, a letter of transmittal for use in effecting delivery
of Y&R Common Shares to the Exchange Agent. Upon surrender of a Y&R share
certificate for cancellation to the Exchange Agent, together with a duly
executed and completed letter of transmittal, and any other documents
required by the Exchange Agent, the holder of each Y&R share certificate
will be entitled to receive in exchange for such Y&R share certificate:
(a) one or more WPP ADRs evidencing, in the aggregate, the whole number
of WPP ADSs that such holder has the right to receive as
consideration for the Merger unless such Y&R Share Owner properly
elects to receive WPP Ordinary Shares instead of all or some of his
entitlement to WPP ADSs; and
(b) a cheque for an amount (after giving effect to any required tax
withholdings) equal to:
(i) cash in lieu of fractions of WPP ADSs and/or WPP Ordinary
Shares, as the case may be; and
(ii) any cash dividends or other distributions in respect of WPP
ADSs and/or WPP Ordinary Shares with (aa) a record date after
the completion of the Merger and for which such WPP ADSs and/or
WPP Ordinary Shares are entitled to rank and (bb) a payment
date on or before the date the holder properly delivers the Y&R
share certificate to the Exchange Agent.
The Y&R share certificates so surrendered will be cancelled. No
interest will be paid or accrued on any amount payable upon
surrender of the Y&R Common Shares.
3.9 Save pursuant to the Merger, none of the WPP Ordinary Shares have been or
will be marketed or made available to the public in whole or in part in
conjunction with the application for listing and trading of those
securities.
3.10 WPP Ordinary Shares have been admitted to the Official List and are traded
on the London Stock Exchange. WPP ADSs are quoted on the Nasdaq in New
York. No temporary documents of title will be issued.
3.11 The WPP Ordinary Shares are, and the Consideration Shares will be, in
registered form and may be held in uncertificated form.
3.12 The Consideration Shares will be credited as fully paid and will rank PARI
PASSU in all respects with the existing WPP Ordinary Shares, except they
will not rank for the interim dividend payable in respect of the year
ending 31 December 2000 or for any other dividend the record date of which
falls prior to the Effective Date.
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4. MEMORANDUM AND ARTICLES OF ASSOCIATION OF WPP
4.1 MEMORANDUM OF ASSOCIATION
The Memorandum of Association of WPP provides that its principal objects
are, inter alia, to carry on the business or businesses of media
advertising, market research, public relations, sales promotion and
specialist communications and to develop concepts for advertising,
marketing, research, sales promotion and similar operations. The objects of
WPP are set out in full in clause 4 of WPP's Memorandum of Association
which is available for inspection at the address specified in paragraph 15
below.
4.2 ARTICLES OF ASSOCIATION
The Articles of Association of WPP contain, amongst other things,
provisions to the following effect:
(a) VOTING RIGHTS OF MEMBERS
Subject to disenfranchisement in the event of (i) non-payment of any
call or other sum due and payable in respect of any share or (ii) any
non-compliance with any statutory notice requiring disclosure of the
beneficial ownership of any shares and subject to any special rights
or restrictions as to voting for the time being attached to any
shares, on a show of hands every member who (being an individual) is
present in person or (being a corporation) is present by a duly
authorised representative not being himself a member, has one vote
and on a poll every member present in person, by proxy or by
representative, has one vote for every share of which he is a holder.
In the case of joint holders, the vote of the person whose name
stands first in the register of members and who tenders a vote is
accepted to the exclusion of any votes tendered by any other joint
holders.
(b) DIVIDENDS AND UNCLAIMED DIVIDENDS
(i) The Company in general meeting may declare a dividend to be
paid to the members, but no dividend shall exceed the amount
recommended by the Board of WPP.
(ii) The Board may pay such interim dividends as appear to the
Board to be justified by the financial position of WPP and may
also pay any dividend payable at a fixed rate at intervals
settled by the Board whenever the financial position of WPP, in
the opinion of the Board, justifies its payment.
(iii) Unless the rights attaching to, or the terms of issue of any
share state otherwise, all dividends shall be declared and paid
according to the amounts paid up on the shares in respect of
which the dividend is paid and shall be apportioned and paid
PRO RATA according to the amounts paid up on the shares during
any portion or portions of the period in respect of which the
dividend is paid but no amount paid up on a share in advance of
calls shall be treated for this purpose as paid up on the
share. Dividends may be declared or paid in any currency.
(iv) No dividend or other monies payable in respect of a share
shall bear interest against WPP unless otherwise provided by
the rights attached to the share. Calls on shares or other
debts in relation to WPP Ordinary Shares may be deducted from
dividends.
(v) Any dividend unclaimed for a period of 12 years after having
become due for payment shall be forfeited and cease to remain
owing by WPP.
(vi) With the sanction of an ordinary resolution and the
recommendation of the Board payment of any dividend may be
satisfied wholly or in part by the distribution of specific
assets and in particular of paid up shares or debentures of any
other company. The Board may, if authorised by an ordinary
resolution, offer a scrip dividend and that scrip dividend may
be satisfied by the issue of further shares, whether or not of
the same class of shares on which the dividend is due.
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(c) RETURN OF CAPITAL
Subject to the rights attached to any shares issued on any special
terms and conditions, on a winding up the surplus assets remaining
after payment of all creditors of the Company will be divided among
the members of the Company according to their respective holdings of
shares. The liquidator may, with the sanction of an extraordinary
resolution of the Company and any other sanction required by statute
(i) divide among the members in specie the whole or any part of the
assets of the Company; or (ii) vest the whole or any part of the
assets in trustees on such trusts for the benefit of members as the
liquidator shall think fit, but no member shall be compelled to
accept any assets upon which there is any liability.
(d) RESTRICTIONS ON ORDINARY SHARES
If a member or any person appearing to be interested in shares in the
Company has been duly served with a notice pursuant to section 212 of
the Companies Act and is in default in supplying to the Company the
information thereby required within the time specified in such
notice, the Directors may serve on such member or on any such person
a notice (a "restriction notice") in respect of the shares in
relation to which the default occurred ("Default Shares") and any
other shares held at the date of the restriction notice directing
that the member shall not, nor shall any transferee to which any of
such shares are transferred other than pursuant to a permitted
transfer under the Articles, be entitled to be present or to vote,
either in person or by proxy, at any general meeting or class meeting
of the Company. Where the Default Shares represent at least 0.25% of
the issued shares of the Company of the same class, the restriction
notice may in addition direct that such a member shall not be
entitled in respect of the Default Shares to receive any dividend or
other distribution or to transfer or agree to transfer any of those
shares or any rights in them.
(e) VARIATION OF RIGHTS
Whenever the share capital of the Company is divided into different
classes of shares, all or any of the rights for the time being
attached to any class of shares in issue may from time to time
(whether or not WPP is being wound up) be varied with the consent in
writing of the holders of three-fourths in nominal value of the
issued shares of that class or with the sanction of an extraordinary
resolution passed at a separate general meeting of the holders of
those shares. At any separate general meeting, the necessary quorum
is two persons holding or representing by proxy at least one-third in
nominal amount of the issued shares of the class in question (but at
any adjourned meeting, any person holding shares of the class or his
proxy is a quorum).
Unless otherwise expressly provided by the terms of their issue, the
rights attached to any class of shares shall not be deemed to be
varied by the creation or issue of further shares ranking PARI PASSU
with them.
(f) ALTERATION OF CAPITAL
The Company may by ordinary resolution:
(i) increase its capital by the creation of new shares of such
amount as the resolution prescribes;
(ii) consolidate and divide all or any of its share capital into
shares of a larger amount than its existing shares;
(iii) sub-divide its shares, or any of them, into shares of smaller
amount than is fixed by the Memorandum of Association or the
Articles, but so that the proportion between the amount paid up
and the amount (if any) not paid up on each reduced share shall
be the same as it was in the case of the share from which the
reduced share is derived; and
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(iv) cancel any shares which, at the date of passing the resolution
have not been taken or agreed to be taken by any person and
diminish the amount of its share capital by the amount of the
shares so cancelled.
Subject to the provisions of the Companies Act and any other statute
and to any rights conferred on the holders of any class of shares,
the Company may by special resolution:
(v) purchase all or any of its shares of any class, including any
redeemable shares; and
(vi) reduce its share capital, any capital redemption reserve and
any share premium account in any way.
(g) TRANSFER OF SHARES
(i) Subject to the restrictions in the Articles, any member may
transfer all or any of his shares to another person by an
instrument of transfer in any usual form, or in such other form
as the Board may approve. The instrument of transfer of a share
shall be signed by or on behalf of the transferor and (except
in the case of a fully paid share) by or on behalf of the
transferee. The transferor shall be deemed to remain the holder
of the share until the name of the transferee is entered into
the register in respect of the share.
(ii) The Board may, in its absolute discretion and without giving
any reason for its decision, refuse to register any transfer of
a share which is not fully paid up (but not so as to prevent
dealings in a class of shares which is listed on the London
Stock Exchange from taking place on an open and proper basis)
or any transfer of a share on which the Company has a lien. The
Board may also refuse to register any transfer unless it is:
(aa) in respect of only one class of shares;
(bb) in favour of no more than four transferees;
(cc) left at the office or such other place as the Board may
decide, for registration; and
(dd) accompanied by the certificate for the shares to be
transferred (except where the shares are registered in
the name of the market nominee and no certificate has
been issued for them) and such other evidence (if any) as
the Board may reasonably require to prove that the title
of the intending transferor or his right to transfer the
shares.
(iii) If the Board refuses to register a transfer of a share, it
shall, within two months after the date on which the transfer
was lodged, send to the transferee notice of the refusal.
(iv) The registration of transfers of shares or of any class of
shares may be suspended at such time and for such periods (not
exceeding 30 days in any year) as the Board may decide.
(h) DIRECTORS OF WPP
(i) The Directors (other than alternate directors) shall not,
unless otherwise determined by an ordinary resolution of the
Company, be less than six in number.
(ii) A Director need not be a member of the Company.
(iii) There is no age limit for Directors.
(iv) At each annual general meeting any Director then in office who
has been appointed by the Board since the previous annual
general meeting or at the date of the notice convening the
annual general meeting has held office for more than 30 months
since he was appointed or last appointed by the Company in
general meeting shall retire from office but shall be eligible
for re-appointment.
(v) The Directors (other than any Director who for the time being
holds an executive office or employment with the Company or a
subsidiary of the Company) shall be
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paid out of the funds of the Company by way of remuneration for
their services as Directors such fees not exceeding in
aggregate L250,000 per annum as the Directors may from time to
time determine or such larger sum as the Company may, by
ordinary resolution, determine. Such fee shall be divided among
them in such proportion and manner as they may agree, or
failing agreement, equally.
(vi) The Board may grant special remuneration to any Director who
performs any special or extra services to or at the request of
the Company. Special remuneration may be payable to a Director
in addition to his ordinary remuneration (if any) as a
Director.
(vii) The Directors shall also be paid out of the funds of the
Company all expenses properly incurred by them in and about the
discharge of their duties, including their expenses of
travelling to and from the meetings of the Board, committee
meetings, general meetings and separate meetings of the holders
of any class of securities of the Company. A Director may also
be paid out of the funds of the Company all expenses incurred
by him in obtaining professional advice in connection with the
affairs of the Company or the discharge of his duties as a
Director.
(viii) The Board may exercise all the powers of the Company to pay,
provide or procure the grant of pensions or other retirement or
superannuation benefits and death, disability or other
benefits, allowances or gratuities to any person who is or has
been at any time a Director of the Company or in the employment
or service of the Company or of any company which is or was a
subsidiary of or associated with the Company or of the
predecessors in business of the Company or any subsidiary or
associated company or the relatives or dependants of any such
person. For that purpose the Board may procure the
establishment and maintenance of, or participate in, or
contribute to any non-contributory or contributory pension or
superannuation fund, scheme or arrangement or pay any insurance
premiums.
(ix) Subject to any applicable statutory provisions, a Director
shall not be disqualified by his office from entering into any
contract with the Company, either with regard to his tenure of
any office or position in the management, administration or
conduct of the business of the Company, or as vendor, purchaser
or otherwise. A Director may hold and be remunerated in respect
of any other office or place of profit with the Company (other
than the office of auditor of the Company) in conjunction with
his office as Director and he (or his firm) may also act in a
professional capacity for the Company (except as auditor) and
may be remunerated for it.
(x) A Director who to his knowledge is in any way, whether directly
or indirectly, interested in a contract with the Company shall
declare the nature of his interest at a meeting of the
Directors.
(xi) A Director shall not vote or be counted in the quorum at a
meeting in respect of any resolution concerning his own
appointment (including fixing and varying its terms), or the
termination of his own appointment, as the holder of any office
or place of profit with the Company or any other company in
which the Company is interested but, where proposals are under
consideration concerning the appointment (including fixing or
varying its terms), or the termination of the appointment of
two or more Directors to offices or places of profit with the
Company or any company in which the Company is interested,
those proposals may be divided and considered in relation to
each Director separately; and in such case each of the
Directors concerned (if not otherwise debarred from voting
under the Articles) shall be entitled to vote and be counted in
the quorum in respect of each resolution except that concerning
his own appointment or the termination of his own appointment.
(xii) A Director shall not vote (or be counted in the quorum at a
meeting) in respect of any contract in which he has an interest
which (together with any interest of a connected
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person) is to his knowledge a material interest.
Notwithstanding the above, a Director shall be entitled to vote
(and be counted in the quorum) on:
(aa) any contract in which he is interested by virtue of an
interest in shares, debentures or other securities of the
Company or otherwise in or through the Company;
(bb) the giving of any guarantee, security or indemnity in
respect of money lent or obligations incurred by him or
by any other person at the request of, or for the benefit
of, the Company or any of its subsidiary undertakings; or
a debt or obligation of the Company or any of its
subsidiary undertakings for which he himself has assumed
responsibility under a guarantee or indemnity or by the
giving of security;
(cc) any issue or offer of shares, debentures or other
securities of the Company or any of its subsidiary
undertakings in respect of which he is or may be entitled
to participate in his capacity as holder of any such
securities or as an underwriter or sub-underwriter;
(dd) any contract concerning another company in which he and
any connected person do not to his knowledge hold an
interest in shares (within the meaning of sections 198 to
211 of the Companies Act) representing one per cent. or
more of the issued shares of any class of such company or
of the voting rights of that company;
(ee) any arrangement for the benefit of employees of the
Company or any of its subsidiary undertakings which does
not accord to him any privilege or benefit not generally
accorded to the employees to whom the arrangement
relates; and
(ff) the purchase or maintenance of insurance for the benefit
of Directors or for the benefit of persons including
Directors.
(i) BORROWING POWERS
(i) The Board may exercise all the powers of the Company to borrow
money and to mortgage or charge all or any part of its
undertaking, property and assets (both present and future) and
uncalled capital and to issue debentures and other securities,
whether outright or as collateral security for any debt,
liability or obligation of the Company or of any third party.
(ii) The Board shall restrict the borrowings of the Company and
exercise all voting and other rights or powers of control
exercisable by the Company in relation to its subsidiary
undertakings (if any) so as to secure (but as regards
subsidiary undertakings only so far as by such exercise it can
secure) that the aggregate principal amount outstanding at any
time in respect of all borrowings by the WPP Group (exclusive
of any borrowings which are owed by one Group company to
another Group company) after deducting the amount of cash
deposited will not, without the previous sanction of the
Company in general meeting, exceed an amount equal to 2.5 times
the adjusted capital and reserves (as defined in the Articles)
or any higher limit fixed by ordinary resolution of the Company
which is applicable at the relevant time.
To date no resolution of the type referred to in this paragraph
has been passed.
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5. WPP SHARE SCHEMES AND DETAILS OF OUTSTANDING OPTIONS AND AWARDS UNDER THE
WPP SHARE SCHEMES AND Y&R STOCK OPTION PLANS
5.1 WPP SHARE SCHEMES
The following is a summary of the principal terms of the WPP Share
Schemes:
(A) THE WPP WORLDWIDE OWNERSHIP PLAN (1996) (THE "WORLDWIDE PLAN")
(I) OUTLINE
The Worldwide Plan is constituted by rules and includes a section which is
approved by the Inland Revenue under the Income and Corporation Taxes Act
1988. The Worldwide Plan also contains additional sections which amend the
rules in certain overseas jurisdictions.
(II) ELIGIBILITY
Options may be granted to employees of the Company or any subsidiary
designated as a participating company. In practice, options have been
granted to full-time employees of the Company and 100% owned subsidiaries
with at least two years' service, who are not granted options under the
Executive Plan (as defined in paragraph 5.1(b) below) or are not otherwise
entitled to participate in other WPP Share Schemes.
(III) GRANT OF OPTIONS
Options will normally be granted six weeks following the announcement of
the Company's results to the London Stock Exchange for any financial
period.
(IV) OPTION PRICE
The price at which an option is granted must not be less than the average
middle-market quotation of WPP Ordinary Shares, as derived from the Daily
Official List of the London Stock Exchange, over any number of consecutive
dealing days (being not more than 5) immediately preceding the grant date
or, in the case of an option over a WPP ADS, the fair market value of a WPP
ADS as quoted on the Nasdaq over any number of consecutive dealing days
(being not more than 5) immediately preceding the grant date.
(V) EXERCISE OF OPTIONS
Options granted under the Worldwide Plan are generally exercisable on the
third anniversary of grant and at six monthly intervals thereafter.
The options may be exercised for a period of 12 months after the
optionholder ceases employment, if the optionholder ceases employment by
reason of injury, disability, death, retirement upon reaching the age when
the optionholder becomes bound to retire under his employment contract or
following the sale of the company or business in which the optionholder is
employed or, in respect of options granted before March 1999, redundancy.
If an optionholder ceases employment for any other reason, the Directors
may permit options to be exercised within 12 months of ceasing employment.
Options may also be exercised in the event of a takeover, reconstruction or
winding up of the Company.
(VI) ISSUE OF SHARES
Shares issued on the exercise of options will rank equally with shares of
the same class in issue on the date of allotment except in respect of
rights arising by reference to a prior record date.
(VII) SCHEME LIMITS
The Worldwide Plan is subject to an overall limit on the number of WPP
Ordinary Shares or WPP ADSs which may be allocated under the Worldwide
Plan. This provides that in any 10 year period beginning with 28 June 1999,
not more than 10% in aggregate of the issued ordinary share capital of the
Company for the time being may be issued under options granted under the
Executive Plan, the Worldwide Plan or under any employee share scheme
adopted by the Company. For the
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purposes of this limit, rights to acquire WPP Ordinary Shares which are
released or which lapse without being exercised cease to count.
(VIII) VARIATION OF SHARE CAPITAL
In the event of a variation of the share capital of WPP, the Board may make
certain adjustments. An adjustment may only reduce the price at which
shares are acquired upon the exercise of an option to less than their
nominal value if the Board is authorised to capitalise from the reserves of
the Company a sum equal to the difference between the nominal value of the
shares and exercise price of the options and to apply such sum in paying up
such amount on such shares.
(IX) AMENDMENTS
The Directors may amend the provisions of the Worldwide Plan or the terms
of options granted under it provided that no amendment to the advantage of
participants in the Worldwide Plan can be made without the prior approval
by ordinary resolution of the members of the Company, unless the amendment
is a minor amendment to take account of a change in legislation or to
obtain favourable tax, exchange control or regulatory treatment for any
participant or any group company.
Amendments to the approved part of the Worldwide Plan must also be approved
by the Inland Revenue.
(B) THE WPP EXECUTIVE STOCK OPTION PLAN (1996) (THE "EXECUTIVE PLAN")
(I) OUTLINE
The Executive Plan is constituted by rules and includes a section which is
approved by the Inland Revenue under the Income and Corporation Taxes Act
1988. The Executive Plan also contains additional sections which amend the
rules in certain jurisdictions. The Executive Plan is administered by the
Compensation Committee (a committee of the Board).
(II) ELIGIBILITY
Options may only be granted to employees or full-time directors of the
Company or a subsidiary.
(III) GRANT OF OPTIONS
Options may only normally be granted within six weeks following the
announcement of the Company's results to the London Stock Exchange for any
financial period.
(IV) OPTION PRICE
The price at which an option is granted must not be less than the average
middle-market quotation of WPP Ordinary Shares, as derived from the Daily
Official List of the London Stock Exchange, over any number of consecutive
dealing days (being not more than 5) immediately preceding the grant date
or, in the case of an option over a WPP ADS, the fair market value of a WPP
ADS as quoted on the Nasdaq over any number of consecutive dealing days
(being not more than 5) immediately preceding the grant date.
(V) EXERCISE OF OPTIONS
Options granted under the Executive Plan are generally exercisable after
the third anniversary of grant. The exercise of an option is conditional on
the satisfaction of performance conditions set by the Compensation
Committee at the date of grant.
The options may also be exercised for a period of 12 months after the
optionholder ceases employment, if the optionholder ceases employment by
reason of injury, disability, death or retirement upon reaching the age
when the optionholder becomes bound to retire under his employment contract
or, following the sale of the company or business in which the optionholder
is employed or, in respect of options granted before March 1999,
redundancy. If an optionholder ceases employment for any other reason, the
Compensation Committee may permit options to be exercised within 12 months
of ceasing employment. Options may also be exercised in the event of a
takeover, reconstruction or winding up of the Company.
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(VI) ISSUE OF SHARES
Shares issued on the exercise of options will rank equally with shares of
the same class in issue on the date of allotment except in respect of
rights arising by reference to a prior record date.
(VII) SCHEME LIMITS
The Executive Plan is subject to an overall limit on the number of WPP
Ordinary Shares or WPP ADSs which may be allocated under the Executive
Plan. This provides that in any 10 year period beginning with 28 June 1999,
not more than 10% in aggregate of the issued ordinary share capital of the
Company for the time being may be issued under options granted under the
Executive Plan, the Worldwide Plan or under any employee share scheme
adopted by the Company. For the purposes of this limit, rights to acquire
shares which are released or which lapse without being exercised cease to
count.
(VIII) VARIATION OF SHARE CAPITAL
In the event of a variation of the share capital of WPP, the Board may make
certain adjustments. An adjustment may only reduce the price at which
shares are acquired upon the exercise of an option to less than their
nominal value if the Board is authorised to capitalise from the reserves of
the Company a sum equal to the difference between the nominal value of the
shares and exercise price of the options and to apply such sum in paying up
such amount on such shares.
(IX) AMENDMENTS
The Directors may amend the provisions of the Executive Plan or the terms
of options granted under it provided that no amendment to the advantage of
participants in the Executive Plan will be made without the prior approval
by ordinary resolution of the members of the Company unless the amendment
is a minor amendment to take account of a change in legislation or to
obtain favourable tax, exchange control or regulatory treatment for any
participant or any group company.
Amendments to the approved section of the Executive Plan cannot be made
without the prior approval of the Inland Revenue.
(C) EARLIER WPP EXECUTIVE SHARE OPTION SCHEMES
The Company has also operated the WPP Group plc Executive Share Option
Scheme 1994 and other WPP Group Executive Share Option Schemes (together,
the "Earlier Schemes"). Since the introduction of the Executive Plan, no
further options have been granted under the Earlier Schemes. There are
currently 6,335,222 WPP Ordinary Shares under option under the Earlier
Schemes with exercise prices ranging from 29.5 pence to 154 pence per
share. All options granted under the Earlier Schemes will lapse within 10
years of the date of their grant. The terms of the Earlier Schemes are
similar to those of the Executive Plan.
(D) LEADERSHIP EQUITY ACQUISITION PLAN ("LEAP")
(I) OUTLINE
In September 1999, WPP Share Owners approved the introduction of LEAP to
reward performance which is superior to that of the Company's peer
companies, so as to create strong shared interests with WPP Share Owners
through significant personal investment and ownership in stock by
executives and to ensure competitive total rewards in the appropriate
market place.
(II) INVESTMENT SHARES
A participant must commit investment shares in order to qualify for
matching shares (as described in (d)(iii) below). The minimum value of
investment shares is an amount equal to the participant's annual earnings
(salary plus target annual bonus) and the maximum value of investment
shares is three times annual earnings (other than for Sir Martin Sorrell,
as described below). Individual limits within this range are determined by
the Compensation Committee. No more than two-thirds of a participant's
investment shares can be satisfied by shares held by the participant at the
time of participation being offered. The balance may be satisfied by
purchases
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in the market or through the acquisition of shares with deferred annual
bonuses attributable to, or Long Term Incentive Plan or Performance Share
Plan awards maturing in, the year in which participation is offered.
Investment shares are committed to LEAP for a 5 year period (the
"investment period"). The Compensation Committee will decide the timing of
a participant's investment following any offer to participate in LEAP.
Investment shares will be held under arrangements approved by the
Compensation Committee.
(III) MATCHING SHARES
The Compensation Committee will make matching shares available to
participants who commit investment shares to LEAP. For each investment
share committed to LEAP, the participant may earn up to five matching
shares, if the performance condition is fully satisfied over the
performance period. The number of matching shares which a participant may
receive at the end of the investment period will depend on the performance
of the Company measured over 5 financial years commencing with the
financial year in which the WPP Ordinary Shares are committed ("performance
period"). The number of matching shares will depend on the total share
owner return achieved by the Company relative to 15 comparator businesses
(including WPP) in the global communication services industry. The maximum
number of matching shares is 5 for every investment share, for which the
Company must rank first or second over the performance period. If the
Company's performance is below the median of the comparator group, only
half a matching share will vest for every WPP Ordinary Share held
throughout the investment period.
(IV) PARTICIPATION
Following the awards made in 1999, new participation will usually only be
offered during the period of 42 days commencing on the day on which the
Company releases its results for any financial period.
The Compensation Committee will select the executive Directors of the
Company and the senior executives throughout the WPP Group to participate
in LEAP. To date, awards have been made to 15 directors and executives. Sir
Martin Sorrell, the group chief executive has, together with JMS, committed
to LEAP WPP Ordinary Shares worth US $10 million calculated at a price of
L6.335 per WPP Ordinary Share, of which WPP Ordinary Shares worth
US $3 million are shares purchased or to be purchased in the market since
16 August 1999. The Company intends to invite Michael Dolan and certain
senior executives of Y&R to participate in LEAP. Michael Dolan and the Y&R
participants will be deemed to have commenced participation in LEAP on
22 September 1999, that is on the same date as the current LEAP
participants. However, the number of matching shares referred to in
sub-paragraph (iii) above to which Michael Dolan and the Y&R participants
may become entitled to receive will be proportionately reduced to reflect
the residual performance and investment periods. Employees within 3 years
of their normal retirement date may only participate in exceptional
circumstances.
(V) FORM OF AWARDS
The rules confer discretion on the Compensation Committee to decide the
form in which awards will be made. The Compensation Committee will decide
which form is most appropriate for each award in the light of the
accounting and tax consequences, in particular US GAAP.
The manner in which an award is satisfied at the end of the investment
period depends on the form of the particular award. Awards will normally be
satisfied by transferring the number of WPP Ordinary Shares in respect of
which the award is vested to the participant or, in the case of WPP ADSs,
to the depositary from one of the Company's employee share trusts.
Awards are personal to each participant and cannot be transferred except on
a limited basis, approved by the Compensation Committee, within a
participant's close family or family interest. The value of matching shares
is not pensionable.
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(VI) SPECIAL SITUATIONS
If, during the investment period, a participant ceases to be employed by
the WPP Group for any reason other than voluntary resignation or
termination for cause, the number of matching shares which is capable of
vesting shall be reduced proportionately based on the part of the
investment period that the participant remained in employment (but the
award will lapse altogether if the participant ceases to be in employment
during the first year of the investment period or if the participant does
not retain all of his investment shares until the end of the investment
period). The reduced number of matching shares may vest, to the extent
which the performance condition is satisfied, at the end of the investment
period, except that, on cessation of employment, no matching shares will
vest if the Company's performance is ranked below median in the comparator
group, and unless and to the extent that the Compensation Committee decides
otherwise. If the participant resigns voluntarily from the WPP Group or his
employment is terminated for cause during the investment period, the
matching shares will not be provided, except to the extent that the
Compensation Committee decides otherwise.
(VII) CHANGE OF CONTROL
Following a change of control of the Company as a result of a takeover
offer, a number of matching shares may vest up to the extent that the
performance condition is satisfied over the 5 year period shortened to the
date of the change of control. For the purposes of determining whether the
performance condition is satisfied over the shortened period, the price of
WPP Ordinary Shares for each of the 60 dealing days up to and including the
day on which control is obtained is deemed to be the higher of the closing
price on the day on which control is obtained as derived from the Daily
Official List of the London Stock Exchange and the price which would
otherwise have been used to determine the total share owner return of the
Company.
If a court sanctions a compromise or arrangement under Section 425 of the
Companies Act or a resolution is passed for the voluntary winding up of the
Company, the terms for awards and the terms on which the investment shares
have been committed to LEAP may be varied in such manner as the
Compensation Committee decides and the auditors (or other financial
advisers) confirm to be, in their opinion, fair and reasonable.
(VIII) GENERAL
The Compensation Committee may make arrangements under which those persons
whose services are provided to the WPP Group through a services company may
(with any services company) be treated as eligible to participate in LEAP.
Such arrangements may provide for the award of notional matching shares,
which may be satisfied in cash on vesting.
The Compensation Committee may amend the provisions of LEAP or the terms of
all outstanding awards at any time except that amendments to the advantage
of eligible employees or participants require WPP Share Owner approval
(unless they are minor amendments to benefit the administration of LEAP, to
take account of a change in legislation or to obtain or maintain favourable
tax, exchange control or regulatory treatment for participants in LEAP or
for any member of the WPP Group). The Compensation Committee may also amend
the performance condition in certain circumstances and will consider in the
light of exceptional financial circumstances whether the recorded total
share owner return of the Company is consistent with the achievement of
commensurate underlying financial performance.
Offers of participation may not be made under LEAP after 2 September 2004.
(E) THE WPP PERFORMANCE SHARE PLAN ("PSP")
Annual grants of WPP performance shares are made to executive Directors
(including since 1999 to the WPP group chief executive and JMS). For awards
currently outstanding, the value of each performance share is equivalent to
one WPP Ordinary Share and the number of shares vesting over each three
year performance period is dependent on the growth of WPP's total share
owner return relative to the growth of total share owner return of 15 major
publicly traded marketing services companies (including WPP). Where the WPP
Group's total share owner return is below the median level of the peer
group, none of the performance shares vest. Currently, at median
performance, 50% of the performance shares vest, with higher percentage
vesting for superior performance up to 100% if WPP ranks at least equal to
the second ranking peer company.
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Contingent grants of performance shares for the 1998-2000, 1999-2001, and
2000-2002 periods range from 25% to 100% of base salary.
WPP performance shares are provided from one of the Company's employee
share trusts and not by way of issue of new WPP Ordinary Shares.
(F) THE WPP OPERATING COMPANY LONG TERM INCENTIVE PLAN
Senior executives of most WPP Group operating companies participate in
long-term incentive plans, which provide awards in cash and WPP Ordinary
Shares and WPP ADSs for the achievement of three year financial performance
targets. These plans operate on a rolling three year basis with awards
satisfied in March 2000 under the 1997-99 long-term incentive plans. The
value of payments earned by executives over each performance period is
based on the achievement of targeted improvements in the following
performance measures:
(i) average operating profit or operating cash flow; and
(ii) average operating margin.
The WPP Ordinary Shares and WPP ADSs provided under these long-term
incentive plans are subject to restrictions on sale for specified periods.
For the periods 1998-2000, 1999-2001 and thereafter, the stock portion of
each payment is 50%. Restrictions on the sale of this stock are lifted
after one year in respect of 50% of the stock and after two years for the
balance, if the executive remains employed in the WPP Group.
(G) THE CAPITAL INVESTMENT PLAN (``CIP"), NOTIONAL SHARE AWARD PLAN (``NSAP")
AND PHANTOM OPTIONS
The CIP provides Sir Martin Sorrell with a capital incentive which was
initially dependent on satisfaction of performance requirements over a five
year period with effect from 4th September 1994 and which matured in full
in September 1999.
Sir Martin Sorrell has agreed to defer entitlement to the 4,691,392 WPP
Ordinary Shares (``Performance Shares") which he would otherwise have been
able to acquire in September 1999, subject to good leaver, change of
control and other specified provisions, so as to correspond with the
investment period under LEAP. Accordingly subject to the provisions of the
CIP, the right to acquire the Performance Shares may be exercised at any
time during the period 30 September 2004 to 31 December 2004. These
Performance Shares were acquired by an ESOP in 1994 at a total cost of
approximately L5.5 million.
JMS has agreed, subject to good leaver, change of control and other
specified provisions, to defer its interest under the NSAP on a similar
basis to that on which Sir Martin Sorrell has agreed to defer his interest
under the CIP. Accordingly, subject to the provisions of the NSAP, JMS's
right to receive a cash sum under the NSAP may be exercised at any time
during the period 30 September 2004 to 31 December 2004 and will be
calculated by reference to the average price of a WPP Ordinary Share for
the five dealing days before JMS's right under the NSAP is exercised. The
NSAP relates to 1,754,520 notional WPP Ordinary Shares.
The rights of Sir Martin Sorrell and JMS respectively under the CIP and the
NSAP are dependent on Sir Martin Sorrell remaining interested in 747,252
WPP Ordinary Shares in which he invested in September 1994. The rights of
JMS under the NSAP may on exercise be satisfied by the allotment of new WPP
Ordinary Shares as a result of the authority conferred on the Directors
referred to in paragraph 3.5(c) of this Part VI.
JMS has also been granted a number of phantom options by WPP. Phantom
options are linked to the share price at the date of grant, but no actual
shares are purchased upon exercise. When the option is "exercised" JMS will
receive a cash payment equal to the difference between the exercise price
at the date of grant and the market value of the WPP Ordinary Shares at the
date of exercise. JMS has unexercised phantom options in respect of
1,571,190 WPP Ordinary Shares granted in 1993 at a base price of 52.5p per
share exercisable between April 1996 and April 2003 and unexercised phantom
options in respect of 577,391 WPP Ordinary Shares granted in 1994 at a base
price of 115p per share exercisable in March 2004. JMS has indicated that
it does not intend to exercise the 1993 phantom options until March 2003,
subject to good leaver and change of control provisions. Pursuant to the
authority referred to in paragraph 3.5(c) of this Part VI, the
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<PAGE>
Directors have been given the authority to satisfy such cash entitlements
by issuing WPP Ordinary Shares in lieu of such cash payments.
5.2 OUTSTANDING OPTIONS AND AWARDS UNDER THE WPP SHARE SCHEMES
The table below shows details of the options and awards which were
outstanding under the WPP Share Schemes on 23 August 2000 (the latest
practicable date prior to the publication of this document). No
consideration was paid for the grant of the options and awards.
<TABLE>
<CAPTION>
OPTIONS EXERCISE
DATE OPTIONS EXERCISE PRICE PER WPP NUMBER OF WPP
SCHEME GRANTED PERIOD ORDINARY SHARE ORDINARY SHARES
------ ------------------ ---------- ----------------- ----------------
<S> <C> <C> <C> <C>
The WPP 8 April 1991 1996-2001 L1.330 58,411
Executive Share 15 April 1992 1997-2002 L0.560 103,771
Option Schemes 25 September 1993 1995-2002 L0.295 90,052
7 October 1993 1996-2003 L1.020 161,183
15 April 1994 1997-2004 L1.150 19,194
26 September 1994 1997-2004 L1.190 1,569,009
14 April 1995 1998-2005 L1.080 878,686
25 September 1995 1998-2005 L1.540 3,454,916
26 June 1996 1999-2006 L2.140 968,644
19 September 1996 1999-2006 L2.335 3,875,077
24 February 1997 2000-2007 L2.535 12,074
26 September 1997 2000-2007 L2.835 4,493,476
5 March 1998 2001-2008 L3.030 30,132
28 September 1998 2001-2008 L2.930 4,639,430
6 November 1998 2001-2008 L3.270 47,450
10 March 1999 2002-2009 L5.185 428,112
24 September 1999 2002-2009 L5.700 3,321,145
21 March 2000 2003-2010 L10.77 312,775
The WPP 17 March 1997 2000-2007 L2.695 284,625
Worldwide 31 March 1998 2001-2008 L3.030 1,872,525
Ownership Plan 1 April 1999 2002-2009 L5.315 1,519,050
31 May 2000 2003-2010 L7.79 1,261,350
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE NUMBER OF WPP
PLAN AWARDS PERFORMANCE PERIOD ORDINARY SHARES
------------------- ----------------------------------- ----------------
<S> <C> <C>
The WPP Performance Share Plan 1 January 1996-31 December 1998 76,203
The WPP Performance Share Plan 1 January 1997-31 December 1999 149,562
The WPP Performance Share Plan 1 January 1998-31 December 2000 245,384
The WPP Performance Share Plan 1 January 1999-31 December 2001 462,404
The WPP Performance Share Plan 1 January 2000-31 December 2002 281,418
LEAP(1) 1 January 1999-31 December 2003 12,960,045
Capital Investment Plan and N/A 8,594,493
Notional Share Award Plan and
unexercised phantom options(2)
--------------
</TABLE>
NOTES:
(1) The number of WPP Ordinary Shares shown for LEAP represents the
maximum number of matching shares which is capable of vesting at the
end of the performance period (in relation to awards already made and
not taking into account invitations that may be made to other senior
executives), if the performance requirement is satisfied to the
fullest extent and subject to the retention of WPP investment shares
until the end of the investment period.
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<PAGE>
(2) The 6,445,912 WPP Ordinary Shares represent the number of shares or
cash equivalent of shares which vest under the Capital Investment
Plan ("CIP") and the Notional Share Award Plan ("NSAP"). As mentioned
in paragraph 5.1(g) above, Sir Martin Sorrell has agreed to defer his
entitlement to the 4,691,392 WPP Ordinary Shares which he would
otherwise have been able to acquire in September 1999 under the CIP
subject to good leaver, change of control and other specified
provisions, so as to correspond with the investment period under
LEAP. JMS has agreed, subject to good leaver, change of control and
other specified provisions, to defer its interest under the NSAP on a
similar basis to that on which Sir Martin Sorrell has agreed to defer
his interest under the CIP. The NSAP relates to 1,754,520 notional
WPP Ordinary Shares. The unexercised phantom options relate to
2,148,581 WPP Ordinary Shares. Please see paragraph 5.1(g) of
Part VI for further details.
5.3 OUTSTANDING Y&R STOCK OPTIONS
As at 21 August 2000 (the latest practicable date prior to the publication
of this document) there were 23,293,354 Y&R Stock Options outstanding.
Upon the Merger becoming effective, each outstanding Y&R Stock Option will
convert into an option to acquire 4.175 new WPP Ordinary Shares, if the
option holder is primarily resident or employed in Europe, or into an
option to acquire 0.835 of a WPP ADS in all other cases.
6. PRINCIPAL SUBSIDIARY UNDERTAKINGS AND ASSOCIATED UNDERTAKINGS
WPP is the holding company of the WPP Group. The following table contains
a list of the principal subsidiary undertakings and associated
undertakings of WPP being those which are considered by WPP to be likely
to have a significant effect on the assets and liabilities, financial
position and/ or the profits and losses of the WPP Group.
<TABLE>
<CAPTION>
COUNTRY OF PERCENTAGE
NAME REGISTERED OFFICE ACTIVITY INCORPORATION OWNED
---- ---------------------- ------------------ ------------- -----------
<S> <C> <C> <C> <C>
The Ogilvy Group, Worldwide Plaza, 309 Holding Company USA 100
Inc. West 49th Street
New York, 10019-7399
USA
J. Walter Thompson 466 Lexington Avenue Holding Company USA 100
Company New York, NY 10017 USA
The Ogilvy Group 10 Cabot Square Advertising England and 100
(Holdings) Limited Canary Wharf Wales
London, E14 4QB
England
CommonHealth LP 30 Lanidex Plaza West Healthcare USA 100
Parsippany Advertising
NJ 07054 USA
Asatsu DK, Inc. 16-12 Ginza 7-Chome, Advertising Japan 20
Chuo-Ku
Tokyo 104-8172
Japan
Hill & 466 Lexington Avenue Public USA 100
Knowlton, Inc. New York, NY 10017 USA Relations and
Affairs
WPP Group Services Boulevard de Co-ordination Belgium 100
S.A. L'Imperatrice 13, Centre
B-1000 Brussels
Belgium
BMRB International Hadley House Information and England and 100
Limited 79-81 Uxbridge Road Consultancy Wales
London W5 5SU
England
</TABLE>
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7. DIRECTORS, PROPOSED DIRECTORS AND Y&R DIRECTORS
7.1 The Directors of WPP and their respective functions are as follows:
<TABLE>
<S> <C>
DIRECTOR OFFICE
Hamish Maxwell Chairman, Non-Executive Director
Sir Martin Stuart Sorrell Group Chief Executive
Paul Winston George Richardson Group Finance Director
Brian John Nordstrom Brooks Chief Human Resources Officer
Eric Ralph Salama Group Director of Strategy and
Chief Executive of wpp.com
John Jeremy David Bullmore Non-Executive Director
Esther Dyson Non-Executive Director
Steven Heyer Non-Executive Director
Masao Inagaki Non-Executive Director
John Bernard Haysom Jackson Non-Executive Director
Christopher Alasdhair Anthony Ewan Mackenzie Non-Executive Director
Stanley Wilbur Morten Non-Executive Director
John Anthony Quelch Non-Executive Director
Joel Emanuel Smilow Non-Executive Director
</TABLE>
The business address of all of the Directors of WPP is 27 Farm Street,
London W1J 5RJ.
Steven Heyer and Joel Smilow will retire as Directors of WPP on the
Effective Date.
7.2 The Proposed Directors and their proposed functions will be as follows:
<TABLE>
<S> <C>
PROPOSED DIRECTOR OFFICE
Michael James Dolan Chief Executive Officer of Y&R
Frederick Warren Hellman Non-Executive Director
Michael Hugh Jordan Non-Executive Director
Sir Christopher Lewinton Non-Executive Director
</TABLE>
7.3 A short biography of each of the Directors of WPP and the Proposed
Directors is set out below:
(a) DIRECTORS
HAMISH MAXWELL was appointed to the Board in 1996. He previously served as
chairman and chief executive with Philip Morris Companies Inc. from 1984 to
1991. He was formerly a director of Bankers Trust and is a director of Sola
International Inc.
SIR MARTIN SORRELL was appointed to the Board and became group chief
executive in 1986. He is a director of Colefax Group plc and a number of
WPP Group subsidiary and associated companies. He was formerly a director
of Storehouse plc.
PAUL RICHARDSON was appointed to the Board in 1996. He has served as group
finance director since December 1996 after spending four years with the
Company as director of treasury. Previously he spent six years with Hanson
plc. He is a chartered accountant and member of the Association of
Corporate Treasurers. He is also a director of Chime Communications plc,
Singleton Group Limited in Australia, Syzygy AG, The Grass Roots Group plc,
International Business Research (USA) Inc., Internet Crimes Group, Inc. and
a number of WPP Group subsidiaries.
BRIAN BROOKS was appointed to the Board in September 1992. Previously he
was a partner in Towers Perrin Limited, in New York and London. He is a
lawyer and is admitted to practice law in the United States.
ERIC SALAMA was appointed to the Board in July 1996. He is an adviser to
the UK Government in the fields of creative and media industries and
education and a Trustee of the British Museum. He is a director of
Deckchair.com Holdings Limited, The Grass Roots Group plc, Syzygy AG and
Metapack Limited.
JEREMY BULLMORE was appointed to the Board in 1987 after 33 years at J.
Walter Thompson Company Inc. (the last 11 of which he was chairman). He was
chairman of the Advertising Association from 1981 to 1987. He is also a
director of Guardian Media Group plc and president of National Advertising
Benevolent Society.
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ESTHER DYSON was appointed to the Board in June 1999 as a non-executive
director. She is also a director of Medscape, APP Group, Uproar Inc, IBS,
Graphisoft N.V., EDVenture Forums, Thinking Tools Inc., LanguageWare.net,
Aristotle, Audumbla, Scala Business Solutions N.V., GreaterTalent.com,
CV-Online, New World Publishing, KeySystem, Cybiko, NewspaperDirect,
BrunswickDirect, TrustWorks, Sourceree, Talus Solutions and on the advisory
boards of Internet Capital Group, ICG Europe, Rambler Group, Municel, Tacit
Information Systems and Swissair Group. She is also the chairman of
EDVenture Holdings, Internet Corp. and wpp.com. She is a former director of
PRT Group.
STEVEN HEYER was appointed to the Board in May 2000. He is president and
chief operating officer for Turner Broadcasting System, Inc., a division of
Time Warner and was previously president and chief operating officer of
Young & Rubicam Advertising Worldwide. He is chairman of Cable Advertising
Bureau and a director of the Ad Council in the US. He is also a director of
eHatchery and ArtisanNetwork.com. He was formerly a director of
RealEstate.com.
MASAO INAGAKI was appointed to the Board in September 1998 as a result of
the WPP-Asatsu strategic alliance. He has been vice president of the Japan
Advertising Agencies Association since 1987 and is a director and chairman
of Asatsu-DK, Inc. He was also a director of BBDO Worldwide Inc.
JOHN JACKSON was appointed to the Board in September 1993. He is chairman
of Hilton Group plc and Celltech Chiroscience plc and a director of
Billiton PLC, Brown & Jackson plc, Burdale Holdings Limited, Cambridge
Animation Systems Limited, Concept Broadcast Development Limited, Envision
Licensing Limited, History Today Limited, Neos Limited, John Jackson
Consultants Limited, One World Action Limited, Twenty Five Ennismore
Gardens Limited, Wyndeham Press Group plc, Xenova Group PLC, Urban Catalyst
Limited, Oxford Technology Venture Capital Trust plc and Oxford Technology
II Venture Capital Trust plc. He is also the non-solicitor chairman of
Mishcon de Reya and chairman of the Countryside Alliance. He is also a
former director of Caledonian Publishing plc, Duphar Limited, Hephaistos
Limited, Howden Group plc, Graseby plc, National Interactive Video Centre
(a charity), Peboc Limited, Pilot Investment Trust plc and Renex Limited.
CHRISTOPHER MACKENZIE was appointed to the Board in March 2000. He is a
partner and principal at Clayton, Dubilier & Rice, the US based private
equity firm and a director of CD&R Limited and previously company officer
of General Electric. He is a non-executive director of Fairchild - Dormier
GmbH and Schulte GmbH and Jacquesson et Fils S.A.
STANLEY MORTEN was appointed to the Board in 1991. He is chairman and
president of Morten Paper and Metal, Inc. He was until recently chief
operating officer of Punk, Ziegel & Company and was previously managing
director of the equity division of Wertheim Schroder & Co, Inc in New York.
JOHN QUELCH was appointed to the Board in 1988. He is Professor and Dean of
the London Business School and was formerly the Sebastian S. Kresge
Professor of Marketing at Harvard Business School. He is a director of
Communication Services Group. He was also a director of US Office Products
Company, USA Floral Products Inc and Pentland Group Plc.
JOEL SMILOW was appointed to the Board in April 1998. He has served as a
special adviser to WPP since December 1995. He is also non-executive
chairman of Dinex Group LLC and a director of Lincolnshire
Management, Inc. and a member of the advisory board of Meadowbrook Exchange
Fund. He was previously chairman and chief executive officer of Playtex
Products Inc. and Playtex Apparel Inc. He was also formerly a director of
Barcelona Nut Processing Company and Celadon.
(b) PROPOSED DIRECTORS
MICHAEL J. DOLAN, has been a vice chairman, president, chief operating
officer and chief financial officer and a director of Y&R since July 1996.
From 1992 to 1996, he was president and chief executive officer of the
joint venture, Snack Ventures Europe, between PepsiCo Foods International
("PFI") and General Mills. He also served PFI as senior vice president,
operations. He is a director of Luminant Worldwide Corporation, Thomas
Weisel Partners, Gamut Interactive and is expected to become chief
executive officer of Y&R and an executive director of WPP upon completion
of the Merger.
F. WARREN HELLMAN, has been a director of Y&R since December 1996. He is
chairman of Hellman and Friedman LLC, a private investment company he
founded in 1984. Previously he was
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president and a director of Lehman Brothers, as well as head of its
investment banking division, and chairman of Lehman Corporation (a
closed-end investment company). He is a director of Levi Strauss & Co. and
II Fornaio (America) Corp., as well as a number of private venture-backed
companies. He is also a director of Matrix Partners, FWB Associates and
Farallon Capital Management.
MICHAEL H. JORDAN, has been a director of Y&R since December 1999. He has
been chairman of the board of directors of Luminant Worldwide Corporation
since the closing of its initial public offering in September 1999 and an
advisor to Luminant Worldwide Corporation since January 1999. In addition,
since May 1999, he has been chairman of the board of directors of
eOriginal, Inc. and chief executive officer since December 1999. He retired
in December 1998 as chairman and chief executive officer of CBS
Corporation, formerly Westinghouse Electric Corporation, positions he held
since June 1993. Prior to joining Westinghouse Electric Corporation, he was
a principal with the investment firm of Clayton, Dubilier & Rice, Inc. from
September 1992 to June 1993. From 1974 to 1992 he was an executive at
PepsiCo, Inc. holding a number of positions including president and chief
financial officer. He is also a director of Aetna Inc., Clariti
Telecommunications International Ltd., Dell Computer Corp., and
Marketwatch.com Inc. He is a member of the President's Export Council, the
chairman of the US-Japan Business Council, the chairman of The College
Fund/UNCF and the chairman of the Policy Board of the Americans for the
Arts. He was formerly a director of CVS Corporation, Rhone-Poulenc Rorer,
Inc, and is currently a director of Digital Convergence.com Inc., Enikia
LLC, eRewards Inc., Eritmo.com Inc., GrupoCima, Microcast Incorporated and
Wirebreak Networks, Inc., Sky Auction.com Inc. and The Feld Group.
SIR CHRISTOPHER LEWINTON, has been a director of Y&R since May 1999. He is
chairman of TI Group plc, a specialised engineering company, a position he
has held since 1989 and is a director of Video Networks Limited. He was
formerly on the supervisory board of Mannesmann A.G., and formerly a
director of Messier Dowty International and Reed Elsevier PLC.
7.4 The Directors of Y&R and their respective functions are as follows:
<TABLE>
<S> <C> <C>
Y&R DIRECTOR OFFICE
Thomas D. Bell, Jr. Chairman and Chief Executive Officer
Michael J. Dolan Vice Chairman, President and Chief Operating Officer
Edward H. Vick Director
Richard S. Bodman Director
F. Warren Hellman Director
Michael H. Jordan Director
Sir Christopher Lewinton Director
John F. McGillicuddy Director
Judith H. Rodin Director
Alan D. Schwartz Director
</TABLE>
The business address of all the Directors of Y&R is 285 Madison Avenue, New
York NY 10017.
7.5 DIRECTORS' SERVICE CONTRACTS
7.5.1 SIR MARTIN SORRELL
(a) Sir Martin Sorrell's services to the WPP Group outside the USA are
provided by JMS and he is employed by WPP Group USA, Inc. for his
duties in the USA.
(b) Taken together, the agreement with JMS (the "UK Agreement") and the
agreement with Sir Martin Sorrell (the "US Agreement") provide for
annual salary and fees of L840,000, annual pension contributions of
L336,000, an annual bonus of up to 200% of his annual salary and
fee, and participation in LEAP. In addition, JMS has certain
unexercised phantom options which are referred to in
paragraph 5.1.(g) of this Part VI.
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<PAGE>
(c) Sir Martin Sorrell and JMS have, in addition, agreed to defer their
respective interests under CIP and NSAP as described in paragraph
5.1(g) above until September 2004. JMS has also stated its intention
not to exercise its phantom options in respect of 1993 until March
2003 and has agreed to defer its interests in the phantom options in
respect of 1994 until March 2004.
(d) In addition, the Company is under an obligation to reimburse JMS the
cost of providing life and accident insurance, health insurance,
other benefits as may be agreed from time to time and 50% of the
reasonable cost of providing insurance against the UK Agreement and
the US Agreement terminating in the event of death, ill-health or
disability.
(e) The Company may terminate the UK Agreement and the US Agreement with
immediate effect for certain defaults committed by either JMS or Sir
Martin Sorrell and in the event of Sir Martin Sorrell's ill-health or
disability in accordance with the provisions of the UK Agreement and
the US Agreement ("Permitted Terminations").
(f) In a number of specified circumstances, such as a reduction by the
Company in the fees payable or the bonus and incentive provisions
contained in the UK Agreement and the US Agreement, JMS and Sir
Martin Sorrell may terminate the UK Agreement and the US Agreement
and any such termination will be deemed to be a termination of the UK
Agreement and the US Agreement by the Company. JMS may terminate the
UK Agreement if a person acquires 20% or more of the Company and,
within 12 months, the majority of the Board of WPP alters and JMS
does not approve the appointments to the Board of WPP. If the US
Agreement terminates (for reasons other than a US divestment
following which Sir Martin Sorrell is offered similar employment with
another member of the WPP Group), the UK Agreement will also
terminate. Upon a change of control of the Company, JMS and Sir
Martin Sorrell may terminate the UK Agreement and US Agreement
respectively within 90 days and the Company is obliged to pay two
times the annual fees, salary and bonuses and, in respect of the US
Agreement, pension contributions payable to JMS and Sir Martin
Sorrell. If the Company terminates the UK Agreement and the US
Agreement for any reason other than a Permitted Termination then the
Company shall pay to JMS and Sir Martin Sorrell amounts representing
twice of each of their annual fee and salary.
(g) Sir Martin Sorrell has also entered into covenants, which apply for
the period of 12 months following termination of the UK Agreement and
the US Agreement ("Termination"), under which he has agreed not to
compete with any business carried on by the Company or any member of
the WPP Group in any country in which the business of the Company or
any member of the WPP Group is carried on at the date of Termination,
nor to solicit business or custom or services, which are
substantially similar to or competitive with the services being
provided by the Company or any member of the WPP Group, from major
clients or clients with which Sir Martin Sorrell was involved in the
12 months before Termination, nor to induce suppliers with whom he
was actively involved during the twelve months ending on Termination,
nor to induce employees with whom he had material dealings in
connection with the provision of services during the 12 months ending
on Termination to cease employment with the Company or any member of
the WPP Group.
7.5.2 MR. PAUL RICHARDSON
Mr Paul Richardson has a service agreement dated 8 January 1997. The
agreement is terminable at any time on 12 months' notice by either
party. Mr Richardson is entitled to receive an annual salary from
1 April 1999 of L225,000, an annual bonus of between 50% and 75% of
base salary subject to the satisfaction of annual performance targets
and to participate in the WPP Performance Share Plan and LEAP.
Mr Richardson is also entitled to a pension contribution equal to
10% of base salary, a car allowance, private medical cover and risk
benefit cover.
7.5.3 MR. BRIAN BROOKS
Mr Brian Brooks has a service agreement dated 1 June 1993. The
agreement is terminable at any time by not less than 12 months'
written notice given by either party. Mr Brooks is entitled to
receive an annual salary of US$325,000, a bonus of between 50% and
75% of
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base salary subject to certain conditions being met and incentives
under the WPP Performance Share Plan and LEAP. Mr Brooks is also
entitled to be a member of the medical, dental, retirement and
disability plan established by WPP Group USA, Inc and life insurance
cover.
7.5.4 MR. ERIC SALAMA
Mr Eric Salama has a service agreement dated 1 April 1997. The
agreement is terminable at any time on 12 months' notice by either
party. Mr Salama is entitled to receive an annual salary from
1 April 1999 of L165,000, an annual bonus of between 50% and 75% of
base salary subject to the satisfaction of annual performance targets
and to participate in the WPP Performance Share Plan and LEAP.
Mr Salama is also entitled to a pension contribution equal to 10% of
base salary, a car allowance, private medical cover and risk benefit
cover.
7.5.5 NON-EXECUTIVE DIRECTORS
The following non-executive Directors all have letters of appointment
for a three year term and are entitled to receive the fees set out
below and to be reimbursed all reasonable out of pocket expenses:
<TABLE>
<CAPTION>
DATE OF
NAME FEES APPOINTMENT
---- ---------- -------------------
<S> <C> <C>
Hamish Maxwell L102,000 15 July 1996
Jeremy Bullmore(1) L25,000 23 December 1987
Esther Dyson(2) L25,000 28 June 1999
Steven Heyer L25,000 18 May 2000
Masao Inagaki(3) -- 14 September 1998
John Jackson L30,000 28 September 1993
Christopher Mackenzie L25,000 14 March 2000
Stanley Morten L30,000 2 December 1991
John Quelch L25,000 11 February 1988
Joel Smilow L25,000 23 April 1998
--------------
</TABLE>
NOTES:
(1) In addition to his fee as a non-executive Director, Jeremy
Bullmore is also entitled to receive further remuneration under
his consulting arrangements with the Company. In this respect,
for the year ended 31 December 1999, Mr Bullmore received an
additional L46,000 and the sum of L11,000 as a car allowance.
(2) In addition to her fee as a non-executive Director, Esther
Dyson is entitled to consulting fees of US$10,000 per day for
services she provides to wpp.com. She may elect to receive all
or part of this fee in the form of WPP Ordinary Shares.
(3) Pursuant to the agreement referred to in paragraph 9.1(c) of
Part VI of this document, Asatsu-DK, Inc. has the right to
appoint a non-executive director to the WPP Board subject to it
retaining its shareholding in WPP. Mr. Inagaki was appointed
pursuant to this right.
(4) Steven Heyer and Joel Smilow will retire as Directors of WPP
on the Effective Date.
7.6 PROPOSED DIRECTORS' SERVICE CONTRACTS AND LETTERS OF APPOINTMENT
7.6.1 MR. MICHAEL DOLAN'S SERVICE CONTRACT
(a) Contemporaneously with the execution of the Merger Agreement, Y&R
entered into a service agreement with Mr. Michael J. Dolan, a vice
chairman of Y&R and Y&R's chief operating officer, to serve as chief
executive officer of Y&R following the Merger.
(b) Mr. Dolan's service agreement provides for an initial four year term
of employment which begins upon completion of the Merger. The service
agreement also provides for a one year extension of the term of
Mr. Dolan's employment. Under his service agreement, Mr. Dolan's
remuneration will comprise:
(i) a starting annual base salary of US$800,000, subject to
increase by WPP;
(ii) an annual cash bonus with a target bonus amount of US$600,000
(but with an opportunity to earn up to 200% of his base salary)
to be determined based on the
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<PAGE>
achievement of annual targets provided that for the year 2000,
Mr. Dolan's annual bonus will not be less than US$800,000;
(iii) a one-time stay bonus of US$800,000 payable on the first
anniversary of completion of the Merger if Mr. Dolan is then an
employee of Y&R;
(iv) on 1 January 2001, an award of 5,000 units (indexed to the
value of WPP Ordinary Shares) pursuant and subject to the terms
and conditions of a long-term incentive plan to be established
after completion of the Merger. The plan under which the award
will be made will be modelled on the WPP Operating Company Long
Term Incentive Plan (see paragraph 5.1(f) above);
(v) in September 2001, the grant of stock options to acquire WPP
ADSs with an aggregate fair market value equal to his annual
base salary at that time, subject to the terms of the Executive
Plan;
(vi) the right to participate in LEAP and the incentive and
employee stock option programmes of WPP and the employee
benefit programmes of Y&R on special terms.
(c) Mr. Dolan's service agreement also provides that if his employment is
terminated by Y&R without cause (as defined in the service agreement)
or he leaves Y&R for good reason (as defined in the service
agreement) within two years following completion of the Merger, he
will be entitled to receive:
(i) a pro-rata bonus for the performance year in which his contract
is terminated;
(ii) a severance benefit equal to three times the sum of:
(aa) his highest annual base salary at any time during the
12 months immediately preceding the date of termination
of his contract; and
(bb) the greater of his annual target bonus immediately
preceding the date of termination of his contract and the
average of his annual bonuses earned during the three
year period preceding the Merger; and
(iii) insurance and supplemental retirement benefits.
(d) If however Mr. Dolan's employment is terminated by Y&R without cause
(as defined in the service agreement) or he leaves Y&R for good
reason (as defined in the service agreement) within the third or
fourth year of the initial term of his service agreement, he will be
entitled to a severance benefit equal to, depending upon the time of
termination, no less than one times but no more than two times the
sum of:
(i) the greater of his annual base salary during the year preceding
the termination of his employment; and
(ii) the greater of his annual target bonus amount immediately
preceding the date of termination of his contract and the
average of his annual bonuses earned during the three year
period preceding the Merger.
(e) The service agreement provides that if any payments to Mr. Dolan
under the agreement or otherwise would be subject to tax under
Section 4999 of the US Code, Y&R will provide an additional payment
so that Mr. Dolan will receive a net amount equal to the payment he
would have received if the tax had not applied.
(f) Mr. Dolan's service agreement also provides that with respect to any
awards of performance shares granted to him under the Young
& Rubicam 1997 Incentive Compensation Plan, performance goals and
other conditions will be deemed to be met as of the effective time of
the Merger and Y&R will pay him a lump sum cash payment equal to the
value of these performance shares. The benefits payable under his
service agreement are in lieu of any severance benefits payable to
Mr. Dolan under any other agreements or severance plans of Y&R.
155
<PAGE>
(g) Mr. Dolan has also entered into covenants which apply for 12 months
following termination of his service agreement, under which he has
agreed not to:-
(i) for one year, work for any competitor of Y&R on the account of
any Y&R client with whom he had a direct relationship or as to
which he had a significant involvement at any time during the
two years prior to his termination;
(ii) for one year, if his responsibilities are of a corporate nature
and do not principally involve client service, work for a
principal competitor of Y&R in a similar function;
(iii) for one year, if his responsibilities are of a client service
related nature, work for a competitor of Y&R on the account of
any substantial competitor of any client for which he had
substantial responsibility during the two years prior to
termination or work directly for a competitor of these
clients;
(iv) for one year, solicit or hire any employee of Y&R; and
(v) at any time, disclose any confidential information of Y&R and
its clients.
7.6.2 Following completion of the Merger, each of the Proposed Directors
(other than Mr. Dolan) will be appointed as a non-executive Director
of WPP for an initial two year fixed period and will be entitled to
receive fees of L25,000 per annum and to be reimbursed for all
reasonable out of pocket expenses.
7.7 Save as disclosed in paragraph 7.3 above, none of the Directors or
Proposed Directors has been a partner in any partnership in the last five
years.
7.8 None of the Directors or Proposed Directors has any unspent convictions in
relation to indictable offences, has been bankrupt or has made or been the
subject of any individual voluntary arrangement.
7.9 Other than as referred to in this paragraph 7.9, none of the Directors or
Proposed Directors has been a director of any company at the time of or
within the 12 months preceding the date of its receivership, compulsory
liquidation, creditors voluntary liquidation, administration, company
voluntary arrangement or any composition or arrangement with its creditors
generally or any class of its creditors. Sir Martin Sorrell is a director
of certain WPP companies, being Wigmore Limited, Wigmore Properties
Holdings plc and Farfind Limited, all of which are in liquidation. There is
no deficiency to creditors in any of these liquidations. John Jackson was a
director of Quorum Computers Limited which was put into receivership. There
were no deficiencies to secured creditors but there was a deficiency to
unsecured creditors totalling L100,000 and to shareholders totalling
L560,000. Mr. Hellman was a director of MobileMedia Corporation until
14 August 1998. On 30 January 1998 MobileMedia Corporation (the "company"),
and its subsidiaries filed for bankruptcy protection under chapter 11 of
title II of the US Code. The company is subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (the "Court").
The company submitted a plan of reorganisation to the Court for approval,
which was approved in connection with the company's merger into Arch
Communications Group, Inc. in 1999. All creditors were satisfied in cash or
by the issue of stock in Arch Communications Group, Inc.
7.10 None of the Directors or Proposed Directors has been a partner of any
partnership which has been placed into compulsory liquidation or
administration or entered into a partnership voluntary arrangement at the
time of or within 12 months preceding such event and there have been no
receiverships of any asset of any of the Directors or Proposed Directors or
of any partnership of which any of the Directors or Proposed Directors was
a partner at the time of or within the 12 months preceding such events.
7.11 None of the Directors or Proposed Directors has been publicly criticised
by any statutory or regulatory authority or disqualified by a court from
acting as a director of a company or from acting in the management or
conduct or the affairs of any company.
7.12 No Director or Proposed Director has, or has had, any interest in any
transactions which are or were unusual in their nature and conditions or
significant to the business of the WPP Group and which were effected by the
Company (i) during the current or immediately preceding financial year of
the Company or (ii) during an earlier financial year and which remain in
any respect outstanding or unperformed.
156
<PAGE>
7.13 The aggregate remuneration (including benefits in kind and pension
contributions) of the Directors of WPP for the year ended 31 December 1999
was L7,846,000. Save as disclosed in paragraphs 7.6 above and 7.14 below,
the total emoluments receivable by the Directors or Proposed Directors of
WPP will not be varied as a consequence of the Merger.
8. INTERESTS OF THE DIRECTORS AND THE PROPOSED DIRECTORS
8.1 As at 23 August 2000 (the latest practicable date prior to the publication
of this document) and immediately following completion of the Merger the
interests of the Directors and the Proposed Directors and persons connected
with them (within the meaning of section 346 of the Companies Act) in the
issued share capital of WPP (all of which, unless otherwise stated, are
beneficial) which (i) have been notified by each Director or Proposed
Director to the Company pursuant to sections 324 or 328 of the Companies
Act; or (ii) are required pursuant to section 325 of the Companies Act to
be entered in the register referred to therein; or (iii) are interests of a
connected person of a Director or Proposed Director and which would, if the
connected person were a Director, be required to be disclosed under
(i) and (ii) above, and the existence of which is known or could with
reasonable diligence be ascertained by the Director or Proposed Director,
were as follows:
<TABLE>
<CAPTION>
IMMEDIATELY FOLLOWING
COMPLETION OF THE
BEFORE THE MERGER MERGER
-------------------------------------------- -----------------------
PERCENTAGE
NUMBER OF OF ISSUED
WPP ORDINARY PERCENTAGE OF ENLARGED
ORDINARY SHARE CAPITAL ISSUED ORDINARY SHARE
DIRECTOR SHARES (%) CAPITAL (%)(1)
-------- ---------------------------- ------------- -----------------------
<S> <C> <C> <C>
Hamish Maxwell 35,000 0.01 0.01
Sir Martin Sorrell(2) 11,238,373 1.44 0.93
Paul Richardson 331,176 0.04 0.03
Brian Brooks 361,783 0.04 0.03
Eric Salama 429,576 0.05 0.03
Jeremy Bullmore 20,065 0.01 0.01
Esther Dyson -- -- --
Steven Heyer -- -- --
Masao Inagaki(4) 31,295,646 4.02 2.60
John Jackson 12,500 0.01 0.01
Christopher Mackenzie 10,000 0.01 0.01
Stanley Morten 20,000 0.01 0.01
John Quelch 10,000 0.01 0.01
Joel Smilow 100,000 0.01 0.01
Michael J. Dolan -- -- 0.07
F. Warren Hellman -- -- 0.01
Michael H. Jordan -- -- 0.01
Sir Christopher Lewinton -- -- 0.01
--------------
</TABLE>
NOTES:
(1) Assumes that during the period between 23 August 2000 and the
date on which completion of the Merger occurs no new WPP
Ordinary Shares are issued other than in connection with the
Merger and that there will be no dealings by any Director or
Proposed Director (or his connected person).
(2) Sir Martin Sorrell is also interested in the WPP Ordinary
Shares set opposite his name at paragraph 8.2 below.
(3) Messrs Richardson, Brooks, and Salama are respectively also
interested in the number of WPP Ordinary Shares set opposite
their names at paragraph 8.2 below.
(4) Mr. M. Inagaki is a director and chairman of Asatsu-DK, Inc.
which is interested in 31,295,646 WPP Ordinary Shares
representing 4.02% of the issued share capital of the Company
immediately before the Merger.
(5) Each of the Directors has a technical interest as an employee
and potential beneficiary in one of the Company's ESOPs in
shares in the Company held under the relevant ESOP.
157
<PAGE>
(6) Each of Messrs Maxwell, Bullmore, Jackson, Mackenzie, Morten
and Quelch are interested in less than 0.01% of the existing
issued share capital and will be interested in less than 0.01%
of the enlarged issued share capital of WPP immediately
following completion of the Merger.
(7) None of the Proposed Directors has any interest in WPP
Ordinary Shares save for interests in WPP ADSs arising upon the
Merger becoming effective (see paragraph 8.3 below for these
details). Messrs Hellman, Jordan and Lewinton will be
interested in less than 0.01% of the enlarged issued share
capital of WPP immediately following completion of the Merger.
(8) Steven Heyer and Joel Smilow will retire as Directors of WPP
on the Effective Date.
8.2 As at 23 August 2000 (the latest practicable date prior to the publication
of this document) the Directors had been granted awards over WPP Ordinary
Shares under the WPP Share Schemes as follows:
<TABLE>
<CAPTION>
NUMBER OF
DIRECTOR PLAN ORDINARY SHARES PERFORMANCE PERIOD
-------- -------- ---------------- -----------------------
<S> <C> <C> <C>
Sir M S Sorrell -- 8,594,493(1) N/A
PSP 219,812 1 Jan 1999-31 Dec 2001
PSP 137,255 1 Jan 2000-31 Dec 2002
LEAP 5,369,070 1 Jan 1999-31 Dec 2003
P W G Richardson PSP 10,577 1 Jan 1996-31 Dec 1998
PSP 33,470 1 Jan 1997-31 Dec 1999
PSP 55,513 1 Jan 1998-31 Dec 2000
PSP 65,944 1 Jan 1999-31 Dec 2001
PSP 36,765 1 Jan 2000-31 Dec 2002
LEAP 299,030 1 Jan 1999-31 Dec 2003
B J Brooks PSP 18,545 1 Jan 1996-31 Dec 1998
PSP 29,990 1 Jan 1997-31 Dec 1999
PSP 46,728 1 Jan 1998-31 Dec 2000
PSP 50,623 1 Jan 1999-31 Dec 2001
PSP 32,185 1 Jan 2000-31 Dec 2002
LEAP 272,600 1 Jan 1999-31 Dec 2003
E R Salama PSP 12,400 1 Jan 1996-31 Dec 1998
PSP 27,892 1 Jan 1997-31 Dec 1999
PSP 46,261 1 Jan 1998-31 Dec 2000
PSP 48,359 1 Jan 1999-31 Dec 2001
PSP 26,961 1 Jan 2000-31 Dec 2002
LEAP 272,645 1 Jan 1999-31 Dec 2003
</TABLE>
------------------
NOTES:
(1) This represents the interests of Sir Martin Sorrell and JMS in the
CIP, the NSAP and unexercised phantom options. See paragraph 5.1(g)
above for further details.
(2) The number of WPP Ordinary Shares shown for LEAP represent the
maximum number of matching shares which are capable of vesting at the
end of the performance period for these Directors and JMS, if the
performance requirement is satisfied to the fullest extent and
subject to the retention of WPP investment shares until the end of
the investment period which expires in September 2004.
158
<PAGE>
8.3 As at 23 August 2000 (the latest practicable date prior to publication of
this document) the Proposed Directors are interested in the following Y&R
Common Shares and Y&R Stock Options and will be interested in the following
number of WPP ADSs immediately after completion of the Merger:
<TABLE>
<CAPTION>
IMMEDIATELY
AFTER
COMPLETION OF
BEFORE THE MERGER THE MERGER
----------------------------------- ----------------
NUMBER OF Y&R
COMMON NUMBER OF Y&R NUMBER OF WPP
SHARES STOCK OPTIONS(1) ADSS(2)
PROPOSED DIRECTOR ---------------- ---------------- ----------------
<S> <C> <C> <C>
Michael J. Dolan 254,679(3) 810,865 889,729
F. Warren Hellman 285,916 2,000 240,409
Michael H. Jordan 2,835 2,000 4,037
Sir Christopher Lewinton 3,209 2,000 4,349
</TABLE>
------------------
NOTES:
(1) All of the Proposed Directors hold unvested options to purchase
Y&R Common Shares granted under the Y&R Director Deferred Fee Plan
and the Y&R Director Stock Option Plan. Upon the Merger becoming
effective, each of Messrs Dolan, Hellman, Jordan and Lewinton will be
entitled to receive 0.835 of a WPP ADS upon exercise of each option
to acquire a Y&R Common Share.
(2) This assumes (i) that each of Messrs Dolan, Hellman, Jordan and
Lewinton will elect to receive 0.835 of a WPP ADS for each Y&R Common
Share he holds rather than elect to receive five new WPP Ordinary
Shares in lieu of each WPP ADS he would otherwise be entitled to
receive and (ii) that each Y&R Stock Option is exercised.
(3) Of the 254,679 Y&R Common Shares which Mr. Dolan is interested in
1,200 Y&R Common Shares are held by his wife and children.
8.4 No loans have been granted or guarantees provided to or for the benefit of
any of the Directors or Proposed Directors by any member of the WPP Group.
8.5 Save as disclosed in paragraphs 8.1, 8.2 and 8.3 of Part VI of this
document, none of the Directors of WPP nor any of the Proposed Directors
nor any persons connected with them have any interests in the share capital
of WPP.
8.6 Save as disclosed below, as at 23 August 2000, (the latest practicable
date prior to the publication of this document) the Directors and Proposed
Directors were not aware, nor had they been notified in accordance with
Part VI of the Companies Act, that any person was interested directly or
indirectly in WPP Ordinary Shares amounting to 3% or more of the current
issued share capital of WPP or would be, immediately following completion
of the Merger, interested in 3% or more of WPP's issued share capital as
enlarged by the Merger.
<TABLE>
<CAPTION>
PERCENTAGE OF ISSUED PERCENTAGE OF ISSUED
NUMBER OF SHARE CAPITAL HELD SHARE CAPITAL
WPP ORDINARY BEFORE THE MERGER FOLLOWING COMPLETION
NAME OF SHARE OWNER SHARES (%) OF THE MERGER (%)
------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Legg Mason 41,081,541 5.27 3.42
Asatsu-DK, Inc. 31,295,646 4.02 2.60
WPP ESOP 30,761,069 3.95 2.56
CGNU plc 26,327,909 3.38 2.19
--------------
</TABLE>
NOTE:
This assumes that 433,710,712 new WPP Ordinary Shares will be issued in
connection with the Merger and that there will be no dealings by such share
owners in WPP Ordinary Shares during the period between 23 August 2000 and
the date of completion of the Merger.
8.7 So far as the Directors and Proposed Directors are aware there are no
persons who, directly or indirectly, jointly or severally, exercise or
could exercise control over WPP.
159
<PAGE>
9. MATERIAL CONTRACTS
9.1 The following contracts (not being contracts entered into in the ordinary
course of business) (i) have been entered into by a member of the WPP Group
during the two years immediately preceding the date of this document and
are or may be material or (ii) contain a provision under which a member of
the WPP Group has an obligation or entitlement which is or may be material
to the WPP Group as at the date of this document:
(a) A US$500,000,000, four year, multicurrency revolving credit facility
agreement dated 3 July 1998 between WPP and certain of its
subsidiaries as borrowers, certain specified banks and financial
institutions as lenders, Bankers Trust Company as facility agent and
Bankers Trust International, Barclays Bank PLC and J.P. Morgan
Securities Ltd. as arrangers. The facility is available for general
corporate purposes. The margin payable under the facility is
initially 0.425% per annum (plus LIBOR and reserve asset costs (as
defined therein)) although following delivery of a ratio certificate
by WPP this may be adjusted to between a range of 0.55% per annum to
0.2% per annum. The obligations of each of the borrowers to the
facility agent and each of the lenders under the facility are
guaranteed by WPP.
(b) An indenture dated 15 July 1998 between WPP Finance (USA)
Corporation, WPP as guarantor and Bankers Trust Company as trustee,
in connection with the issue by WPP Finance (USA) Corporation of
US$200,000,000 6 5/8% Notes due 15 July 2005 and US$100,000,000
6 7/8% Notes due 15 July 2008 (together, the "Notes"). The Notes are
fully and unconditionally guaranteed by WPP. Pursuant to the
Indenture, WPP is subject to certain covenants and restrictive
covenants including a negative pledge and limitations on sale and
leaseback transactions and on indebtedness of certain subsidiaries.
The Indenture contains customary provisions with respect to events of
default by WPP or WPP Finance (USA) Corporation.
(c) An agreement dated 3 August 1998 between WPP and Asatsu-DK, Inc
("Asatsu") pursuant to which WPP subscribed for approximately 23% (at
that time) of the share capital of Asatsu for approximately L139
million and Asatsu subscribed for 31,295,646 WPP Ordinary Shares
representing approximately 4% (at that time) of the issued share
capital of WPP. Each party agreed not to transfer any shares held by
them in the other for a period of five years and thereafter only to
transfer such shares following a procedure set out in the agreement.
Each party is further entitled to nominate a non-executive director
to the board of the other subject to retaining its shareholding in
the other. On the same date, Asatsu and WPP entered into a
co-operation and alliance agreement to exploit mutual opportunities
for business both inside and outside Japan. Due to the disparity of
the percentage shareholdings of WPP in Asatsu and of Asatsu in WPP,
an agreement was also entered into on 3 August 1998 imposing, INTER
ALIA, limitations, in certain circumstances, on the voting rights in
respect of the shares held by WPP in Asatsu.
(d) A syndicated 364 day revolving credit facility agreement dated
15 October 1999 between WPP Pearls Limited as borrower, WPP, Barclays
Bank PLC as agent and arranger and certain financial institutions as
lenders. The borrowers under the facility are WPP Pearls Limited and
any other subsidiary of WPP that accedes to the facility as borrower.
The aggregate amount of the revolving credit facility available under
the agreement is US$150,000,000. The facility is available to be used
for general corporate purposes and may be drawn down in dollars or in
any other currency which is freely transferable and available in the
London interbank market. The interest payable under the facility is
0.40% per annum over LIBOR and reserve asset costs (as defined
therein). The obligations of each of the borrowers under the
agreement are guaranteed by WPP and by any other subsidiary of WPP
that accedes to the facility.
(e) A US$700,000,000, 364 day, multicurrency revolving credit facility
agreement dated 7 August 2000 between WPP Finance Co. Limited and WPP
Group U.S. Finance Corp. as borrowers, WPP as guarantor, Citibank
International plc as facility agent and certain specified banks and
financial institutions as lenders. The facility is available to
finance the working capital requirements of the WPP Group and,
following completion of the Merger, to repay certain existing
indebtedness of the Y&R Group and to finance the working capital
requirements of the Y&R Group. The term of the facility may be
extended for a further 364 days at the discretion of each of the
lenders on the request of WPP in its capacity as
160
<PAGE>
borrowers' agent. The whole or part of the facility may be converted
into a term loan with a fixed term to 7 August 2003 at any time
during the first year following signing (subject to certain
restrictions). The interest payable under the facility is 0.40% per
annum, over LIBOR (or in the case of advances in Euros EURIBOR) and
mandatory costs. The obligations of each of the borrowers under the
agreement are guaranteed by WPP.
(f) the contracts relating to the Merger referred to in Section A of
Part V of this document.
9.2 The following contracts (not being contracts entered into in the ordinary
course of business) (i) have been entered into by a member of the Y&R Group
during the two years immediately preceding the date of this document and
are or may be material or (ii) contain a provision under which a member of
the Y&R Group has an obligation or entitlement which is material to the Y&R
Group as at the date of this document:
(a) A lease dated 12 July 1984 between Peter Catalano and Michael
Kornblum and Y&R relating to the lease of offices at 230 Park Avenue
South, New York, New York for a current annual rent of US$16,650,000
increasing by an annual rate of 3.5% for the remainder of the lease.
The lease is due to expire on 22 January 2006, although Y&R has the
option to renew the lease for 4 further terms of 5 years each.
(b) A US$200,000,000, one-year credit facility agreement ("the facility")
dated 30 June 1999 between Y&R as borrower, certain banks and
financial institutions, Citibank N.A. as administrative and
documentation agent, and Salomon Smith Barney Inc. as arranger and
book manager, as amended and restated by an agreement dated 29 June
2000. The facility contains customary provisions with respect to
warranties and representations events of default, restrictive
covenants including negative pledges and restrictions on future
borrowings. Y&R is required to pay interest on outstanding borrowings
under the facility at varying rates, generally equal to the base
rate, or to an applicable margin in the range of 0.525% per annum to
0.700% per annum plus LIBOR (depending on the ratio of debt to
earnings (before interest, taxation, depreciation and amortisation)).
Y&R is also required to pay a facility fee ranging from 0.100% per
annum to 0.175% per annum to 0.200% per annum on the total amount of
the commitment.
(c) An indenture dated 20 January 2000 between Y&R and Bank of New York
as trustee pursuant to which Y&R issued US$287,500,000 Y&R
Convertible Notes. The Y&R Convertible Notes are currently
convertible into an aggregate of 3,919,030 Y&R Common Shares at a
conversion price of US$73.36 per share. After the Merger the Y&R
Convertible Notes will be convertible into 0.835 of a WPP ADS for
each Y&R Common Share into which they were convertible prior to the
Merger.
(d) A US$400,000,000, five year unsecured revolving credit facility ("the
Revolving Credit Facility") dated 8 May 1998, between Y&R and other
members of the Y&R Group as borrowers, certain banks and financial
institutions, Citibank N.A. as administrative and documentation
agent, Bank of America National Trust and Savings Association as
syndication agent, Citicorp Securities as arranger, and BancAmerica
Robertson Stephens as co-arranger, as amended by an agreement dated
30 June 1999. The Revolving Credit Facility contains customary
provisions with respect to warranties and representations, events of
default, and restrictive covenants including negative pledges and
restrictions on future borrowings. Y&R is required to pay interest on
outstanding borrowings under the Revolving Credit Facility at varying
rates, generally equal to the base rate, or to an applicable margin
in the range of 0.275% per annum to 0.300% per annum plus LIBOR
(depending on the ratio of debt to earnings (before interest,
taxation, depreciation, and amortisation)). Y&R is also required to
pay a facility fee ranging from 0.125% per annum to 0.200% per annum
of the total amount of the commitment. Under the Revolving Credit
Facility, Y&R guarantees the obligations of each borrower.
(e) The contracts relating to the Merger referred to in Section A of
Part V of this document.
161
<PAGE>
10. LITIGATION
10.1 WPP
(a) Save as set out in subparagraphs (b) and (c) below, there are no, nor
have there been any, legal or arbitration proceedings nor, so far as
the Directors of WPP are aware, are any such proceedings pending or
threatened by or against WPP or any of its subsidiaries, which may
have, or have had during the 12 months preceding the date of this
document, a significant effect on the WPP Group's financial position.
(b) During 1997, WPP entered into negotiations with Canary Wharf Limited
to take a lease of the five floors of 25 North Colonade, Canary
Wharf. Although heads of terms were exchanged, contracts were not
entered into, and WPP and Ogilvy & Mather Limited commenced
proceedings against Canary Wharf Limited and certain of its directors
and employees for damages for fraudulent misrepresentation,
conspiracy, deceit and unlawful interference with WPP's business
interests. The four week trial concluded on 14 July 2000. Judgment
was given by Mr Justice Ferris on 23 August 2000. The trial was
concerned only with issues of liability, and, therefore, the judgment
did not deal with the question of damages. Judgment was given in
favour of Canary Wharf Limited. A costs order has not yet been made.
If costs are awarded against WPP and Ogilvy & Mather Limited they are
likely to be in the region of L600,000 to L800,000.
(c) An action was commenced by Hispanic Newspapers Network, Inc., and
others, in the United States District Court for the Southern District
of New York in August 2000 against Ogilvy & Mather, J. Walter
Thompson, Y&R and WPP (the "defendants"). The plaintiffs represent a
group of fourteen Hispanic owned newspapers. The complaint is based
on causes of action for certain alleged antitrust violations, civil
rights violations and other statutory violations based on the
plaintiffs' allegation that the defendants conspired to unlawfully
exclude the plaintiffs from earning advertising revenues from various
federal government advertising accounts. The plaintiffs seek
compensatory damages of no less than US$300 million, treble damages,
unspecified punitive damages and injunctive relief. The defendants
have yet to be served in the action. WPP and Y&R believe that the
action is without substance and intend to vigorously defend this
action.
10.2 Y&R
(a) Save as referred to in paragraph 10.1(c) above, there are no, nor
have there been any, legal or arbitration proceedings nor, so far as
Y&R are aware, are any such proceedings pending or threatened by or
against Y&R or any of its subsidiaries which may have, or have had
during the 12 months preceding the date of this document, a
significant effect on the Y&R Group's financial position.
162
<PAGE>
11. PRINCIPAL ESTABLISHMENTS
WPP Group's principal establishments and summary details of them are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL
ESTABLISHMENT AND LOCATION ACTIVITY AREA (SQ. FT.) FREEHOLD/LEASEHOLD
-------------------------- ----------- -------------- -------------------
<S> <C> <C> <C>
The Ogilvy Group, Inc Advertising 585,460 Leasehold
Worldwide Plaza
309 West 49th Street
New York, New York USA
J Walter Thompson USA Inc. Advertising 456,132 Leasehold
466 Lexington Avenue
New York
New York, USA
J Walter Thompson USA Inc. Advertising 173,234 Leasehold
900 North Michigan Avenue
Chicago, Illinois USA
The Ogilvy Group (Holdings) Limited Advertising 103,854 Leasehold
10 Cabot Square
London, England
J Walter Thompson USA Inc Advertising 98,202 Leasehold
500 Woodward Avenue
Detroit, Michigan USA
</TABLE>
12. UNITED KINGDOM TAXATION
THE FOLLOWING SUMMARY IS NOT EXHAUSTIVE, IS INTENDED AS A GENERAL GUIDE FOR
WPP SHARE OWNERS WHO ARE RESIDENT OR ORDINARILY RESIDENT FOR TAX PURPOSES
IN THE UK ONLY (THE "UK SHARE OWNERS") AND RELATES ONLY TO UK TAXATION. IT
IS BASED ON CURRENT UK LAW AND CURRENT PUBLISHED INLAND REVENUE PRACTICE
AND MAY NOT APPLY TO CERTAIN SPECIAL CATEGORIES OF UK SHARE OWNERS, SUCH AS
DEALERS IN SECURITIES. WPP SHARE OWNERS WHO ARE IN ANY DOUBT ABOUT THEIR
TAX POSITION OR WHO ARE SUBJECT TO TAX IN ANY JURISDICTION OTHER THAN THE
UK SHOULD CONSULT THEIR OWN APPROPRIATE PROFESSIONAL ADVISER IMMEDIATELY.
There is no UK withholding tax on dividends nor will WPP any longer be
liable to account for advance corporation tax in respect of the payment of
any dividend.
An individual UK share owner who receives a dividend will be entitled to a
tax credit equal to one ninth of the dividend. The individual will be
taxable on the total of the dividend and the related tax credit (the "
gross dividend"), which will be regarded as the top slice of such
individual's income. For individual UK share owners, the tax credit will
satisfy the whole of the lower and basic tax liability. Higher rate
taxpayers pay tax at 32.5% on the gross dividend. However, the tax credit
is available for offset against the higher rate liability, such that the
net additional amount payable is equal to 22.5% of the gross dividend plus
the tax credit. So, for example, a dividend of L80 will carry a tax credit
of L8.89 and the income tax payable on the dividend by an individual liable
to income tax at the higher rate would be 32.5% of L88.89, namely L28.89,
less the tax credit of L8.89, leaving a net tax charge of L20.
A UK share owner that is a company will not generally be taxable on any
dividend it receives from WPP.
UK share owners who are not liable to income tax or corporation tax on
dividends received by them from WPP will not be entitled to claim payment
of the tax credit in respect of those dividends. However, investors holding
their shares in WPP through personal equity plans ("PEPs") or Individual
Savings Accounts ("ISAs") will be entitled to recover the tax credit on
dividends paid by WPP until April 2004.
For dividends paid to trustees of UK resident discretionary or accumulation
trusts, the dividend plus tax credit will be subject to UK income tax at a
rate of 25% with a non-refundable tax credit equal to one ninth of the
dividend.
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The amount of the tax credit in respect of a dividend paid which
constitutes income of a pension fund, charity or venture capital trust,
will not be repaid. However, charities are entitled to claim from the
Inland Revenue a payment equal to a proportion of any dividend paid before
the tax year ending 6 April 2004.
The right of a share owner who is not resident (for tax purposes) in the UK
(a "non-resident share owner") to a tax credit in respect of a dividend
received from WPP and to claim payment of any part of that tax credit will
depend on the existence and terms of any double taxation convention between
the UK and the country in which the share owner is resident. Non-resident
share owners may also be subject to tax on dividend income under any law to
which they are subject outside the UK.
13. WORKING CAPITAL
The Company is of the opinion that the enlarged WPP Group has sufficient
working capital for its present requirements, that is for at least the
next 12 months following the date of this document.
14. GENERAL
(a) There has been no significant change in the financial or trading
position of the WPP Group since 30 June 2000, being the date to which
WPP prepared its unaudited interim accounts.
(b) There has been no significant change in the financial or trading
position of the Y&R Group since 30 June 2000, being the date to which
Y&R prepared its unaudited interim accounts.
(c) Each of Goldman Sachs International and Merrill Lynch International
have given and have not withdrawn their respective written consents
to the issue of this document with the references to their respective
names in the form and context in which they appear.
(d) Each of Arthur Andersen and PricewaterhouseCoopers LLP have given and
have not withdrawn their respective written consents to the inclusion
of the references to their respective names (and their respective
letters referred to in Parts III and IV of this document) in the form
and context in which they are included and have authorised the
contents of those parts of this document for the purposes of section
152(1)(e) of the Financial Services Act 1986.
(e) The registrars of WPP are Computershare Services PLC, PO Box 82, The
Pavilions, Bridgwater Road, Bristol BS99 7HH.
15. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection during
usual business hours on any weekday (Saturdays and public holidays
excepted) at the offices of Allen & Overy, One New Change, London
EC4M 9QQ until the conclusion of the Extraordinary General Meeting:
(a) the Memorandum and Articles of Association of WPP;
(b) the published audited consolidated accounts of WPP for the two
financial years ended 31 December 1999 and the unaudited interim
results for the six months ended 30 June 2000;
(c) the published audited consolidated accounts of Y&R for the two
financial years ended 31 December 1999 and the unaudited interim
results for the six months ended 30 June 2000;
(d) the rules of the WPP Share Schemes;
(e) the letter from PricewaterhouseCoopers LLP regarding the summary of
differences between US GAAP and UK GAAP for Y&R set out in Section 6
of Part III of this document;
(f) the letter from Arthur Andersen set out in Part IV of this document;
(g) the letter from Goldman Sachs & Co. dated 11 May 2000 giving its
opinion as at that date that the consideration to be paid by WPP to
Y&R Share Owners is fair from a financial point of view to WPP;
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(h) the letter from Merrill Lynch International dated 11 May 2000 giving
its opinion as at that date that the consideration to be paid by WPP
to Y&R Share Owners is fair from a financial point of view to WPP;
(i) the service agreements and letters of appointment of the Directors
of WPP and the service agreement for Mr. Dolan each of which is
referred to in paragraph 7 of Part VI of this document;
(j) the material contracts referred to in paragraph 9 of Part VI of this
document;
(k) the Proxy Statement/Prospectus;
(l) the written consents referred to in paragraph 14 of Part VI of this
document;
(m) the Circular; and
(n) the Y&R stock option plans pursuant to which the Y&R Stock Options
have been granted.
Dated 25 August 2000
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DEFINITIONS
The following definitions apply throughout this document, unless the context
otherwise requires:
<TABLE>
<S> <C>
"Admission" means admission of the Consideration Shares to the Official
List and to trading on the London Stock Exchange's market
for listed securities and "Admission becoming effective"
means it becoming effective in accordance with paragraph 7.1
of the Listing Rules and paragraph 2.1 of the admission and
disclosure standards published by the London Stock Exchange;
"Articles" or "Articles of the memorandum and articles of association of WPP;
Association"
"Board" the Board of Directors of WPP, or the Board of Directors of
Y&R, as the context requires;
"Circular" the circular to WPP Share Owners dated the same date as
these Listing Particulars containing, INTER ALIA, the notice
of EGM;
"Companies Act" the Companies Act 1985;
"Company" or "WPP" WPP Group plc;
"Consideration Shares" the new WPP Ordinary Shares to be issued, credited as fully
paid, pursuant to the Merger;
"CREST" a relevant system (as defined in the Regulations) in respect
of which CRESTCo Limited is Operator (as defined in the
Regulations), being a paperless system enabling securities
to be evidenced otherwise than by way of a written
instrument;
"Directors" or "WPP Directors" the directors of WPP;
"Depositary" Citibank, N.A. in its capacity as depositary in respect of
WPP ADSs;
"Effective Date" the date and time upon which all of the conditions to the
Merger have been satisfied or waived;
"enlarged WPP Group" the WPP Group as enlarged by the Y&R Group following
completion of the Merger;
"European Commission" the Commission of the European Communities established by
Article 7 of the Treaty of Rome;
"Exchange Agent" an exchange agent reasonably acceptable to WPP and Y&R;
"Extraordinary General Meeting" the extraordinary general meeting of WPP convened for
or "EGM" 10.00 a.m. on 29 September, 2000 for the purpose, INTER
ALIA, of giving approval to the Merger;
"FRS" Financial Reporting Standards issued by the Accounting
Standards Board;
"JMS" JMS Financial Services Limited;
"LIBOR" London Interbank Offered Rate;
"Listing Rules" the listing rules of the UK Listing Authority;
"London Stock Exchange" London Stock Exchange plc;
"Long Stop Date" 11 February 2001;
</TABLE>
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<TABLE>
<S> <C>
"Material Adverse Effect" with respect to any entity, a material adverse effect on the
financial condition, properties, business or results of
operations of such entity and its subsidiaries, taken as a
whole except that events, consequences or conditions caused
by the following will not be considered to have a material
adverse effect: (i) the announcement of the Merger Agreement
and the Merger, including any termination or reduction in
client business due to the announcement of completion of the
Merger or the identity of the parties to the Merger;
(ii) the impact of any change in business of specified
clients publicly announced before the Merger Agreement is
signed; or (iii) general changes in economic conditions in
the broader economy or the advertising industry, unless the
change materially and disproportionately effects only one
party to the Merger Agreement;
"Member State" a member country of the European Union;
"Merger" the proposed merger of WPP with Y&R, details of which are
set out in this document;
"Merger Agreement" the amended and restated agreement and plan of merger dated
as of
11 May 2000 between WPP, Y&R, York Merger Corp and York II
Merger Corp;
"Nasdaq" National Association of Securities Dealers Automated
Quotation System National Market;
"Noon Buying Rate" the noon buying rate in New York City for cable transfers in
sterling as certified for customs purposes by the Federal
Reserve Bank of New York;
"Official List" the official list of the UK Listing Authority;
"Proposed Directors" the proposed new directors of WPP whose names are set out in
paragraph 7.2 of Part VI of this document;
"Proxy Statement/ Prospectus" the proxy statement/prospectus distributed to Y&R Share
Owners to seek their approval to the Merger;
"Regulations" the Uncertificated Securities Regulations 1995 (SI 1995 No.
95/3272);
"SDRT" stamp duty reserve tax;
"SEC" US Securities and Exchange Commission;
"share owner" a holder of WPP Ordinary Shares or Y&R Common Shares, as the
context requires;
"sterling", "L" and "p" the lawful currency of the UK;
"UK GAAP" generally accepted accounting principles in the UK;
"uncertificated" or "in record on the relevant register of the share or security
uncertificated form" concerned as being held in uncertificated form in CREST, and
title to which by virtue of the Regulations may be
transferred by means of CREST;
"United Kingdom" or "UK" the United Kingdom of Great Britain and Northern Ireland;
"United States" or "US" the United States of America, its territories and
possessions, any state of the United States and the District
of Columbia and all other areas subject to its jurisdiction;
"US Code" US Internal Revenue Code of 1986, as amended;
"US Dollars", "US$" or "$" the lawful currency of the United States;
"US GAAP" generally accepted accounting principles in the US;
"WPP ADR" an American Depositary Receipt evidencing a WPP ADS;
"WPP ADS" an American Depositary Share representing five WPP Ordinary
Shares;
</TABLE>
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<TABLE>
<S> <C>
"WPP Group" WPP and its subsidiary undertakings and, where the context
requires, its interests in joint ventures and associated
undertakings;
"WPP Ordinary Shares" ordinary shares of 10p each in WPP;
"WPP Share Owner" a holder of WPP Ordinary Shares;
"WPP Share Schemes" The WPP Worldwide Ownership Plan 1996, The WPP Executive
Share Option Scheme 1994, The WPP Executive Stock Option
Plan 1996, The WPP Executive Share Option Scheme, The WPP
Performance Share Plan, the WPP Operating Company Long Term
Incentive Plan, the Leadership Equity Acquisition Plan, The
Capital Investment Plan and the Notional Share Award Plan;
"Y&R" or "Young & Rubicam" Young & Rubicam Inc.;
"Y&R Common Shares" shares of common stock of par value US$0.1 of Y&R;
"Y&R Convertible Notes" the Young & Rubicam 3% Convertible Subordinated Notes due
2005;
"Y&R Directors" the Directors of Y&R;
"Y&R Group" Y&R and its subsidiary undertakings and, where the context
requires, its interests in joint ventures and associated
undertakings;
"Y&R Share Owner" a holder of Y&R Common Shares;
"Y&R Stock Options" options to acquire Y&R Common Shares pursuant to the
following stock option plans:
Young & Rubicam Inc. Incentive Compensation Plan, Young &
Rubicam Inc. Change in Control Severance Plan, Young &
Rubicam Inc. Directors Stock Option Plan, Young & Rubicam
Inc. Director Deferred Fee Plan, (as amended), Young &
Rubicam Inc. Deferred Compensation Plan, Young & Rubicam
Holdings Inc. Restricted Stock Plan, and Young & Rubicam
Holdings Inc. Management Stock Option Plan;
"York Merger Corp" York Merger Corp., a wholly-owned subsidiary of WPP
incorporated in the State of Delaware;
"York II Merger Corp" a whollly owned subsidiary of York Merger Corp.
</TABLE>
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MERRILL CORPORATION LTD. London
00LON1326
