FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month FEBRUARY 1999
- --------------------------------------------------------------------------------
REUTERS GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
85 FLEET STREET, LONDON EC4P 4AJ, ENGLAND
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(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]
Form 20-F _X_ Form 40-F __
[Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.]
Yes ___ No _X_
THIS REPORT IS INCORPORATED BY REFERENCE IN THE PROSPECTUSES CONTAINED IN POST
EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT NO. 33-16927 ON FORM S-8,
POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 33-69694 ON FORM
F-3, POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 33-90398 ON
FORM S-8, POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 333-7374
ON FORM F-3 AND REGISTRATION STATEMENT NO. 333-5998 ON FORM S-8 FILED BY THE
REGISTRANT UNDER THE SECURITIES ACT OF 1933.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REUTERS GROUP PLC
--------------------------------
(Registrant)
Dated: February 18, 1999 By: /s/ Nancy C. Gardner
----------------------------
Nancy C. Gardner
Attorney-in-Fact
REUTERS
International News Release
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REUTERS GROUP PLC
PRELIMINARY STATEMENT
For the year ended 31 December 1998
Reuters Group PLC
85 Fleet Street
London EC4P 4AJ
Tel: 0171 250 1122
Reg. No. 3296375
Reuters Group PLC
Highlights of the Preliminary Results
for the year ended 31 December 1998
9 February 1999 No. 05/99
- -- Revenue up 5% (up 9% ex-currency).
- -- Earnings before interest, tax, depreciation and amortisation up 2% (up 10%
ex-currency).
- -- Operating profit up 2% (up 14% ex-currency).
- -- Pre-tax profit of (pound)580 million (US$963 million) down 7% (up 2%
ex-currency) reflecting (pound)78 million (US$130 million) fall in interest
receivable following (pound)1.5 billion (US$2.5 billion) return of capital
in February 1998.
- -- For those who track Reuters performance on a pre-goodwill basis, pre-tax
profit excluding goodwill down 7% to (pound)631 million.
- -- Earnings per ordinary share up 11% to 26.7p (earnings per American
Depositary Share (ADS) up 11% to US$2.66) reflecting the lower number of
shares in circulation following the return of capital in February 1998.
- -- For those who track Reuters performance on a pre-goodwill basis, adjusted
earnings per ordinary share excluding goodwill up 12% to 30.3p.
- -- Proposed final dividend up 11% to 11.0p.
1
Summary of Results
The following is a summary of the unaudited results of Reuters Group PLC (NASDAQ
symbol: RTRSY) for the year to 31 December 1998:
YEAR TO 31 DECEMBER % CHANGE YEAR TO 31 DECEMBER
1998 1997 ACTUAL RATES COMPARABLE 1998 1997
(POUND)M (POUND)M OF EXCHANGE RATES OF EXCHANGE US$M US$M
- ------------------------------------------------------------------------------------------------------------
Revenue 3,032 2,882 5% 9% 5,033 4,784
- ------------------------------------------------------------------------------------------------------------
Operating costs 2,482 2,341 6% 8% 4,120 3,886
- ------------------------------------------------------------------------------------------------------------
Operating profit 550 541 2% 14% 913 898
- ------------------------------------------------------------------------------------------------------------
Operating margin 18.2% 18.8% 18.2% 18.8%
- ------------------------------------------------------------------------------------------------------------
Net interest receivable 2 80 (98%) (98%) 3 133
- ------------------------------------------------------------------------------------------------------------
Profit before taxation 580 626 (7%) 2% 963 1,039
- ------------------------------------------------------------------------------------------------------------
Tax rate 33.8% 37.7% 33.8% 37.7%
- ------------------------------------------------------------------------------------------------------------
Earnings per ordinary
share 26.7p 24.0p 11%
- ------------------------------------------------------------------------------------------------------------
Earnings per ADS US$2.66 US$2.39 11%
- ------------------------------------------------------------------------------------------------------------
Dividend per ordinary
share: Interim 3.4p 3.1p 10%
Final 11.0p 9.9p 11%
- ------------------------------------------------------------------------------------------------------------
Number of ordinary
shares ranking for
dividend (millions) 1,409 1,407
- ------------------------------------------------------------------------------------------------------------
Notes:
- -- This summary is taken from and should be read in conjunction with the
full preliminary statement and notes.
- -- The dividend is payable on 26 April 1999 to ordinary shareholders on the
register at 19 March 1999 and on 30 April 1999 to ADS holders on the
register at 19 March 1999.
- -- For convenience the US dollar equivalents for both years have been
converted throughout this news release at US$1.66 = (pound)1, a rate
prevailing on 31 December 1998.
- -- This news release may be deemed to include forward-looking statements
within the meaning of the US securities laws. For a discussion of
factors that could affect future results, reference should be made to
the Cautionary Statements included in the full preliminary statement on
pages 24-26 and to Business Risks from year 2000 issues included on page
23.
- -- The financial information for the year ended 31 December 1997 does not
comprise statutory accounts but has been extracted from the statutory
accounts of Reuters Holdings PLC for that year which have been delivered
to the Registrar of Companies. The auditors' report on the statutory
accounts was unqualified and did not contain a statement made under
section 237(2) or (3) of the Companies Act 1985. The financial
information for the year ended 31 December 1998 does not comprise
statutory accounts within the meaning of section 240 of the Companies
Act 1985. Statutory accounts of Reuters Group PLC for that period will
be delivered to the Registrar of Companies in due course.
- -- Reuters and the dotted and sphere logos are the trademarks of the Reuters
Group of Companies.
2
Statement
Revenue at (pound)3,032 million (US$5,033 million) increased by (pound)150
million (US$249 million) or 5% at actual exchange rates and by 9% at comparable
exchange rates. Earnings before interest, tax, depreciation and amortisation
(EBITDA) grew by 2% at actual rates and by 10% at comparable rates. Goodwill
amortisation remained constant at (pound)51 million (US$85 million) of which
(pound)5 million (US$8 million) in 1998 was charged against the group's share of
associates' profit. Operating profit at (pound)550 million (US$913 million) grew
by 2% at actual rates and by 14% at comparable rates.
Profit on disposals of investments made by Reuters "Greenhouse Fund" in high
technology companies was (pound)26 million (US$43 million). As a result of the
return of (pound)1.5 billion (US$2.5 billion) to shareholders in February, net
interest receivable fell to (pound)2 million (US$3 million) from (pound)80
million (US$133 million) reflecting ten months' worth of net borrowing. Net
interest income in the first half of 1998 was (pound)11 million (US$18 million),
offset in part by a net interest charge of (pound)9 million (US$15 million) in
the second half of the year. Reflecting this pre-tax profit at (pound)580
million (US$963 million) fell by 7% at actual exchange rates but rose by 2% at
comparable exchange rates.
Earnings per share rose 11% compared to 1997 from 24.0p to 26.7p on a lower
number of shares in circulation following the return of capital in February
1998.
The effective tax rate for the year was 33.8% in 1998, down from the 1997
effective rate of 37.7%. Excluding goodwill amortisation and costs charged in
1997 relating to the return of capital to shareholders, the effective tax rate
for both years was unchanged.
A final dividend of 11.0p is proposed, making the total for the year 14.4p - a
rise of 11%.
Net debt on the balance sheet at 31 December 1998 amounted to (pound)3 million
(US$5 million). Excluding the return of capital in February 1998 Reuters
generated a net cash inflow of (pound)189 million (US$314 million) compared with
(pound)240 million (US$398 million) in 1997. This decline reflects greater
spending on acquisitions and lower net interest received partly offset by lower
capital expenditure.
Capital expenditure in 1998 was (pound)296 million (US$491 million), down
(pound)65 million (US$109 million) compared to 1997. Expenditure on subscriber
equipment was broadly in line with last year. Infrastructure spending required
for the 3000 series fell reflecting heavy investment in capacity in 1997.
Instinet continued to invest to meet the growing demands of the market.
Depreciation was up (pound)19 million (US$31 million) owing to higher capital
expenditure in past years.
We successfully completed the project to convert products and systems to the
euro. Incremental costs were lower than expected at (pound)6 million (US$10
million). We have made significant progress with the Millennium Programme; the
key focus in 1999 will be on continuity planning. Incremental millennium costs
were (pound)31 million (US$51 million) for 1998 and we expect to spend a further
(pound)14 million (US$23 million) in 1999. Activity on the Millennium Programme
will be weighted towards the first half of 1999.
Operating profit in the second half of 1998 at (pound)272 million (US$452
million) decreased by (pound)6 million (US$9 million) compared with the first
half of the year. Phasing of costs associated with the Millennium Programme, new
initiatives following the acquisition of Lipper Analytical Services Inc. and
Liberty SA, new investment at Instinet and costs in connection with the
reorganisation of the company offset the impact of stronger revenue growth in
the second half of the year. Costs associated with these initiatives and
investments will continue through 1999. We expect benefits from the
reorganisation to flow through in the second half of the year.
3
Sterling remained strong during the first three quarters but weakened in the
fourth quarter. The sterling trade weighted index was 99.7 at the end of 1998
compared to 104.4 at the end of 1997. If 1998 year end exchange rates had
prevailed throughout 1998, (pound)31 million (US$51 million) would have been
added to operating profit before currency hedging. Currency hedging gains were
(pound)45 million (US$74 million) for the full year compared to (pound)56
million (US$92 million) in 1997. At the end of 1998, the currency hedging book
had an unrealised loss of (pound)3 million (US$5 million) in respect of 1999.
Revenue growth in the fourth quarter was 9% at comparable exchange rates.
Instinet grew 19% at underlying rates helped by record volumes in the US market
and very strong growth outside the US. Instinet is this week outlining a new
initiative to explore an extension of its business into the fixed income market.
Other transaction products revenued decreased 2%, reflecting a small decline in
the number of accesses to our foreign exchange dealing services. Revenue from
information products grew 9% in the quarter. Outright revenue was up 17%, helped
by good sales of Risk Management and TIBCO products.
Price increases taking effect in January 1999 will be offset by a decline in new
orders for subscription products in the last quarter of 1998, as clients reacted
to the sudden emerging markets crisis at the onset of autumn. The sale of
Information Management Systems and Risk Management products was not affected but
our business in Russia suffered a sharp though not unexpected setback. Demand in
Asia continues weak but this is offset by an encouraging performance in Japan,
where we are making progress in penetrating domestic markets. We continue to
make steady progress in rolling out the 3000 product line and the Reuters Plus
domestic equities product in the United States. The disposal of Reuters Health
Information practice management systems and Reuters Voice Systems will have some
impact on revenue growth this year.
Chief Executive Peter Job said: "We turned to our advantage the many ups and
downs of 1998, translating them into a strong underlying performance with
operating profit at comparable rates up 14%. At the same time we returned
(pound)1.5 billion (US$2.5 billion) of surplus capital to shareholders.
"The challenges we faced in 1998 varied. The euro conversion was planned but
stretching nevertheless and the collapse of emerging markets developed with
extraordinary speed. We found time to reorganise our business radically and to
launch new initiatives in funds information and automated entry of stock orders.
Our early "Greenhouse Fund" investments in high technology companies produced
excellent returns and significant insights into future business models.
"1999 will be another year full of action and new initiatives. We are, like many
others, uncertain at the moment about the outlook for markets and economies and
how our clients' business will be impacted. We have an increasing level of
confidence in our ability to address the millennium issue. We are on track with
a timely new organisation structure designed to produce efficiencies. On balance
we expect lower revenue growth this year and an increased ability to manage the
economics of the business."
END
4
Revenue Analysis -- Year to 31 December 1998
YEAR TO 31 YEAR TO
DECEMBER % CHANGE 31 DECEMBER
1998 1997 ACTUAL RATES COMPARABLE 1998 1997
(POUND)M (POUND)M OF EXCHANGE RATES OF EXCHANGE US$M US$M
REVENUE ANALYSIS
BY SEGMENT
- ------------------------------------------------------------------------------------------------------------
Europe, Middle East
and Africa 1,566 1,484 6% 8% 2,599 2,463
Asia/Pacific 466 496 (6%) 3% 773 823
The Americas 454 437 4% 5% 754 726
Instinet 446 383 16% 18% 740 636
TIBCO 100 82 23% 24% 167 136
- ------------------------------------------------------------------------------------------------------------
TOTAL 3,032 2,882 5% 9% 5,033 4,784
- ------------------------------------------------------------------------------------------------------------
REVENUE ANALYSIS
BY PRODUCT
Information products
Recurring 1,716 1,640 5% 9% 2,849 2,722
Outright 233 212 10% 13% 387 352
---------- --------- --------- --------- ------- -------
1,949 1,852 5% 9% 3,236 3,074
---------- --------- --------- --------- ------- -------
Transaction products
Instinet 446 383 16% 18% 740 636
Other transaction products 436 445 (2%) 2% 723 738
---------- --------- --------- --------- ------- -------
882 828 6% 9% 1,463 1,374
---------- --------- --------- --------- ------- -------
Media and
Professional products 201 202 (1%) 1% 334 336
- ------------------------------------------------------------------------------------------------------------
TOTAL 3,032 2,882 5% 9% 5,033 4,784
- ------------------------------------------------------------------------------------------------------------
5
Revenue Analysis --fourth quarter 1998
3 MONTHS TO 3 MONTHS TO
31 DECEMBER % CHANGE 31 DECEMBER
1998 1997 ACTUAL RATES COMPARABLE 1998 1997
(POUND)M (POUND)M OF EXCHANGE RATES OF EXCHANGE US$M US$M
REVENUE ANALYSIS
BY SEGMENT
- ------------------------------------------------------------------------------------------------------------
Europe, Middle East
and Africa 423 390 9% 8% 702 647
Asia/Pacific 123 125 (2%) 3% 204 207
The Americas 114 114 0% 2% 189 190
Instinet 119 102 17% 19% 198 170
TIBCO 39 29 33% 34% 65 48
- ------------------------------------------------------------------------------------------------------------
TOTAL 818 760 8% 9% 1,358 1,262
- ------------------------------------------------------------------------------------------------------------
REVENUE ANALYSIS
BY PRODUCT
Information products
Recurring 448 418 7% 8% 743 694
Outright 92 79 17% 17% 152 130
---------- --------- --------- --------- ------- -------
540 497 9% 9% 895 824
---------- --------- --------- --------- ------- -------
Transaction products
Instinet 119 102 17% 19% 198 170
Other transaction products 107 111 (3%) (2%) 178 183
---------- --------- --------- --------- ------- -------
226 213 6% 8% 376 353
---------- --------- --------- --------- ------- -------
Media and
Professional products 52 50 3% 2% 87 85
- ------------------------------------------------------------------------------------------------------------
TOTAL 818 760 8% 9% 1,358 1,262
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6
Review of Preliminary Results
The following review has been prepared in accordance with both the
recommendations of the UK Accounting Standards Board in their statement entitled
'Operating and Financial Review', and the US requirement for a Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Under US law all statements other than statements of historical fact included in
this review are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Certain important factors that could cause
actual results to differ materially from those discussed in such forward-looking
statements are described under "Cautionary Statements" as well as elsewhere in
this review. All written and oral forward-looking statements made on or after
the date hereof and attributable to Reuters are expressly qualified in their
entirety by such Cautionary Statements.
FINANCIAL SUMMARY
Revenue increased 5% to (pound)3,032 million in 1998. Excluding the impact of
currency movements, revenue grew 9%, in line with growth at comparable rates in
1997.
REVENUE AT ACTUAL AND
COMPARABLE RATES (% CHANGE)
1996 1997 1998
- ------------------------------------
Actual 8% (1%) 5%
Comparable 8% 9% 9%
- ------------------------------------
Fourth quarter revenue grew 8% at actual rates, and 9% at comparable exchange
rates.
Operating profit, which includes the amortisation of goodwill, grew 2% to
(pound)550 million at actual exchange rates and 14% at comparable rates. This
compares with an 8% decline at actual rates in 1997 which principally reflected
the impact of currency, and 8% growth at comparable rates. Operating margin in
1998 was 18.2%, compared to 18.8% in 1997. However, excluding the impact of
currency movements, operating margin improved by 0.9%.
External costs related to the millennium and Euro Programmes increased to
(pound)37 million in 1998, compared with (pound)11 million in 1997. Further
details of these programmes are disclosed on pages 21 - 24.
OPERATING PROFIT AT ACTUAL AND
COMPARABLE RATES (% CHANGE)
1996 1997 1998
- ------------------------------------
Actual 16% (8%) 2%
Comparable 7% 8% 14%
- ------------------------------------
Goodwill amortisation remained constant at (pound)51 million. Of this (pound)5
million related to investments in associates during the year which was charged
against the group's share of associates' profits.
Earnings before interest, tax, depreciation and amortisation (EBITDA) grew 2% at
actual rates to (pound)927 million, and 10% at comparable rates compared with 8%
in 1997.
The sale of a number of investments in high technology companies held in the
Reuters Greenhouse fund resulted in an exceptional profit of (pound)26 million
in 1998.
7
Net interest receivable was (pound)2 million compared with (pound)80 million in
1997 reflecting ten months' worth of net borrowings in 1998 following the return
of (pound)1.5 billion to shareholders in February. Net interest income in the
first half of 1998 was (pound)11 million, offset in part by a net interest
charge of (pound)9 million in the second half of the year. Net debt at the end
of 1998 was (pound)3 million.
Profit before tax of (pound)580 million was down 7% at actual exchange rates but
up 2% at comparable exchange rates, despite the fall in interest income.
The effective rate of tax for 1998 was 33.8% compared with 37.7% in 1997.
Excluding goodwill amortisation and costs charged in 1997 relating to the return
of capital to shareholders, the effective tax rate for both years was unchanged.
Earnings per share increased 11% in 1998 to 26.7p from 24.0p in 1997. 1997
earnings per share fell 12% from 27.3p in 1996, principally reflecting the
decline in operating profit due to currency and once off tax costs related to
the return of capital to shareholders.
The final dividend per share has been increased by 11% to 11.0p resulting in a
total dividend for the year of 14.4p, also up 11% on 1997. Dividend cover
decreased to 1.9 in 1998 from 2.1 in 1997.
Investment in the business continued with (pound)296 million spent on capital
expenditure, (pound)200 million on development and (pound)157 million on
acquisitions and investments.
Free cash flow increased 9% to (pound)490 million. Free cash flow per share was
34.1p, up 23% from 27.7p in 1997, reflecting the lower number of shares in issue
following the capital reorganisation.
Operating profit in the second half of 1998 at (pound)272 million decreased by
(pound)6 million compared with the first half of the year.
Phasing of costs associated with the Millennium Programme, new initiatives
following the acquisition of Lipper Analytical Services Inc. and Liberty SA, new
investment at Instinet and costs in connection with the reorganisation of the
company offset the impact of stronger revenue growth in the second half of the
year. Costs associated with these initiatives and investments will continue
through 1999. Benefits from the reorganisation are expected to flow through in
the second half of the year.
EARNINGS AND DIVIDENDS
PER SHARE (% CHANGE)
1996 1997 1998
- -------------------------------------------------
Earnings per share growth 18% (12%) 11%
Dividends per share growth 20% 11% 11%
- -------------------------------------------------
8
1998 REVENUE BY TYPE
- ------------------------------
Recurring 72%
Usage 20%
Outright Sales 8%
- ------------------------------
1998 REVENUE BY PRODUCT
- -----------------------------------
Financial Information 64%
Transactions 29%
Media/Professional 7%
- -----------------------------------
Sterling remained strong during the first three quarters but weakened in the
fourth quarter. The sterling trade weighted index was 99.7 at the end of 1998
compared to 104.4 at the end of 1997. If 1998 year end exchange rates had
prevailed throughout 1998, (pound)31 million would have been added to operating
profit before currency hedging.
Currency hedging gains were (pound)45 million for the full year compared to
(pound)56 million in 1997. At the end of 1998, the currency hedging book had an
unrealised loss of (pound)3 million in respect of 1999.
Revenue growth in the fourth quarter was 9% at comparable exchange rates.
Instinet grew 19% at underlying rates helped by record volumes in the US market
and very strong growth outside the US. Other transaction products revenue
decreased 2%, reflecting a small decline in the number of accesses to our
foreign exchange dealing services. Revenue from information products grew 9% in
the quarter. Outright revenue was up 17%, helped by good sales of Risk
Management and TIBCO products.
Price increases taking effect in January 1999 will be offset by a decline in new
orders for subscription products in the last quarter of 1998, as clients reacted
to the sudden emerging markets crisis at the onset of autumn. The sale of
Information Management Systems and Risk Management products was not affected but
our business in Russia suffered a sharp though not unexpected setback. Demand in
Asia continues to be weak but this is offset by an encouraging performance in
Japan, where we are making progress in penetrating domestic markets. We continue
to make steady progress in rolling out the 3000 product line and the Reuters
Plus domestic equities product in the United States. The disposal of Reuters
Health Information practice management systems and Reuters Voice Systems will
have some impact on revenue growth this year.
REVENUE BY TYPE
Year to 31 December
((pound)m) 1998 1997 1996
- -------------------------------------------------------------
Recurring 2,170 2,147 2,232
Usage 621 511 478
Outright sales 241 224 204
- -------------------------------------------------------------
TOTAL 3,032 2,882 2,914
- -------------------------------------------------------------
Recurring revenue, which is principally derived from the sale of subscription
services, represented 72% of group revenue in 1998, compared with 74% in 1997.
Usage-based revenue, principally derived from Instinet and Dealing 2000-2,
represented 20% of total revenue compared to 18% in 1997. Outright revenue,
9
which comprises once-off sales of information management systems and risk
management software, represented 8% of group revenue in both 1997 and 1998.
REVENUE BY PRODUCT
Year to 31 December
((pound)m) 1998 1997 1996
- -------------------------------------------------------------
Financial
information 1,949 1,852 1,892
Transaction 882 828 813
Media/
Professional 201 202 209
- -------------------------------------------------------------
TOTAL 3,032 2,882 2,914
- -------------------------------------------------------------
The proportion of revenue derived from each product group was at similar levels
in each of the last three years.
FINANCIAL INFORMATION PRODUCTS
REVENUE
Year to 31 December
((pound)m) 1998 1997 1996
- ------------------------------------------------------------------
Europe,
Middle East
and Africa 1,164 1,087 1,145
Asia/Pacific 342 359 365
The Americas 343 324 322
TIBCO 100 82 60
- ------------------------------------------------------------------
TOTAL 1,949 1,852 1,892
- ------------------------------------------------------------------
% CHANGE
actual 5% (2%)
comparable 9% 8%
- ------------------------------------------------------------------
Financial information products revenue grew 5% at actual rates and 9% at
comparable rates. This reflects growth in both recurring and outright revenue.
1998 revenue included (pound)7 million of revenue related to the acquisitions of
Lipper Analytical Services Inc. and Liberty SA during the year, and (pound)15
million of revenue related to Reuters Voice Systems which was sold in December
1998.
RECURRING REVENUE
Year to 31 December
1998 1997 1996
- -----------------------------------------------------------------------
REVENUE ((POUND)M) 1,716 1,640 1,703
% CHANGE
actual 5% (4%)
comparable 9% 7%
- -----------------------------------------------------------------------
ACCESSES (000S)
3000 products 48 28 1
Off trading 87 49 21
floor products
Other products 310 309 299
- -----------------------------------------------------------------------
TOTAL 445 386 321
- -----------------------------------------------------------------------
REVENUE PER
ACCESS ((POUND)000) 4.1 4.7 5.6
% CHANGE
actual (11%) (16%)
comparable (8%) (7%)
- -----------------------------------------------------------------------
10
Accesses grew 15% year on year to 445,000 at 31 December 1998. This compares to
growth of 20% in 1997. Installed 3000 accesses increased from 28,000 at the end
of 1997 to 48,000 at the end of 1998. Approximately 30% of all 3000
installations relate to new users, of which nearly 7,000 were installed during
1998. New products aimed at the Japanese and US domestic markets were introduced
during the year.
FINANCIAL INFORMATION PRODUCTS deliver real-time and historical news and
financial data to customers within the financial markets and provide the
software tools to analyse data. Reuters main offerings are the series 2000 and
3000 product lines.
Information management systems offer customers the means to integrate and
analyse data from a variety of sources for financial trading rooms. Risk
management, order handling products and customised solutions from TIBCO offer
customers the means of managing their own information flows and exposure to
risk.
FINANCIAL INFORMATION PRODUCTS (POUND)M
1996 1997 1998
- ---------------------------------------------
Recurring revenue 1,703 1,640 1,716
Outright revenue 189 212 233
- ---------------------------------------------
10 (continued)
TRANSACTION PRODUCTS principally comprise Dealing 2000-1, Dealing 2000-2 and
Instinet. Dealing 2000 products enable foreign exchange professionals to
converse electronically with chosen trading partners using Reuters Dealing
2000-1 or the Dealing 2000-2 automated matching system. Instinet provides agency
brokerage services in global equities to securities industry professionals in
more than 26 countries.
TRANSACTION PRODUCTS (POUND)M
1996 1997 1998
- ----------------------------------------
Dealing 467 445 436
Instinet 346 383 446
- ----------------------------------------
There were 87,000 installed off-trading floor accesses at 31 December 1998.
These products are aimed at users of financial information outside the dealing
room. Web-based products accounted for most of the growth and represented
approximately 50,000 of the installed base at the end of the year.
Revenue per access at comparable rates continued to fall, as the proportion of
lower priced off trading floor products increased. Excluding these accesses, the
revenue per access at comparable exchange rates was stable.
Selective price rises taking effect in January 1999 will increase 1999 recurring
revenue by approximately 1%.
OUTRIGHT REVENUE
Year to 31 December
1998 1997 1996
- --------------------------------------------------------
REVENUE ((POUND)M) 233 212 189
% CHANGE
actual 10% 12%
comparable 13% 22%
- --------------------------------------------------------
Revenue growth at comparable rates in 1998 reflected strong demand for risk
management products, particularly in Europe, and information management systems
from TIBCO.
TRANSACTION PRODUCTS
REVENUE
Year to 31 December
((pound)m) 1998 1997 1996
- ---------------------------------------------------------------
Europe, Middle East
and Africa 266 266 286
Asia/Pacific 97 107 108
The Americas 73 72 73
Instinet 446 383 346
- ---------------------------------------------------------------
TOTAL 882 828 813
% CHANGE
actual 6% 2%
comparable 9% 10%
- ---------------------------------------------------------------
ACCESSES (000S)
Dealing 24 25 24
Instinet 16 13 9
- ---------------------------------------------------------------
TOTAL 40 38 33
- ---------------------------------------------------------------
REVENUE PER ACCESS 22.5 23.4 25.5
((POUND)000)
% CHANGE
actual (3%) (8%)
comparable 0% (1%)
- ---------------------------------------------------------------
Revenue growth of 9% at comparable rates included growth of 18% at Instinet,
discussed further on page 14, and slower growth of 2% from Dealing products.
Revenue per access at comparable rates was stable.
11
MEDIA AND PROFESSIONAL PRODUCTS
REVENUE
Year to 31 December
((pound)m) 1998 1997 1996
- ---------------------------------------------------------------
Europe, Middle East
and Africa 136 131 133
Asia/Pacific 27 30 31
The Americas 38 41 45
- ---------------------------------------------------------------
TOTAL 201 202 209
% CHANGE
actual (1%) (3%)
comparable 1% 3%
- ---------------------------------------------------------------
MEDIA PRODUCTS
Year to 31 December
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 127 138 155
% CHANGE
actual (8%) (11%)
comparable (6%) (4%)
- ---------------------------------------------------------------
Media revenue fell 6% at comparable exchange rates, reflecting the full year
impact of the disposal of the satellite services business in 1997 and fewer TV
location specials.
PROFESSIONAL PRODUCTS
Year to 31 December
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 74 64 54
% CHANGE
actual 14% 19%
comparable 16% 25%
- ---------------------------------------------------------------
Strong growth from professional products reflected the continued success of the
Reuters Business Briefing product range. Password accesses to Reuters Business
Briefing increased by nearly 20% to 13,100 at the year end and revenues
increased over 30% at comparable rates.
Included with professional products revenue was (pound)19 million related to
Reuters Health Information practice management systems which was sold in
December 1998.
MEDIA PRODUCTS comprise textual news, television services, pictures and graphics
for republication by media customers and also the repackaging and sale of
content for online services.
PROFESSIONAL PRODUCTS provide a range of near real-time and historical financial
information news products and related technology to the corporate and
professional markets. Reuters Business Briefing provides access to 10 years'
business information from one of the world's most comprehensive databases.
MEDIA AND PROFESSIONAL PRODUCTS
(POUND)M
1996 1997 1998
- ----------------------------------------
Media 155 138 127
Professional 54 64 74
- ----------------------------------------
12
EUROPE, MIDDLE EAST AND AFRICA
(POUND)M
1996 1997 1998
- -------------------------------------------
Revenue 1,564 1,484 1,566
Contribution 588 498 538
- -------------------------------------------
ASIA/PACIFIC
(POUND)M
1996 1997 1998
- -------------------------------------------
Revenue 504 496 466
Contribution 193 184 177
- -------------------------------------------
THE AMERICAS
(POUND)M
1996 1997 1998
- -------------------------------------------
Revenue 440 437 454
Contribution 26 37 25
- -------------------------------------------
SEGMENTAL ANALYSIS OF REVENUE AND CONTRIBUTION
EUROPE, MIDDLE EAST & AFRICA
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 1,566 1,484 1,564
% CHANGE
actual 6% (5%)
comparable 8% 6%
- ---------------------------------------------------------------
CONTRIBUTION ((POUND)M) 538 498 588
% CHANGE
actual 8% (15%)
comparable 13% 2%
- ---------------------------------------------------------------
Actual operating
margin 34% 34%
- ---------------------------------------------------------------
Revenue growth at comparable rates in the more mature European markets was in
the range of 5% - 10%, with 7% growth in the UK and Ireland and 6% growth in
Germany.
Revenue from the emerging markets in central and eastern Europe continued to
grow strongly, up 13% at comparable rates, despite the deteriorating economic
environment in Russia.
Contribution growth at comparable rates of 13%, ahead of revenue growth of 8%,
reflected the impact of tight cost control across the region.
ASIA/PACIFIC
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 466 496 504
% CHANGE
actual (6%) (2%)
comparable 3% 9%
- ---------------------------------------------------------------
CONTRIBUTION ((POUND)M) 177 184 193
% CHANGE
actual (4%) (5%)
comparable 7% 9%
- ---------------------------------------------------------------
Actual operating
margin 38% 37%
- ---------------------------------------------------------------
13
Revenue growth at comparable rates of 3% was depressed by the impact of the
Asian financial crisis on the region's economy. Revenue growth in Japan was 8%
at comparable rates.
Tight cost control resulted in contribution growth of 7% at comparable rates
despite the low level of revenue growth.
THE AMERICAS
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 454 437 440
% CHANGE
actual 4% (1%)
comparable 5% 6%
- ---------------------------------------------------------------
CONTRIBUTION ((POUND)M) 25 37 26
% CHANGE
actual (33%) 45%
comparable (36%) 76%
- ---------------------------------------------------------------
Actual operating
margin 5% 8%
- ---------------------------------------------------------------
Revenue from the Americas, which excludes Instinet and TIBCO, grew 4% at actual
rates and 5% at comparable rates in 1998.
13 (continued)
North American revenue grew 5% at comparable rates reflecting continuing demand
for information products. Revenue grew 11% at comparable rates in Latin America.
The decline in contribution reflected development and infrastructure costs to
support new domestic products.
INSTINET
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 446 383 346
% CHANGE
actual 16% 11%
comparable 18% 17%
- ---------------------------------------------------------------
CONTRIBUTION ((POUND)M) 155 149 135
% CHANGE
actual 3% 11%
comparable 6% 18%
- ---------------------------------------------------------------
Operating margin 35% 39%
- ---------------------------------------------------------------
Instinet's 1998 revenue growth of 18% at comparable rates reflected growth in
the second half of the year of 23%, compared to 13% in the first half, as a
result of higher levels of activity.
At comparable rates, Instinet revenues in the US grew 10% compared with 15%
growth in 1997. Revenue growth in the second half of the year was 17% compared
with 3% in the first half of 1998.
Revenue growth from activities outside the US was 70%.
Revenues from this segment now represent nearly 20% of total Instinet revenues.
Growth was driven principally by increased trading in European equities.
The lower level of contribution growth compared to revenue growth resulted in a
decline in margin to 35% from 39% in 1997. This reflected additional costs
associated with capacity requirements and product development during 1998.
For information concerning certain rules that could affect Instinet's business
see Cautionary Statements: 'SEC rules on ECN usage', 'SEC rules for Alternative
Trading Systems', and 'NASD initiatives' on pages 25 to 26.
TIBCO
1998 1997 1996
- ---------------------------------------------------------------
REVENUE ((POUND)M) 100 82 60
% CHANGE
actual 23% 37%
comparable 24% 45%
- ---------------------------------------------------------------
CONTRIBUTION ((POUND)M) 13 15 12
% CHANGE
actual (13%) 23%
comparable (14%) 30%
- ---------------------------------------------------------------
Operating margin 13% 18%
- ---------------------------------------------------------------
TIBCO comprises two units, TIBCO Finance Technology, which focuses on the
finance sector and TIBCO Software, which pursues opportunities outside the
finance sector.
INSTINET
(POUND)M
1996 1997 1998
- -------------------------------------------
Revenue 346 383 446
Contribution 135 149 155
- -------------------------------------------
TIBCO
(POUND)M
1996 1997 1998
- -------------------------------------------
Revenue 60 82 100
Contribution 12 15 13
- -------------------------------------------
14
TOTAL 1998 GROWTH IN REVENUE, COSTS AND OPERATING PROFIT
Growth at Growth at
Actual Rates Comparable Rates
- -------------------------------------------------------
Revenue 5% 9%
Costs 6% 8%
Operating Profit 2% 14%
- -------------------------------------------------------
TOTAL 1998 COSTS BY TYPE
- -----------------------------
Staff 37%
Services 24%
Depreciation 13%
Data 10%
Communicating 8%
Space 5%
Other 3%
- -----------------------------
Minority shareholdings in TIBCO Software are held by Cisco Systems Inc and
Mayfield Venture Capital.
Revenue continued to grow at double digit levels in both businesses. However,
overall operating margin and profit overall declined due to continuing
investment in product development and increased sales support costs.
EMERGING MARKETS
Revenue from emerging markets (eastern Europe, Latin America, South East and
East Asia, excluding Hong Kong and Singapore) grew 1% to (pound)275 million in
1998 or 6% at comparable rates, compared with 15% growth at comparable rates in
1997.
Revenues in the CIS grew 2% at comparable rates although this does not fully
reflect the impact of client cancellations in the last quarter of 1998.
The decline in revenue growth in Asia reflected increased levels of client
cancellations during 1997 and 1998. The group's revenues from Malaysia, Thailand
and Indonesia, the three Asian markets with the greatest economic difficulties
in 1998, totalled less than 1.5% of group revenue.
CENTRAL COSTS
Central costs which comprise corporate costs and central development, marketing
and technical operations grew 1% in 1998 at actual exchange rates to (pound)351
million.
Development expenditure, which excluded costs associated with the Millennium
Programme, fell 15% to (pound)200 million in 1998, and represented approximately
7% of group revenue. In 1997 development expenditure increased 17% to (pound)235
million.
OPERATING PROFIT
Operating profit grew 2% at actual rates and 14% at comparable rates. Operating
profit of (pound)272 million in the second half of 1998 decreased by (pound)6
million, compared with the first half of the year.
TOTAL COSTS
Total costs grew 8% in 1998 at comparable exchange rates, compared with revenue
growth of 9%. In 1997 both revenue and costs grew by 9%.
15
COSTS BY TYPE
Year to 31 December
((pound)m) 1998 1997 1996
Staff 928 835 856
Services 586 585 539
Depreciation 331 312 283
Data 242 207 195
Communications 207 201 202
Space 129 142 150
Cost of sales and 52 64 59
other
Goodwill 46 51 49
amortisation
Currency hedging (45) (56) (5)
activities - net
gain
Foreign currency 6 -- (6)
translation - net
loss/(gain)
- ----------------------------------------------------------------------
TOTAL 2,482 2,341 2,322
- ----------------------------------------------------------------------
(% CHANGE)
actual 6% 1%
comparable 8% 9%
- ----------------------------------------------------------------------
Year to 31 December
STAFF 1998 1997 1996
COST ((POUND)M) 928 835 856
(% CHANGE)
actual 11% (2%)
comparable 14% 5%
- ----------------------------------------------------------------------
Total staff costs increased 14% at comparable rates, reflecting growth in staff
numbers, the impact of inflationary increases, and costs related to the company
reorganisation.
Total staff numbers grew by 5% in the year to 16,938 at 31 December 1998.
Approximately half of this growth related to Instinet and TIBCO. The net effect
of acquisitions and disposals was not material. In 1997, staff numbers grew 4%
to 16,119.
Year to 31 December
SERVICES 1998 1997 1996
- ----------------------------------------------
COST ((POUND)M) 586 585 539
(% CHANGE)
actual 0% 9%
comparable 2% 17%
- ----------------------------------------------
Cost containment initiatives continued to restrict services spending, although
there was an increase in consultancy and contractor costs to support the
Millennium and Euro projects.
Year to 31 December
DEPRECIATION 1998 1997 1996
- ----------------------------------------------
COST ((POUND)M) 331 312 283
(% CHANGE)
actual 6% 10%
comparable 7% 11%
- ----------------------------------------------
16
The depreciation charge grew at a slower rate in 1998 reflecting a reduction in
the level of capital expenditure.
Year to 31 December
DATA 1998 1997 1996
- ----------------------------------------------
COST ((POUND)M) 242 207 195
(% CHANGE)
actual 17% 6%
comparable 20% 12%
- ----------------------------------------------
Growth in data costs was principally due to the continuing increase in
recoverable exchange fees on equity products and increased demands for
specialist data.
Year to 31 December
COMMUNICATIONS 1998 1997 1996
- ----------------------------------------------
COST ((POUND)M) 207 201 202
(% CHANGE)
actual 3% 0%
comparable 7% 7%
- ----------------------------------------------
Volumes of data delivered over Reuters products continued to increase. The
associated increase in costs was partially offset by savings from the sale of
the satellite services business in 1997 and tariff reductions. The most
significant growth was in local distribution costs, which are largely
recoverable from clients.
Year to 31 December
SPACE 1998 1997 1996
- ---------------------------------------------------
COST ((POUND)M) 129 142 150
(% CHANGE)
actual (9%) (6%)
comparable (7%) 1%
- ---------------------------------------------------
No significant expansion or refurbishment costs were incurred in 1998.
GOODWILL
The total goodwill amortisation charge of (pound)51 million was unchanged
compared with 1997. Of the 1998 charge, (pound)5 million related to associated
undertakings and was charged against the group's share of income from
associates.
COSTS BY FUNCTION
Selling, marketing and administrative expenses increased 8% at actual rates in
16 (continued)
1998 to (pound)714 million compared with a 2% decline in 1997.
Production and communication costs grew 6% at actual rates in 1998 to
(pound)1,722 million compared with growth of 2% in 1997.
INCOME FROM FIXED ASSET INVESTMENTS AND ASSOCIATES
During 1998, a number of investments in high technology companies, held within
the Reuters Greenhouse Fund, were sold resulting in an exceptional profit of
(pound)26 million. The sales related principally to investments in Yahoo!,
Infoseek and Sportsline.
Income of (pound)3 million from fixed asset investments comprised distributions
from a US venture capital fund specialising in high technology companies.
The group's shares of losses from associates of (pound)1 million in 1998
included Reuters share of the profit of Independent Television News (ITN) less
goodwill amortisation of (pound)5 million related to investments in associates
in the second half of 1998.
SHAREHOLDER VALUE
Reuters aims to grow its value and outperform its peers. Reuters believes that
its mix of assets, some of which are unique to the company, will help it to meet
this aim. These assets, some of which are not included in the consolidated
balance sheet, include:
- -- Reuters independence, as enshrined in the Reuter Trust Principles;
- -- Goodwill attached to the Reuters name;
- -- Software and other intellectual property;
- -- Global databases of financial and other information;
- -- An integrated global organisation including a skilled workforce.
Reuters uses a model for measuring and ranking its total shareholder return
(TSR) compared with that of the other 99 companies in the FTSE 100 index at the
start of each measurement period. This model is used to determine vesting of
awards under performance-linked share plans. Reuters rankings over both
completed three year periods, and ongoing two and one year measurement periods
are set out below:
REUTERS TSR RANKING IN FTSE 100
Completed Ongoing
Period Period
- --------------------------------------
94-96 7
95-97 60
96-98 79
97-98 95
98 84
- --------------------------------------
RETURN OF CAPITAL TO SHAREHOLDERS
On 18 February 1998 Reuters implemented a capital reorganisation which returned
(pound)1.5 billion of surplus capital to shareholders. The reorganisation
involved the creation of a new holding company, Reuters Group PLC, which became
the ultimate parent company of Reuters Holdings PLC in a court approved scheme
of arrangement.
Ordinary shareholders received 13 shares in Reuters Group PLC plus (pound)13.60
in cash for every 15 shares held. Holders of American Depositary Shares (ADSs),
each representing six ordinary shares, received 13 new ADSs plus the US dollar
equivalent of (pound)81.60 in cash for every 15 ADSs held.
The capital reorganisation has been accounted for as a group reconstruction and
merger accounting principles have been applied.
FINANCIAL NEEDS AND RESOURCES
Excluding the (pound)1.5 billion return of capital to shareholders, net funds
increased by (pound)189 million during 1998. Total net debt at 31 December 1998
amounted to (pound)3 million and comprised cash and short term investments of
(pound)1,006 million offset by (pound)1,009 million of debt.
17
"Free cash flow" which comprises operating cash flow plus net interest and other
investment income received less tax paid and expenditure on tangible fixed
assets was (pound)490 million, compared with (pound)449 million in 1997. This
reflects higher cashflow from operations and reduced capital expenditure, offset
by increased tax payments arising from timing differences between the payment
and recovery of advance corporation tax and reduced net interest income
following the return of surplus capital to shareholders.
Additions to fixed assets were (pound)296 million, (pound)65 million lower than
1997. Subscriber equipment expenditure fell (pound)13 million to (pound)119
million and other equipment additions fell (pound)52 million to (pound)177
million due principally to lower levels of infrastructure spending following the
heavy investment in capacity in 1997. Reuters spent (pound)157 million on
acquisitions and investments compared to (pound)29 million in 1997, principally
in the areas of funds measurement and automated entry of stock orders.
Dividends paid were (pound)188 million, (pound)8 million down from 1997,
reflecting the reduced number of shares in issue following the capital
reorganisation, offset by an increase in dividends per share.
Reuters expects to be able to finance its current business plans from existing
resources and facilities. In February 1998 Reuters Group PLC put in place
syndicated loan facilities with a total commitment of (pound)1.5 billion, of
which (pound)1.0 billion expired in December 1998 and (pound)500 million expires
in December 2002.
A Euro Commercial Paper Programme was established in March 1998 providing access
to (pound)1.5 billion in uncommitted finance, subject to market conditions. In
December 1998 Reuters established a Euro Medium Term Note Programme which will
provide access to up to (pound)1.0 billion of uncommitted facilities, subject to
market conditions. In addition, at 31 December 1998 Reuters had unused,
short-term uncommitted bank borrowing facilities denominated in various
currencies, the sterling equivalent of which was approximately (pound)741m, at
money market rates varying principally between 2% and 13% depending on the
currency.
In February 1998 Reuters entered into a joint venture with Rudin Times Square
Associates, LLC to develop an 855,000 square foot building in the Times Square
section of New York City, to be known as "The Reuters Building". Each party will
invest approximately US$45 million of equity, with other costs to be funded
through a loan. The total cost of the project is estimated to be approximately
US$360 million.
TREASURY MANAGEMENT
A substantial portion of Reuters revenue is committed under one and two-year
contracts and approximately 80% is denominated in non-sterling currencies.
Reuters also has significant costs denominated in foreign currencies with a
different mix from revenue. Reuters profits are, therefore, exposed to currency
fluctuations. The approximate proportion of operating profit excluding goodwill
amortisation and currency gains attributable to each key currency group was as
follows:
OPERATING PROFIT BY CURRENCY
1998 1997
Continental Europe
euro currencies 80% 74%
other 19% 16%
US dollar 54% 55%
Japanese Yen 13% 14%
Sterling
- depreciation (59%) (52%)
- other (22%) (23%)
Other 15% 16%
- ---------------------------------------------------
TOTAL 100% 100%
- ---------------------------------------------------
18
Sterling costs exceeded sterling revenues due to the level of UK-based
marketing, development, operational and central management costs, and
depreciation which, with the exceptions of Instinet and TIBCO, is largely
accounted for in sterling once an asset has been acquired.
In broad terms using the 1998 mix of profits, the impact of an additional
unilateral 1% strengthening of sterling would have been a reduction of
approximately (pound)9 million in 1998 operating profits before hedging (1997:
(pound)9 million).
Sterling strengthened significantly over 1997 and the first nine months of 1998,
although it weakened in the last quarter of 1998. As a result, 1997 and 1998
operating profits were adversely affected.
The risk that sterling might strengthen against foreign currencies is hedged
within parameters laid down by the Board. The priority in treasury policy is to
reduce the risk of earnings volatility to acceptable levels while allowing a
degree of flexibility to take advantage of market movements.
STERLING TRADE WEIGHTED
EXCHANGE RATE INDEX
INDEX ON LAST DAY OF MONTH
----------------------------------
MONTH 1996 1997 1998
Jan 83.3 94.4 105.0
Feb 83.3 98.3 105.1
Mar 83.4 98.0 108.8
Apr 83.8 100.1 106.3
May 86.3 99.3 103.6
Jun 86.3 102.1 107.0
Jul 84.6 104.6 104.2
Aug 85.3 102.2 106.0
Sep 87.0 100.4 103.3
Oct 90.2 102.3 100.0
Nov 94.0 105.0 100.5
Dec 96.1 104.4 99.7
The main principles underlying currency hedging policies are as follows:
- -- Committed hedging cannot exceed the underlying cash flow exposure;
- -- Options may only be written against an underlying exposure;
- -- Levels of cover for currency hedging cannot exceed 90% of underlying
exposure for the first 12 months and 70% for the following 12 months.
The company has adopted value at risk ("VAR") analysis as a means of quantifying
the potential impact of exchange rate volatility on reported earnings. VAR is a
measure of the potential loss on a portfolio within a specified time horizon, at
a specified confidence interval. Loss is defined, in this instance, as the
diminution in value of rolling 12 month forecast group profits denominated in
sterling. Due to the approximations used in determining VAR, the theory provides
order of magnitude estimates only but these are useful for comparison purposes.
Reuters estimates that there is currently a 5% chance that profits forecast for
the coming 12 months will deteriorate by more than (pound)70 million as a result
of currency fluctuations before hedging and (pound)37 million after taking into
account hedging at 31 December 1998 (1997: (pound)74 million before hedging and
(pound)42 million after hedging). These figures represent the value at risk and
are illustrated graphically below:
19
OPERATING PROFIT SENSITIVITY TO
CURRENCY FLUCTUATIONS BASED ON VAR ANALYSIS
Probability
Profit (pound) Without Hedging With Hedging
- -------------- --------------- ------------
- -170.0124796 3.14872E-06 6.33421E-15
- -165.7621676 4.6739E-06 2.608E-14
- -161.5118556 6.86884E-06 1.03601E-13
- -157.2615436 9.9941E-06 3.97063E-13
- -153.0112316 1.43966E-05 1.46823E-12
- -148.7609196 2.05322E-05 5.23806E-12
- -144.5106076 2.89913E-05 1.80296E-11
- -140.2602956 4.05281E-05 5.98746E-11
- -136.0099836 5.60921E-05 1.9184E-10
- -131.7596717 7.68607E-05 5.93028E-10
- -127.5093597 0.000104271 1.76869E-09
- -123.2590477 0.000140049 5.08942E-09
- -119.0087357 0.000186232 1.41295E-08
- -114.7584237 0.00024518 3.78462E-08
- -110.5081117 0.000319576 9.78046E-08
- -106.2577997 0.0004124 2.43858E-07
- -102.0074877 0.000526891 5.86615E-07
- -97.75717574 0.00066647 1.36148E-06
- -93.50686375 0.000834635 3.04865E-06
- -89.25655176 0.001034832 6.58636E-06
- -85.00623978 0.001270282 1.37285E-05
- -80.75592779 0.001543788 2.76084E-05
-76.5056158 0.001857514 5.35672E-05
- -72.25530381 0.002212757 0.000100276
- -68.00499182 0.00260971 0.000181107
- -63.75467983 0.003047249 0.000315583
- -59.50436784 0.003522741 0.000530556
- -55.25405585 0.004031906 0.000860578
- -51.00374387 0.004568748 0.001346755
- -46.75343188 0.005125557 0.002033421
- -42.50311989 0.005693011 0.002962143
-38.2528079 0.00626037 0.004163178
- -34.00249591 0.006815771 0.00564526
- -29.75218392 0.007346612 0.007385555
- -25.50187193 0.007840003 0.009322285
- -21.25155994 0.008283282 0.011352767
- -17.00124796 0.008664544 0.013338937
- -12.75093597 0.008973172 0.01512101
- -8.500623978 0.009200329 0.016537906
- -4.250311989 0.009339374 0.017451001
0 0.009386188 0.017766435
4,250311989 0.009339374 0.017451001
8.500623978 0.009200329 0.016537906
12.75093597 0.008973172 0.01512101
17.00124796 0.008664544 0.013338937
21.25155994 0.008283282 0.011352767
25.50187193 0.007840003 0.009322285
29.75218392 0.007346612 0.007385555
34.00249591 0.006815771 0.00564526
38.2528079 0.00626037 0.004163178
42.50311989 0.005693011 0.002962143
46.75343188 0.005125557 0.002033421
51.00374387 0.004568748 0.001346755
55.25405585 0.004031906 0.000860578
59.50436784 0.003522741 0.000530556
63.75467983 0.003047249 0.000315583
68.00499182 0.00260971 0.000181107
72.25530381 0.002212757 0.000100276
76.5056158 0.001857514 5.35672E-05
80.75592779 0.001543788 2.76084E-05
85.00623978 0.001270282 1.37285E-05
89.25655176 0.001034832 6.58636E-06
93.50686375 0.000834635 3.04865E-06
97.75717574 0.00066647 1.36148E-06
102.0074877 0.000526891 5.86615E-07
106.2577997 0.0004124 2.43858E-07
110-5081117 0.000319576 9.78046E-08
114.7584237 0.00024518 3.76462E-08
119.0087357 0.000186232 1.41295E-08
123.2590477 0.000140049 5.08942E-09
127.5093597 0.000104271 1.76869E-09
131.7596717 7.68607E-05 5.93028E-10
136.0099836 5.60921E-05 1.9184E-10
140.2602956 4.05281E-05 5.98746E-11
144.5106076 2.89913E-05 1.80296E-11
148.7609196 2.05322E-05 5.23806E-12
153.0112316 1.43966E-05 1,46823E-12
157.2615436 9.9941E-06 3.97063E-13
161.5118556 6.86884E-06 1.03601E-13
165.7621676 4.6739E-06 2.608E-14
170.0124796 3.14872E-06 6.33421E-15
19 (continued)
During 1998 the average value at risk before hedging on forecast profits for the
coming 12 months varied between (pound)55 million and (pound)76 million and
averaged (pound)64 million (1997: (pound)72 million) and after hedging varied
between (pound)30 million and
19 (continued)
(pound)43 million, averaging (pound)35 million (1997: (pound)36 million).
The gain/(loss) on currency hedging activities for the three years to December
1998 and the fair value of the unrecognised gain on the hedging book at the end
of 1998 are summarised below:
CURRENCY HEDGING GAINS/(LOSSES)
((POUND)M) 1998 1997 1996
- ---------------------------------------------
Recognised gains in 45 56 5
the year
Unrecognised (6) 39 39
(losses)/gains at
31 December
- ---------------------------------------------
The unrecognised gains/(losses) are based on fair values at the end of each year
and include certain realised items which have been deferred because they relate
to future periods.
Recognised currency hedging gains were lower in 1998 compared with 1997 due to
the relative strength of sterling when hedging for 1998 was undertaken. Of the
currency gains recognised in 1998, (pound)43 million related to contracts in
place at the end of 1997. Unrecognised losses of (pound)6 million at 31 December
1998 compare with unrecognised gains of (pound)39 million at 31 December 1997.
The fall reflects the strength of sterling during most of 1998, when the
majority of cover was arranged, and the impact of sterling's subsequent weakness
at the end of 1998.
Of the unrecognised currency hedging loss at 31 December 1998, (pound)3 million
relates to 1999 (31 December 1997 - (pound)36 million profit related to 1998.)
Net cash flows are mainly converted into sterling and either applied to reduce
debt or invested in money market instruments with financial institutions holding
strong credit ratings. The use of sterling instruments avoids any currency
exposure. Interest rates are hedged using a mix of financial instruments which
commence and mature at various dates through to April 2000. The maturity of
investments and debt are matched to minimise interest rate risk.
In broad terms, using the average net funds position, adjusted on a proforma
basis for the return of capital to shareholders as if it had taken place at the
beginning of the year, a 1% increase in global interest rates would have reduced
proforma profit before tax in 1998 by approximately (pound)1 million (1997:
(pound)3 million) excluding the impact of hedging.
US GAAP
Reconciliations of net income and shareholders' equity under UK and US GAAP are
set out on pages 36-38. A discussion of the relevant US accounting policies
which differ materially from UK GAAP is given on page 80 of Reuters Holdings PLC
1997 annual report and accounts. Two additional accounting adjustments were made
in 1998.
Firstly, a deduction of (pound)2 million before tax was made in respect of the
recognition of revenue from sales of software subject to millennium warranties.
Under UK GAAP, revenue and related direct costs from contracts for the outright
sale of software systems are recognised at the time of client acceptance. Under
US GAAP, specific rules were introduced with effect from January 1998 for the
determination of client acceptance in cases where future significant
modifications or upgrades to the software are considered to be part of the
client's overall acceptance of the product. Under these rules, an amount of
revenue is required to be deferred until these software upgrades have been
delivered and accepted by the client.
The adjustment made for 1998 of (pound)2 million compares with a (pound)22
million adjustment required in the first half of 1998. The fall reflects the
progress in the second half of 1998 in the delivery and installation of
millennium compliant software.
20
Secondly, a different accounting treatment is required under US GAAP to reflect
the impact of the capital reorganisation in February 1998. Under US GAAP this
transaction was deemed to be a share consolidation combined with a special
dividend and requires retroactive restatement of earnings per share and per ADS
and dividends per share and per ADS. Under UK GAAP no restatement of earnings
per share was deemed necessary as the return of capital was considered to be
equivalent to a repurchase of shares at market value and the number of new
shares in Reuters Group PLC was set to facilitate comparability with those of
Reuters Holdings PLC.
REPORTING UNDER THE NEW ORGANISATION STRUCTURE
With effect from 1 January 1999 the Group has been reorganised into two business
divisions - Reuters Information (RI) and Reuters Trading Systems (RTS). Instinet
continues to operate as an autonomous subsidiary. A Global Sales and Operations
group (GSO) has been established to co-ordinate the activities of the
geographical units responsible for the sale, installation, delivery and support
of divisional products.
The external reporting of financial performance will be revised with effect from
the 1999 interim announcement to reflect this new organisation structure.
EUROPEAN MONETARY UNION
The Reuters Euro Programme established to handle the product-related issues
arising from European Monetary Union was completed successfully.
The programme addressed changes to Reuters systems and products required to meet
the demands of the single European currency. Product revisions to address euro
issues were completed and tested on time.
Conversion and testing of approximately 1 billion pieces of information held on
Reuters historical databases took place over the four days prior to the opening
of the markets on 4 January 1999.
The incremental external costs incurred on the Euro Programme amounted to
(pound)6 million in 1998. Some additional expenditure will be incurred in 1999,
principally related to the additional client support required in the first few
weeks of the year.
YEAR 2000 READINESS DISCLOSURE
MILLENNIUM PROGRAMME
Reuters established its Millennium Programme in 1996 to address the issues
arising as a result of the change of millennium. Many computer systems, as well
as equipment that uses embedded chips, store or process date information using
only the last two digits of the year. From 1 January 2000 these systems may be
unable to distinguish between 1900 and 2000. This is complicated by the fact
that the year 2000 is also a leap year. If not overcome these problems could
disrupt the normal business operations of companies, including Reuters. Reuters
Millennium Programme is led by an executive director, supported by a full time
programme director, and both central and locally based millennium staff. The
Programme consists of six key parts:
1) Awareness - making Reuters customers, suppliers and employees aware of its
Millennium Programme and its progress through a series of brochures and a
comprehensive public Internet Millennium web-site.
2) Product Strategy - determining which Reuters products would be included in
the Reuters Millennium Programme and which older products would be declared
obsolete and replaced by newer products in accordance with the normal business
cycle.
21
3) Inventory - identifying and recording all aspects of Reuters business that
are date sensitive. The inventory details both third party and proprietary
software used in Reuters, hardware from desktop PCs to main frame computers,
third party datafeeds whether they be from an exchange or a single institution,
telecommunication and building services and other equipment that is utilised for
business operations.
4) Development - assessment of date sensitivity, and rectification or
replacement of date sensitive products. To date, over 1,500 of Reuters
proprietary software applications have been renovated.
5) Testing - verification of rectification. Testing is carried out at three
levels: Unit testing of individual software applications -- Integration
testing of groups of related applications -- Product testing to give assurance
of end to end operation
6) Implementation - installation of tested products and systems. To date, over
85% of client site applications have been upgraded.
Much of the work under the six phases of the Millennium Programme has been
completed. Some work will continue in 1999, including product assurance,
industry based testing, development work for certain corporate systems and
residual client site implementation. Reuters will also continue to verify the
efforts of its suppliers.
As part of the Millennium Programme, Reuters actively participates in a number
of national and international year 2000 groups which include representation from
customers, suppliers, infrastructure suppliers, regulatory and government
authorities, and other organisations with a significant interest in year 2000
issues.
MILLENNIUM PROGRAMME COSTS
The effort associated with the Millennium Programme falls into two main
categories:
1) The diversion of existing internal resources. This includes development staff
who would otherwise be deployed on other projects and operational staff involved
in the implementation at customer sites.
2) Incremental external resources, largely contractors and consultants, who will
not remain following the completion of the programme.
Details of the costs incurred in 1998 and budgeted for 1999 are set out below.
1999
1998 budget
Costs (POUND)(M)
- ---------------------------------------------
Internal effort
Development 10 6
Implementation 14 8
External effort
Development 18 7
Implementation 13 7
Total 55 28
- ---------------------------------------------
Internal and external costs for 1998 were in line with expectations. Incremental
capital expenditure arising as a direct result of the programme was (pound)33
million in 1998. No estimation of the cost of assets replaced in the normal
business cycle has been made.
The 1998 internal development effort of (pound)10 million represented 5% of
total group development expenditure. The (pound)14 million of implementation
activity represented 8% of client site activity. Accordingly, Reuters believes
that the Millennium Programme has not resulted in any material deferrals of
product developments or decreases in service quality at client sites. As
internal resource plans have considered Millennium Programme requirements since
1996, it is not possible to assess whether forthcoming
22
product development might have occurred sooner in the absence of this programme.
No material costs are currently projected for the year 2000 or beyond. However,
due to the number of variables and dependencies involved, Reuters does not
consider it possible to identify, avoid or quantify the damage that could result
from all possible millennium-related problems.
Reuters has used, and expects to continue to use, internally generated funds to
cover the cost of the Millennium Programme.
BUSINESS RISKS FROM YEAR 2000 ISSUES
The production of Reuters services and Reuters internal operations rely on third
party suppliers of data, hardware, software, telecommunications utilities,
buildings and building services. A failure of a third party supplier represents
a business risk to Reuters. Third party suppliers of date sensitive products and
services have been included in the millennium inventory. These suppliers have
been surveyed by Reuters about the nature and progress of their millennium work,
and may be requested to provide additional information, including regular
updates of the progress of their work.
Testing to verify Reuters use of certain third party products and services is
also carried out to gain further assurance. However, in the case of
telecommunications and utility suppliers, testing has not been possible, and
generally it has been difficult to obtain full assurances of millennium
compliance from them. Failure of a telecommunications or utility provider is
therefore a business risk for Reuters.
Through existing disaster recovery plans, Reuters already has the capability to
manage certain telecommunications and utilities failures. These plans will be
refined during the business continuity planning process described below.
Reuters products make use of software running in Reuters technical centres and
software at customer sites. Both types of software are tested and certified as
part of the Reuters Millennium Programme. A risk is posed to the effective
delivery of Reuters products if a problem is experienced with client site
software which requires site visits by Reuters engineers to overcome, due to the
time required to visit all customers. Remote support techniques such as direct
downloading and delivery via the Internet will form part of the business
continuity plan to minimise this risk.
Although Reuters will continue to devote substantial resources to address its
millennium issues, there can be no assurance that its products will not contain
undetected year 2000 problems. Moreover, while Reuters business continuity plan
will require that there is enhanced staff coverage at the beginning of the year
2000 and thereafter when needed, there can be no assurance that an unexpected
level of millennium problems will not result in a shortage of qualified
personnel to deal with them or in a diversion of personnel from other
operations.
In addition, many commentators believe that there will be a significant amount
of litigation arising out of millennium-related issues. The unprecedented nature
of any such litigation makes it impossible for Reuters to predict the impact
that any such litigation would have on Reuters.
Reuters expects that the development of its business continuity plan will
further refine its understanding of the relevant business risks arising from the
change of millennium, and there may be additional risks of which Reuters is not
now aware.
23
REUTERS CONTINUITY PLAN
Reuters is currently preparing a comprehensive business continuity plan
specifically designed for the Millennium. The continuity plan is a key component
of Reuters preparation for the millennium and will be the primary focus of the
programme during 1999.
Reuters already has as part of its day to day operations plans that can be
executed in the event of certain service failures. These range from failure of a
single computer or software application to the failure of a key global technical
centre. These operational plans will form the basis of the millennium continuity
plan after being checked for applicability and enhanced as appropriate.
Continuity planning focuses on three areas in Reuters - production,
infrastructure, and customer environment. Potential incidents in each area are
being identified, assessed and, where possible, plans put in place to handle the
incident. Continuity plans will include additional staff coverage globally for
key parts of the Reuters business. This ranges, for example, from enhanced help
desks, field support, software support and operational support to incident
monitoring and decision making.
CAUTIONARY STATEMENTS
IMPACT OF CURRENCY MOVEMENTS
Reuters receives revenue and incurs expenses in more than 60 currencies and is
thereby exposed to the impact of fluctuations in currency rates. Sterling's
strength in the first three quarters of 1998 has restricted revenue and earnings
growth. A resumption of sterling's strength could further restrict reported
revenue and earnings in 1999. Reuters currency exposure is actively hedged. For
additional information concerning currency fluctuations see "Treasury
Management" on page 18.
STATE OF FINANCIAL MARKETS
Reuters business is dependent upon the health of the financial markets and the
participants in those markets. Recent events in the financial sector in Asia,
Russia and Latin America have created uncertainty in these and other markets and
the full impact of these events has not yet been reflected in revenue. Reuters
business could also be adversely affected by consolidations and rationalisations
among clients in the banking and other industries.
Reuters transactions business is particularly dependent upon the level of
activity in the foreign exchange and equity markets.
PRODUCT DEVELOPMENT
Products in the information technology industry are becoming increasingly
sophisticated. As a result, Reuters, like other information vendors, may
encounter difficulties or delays in the development, production, testing,
marketing, installation and market acceptance of new products.
EUROPEAN ECONOMIC AND MONETARY UNION
The introduction of a single currency in Europe in January 1999 has initially
resulted in a reduction in the volume of foreign exchange trading. At this time
Reuters is unable to predict whether this will have a long-term effect on the
company's foreign exchange information and transaction services.
MILLENNIUM ISSUES
Reuters is exposed to various risks arising out of the change of millennium and
the impact which this may have on its products and the development and
production processes upon which they depend. A risk is posed to the effective
delivery of Reuters products if a problem is experienced with client site
software which requires site visits by Reuters engineers to overcome, due to the
time required to visit all customers. Also, Reuters services and internal
24
operations rely on third party suppliers of data, hardware, software,
telecommunications, utilities and building services. For further information
concerning Reuters Millennium Programme, see "Millennium Programme" on pages
21-24. Additional risks are described under the heading "Business Risks from
Year 2000 issues" on pages 22-23.
BROKER ACTIVITIES
Certain Reuters subsidiaries act as brokers in the financial markets but do not
undertake trading on their own account. Instinet Corporation is an agency broker
in the equities markets and Reuters Transaction Services Limited (RTSL) operates
the Dealing 2000-2 electronic brokerage services for the foreign exchange
market. These brokers could incur losses from broken trades and, in respect of
equities, the failure of a counterparty. Reuters seeks to mitigate these risks
by computerised systems, procedural controls and contractual agreements with
customers.
SEC RULES FOR ALTERNATIVE TRADING SYSTEMS
In December 1998 the US Securities and Exchange Commission (SEC) promulgated new
rules overhauling the regulation of certain "alternative trading systems". The
rules expand the SEC's interpretation of the definition of "exchange" under the
US securities laws to encompass a broad range of electronic brokerage
activities, including those conducted by Instinet Corporation.
The rules permit alternative trading systems to choose to be regulated either as
a national securities exchange or as a broker-dealer, provided that they comply
with certain additional requirements imposed by a new Regulation ATS. The
requirements include, among others, mandatory public display of, and public
access to, best-priced orders displayed within the system and the establishment
and application of fair access and capacity, integrity and security standards.
The new rules were promulgated with an effective date of 21 April 1999, subject
to a phase-in provision for the public display requirement (with 50% of covered
securities required to be displayed on 21 April 1999 and the remaining 50%
required to be displayed on 30 August 1999).
Implementation of Regulation ATS may have a significant impact on Instinet's
business. Mandatory order display may result in an increased volume of message
traffic, with resulting additional costs associated with increasing network
capacity. Implementation of the Regulation is also expected to require
functional modifications to Instinet Corporation's systems and its customers'
interfaces.
Instinet Corporation has commenced discussions with the staff of the SEC
Division of Market Regulation regarding implementation of Regulation ATS in a
manner that would minimise or avoid disruption to Instinet's business. Reuters
is unable to predict the outcome of these discussions, although they may have a
significant impact on the extent to which Instinet's business is affected by
Regulation ATS.
SEC RULES ON ECN USAGE
Reuters and Instinet Corporation continue to monitor the operation of SEC rules
governing market-maker and exchange specialist usage of electronic
communications networks (ECNs).
Most recently, by letter dated 18 December 1998, the SEC Division of Market
Regulation issued an extension, until 19 February 1999, of the Division's
no-action position verifying Instinet Corporation's status as an ECN. The
Division continues to condition its position upon, among other things, Instinet
Corporation's representation
25
that it has sufficient capacity to handle the volume of trading reasonably
anticipated. Reuters has no reason at this time to believe that Instinet
Corporation will not be able to continue to meet its obligations as an ECN under
currently applicable SEC rules, although Instinet's status could be adversely
affected by the implementation of Regulation ATS, as described below.
NASD INITIATIVES
The US National Association of Securities Dealers, Inc. (NASD), which oversees
the activities of US broker-dealers and also operates and regulates the primary
market for the trading of over-the-counter securities (Nasdaq), is considering a
number of changes to the Nasdaq marketplace.
Some of these changes could put the NASD into direct competition with Instinet
or otherwise have a significant impact on Instinet's business. Each of the
NASD's proposals must be approved by the SEC. At this time Reuters is unable to
predict whether, when or in what form any of the NASD's proposals will be
approved or implemented, or the impact that any such implementation would have
on Instinet Corporation's business.
FURTHER REGULATION OF TRANSACTION PRODUCTS
The increasing use of electronic systems as alternatives to traditional exchange
and over-the-counter trading has led authorities in several jurisdictions to
explore various methods of regulating such systems, including the SEC rules
described below, implementation of which could impact Instinet and other
transaction products offered by Reuters from time to time.
KEY SUPPLIERS
Reuters is reasonably dependent on certain hardware and software suppliers,
although alternative sources could be found if the need arose. The main
suppliers are Intel Corporation, Microsoft Corporation, Compaq Computer
Corporation and NCR Corporation.
NETWORKS AND SYSTEMS
Reuters networks and systems risk being impacted by a catastrophic failure of
long or short duration due to factors beyond its control. Reuters seeks over
time to minimise these risks as far as it can by, inter alia, security controls,
systems and communications redundancy and elimination of single points of
failure where feasible.
INTERNET
Availability of the public Internet and Internet technology may, over time,
reduce barriers to entry for new information providers, creating additional
competition and new price/cost dynamics in the industry. It may also increase
the availability of commoditised data in cheaper forms and the loss of control
over intellectual property. As a new publishing medium, it will also create new
outlets for content providers.
GEOGRAPHICAL OPERATIONS
Reuters may suffer discriminatory tariffs or other forms of government
intervention due to the nature of its editorial and other reporting activities.
REUTERS ANALYTICS
In January 1998 Reuters was notified that Reuters Analytics Inc. ("Reuters
Analytics"), one of its US subsidiaries, is the subject of a grand jury
investigation in New York arising out of an arrangement that Reuters Analytics
had with a New York-based consultant. The consultant subscribed to Bloomberg
L.P.'s service, which included the associated data and analytics.
Reuters is co-operating with the investigation and has engaged external legal
counsel to conduct a thorough internal inquiry. At this time Reuters is unable
to predict the impact the investigation or related events may have on its
business or financial condition.
26
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 1998 (unaudited)
YEAR TO YEAR TO
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Revenue 3,032 2,882 5,033 4,784
Operating costs (2,482) (2,341) (4,120) (3,886)
- --------------------------------------------------------------------------------
Operating profit 550 541 913 898
Profit on disposal of fixed
asset investments 26 -- 43 --
Loss from associates (1) (1) (1) (1)
Income from fixed
asset investments 3 6 5 9
Net interest receivable 2 80 3 133
- --------------------------------------------------------------------------------
Profit on ordinary
activities before taxation 580 626 963 1,039
Taxation on profit on
ordinary activities (196) (236) (325) (392)
- --------------------------------------------------------------------------------
Profit after taxation
attributable to
ordinary shareholders 384 390 638 647
Dividend
Interim (48) (50) (80) (84)
Final (155) (140) (257) (231)
- --------------------------------------------------------------------------------
Retained profit 181 200 301 332
- --------------------------------------------------------------------------------
Earnings per 26.7p 24.0p 26.7p 24.0p
ordinary share
- --------------------------------------------------------------------------------
27
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 1998
(unaudited)
YEAR TO YEAR TO
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Profit attributable to
ordinary shareholders 384 390 638 647
Translation differences
(debited)/credited directly
to reserves (1) 2 (1) 3
- --------------------------------------------------------------------------------
Total recognised gains
and losses relating to
the period 383 392 637 650
- --------------------------------------------------------------------------------
28
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR
ENDED 31 DECEMBER 1998 (unaudited)
YEAR TO YEAR TO
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Net cash inflow from 998 936 1,656 1,554
operating activities
Dividends received from
associates 9 -- 15 --
Returns on investments and
servicing of finance
Interest received 76 79 126 132
Interest paid (72) (3) (119) (4)
Income from fixed asset
investments 3 1 4 1
- --------------------------------------------------------------------------------
Net cash inflow from returns
on investments and servicing
of finance 7 77 11 129
Taxation paid (219) (196) (363) (325)
Capital expenditure and
financial investments
Purchase of tangible fixed
assets (307) (369) (509) (613)
Sale of tangible fixed assets 2 1 3 1
Purchase of fixed asset
investments (22) (21) (36) (35)
Sale of fixed asset
investments 34 11 57 19
- --------------------------------------------------------------------------------
Net cash outflow from capital
expenditure and financial
investments (293) (378) (485) (628)
Acquisitions and disposals
(including associates) (138) (22) (229) (38)
Equity dividends paid (188) (196) (311) (326)
- --------------------------------------------------------------------------------
Cash inflow before use of
liquid resources and
financing 176 221 294 366
Management of liquid
resources
Net decrease/(increase) in
short-term investments 313 (255) 520 (422)
Financing
Return of surplus capital (1,482) -- (2,462) --
Proceeds from issue of shares 13 39 21 64
Shares repurchased -- (21) -- (34)
Net increase/(decrease) in
borrowings 972 (15) 1,614 (26)
- --------------------------------------------------------------------------------
Net cash (outflow)/inflow
from financing (497) 3 (827) 4
- --------------------------------------------------------------------------------
Decrease in cash (8) (31) (13) (52)
- --------------------------------------------------------------------------------
29
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN
NET FUNDS FOR THE YEAR ENDED 31 DECEMBER 1998
(unaudited)
YEAR TO YEAR TO
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Decrease in cash (8) (31) (13) (52)
Cash (inflow)/outflow from
movement in borrowings (972) 15 (1,614) 26
Cash (inflow)/outflow from
movement in liquid resources (313) 255 (520) 422
- --------------------------------------------------------------------------------
Change in net cash resulting
from cashflows (1,293) 239 (2,147) 396
Translation difference -- 1 -- 2
- --------------------------------------------------------------------------------
Movement in net funds (1,293) 240 (2,147) 398
Opening net funds 1,290 1,050 2,142 1,744
- --------------------------------------------------------------------------------
Closing net (debt)/funds (3) 1,290 (5) 2,142
- --------------------------------------------------------------------------------
NET CASH INFLOW FROM OPERATING ACTIVITIES
YEAR TO % YEAR TO
31 DECEMBER CHANGE 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- ---------------------------------------------------------------------------------------
Operating profit 550 541 2% 913 898
Depreciation 331 312 6% 548 519
Goodwill amortisation 46 51 (9%) 77 84
Decrease in stocks 3 10 (67%) 6 17
Increase in debtors (103) (73) 43% (172) (121)
Increase in creditors 171 81 112% 284 134
Profit on disposal of
subsidiaries (5) -- (8) --
Loss on disposal of fixed
assets 3 10 (68%) 5 16
Amortisation of interests
in own shares 3 4 (20%) 5 7
Miscellaneous, principally
translation differences (1) -- -- (2) --
- ---------------------------------------------------------------------------------------
998 936 7% 1,656 1,554
- ---------------------------------------------------------------------------------------
30
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 1998
(unaudited)
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Fixed assets 1,098 1,046 1,823 1,738
Net current assets
Stocks 6 13 10 22
Debtors 595 498 988 827
Cash and short-term
investments 1,006 1,356 1,670 2,251
Creditors (2,250) (1,153) (3,736) (1,915)
- --------------------------------------------------------------------------------
Net current
(liabilities)/assets (643) 714 (1,068) 1,185
Long-term creditors and
provisions (66) (81) (109) (135)
- --------------------------------------------------------------------------------
Net assets 389 1,679 646 2,788
- --------------------------------------------------------------------------------
Capital and reserves
Called-up share capital and
share premium 370 408 616 679
Other reserve (1,717) (290) (2,852) (481)
Profit and loss account
reserve 1,719 1,543 2,854 2,561
- --------------------------------------------------------------------------------
Shareholders' equity 372 1,661 618 2,759
- --------------------------------------------------------------------------------
Minority interest 17 18 28 29
- --------------------------------------------------------------------------------
Capital employed 389 1,679 646 2,788
- --------------------------------------------------------------------------------
31
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS'
FUNDS FOR YEAR TO 31 DECEMBER 1998 (unaudited)
YEAR TO YEAR TO
31 DECEMBER 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Retained profit 181 200 301 332
Translation differences
(debited)/credited directly
to reserves (1) 2 (1) 3
Return of surplus capital
to shareholders (1,482) -- (2,462) --
Shares issued during the
period 13 22 21 37
Shares repurchased during
the period -- (21) -- (34)
- --------------------------------------------------------------------------------
Net (reduction)/addition to
shareholders' equity (1,289) 203 (2,141) 338
Opening shareholders'
equity 1,661 1,458 2,759 2,421
- --------------------------------------------------------------------------------
Closing shareholders'
equity 372 1,661 618 2,759
- --------------------------------------------------------------------------------
32
NOTES TO UNAUDITED PRELIMINARY RESULTS FOR THE
YEAR ENDED 31 DECEMBER 1998
1. BASIS OF PREPARATION
The above financial information has been prepared on a basis consistent with the
accounting policies set out on pages 78 and 79 of Reuters Holdings PLC 1997
annual report. The annual financial statements, which are the first published by
Reuters Group PLC, reflect all adjustments consisting only of normal recurring
adjustments which, in the opinion of management, are necessary to provide a fair
statement of the results for the periods presented.
Reuters Group PLC was incorporated on 24 December 1996 as Nayatronics Limited
and was re-registered as a public limited company on 12 December 1997. On 2
December 1997 the authorised share capital of Reuters Group PLC was increased
from (pound)100 to (pound)50,000 by the creation of 49,900 redeemable preference
shares of (pound)1 each and on 12 December 1997 was further increased to
(pound)525,000,001 by the creation of 2,099,800,000 ordinary shares of 25p each
and one founders share of (pound)1.
On 18 February 1998, Reuters Group PLC issued and credited as fully paid
1,417,331,693 ordinary shares of 25p each and paid cash of (pound)1,482 million
to acquire the majority of the issued share capital of Reuters Holdings PLC
following the approval of a High Court Scheme of Arrangement. In exchange for
every 15 ordinary shares in Reuters Holdings PLC shareholders received 13
ordinary shares in Reuters Group PLC plus (pound)13.60 in cash.
As the cash consideration exceeded ten percent of the nominal value of the new
shares issued, compliance with the detailed accounting requirements of the UK
Companies Act of 1985 would have required the capital reorganisation to be
accounted for as an acquisition. This would have resulted in all of the
separable assets and liabilities of the group at the date of the reorganisation
being recorded at their fair values, substantial goodwill and goodwill
amortisation charges and only post reorganisation results being reported in the
group profit and loss account. The directors do not believe this would have
given a true and fair view of the state of affairs of the group and of its
results as in substance the capital reorganisation represented a change in the
identity of the holding company rather than an acquisition of a business.
Consequently, the capital reorganisation has been accounted for using merger
accounting principles, as the directors consider this necessary in order to meet
the overriding requirements of the UK Companies Act 1985 to show a true and fair
view. The directors consider that it is not practicable to quantify the effect
of this departure from the detailed accounting requirements.
Share capital and reserves in the prior year consolidated balance sheets have
been restated on a proforma basis. The proforma share capital as at 31 December
1997 and 31 December 1996 represents the proforma nominal value of shares in
issue of Reuters Group PLC immediately prior to the reorganisation. Differences
between this amount and the previously reported capital and reserves, excluding
the profit and loss reserve, represent the merger difference and have been
reflected in other reserves.
33
The cash payment and the reduction in the number of ordinary shares was
considered to represent a repurchase of two shares in every fifteen at market
value. Consequently, prior year earnings per share figures have not been
adjusted.
The unaudited financial statements should be read in conjunction with the 1997
annual accounts of Reuters Holdings PLC. The results for the year to 31 December
1997 do not comprise statutory accounts within the meaning of section 240 of the
1985 UK Companies Act but are an abridged proforma version of the statutory
accounts of Reuters Holdings PLC for that year which have been delivered to the
Registrar of Companies. The auditors' report on the statutory accounts was
unqualified and did not contain a statement made under section 237(2) or section
237(3) of the Companies Act.
34
2. SEGMENTAL ANALYSIS
YEAR TO % YEAR TO
31 DECEMBER CHANGE 31 DECEMBER
1998 1997 1998 1997
(POUND)M (POUND)M US$M US$M
- --------------------------------------------------------------------------------
Revenue
Europe, Middle East
and Africa 1,566 1,484 6% 2,599 2,463
Asia/Pacific 466 496 (6%) 773 823
The Americas 454 437 4% 754 726
- --------------------------------------------------------------------------------
2,486 2,417 3% 4,126 4,012
Instinet 446 383 16% 740 636
TIBCO 100 82 23% 167 136
- --------------------------------------------------------------------------------
3,032 2,882 5% 5,033 4,784
- --------------------------------------------------------------------------------
Operating costs where
incurred
Europe, Middle East
and Africa (1,028) (986) 4% (1,705) (1,636)
Asia/Pacific (289) (312) (7%) (480) (518)
The Americas (429) (400) 7% (713) (664)
- --------------------------------------------------------------------------------
(1,746) (1,698) 3% (2,898) (2,818)
Instinet (291) (234) 25% (483) (388)
TIBCO (87) (67) 31% (145) (112)
- --------------------------------------------------------------------------------
(2,124) (1,999) 6% (3,526) (3,318)
- --------------------------------------------------------------------------------
Contribution
Europe, Middle East
and Africa 538 498 8% 894 827
Asia/Pacific 177 184 (4%) 293 305
The Americas 25 37 (33%) 41 62
- --------------------------------------------------------------------------------
740 719 3% 1,228 1,194
Instinet 155 149 3% 257 248
TIBCO 13 15 (13%) 22 24
- --------------------------------------------------------------------------------
908 883 3% 1,507 1,466
Central costs (351) (347) 1% (582) (576)
Net currency gain 39 56 (29%) 65 92
Goodwill amortisation (46) (51) (9%) (77) (84)
- --------------------------------------------------------------------------------
Operating profit 550 541 2% 913 898
- --------------------------------------------------------------------------------
35
3. US GAAP
UK GAAP differ in certain respects from US GAAP. A discussion of the relevant
accounting principles which differ materially is given on page 80 of Reuters
Holdings PLC 1997 annual report and beneath the following table. The following
are the approximate adjustments required to reconcile UK GAAP with US GAAP.
ADJUSTMENTS TO NET INCOME
YEAR TO YEAR TO
31 DECEMBER 1998 31 DECEMBER 1997
(POUND)M (POUND)M
- --------------------------------------------------------------------------------
Profit attributable to ordinary
shareholders in accordance with UK GAAP 384 390
US GAAP adjustments:
Software revenue recognition (see
note (i) below) (2) --
Goodwill and other acquisition
accounting adjustments (3) (3)
Software development (2) (2)
Employee costs (1) (3)
Taxes 16 4
- --------------------------------------------------------------------------------
Approximate net income in
accordance with US GAAP 392 386
- --------------------------------------------------------------------------------
Earnings and dividends (see note (ii) below)
Basic earnings per ADS in
accordance with US GAAP 166.6p 164.5p
Diluted earnings per ADS in accordance
with US GAAP 166.0p 163.4p
Dividend paid per ADS (including
UK advance corporation tax credit) 99.8p 104.7p
Deemed special dividend paid per ADS 627.7p --
- --------------------------------------------------------------------------------
Total dividend paid per ADS 727.5p 104.7p
- --------------------------------------------------------------------------------
Weighted average number of shares used
in basic EPS calculation (millions) 1,411 1,407
- --------------------------------------------------------------------------------
(i) Software revenue recognition
Under UK GAAP, revenue and related direct costs from contracts for the outright
sale of software systems are recognised at the time of client acceptance. Under
US GAAP, specific rules were introduced from January 1998 for the determination
of client acceptance in cases where future significant modifications or upgrades
to the software are considered to be part of the client's overall acceptance of
the product. Under these rules, an amount of revenue is required to be deferred
until these software upgrades have been delivered and accepted by the client.
Warranties provided by Reuters in connection with the delivery of millennium
versions of software fall within these rules and consequently an element of
revenue and related direct cost has been deferred under US GAAP. The policy has
not been adopted under UK GAAP.
36
(ii) Capital reorganisation
As explained in note 1, Reuters Holdings PLC completed a capital reorganisation
in February 1998. Under US GAAP this transaction was deemed a share
consolidation combined with a special dividend and, accordingly, earnings per
share and per ADS and dividends per share and per ADS have been retroactively
restated. Under UK GAAP no restatement of earnings per share was deemed
necessary as the cash payment was considered to be equivalent to a repurchase of
shares at market value and the number of new shares in Reuters Group PLC was set
to facilitate comparability of earnings with those of Reuters Holdings PLC.
ADJUSTMENTS TO SHAREHOLDERS' EQUITY
31 DECEMBER 1998 31 DECEMBER 1997
(POUND)M (POUND)M
- --------------------------------------------------------------------------------
Capital employed before minority
interest in accordance with UK GAAP 372 1,661
US GAAP adjustments:
Software revenue recognition (2) --
Goodwill and other acquisition
accounting adjustments 14 11
Capitalised software development
costs net of amortisation 6 8
Fixed asset investments 42 14
Shares held by employee share
ownership trusts (45) (39)
Liabilities (28) (25)
Taxes (10) (16)
Dividends not formally declared or paid
during the year 155 140
- --------------------------------------------------------------------------------
Shareholders' equity in
accordance with US GAAP 504 1,754
- --------------------------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
YEAR TO YEAR TO
31 DECEMBER 1998 31 DECEMBER 1997
(POUND)M (POUND)M
- --------------------------------------------------------------------------------
Approximate net income
in accordance with US GAAP 392 386
Other comprehensive income, net of tax:
Unrealised gains arising on certain
fixed asset investments:
arising during year 37 8
less gains in net income (19) --
Foreign currency translation differences (1) 2
- --------------------------------------------------------------------------------
Approximate comprehensive income in
accordance with US GAAP 409 396
- --------------------------------------------------------------------------------
37
SUMMARISED BALANCE SHEET (US GAAP BASIS)
31 DECEMBER 1998 31 DECEMBER 1997
(POUND)M (POUND)M
- --------------------------------------------------------------------------------
Assets
Fixed tangible assets 859 858
Current assets 1,565 1,809
Other assets 42 58
Software development costs 6 8
Goodwill and other intangibles 250 174
- --------------------------------------------------------------------------------
Total assets 2,722 2,907
- --------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities 2,102 1,017
Long-term liabilities 75 86
Deferred taxes 24 32
Minority interest 17 18
Shareholders' equity before deductions 562 1,889
Treasury stock - (82)
Shares held by employee share
ownership trusts (58) (53)
- --------------------------------------------------------------------------------
Total shareholders' equity 504 1,754
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity 2,722 2,907
- --------------------------------------------------------------------------------
SUMMARISED CONSOLIDATED CASHFLOW STATEMENT UNDER US GAAP
YEAR TO YEAR TO
31 DECEMBER 1998 31 DECEMBER 1997
(POUND)M (POUND)M
- --------------------------------------------------------------------------------
Net cash inflow from operating activities 795 817
Net cash outflow from investing activities (431) (400)
Net cash outflow from financing activities (764) (85)
- --------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash
equivalents (400) 332
- --------------------------------------------------------------------------------
38
GENERAL STATISTICS AND FINANCIAL RATIOS
GENERAL STATISTICS
DECEMBER % DECEMBER
1998 CHANGE 1997
- -----------------------------------------------------------------------------------------
User accesses (000s)
Information product accesses 445 15% 386
Transaction product accesses 40 6% 38
RBB passwords 13.1 19% 11.0
- -----------------------------------------------------------------------------------------
Total subscriber locations (000s) 57.9 9% 53.0
- -----------------------------------------------------------------------------------------
Average weekly contacts foreign exchange (000s) 1,392 (12%) 1,588
- -----------------------------------------------------------------------------------------
Information sources:
Contributors 4,982 4% 4,800
Markets reported in real time 267 (4%) 277
Journalists 2,072 2% 2,036
Bureaux 216 24% 174
- -----------------------------------------------------------------------------------------
Infrastructure:
Countries in which services distributed 157 (4%) 163
Countries with offices 96 (1%) 97
Cities 218 -- 217
- -----------------------------------------------------------------------------------------
Staff numbers 16,938 5% 16,119
- -----------------------------------------------------------------------------------------
FINANCIAL RATIOS December December
1998 1997
- --------------------------------------------------------------------------------
Operating margin 18.2% 18.8%
Pre-tax margin 19.1% 21.7%
Post-tax margin 12.7% 13.5%
EBITDA margin 30.6% 31.4%
Earnings per share 26.7p 24.0p
Cash flow per ordinary share 67.9p 61.0p
Free cash flow per ordinary share 34.1p 27.7p
Book value per ordinary share 23.3p 99.9p
Return on tangible fixed assets 48.2% 49.0%
Return on equity 78.5% 25.6%
The financial ratios are derived from UK GAAP data.
39
The definitions applied to each of the financial ratios are as follows:
EBITDA margin represents earnings before interest, taxation, depreciation and
amortisation as a percentage of turnover.
Cash flow per ordinary share represents profit before taxation, depreciation and
amortisation of goodwill divided by the number of shares in issue after
deducting shares held by employee share ownership trusts (ESOTs).
Free cash flow per ordinary share represents operating cash flow plus net
interest and other investment income received less tax paid and expenditure on
tangible fixed assets divided by the weighted average number of shares.
Book value per ordinary share represents adjusted shareholders' equity divided
by the number of shares in issue after deducting shares of Reuters Group PLC
held by ESOTs. Adjusted shareholders' equity is calculated after deducting the
carrying value of interests in shares of Reuters Group PLC held by ESOTs.
Return on tangible fixed assets represents profit after taxation as a percentage
of average tangible fixed assets. The average is calculated by adding tangible
fixed assets at the start and the end of each period and dividing by two
(annualised).
Return on equity represents profit attributable to ordinary shareholders divided
by the average adjusted shareholders' equity. In 1997 the average is calculated
by adding adjusted shareholders' equity at the start and the end of each period
and dividing by two. In 1998 a weighted average has been used to reflect the
capital reorganisation (annualised).
40
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or
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or
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Tel: 212 603 3587
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