<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December, 31 1999
-----------------
Commission file number 0-16350
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WPP Group plc
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
United Kingdom
--------------------------------------------------------------------------------
(Jurisdiction of incorporation or organisation)
27 Farm Street
London W1X 6RD England
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares of 10p each
Number of Ordinary Shares of 10p each outstanding on June 5, 2000:
778,632,601
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
---- ----
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
WPP Group plc ("WPP") and its subsidiaries is a leading worldwide communications
services organisation offering national, multinational and global clients a
comprehensive range of advertising and marketing services. These services
include advertising, media investment management, information and consultancy,
public relations and public affairs, branding and identity, healthcare and
specialist communications. The Group's revenues in 1999 were approximately $3.5
billion. Based on 1999 revenues, the Company is the third largest marketing
services company in the world. At year-end, the Group, (including affiliated
companies) employed over 39,000 people in 950 offices in 92 countries throughout
the world.
The Company operates through a number of established national and global
advertising and marketing services companies. Among these are the well known
advertising networks J. Walter Thompson Company and Ogilvy & Mather Worldwide;
MindShare in media investment management; Research International and Millward
Brown in information and consultancy; the worldwide public relations and public
affairs companies Hill and Knowlton and Ogilvy Public Relations Worldwide; and a
wide range of branding and identity, healthcare and specialist communications
companies including the Enterprise Identity Group, specialising in branding and
corporate identity, and CommonHealth, specialising in healthcare communications.
The Company's ten largest clients in 1999 were American Express, Ford, IBM,
Johnson & Johnson, Kellogg, Nestle, Philip Morris, Schering-Plough, Unilever and
Warner Lambert.
The Company's ordinary shares are admitted to the Official List of the UK
Listing Authority and trade on The London Stock Exchange Limited ("The Stock
Exchange") and American Depositary Shares (evidenced by American Depositary
Receipts) representing deposited ordinary shares are quoted on the Nasdaq
National Market ("Nasdaq"). At June 5, 2000, the Company had a market
capitalisation of L7.1 billion ($10.8 billion).
The Company's executive office is located at 27 Farm Street, London W1X 6RD,
England, Tel: (44) 20 - 7408 - 2204 and its registered office is located at
Pennypot Industrial Estate, Hythe, Kent CT21 6PE, England.
Unless the context otherwise requires, the terms "Company", "Group" and
"Registrant" as used herein shall mean WPP and its subsidiaries.
2
<PAGE>
HISTORICAL BACKGROUND
The Company was founded in 1971, and until 1985 operated as a manufacturer and
distributor of wire and plastic products. In 1985, new investors acquired a
significant interest in the Company and changed the strategic direction of the
Company from being a wire and plastics manufacturer and distributor to being a
multinational communications services organization. During 1986, the Company
acquired ten companies in separate purchase transactions in the graphics and
design, incentive and motivation, sales promotion, audio visual and video
communications and specialist communications fields of business, and one in
manufacturing. In 1987, the Company acquired an additional nine companies. The
most significant of these acquisitions was that of JWT Group, Inc. on July 14,
1987, one of the oldest and largest advertising and marketing services
companies, which had the effect of substantially increasing the size of the
Company. In 1988 the Company continued to grow both internally and by the
acquisition of companies to broaden the services offered both geographically and
functionally. In June 1989, the Company acquired The Ogilvy Group, Inc., one of
the leading international advertising and marketing services organizations. This
transaction, along with a series of internally financed "in-fill" acquisitions
made in 1989, allowed the Company to achieve its qualitative strategic objective
of becoming one of just a few major multinational communication services
companies, able to serve clients in all major advertising and marketing services
and geographic areas. Throughout this period, the purchase price for
acquisitions were primarily paid for in cash financed by bank debt, with some
portion of the purchase price paid on a contingent performance basis over time.
1991 THROUGH 1993
The Company carried a significant amount of debt into 1991 when a recession
developed in its most important markets, the United States and the United
Kingdom. Client advertising budgets were trimmed causing revenues (primarily
commissions from media placements) to fall. The Company was not able to reduce
expenses sufficiently at the time and the Company's profits fell.
In 1992 the Company took action to reduce its acquisition related debt burden.
The Company's bank syndicate, led by JP Morgan, exchanged $260 million of debt
for CCRP shares (as defined below), provided a $150 million bridge financing
facility, and entered into a new $800 million 5 year credit facility (the "1992
Consolidated Credit Agreement" or "CCA"). Stability also returned to the
Company's major markets in 1992. The Company added net new business revenues of
over L147 million, operating margins remained steady at 5.6% and the staff cost
to revenue ratio decreased to 53% from 54% in 1991.
In 1993, the Company successfully completed a four-for-five ordinary share
rights issue which raised L85 million net of expenses. The majority of the
proceeds of the rights issue were used to reduce the Company's borrowings and to
provide additional working capital. This, and further financing initiatives
including the sale of some of the Company's non-core operations, enhanced the
Company's capital structure and liquidity. As a result, a large part of the
Company's short-term $150 million bridge loan facility was repaid in advance.
Also in 1993, the Company established targets and initiatives to increase
operating margins by at least 1% per annum (from a low of 5.6% in 1992), to
reduce the operating companies' staff costs to revenue ratio by at least 1% per
annum (from 53% in 1992), to manage the Company's property costs and to reduce
absolute debt levels and the debt to equity ratio.
1994 THROUGH 1999
During the period from 1994 through 1999, the Company's financial and operating
performance showed consistently strong improvement. In 1994 the $150 million
bridge loan facility was repaid by the July due date. The Company's average net
debt was reduced from L361 million in 1993 to L268 million in 1994 while the
Company's interest coverage ratio (i.e. EBITDA to interest) improved to just
under 4 times. In September 1994 the majority of the banks' CCRP shares were
placed to the general public at a profit to the banks, significantly expanding
the Company's equity base.
In August 1995, the 1992 Consolidated Credit Agreement was restructured at a
greatly reduced lending margin. In July 1997, the Company's bank facility was
restructured again into a $650 million revolving credit facility (the "Revolving
Facility Agreement" or "RFA") with further improved lending margins for the
Company. In July 1998 the RFA was amended and modified to a syndicated $500
million revolving credit facility. In July 1998, the Group completed its debut
US$ 300 million USA bond offering, comprising US$ 200 million of 6.625% Notes
due 2005 and US$ 100 million of 6.875% Notes due 2008. Net proceeds were used to
reduce borrowings on existing loan facilities.
3
<PAGE>
The Company's revenues, operating margins and net profit continued to improve
beyond the Company's publicly announced objectives during this period. Revenue
grew by more than 30% while operating margins and the staff costs to revenue
ratio surpassed the respective 1% and 0.6% per annum improvement targets.
Management stock ownership was promoted through the establishment of employee
stock option plans and long term equity based incentive compensation plans at
the operating company levels. Centralised human resources, property management,
procurement, information technology and practice development initiatives were
implemented during this period. In addition, the Company completed a number of
strategic acquisitions and commenced a program of ordinary share repurchases in
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
In 1999 turnover increased to over L9 billion ($15 billion), reflecting the
rapid growth in the Company's media investment management activities, and
revenues grew over 13% to over L2 billion ($3.5 billion) for the first time.
Pre-tax profits rose by 20% to over L255 million ($413 million) and diluted
earnings per share by almost 20% to 22.5p (36.4c).
[GRAPHIC]
Average Net Debt & Net Interest Coverage
----------------------------------------
Year Average Net Debt Net Interest Coverage
--- ---------------- ---------------------
1995 Lm 214.0 4.2
1996 Lm 145.0 6.3
1997 Lm 115.0 7.3
1998 Lm 143.0 7.6
1999 Lm 206.0 8.2
Note: Net interest includes working capital
facility charges.
[GRAPHIC]
Margins
-------
Year Operating Margin EBIT
--- ---------------- -------
1995 9.6% Lm 150
1996 10.8% Lm 182
1997 11.8% Lm 206
1998 12.8% Lm 245
1999 13.4% Lm 291
Note: WPP margins have been stated before working
facility costs.
[GRAPHIC]
Earnings
--------
Year Earnings Diluted EPS
--- -------- ------------
1995 Lm 69.0 9.4p
1996 Lm 100.0 13.5p
1997 Lm 116.0 15.7p
1998 Lm 140.3 18.8p
1999 Lm 172.8 22.5p
[GRAPHIC]
Capital Structure
-----------------
Year Net Debt Market Cap
--- -------- ------------
1995 Lm 214.0 Lm 1,208.0
1996 Lm 145.0 Lm 1,883.0
1997 Lm 115.0 Lm 1,984.0
1998 Lm 143.0 Lm 2,804.0
1999 Lm 206.0 Lm 7,598.0
Note: Net debt is annual average; market cap is
based on year end price.
On May 12, 2000, WPP Group plc and Young & Rubicam Inc. announced that they had
signed a merger agreement under which Young & Rubicam Inc. would join the WPP
Group of companies. Under the terms of the merger agreement, which has been
unanimously approved by both companies' Boards of Directors, each outstanding
share of common stock of Young & Rubicam Inc. will be converted into 0.835 of a
new American Depositary Share of WPP Group plc. Young & Rubicam shareholders may
elect to receive the ordinary shares of WPP Group plc underlying the American
Depository Shares they are otherwise entitled to receive. The merger is expected
to be completed in the fall of 2000; however, because the merger is subject to
governmental and both WPP Group plc and Young & Rubicam Inc. shareholder
approval, the exact timing of the merger cannot be predicted.
At closing market prices on May 11, 2000, this transaction would value Young &
Rubicam Inc at approximately $4.7 billion. The Company believes the merger would
create the world's leading communications services company by bringing together
the finest brands from the major advertising and marketing service disciplines.
Preliminary estimates indicate the combined group would have pro forma 1999
revenues of L3.2 billion ($5.2 billion) and pro forma 1999 operating profit of
approximately L403.0 million ($652.0 million).
4
<PAGE>
INDUSTRY BACKGROUND AND COMPETITION
Although the size and diversity of the communications services business makes
market definition difficult to establish, according to industry sources the
worldwide communications services market in 1999 grew to over $1 trillion for
the first time. Traditional media advertising accounted for approximately 42% of
this market in 1999. Industry sources have predicted that worldwide advertising
spending will grow in the 6-7% range in 2000. Information and consultancy,
public relations and public affairs, and branding and identity, healthcare and
specialist communications activities are continuing to grow faster than
traditional media advertising throughout the world, as clients seek more added
value in the marketing of their products and services. In the case of WPP, these
business streams now represent 53% of revenues. There is also continued evidence
that clients are moving towards the consolidation of their marketing activities,
using only one or a small number of agencies to ensure a consistent brand
presence and message around the world, to better co-ordinate their marketing
activities and to simplify and strengthen their relationships with their
marketing partners. Geographically, the US market continued to grow well in
1999, accounting for nearly 45% of global advertising spending. Emerging
markets, particularly Asia and Latin America, showed some recovery towards the
end of 1999, following a period of lower growth and devaluation in 1997 and
1998.
The communications services businesses are highly competitive and fragmented. At
a holding company level, the Company's principal competitors are other large
multinational marketing and communications companies, including Omnicom Group
and The Interpublic Group of Companies. The actual competition for clients,
however, takes place at the operating company level, within the different
sectors of advertising, media investment management, information and
consultancy, public relations and public affairs, branding and identity,
healthcare and specialist communications. The Company's principal competitors in
the advertising industry are large multinational agencies, including BBDO, DDB
Needham, McCann Erickson, TBWA, Burnett, Young & Rubicam, and Dentsu, as well as
numerous smaller agencies that operate in local markets. The Company's agencies
must compete with other agencies to maintain existing client relationships and
to obtain new clients. Principal competitive factors include the agency's
creative reputation, knowledge of media alternatives and purchasing power,
geographic coverage and diversity, quality of service and understanding of
clients' needs. Improved global communications and free trade, and more stable,
less inflationary worldwide economic growth have contributed to increased
competition in the communications services business. At the same time, however,
the other larger communications services groups are consolidating, diversifying
and growing their market share through acquisitions.
Clients are not generally bound to an individual agency and may move their
accounts to another agency, usually with 90 days' notice. Clients may also
reduce advertising and marketing budgets at any time and for any reason with no
compensation to the agency. Larger clients tend to use more than one agency for
their advertising requirements. In many cases, the Company represents a client
for only a portion of its advertising or marketing services needs or only in
particular geographic areas thus enabling the client to continually compare the
effectiveness of its different agencies' work. Industry practices in the other
communications services businesses reflect similar concerns with respect to
client relationships. Despite these circumstances, there is continued evidence
that clients are moving towards the consolidation of their marketing activities.
This started with IBM's decision in May 1994 appointing Ogilvy & Mather
Worldwide as its worldwide marketing partner. American Express, De Beers,
Eastman Kodak, Ford, Kimberly-Clark Scott, Kraft Foods, Mattel, Diageo and
SmithKline Beecham have also consolidated their activities with Group companies.
Some examples of other major advertisers who have chosen to consolidate their
business with one or just a few large multinational agencies not part of the
Group include Bayer, Citibank, Colgate-Palmolive, and Reckitt & Colman. WPP is
among a select number of marketing services companies that offers worldwide
capabilities to these types of large multinational clients.
An agency's ability to compete for new advertising, and marketing services
clients and assignments, is limited somewhat by the policy followed by many
clients of not permitting agencies working for them to represent competitive
accounts or product lines in the same market. A lesser number of companies will
not permit their advertising and/or marketing services firms to work on
competitive accounts in any market, although, increasingly, converging
strategies seem to be reducing the incidence of this. The fact that the Company
owns interests in a number of international advertising agencies mitigates this
competitive concern. There are also some signs of a weakening of client conflict
policies, as clients wrestle with the difficulties that increasing
globalisation, acquisitions, mass product launches and joint ventures bring.
THE BUSINESS
The Company's business comprises the provision of communications services both
on a national, multinational and global basis. The Company organises its
businesses in four main areas: advertising and media investment management,
information and consultancy, public
5
<PAGE>
relations and public affairs, and branding and identity, healthcare and
specialist communications. Set forth below is a listing of the Group companies
operating within these four business segments as at May 10, 2000, and a listing
of investments in new media companies:
6
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------ ----------------------------------------------------------
ADVERTISING MEDIA INVESTMENT MANAGEMENT
<S> <C>
Ogilvy & Mather Worldwide MindShare
J. Walter Thompson Company Media Insight/Maximize
Conquest Portland Outdoor
Cole & Weber The Media Partnership(1)
Asatsu-DK(1) Tempus Group PLC(2)
Batey(1)
Chime Communications PLC(1)
Equus(1)
SCPF(1 and 4)
------------------------------------------------------------ ----------------------------------------------------------
PUBLIC RELATIONS & PUBLIC AFFAIRS INFORMATION & CONSULTANCY
Hill and Knowlton The Kantar Group:
Ogilvy Public Relations Worldwide Research International
Timmons and Company Millward Brown
The Wexler Group Kantar Media Research
Carl Byoir & Associates AGB Italia(1)
Buchanan Communications BMRB International
Chime Communications PLC(1) IBOPE Media Information(1)
Symmetrical Resources / Simmons
Goldfarb Consultants
IMRB International(1)
Winona Group
Center Partners
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
BRANDING & IDENTITY, HEALTHCARE AND SPECIALIST COMMUNICATIONS
BRANDING, IDENTITY & CORPORATE SECTOR MARKETING DIRECT, PROMOTION & RELATIONSHIP
CONSULTANCY ----------------- MARKETING
----------- - BUSINESS-TO-BUSINESS ---------
Addison Primary Contact A. Eicoff & Co.
Banner McBride - DEMOGRAPHIC MARKETING Brierley & Partners(1)
BDG McColl The Geppetto Group Einson Freeman
Brouillard The Intuition Group EWA
Coley Porter Bell The Market Segment Group High Co(1)
Enterprise IG Mendoza Dillon & Asociados Mando Marketing
- BPRI - FOODSERVICE Oakley Young
- Clever Media The Food Group OgilvyOne Worldwide
JWT Specialized Communications - INVESTOR RELATIONS Perspectives
Lambie-Nairn International Presentations(1) RMG International
Scott Stern - PR & SPORTS MARKETING ROCQM
Tutssels PRISM Group RTCdirect
- REAL ESTATE SpeechNet(4)
STRATEGIC MARKETING CONSULTING Pace The Grass Roots Group(1)
------------------------------- - RETAIL ThompsonConnect Worldwide
The Henley Centre Walker Group/CNI(1)
Management Ventures - TECHNOLOGY
MSI Consulting / Charles River Smith & Jones MEDIA AND TECHNOLOGY SERVICES
Strategies -----------------------------
P-Four Consulting Metro Group
Planners(1) Savatar
Quadra Advisory(1) - HEALTHCARE The Farm(1)
----------
CommonHealth
Shire Hall Group
</TABLE>
----------------------------------------- --------------------------------------
NEW MEDIA INVESTMENTS Metapack(2 and 4)
BigWords(2 and 4) NewsEdge Corporation(2)
Concept(2) Red Sheriff(2 and 4)
Deckchair(2 and 4) Syzygy(1)
e-Rewards(2) TWLi(2)
Imagine(2 and 4) Visible World(2 and 4)
Intraspect(2)
Media Technology Ventures(3)
----------------------------------------- --------------------------------------
1. Associate investment
2. Minority investment
3. Venture fund
4. Not held at December 31 1999
7
<PAGE>
The Company operates in 92 countries throughout the world. Its operations
outside the United States are exposed to the normal business risks and
limitations caused by currency fluctuations, exchange control restrictions,
restrictions on repatriation of earnings and investment of capital and political
instability.
Approximately 47% of the Company's revenues in 1999 were from advertising and
media investment management. Over the past several years, client spending in the
information and consultancy, public relations and public affairs, and branding
and identity, healthcare and specialist communications areas has grown at a
faster pace than media advertising spending. The following table shows for the
last three fiscal years of the Company, reported revenue attributable to each
business segment in which the Company operates.
<TABLE>
<CAPTION>
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
REVENUES 1999 1999 % OF 1998 1998 % OF 1997 1997 % OF
(LM) ($M) TOTAL IN (LM) ($M) TOTAL IN (LM) ($M) TOTAL IN
(I) 1999 (II) 1998 (III) 1997
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising and media 1,013.1 1,639.0 46.6 951.3 1,576.7 49.7 914.1 1,497.4 52.3
investment management
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
Information and consultancy 419.7 679.0 19.3 367.2 608.6 19.1 297.7 487.6 17.0
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
Public relations 178.9 289.4 8.3 134.8 223.4 7.0 114.4 187.4 6.6
and public affairs
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
Branding and identity,
healthcare and specialist 560.9 907.4 25.8 465.1 770.9 24.2 420.5 688.8 24.1
communications
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
TOTAL 2,172.6 3,514.8 100.0 1,918.4 3,179.6 100.0 1,746.7 2,861.2 100.0
============================== =========== ========= ========== ========== =========== =========== ========== ========== =========
</TABLE>
The following table shows, for the last three fiscal years of the Company,
reported revenue attributable to each geographic area in which the Company
operates and demonstrates the Company's regional diversity.
<TABLE>
<CAPTION>
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
REVENUES 1999 1999 % OF 1998 1998 % OF 1997 1997 % OF
(LM) ($M) TOTAL IN (LM) ($M) TOTAL IN (LM) ($M) TOTAL IN
(I) 1999 (II) 1998 (III) 1997
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United
States 915.2 1,480.6 42.1 764.4 1,266.9 39.8 700.8 1,148.0 40.1
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
United 434.7 703.3 20.0 393.5 652.2 20.5 334.0 547.1 19.1
Kingdom
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
Continental Europe 426.2 689.4 19.6 396.0 656.3 20.6 336.2 550.7 19.3
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
Canada,
Asia Pacific, Latin America, 396.5 641.5 18.3 364.5 604.2 19.1 375.7 615.4 21.5
Africa and Middle East
------------------------------ ----------- --------- ---------- ---------- ----------- ----------- ---------- ---------- ---------
TOTAL 2,172.6 3,514.8 100.0 1,918.4 3,179.6 100.0 1,746.7 2,861.2 100.0
============================== =========== ========= ========== ========== =========== =========== ========== ========== =========
</TABLE>
(i) These figures were converted from pounds sterling into dollars at the
average rate (as reported in the London Financial Times) for pounds
sterling for the year ended December 31, 1999 which was L1 = $1.6178.
(ii) These figures were converted from pounds sterling into dollars at the
average rate (as reported in the London Financial Times) for pounds
sterling for the year ended December 31, 1998 which was L1 = $1.6574.
(iii) These figures were converted from pounds sterling into dollars at the
average rate (as reported in the London Financial Times) for pounds
sterling for the year ended December 31, 1997 which was L1 = $1.6381.
The Company currently derives approximately 53% of its revenue from the faster
growing business segments of information and consultancy, public relations and
public affairs, and branding and identity, healthcare and specialist
communications. This percentage is greater than most of the other major
multinational communications services holding companies.
8
<PAGE>
Within this group of business segments, the Company's Kantar Group of
information and consultancy businesses particularly distinguishes WPP from other
multinational advertising and marketing services companies. On a combined basis,
the Company is the third largest market research organization in the world and
the world's largest provider of custom research services. These information and
consultancy businesses historically have been more recession resistant.
Typically, at times of declining sales, many clients will continue to maintain
their strategic marketing efforts and their tracking and evaluation of the
effectiveness of their marketing programs. Services relating to the tracking of
advertising and other brand marketing programs has become one of the largest
growth areas within the Company, as its research companies have obtained greater
numbers of multinational assignments.
The Company is also well positioned for future growth in the area of advertising
and media investment management. According to Advertising Age, the Company ranks
in the top three in all of the ten fastest growing markets of the world. This
international market leadership position should assist the Company to obtain new
multinational assignments, as increasing numbers of multinational clients
evaluate advertising agencies based on the agencies' ability to distribute media
advertising in a coordinated and cost efficient manner in markets throughout the
world.
The Group's ability to cross refer clients and assignments among its different
business segments will continue to enhance the revenue growth of the Company.
The Company estimates that over 25% of new assignments in 1999 were generated
through the joint development of opportunities by two or more Group companies.
See "The Business -- Clients".
The Company's principal activities within each of its business segments are
described below.
ADVERTISING AND MEDIA INVESTMENT MANAGEMENT
ADVERTISING
The principal functions of an advertising agency are to plan and create
advertising programs for its clients and to place advertisements in various
media such as television, cable, the internet, radio, magazines, newspapers and
outdoor locations such as billboards. As part of the advertising programs, the
agency usually will focus on brand management and brand building for the client.
The planning function involves analysis of the market for the particular product
or service, evaluation of alternative methods of distribution and choice of the
appropriate media to reach the desired market most efficiently. The advertising
agency then creates an advertising program, within the limits imposed by the
client's advertising budget, and places orders for space or time with the media
that have been selected. In creating an advertising program for a client, the
advertising agency will supervise the production of advertisements and
commercials for its clients.
Revenue is typically derived from commissions on media placements and fees for
advertising services. Traditionally, the Company's advertising clients received
a package of advertising services in exchange for a commission of 15% of a
client's total media and production expenditures. In recent years, however, this
frequently has tended to become a matter of individual negotiation in the
advertising industry, with the services to be performed being subject to
specific agreement. 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.
The Company's advertising agencies include J. Walter Thompson Company, Ogilvy &
Mather Worldwide, Conquest and Cole & Weber. The Company also owns interests in
Asatsu-DK, Batey and Chime Communications PLC.
J. WALTER THOMPSON COMPANY (J. WALTER THOMPSON). J. Walter Thompson, one of the
world's first advertising agencies, was founded in 1864 and is a full service
multinational advertising agency, providing its clients with both short-term
sales success and long-term brand value. Headquartered in New York, J. Walter
Thompson is the second largest advertising agency brand in the United States and
an organisation of global reach with 278 offices in 88 countries. JWT has become
a total brands communications company offering a broad array of services beyond
traditional advertising, such as interactive communications, new forms of
content advertising, entertainment and digital communications ("-C-JWT"), direct
response and database marketing (ThompsonConnect) and recruitment communications
(JWT Specialized Communications). JWT crafts integrated marketing solutions for
its clients across all communications channels using its proprietary protocol,
THOMPSON TOTAL BRANDING, to drive short-term sales and build long-term brand
value.
9
<PAGE>
J. Walter Thompson's relationships with a number of its major clients have been
in existence for many years, exhibiting an ability to continually adapt to meet
the client's and market's new demands. These clients include Unilever (96
years), Kellogg (67 years), Ford (55 years) and Warner Lambert (36 years). No
single client accounted for more than 18% of J. Walter Thompson's 1999 revenues.
The agency achieved net new billings in 1999 of $837 million, reflecting major
new business wins as well as the multinational consolidations of Kimberley-Clark
and Diageo. New assignments in 1999 in North America included Qwest
Communications International, Unilever's Salon Selectives, Bermuda Tourism,
Miller Genuine Draft, Shell Oil, Pepsi Aquafina, Pacific Gas and Electric
Company, Fox Home Video and Safeway.
OGILVY & MATHER WORLDWIDE (OGILVY & MATHER). Ogilvy & Mather is a full service
multinational advertising agency, and the tenth largest global agency network. A
significant part of its revenues are derived from its direct marketing and
interactive activities. Ogilvy & Mather was formed in 1948, is based in New York
and operates from 359 offices in 100 countries. Major clients of Ogilvy & Mather
include American Express, Eastman Kodak, IBM and Mattel. While Eastman Kodak and
IBM are relatively new clients of Ogilvy & Mather, Mattel has been a client for
42 years and American Express for 34 years. No single client accounted for more
than 16% of Ogilvy & Mather's 1999 revenues. In 1999 Ogilvy & Mather continued
its commitment to "360DEG." brand stewardship for its clients and the agency
achieved net new billings of $899 million. Significant new client accounts
awarded in 1999 include SAP, BPAmoco, Northwest Airlines, Miller Brewing
Company, Mother Nature.com, Telefonica, WebMD and Tenneco. The results of
OgilvyOne Worldwide, Ogilvy & Mather's direct marketing division, are included
within the Group's branding and identity, helathcare and specialist
communications sector.
CONQUEST. Conquest, established by WPP in 1988, is a full service multinational
advertising agency network headquartered in London, serving primarily
European-based clients wanting to promote their brands globally on a fully
controlled and integrated basis. Conquest has 19 offices in 18 countries with
affiliates in North and South America and Asia Pacific. Conquest offers an
alternative approach to international advertising, concentrating on the areas of
consumer, business-to-business, and corporate/financial advertising, and
integrated communications. Conquest's most significant client is Alfa Romeo. Net
new billings were $65 million in 1999 and included new business from Aventis,
Bank of Scotland and Ermenegildo Zegna.
MEDIA INVESTMENT MANAGEMENT
1999 was MindShare's second full year of operations, primarily in Asia Pacific,
Europe and South America. Formed from the merger of the media departments of J.
Walter Thompson and Ogilvy & Mather, MindShare's goal is to become the first
truly global media investment management company. Traditionally, media planning
and buying has been handled within the various advertising agencies, while
research with respect to the effectiveness and strategic benefit of each media
(e.g., TV, print, radio etc.) has been provided by separate research companies.
MindShare's mission is to secure competitive advantage for its clients in a
media world which is changing, and which is defined primarily by the
fragmentation of mass media and high levels of media price inflation.
MindShare operates from 56 offices around the world and has 3,500 employees.
MindShare offers media planning, buying and research services for its clients
which include existing J. Walter Thompson and Ogilvy & Mather clients and new
MindShare clients. Securing competitive pricing is a cornerstone for MindShare,
and MindShare's substantial media volume should ensure favoured customer status
with media owners. At the same time, MindShare is able to redefine media and
approach it from a broader perspective by incorporating within its operation
specialists from the Group companies with differing backgrounds. These include
TV program production, forecasting, digital and interactive media, sponsorship,
research, direct response and ideas generation. In 1999, MindShare achieved
annual billings of $17 billion. No single client accounted for more than 12% of
MindShare's 1999 revenues. New assignments from clients in 1999 included
Unilever, Kraft, Britvic, Pepsi, Nike, Telecom Italia, Sara Lee, KPN and Ford.
Until the first quarter of 2000, in the United States, J. Walter Thompson and
Ogilvy & Mather continued to purchase media separately for their clients;
however, the Company has the ability to purchase network television time through
a J. Walter Thompson-Ogilvy & Mather Alliance which enables Company clients to
obtain better pricing through volume discounts. MindShare's North America
operations were launched in 1999 and the Group intends to continue this roll-out
in 2000, ultimately replacing The Alliance with a full combination of both media
buying operations.
10
<PAGE>
The Company also owns a minority interest in another of the leading
European-based media, planning and buying companies, Tempus Group plc.
INFORMATION AND CONSULTANCY
Information and consultancy activities include consumer, media, corporate
communication and policy research, advertising research, pre-testing and
tracking and evaluation of advertising and promotions, design and management of
international market studies and new product development and testing.
Survey information and consultancy includes both custom (proprietary to a
specific client) and syndicated (multi-client) projects. Custom research
addresses specific issues or problems either on a one-time basis or through
tracking programs. Syndicated research, typically involving market or media
measurement, may involve one-off studies, repeated projects or continuous data
collection from panels of consumers or stores.
To help optimise its worldwide research offering to clients, the Company's
separate global research businesses, have been managed on a co-ordinated basis
under the umbrella of its own parent company The Kantar Group.
Each business is a leader in its own area of expertise or specialisation and
collectively the group forms the largest custom research resource in the world.
The group comprises three worldwide business; Research International, the
world's largest custom research agency; Millward Brown, the leader in the field
of consumer and branding research, is renowned for its advertising and brand
tracking and is the developer of BRANDZ, an advanced diagnostic and predictive
proprietary research tool; Kantar Media Research is a provider of media research
services globally, including Television Audience Measurement, print and
multimedia measurement and software systems; plus two regional and multinational
businesses, IMRB International and Goldfarb Consultants.
PUBLIC RELATIONS AND PUBLIC AFFAIRS
Public relations and public affairs companies advise clients who are seeking to
communicate with consumers, governments and/or the business and financial
communities. Public relations and public affairs activities include national and
international corporate, financial and marketing communications, crisis
management, public affairs and government lobbying. The Company's two main
subsidiaries in this area are Hill and Knowlton, Inc. and Ogilvy Public
Relations Worldwide.
HILL AND KNOWLTON (H&K). H&K, founded in 1927, is the second largest
international public relations and public affairs consultancy worldwide.
Headquartered in New York, Hill and Knowlton has 63 offices in 34 countries, as
well as an extensive associates network. The company employs 1,800 people and
had worldwide fee income of $243 million in 1999. H&K provides worldwide
services to businesses and institutions through its five worldwide practices
(marketing, corporate communications, technology, public affairs and
health/pharmaceutical). The company uses traditional methodologies as well as
cutting edge technologies to develop appropriate and integrated communications
strategies for clients.
OGILVY PUBLIC RELATIONS WORLDWIDE (OPR). OPR is a leading international
communications firm with specialty practices in health and medical, marketing,
technology, corporate communications and public affairs. In 1999, the company
reported worldwide fee income of $125 million. Headquartered in New York, Ogilvy
PR operates 46 offices in 41 markets across the United States, Europe and Asia.
The firm includes three wholly owned subsidiaries; Alexander Ogilvy
(technology), BWR (entertainment) and Feinstein Kean Healthcare (healthcare and
biotechnology). Ogilvy PR, whose revenue grew by over 79% in 1999, is one of the
industry's fastest-growing, top twenty PR firms. INSIDE PR, recently recognised
Ogilvy PR as the "Most Improved Major Agency".
OTHERS. The Company owns a number of other companies specialising in public
relations and public affairs, including Buchanan Communications, Carl Byoir &
Associates, Timmons and Company and The Wexler Group.
BRANDING AND IDENTITY, HEALTHCARE AND SPECIALIST COMMUNICATIONS
11
<PAGE>
The Company's branding and identity, healthcare and specialist communications
activities include direct marketing, sales promotions and relationship
marketing; branding, identity and design; strategic marketing; media and
technology services; and sector marketing, including healthcare, recruitment,
corporate and financial, retail and working environments, internal marketing,
real estate, and ethnic marketing.
BRANDING, IDENTITY AND CORPORATE CONSULTANCY
The Company delivers a large range of identity and design services through a
number of operating subsidiaries. These include Coley Porter Bell, Scott Stern,
Addison, Banner McBride and BDG/McColl in the UK; and internationally, JWT
Specialized Communications, Brouillard Communications and Enterprise IG. These
companies provide complementary services, including space planning, retail and
work interiors, point of sale displays, marketing literature, annual reports and
corporate literature, packaging and brand and corporate identity.
DIRECT, PROMOTION AND RELATIONSHIP MARKETING
The Company has a number of operating businesses in this category.
- OgilvyOne Worldwide, is one of the world's leading direct marketing groups,
providing direct mail, database marketing and direct response
advertising techniques. Its interactive unit, Ogilvy Interactive is the
largest global network of its kind - in 1999 it doubled its profits and
grew 100% in terms of revenue.
- A. Eicoff & Company is one of the leading US specialists in targeted cable and
broadcast television advertising.
- EWA specialises in customer service and loyalty support programs, with units
specialising in government, education, the automobile industry, retail
and agriculture.
- RTCdirect is a leading direct marketing agency which, along with the Company's
Einson Freeman and Promotional Campaigns units, provide a broad range
of marketing and sales promotion services including strategic promotion
planning, marketing consultancy, creative development, production and
implementation and post production analysis, and ranks among the top
promotion companies in the United States and the United Kingdom.
- Others: Mando Marketing, Oakley Young, TMC and The Grass Roots Group plc in
the UK; Baellanger Foucanucourt & Associes SA in France; and DSB&K in
Germany.
STRATEGIC MARKETING CONSULTING
The Company's strategic marketing services assist clients in identifying and
anticipating changes in the business and marketing environment, as well as
devising appropriate marketing strategies. The resources of the strategic
marketing services businesses are also utilised by the Company's other operating
subsidiaries. The Company's main subsidiary engaged in providing strategic
marketing services, the Henley Centre, acts as a consultant and advisor to
businesses and governmental agencies in the international field of planning and
market and product development, using analytical methods and econometric
techniques to aid strategic decision-making. MSI Channel Consulting and Charles
River Strategies specialise in technology research and sales and marketing
consulting.
12
<PAGE>
HEALTHCARE.
The Company has extensive expertise in healthcare marketing and communications
services. Since 1992 several WPP companies have formed a strategic alliance
known as The CommonHealth to offer the largest and most comprehensive specialist
healthcare communications network in the world. CommonHealth clients can call on
any or all of the co-ordinated services of Group companies. Group companies
and/or divisions operating in the healthcare sector include - Ferguson
Communications Group, the largest US advertising agency specialising in
healthcare communications; Health Learning Systems, specialising in providing
healthcare professionals with the latest medical information through educational
programs, video and printed materials; Ogilvy & Mather Worldwide; Hill &
Knowlton; Ogilvy Public Relations Worldwide; Research International; and Zoe
Medical, a leading French healthcare agency.
SECTOR MARKETING
- Smith and Jones Communications Company offers fully integrated communications
services, including advertising, press relations and direct marketing
to the high technology industry.
- Mendoza Dillon & Asociados specializes in advertising for the Hispanic
community and provides clients with integrated marketing services in
this fast-growing specialist market.
- JWT Specialized Communications is a leading full-service recruitment
advertising agency servicing some 1,100 corporations and institutions
through its 25 offices located throughout the United States; and, with
the acquisistion of RADA in January 2000, in the United Kingdom.
- Pace Communications Group, Inc. is one of the largest specialists in the real
estate communications market in the United States, offering
comprehensive services in the marketing of both commercial and
residential property to developers, builders and real estate agents.
- Primary Contact is a leading UK based provider of business-to-business,
financial and corporate advertising.
- The Geppetto Group assists clients in communicating their products and
services to the youth market (children and teens) and implementing
creative branding solutions.
- The Intuition Group focuses on marketing to women.
- Walker Group/CNI specializes in retail marketing and design consultancy on a
global basis.
MEDIA AND TECHNOLOGY SERVICES
- Metro Group provides a diverse range of technical and creative services,
including multimedia, film, video and asset archiving, equipment sales
and post production systems to clients in the UK.
- Savatar specializes in marketing and technology, and acts as a single source
for business technology, interactive strategy, and database and call
center marketing.
WPP.COM/ INVESTMENTS IN NEW MEDIA COMPANIES
In 1999, a new media parent company, wpp.com was formed to co-ordinate WPP's new
media activities across the group's operating brands, to add value in the areas
of new media and technology for clients and to accelerate the development of
WPP's interactive capabilities and revenues. To date, wpp.com has invested in
start-up Internet companies with whom WPP wishes to align itself strategically.
WPP.com also holds minority stakes in several European Internet and interactive
marketing services companies and invests in funds and Business-to-Business
Internet enterprises.
The Group's interactive equity investments have been made indirectly, through
venture funds, and directly. The aim of these indirect investments has been to
keep abreast of Silicon Valley developments and identify potential client
relationships -- thus enhancing the Group's core capabilities. Historically, the
prime venture fund through which WPP has made indirect investments has been
Media Technology Ventures, and its family of funds, (MTV) which has a US West
Coast focus. MTV investments have included Medscape, Quokka Sports and Talk City
-- all recently quoted on Nasdaq.
Recent direct investments have been made in Intraspect (developers of knowledge
management software), Concept! (the second largest German web development
company, recently floated on the German Neuer Markt), TWIi (the internet arm of
IMG Group, the world's
13
<PAGE>
leading sports marketing company), e-Rewards (an e-mail based loyalty company),
Imagine (e-CRM), Metapack (e-fulfilment), Big Words, (e-commerce aimed at
college students) and Visible World (software which allows the customisation of
creative content on websites in real time). Past investments have included Wired
Ventures, BroadVision, Peapod and Hyperparallel.
MANUFACTURING
The original business of the Company remains as the manufacturing division which
operates through subsidiaries of Wire and Plastic Products Limited. The division
produces a wide range of products for commercial, industrial and retail
applications. The Company's revenues from manufacturing activities in 1999 were
less than 1% of the Company total.
WPP GROUP PLC
WPP, the parent company, develops the professional and financial strategy of the
Group, promotes operating efficiencies, coordinates cross referrals of clients
among the Group companies and monitors the financial performance of its
operating subsidiaries. WPP's activities as parent company are increasingly
focusing on non-financial areas such as human resources, property, procurement,
information technology and practice development. Management believes that there
is a significant opportunity to add value to the Group's clients and its people
by developing relationships between Group companies and encouraging cross
referrals of clients among the Group companies and that the parent company is
best placed to coordinate this work. WPP also continues to perform the
traditional roles of central treasury, finance and cash management, tax
reporting, financial control, mergers and acquisitions and investor relations.
WPP STRATEGY
The Group's strategic objective is to be the world's leading provider of
communications services to global, multinational and national companies.
Management believes that the way to achieve this objective is to maintain
financial discipline while developing new ways to add value to the services
provided to the Company's clients.
The Group has established the following financial and strategic objectives:
- To continue to raise operating margins to the level of the best
performing competition, from 13.4% in 1999 to 14% in 2000 and to
15% by 2002.
- To increase the flexibility of the cost structure to cope with
recessions when they come. The Group's investment in people and
property accounts for approximately 60% of revenues. Variable
staff costs, including incentive compensation, freelancers and
consultants, account for almost 6% of revenues and the Group
aims for 7-8%.
- The Group has achieved its objective of reducing average net
debt to L150 - L200 million and increasing interest cover to
over 7 times. Now the Group's focus is how to improve share
owner value by maximising the return on alternative investments
in capital expenditures, acquisitions and investments, dividends
or share buy-backs.
- To advance further the role of the parent company from that of a
financial holding or investment company to a parent company that
adds value to its clients and employees. The key value added
areas that the Company has identified, and is focused on, are
human resources, property management, procurement, information
technology and practice development.
- To place greater emphasis on revenue growth by better
positioning the Group's revenue portfolio in faster-growing
functional areas and geographical markets.
- To improve still further the quality of our creative output by
stepping up training and development programmes; by recruiting
the finest talent; by celebrating and rewarding outstanding
creative success; by acquiring strong creative companies; and by
encouraging, monitoring and promoting achievements in winning
creative awards.
14
<PAGE>
CLIENTS
The Company's structure of independent, autonomous firms and agencies allows it
to provide a broad range of communications services to major national and
multinational clients and to serve their increasingly complex and diverse
geographical needs. At year-end, the Company served approximately 330 national
or multinational clients in three or more service disciplines and the Company
works with more than 60 of these clients in four or more service areas. All
together, the Company now serves over 300 of the Fortune 500 clients, over
one-third of the Nasdaq 100, and works with well over 100 clients in six or more
countries. The Company's ten largest clients in 1999 were American Express,
Ford, IBM, Johnson & Johnson, Kellogg, Nestle, Philip Morris, Schering-Plough,
Unilever and Warner Lambert. Together, such clients accounted for approximately
30% of the Company's revenues in 1999. No client of the Company represents more
than 8% of the Company's aggregate revenues. The Company has maintained
long-standing relationships with many of its clients, with the average length of
relationship for the top 10 clients exceeding 50 years.
While the operating companies owned by the Company operate separately and
independently of each other, and service different clients and/or business
segments, they nevertheless have the opportunity to share certain corporate
resources. The potential for cross-referral of clients among the Company's
subsidiaries is significant, and increasing, as contacts and introductions
between the various subsidiaries of the Company often produce new ideas for
services and new client opportunities, nationally, internationally and by
service functions. This was evidenced during 1999, when over 25% of new
assignments are estimated to have come from the joint development of
opportunities by two or more Group companies. To enhance this process, the
Company has implemented incentive plans whereby a portion of the incentive
compensation for senior executives in the Group is based upon their cooperation
with, and cross referrals to, other Group companies. See "Description of
Business -- Compensation".
ACQUISITIONS
While the Group's main focus has been on organic growth, a number of
acquisitions were completed by the Company during 1999. WPP's acquisition
strategy is to focus on areas where the Group desires to increase its strength
and on the faster growing segments of the business. The execution of this
strategy consisted of (1) increased ownership in existing associated companies
in order to gain equity control and enhance the Company's competitive position;
(2) strategic acquisitions to augment existing Company product lines; and (3)
continued small investments in new areas such as interactive media to establish
a foothold in the high tech markets. Total cash spent on acquisitions and
investments in 1999 was L262.0 million. The Company acquired or made an
investment in a number of companies in 1999, including:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
ADVERTISING AND MEDIA INVESTMENT REGION INFORMATION AND CONSULTANCY REGION
-------------------------------- ------ --------------------------- ------
MANAGEMENT
----------
<S> <C> <C> <C>
Dazai USA Center Partners USA
Portland UK Intelliquest USA
DRI USA
SMG Poland
Steve Perry Consultants UK
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
PUBLIC RELATIONS AND PUBLIC REGION BRANDING AND IDENTITY, REGION
--------------------------- ------ ---------------------- ------
AFFAIRS HEALTHCARE AND SPECIALIST
------- -------------------------
COMMUNICATIONS
--------------
<S> <C> <C> <C>
Blanc & Otus USA BPRI UK
BWR USA Brand Union UK
Feinstein Kean USA Brierley & Partners USA
Hiller Wust Germany Brindfors Sweden
Green Advertising USA
High Co France
International Presentations UK
MSRC USA
Perspectives UK
</TABLE>
15
<PAGE>
P-Four UK
PRISM UK
Shire Hall UK
The Company has continued to make acquisitions and investments in companies in
the first part of 2000, including 51% of the TMI group of companies, one of the
leading advertising groups in the Middle East; 50% of Tamir Cohen Limited, a
leading Isreali advertising agency; 80% of Kader Advertising Holdings B.V.,
parent company of KSM B.V., an advertising agency specialising in retail and
recruitment in the Netherlands; and 100% of Sifo Research & Consulting, a
market-leading market research and consulting company in Sweden.
In May 2000, the Company announced a merger agreement with Young & Rubicam Inc.
This agreement is subject to governmental and both Companies' share holders'
approval. If the agreement is approved, the Company believes, it would create
the world's leading communications services company.
PEOPLE
The assets of marketing and communications services businesses are primarily its
people, and the Company is highly dependent on the talent, creative abilities
and technical skills of its personnel and the relationships its personnel have
with clients. The Company believes that its operating companies have established
reputations in the industry which attract talented personnel. However, the
Company, like all marketing and communications services businesses, is
vulnerable to adverse consequences from the loss of key employees due to the
competition among these businesses for talented personnel. On December 31, 1999
the Group had 29,168 employees located in approximately 950 offices, in 92
countries compared with 26,184 employees on December 31, 1998. Including all the
Group's affiliated companies, total employees were approximately 39,000 on
December 31, 1999. The average number of employees in 1999 was 27,711 compared
with 25,589 in 1998. Total staff costs in 1999 were L1,091.3 million compared
with L952.9 million in 1998. The Company's staff cost to revenue ratio excluding
incentives was almost flat at 46.9%. Variable staff costs as a proportion of
total staff costs have improved to 11.5% and as a proportion of revenues, to
5.8%.
COMPENSATION
In order to attract and retain high quality talent in all areas of its
operations, WPP has established certain incentive plans to provide a more
flexible cost structure for the Company and to permit a stronger link between
longer term sustained performance and the level of staff remuneration. Base
salaries are established within 15% of the median base salary for similar
positions in directly comparable businesses depending on individual and business
unit performance, experience and responsibility. WPP believes that the Company
provides competitive total compensation packages to its executives, placing
great emphasis on the flexible portion of compensation.
Key employees of each of the principal operating companies within the Group
participate in annual incentive compensation plans under which a significant
portion of their total compensation is directly related to the financial
performance of their own company, division, client or functional responsibility.
Individual bonuses are determined on the basis of achievements against
individual performance objectives encompassing key strategic and financial
performance criteria, including the level of co-operation between operating
companies. In addition, a number of the most senior executives in the Company
participate in long-term incentive plans under which awards are payable in a
combination of cash and an interest in WPP ordinary shares, depending on the
achievement of three-year financial performance targets, including conversion of
revenue to profit targets, operating margin targets and staff costs to revenue
ratio targets. Certain executives in the Group are also members of the WPP "100
Club", "400 Club" or "High Potential 500 Club" and receive grants of fair market
value WPP share options exercisable either three or five years from the grant
date assuming that specific performance conditions are met including certain
financial performance targets and targets for cooperation across WPP's operating
companies.
In connection with WPP's emphasis on promoting cooperation and cross referrals
among the Group companies, in 1997 WPP implemented a worldwide share ownership
program for all Company employees with over two years' of service in 100% owned
companies, and a partnership program rewarding outstanding examples of
collaboration across various operating companies within the Group, with the
objective of adding value to the Company's clients' businesses. Both these
initiatives have continued in 1999. Options under the worldwide share ownership
programme have been granted annually to approximately 9,000 people worldwide.
16
<PAGE>
Including outstanding options, interests in WPP restricted stock, stock already
owned and holdings of the Employee Stock Ownership Plan, people working in the
Group currently own, or have interests in, in excess of 63 million ordinary WPP
shares representing over 8% of the Company.
The Leadership Equity Acquisition Plan (LEAP) was approved by share owners on
September 2, 1999. Fifteen executives of the Group have been invited to
participate in the plan. These participants will purchase or have purchased
2,549,059 WPP ordinary shares and have made a commitment to retain them until
September 2004. Under the terms of LEAP, the participants may earn matching
shares over a five-year performance period, based on the Group's relative total
share owner return as compared with 15 other major listed companies in our
industry.
Although still applicable to other key management employees, there is no current
intention to make further option grants to executive directors, including the
Group chief executive. See "Compensation of Directors and Officers" and "Options
to Purchase Securities From Registrant or Subsidiaries".
TRAINING
Many of the companies within the Group offer formal training programs for new
employees. In particular, J. Walter Thompson, Ogilvy & Mather, Research
International, Millward Brown International and Hill & Knowlton have been
actively engaged for many years in the training and development of their
personnel. The companies conduct various educational programs, such as seminars
and workshops, in the United States and abroad, and have various other formal
programs for interchanging ideas, materials and experiences among their offices.
The parent company has initiated a number of multi-company seminars and
workshops aimed at senior employees. These have covered areas such as integrated
marketing, organizational development, management and leadership skills,
retailing and creativity.
REGULATION
From time to time, governments, government agencies and industry self-regulatory
bodies in the United States and other countries in which the Company operates
have adopted statutes, regulations, and rulings which directly or indirectly
affect the form, content, and scheduling of advertising, and public relations
and public affairs, or otherwise affect the activities of the Company and its
clients. Some of the foregoing relate to general considerations such as
truthfulness, substantiation and interpretation of claims made, comparative
advertising, relative responsibilities of clients and advertising, public
relations and public affairs firms, and registration of public relations and
public affairs firms' representation of foreign governments.
In addition, there is an increasing tendency towards consideration and adoption
of specific rules, prohibitions, and media restrictions, and labelling,
disclosure and warning requirements, with respect to advertising for certain
products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food
and certain alcoholic beverages, and to certain groups, such as children.
Proposals have been made for the adoption of additional laws and regulations
which could further restrict the activities of advertising and public relations
and public affairs firms and their clients. Though the Company does not expect
any existing, proposed or future regulations to materially adversely impact the
Company's business, the Company is unable to estimate the effect on its future
operations of the application of existing statutes or regulations or the extent
or nature of future regulatory action.
ITEM 2. DESCRIPTION OF PROPERTY
The majority of the Company's properties are leased, although certain properties
which are used mainly for office space are owned in Argentina, Austria, Brazil,
Mexico, Netherlands, Peru, Thailand and the US, and certain office buildings and
a manufacturing plant is owned in the UK. The Company actively manages its
rental costs to revenue ratio and believes that it is still capable of achieving
significant improvements in this area.
17
<PAGE>
The Company considers its properties owned or leased to be in good condition and
generally suitable and adequate for the purposes for which they are used. See
also Item 9 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Excess Space".
As of December 31, 1999, the fixed asset value (cost less depreciation)
representing properties, both owned and leased, as reflected in the Company's
consolidated financial statements was approximately L89.8 million (US$145.4
million).
See Note 2 of Notes to the Company's Consolidated Financial Statements for a
schedule by years of future minimum rental payments to be made and future
sublease rental payments to be received, as of December 31, 1999, under
non-cancellable operating leases of the Company.
ITEM 3. LEGAL PROCEEDINGS
OUTSTANDING LEGAL PROCEEDINGS
The Company has claims against others and there are claims against the Company
in a variety of matters arising from the conduct of its business. In the opinion
of the management of the Company, the ultimate liability, if any, that is likely
to result from these matters would not have a material effect on the Company's
financial position, or on the results of operations.
SIGNIFICANT CLAIMS SETTLED DURING 1999
None.
ITEM 4. CONTROL OF REGISTRANT
A. As far as WPP is aware, it is neither directly nor indirectly owned or
controlled by one or more corporations or by any government.
B.(i) As of June 5, 2000, the Company is aware of the following interests of
3% or more in the issued ordinary share capital of the Company;
Legg-Mason 5.28%
Asatsu-DK 4.02%
WPP ESOP 3.74%
(ii) As of June 5, 2000, the total amount of voting securities owned by
Officers and Directors (as a group) of the Company was:
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------------- --------------------------------------
Title of Class Number of Shares Owned Percent of Class
---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Ordinary shares par value 10 pence per
share 13,249,751 1.7%
======================================== ====================================== ======================================
</TABLE>
(iii) The Company's ordinary shares are admitted to the Official List of the
UK Listing Authority and trade on The London Stock Exchange and in the
United States on Nasdaq in the form of American Depositary Shares
("ADSs"). Each ADS now represents five ordinary shares (prior to
November 16, 1999, each ADS represented ten ordinary shares; and prior
to
18
<PAGE>
November 15, 1995, each ADS represented two ordinary shares) and is
evidenced by American Depositary Receipts ("ADRs").
(iv) See "Item 5 -- Nature of Trading Market" below for a description of the
Company's share buy back program.
C. The Company does not know of any arrangements the operation of which
may at a subsequent date result in a change in its control.
19
<PAGE>
ITEM 5. NATURE OF TRADING MARKET
The Company's ordinary shares have been traded on The Stock Exchange since 1971.
The Company currently has authorisation to purchase up to 10% of the outstanding
ordinary shares of the Company pursuant to its share buy back program.
Management is authorised to use its discretion in planning purchases of ordinary
shares under the share buy back program. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
The following table sets forth, for the quarters indicated, the reported high
and low middle-market quotations for the Company's ordinary shares on The London
Stock Exchange, based on its Daily Official List. Such quotations have been
translated in each case into United States dollars at the closing rate reported
in the London Financial Times on each of the respective dates of such
quotations.
<TABLE>
<CAPTION>
Translated into
Pounds per United States
Ordinary Share Dollars
---------------------------------- --------------------- --------------------- --------------------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
----
First Quarter 1.15 1.02 1.81 1.65
Second Quarter 1.31 1.00 2.08 1.64
Third Quarter 1.64 1.22 2.60 1.93
Fourth Quarter 1.64 1.45 2.55 2.25
1996
----
First Quarter 2.00 1.57 3.05 2.40
Second Quarter 2.15 1.94 3.34 2.98
Third Quarter 2.45 2.03 3.84 3.16
Fourth Quarter 2.54 2.15 4.35 3.56
1997
----
First Quarter 2.76 2.36 4.41 3.97
Second Quarter 2.64 2.40 4.32 3.93
Third Quarter 2.90 2.38 4.61 4.01
Fourth Quarter 2.92 2.59 4.93 4.22
1998
----
First Quarter 3.43 2.43 5.74 3.96
Second Quarter 4.27 3.43 6.98 5.74
Third Quarter 4.67 2.71 7.68 4.60
Fourth Quarter 3.78 2.02 6.32 3.41
1999
----
First Quarter 5.49 3.59 8.88 5.95
Second Quarter 5.75 4.98 9.30 8.05
Third Quarter 6.27 5.39 10.18 8.69
Fourth Quarter 9.96 5.70 16.09 9.43
2000
----
First Quarter 13.24 8.68 20.84 14.29
Second Quarter* 10.98 7.69 17.13 11.46
* to June 5, 2000
---------------------------------- --------------------- --------------------- ---------------------- ---------------------
</TABLE>
The ordinary shares have traded in the United States since December 29, 1987 in
the form of ADSs which are evidenced by ADRs. From November 16, 1999 onwards,
each ADS represents 5 ordinary shares (previously 10 ordinary shares since
November 15, 1995 and 2 ordinary shares prior to that date). The depositary for
the ADSs is Citibank, N.A. in New York. The following table sets forth, for the
quarters indicated, the reported high and low sales prices of the ADSs as
reported on by Nasdaq. High and low sales prices of the ADSs prior to November
16, 1999 have been restated for comparative purposes to represent one ADS for
every 5 ordinary shares.
20
<PAGE>
<TABLE>
<CAPTION>
US DOLLARS PER ADS
High Low
----------------------------- --------------- ---------------
<S> <C> <C>
1995
----
First Quarter 9 1/16 7 31/32
Second Quarter 10 5/32 8 1/8
Third Quarter 13 1/8 9 3/8
Fourth Quarter 12 31/32 11 3/8
1996
----
First Quarter 15 5/16 11 15/16
Second Quarter 16 3/4 15
Third Quarter 19 1/4 15 13/16
Fourth Quarter 11 15/32 17 1/2
1997
----
First Quarter 22 19 9/16
Second Quarter 22 19 9/16
Third Quarter 23 5/8 19 7/8
Fourth Quarter 24 7/8 21 5/16
1998
----
First Quarter 29 3/16 20 1/4
Second Quarter 35 3/4 28 3/4
Third Quarter 38 1/2 22 13/16
Fourth Quarter 32 3/8 18
1999
----
First Quarter 44 3/8 30 7/16
Second Quarter 46 39 3/4
Third Quarter 50 7/16 42 11/16
Fourth Quarter 83 1/8 47 1/2
2000
----
First Quarter 102 9/16 70 1/8
Second Quarter* 85 1/2 56 1/2
* to June 5, 2000
----------------------------- --------------- ---------------
</TABLE>
It is not possible for the Company to determine what percentage of the
outstanding ordinary shares are owned by holders in the United States because of
the use of nominee share owners. The share register of the Company as of
December 31, 1999 revealed holders with registered addresses in the United
States who owned, in aggregate, approximately 1.3% of the outstanding ordinary
shares. In addition, the depositary for the ADSs as at December 31, 1999 held
44,904,130 ordinary shares, approximately 5.8% of the outstanding ordinary
shares, backing 8,980,826 outstanding ADRs held by 387 registered holders based
in the United States.
However, the Company believes that further shares may in fact be beneficially
held by holders in the United States, representing approximately 41% of the
issued share capital.
21
<PAGE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Until October 21, 1979, the rules issued under the United Kingdom Exchange
Control Act of 1947 imposed restrictions on remittances by United Kingdom
residents to persons not resident in the United Kingdom or certain other
territories. These restrictions did not apply to remittances of dividends to
persons resident or treated as resident in the United States or Canada who were
not domiciled in the United Kingdom.
The legislation pursuant to which such exchange controls were imposed has been
repealed and there are currently no such United Kingdom foreign exchange control
restrictions on remittances of dividends on the ordinary shares or on the
conduct of the Registrant's operations.
Under the Company's Memorandum and Articles of Association and English law in
force at the date of this Report, persons who are neither residents nor
nationals of the United Kingdom may freely hold, vote and transfer ordinary
shares in the same manner as United Kingdom residents or nationals.
ITEM 7. TAXATION
The taxation discussion set forth below is intended only as a descriptive
summary and does not purport to be a complete technical analysis or listing of
all potential tax effects relevant to a decision to purchase, hold or in any way
transfer ordinary shares or ADRs. The statements of United Kingdom and United
States tax laws set out below are based on the laws in force as of the date of
this Annual Report, and are subject to any changes in United States or United
Kingdom law, and in any double taxation convention between the United States and
the United Kingdom, occurring after that date.
The following summary of certain United States and United Kingdom tax
consequences is not exhaustive of all possible tax considerations and
prospective purchasers of ADSs are advised to satisfy themselves as to the
overall tax consequences of their ownership of ADSs and the ordinary shares
represented thereby by consulting their own tax advisers. In addition, this
summary provides no advice with respect to a United States shareholder (either
corporate or individual) where the shareholder controls, or is deemed to
control, 10% or more of the voting stock of the Company.
As used herein, the term "United States corporation" means any corporation
organized under the laws of the United States or any state or the District of
Columbia.
For the purposes of the current United States - United Kingdom double taxation
conventions and for the purposes of the United States Internal Revenue Code of
1986, as amended (the "Code"), discussed below, the holders of ADSs will be
treated as the owners of the underlying ordinary shares represented by the ADSs
that are evidenced by such ADRs.
TAXATION OF DIVIDENDS
UNITED KINGDOM RESIDENTS. In respect of dividends paid after April 6, 1999, the
notional tax credit that will be available for an individual shareholder
resident in the United Kingdom will be 1/9th of the dividend. Tax credits are no
longer repayable to UK holders with no tax liability. Individuals whose income
is not within the higher income tax band are liable to tax at 10% on the
dividend income and the notional tax credit will continue to satisfy their
income tax liability on UK dividends. The higher rate of tax on dividend income
was also reduced to 32.5% from April 6, 1999.
In the case of an individual who is a United States citizen and a resident of
the United Kingdom, the dividend must be reported as income in the shareholder's
United States income tax liability, and the notional United Kingdom tax credit
attached to the dividend and any further UK taxes suffered on the dividend
income will be eligible to be claimed as a credit against the individual
shareholder's United States income tax liability, subject to certain
limitations.
UNITED STATES RESIDENTS. In the case of an individual who is a United States
citizen and not a resident of the United Kingdom, the dividend (i.e. the cash
dividend exclusive of any notional tax credit in respect of such dividend) must
be reported as income in the
22
<PAGE>
shareholder's United States income tax liability, and the United Kingdom tax
(including withholding taxes) actually paid or accrued to the Inland Revenue
will be eligible to be claimed as a credit against the individual shareholder's
United States income tax liability, subject to certain limitations and, in any
case, only to the extent that such tax exceeds the amount of ACT credit in
respect of the related dividend.
Under the Income Tax Convention between the United States and the United Kingdom
the tax treatment depends upon the status of the shareholder. A shareholder who
is a United States resident individual or a United States corporation (other
than a corporation which controls at least 10% of the voting stock of the
Company), and whose holding is not effectively connected with (a) a permanent
establishment through which the shareholder carries on business in the United
Kingdom or (b) a fixed base regularly available and situated in the United
Kingdom from which the shareholder performs independent personal services, is
entitled to a payment equal to the tax credit to which a United Kingdom resident
individual would have been entitled in respect of such dividend, subject to a
withholding tax of 15% of the net dividend plus credit. Since April 6, 1999,
this payment is effectively reduced to nil (as withholding tax is greater than
the tax credit).
However, a portfolio investor (ie all investors holding less than 10% of the
voting stock of the company) may elect to be treated as receiving the amount due
from the UK government (ie 10 x tax credit less 15% withholding tax) by
indicating the election on a timely filed form 8833 for the relevant year. With
the election, a portfolio investor is treated as having received an additional
dividend equal to the gross amount of the tax credit and having paid the
withholding tax due, on the date of the distribution. The portfolio investor can
thus include the gross payment received in dividend income and may claim a
foreign tax credit. The amount of the creditable withholding tax cannot exceed
the tax credit payable to the investor. Alternatively, portfolio investors can
choose to be taxed on the net dividend received. Shareholders should consult
with their tax advisor to determine whether there is an advantage in filing form
8833 in their case.
The gross dividend (the sum of the dividend paid by the Company plus any related
United Kingdom tax credit) will be treated as foreign source dividend income for
United States Federal income tax purposes provided that such dividend is paid
out of the company's earnings and profits, as defined for United States Income
Tax purposes. If the dividend is not paid out of earnings and profits, it will
be treated as a return of capital (up to the holders' tax basis in their
shares).
Any excess above the combination of the amounts treated as dividends and returns
of capital will be treated as a capital gain. Dividends paid out of earnings and
profits to a holder who is a United States citizen or a United States resident
will not be eligible for the 70% dividends received deduction allowed to United
States corporations under Section 243 of the Code. However, subject to certain
limitations on foreign tax credits generally, the applicable United Kingdom
withholding tax (if any) will be treated as a foreign income tax eligible for
credit against such share owners' United States Federal income taxes.
In certain cases the tax treatment under the Income Tax Convention described
above may be limited or denied if the holder acquired the ADRs or ordinary
shares primarily to secure the benefits of the Convention and not for bona fide
commercial reasons.
TAXATION OF CAPITAL GAINS
An individual shareholder resident in the United Kingdom will be liable to
United Kingdom taxation on capital gains realized on the disposal of their ADSs
or ordinary shares.
Holders of ADSs or ordinary shares who are United States resident individuals or
United States corporations, and who are not resident or ordinarily resident in
the United Kingdom, will not be liable to United Kingdom taxation of capital
gains realized on the disposal of their ADSs or ordinary shares unless the ADSs
or ordinary shares are used or held for the purposes of a trade carried on in
the United Kingdom through a permanent establishment. However, a holder of ADSs
or ordinary shares who is a United States citizen or a United States resident
(as defined above) will be liable to taxation of such capital gains under the
laws of the United States.
23
<PAGE>
ESTATE AND GIFT TAX
The current Estate and Gift Tax Convention between the United States and the
United Kingdom generally relieves from United Kingdom inheritance tax (the
equivalent of United States estate and gift tax) the transfer of ordinary shares
or of ADSs where the shareholder or holder of the ADS's making the transfer is
domiciled for the purposes of the Convention in the United States and is not a
national of the United Kingdom. This will not apply if the ordinary shares or
ADSs are part of the business property of an individual's permanent
establishment in the United Kingdom or are related to the fixed base in the
United Kingdom of a person providing independent personal services.
If no relief is given under the Convention, inheritance tax will be charged at a
rate worked out on a cumulative basis on the amount by which the value of the
transferor's estate is reduced as a result of any transfer (unless the transfer
is exempt or "potentially exempt") made by way of gift or other gratuitous
transaction by an individual or on the death of an individual or into certain
defined trusts.
Potentially exempt transfers are transfers made to certain specified classes of
person and become wholly exempt if made at least more than seven years before
the death of the transferor and it becomes chargeable if not so made. Special
rules apply to gifts made subject to a reservation of benefit. In the unusual
case where ordinary shares or ADSs are subject to both United Kingdom
inheritance tax and United States gift or estate tax, the Convention generally
provides for tax paid in the United Kingdom to be credited against tax payable
in the United States or for tax paid in the United States to be credited against
tax payable in the United Kingdom based on priority rules set forth in the
Convention.
STAMP DUTY AND STAMP DUTY RESERVE TAX
Under the Finance Act 1986 (the "Finance Act"), no UK Stamp Duty will be payable
on any transfer of an ADS or on any delivery or negotiation of an ADR, provided
that the instrument of transfer is executed and remains outside the UK nor will
there be any liability to Stamp Duty Reserve Tax in respect of any agreement for
transfer of ADSs. Dealings in ADRs in bearer form outside the UK will be free of
Stamp Duty, but certain bearer dealings within the UK may attract Stamp Duty at
the rate of 1.5%.
The Finance Act provides that, as from October 27, 1986, there will be a charge
to ad valorem Stamp Duty on any instrument transferring ordinary shares to a
nominee or agent for a depositary which then issues depositary receipts (such as
the ADRs). Where the instrument is liable to Stamp Duty as a "conveyance on
sale" then the rate of duty is 1.5% of the consideration for the sale
implemented by the instrument.
Where the instrument of transfer is not stampable as a conveyance on sale, then
the rate of duty is 1.5% of the market value of the security transferred by the
instrument, except that the rate of duty is reduced to 1% in the case of certain
transfers effected by a qualified dealer in securities (as defined in the
Finance Act).
The Finance Act also provides that there is to be a charge to Stamp Duty Reserve
Tax which will apply where ordinary shares are transferred, issued or
appropriated to a nominee or agent for a depositary under an arrangement under
which the depositary issues ADRs. Stamp Duty Reserve Tax, which is payable by
the depositary, is charged at a rate of 1.5% of the consideration for the
transfer. Where there is no such consideration, the rate of Stamp Duty Reserve
Tax is 1.5% of the market value of the securities transferred or 1% in the case
of certain transfers effected by a qualified dealer in securities (as defined in
the Finance Act). The charge to Stamp Duty Reserve Tax will, however, be reduced
by the amount, if any, of ad valorem Stamp Duty paid on the instrument
transferring the ordinary shares.
In the case of conveyances or transfers of ordinary shares executed pursuant to
contracts made after October 27, 1986 the rate of duty is 1/2% of the
consideration, if any, for the transfer. There is a charge to Stamp Duty Reserve
Tax at a rate of 1/2% of the consideration for the transaction where there is an
agreement for the sale of ordinary shares. The Stamp Duty Reserve Tax will in
general be payable by the purchaser of the ordinary shares but regulations have
been made which provide for the tax to be collected in certain circumstances
from persons other than the purchaser (e.g. a market maker). The charge to Stamp
Duty Reserve Tax will, however, be reduced by the amount, if any, of ad valorem
Stamp Duty paid on the instrument transferring the ordinary shares.
A gift for no consideration of ordinary shares (other than as part of ADR
arrangements) will not attract a Stamp Duty charge after May 1, 1987 (if
appropriately certified) and is exempt from Stamp Duty Reserve Tax.
24
<PAGE>
A transfer of ordinary shares from a depositary or its agent or nominee to a
person purchasing from an ADS holder on cancellation of an ADR is liable to duty
as a "conveyance on sale" because it completes a sale of such ordinary shares
and will be liable to ad valorem Stamp Duty, payable by the purchaser.
A transfer of ordinary shares from a depositary or its agent or nominee to an
ADS holder on cancellation of an ADR which is not liable to duty as a
"conveyance on sale" is currently understood to be liable to a fixed Duty of
50p.
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from the Consolidated
Financial Statements of the Company which appear elsewhere in this Form 20-F and
should be read in conjunction with, and are qualified in their entirety by
reference to, such Financial Statements including the notes thereto. Such
Consolidated Financial Statements have been audited by Arthur Andersen,
Independent Chartered Accountants.
The Consolidated Financial Statements of the Company are prepared in accordance
with UK GAAP, which differ in certain significant respects from US GAAP. A
reconciliation to US GAAP is set forth on pages F-18 to F-20 of the Consolidated
Financial Statements.
25
<PAGE>
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997 1996 1995
Lm Lm Lm Lm Lm
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH UK GAAP:
Turnover (or gross billings) 9,345.9 8,000.1 7,287.3 7,084.0 6,553.1
Revenue 2,172.6 1,918.4 1,746.7 1,691.3 1,554.9
EBITDA (i) 333.0 278.9 234.6 210.8 175.7
Operating Profit 263.5 229.1 194.9 170.1 135.0
Income before taxes and minority
interests 255.4 212.8 177.4 153.3 113.7
Net income before dividends 172.8 140.3 116.0 100.0 68.7
Basic earnings per share 22.9p 19.1p 15.8p 13.6p 9.4p
Diluted earnings per share 22.5p 18.8p 15.7p 13.5p 9.4p
Dividends per share, excluding
tax credit 3.1p 2.56p 2.13p 1.7p 1.31p
AMOUNTS IN ACCORDANCE WITH US GAAP:
Net income after goodwill
amortization, taxes and minority
interests 106.8 99.5 80.2 67.1 25.7
Basic earnings per share 14.2p 13.5p 10.9p 9.1p 3.5p
Diluted earnings per share 13.8p 13.2p 10.8p 9.0p 3.5p
Dividends per share excluding tax
credit 2.72p 2.27p 1.844p 1.421p 1.195p
AMOUNTS IN ACCORDANCE WITH UK GAAP:
Goodwill 541.4 248.6 - - -
Total assets 3,206.4 2,452.5 1,979.3 1,894.8 1,881.2
Long-term liabilities, including
provision for liabilities and
minority interests 740.2 487.5 302.9 364.5 421.9
Total share owners' funds
(shareholders'equity) (iii) 318.2 187.7 (25.2) 22.3 (62.4)
AMOUNTS IN ACCORDANCE WITH US GAAP:
Goodwill and other intangibles 1,404.2 1,263.5 1,073.4 1,101.7 1,229.7
Total assets 3,726.3 3,059.2 2,675.7 2,629.2 2,760.9
Long-term liabilities, including
provision for liabilities and
minority interests 608.1 386.4 265.3 361.5 426.5
Total share owners' funds
(shareholders' equity) 1027.5 908.7 719.1 767.8 808.4
----------------------------------------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------
1999 1998 1997 1996 1995
$m $m $m $m $m
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH UK GAAP:
Turnover (or gross billings) 15,119.8 13,259.4 11,937.3 11,062.4 10,342.1
Revenue 3,514.8 3,179.6 2,861.2 2,641.1 2,453.9
EBITDA (i) 538.7 462.2 384.3 329.2 277.3
Operating Profit 426.3 379.7 319.2 265.6 213.1
Income before taxes and minority
interests 413.2 352.7 290.6 239.4 179.4
Net income before dividends 279.6 232.6 190.0 156.2 108.4
Basic earnings per share 37.0c 31.7c 25.9c 21.2c 14.8c
Diluted earnings per share 36.4c 31.2c 25.7c 21.1c 14.8c
Dividends per share, excluding
tax credit 5.0c 4.2c 3.5c 2.7c 2.1c
AMOUNTS IN ACCORDANCE WITH US GAAP:
Net income after goodwill
amortization, taxes and minority
interests 172.8 164.9 131.4 104.8 40.6
Basic earnings per share 23.0c 22.4c 17.9c 14.2c 5.5c
Diluted earnings per share 22.3c 21.9c 17.7c 14.1c 5.5c
Dividends per share excluding tax
credit 4.4c 3.8c 3.0c 2.2c 1.9c
AMOUNTS IN ACCORDANCE WITH UK GAAP:
Goodwill 876.1 413.6 - - -
Total assets 5,188.6 4,080.4 3,256.7 3,242.6 2,920.8
Long-term liabilities, including
provision for liabilities and
minority interests 1,197.8 811.1 498.4 623.8 655.0
Total share owners' funds
(shareholders'equity) (iii) 514.9 312.2 (41.5) 38.2 (96.9)
AMOUNTS IN ACCORDANCE WITH US GAAP:
Goodwill and other intangibles 2,272.3 2,102.2 1,766.2 1,885.3 1,909.2
Total assets 6,029.9 5,089.9 4,402.6 4,499.3 4,286.6
Long-term liabilities, including
provision for liabilities and
minority interests 984.0 642.9 436.5 618.6 662.2
Total share owners' funds
(shareholders' equity) 1,662.7 1,511.9 1,183.2 1,313.9 1,255.1
----------------------------------------- --------- -------- --------- -------- ---------
</TABLE>
(i) EBITDA is defined as earnings (operating profit) before interest, tax,
depreciation and amortization.
(ii) Goodwill includes goodwill arising on the acquisition of both
subsidiary and associate undertakings. The latter is shown within
investments in the Group's consolidated balance sheet in accordance
with UK GAAP. Prior to January 1, 1998 goodwill was written off to
reserves in accordance with UK GAAP then applicable.
(iii) Share owners' funds includes the valuation of certain acquired
separable corporate brands
26
<PAGE>
DIVIDENDS
Dividends on the Company's ordinary shares, when paid, are paid to share owners
as of a record date which is fixed after consultation between the Company and
The Stock Exchange.
The table below sets forth the amounts of interim, final and total dividends
paid on the Company's ordinary shares in respect of each fiscal year indicated.
The dividends are also shown translated into US cents per ADS using the Closing
Buying Rate (as reported in the London Financial Times) for pounds sterling on
each of the respective payment dates for such dividends.
<TABLE>
<CAPTION>
------------------------------------------------------------------- ------------------------------------------------
PENCE PER ORDINARY SHARE TRANSLATED INTO US CENTS PER ADS
------------------------------------------------------------------- ------------------------------------------------
YEAR ENDED: INTERIM FINAL TOTAL INTERIM FINAL TOTAL
------------------ --------------- ---------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1995 0.445 0.865 1.31 3.5* 6.8* 10.3*
------------------ --------------- ---------------- --------------- ---------------- --------------- ---------------
1996 0.556 1.144 1.70 4.3* 8.9* 13.2*
------------------ --------------- ---------------- --------------- ---------------- --------------- ---------------
1997 0.70 1.43 2.13 5.7* 11.7* 17.4*
------------------ --------------- ---------------- --------------- ---------------- --------------- ---------------
1998 0.84 1.72 2.56 7.0* 14.3* 21.3*
------------------ --------------- ---------------- --------------- ---------------- --------------- ---------------
1999 1.0 2.1 3.1 8.1* 17.0* 25.1*
================== =============== ================ =============== ================ =============== ===============
</TABLE>
* These amounts have been restated to reflect the current value of one ADS to 5
ordinary shares (prior to November 16, 1999 one ADS represented 10 ordinary
shares and, prior to November 15, 1995, one ADS represented two shares).
The 1999 interim dividend was paid on November 22, 1999 to share owners on the
register at October 22, 1999. The 1999 final dividend will be paid on July 10,
2000 to share owners on the register at June 9, 2000. The 1999 proposed final
dividend has been translated into US cents using the 1999 average exchange rate
of $1.6178.
EXCHANGE RATES
Fluctuations in the exchange rate between the pound sterling and the United
States dollar will affect the dollar equivalent of the pound sterling prices of
the Company's ordinary shares on The Stock Exchange, and as a result, are likely
to affect the market price of the ADS in the United States. Such fluctuations
will also affect the dollar amounts received by holders of ADSs on conversion by
the Depositary of cash dividends paid in pounds sterling by the ordinary shares
represented by the ADSs. The following table sets forth for the periods
indicated the average, high, low and period end Closing Buying Rates (as
reported in the London Financial Times) for pounds sterling expressed in
dollars:
27
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------- ------------------- ------------------- ------------------- -------------------
YEAR ENDED DECEMBER 31 AVERAGE HIGH LOW PERIOD END
--------------------------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
1995 1.5782 1.6440 1.5302 1.5526
--------------------------------------- ------------------- ------------------- ------------------- -------------------
1996 1.5616 1.7113 1.4965 1.7113
--------------------------------------- ------------------- ------------------- ------------------- -------------------
1997 1.6381 1.7062 1.5803 1.6454
--------------------------------------- ------------------- ------------------- ------------------- -------------------
1998 1.6574 1.7185 1.6149 1.6638
--------------------------------------- ------------------- ------------------- ------------------- -------------------
1999 1.6178 1.6746 1.5502 1.6182
======================================= =================== =================== =================== ===================
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In connection with the provisions of the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"), the Company may include Forward-Looking
Statements (as defined in the Reform Act) in oral or written public statements
issued by or on behalf of the Company. These Forward-Looking Statements may
include, among other things, plans, objectives, projections, anticipated future
economic performance as assumptions and the like that are subject to risks and
uncertainties. As such, actual results or outcomes may differ materially from
those discussed in the Forward-Looking Statements. Important factors which may
cause actual results to differ include but are not limited to: the unanticipated
loss of a material client or key personnel, delays or reductions in client
advertising budgets, shifts in industry rates of compensation, government
compliance costs or litigation, unanticipated natural disasters, the Company's
exposure to changes in the values of other major currencies (because a
substantial portion of its revenues are derived and costs incurred outside of
the United Kingdom), the overall level of economic activity in the Company's
major markets (which varies depending on, among other things, regional, national
and international political and economic conditions and government regulations
in the world's advertising markets) and the ability to project risk factors
which may vary. In light of these and other uncertainties, the Forward-Looking
Statements included in the document should not be regarded as a representation
by the Company that the Company's plans and objectives will be achieved.
IMPACT OF EXCHANGE RATES
The Company's reporting currency has always been UK Sterling. Historically
approximately 80% of the Company's consolidated revenues and profits have come
from outside the UK introducing a foreign exchange variable to the reporting of
the Company's consolidated results. The effect over the past five years, due to
the relative strength of UK Sterling, has been generally to reduce the Company's
UK Sterling reported results.
To neutralise this foreign exchange impact and to better illustrate the
underlying improvement in revenue and profit from one year to the next, the
Company has adopted the practice of publishing results in both reportable
currency (local currency results translated into UK Sterling at the prevailing
foreign exchange rate) and constant currency (current and prior year local
currency results translated into UK Sterling at a budget or "constant" foreign
exchange rate).
On average during 1999 the UK Sterling weakened by 2% against the US Dollar,
strengthened by 3% against its principal European trading currencies and
weakened by 7% against its principal Asian trading currencies. However, it
should be noted that although the movements in UK Sterling had a negative impact
on the reporting of the Company's 1999 results, there was very little adverse
profit impact as the Company's international revenues are earned in the same
currency as the costs are incurred thereby reducing economic exposure to
currency flunctuations. In addition, the Company funds the majority of its
borrowing requirement in US Dollars and the US Dollar interest expense hedges
part of the US Dollar revenues generated by the Company's United States
operations.
28
<PAGE>
Significant cross-border trading exposures are hedged by the use of forward
foreign exchange contracts. There were no outstanding material forward foreign
exchange contracts in place at December 31, 1999. No speculative foreign
exchange trading is undertaken.
OVERVIEW
The following discussion is based on the Company's audited Consolidated
Financial Statements included elsewhere in the document. The Consolidated
Financial Statements have been prepared in accordance with UK GAAP. See pages
F-18 to F-19 of "Notes to Consolidated Financial Statements" which contain a
discussion of the principal differences between UK and US GAAP relevant to the
Company.
OUTLOOK
The Company's budgets for 2000 have been prepared on a conservative basis. They
predict like-for-like, year-on-year revenue increases of more than 7% in
comparison to 1999. This compares with budgeted growth of 6% in 1998 against an
actual outcome of almost 8% and budgeted growth of over 4% and actual growth of
almost 8% in 1999.
Revenues for the first three months of 2000 were up 20.4% over last year at
constant exchange rates (19.8% on a reportable currency basis). In the first
three months of 2000, net debt averaged L230 million compared to L138 million
for the same period in 1999 at constant exchange rates, reflecting the L322
million spent on capital expenditure, acquisitions, share purchases and
dividends in the previous twelve months. Free cash flow over the same period was
L222 million.
The Company will continue to concentrate on improving the balance of its
resources and the flexibility of its costs particularly in the staff and
property areas. To achieve this, short-term and long-term incentive plan
objectives have been based on improving absolute levels of operating profit,
operating margins, staff cost to revenue ratios, incremental revenue conversion,
revenue growth and Group co-operation. As the Group's margins improve and come
closer to matching the very best performing competition, increasing emphasis
will be placed on revenue generation through these incentive objectives. The
Company does not believe that there is any functional, geographic, account
concentration or structural reason that should prevent the Group from achieving
operating margins of 14% by 2000. The two best-performing listed competitors in
the industry generate margins of 15-16%.
FISCAL 1999 COMPARED WITH FISCAL 1998
REVENUES AND OPERATING INCOME - Revenues increased by 13.3% on a reportable
currency basis in 1999 to L2,172.6 million from L1,918.4 million in 1998. On a
constant currency basis the revenue increase was 12% with strong growth in all
disciplines (advertising and media investment management 5.2%, information and
consulting 13.9%, public relations and public affairs 30.5%, branding and
identity, healthcare and specialist communications 19.2%) and regions (North
America 16.8%, United Kingdom 10.5%, Continental Europe 11.0% and Asia Pacific,
Latin America, Africa and the Middle East 4.0%). The Company's non-advertising
activities grew to represent over 53% of Group revenues.
Reported operating income (including associate income) rose by 18.6% to L290.8
million in 1999 from L245.2 million in 1998. Reported currency operating margins
increased from 12.8% to 13.4%. Reported operating costs rose by 13.4% and by
almost 12% in constant currency. Operating margins before short and long-term
incentive payments (totalling L71.0 million or almost 20% of operating profit
before bonus and taxes) rose to 16.7% from 15.8%. Staff and property costs
represent approximately 60% of the Company's cost base. The Company places great
emphasis on the control of these costs. The incentive arrangements for the
Company's most senior staff include specific financial objectives for the
improvement in absolute operating profit, operating margins, as well as
improvements in the staff cost to revenue ratios of each operating division.
Variable staff costs as a proportion of total staff costs have increased over
recent years to 11.5% and as a proportion of revenues to 5.8%. This has resulted
in increased flexibility in the cost structure. Continued efforts to minimise
property costs include consolidation of operations into shared space upon lease
renewal.
29
<PAGE>
INTEREST EXPENSE - In reported currency, net interest expense increased to L23.4
million from L19.2 million in 1998 reflecting the increased level of acquisition
activity and share repurchases. Charges in respect of working capital facilities
deceased to L12.0 million from L13.2 million. Interest cover improved to 8.2
times in comparison to 7.6 times in the prior year.
The company continues to be substantially protected against a significant rise
in US interest rates by interest rate swaps at US dollar LIBOR of 6.25% or below
(excluding margin), with maturities extending to January 2003.
TAXES - The Company's tax rate on a reported currency basis was 30.0% on
profits, compared with 31.5% in 1998. This reflects the impact of tax
restructuring within the company. Since 1992, the Group has reduced its tax rate
on profits before non-operating exceptional items by over one-third from 47% in
that year.
NET INCOME/LOSS - Net income available to ordinary share owners was L172.8
million in the year ended December 31, 1999 against L140.3 million in 1998.
FISCAL 1998 COMPARED WITH FISCAL 1997
REVENUES AND OPERATING INCOME - Revenues increased by 9.8% on a reportable
currency basis in 1998 to L1,918.4 million from L1,746.7 million in 1997.
However, on a constant currency basis the revenue increase was 13% with strong
growth in all disciplines (advertising and media investment management 8.4%,
information and consultancy 26.4%, public relations and public affairs 20.8% and
branding and identity, healthcare and specialist communications 12.0%) and most
regions (North America 11.1%, Continental Europe 20.9%, Asia, Latin America,
Africa and the Middle East 5.4% and the United Kingdom 17.7%). Non-advertising
activities accounted for more than 50% of revenues for the first time.
Reported operating income (including associate income) rose by 19% to L245.2
million in 1998 from L205.5 million in 1997. Reported currency operating margins
increased from 11.8% to 12.8%. Reported operating costs rose by 10.2% and the
company's staff cost to revenue ratio improved to 49.7% from 50.3%.
INTEREST EXPENSE - In reported currency, net interest expense increased from
L16.1 million to L19.2 million. Charges in respect of working capital facilities
increased to L13.2 million from L12.0 million due to higher utilisation.
TAXES - The Company's tax rate on a reported currency basis for the year ended
December 31, 1998 was 31.5% on profits, compared with 32% in 1998.
NET INCOME / LOSS - Net income available to ordinary share owners was L140.3
million in the year ended December 31, 1998 against L116.0 million in 1997. The
improvement reflects the continuing increase in operating income in 1998, as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The primary source of funds for the group since 1995 has been cash
generated from operations. The primary uses of cash funds since 1995 have been
to service and repay bank debt, for capital expenditures, and since 1997 to fund
acquisitions and ordinary share repurchases. The Company evaluates its free cash
flow requirements and other needs when deciding the amount to allocate to
ordinary share repurchases. In 1999 the Company invested only L18 million in
share repurchases but continues to be committed to a rolling annual buy-back
programme of a recently increased amount of L100 million representing
approximately 1 - 1.5% of the Company's share capital. For a breakdown of the
Company's sources and uses of cash see the "Consolidated Statements of Cash
Flows" included as part of the Company's Consolidated Financial Statements in
Item 18 of this Report.
LIQUIDITY RISK MANAGEMENT The Group manages liquidity risk by ensuring
continuity and flexibility of funding even in difficult market conditions.
Undrawn committed borrowing facilities are maintained in excess of average gross
borrowing levels and debt maturities are closely monitored.
30
<PAGE>
LIQUIDITY. Since 1995 the majority of the unsecured debt of the Group has been
funded under various syndicated loan facilities. In conjunction with the
improved profitability and credit standing of the Group, each new loan facility
has brought reduced pricing and less restrictive covenants.
BONDS. In 1998, the Group completed its debut US$ 300 million USA bond offering.
The Group issued US$ 200 million of 6.625% Notes due 2005 and US$ 100 million of
6.875% Notes due 2008. Net proceeds were used for general corporate purposes
including to reduce drawings on existing loan facilities.
REVOLVING CREDIT FACILITIES. The Company's debt is also funded by a syndicated
$500 million revolving credit facility (the "Amended RFA") dated July 1998. The
facility is due to expire in July 2002.
Interest in the Company's borrowings under the Amended RFA is payable at a
margin of between 0.20% and 0.55% (determined by certain conditions being met)
over the LIBOR rate for the relevant currency plus certain costs, if any,
designated at a specified rate. A significant portion (40% to 60%) of the
Group's interest exposure is hedged by 4 and 5 year interest rate swap
agreements where the counterparty is a member of the Amended RFA syndicate.
In 1999, an additional revolving facility agreement was implemented for US$150
million. This facility was refinanced in January 2000 and has a 365 day
maturity.
Additional working capital liquidity is provided to the Group through short-term
money market and overdraft facilities. These facilities, almost exclusively from
Amended RFA syndicated banks, are used in the US and UK for short-term cash
management needs and outside the US and UK for seasonal working capital
purposes.
The Company also has a securitized working capital facility, currently in the
amount of $350 million, which was entered into in 1993 and which has been
amended several times, and most recently renewed in December 1998.
See note 8 of Notes to the Consolidated Financial Statements which contains an
analysis of net funds with debt analysed by year of repayment.
31
<PAGE>
CASH FLOWS.
1999. As at December 31, 1999, the Group was cash positive with net cash of L92
million compared with L134 million at December 31, 1998 (1998: L124 million on
the basis of 1999 year-end exchange rates), despite cash expenditure of L262
million on acquisitions and L18 million on share repurchases. This was primarily
due to the seasonally strong fourth quarter and management efforts to improve
working capital.
Net debt averaged L206 million in the year ended December 31, 1999, an increase
of L63 million from L143 million in 1998 (up L51 million against L155 million in
1998 at 1999 exchange rates). Cash flow continued to improve as a result of
improved profitability and management of working capital. In 1999, operating
profit was L264 million, capital expenditure L65 million, depreciation L42
million, tax paid L58 million, interest and similar charges paid L33 million and
other net cash inflows of L21 million. Free cash flow available for debt
repayment, acquisitions, share buy-backs and dividends was therefore L171
million. This free cash flow was more than absorbed by acquisition payments and
investments of L262 million (offset by L52 million of cash acquired), share
repurchases and cancellations of L18 million and dividends of L21 million.
1998. In the year ended December 31, 1998, net debt averaged L143 million
compared with L115 million in 1997. This increase was due to an increase in
capital expenditure, share purchases by the ESOP Trust and acquisitions. Net
cash inflow from operating activities was L256 million in the year ended
December 31, 1998 (compared to L283 million in 1997), the decrease primarily due
to increased operating profit being more than offset by higher year end net
working capital.
The net cash outflow of L29 million in 1998 from return on investments and
servicing of finance compares with L31 million in 1997. The slight decrease is
due to a lower level of interest payments during 1998, partly offset by an
increase in dividends paid to minority interests. Tax payments increased to L59
million in 1998 from L54 million in 1997 reflecting higher profitability.
Net cash used in capital expenditure and financial investment rose to L82
million from L46 million in 1997 primarily due to an increase in the purchase of
the Company's shares by the ESOP Trust, and increased capital spending
Cash payments in respect of acquisitions and earnouts increased to L115 million
from L68 million in 1997.
The equity dividend paid to share owners increased to L17 million from L14
million in 1997. The effect of currency movements on the value of overseas cash
and overdrafts was to increase their value by L1 million during the year. Cash
of L78 million was generated by financing activities in the year ended December
31, 1998, leading to a net increase in cash and overdrafts of L36 million from
December 31, 1997.
CAPITAL STRUCTURE
At December 31, 1999, the Company's capital base was comprised of 774,454,422
ordinary shares of 10 pence each.
ASSET DISPOSALS.
There were no significant asset disposals during 1997, 1998 or 1999.
EXCESS SPACE
The task of eliminating surplus property costs has been achieved over the last
eight years. Excess space generally represents discrete unutilised areas of the
Company's properties which are available for sublet. Over 650,000 square feet of
excess space with a cash cost of approximately L14 million ($22 million) per
annum has been either sublet or absorbed. The excess space arose from a
reduction in headcount together with property decisions made by certain
companies prior to their acquisition by the Company. WPP's rental costs to
revenue ratio is competitive with the best performing competition, although
capable of greater improvement.
32
<PAGE>
INFLATION
As in 1998 and 1997, in management's opinion the effect of inflation has not had
a material impact on the Company's results for the year or financial position as
at December 31, 1999.
INTEREST RATE RISK MANAGEMENT
The Group's interest rate management policy recognises that fixing rates on all
its debt eliminates the possibility of benefiting from rate reductions and
similarly, having all its debt at floating rates unduly exposes the Group to
increases in rates. The Group therefore aims to limit the impact from increases
in rates while seeking to ensure that it benefits from rate reductions by
regularly reviewing its exposure profile and deciding upon the periods for
fixing rates in the light of financial market expectations. Its principal
borrowing currencies are US dollars and pounds sterling. Borrowings in these two
currencies, including amounts drawn under the working capital facility,
represented 99% of the Group's gross indebtedness at December 31, 1999 (at
US$871 million and L132 million respectively) and 98% of the Group's average
gross debt during the course of 1999 (at US$752 million and L71 million). 75% of
the year-end US$ debt is at fixed rates averaging 6.42% for an average period of
52 months. The sterling debt is all at floating rates. Other than fixed rate
debt, the Group's other fixed rates are achieved through interest rate swaps
with the Group's bankers. The Group also uses forward rate agreements and
interest rate caps to manage exposure to interest rate changes. However, the
Group did not have any contracts in these instruments at December 31, 1999.
These interest rate derivatives are used only to hedge exposures to interest
rate movements arising from the Group's borrowing and surplus cash balances
arising from its commercial activities and are not traded independently.
Payments made under these instruments are accounted for on an accruals basis.
See Note 8 of the `Notes to the Consolidated Financial Statements' which
contains an analysis of the debt and fixed rate maturities.
YEAR 2000 COMPLIANCE
The directors confirm that an internal review of all computer systems (hardware
and software) and the implementation of a millennium compliance programme were
successfully completed prior to the end of December 1999. No significant
problems have been encountered since December 31, 1999. However, the directors
continue to monitor the position.
The costs associated with the compliance programme were:
<TABLE>
<CAPTION>
----------------------------------- --------------- --------------- --------------- --------------- ---------------
1997 1998 1999 2000 TOTAL
$M $M $M $M $M
----------------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Internal resource 1 3 6 0 10
----------------------------------- --------------- --------------- --------------- --------------- ---------------
External resource 0 1 2 0 3
----------------------------------- --------------- --------------- --------------- --------------- ---------------
Other costs 0 3 3 0 6
----------------------------------- --------------- --------------- --------------- --------------- ---------------
TOTAL COST 1 7 11 0 19
----------------------------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>
ECONOMIC AND MONETARY UNION IN EUROPE - (`EMU')
The Group's European companies, including those in the UK, have been preparing
for the introduction of the single currency within Europe. These preparations
have principally included analysis of the impact of the single currency on the
business of the Group's operating companies and the upgrading of information
systems.
To date, the proportion of clients and suppliers in Europe requiring
euro-denominated transactions is less than 15%. The Group's companies in Belgium
adopted the euro as their functional currency on January 1, 1999. The lessons of
this pilot project are being applied to similar conversion projects in the
remaining EMU-based operating companies.
WPP does not expect the introduction of the euro to have a material effect on
the Group's trading performance and all associated costs are being expensed as
incurred.
33
<PAGE>
The Group does not anticipate changing its reporting currency to the euro until
the UK decides to join EMU.
US GAAP
The Company's Consolidated Financial Statements included elsewhere herein have
been prepared in accordance with UK GAAP which differ in certain significant
respects from US GAAP.
For the year ended December 31, 1999 net income under US GAAP was L106.8 million
compared with net income of L99.5 million for the same period in 1998. The
corresponding figures under UK GAAP were net income of L172.8 million and L140.3
million, respectively. Share owners' funds, i.e. shareholders' equity, under US
GAAP at December 31, 1999 were L1,027.5 million, as compared with share owners'
funds of L318.2 million under UK GAAP. See pages F-18 to F-20 of `Notes to the
Consolidated Financial Statements' for a discussion of the principal differences
between US GAAP and UK GAAP that affect the Group's financial statements.
34
<PAGE>
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has entered into interest rate swap agreements with off-balance
sheet risk in order to reduce its exposure to changes in interest rates on its
variable rate long-term debt. As of December 31, 1999, the Company had obtained
interest rate protection agreements with respect to $350 million of indebtedness
maturing at various times through 2003. The fair value of the swaps at December
31, 1999 was $353.4 million (at December 31, 1998 - $338.5 million) All interest
rate derivative contracts are approved by senior financial management prior to
execution.
Credit risk related to the interest rate swap agreements is the possibility that
the counterparty will fail to fulfill its contractual commitment, and the amount
of this risk is represented by the positive fair value of the interest rate
swaps outstanding at the given time. The Company only enters into derivative
contracts with well known trading banks which are members of the RFA syndicate
and which are investment grade. The following table provides the Company's
outstanding interest rate swaps with the notional principal value and the
weighted average fixed interest rate by maturity date.
<TABLE>
<CAPTION>
$ MILLIONS 1999 2000 2001 2002
------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Notional Principal Outstanding at $350 $350 $250 $200
December 31, 1999
Average Fixed Rate Payable 6.17% 6.17% 6.20% 6.22%
Average Variable Rate Receivable Six-month Six-month Six-month Six-month
LIBOR LIBOR LIBOR LIBOR
</TABLE>
The variable rate receivable on the interest rate swaps is based on six month
LIBOR and is not forecast in this table. The six month LIBOR rate at December
31, 1999 was 6.29%. However, the rate on the underlying variable rate debt drawn
under the RFA is payable based on LIBOR plus a margin, offsetting the interest
rate receivable under the interest rate swap (excluding the margin).
The Company's approach to managing foreign exchange rate risk is discussed in
Item 9 `Management's discussion and analysis of financial condition and results
of operations'. See also Note 8 of the Consolidated Financial Statements for
an analysis of fixed and floating rate debt by currency.
35
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and executive officers of the Company as of May 10, 2000 are as
follows:
<TABLE>
<CAPTION>
---------------------------- ----------------------------------------------------------------------- ------ -------------
NAME POSITION AGE YEAR
---- -------- --- ----
APPOINTED
---------
<S> <C> <C> <C>
Brian J Brooks Chief Human Resources Officer and Director 44 1992
Jeremy J D Bullmore Non-Executive Director 70 1988
Paul Delaney Director of Group Treasury 47 1999
Esther Dyson Non-Executive Director 48 1999
Steven Heyer Non-Executive Director 47 2000
Masao Inagaki Non-Executive Director 77 1998
John B H Jackson Non-Executive Director 70 1993
Christopher Mackenzie Non-Executive Director 45 2000
Hamish Maxwell Non-Executive Chairman 73 1996
Stanley W Morten Non-Executive Director 56 1991
John A Quelch Non-Executive Director 48 1987
Joel E Smilow Non-Executive Director 67 1998
Eric R Salama Group Director of Strategy, Director and Chief Executive of wpp.com 39 1996
Sir Martin Sorrell Group Chief Executive and Director 55 1986
Paul W G Richardson Group Finance Director and Director 42 1993
Martyn Roberts Director of Group Taxation 51 1987
============================ ======================================================================= ====== =============
</TABLE>
TERMS OF DIRECTORS AND EXECUTIVE OFFICERS
The Company's Articles of Association provide that a director appointed since
the last Annual General Meeting, or who has held office for more than 30 months
since his appointment or reappointment by the Company in general meeting shall
retire from office but shall be eligible for reappointment. The Company has also
decided this year that those directors who are aged 70 or over on the date of
the Notice of Annual General Meeting will also retire from office at the
forthcoming Annual General meeting, but being eligible, are all offering
themselves for re-election. Details of the directors who, whether under the
Articles of Association of the Company or otherwise, are to retire and who offer
themselves for re-election are set out in the Notice of Annual General Meeting.
The directors may from time to time appoint any other person to be a director.
Any director so appointed shall hold office only until the next Annual General
Meeting following his appointment when he shall retire but shall be eligible for
re-election at that meeting.
36
<PAGE>
THE GROUP CHIEF EXECUTIVE: SIR MARTIN SORRELL
Sir Martin Sorrell's services to the Group outside the USA are provided by JMS
Financial Services Limited ("JMS"). He is directly employed by WPP Group USA,
Inc. for his activities in the USA. Taken together, the agreement with JMS ("the
UK Agreement") and the agreement with the Group chief executive directly (the
"US Agreement") provide for the following remuneration all of which is further
disclosed in "ITEM 11 -- COMPENSATION OF DIRECTORS AND OFFICERS" and "ITEM 12 --
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES".
- annual salary and fees of L761,000;
- annual pension contributions of L324,000;
- short-term incentive (annual bonus); and
- the Leadership Equity Acquisition Plan.
In addition JMS is entitled to phantom options linked to the WPP share price,
granted in 1993 and 1994 as disclosed in the table entitled "Share Options" in
"ITEM 12 -- OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES". No
further phantom options have been or will be granted to JMS or the Group chief
executive.
JMS has stated its intention not to exercise the phantom options in respect of
1993 until March 2003 and has agreed to defer its interest in the phantom
options in respect of 1994 until March 2004.
Both the UK Agreement and the US Agreement may be terminated within a period of
90 days from a change of control. In these agreements "change of control" is as
defined respectively in section 416 of the Income and Corporation Taxes Act 1988
and the Securities Exchange Act 1934.
On a termination by the Group chief executive and JMS, WPP is obliged to pay an
amount equal to twice the annual fee, bonus and pension payments payable under
the UK Agreement; a further amount equal to the fee payable under the UK
Agreement less any amount payable in respect of the National Share Award Plan
and also to continue certain benefits such as health insurance.
THE CAPITAL INVESTMENT PLAN (CIP) AND NOTIONAL SHARE AWARD PLAN (NSAP)
The CIP provides the Group chief executive with a capital incentive initially
over a five-year period with effect from September 4, 1994 and which matured in
September 1999.
The Group chief executive has agreed to defer entitlement to the 4,691,392
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 rights to acquire the
Performance Shares may be exercised in the period September 30, 2004 to December
31, 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 the Group chief executive has agreed to defer his interest under the CIP.
Accordingly, subject to the provisions of the NSAP, JMS's right to receive a sum
under the NSAP may be exercised in the period September 30, 2004 to December 31,
2004 and will be calculated by reference to the average price of a WPP share for
the five dealing days before JMS's right under the NSAP is exercised. The NSAP
relates to 1,754,520 notional WPP shares.
Awards made to the Group chief executive or JMS under the CIP; the Notional
Share Award Plan and the phantom options, become immediately exercisable on a
change of control. Under these plans, "change of control" is defined as the
acquisition by a person of persons of more than 20% of the issued share capital
of WPP where this is followed within 12 months by the appointment of a director
with neither the Group chief executive's nor JMS's approval.
The rights of the Group chief executive and JMS respectively under the CIP and
the NSAP are dependent on Sir Martin Sorrell remaining interested until
September 2004 in 747,252 shares in which he invested in September 1994.
DIRECTOR'S SERVICE CONTRACTS AND NOTICE PERIODS
37
<PAGE>
WPP currently has service contracts with all of its executive directors and
executive officers. Except for the Group chief executive, each of the parent
company executive directors is employed under a contract under which the
director must give the Company 12 months notice and the Company must give the
executive 12 months' notice. Mr B J Brooks is employed under a service contract
dated June 1, 1993, Mr P W G Richardson is employed under a service contract
dated January 8, 1997 and Mr E R Salama is employed under a service contract
dated April 1, 1997. There are no change of control provisions in the contracts
for executive directors, other than in respect of the Group chief executive.
The Board unanimously consider that, given the special position of the Group
chief executive and the personal investment commitment made by him in the
Company, there are special circumstances for the notice period applicable to
him, which is for a fixed term of three years from September 1, 1999 renewable
on or before September 1, each year. The Company anticipates that the current
term will be renewed in September 2000 on this basis.
NON-EXECUTIVE DIRECTORS
Remuneration for non-executive directors consists of fees for their services in
connection with the Board and Board committee meetings and where appropriate,
for devoting additional time and expertise for the benefit of the Group.
Non-executive directors are not eligible for membership of any Company pension
plans, and do not participate in any of the Group's short or long-term incentive
programmes or in any of the Group's stock plans. Non-executive directors may
receive a part of their fees in ordinary shares of the Company.
The chairman, Mr H Maxwell, has a contract which is terminable by giving not
less than three months' notice. All other non-executive directors have letters
of appointment, which are renewable for a two-year period.
38
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the fiscal year ended December 31, 1999 the aggregate compensation paid by
WPP and its subsidiaries to all directors and officers of WPP as a group for
services in all capacities was L7,930,000. Such compensation was primarily paid
by WPP and its subsidiaries in the form of salaries and performance-related
bonuses.
The sum of L410,000 was set aside and paid in the last fiscal year to provide
pension benefits for directors and officers of WPP.
DIRECTORS' REMUNERATION
Remuneration of the directors was as follows:
<TABLE>
<CAPTION>
-------------------- ----------- ----------- ----------- ----------- ----------- ---------- ------------------- ------------------
SHORT-
TERM LONG-TERM PENSION
LOCATION SALARY OTHER INCENTIVE INCENTIVE PLANS CONTRIBUTIONS
AND FEES BENEFITS PLANS 1999 1998 1999(3) 1998(3) 1999 1998
L000 L000 (ANNUAL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
BONUS)(1) L000 L000 L000 L000 L000 L000
L000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHAIRMAN
H Maxwell USA 102 - - 102 100 - - - -
EXECUTIVE
DIRECTORS
M S Sorrell UK 761 23 540 1,324(2) 1,340(2) - - 324 315
B J Brooks USA 176 3 88 267 269 904 188 26 21
P W G Richardson UK 214 22 113 349 301 2,844 107 21 18
E R Salama UK 161 21 83 265 259 1,094 126 16 15
G C Sampson(6) UK 73 6 3 82 82 17 - - -
NON-EXECUTIVE
DIRECTORS (6)
J J D Bullmore(4) UK 71 11 - 82 95 - - - -
E Dyson(5) USA 13 - - 13 - - - - -
M Inagaki Japan - - - - 5 - - - -
J B H Jackson UK 25 - - 25 20 - - - -
S W Morten USA 29 - - 29 21 - - - -
J A Quelch USA 23 32 - 55 77 - - - -
J Smilow USA 25 - - 25 15 - - - -
TOTAL
REMUNERATION 1,673 118 827 2,618 2,584 4,859 421 387 369
-------------------- ----------- ----------- ----------- ----------- ----------- ---------- --------- --------- -------- ---------
</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 Financial Services Limited ("JMS") and the salary payable
under the US Agreement referred to in Item 10 above. In 1999, as in previous
years, JMS discharged all relevant UK national insurance 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 has been
converted into L sterling at $1.6178 to L1. The salary and fees were increased
with effect from September 1, 1999.
3 These amounts represent gains realised on the exercise of share options
and, where relevant, payments under the Performance Share Plan.
4 JJD Bullmore has a consulting arrangement with the company in addition to
his fee as a non-executive director.
5 Appointed June 28, 1999.
6 C Mackenzie and S Heyer were appointed after the year end in March 2000
and in May 2000 respectively and GC Sampson retired in May 2000.
The Company has also disclosed to its share owners details of its remuneration
policies for senior employees. These are summarized as follows:
- SCOPE OF THE COMPENSATION COMMITTEE - during the year the Compensation
committee was comprised exclusively of independent non-executive directors
(S W Morten, H Maxwell and J A Quelch). No member of the committee has any
personal financial interest, other than as share owners, in the matters to
be decided by the committee, no potential conflicts of interest arising from
cross-directorships and no day-to-day involvement in running the Group's
businesses. The Compensation committee, which seeks the advice of
independent remuneration consultants, is responsible for establishing and
overseeing the implementation of
39
<PAGE>
remuneration policy for the Group with specific reference to the following:
assessment of competitive practices and determination of competitive
positioning; base salary levels; annual and long-term incentive awards;
policy and grants relating to WPP share ownership; pensions and other
executive benefits. The Compensation committee determines awards under
annual and long-term incentive plans and awards of WPP stock under a number
of plans, for Group employees who are paid a base salary of $150,000 or
more.
- The Compensation committee determines the remuneration of the Group chief
executive, on the basis of a comparison with the chief executives of other
global, multi-agency communications companies, including the Omnicom Group
(Omnicom) and The Interpublic Group (IPG). The remuneration, stock incentive
arrangements and benefits of the other executive directors are based on
comparable positions in multinational companies of a similar size and
complexity.
- ELEMENTS OF EXECUTIVE REMUNERATION - The following comprised the principal
elements of executive remuneration for the period under review;
- Base Salaries
- Annual incentives
- Long-term incentives, including stock ownership and LEAP; and
- Pensions
Base salary levels are established by reference to the market median for
similar positions in directly comparable businesses and by comprehensive
market survey information. In the case of the parent company, this includes
other global services companies such as IPG and Omnicom and, for J. Walter
Thompson Company and Ogilvy and Mather Worldwide, the competitive market
includes other major multinational advertising agencies. For each of the
other operating companies in the Group, a comparable definition of business
competitors is used to establish competitive median salaries. Individual
salary levels are set within a range of 15 % above or below the competitive
median, taking a number of relevant factors into account, including
individual and business unit performance, level of experience, scope of
responsibility and the competitiveness of total remuneration.
Salary levels for executives are reviewed every 18, 24 or 36 months,
depending on the level of base salary. Executive salary adjustments are made
on the recommendation of the Group chief executive for operating company
chief executives and parent company executive directors and by the chief
executive officer of each operating company for all other executives.
Annual incentives are paid under plans established for each operating
company and for executives of the parent company. Group-wide, there are
approximately 3,000 participants in annual incentive plans, or approximately
10% of all employees. In the case of the Group chief executive and other
parent company directors and executives, the total amount of annual
incentive payable is based on the achievement of Group operating profit and
operating cash flow targets established by the Compensation committee and
approved by the Board. In the case of each operating company, operating
profit targets are agreed each year.
Within the limits of available annual incentive funds, individual awards are
paid on the basis of achievements against individual performance objectives,
encompassing key strategic and financial performance criteria, including:
- Operating profit;
- Profit margin;
- Staff costs to revenue;
- Revenue growth and conversion;
- Level of co-operation among operating companies; and
- Other key strategic goals.
In each case, the annual incentive objectives relate to the participant's own
operating company, division, client or functional responsibility. Each
executive's annual incentive opportunity is defined at a "target" level for the
full achievement of objectives. Higher awards may be paid for outstanding
performance in excess of target. With effect from January 1, 2000 the target
level for the Group chief executive is 100% of base fees/salary and the maximum
level is 200%. For other Group executive directors the target commencing January
1, 2000 is 50% of base salary and the maximum is 75%. Long-term incentives,
including option grants, comprise a significant element of total remuneration
for senior executives in the parent company and each operating company. During
1999,
40
<PAGE>
Group-wide, approximately 900 of those executives participated in a long-term
incentive plan and this number will increase in the current year.
The committee periodically reviews the operation of the Group's long-term
incentive programmes to ensure that the performance measures and levels of
reward are appropriate and competitive.
PARENT COMPANY - Annual grants of WPP performance shares are made to executive
directors (including since 1999 to the Group chief executive). For awards
currently outstanding, the value of each performance share is equivalent to one
WPP 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 (including WPP) major publicly
traded marketing services companies, namely Aegis, Cordiant, Grey Advertising,
Havas Advertising, IPG, A C Nielsen, Nielsen Media Research, Omnicom, Publicis,
Saatchi & Saatchi, Snyder Communications, Taylor Nelson Sofres, True North
Communications and Young & Rubicam. Where the 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 percentages vesting for superior performance up to 100% if WPP ranks at
least equal to the second ranking peer company.
For performance periods prior to 1998-2000 the Performance Share Plan is based
on WPP's total share owner return relative to seven peer companies. The group of
peer companies was expanded for later performance periods in order to be
consistent with the provisions of LEAP as described below.
Over the 1997-99 performance period, WPP's performance ranked third among the
peer group companies. Contingent grants of performance shares for the 1998-2000,
1999-2001 and 2000-2002 periods range from 25% to 80% of base salary.
OPERATING COMPANIES - Senior executives of most Group operating companies
participate in long-term incentive plans, which provide awards in cash and
restricted WPP stock for the achievement of three-year financial performance
targets. These plans operate on a rolling three-year basis with awards paid 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:
- average operating profit or operating cash flow; and
- average operating margin.
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 Group.
In addition, some executives also receive annual grants of WPP stock options
through their membership of the WPP Group `100 Club' or `400 Club' or `High
Potential 500 Club'. These `Clubs' recognise a participant's contribution to the
achievement of WPP's strategic aims, including business co-operation across
operating companies. All members of the `Clubs', including the chief executive
officer of each operating company, receive an annual grant of fair market value
WPP stock options, which are exercisable three years from the grant date
assuming that specific performance conditions are met. Each year the grant value
(number of shares times fair market value at the grant date) of these awards
ranges from approximately 15% to 100% of base salary.
CLIENT EQUITY INVESTMENT FUNDS- To address increasing competition for talent
from new sources, as well as the growth of client revenues from internet
companies, the Company is establishing a fund for each major operating group
through which investments will be made in the stock of pre-IPO clients. These
investments will be limited to a specified portion of the fee income derived
from each client, and there is an overall limit on the level of client equity
investments by each operating group. These client equity investments will
generally be sold as soon as possible following a public offering. Positive
returns realised on client equity investments will then be used to acquire WPP
shares, which will be allocated to employees in the operating companies. The WPP
shares will vest in two equal installments over a two-year period.
LEADERSHIP EQUITY ACQUISITION PLAN (`LEAP') - In September 1999 share owners
approved the introduction of LEAP to reward performance which is superior to
that of WPP's peer companies, so as to create strong shared interests with share
owners through
41
<PAGE>
significant personal investment and ownership in stock by executives and to
ensure competitive total rewards in the appropriate marketplace.
Under LEAP, participants must commit WPP shares (`WPP shares'), valued at not
less than their annual earnings, of which no more than two-thirds may be
satisfied by a participant's existing holding of WPP shares, in order to provide
an opportunity to earn additional WPP shares (`matching shares'). These
investment shares must be committed to LEAP for a five-year period (`investment
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 five financial years commencing with the financial year in which
the WPP shares are committed. The number of matching shares will depend on the
total shareholder return (`TSR') achieved by the Company relative to the 15
(including WPP) major publicly traded marketing services companies referred to
above. The maximum number of matching shares is five 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 share held throughout the investment
period.
On a change of control after the first anniversary of the start of the LEAP
investment period, matching shares may be received only to the extent that the
performance condition has been satisfied over the period from the start of the
performance period to the date of the change of control. The compensation
committee will also consider, in the light of exceptional financial
circumstances during the performance period, whether the recorded TSR is
consistent with the achievement of commensurate underlying performance.
Executive directors of the Company and senior executives throughout the Group
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 shares worth $10 million calculated at a price of L5.685
per share of which shares worth $3 million must have been purchased in the
market after August 16, 1999.
It is expected that the matching shares to which participants (other than JMS)
become entitled for the awards made in 1999 will be provided from one of the
Company's employee share ownership plans (`ESOPs'). The ESOPs have acquired the
maximum potential number of matching shares in respect of awards made in 1999 at
an average cost not exceeding L3.70 per share.
EXECUTIVE STOCK OWNERSHIP POLICY - During 1996, the Company introduced stock
ownership goals for the most senior executives in the Group. These range from
50% to 400% of salary. Future stock option grants will vary depending on whether
an individual achieves and maintains specified levels of WPP stock ownership.
EXECUTIVE STOCK OPTION PLAN AND WORLDWIDE OWNERSHIP PLAN - The 1996 Executive
Stock Option Plan has been used to make option grants to members of the 100, 400
and High Potential 500 Clubs including key employees of the parent company, but
excluding parent company executive directors and the Group chief executive.
In 1997 the Company broadened stock option participation by introducing the
Worldwide Ownership Plan for all employees of 100%-owned Group companies with at
least two years' service, in order to develop a stronger ownership culture and
greater knowledge of Group resources. As at April 30, 2000 options under this
Plan had been granted to more than 8,400 employees for in excess of 7.6 million
ordinary shares of the Company. Grants made under this plan to approximately
5,400 employees in 1997 became exercisable in March 2000.
RETIREMENT BENEFITS - The form and level of Company-sponsored retirement
programmes varies depending on historical practices and local market
considerations. The level of retirement benefits is regularly considered when
reviewing executive remuneration level.
In the two markets where the Group employs the largest number of people, the US
and UK, pension provision generally takes the form of defined contribution
benefits, although the Group still maintains one defined benefit plan in the US
and three defined benefit plans in the UK. In each case, these pension plans are
provided for the benefit of employees in specific operating companies and in the
case of the UK plans, are closed to new entrants. All pension coverage for the
parent company's executive directors is on a defined contribution basis and only
base salary is pensionable under any Company retirement plan. Details of pension
contributions for the period under review in respect of parent company executive
directors are set out elsewhere in Item 11 "Compensation of Directors and
Officers".
42
<PAGE>
One of the "executive officers" was also an executive director of WPP during
1999. This information represents additional disclosure to that provided in
"Directors' remuneration" in Item 11 and has been provided in a similar manner
to the compensation disclosure of the Company's main US-based competitors.
COMPENSATION OF `EXECUTIVE OFFICERS'
The following tables sets out compensation details for the Group chief executive
and each of the other five most highly compensated executive officers in the
Group as at December 31, 1999 (the `executive officers'). As used in this
statement, the `executive officers' are deemed to include executive directors of
the Company, or an executive who served as the chief executive officer of one of
the Group's major operating companies.
This information covers compensation for services rendered in all capacities and
paid in each of the two calendar years December 31, 1998 and 1999. Incentive
compensation paid in 2000 for performance in 1999 and previous years, is not
included in these tables, consistent with US reporting requirements.
<TABLE>
<CAPTION>
1999 EXECUTIVE REMUNERATION
------------------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
--------------------------------
SHARE
OTHER ANNUAL OPTIONS
COMPENSATION SARS AND RESTRICTED LTIP ALL
SALARY BONUS(1) (2) PHANTOM SHARES PAYMENTS OTHER
NAME PRINCIPAL POSITION YEAR $000 $000 $000 SHARES(3) NUMBER $000 COMPENSATION
NUMBER (4)
$000
<S> <C> <C> <C> <C> <C> <C> <C>
M Sorrell Group chief executive 1999 1,231 979 37 - - - 524
WPP Group 1998 1,180 1,009 38 - - - 523
S. Lazarus Chairman/ 1999 850 638 31 18,288(7) 215,554 263 128
Chief executive officer 1998 850 638 30 170,398 316,772 254 93
Ogilvy & Mather
Worldwide
C. Jones Chief executive officer 1999 750 225 18 16,138(7) 18,072 153 112
J Walter Thompson 1998 750 75 13 150,351 32,644 334 80
Company
I Gotlieb Chairman/Chief 1999 219(6) - 7 96,826(7) - - 25
executive officer 1998 - - - - - - -
MindShare
H. Paster Chairman/chief 1999 550 344 17 11,834(7) 6,300 159 31
executive officer 1998 550 275 17 77,180 5,990 90 31
Hill and Knowlton
R Seltzer Chairman/ 1999 423 395 25 9,682(7) 72,487 - 8
Chief executive officer 1998 400 200 25 80,187 96,800 - 8
Ogilvy Public
Relations Worldwide
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes
1. Represents short-term incentive awards paid during calendar years 1998 and
1999 in respect of the prior year's incentive plans.
2. Includes the value of company cars, club memberships, executive health and
other benefits and supplemental executive life insurance.
3. As used in this report, the term "phantom shares" (as used in the UK) and the
term `free-standing SARs' (as used in the US) are interchangeable. Matching
shares which could vest under LEAP are not included in this table, but are
referred to elsewhere in Item 11 within the table entitled "Long-Term Incentive
Plan grants in 1999"
4. Includes accruals during each calendar year under consideration, under
defined contribution retirement and defined benefit retirement arrangements.
5. Options granted in 1999 were over ADRs (based on the ratio in existence at
December 31, 1999) and in 1998 over ordinary shares.
6. Irwin Gotlieb was appointed as Chairman/Chief executive officer of MindShare
in September 1999.
7. Represents grants in American Depositary Shares (ADSs).
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN GRANTS IN 1999(1)
------------------------------------------------------------------------------------------------------------
PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
$ $ $
<S> <C> <C> <C> <C>
M S Sorrell(2) n/a n/a n/a n/a
S. Lazarus 1999- 2001 - 650,000 975,000
C. Jones 1999- 2001 - 600,000 900,000
I Gotlieb 1999-2001 - 400,000 600,000
------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
H. Paster 1999- 2001 - 65,000 97,500
R. Seltzer n/a - 150,000 225,000
------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
1. This table does not include the maximum number of Matching shares which
are capable of vesting under LEAP. If the performance requirement under
LEAP is satisfied to the fullest possible extent and subject to the WPP
investment shares being retained until the end of the investment period
(September 2004), the maximum number of matching shares which may vest
in relation to the performance period ending December 31, 2003 is as
follows: Sir Martin Sorrell (including those attributable to JMS)
5,369,070; S Lazarus 1,610,700; C Jones 1,610,700; H Paster 439,750 and
R Seltzer 362,400.
2. An award of 137,255 units under the Performance Share Plan was made to
Sir Martin Sorrell during 1999. Each unit is analogous to an ordinary
share of WPP Group plc.
OTHER LONG-TERM INCENTIVE PLAN AWARDS (1)
Long-term Incentive Plan awards granted to directors are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Price per
share of
Granted/ Granted vested
At Jan (lapsed) Vested At Dec 31 (lapsed) Vested At May 10 units on
1 1999 1999 1999 1999 2000(4) 2000 2000 valuation
Plan(1) Number Number Number Number Number Number Number Performance Period date (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks PSP 73,933 - (36,966) 36,967 122 (18,544) 18,545 1 Jan 1996-31 Dec 1998 365.8p
PSP 60,864 - - 60,864 (883) (29,991) 29,990 1 Jan 1997-31 Dec 1999 981.0p
PSP 46,728 - - 46,728 - - 46,728 1 Jan 1998-31 Dec 2000 n/a
PSP - 50,623 - 50,623 - - 50,623 1 Jan 1999-31 Dec 2001 n/a
PSP - - - - 32,185 - 32,185 1 Jan 2000-31 Dec 2002 n/a
LEAP - 272,600 - 272,600 - - 272,600 1 Jan 1999-31 Dec 2003 n/a
P W G
Richardson PSP 42,172 - (21,086) 21,086 68 (10,577) 10,577 1 Jan 1996-31 Dec 1998 365.8p
PSP 67,925 - - 67,925 (985) (33,470) 33,470 1 Jan 1997-31 Dec 1999 981.0p
PSP 55,513 - - 55,513 - - 55,513 1 Jan 1998-31 Dec 2000 n/a
PSP - 65,944 - 65,944 - - 65,944 1 Jan 1999-31 Dec 2001 n/a
PSP - - - - 36,765 - 36,765 1 Jan 2000-31 Dec 2002 n/a
LEAP - 299,030 - 299,030 - - 299,030 1 Jan 1999-31 Dec 2003 n/a
E R Salama PSP 49,438 - (24,719) 24,719 80 (12,399) 12,400 1 Jan 1996-31 Dec 1998 365.8p
PSP 56,604 - - 56,604 (820) (27,892) 27,892 1 Jan 1997-31 Dec 1999 981.0p
PSP 46,261 - - 46,261 - - 46,261 1 Jan 1998-31 Dec 2000 n/a
PSP - 48,359 - 48,359 - - 48,359 1 Jan 1999-31 Dec 2001 n/a
PSP - - - - 26,961 - 26,961 1 Jan 2000-31 Dec 2002 n/a
LEAP - 272,645 - 272,645 - - 272,645 1 Jan 1999-31 Dec 2003 n/a
M S Sorrell - 6,445,912 - - 6,445,912 - - 6,445,912 n/a n/a
(3)
PSP - 219,812 - 219,812 - - 219,812 1 Jan 1999-31 Dec 2001 n/a
PSP - - - - 137,255 - 137,255 1 Jan 2000-31 Dec 2002 n/a
LEAP - 5,369,070 - 5,369,070 - - 5,369,070 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 Plan (PSP) and the Leadership Equity Acquisition Plan (LEAP).
Details of the PSP and LEAP can be found in Item 11. 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 December 31 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 in Item 10. 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 December 31, 1999.
4. Includes dividends received in respect of vested restricted stock which have
been reinvested in the acquisition of further ordinary shares.
44
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
An analysis of share options is shown in Note 22 of the Consolidated Financial
Statements in Item 19. This includes both the movement in the year and an
analysis of unexercised options at December 31, 1999.
The Company's approach to utilising share options within the overall
remuneration policy is discussed in Item 11.
SHARE OPTIONS(1)
Outstanding options granted to the directors are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Market
Granted/ Exercised/ Exercised/ At Dec At May price per
At Jan 1 (Lapsed) realised retained 31, Exercised 10, Exercise dates Exercise share on
1999 in 1999 1999 1999 1999 2000 2000 Commence- price date of
Number Number Number Number Number Number Number ment expiry per share exercise
-------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks 68,967 - (49,697) (19,270) - - - Dec 1998 Dec 2005 158.0p 553.0p
P W G
Richardson 100,000 - (30,000) (70,000) - - - Jan 1996 Jan 2000 40.0p 760.5p
102,941 - - (102,941) - - - Oct 1996 Oct 2003 102.0p 750.5p
88,235 - - (88,235) - - - Sep 1997 Sep 2004 119.0p 750.5p
32,468 - (32,468) - - - - Sep 1998 Sep 2005 154.0p 760.5p
24,497 - (24,497) - - - - Sep 1999 Sep 2006 233.5p 760.5p
E R Salama 67,227 - (16,121) (51,106) - - - Sep 1997 Sep 2004 119.0p 499.5p
90,909 - (73,612) (17,297) - - - Sep 1998 Sep 2005 154.0p 499.5p
G C Sampson 4,313 - - (4,313) - - - Apr 1998 Apr 2005 108.0p 499.5p
-------------- -------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- --------- ---------
</TABLE>
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 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 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 December 31, 1999 was 981.0p and the share price
during the year ranged between 359.0p and 996.0p.
45
<PAGE>
DIRECTORS' INTERESTS
ORDINARY SHARES
Directors' interests in the Company's share capital, all of which were
beneficial, were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Shares acquired Shares acquired
through long-term through long-term
incentive plan Other incentive plan awards in
awards in 1999(1) interests at 2000
------------------- Dec 31, ------------------------
At 1 Jan 1999 inc. Other
1999 or date shares interests At May 10,
of purchased At 31 Dec acquired 2000
appointment Vested (sold) in 1999(2) 1999(1) Vested (sold)(1) since Dec
if later 31, 1999
------------------ ------------ ----------- --------- -------------- ------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
B J Brooks 381,705 36,966 (22,186) (49,697) 346,788 48,535 (33,540) - 361,783
J J D Bullmore 20,065 - - - 20,065 - - - 20,065
E Dyson - - - - - - - - -
M Inagaki(4) - - - - - - - - -
J B H Jackson 12,500 - - - 12,500 - - - 12,500
C Mackenzie - - - - - - - 10,000 10,000
H Maxwell 35,000 - - - 35,000 - - - 35,000
S W Morten 20,000 - - - 20,000 - - - 20,000
J A Quelch 10,000 - - - 10,000 - - - 10,000
P Richardson 375,644 21,086 (3,086) (62,468) 331,176 44,047 (44,047) - 331,176
E R Salama 483,910 24,719 (9,719) (89,733) 409,177 40,291 (19,892) - 429,576
G C Sampson 554,313 - - - 554,313 - - - 554,313
J E Smilow 100,000 - - - 100,000 - - - 100,000
M S Sorrell(2) 13,093,414 - - 200,000 13,293,414 - - - 13,293,414
================== ============ =========== ========= ============== ============= ========= ========== =========== ============
</TABLE>
Notes
1 Further details of long-term incentive plans are given elsewhere in Item 11
within the table entitled "Other long-term incentive plan awards".
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 in Item 10,
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 December 31, 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, which at May 10, 2000
was interested in 31,295,646 shares representing 4.02% of the issued share
capital of the Company.
5. Save as disclosed above and in items 10 and 11, no
director had any interest in any contract of significance with the Group during
the year.
As used in this statement, the "executive officers" are deemed to include
executive directors of the Company, or any executive who currently serves as the
chief executive officer of one of the Group's major operating companies.
46
<PAGE>
<TABLE>
<CAPTION>
OPTIONS GRANTED IN 1999
-------------------------------------------------------------------------------------------------------------------------------
Potential realisable value at assumed
annual rates of stock price appreciation
Stock options, % of total for option term
granted options granted
(number of by Company Exercise price 0% 5% 10%
ADRs) in 1999 ($ per share) Expiry date $ $ $
------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
M S Sorrell - - - - - - -
S Lazarus 18,288 2.1 46.48 24 Sept 2009 - 534,577 1,354,723
C Jones 16,138 1.8 46.48 24 Sept 2009 - 471,730 1,195,457
I Gotlieb 96,826 10.9 46.48 24 Sept 2009 - 2,830,323 7,172,589
H Paster 11,834 1.3 46.48 24 Sept 2009 - 345,920 876,629
R Seltzer 9,682 1.1 46.48 24 Sept 2009 - 283,015 717,215
===============================================================================================================================
</TABLE>
All options granted to executives in this table are exerciseable three years
from the grant date and expire ten years from the grant date.
STOCK OPTION, SAR AND PHANTOM STOCK EXERCISES IN LAST FINANCIAL YEAR AND FINAL
YEAR-END SHARE OPTION, SAR AND PHANTOM STOCK VALUES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Number of ordinary shares Value of unexercised
underlying unexercised share options, in-the-money share options, SARs
Ordinary Market value at SARs and phantom stocks at year end and phantom stocks at year end ($)(1)
shares acquired exercise date ----------------------------------- -------------------------------------
on exercise ($) Exerciseable Unexerciseable Exerciseable Unexerciseable
<S> <C> <C> <C> <C> <C> <C>
M S Sorrell - - 1,571,190 577,391 23,607,109 8,091,334
S Lazarus - - 1,026,959 375,700 13,263,811 3,790,379
C Jones 417,303 5,235,459 - 572,627 - 6,066,055
I Gotlieb - - - 484,130 - 3,219,852
H Paster 258,225 1,820,379 163,720 219,849 2,180,609 2,195,238
R Seltzer - - - 215,349 - 2,193,870
==================================================================================================================================
</TABLE>
(1) The value is calculated by subtracting the exercise price from the fair
market value of the Company's ordinary shares on December 31, 1999, namely
L9.81 and using an exchange rate of $1.6182 to L1.
47
<PAGE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
None.
48
<PAGE>
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
49
<PAGE>
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
None.
50
<PAGE>
PART IV
ITEM 18. FINANCIAL STATEMENTS
See Page F-1.
51
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
Consolidated Financial Statements of WPP Group plc as at December 31,
1999, 1998, and 1997 (page F-1)
B. EXHIBITS
1 (a) Revolving Facility Agreement dated October 15, 1999 between
Moveability Limited, WPP Group plc, Barclays Bank plc and the Lenders
referred to therein, partially refinanced by (i) the Term Loan
Agreement dated January 14, 2000 between WPP Pearls Limited, WPP Group
plc and HSBC Bank plc, (ii) the Term Loan Agreement dated January 14,
2000 between WPP Pearls Limited, WPP Group plc and The Royal Bank of
Scotland plc and (iii) the Term Loan Agreement dated January 14, 2000
between WPP Pearls Limited, WPP Group plc and National Westminster
Bank plc.
1 (b) Amendment No.1 to Amended and Restated Deposit Agreement, dated
as of November 9, 1999, by and among WPP Group plc, Citibank NA, as
Depository, and holders and beneficial owners from time to time of
American Depository Receipts issued thereunder (incorporated herein by
reference to Exhibit (a) (i) of Amendment No 1 to the Registration
Statement of Form F-6 filed with the Securities and Exchange
Commission on November 9, 1999 (Reg. No. 233-5906)).
52
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned thereunto duly authorised.
WPP Group plc
By: /s/ P W G RICHARDSON
----------------------
Paul W G Richardson
Group Finance Director
June 22, 2000
53
<PAGE>
WPP GROUP PLC
INDEX TO FINANCIAL STATEMENTS
ITEM 18.
<TABLE>
<CAPTION>
Financial
Statement
Number Page
------ ----
<S> <C> <C>
A. Consolidated Financial Statements of WPP Group plc as of
the years ended December 31, 1999, 1998, and 1997
(i) Report of Independent Chartered Accountants F-2
(ii) Consent of Independent Chartered Accountants F-3
(iii) Accounting policies F-4
(iv) Consolidated profit and loss account for the years ended
December 31, 1999, 1998 and 1997 F-6
(v) Consolidated statements of cash flows for the years
ended December 31, 1999, 1998 and 1997 F-7
(vi) Consolidated statement of recognised gains and losses for
the years ended December 31, 1999, 1998 and 1997 F-7
(vii) Consolidated balance sheets as of December 1999,
1998, and 1997 F-8
(viii) Consolidated statements of changes in share owners' funds
for the years ended December 31, 1999, 1998 and 1997 F-9
(ix) Notes to the consolidated profit and loss account F-10
(x) Notes to the consolidated cash flow statement F-12
(xi) Notes to the consolidated balance sheet F-13
(xii) Reconciliation to Generally Accepted US Accounting
Principles F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors and share owners of WPP Group plc:
We have audited the accompanying consolidated balance sheets of WPP Group plc
and subsidiaries as of December 31, 1999, 1998, and 1997 and the related
consolidated profit and loss account, statement of changes in share owners'
funds, statement of recognised gains and losses and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United Kingdom and the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WPP Group plc and subsidiaries
as of December 31, 1999, 1998 and 1997 and the results of their operations and
their cash flows for the years then ended December 31, 1999 in conformity with
generally accepted accounting principles in the United Kingdom.
Certain accounting practices of WPP Group plc used in preparing the accompanying
consolidated financial statements conform with generally accepted accounting
principles in the United Kingdom, but do not conform with accounting principles
generally accepted in the United States. A description of these differences and
the adjustments required to conform the consolidated financial statements to
accounting principles generally accepted in the United States are set forth on
F-18 to F-19.
May 10, 2000 Arthur Andersen
Chartered Accountants
and Registered Auditors
London, England
F-2
<PAGE>
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
As independent chartered accountants, we hereby consent to the incorporation of
our report included in this Form 20-F, into the Company's previously filed
Registration Statements on File No.33-33906, File No. 333-4302, File No.
333-5368 and File No. 333-6378 on Form S-8.
London, England Arthur Andersen
June 16, 2000
F-3
<PAGE>
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 year (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.
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.
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.
F-4
<PAGE>
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. There has been no material impact on the financial statements as a result
of the adoption of these new standards.
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 arrangement. 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.
F-5
<PAGE>
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
NOTES LM LM LM
----- -------- -------- --------
<S> <C> <C> <C> <C>
1 TURNOVER (GROSS BILLINGS)................................. 9,345.9 8,000.1 7,287.3
Cost of sales............................................. (7,173.3) (6,081.7) (5,540.6)
-------- -------- --------
1 REVENUE................................................... 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
2 Operating costs........................................... (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
-------- -------- --------
1 PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND
TAXATION.................................................. 290.8 245.2 205.5
4 Net interest payable and similar charges.................. (35.4) (32.4) (28.1)
-------- -------- --------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............. 255.4 212.8 177.4
5 Taxation on profit on ordinary activities................. (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
6 Ordinary dividends........................................ (24.0) (19.6) (15.7)
-------- -------- --------
RETAINED PROFIT FOR THE YEAR.............................. 148.8 120.7 100.3
======== ======== ========
7 EARNINGS PER SHARE........................................
Basic earnings per ordinary share......................... 22.9p 19.1p 15.8p
-------- -------- --------
Diluted earnings per ordinary share....................... 22.5p 18.8p 15.7p
-------- -------- --------
6 ORDINARY DIVIDEND PER SHARE...............................
Interim dividend.......................................... 1.0p 0.84p 0.7p
-------- -------- --------
Final dividend............................................ 2.1p 1.72p 1.43p
-------- -------- --------
EARNINGS PER ADR..........................................
Basic earnings per ADR.................................... 114.5p 95.5p 79.0p
-------- -------- --------
Diluted earnings per ADR.................................. 112.5p 94.0p 78.5p
-------- -------- --------
ORDINARY DIVIDEND PER ADR (NET)...........................
Interim................................................... 5.0p 4.2p 3.5p
-------- -------- --------
Final..................................................... 10.5p 8.6p 7.2p
======== ======== ========
</TABLE>
------------------------
The accompanying notes form an integral part of this profit and loss account.
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.
Movements in share owners' funds are set out on page F-9.
Comparative figures in the profit and loss account have been restated following
a change in the ratio of ordinary shares per ADR from 10 ordinary shares per ADR
to five ordinary shares per ADR.
F-6
<PAGE>
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
NOTES LM LM LM
----- -------- -------- --------
<C> <S> <C> <C> <C>
9 NET CASH INFLOW FROM OPERATING ACTIVITIES................... 348.5 256.0 283.0
Dividends received from associates.......................... 4.3 3.4 2.8
10 Return on investments and servicing of finance.............. (37.1) (28.7) (30.5)
United Kingdom and overseas tax paid........................ (58.4) (59.0) (54.0)
10 Capital expenditure and financial investment................ (80.5) (82.1) (45.8)
10 Acquisition payments........................................ (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
10 Net cash inflow/(outflow) from financing.................... 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 (258.0) (95.2) 126.1
financing.................................................
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
8 NET FUNDS AT BEGINNING OF YEAR.............................. 134.3 194.7 159.2
------ ------ ------
8 NET FUNDS AT END OF YEAR.................................... 91.9 134.3 194.7
====== ====== ======
</TABLE>
The accompanying notes form an integral part of this cash flow statement.
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
NOTES LM LM LM
----- -------- -------- --------
<S> <C> <C> <C> <C>
Profit for the financial year............................... 172.8 140.3 116.0
23 Exchange adjustments on foreign currency net investments.... (31.2) 4.0 (40.1)
----- ----- -----
TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR...... 141.6 144.3 75.9
===== ===== =====
</TABLE>
The accompanying note forms an integral part of this statement of total
recognised gains and losses.
F-7
<PAGE>
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
NOTES LM LM LM
----- -------- -------- --------
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets
12 Corporate brands.......................................... 350.0 350.0 350.0
12 Goodwill.................................................. 410.3 158.0 --
13 Tangible assets........................................... 196.7 166.7 143.5
14 Investments............................................... 356.9 268.2 70.5
-------- -------- --------
1,313.9 942.9 564.0
-------- -------- --------
CURRENT ASSETS
15 Stocks and work in progress............................... 113.5 107.3 99.7
16 Debtors................................................... 1,040.4 893.1 827.6
17 Debtors within working capital facility:
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
18 CREDITORS: amounts falling due within one year (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
19 CREDITORS: amounts falling due after more than one year... (652.5) (401.5) (221.5)
20 PROVISIONS FOR LIABILITIES AND CHARGES.................... (79.2) (77.9) (74.5)
-------- -------- --------
NET ASSETS/(LIABILITIES).................................. 326.7 195.8 (18.3)
-------- -------- --------
CAPITAL AND RESERVES
22 Called up share capital................................... 77.5 76.6 73.6
Share premium account..................................... 602.9 562.9 421.6
Goodwill write-off reserve................................ -- -- (1,160.4)
23 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.
Signed on behalf of the Board on 10 May 2000:
SIR MARTIN SORRELL
Group chief executive
P W G RICHARDSON
Group finance director
F-8
<PAGE>
CONSOLIDATED STATEMENT OF SHARE OWNERS' FUNDS
FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
Movements during the year were as follows:
<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>
F-9
<PAGE>
NOTES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT
1 SEGMENT INFORMATION
The Group is the leading worldwide communications services organisation
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>
There is no significant cross-border trading.
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>
------------------------------
(1) PBIT: Profit on ordinary activities before interest and taxation.
Profit before tax ('Income before income taxes') comprised the following:
<TABLE>
<CAPTION>
1999 1998 1997
LM LM LM
-------- -------- --------
<S> <C> <C> <C>
Domestic (UK).................................... 45.1 39.4 30.5
Foreign.......................................... 210.3 173.4 146.9
----- ----- -----
Income before income taxes....................... 255.4 212.8 177.4
----- ----- -----
</TABLE>
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
------- ------- -------
102.7 88.9 86.9
------- ------- -------
Auditors' remuneration:
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>
F-10
<PAGE>
NOTES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT (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>
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.
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.
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>
SWAPS 1999 1998 1997
----- -------- -------- --------
<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 MNTHS 6 mnths 6 mnths
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.
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>
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%
(1998 31.0% and 1997: 31.5%)..................... 77.3 66.0 55.9
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 the year 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 ADR 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 ADR from 10 ordinary shares per ADR to five ordinary shares
per ADR.
F-11
<PAGE>
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
8 SOURCES OF FINANCE
The following table is a supplementary disclosure to the consolidated cash
flow statement, summmarising 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), further details of which are disclosed on
pages F-9 and F-16.
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.
REVOLVING FACILITY AGREEMENT During the year, the Group entered into a
further Revolving Facility Agreement for US$150 million. This facility has a
365-day maturity.
Borrowings under the Revolving Credit Facility and the Revolving Facility
Agreement are governed by certain financial covenants based on the results and
financial position of the Group.
The following table is an analysis of net funds with debt analysed by year
of repayment:
<TABLE>
<CAPTION>
CHANGE CHANGE
1999 IN YEAR 1998 IN YEAR 1997
LM LM LM LM LM
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DEBT
Within one year................. (92.7) (92.7) -- 9.3 (9.3)
Between one and two years....... -- -- -- -- --
Between two and five years...... (183.1) (168.0) (15.1) 71.9 (87.0)
Over five years--by
instalments................... (183.7) (4.6) (179.1) (178.1) (1.0)
------ ------ ------ ------ ------
DEBT FINANCING UNDER THE CREDIT
FACILITY AGREEMENT AND FROM
UNSECURED LOAN NOTES.......... (459.5) (265.3) (194.2) (96.9) (97.3)
Short-term overdrafts--within
one year...................... (55.6) 39.8 (95.4) (22.9) (72.5)
Cash at bank and in hand........ 607.0 183.1 423.9 59.4 364.5
------ ------ ------ ------ ------
NET FUNDS....................... 91.9 (42.4) 134.3 (60.4) 194.7
====== ====== ====== ====== ======
</TABLE>
Analysis of fixed and floating rate debt by currency:
<TABLE>
<CAPTION>
FIXED FLOATING PERIOD
LM RATE(1) BASIS (MONTHS)(1)
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
CURRENCY
US$.............................. 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>
------------------------------
(1) Weighted average
(2) Including drawings on working capital facility as described on page F-14.
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>
10 ANALYSIS OF NON-OPERATING CASH FLOWS
The following tables analyse the items included within the main cash flow
headings on page F-7.
<TABLE>
<CAPTION>
1999 1998 1997
LM LM LM
-------- -------- --------
<S> <C> <C> <C>
RETURN 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>
Long-term debt repayments are due as follows:
<TABLE>
<CAPTION>
1999
LM
-----
<S> <C>
2000....................................................... 92.7
2001....................................................... --
2002....................................................... 183.1
2003....................................................... --
2004....................................................... --
2005 and beyond............................................ 183.7
=====
</TABLE>
F-12
<PAGE>
NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)
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>
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 Thomson, 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 as
stated on page F-4.
<TABLE>
<CAPTION>
LM
--------
<S> <C>
GOODWILL
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.
13 TANGIBLE FIXED ASSETS
The movements in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
LAND AND BUILDINGS FIXTURES,
-------------------- FITTINGS
SHORT AND COMPUTER
FREEHOLD LEASEHOLD EQUIPMENT EQUIPMENT TOTAL
COST: LM LM LM LM LM
----- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
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
==== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
LAND AND BUILDINGS FIXTURES,
-------------------- FITTINGS
SHORT AND COMPUTER
FREEHOLD LEASEHOLD EQUIPMENT EQUIPMENT TOTAL
COST: LM LM LM LM LM
----- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
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>
F-13
<PAGE>
14 FIXED ASSET INVESTMENTS
The following are included in the net book value of fixed asset investments:
<TABLE>
<CAPTION>
GOODWILL
ON
ASSOCIATE ASSOCIATE OTHER
UNDER- UNDER- OWN INVEST-
TAKINGS TAKINGS SHARES MENTS 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>
------------------------------
(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.
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
(NON-INTEREST BEARING)
Other debtors.................................. 34.7 20.5 18.9
Prepayments.................................... 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.
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.
F-14
<PAGE>
NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)
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 24)...... 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 24)........... 131.2 83.6 25.3
Other creditors and accruals................ 31.6 32.4 32.9
----- ----- -----
652.5 401.5 221.5
===== ===== =====
</TABLE>
20 PROVISIONS FOR LIABILITIES AND CHARGES, AND CONTINGENT LIABILITIES
The movement in the year on provisions comprises:
<TABLE>
<CAPTION>
LONG-
PENSION 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.
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>
The information required to be disclosed in accordance with SFAS No.132
concerning the funded status of the Group's defined benefit schemes at 31
December 1999 is shown on F-20.
F-15
<PAGE>
NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)
20 PROVISIONS FOR LIABILITIES AND CHARGES, AND CONTINGENT LIABILITIES
(CONTINUED)
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.
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>
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 advisers. 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
Equity ordinary shares of
10p each............... 1,250 125.0 1,250 125.0 1,000 100.0
----- ----- ----- ----- ----- -----
ISSUED
Equity 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>
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>
A further grant was made on 21 March 2000 of 317,008 options at L10.77
exercisable between 2003 and 2010.
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>
LEAP awards were made at an exercise price equal to market value on the date
of grant.
F-16
<PAGE>
23 SHARE OWNERS' FUNDS
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).
24 ACQUISITIONS AND DISPOSALS
Goodwill arising on acquisitions in the year was calculated as follows:
<TABLE>
<CAPTION>
BOOK FAIR
VALUE OF VALUE COST OF
CASH OTHER ADJUST- FAIR ACQUISI- GOOD-
ACQUIRED ASSETS MENTS VALUE TION WILL
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.
F-17
<PAGE>
RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The following is a summary of the estimated material adjustments to profit
and ordinary share owners' funds which would be required if US Generally
Accepted Accounting Principles (US GAAP) had been applied:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER
-----------------------------------------
1999 1998 1997
NOTES LM LM LM
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME
Profit attributable to ordinary share
owners under UK GAAP..................... 172.8 140.3 116.0
US GAAP adjustments:
Amortisation of goodwill and other
intangibles.............................. 1 (42.1) (38.2) (34.1)
Executive compensation..................... 1 (58.4) (2.6) (1.7)
Deferred tax items......................... 1 34.5 -- --
----- ----- -----
(66.0) (40.8) (35.8)
----- ----- -----
Net income as adjusted for US GAAP......... 106.8 99.5 80.2
----- ----- -----
</TABLE>
Comprehensive income (total recognised gains and losses) for the year under
UK GAAP was L141.6 million, (1998: L144.3 million, 1997: L75.9 million).
Comprehensive income for the year under US GAAP was L116.8 million (1998:
L103.5 million, 1997: L40.1 million).
<TABLE>
<S> <C> <C> <C> <C>
Basic earnings per share as adjusted for US
GAAP (p).................................. 2 14.2 13.5 10.9
Diluted earnings per share as adjusted for
US GAAP (p)............................... 2 13.8 13.2 10.8
</TABLE>
A reconciliation from UK to US GAAP in respect of earnings per share is
shown below.
The Company applies US APB Opinion 25 and related interpretations when
accounting for its stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards under those plans consistent with the method of SFAS Statement 123
'Accounting for Stock-Based Compensation', the Company's net income and earnings
per share under US GAAP would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income as adjusted for US GAAP:
As reported (Lm)................................ 106.8 99.5 80.2
Pro forma (Lm).................................. 102.6 96.8 77.5
----- ----- -----
Basic earnings per share per US GAAP:
As reported (p)................................. 14.2 13.5 10.9
Pro forma (p)................................... 13.6 13.2 10.6
===== ===== =====
</TABLE>
Further details regarding stock option plans and the fair valuation of
option grants can be found on page F-16.
<TABLE>
<CAPTION>
AS AT 31 DECEMBER
------------------------------
1999 1998 1997
NOTES LM LM LM
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SHARE OWNERS' FUNDS
Share owners' funds under UK GAAP....... 318.2 187.7 (25.2)
US GAAP adjustments:
Capitalisation of goodwill arising on
acquisition (net of accumulated
amortisation and amounts capitalised
under UK GAAP)........................ 1 685.2 762.7 932.8
Reversal of revaluation of corporate
brand names........................... 1 -- -- (175.0)
Revaluation of investments marked to
market................................ 1 41.2 -- --
Shares owned by Employee Share Option
Plan (ESOP)........................... 1 (71.3) (58.1) (27.0)
Deferred tax items...................... 1 41.9 7.4 7.4
Proposed final ordinary dividend, not
yet declared.......................... 1 16.2 13.4 10.5
Other................................... (3.9) (4.4) (4.4)
------- ----- ------
709.3 721.0 744.3
------- ----- ------
Share owners' funds as adjusted for US
GAAP.................................. 1,027.5 908.7 719.1
======= ===== ======
</TABLE>
Gross goodwill capitalised under US GAAP (before accumulated amortisation)
amounted to L1,582.6 million (1998: L1,509.5 million, 1997: L1,211.2 million),
net of disposals made. The movement in goodwill arises due to the impact of
acquisitions made during the year and also its denomination in various
currencies, resulting in exchange rate movements against sterling.
MOVEMENT IN SHARE OWNERS' FUNDS UNDER US GAAP
<TABLE>
<CAPTION>
1999 1998 1997
LM LM LM
-------- -------- --------
<S> <C> <C> <C>
Net income for the year under US GAAP.......... 106.8 99.5 80.2
Prior year final dividend...................... (13.4) (10.5) (8.3)
Current year interim dividend.................. (7.8) (6.2) (5.2)
------- ----- -----
Retained earnings for the year................. 85.6 82.8 66.7
Ordinary shares issued in respect of
acquisitions................................. 0.8 105.4 --
Share options exercised........................ 12.1 4.1 2.4
Shares owned by Employee Share Option Plan..... (13.2) (31.1) (9.7)
Revaluation of investments marked to market.... 41.2 -- --
Share buy-backs................................ -- (21.3) (18.5)
Exchange adjustments:
Revaluation of goodwill...................... (34.9) 43.1 (51.2)
Foreign currency net investment.............. (31.2) 4.0 (40.1)
Executive compensation......................... 58.4 2.6 1.7
------- ----- -----
New additions to share owners' funds........... 118.8 189.6 (48.7)
Share owners' funds at 1 January............... 908.7 719.1 767.8
------- ----- -----
Share owners' funds at 31 December............. 1,027.5 908.7 719.1
======= ===== =====
</TABLE>
F-18
<PAGE>
NOTES TO RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
1 SIGNIFICANT DIFFERENCES BETWEEN UK AND US ACCOUNTING PINCIPLES
The Group's financial statements are prepared in accordance with Generally
Accepted Accounting Principles (GAAP) applicable in the UK which differ in
certain significant respects from those applicable in the US. These differences
relate principally to the following items:
GOODWILL, US PURCHASE ACCOUNTING AND LONG-LIVED ASSETS
Under US and UK GAAP, purchase consideration in respect of subsidiaries
acquired is allocated on the basis of fair values to the various net assets,
including intangible fixed assets, of the subsidiaries at the dates of
acquisition and any net balance is treated as goodwill. Under UK GAAP, and in
accordance with FRS 10 (Goodwill and Intangible Assets), goodwill arising on
acquisitions on or after 1 January 1998 has been capitalised as an intangible
asset. No amortisation has been provided against this goodwill for the reasons
described in the note on accounting policies in the financial statements.
Goodwill arising on acquisitions before 1 January 1998 was fully written off
against share owners' equity, in accordance with the then preferred treatment
under UK GAAP. Under US GAAP, goodwill in respect of business combinations
accounted for as purchases would be charged against income over its estimated
useful life, being not more than 40 years. Accordingly, for US GAAP purposes,
the Group is amortising goodwill over 40 years. The Group evaluates the carrying
value of its tangible and intangible assets whenever events or circumstances
indicate their carrying value may exceed their recoverable amount. An impairment
loss is recognised when the estimated future cash flows (undiscounted and
without interest) expected to result from the use of an asset are less than the
carrying amount of the asset. Measurement of an impairment loss is based on fair
value of the asset computed using discounted cash flows if the asset is expected
to be held and used.
CONTINGENT CONSIDERATION
Under UK GAAP, the Group provides for contingent consideration as a
liability when it considers the likelihood of payment as probable. Under US
GAAP, contingent consideration is not recognised until the liability is
determined beyond reasonable doubt. At 31 December 1999, the Group's liabilities
for vendor payments under UK GAAP totalled L172.4 million (1998: L97.9 million,
1997: L34.4 million). As these liabilities are represented by goodwill arising
on acquisition, there is no net effect on shareholders' funds.
CORPORATE BRAND NAMES
Under UK GAAP, the Group carries corporate brand names as intangible fixed
assets in the balance sheet. The initial recognition of the J. Walter Thompson
corporate brand gave rise to a credit of L175.0 million to the revaluation
reserve. This was not recognised under US GAAP. Following the implementation of
FRS 10 under UK GAAP, this amount was transferred to the profit and loss account
reserve in 1998. Consequently, under US GAAP, the relevant reversal was netted
against goodwill capitalised in the balance sheet. The Ogilvy & Mather brand
name, acquired as part of The Ogilvy Group, Inc., was booked as an acquisition
adjustment to balance sheet assets acquired and is amortised as part of goodwill
over 40 years.
DIVIDENDS
Under UK GAAP, final ordinary dividends are provided in the financial
statements on the basis of recommendation by the directors. This requires
subsequent approval by the share owners to become a legal obligation of the
Group. Under US GAAP, dividends are provided only when the legal obligation to
pay arises.
DEFERRED TAX
Under UK GAAP, deferred tax is accounted for 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.
EXECUTIVE COMPENSATION
Under UK GAAP the part of executive compensation satisfied in stock is
charged through the profit and loss account at the cost to the Group of
acquiring the stock. Under US GAAP such compensation is measured at the fair
value of WPP common stock at the date the performance condition is met or the
award vests with the employee. Differences occur as the WPP Share Ownership Plan
acquires stock before the liability to the employee arises.
Additionally, under UK GAAP stock options granted with performance criteria
do not give rise to a profit and loss account charge provided that the exercise
price is equal to the fair value of the stock at the date of grant. Under US
GAAP stock options granted with performance criteria (other than a requirement
for employment to continue) are subject to variable plan accounting under APB
Opinion 25. Under variable plan accounting any appreciation in stock value from
the date of grant to the date upon which the performance conditions are
satisfied is charged to the profit and loss account.
CASH FLOWS
Under UK GAAP the Group complies with the Financial Reporting Standard
No. 1 Revised 'Cash Flow Statements' (FRS 1 Revised), the objective and
principles of which are similar to those set out in SFAS 95 'Statement of Cash
Flows' (SFAS). The principal difference between the two standards is in respect
of classification. Under FRS 1 Revised, the Group presents its cash flows for
(a) operating activities; (b) returns on investments and servicing of finance;
(c) taxation; (d) investing activities; (e) equity dividends paid and
(f) financing activities. SFAS 95 requires only three categories of cash flow
activity (a) operating; (b) investing; and (c) financing. Cash flows arising
from taxation and returns on investment and servicing of finance under FRS 1
Revised would be included as a financing activity under SFAS 95. Payments made
against provisions set up on the acquisition of subsidiaries have been included
in investing activities in the consolidated statement of cash flows. Under US
GAAP these payments would be included in determining net cash provided by
operating activities.
SHARES OWNED BY EMPLOYEE SHARE OPTION PLAN (ESOP)
Under UK GAAP, shares purchased by the ESOP are recorded as fixed asset
investments at cost less amounts written off. Under US GAAP, these shares are
recorded at cost and deducted from share owners' equity. The Group's ESOPs
comprise trusts which acquire WPP shares in the open market to fulfil
obligations under the Group's stock-based compensation plans. These trusts do
not meet the definition of an "ESOP" under US GAAP.
LISTED INVESTMENTS
Under UK GAAP, the carrying value of listed investments, where these
represent an interest of less than 20%, is determined as cost less any provision
for diminution in value. Under US GAAP, such investments are marked to market
and any resulting unrealised gain or loss is taken to share owners' funds. The
only material listed investment is in Tempus Group plc which is considered to be
an "available for sale" security under US GAAP.
2 EARNINGS PER SHARE--RECONCILIATION FROM UK TO US GAAP
Both basic and diluted earnings per share under US GAAP have been calculated
by dividing the net income as adjusted for US GAAP differences by the weighted
average number of shares in issue during the year. The calculation of the
weighted average number differs for UK and US GAAP purposes as follows:
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
PER SHARE PER SHARE
YEAR ENDED 31 DECEMBER 1999 NO. NO.
--------------------------- ----------- -----------
<S> <C> <C>
Under UK GAAP........................... 753,324,054 768,691,993
----------- -----------
Weighted average number of share options
issued with exercise criteria not yet
satisfied at 31 December 1999......... -- 5,430,846
----------- -----------
Under US GAAP........................... 753,324,054 774,122,839
----------- -----------
Year ended 31 December 1998
----------- -----------
Under UK GAAP........................... 735,700,122 746,939,733
----------- -----------
Weighted average number of share options
issued with exercise criteria not yet
satisfied at 31 December 1998......... -- 4,115,097
----------- -----------
Under US GAAP........................... 735,700,122 751,054,830
----------- -----------
Year ended 31 December 1997
----------- -----------
Under UK GAAP........................... 732,426,990 738,922,627
----------- -----------
Weighted average number of share options
issued with exercise criteria not yet
satisfied at 31 December 1997......... -- 5,819,153
----------- -----------
Under US GAAP........................... 732,426,990 744,741,780
----------- -----------
</TABLE>
F-19
<PAGE>
3 RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards in the United States requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognised currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133, as amended by Statement 137, is effective for fiscal years
beginning after 15 June 2000. A company may also implement the Statement as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning 16 June 1998 and thereafter). Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after 31 December 1997.
The Group has not yet quantified the impact of adopting Statement 133 on the
amounts presented under US generally accepted accounting standards. However, the
Statement could increase volatility in earnings and other comprehensive income.
4 ADDITIONAL US PENSION DISCLOSURES
The following table shows the information required to be disclosed in
accordance with SFAS No.132 concerning the funded status of the Group's defined
benefit schemes at 31 December 1999.
<TABLE>
<CAPTION>
YEAR ENDING 31 DECEMBER 1999
------------------------------------------------------------------------
US NON-US
SCHEMES SCHEMES TOTAL
LM LM LM
-------- -------- --------
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year.................................. 53.3 113.5 166.8
Service cost............................ 3.5 3.6 7.1
Interest cost........................... 4.0 5.8 9.8
Member contributions.................... 0.0 0.6 0.6
Actuarial (gain)/loss................... 1.7 21.6 23.3
Benefits paid........................... (2.2) (7.6) (9.8)
Benefit obligation at end of year....... 60.3 137.5 197.8
---- ----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year............................... 48.5 117.5 166.0
Actual return on plan assets............ 4.9 31.8 36.7
Employer contributions.................. 5.0 3.7 8.7
Plan participants' contributions........ 0.0 0.6 0.6
Benefits paid........................... (2.2) (7.6) (9.8)
Fair value of plan assets at end of
year.................................. 56.2 146.0 202.2
---- ----- -----
Funded status at end of year............ (4.1) 8.4 4.3
Unrecognised net actuarial
(gain)/loss........................... 0.2 (18.5) (18.3)
Unrecognised prior service cost......... 0.2 0.0 0.2
Unrecognised net transition
(asset)/obligation.................... 0.1 (2.5) (2.4)
Net amount recognised................... (3.6) (12.6) (16.2)
---- ----- -----
PREPAID/(ACCRUED) BENEFIT COST.......... (3.6) (12.6) (16.2)
---- ----- -----
COMPONENTS OF NET PERIODIC PENSION COST
Service cost............................ 3.5 3.6 7.1
Interest cost........................... 4.0 5.8 9.8
Expected return on plan assets.......... (4.2) (6.9) (11.1)
Amortisation of transition
(asset)/obligation.................... 0.2 0.0 0.2
Amortisation of prior service cost...... 0.1 0.0 0.1
Amortisation of net (gain)/loss......... 0.0 0.3 0.3
Curtailment charge...................... 0.0 0.0 0.0
Net periodic pension cost............... 3.6 2.8 6.4
---- ----- -----
Weighted-average assumptions as of end
of year
Discount rate........................... 7% 7% 7%
Expected return on plan assets.......... 5% 5% 5%
Rate of compensation increase........... 5% 5% 5%
---- ----- -----
</TABLE>
Footnotes:
1. The defined benefit pension cost for 1999 was L6.4 million.
2. The pension cost for defined contribution schemes for 1999 was L21.4
million.
3. A number of plans have an unfunded accumulated benefit obligation. The
breakdown showing this is as follows:
<TABLE>
<CAPTION>
US NON-US
PLANS PLANS TOTAL
LM LM LM
-------- -------- --------
<S> <C> <C> <C>
Assets...................................... 8.1 10.1 18.2
Accumulated benefit obligation.............. 14.6 22.7 37.3
---- ---- ----
</TABLE>
F-20
<PAGE>
WPP GROUP PLC
INDEX TO EXIBITS
<TABLE>
<CAPTION>
Exhibit
Number Page
------ ----
<S> <C> <C>
1 (a) Revolving Facility Agreement dated October 15, 1999 between
Moveability Limited, WPP Group plc, Barclays Bank plc and the Lenders
referred to therein, partially refinanced by (i) the Term Loan
Agreement dated January 14, 2000 between WPP Pearls Limited, WPP Group
plc and HSBC Bank plc, (ii) the Term Loan Agreement dated January 14,
2000 between WPP Pearls Limited, WPP Group plc and The Royal Bank of
Scotland plc and (iii) the Term Loan Agreement dated January 14, 2000
between WPP Pearls Limited, WPP Group plc and National Westminster
Bank plc.
1 (b) Amendment No.1 to Amended and Restated Deposit Agreement, dated
as of November 9, 1999, by and among WPP Group plc, Citibank NA, as
Depository, and holders and beneficial owners from time to time of
American Depository Receipts issued thereunder (incorporated herein by
reference to Exhibit (a) (i) of Amendment No 1 to the Registration
Statement of Form F-6 filed with the Securities and Exchange
Commission on November 9, 1999 (Reg. No. 233-5906)).
</TABLE>
