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 July 1999
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REUTERS GROUP PLC
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(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: July 28, 1999 By: /s/ Nancy C. Gardner
----------------------------
Nancy C. Gardner
Attorney-in-Fact
REUTERS
INTERNATIONAL NEWS RELEASE
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REUTERS GROUP PLC
INTERIM STATEMENT
For the six months ended 30 June 1999
REUTERS GROUP PLC
85 FLEET STREET
LONDON EC4P 4AJ
TEL: 0171 250 1122
REG. NO. 3296375
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CONTENTS
Highlights of the Interim Results 2
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Summary of Results 3
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Statement 4
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Revenue Analysis -- six months to 30 June 1999 6
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Revenue Analysis -- second quarter 1999 7
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Review of Interim Results 8
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Consolidated Profit and Loss Account 21
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Consolidated Statement of Total Recognised Gains and Losses 22
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Consolidated Cash Flow Statement 23
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Reconciliation of Net Cash Flow to Movement in Net Funds 24
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Net Cash Inflow from Operating Activities 25
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Consolidated Balance Sheet 26
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Reconciliation of Movement in Shareholders' Funds 27
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Notes to Unaudited Interim Results 28
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Cautionary Statements 34
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General Statistics 37
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1
REUTERS GROUP PLC
HIGHLIGHTS OF THE INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 1999
20 July 1999 No. 18/99
o Revenue up 8% (up 5% ex-currency).
o Operating profit stable (up 3% ex-currency).
o Pre-tax profit of (pound)300 million (US$474 million) up 2% (up 5%
ex-currency).
o For those who track Reuters performance on a pre-goodwill basis, pre-tax
profit excluding goodwill up 2% to (pound)326 million.
o Earnings per ordinary share up 8% to 14.3p (earnings per American
Depositary Share (ADS) up 8% to US$1.36).
o For those who track Reuters performance on a pre-goodwill basis, earnings
per ordinary share excluding goodwill up 8% to 16.2p.
o Interim dividend up 7% to 3.65p.
2
SUMMARY OF RESULTS
The following is a summary of the unaudited results of Reuters Group PLC (NASDAQ
symbol: RTRSY) for the six months to 30 June 1999:
SIX MONTHS TO % CHANGE SIX MONTHS TO
30 JUNE ACTUAL COMPARABLE 30 JUNE
1999 1998 RATES OF RATES OF 1999 1998
(POUND)M (POUND)M EXCHANGE EXCHANGE US$M US$M
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Revenue 1,562 1,453 8% 5% 2,469 2,295
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Operating costs 1,284 1,175 9% 6% 2,030 1,856
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Operating profit 278 278 0% 3% 439 439
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Operating margin 17.8% 19.1% 17.8% 19.1%
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Net interest
(payable)/receivable (6) 11 - - (9) 17
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Profit before taxation 300 294 2% 5% 474 464
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Tax rate on profit
before goodwill 30% 31% 30% 31%
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Earnings per
ordinary share 14.3p 13.3p 8% 14.3p 13.3p
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Earnings per ADS $1.36 $1.26 8% $1.36 $1.26
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Dividend per
ordinary share:
Interim 3.65p 3.4p 7% 3.65p 3.4p
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Number of ordinary
shares ranking for
dividend (millions) 1,413 1,409 1,413 1,409
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Notes:
o This summary is taken from, and should be read in conjunction with, the
full attached statement and notes.
o The interim dividend is payable on 7 September 1999 to ordinary
shareholders on the register at 6 August 1999 and on 13 September 1999 to
ADS holders on the register at 6 August 1999.
o For convenience the US dollar equivalents for both years have been
converted throughout this news release at US$1.58 = (pound)1, a rate
prevailing on 30 June 1999.
3
STATEMENT
Revenue for the first half of the year rose by 8% at actual exchange rates to
(pound)1,562 million (US$2,469 million) and by 5% at comparable rates. Earnings
per share (EPS) grew by 8% to 14.3p after goodwill amortisation, and to 16.2p
before goodwill amortisation. The interim dividend of 3.65p rose 7% from 3.4p
last year.
Profit before tax (PBT) rose 2% to (pound)300 million (US$474 million) after
goodwill amortisation, aided by profit from the Greenhouse Fund of (pound)29
million (US$45 million). This fund holds 25 investments, mainly in
internet-related companies, 10 of which have been made this year. PBT growth was
reduced by the loss of interest income, following the return of capital made
last year. Interest paid of (pound)6 million (US$9 million) this year contrasts
with interest received of (pound)11 million (US$17 million) in the first half of
1998. The tax rate was slightly lower, in line with the lower UK tax rates.
Operating profit at (pound)278 million (US$439 million) was flat at actual rates
but grew by 3% at comparable rates. Growth was held back by lower net currency
gains of (pound)3 million (US$5 million) down from (pound)22 million (US$34
million), and higher investment at Instinet and the Reuters Trading Systems
division. This reduced operating margin to 17.8% from 19.1%.
Trading conditions in the first half were more difficult, particularly in
foreign exchange markets. Net new order levels consequently remained at lower
levels than in the same period last year. However, the new divisional structure
is already starting to deliver the expected benefits of cost containment.
Revenue for Reuters Information (RI) which represented 52% of the Group's
revenue was (pound)808 million (US$1,277 million), up 7%, or 5% at comparable
rates. Contribution was (pound)114 million (US$180 million), up 24%. The margin
rose to 14% from 12% for the same period last year reflecting the strong focus
on cost containment. Revenue growth was affected by the weakness of the foreign
exchange markets and the continuing difficult business climate in Asia, offset
by growth in equities and fixed income markets. The 3000 product continued to
sell well with sold accesses reaching 74,700. The next generation Reuters 3000
Xtra product is being introduced currently. Reuters Plus, the US domestic
equities service, has performed well with sales reaching 37,500 accesses and
there has been significant year on year growth in off-trading floor products
with installed accesses up from 72,000 to 98,000.
Revenue for Reuters Trading Systems (RTS) which represented 24% of the Group's
revenue was (pound)379 million (US$599 million), down 1%, or 3% at comparable
rates. Contribution was (pound)117 million (US$185 million), down 13%. The
revenue decline reflects a 10% fall, at comparable rates, in revenue for Money
Transaction Systems (MTS), which comprises Reuters foreign exchange dealing and
matching services, Dealing 2000-1 and Dealing 2000-2. The number of Dealing
2000-1 accesses fell by 1,000 to 23,000 in the first six months of this year.
This service is being affected by the introduction of the euro, difficulties in
emerging markets and by banking consolidation. Revenue growth in the rest of the
RTS business, including Risk Management and Financial Enterprise Systems, was up
9% to (pound)179 million (US$283 million). The RTS margin fell to 31% from 35%,
due in part to an increase in costs of 6%, which reflected a build-up in
resources at TIBCO Finance and investment in Securities Transaction Systems.
TIBCO Software Inc., which supplies software to non-financial markets, recently
completed an Initial Public Offering (IPO) and is now quoted on NASDAQ. Reuters
retains a 63% stake in the company on an undiluted basis.
4
Instinet's performance continued to benefit from good growth in equities
markets. Revenue grew by 23% to (pound)255 million (US$403 million) with growth
of 19% in the US and 38% in the International business. Margins at 31% were down
from 36% due to increased investment in new business development activity which
includes investment in the new Fixed Income product, currently expected to be
launched later this year. Instinet has also made investments in Tradepoint, the
London-based electronic stock exchange, and W.R. Hambrecht, an entrepreneurial
investment bank, and is considering the possibility of developing services for
the retail market.
Revenue for the Corporate and Media Information Group (CMIG) was (pound)105
million (US$167 million), up 4% at actual rates and 2% at comparable rates. The
loss of (pound)6 million (US$ 9 million) was reduced from a loss of (pound)20
million (US$30 million) last year. With effect from 1 July 1999 CMIG became part
of the recently announced Ventures Division, which comprises the traditional
news and television agency business, new media services supplied to Internet
websites, the Greenhouse Fund and other new business developments. It will also
have responsibility for the relationship with Dow Jones Reuters Business
Interactive LLC, the joint venture that as of 1 July 1999 combines Reuters
Business Briefing (RBB) and Dow Jones Interactive. RBB had revenue of (pound)31
million (US$49 million) in the first half, up 24% at actual rates, and 22% at
comparable rates. On a proforma basis, reflecting the new joint venture between
Reuters and Dow Jones, Reuters Ventures would have made a contribution loss of
(pound)5 million (US$8 million).
Chief Executive, Peter Job, said: "Challenging conditions are pushing down our
revenue growth rate but we are investing in several good opportunities being
created by the fast pace of change in financial markets. I'm looking for
improvement in profit growth during the second half of the year.
"The Internet is opening up big new market segments with a lower price tag and
much lower delivery costs. We are reaping benefits in terms of marketing
insights as well as hard cash from having started investing in Internet
companies five years ago. Our early decision to put news and pictures on the Web
has enabled us to build an audience of many millions on most of the popular
sites.
"The US$2 billion flotation of TIBCO Software, which we set up for the Internet
two years ago, is a great endorsement of our Internet strategy thus far."
END
This news release may be deemed to include forward-looking statements within the
meaning of the US securities laws. For a discussion of factors that could affect
future results, reference should be made to the Cautionary Statements included
on pages 34 to 36 and to the Business risks from Year 2000 issues included on
pages 19 to 20 of this International News Release.
Copies of this news release will be available to the public at Reuters Group
PLC, 85 Fleet Street, London EC4P 4AJ and on the World Wide Web at
http://www.reuters.com
REUTERS AND THE DOTTED AND SPHERE LOGOS ARE THE TRADEMARKS OF THE REUTERS GROUP
OF COMPANIES.
5
REVENUE ANALYSIS - SIX MONTHS TO 30 JUNE 1999
SIX MONTHS TO % CHANGE SIX MONTHS TO YEAR TO
30 JUNE ACTUAL COMPARABLE 30 JUNE 31 DECEMBER
1999 1998 RATES OF RATES OF 1999 1998 1998 1998
(POUND)M (POUND)M EXCHANGE EXCHANGE US$M US$M (POUND)M US$M
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REVENUE ANALYSIS
BY DIVISION
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Reuters
Information 808 754 7% 5% 1,277 1,192 1,531 2,419
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Reuters Trading
Systems 379 381 (1%) (3%) 599 602 827 1,307
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Instinet 255 208 23% 20% 403 328 446 704
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Corporate/Media 105 101 4% 2% 167 160 208 328
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TIBCO Software 21 14 57% 53% 33 21 35 56
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Intra group revenue (6) (5) (10) (8) (15) (23)
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Total 1,562 1,453 8% 5% 2,469 2,295 3,032 4,791
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REVENUE ANALYSIS
BY GEOGRAPHY
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Europe, Middle
East and Africa 781 756 3% 2% 1,235 1,196 1,556 2,459
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Asia/Pacific 237 232 2% (2%) 375 366 466 736
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The Americas 248 225 11% 8% 392 354 464 733
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Instinet 255 208 23% 20% 403 328 446 704
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TIBCO (Note 1) 41 32 25% 22% 64 51 100 159
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Total 1,562 1,453 8% 5% 2,469 2,295 3,032 4,791
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REVENUE ANALYSIS
BY TYPE
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Recurring 1,167 1,091 7% 5% 1,846 1,724 2,170 3,429
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Usage 305 273 11% 10% 481 431 621 981
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Outright 90 89 1% 0% 142 140 241 381
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Total 1,562 1,453 8% 5% 2,469 2,295 3,032 4,791
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Note 1: TIBCO comprises the results of TIBCO Finance, which forms part of
Reuters Trading Systems division, and TIBCO Software.
6
REVENUE ANALYSIS - SECOND QUARTER 1999
SIX MONTHS TO % CHANGE THREE MONTHS TO
30 JUNE ACTUAL COMPARABLE 30 JUNE
1999 1998 RATES OF RATES OF 1999 1998
(POUND)M (POUND)M EXCHANGE EXCHANGE US$M US$M
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REVENUE ANALYSIS
BY DIVISION
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Reuters Information 403 378 6% 4% 636 599
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Reuters Trading
Systems 194 197 (1%) (3%) 307 311
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Instinet 130 107 23% 20% 205 167
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Corporate/Media 53 51 4% 2% 84 81
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TIBCO Software 13 7 100% 94% 21 11
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Intra-group revenue (2) (2) (3) (3)
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Total 791 738 7% 5% 1,250 1,166
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REVENUE ANALYSIS
BY GEOGRAPHY
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Europe, Middle
East and Africa 388 384 1% 1% 615 609
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Asia/Pacific 118 117 2% (3%) 188 185
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The Americas 129 115 13% 10% 203 179
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Instinet 130 107 23% 20% 205 168
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TIBCO (Note 1) 26 15 56% 54% 39 25
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Total 791 738 7% 5% 1,250 1,166
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REVENUE ANALYSIS
BY TYPE
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Recurring 579 541 7% 5% 915 855
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Usage 156 145 8% 6% 247 229
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Outright 56 52 7% 7% 88 82
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Total 791 738 7% 5% 1,250 1,166
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Note 1: TIBCO comprises the results of TIBCO Finance, which forms part of
Reuters Trading Systems division, and TIBCO Software.
7
REVIEW OF INTERIM 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" on pages 34 to 36 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 8% at actual rates to (pound)1,562 million in the first half
of 1999. At comparable rates revenue grew 5% compared with growth in the first
half of 1998 of 8%.
Second quarter revenue grew 7% at actual rates and 5% at comparable rates.
Total costs grew 9% at actual rates in the first half of 1999, and 6% at
comparable rates.
Operating profit was stable at (pound)278 million, reflecting a fall in net
currency gains to (pound)3 million from (pound)22 million in the first half of
1998. At comparable rates, operating profit grew 3%.
FIRST HALF 1999 GROWTH
GROWTH AT ACTUAL RATES GROWTH AT COMPARABLE RATES
---------------------- --------------------------
Revenue 8% 5%
Costs 9% 6%
Operating profit 0% 3%
Millennium programme costs in respect of incremental external effort amounted to
(pound)10 million in the first half of 1999 compared with (pound)11 million in
1998. Further incremental costs of (pound)13 million (1998: (pound)20 million)
are estimated to be incurred in the second half of the year principally in
relation to testing and continuity planning.
Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 1% at
actual rates to (pound)462 million, and was stable at comparable rates.
Profit on disposal of fixed asset investments was (pound)29 million. This
reflected the sale of a number of investments in high technology companies held
in the Reuters Greenhouse Fund.
Net interest payable was (pound)6 million compared with net interest receivable
of (pound)11 million in the first half of 1998. This reflects the return of
(pound)1.5 billion of cash to shareholders in February 1998.
Profit before tax increased 2% to (pound)300 million at actual rates and 5% at
comparable rates.
8
The tax charge for the first half of 1999 is based on an estimated tax rate of
30% on profit before goodwill amortisation compared with a rate of 31% in 1998
and the UK corporate tax rate of 30.25% for 1999.
As a result earnings per share increased 8% in the first half of 1999 to 14.3p
from 13.3p in the first half of 1998.
Free cash flow per share was 16.6p, up 22% from 13.6p in the first half of 1998.
Investment in the business continued with (pound)104 million of fixed asset
additions, (pound)96 million of development expenditure and (pound)8 million of
acquisitions and investments net of disposal proceeds. The impact of
acquisitions and disposals was not material to group revenue and operating
profit growth.
The interim dividend per share has been increased by 7% to 3.65p. Dividend cover
decreased to 3.9 in the first half of 1999 from 4.1 in the first half of 1998.
COMPANY STRUCTURE
Following the company reorganisation, Reuters is now managed on a divisional
basis. In the first six months of 1999, the divisions comprised Reuters
Information, Reuters Trading Systems, Instinet and the Corporate/Media
Information Group and segmental disclosures reflect this new structure.
TIBCO Software completed an Initial Public Offering on 14 July 1999, generating
net proceeds of US$127 million. Reuters did not sell any of its shares in the
offering.
Reuters retains a holding of 63% in TIBCO Software on an undiluted basis.
Reuters voting rights are restricted to a maximum of 49% and accordingly TIBCO
Software will now be treated as an associate company in the results of the
group.
With effect from 1 July 1999 Reuters Business Briefing was transferred into a
new joint venture company, Dow Jones Reuters Business Interactive ('DJRBI'). The
remaining wholly owned Corporate /Media Information businesses will form part of
the new Reuters Ventures division, which will also be responsible for managing
Reuters investment in DJRBI and the Greenhouse Fund.
REUTERS INFORMATION
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6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
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Revenue 808 754 7% 5%
Costs (694) (662) 5% 3%
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Contribution 114 92 24% 16%
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Margin 14% 12%
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Reuters Information (RI) contribution for the first half of 1999 grew 16% at
comparable rates. Contribution margin increased from 12% to 14%.
Revenue growth at actual rates was 7%, or 5% at comparable rates. Excluding the
impact of acquisitions, underlying revenue growth was 4% at comparable rates.
Shrinkage in the foreign exchange market which generates one third of the
division's revenue, was offset by growth in the equities, fixed income, and
commodities/ energy markets.
Early action to contain costs in the new division also improved profit and
margin.
Reuters Information is responsible for all financial information products. Its
aim is to produce, for financial professionals and their clients, its own
differentiated content and features while aggregating key third party products
in a convenient way.
9
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6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
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RI REVENUE
Europe, Middle
East & Africa 490 457 7% 6%
Asia/Pacific 148 143 4% (1%)
The Americas 170 154 10% 8%
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808 754 7% 5%
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ACCESSES (000)
3000 56 38 48%
OTF/OIS 98 72 35%
Other 323 308 5%
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Total 477 418 14%
REVENUE PER
ACCESS ((POUND)000) 1.8 1.9 (7%) (9%)
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The regional picture was mixed. At comparable rates Asian revenues fell slightly
while revenues in Europe grew 6%, reflecting double digit growth in Germany
offset by low single digit growth in the UK and Ireland. Revenue growth at
comparable rates in the Americas of 8% included the impact of the acquisition of
Lipper Analytical Services in July 1998. Excluding this, underlying revenue
growth was 3%.
The new Reuters 3000 Xtra flagship product was launched in the second quarter,
and sales are expected to come fully on stream after customers emerge from their
millennium programmes early next year. Good growth continued in Internet
delivered products for users outside the trading room.
Accesses grew 14% year on year to 477,000 at 30 June 1999. Installed 3000
accesses increased from 48,000 at the end of 1998 to 56,000 at 30 June 1999.
Approximately 30% of 3000 installations at 30 June 1999 related to new users, of
which over 2,200 were installed during 1999.
There were 98,000 installed Off-Trading Floor (OTF) and Online Investor Services
(OIS) accesses at 30 June 1999. OTF products are aimed at users of financial
information outside the dealing room while OIS products provide clients with
online information for their own customer bases.
Revenue per access declined 9% at comparable rates, principally reflecting the
increased proportion of lower priced OTF products.
RI's cost base represents over half of the group's total costs.
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COSTS BY FUNCTION - RI
6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
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Production and
communication 476 446 7% 5%
Selling and
marketing 101 98 2% 1%
Support services
and administration 117 118 (1%) (2%)
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TOTAL 694 662 5% 3%
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Headcount 9,188 9,084 1%
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Cost growth was 5% at actual rates and 3% at comparable rates. Excluding the
impact of acquisitions, underlying costs increased by 1% at comparable rates.
Production and communication costs increased by 5% at comparable rates. This was
largely due to growth in recoverable exchange fees on equity products and
growing demand for specialist data, offset by a decline in development costs,
reflecting initiatives to rationalise and improve the efficiency of central
development groups.
Selling and marketing costs increased 1% at comparable rates.
Support services and administration costs declined 2% at comparable rates
reflecting the benefit of streamlining activities in the UK and Ireland.
Headcount grew by 1%, but fell by 2% excluding the impact of acquisitions.
10
REUTERS TRADING
SYSTEMS
- --------------------------------------------------------------
6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
- --------------------------------------------------------------
REVENUE 379 381 (1%) (3%)
Costs (262) (246) 6% 4%
- --------------------------------------------------------------
CONTRIBUTION 117 135 (13%) (16%)
- --------------------------------------------------------------
Margin 31% 35%
- --------------------------------------------------------------
Revenue declined 1% at actual rates and 3% at comparable rates in the first half
of 1999. Excluding the impact of acquisitions and disposals, revenue increased
by 1% at actual rates but declined 2% at comparable rates.
Costs grew 4% at comparable rates reflecting increased investment in product
development and sales support functions at TIBCO Finance and investment in the
Securities Transaction Systems business. These investments, together with a
decline in Dealing revenues, led to the fall in margin and contribution.
The primary objective of Reuters Trading Systems (RTS) is to supply customers
with an open framework for their business processes, enabling an improved
information and transaction flow, as well as cost efficiencies and economies of
scale. Through a combination of product offerings RTS aims to deliver integrated
and seamless business solutions on a global basis.
The RTS product range offers clients the means to:
o converse and transact with trading partners in the money and foreign
exchange markets (Dealing)
o integrate and analyse data from a variety of sources in the trading room
and elsewhere (Financial Enterprise Systems)
o control exposure to risk (Risk Management Systems)
o manage order flows in the securities markets (Securities Transaction
Systems)
o provide Internet-based online trading and information services to the
client's own customer base (e-commerce solutions).
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6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
- -------------------------------------------------------------------
RTS REVENUE BY
PRODUCT:
Dealing 200 217 (8%) (10%)
Financial
Enterprise
Systems 122 115 5% 3%
Risk
Management
Systems 44 33 35% 31%
Other 13 9 51% 46%
Reuters Voice
Systems* -- 7 -- --
- -------------------------------------------------------------------
379 381 (1%) (3%)
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*Sold in December 1998.
Dealing revenue declined by 10% at comparable rates. Dealing accesses declined
by 9% compared to June 1998, to 23,000.
The Dealing business was adversely affected by shrinkage in the foreign exchange
markets. This reflected the turmoil in emerging markets in the second half of
1998, client consolidations, and a decline in inter-bank market making and
trading activity, arising in part from the introduction of the euro on 1 January
1999.
Dealing 3000 Direct, a new conversational Dealing product, is currently in
testing with customers and is targeted for launch in the second half of 1999.
This will be followed by Dealing 3000 Spot Matching, a new foreign exchange
matching system.
Revenue from Financial Enterprise Systems grew 3% at comparable rates. The
acquisition of the trading room service and consulting business of the New
York-based MarketNet Group was completed in June 1999. TIBCO Finance is included
within Financial Enterprise Systems. Revenue grew 7% at comparable rates.
11
Strong revenue growth from Risk Management products continued with revenue up
31% at comparable rates. New product releases in the second half are expected to
maintain order levels although installations, and hence revenue may slow in the
second half of 1999 as customers prioritise work on millennium compliance.
Revenue from other product lines grew 46% at comparable rates. This includes
revenue from the new Securities Transaction Systems business, which builds on
the acquisition of Liberty SA in the second half of 1998, and from e-commerce
solutions. Whilst revenue is not yet significant in these areas, the potential
for growth is promising.
INSTINET
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6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
- ---------------------------------------------------------------------
REVENUE
US 200 168 19% 17%
International 55 40 38% 34%
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Total 255 208 23% 20%
Costs (175) (133) 32% 29%
- ---------------------------------------------------------------------
CONTRIBUTION 80 75 7% 4%
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Margin 31% 36%
Headcount 1,350 1,229 10%
- ---------------------------------------------------------------------
Revenues grew 23% at actual rates in the first half of 1999 and 20% at
comparable rates, as a result of continued strong volume growth in the US and
European equity markets.
Increased investment in new business opportunities contributed to cost growth of
29% at comparable rates, which restricted growth in contribution to 4% at
comparable rates. Investment included (pound)7 million in respect of the
development of a fixed income offering. Contribution margin declined to 31% from
36% in the first half of 1998.
Instinet provides global electronic equity brokerage services to investment
professionals.
The US equity business saw share volumes increase by 28% in the first half,
although average cents per share pricing continued to decline due to competitive
pressure. As a result revenue growth in the US was restricted to 17% at
comparable rates. In the international markets trading volumes increased 35%
compared to the first half of 1998.
Average trade size declined during the first half of 1999, partly as a result of
changes in US trading rules. This fall in average trade size has an impact on
costs of clearing and settlement, and on system capacity, where further
investment was required to comply with US trading rule changes.
Instinet continues to face significant change in its core markets, driven by new
and developing technologies, increased competition and an evolving regulatory
environment. Instinet intends to continue to seek out and invest in new business
opportunities. Instinet invested in W.R. Hambrecht, a US broker offering a
web-based IPO system in June 1999, and in Tradepoint Financial Networks plc, a
listed UK equity stock exchange in July 1999.
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 34 and 35.
12
CORPORATE/MEDIA
INFORMATION GROUP
- ----------------------------------------------------------------------
6 months to
30 June % change
1999 1998 Actual Comparable
(pound)m (pound)m rates rates
- ----------------------------------------------------------------------
REVENUE
RBB 31 25 24% 22%
New media,
TV & News 74 67 11% 9%
Practice
Management
Systems -- 9 -- --
- ----------------------------------------------------------------------
105 101 4% 2%
COSTS (111) (121) (8%) (9%)
- ----------------------------------------------------------------------
CONTRIBUTION (6) (20) 71% 70%
- ----------------------------------------------------------------------
Greenhouse
fund
profits 29 0 --
Headcount 1,901 2,188 (13%)
- ----------------------------------------------------------------------
Revenue for the period grew by 4% at actual rates and 2% at comparable rates.
Excluding the impact of acquisitions and disposals revenue growth was 9% at
comparable rates.
Cost containment initiatives in the Reuters Business Briefing (RBB) and
television businesses, together with the beneficial impact of acquisitions and
disposals, contributed to a significantly reduced loss of (pound)6 million,
compared with a loss of (pound)20 million in 1998.
RBB revenue grew by 22% at comparable rates reflecting a strong performance
across all geographical markets.
Revenue growth in new media, television and news was 9% at comparable rates.
Excluding acquisitions revenue grew 4% at comparable rates.
Headcount fell by 13% principally reflecting the disposal of the Practice
Management Systems business in December 1998.
The Reuters Greenhouse Fund, which holds 25 investments in quoted and unquoted
US and European high technology companies, disposed of a number of investments
in the first half of 1999 resulting in a gain of (pound)29 million. At 30 June
1999 the market value of quoted Greenhouse fund investments was (pound)68
million.
REUTERS VENTURES
On 1 July 1999 Reuters Business Briefing became part of the Dow Jones Reuters
Business Interactive (DJRBI) joint venture in which Reuters has a 50% interest.
The remaining Corporate/ Media business will now form part of the Reuters
Ventures division which will be responsible for accelerating Reuters push into
the Internet sector and act as the vehicle for expanding the Greenhouse fund. In
addition it will be responsible for managing Reuters relationship with the DJRBI
joint venture.
On a proforma basis, revenue and contribution for Reuters Ventures in the first
half of 1999 were (pound)74 million and (pound)(5) million respectively,
compared with 1998 half year revenue and contribution of (pound)76 million and
(pound)(12) million.
TIBCO SOFTWARE
TIBCO Software provides software solutions that enable businesses to integrate
internal operations, business partners and customer channels in real time.
TIBCO Software revenues grew 57% at actual rates to (pound)21 million, or 53% at
comparable rates. This reflects increased sales of the TIB/ActiveEnterprise
product suite.
Contribution fell to a loss of (pound)6 million from a loss of (pound)1 million
in 1998, as a result of increased investment in product development and sales
and marketing activities.
13
GROUP COSTS
- --------------------------------------------------------------------
COST BY FUNCTION
6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
- --------------------------------------------------------------------
Production and
communication 792 745 6% 4%
Selling and marketing 249 221 13% 10%
Support services and
administration 222 206 8% 7%
Goodwill amortisation 24 25
Net currency gain (3) (22)
- --------------------------------------------------------------------
TOTAL 1,284 1,175 9% 6%
- --------------------------------------------------------------------
The presentation of costs by function has been revised to reflect more closely
the activities under which costs are managed in the new organisational
structure.
A significant proportion of the group's activities are managed by the Global
Sales & Operations organisation on behalf of the divisions. Where costs relate
to two or more divisions they are allocated across divisions using the most
appropriate metrics available. These allocation methods may change over time as
measurement techniques are refined.
Production and communications costs comprise costs involved in the development
and delivery of Reuters products and content to its clients. Production and
communications costs grew 4% at comparable rates.
Development costs which are included in production and communication costs
declined 17% to (pound)96 million, reflecting some rationalisation of
development activity.
Selling and marketing costs relate to sales, marketing and client support
activities. Selling and marketing costs grew 10% at comparable rates as a result
of the increased marketing activity connected with new product development.
Support services and administration costs represent the cost of maintaining the
company's internal infrastructure, including internal systems, property and
office costs, finance, legal and general management costs. Support services and
administration costs grew 7% at comparable rates.
Total expenditure associated with the Millennium Programme amounted to (pound)21
million in the first half of 1999. Of this, (pound)10 million related to
incremental external effort, compared with (pound)11 million in the first half
of 1998.
- -----------------------------------------------------------------
COST BY TYPE
6 Months to
30 June % Change
1999 1998 Actual Comparable
(pound)m (pound)m Rates Rates
- -----------------------------------------------------------------
Staff 481 425 13% 10%
Services 285 269 6% 5%
Depreciation 160 162 (1%) (3%)
Data 136 116 17% 16%
Communi-
cations 106 105 1% 0%
Space 66 64 4% 2%
Cost of sales
and other 29 31 (5%) (7%)
Goodwill
amortisation 24 25
Net currency
gain (3) (22)
- -----------------------------------------------------------------
TOTAL 1,284 1,175 9% 6%
- -----------------------------------------------------------------
Total staff costs increased 10% at comparable rates reflecting growth in
headcount and remuneration. Headcount was 16,898 at 30 June 1999, compared with
16,699 at 30 June 1998.
Data costs increased 16% at comparable rates due to the increased level of
specialist data and recoverable exchange fees in Reuters Information products.
FINANCIAL NEEDS AND
RESOURCES
"Free cash flow" which comprises operating cash flow and investment income
received less net interest expense, tax paid and expenditure on tangible fixed
assets was (pound)234 million,
14
compared with (pound)200 million in the first six months of 1998. This reflects
reduced capital expenditure and lower tax payments as a result of the abolition
of advance corporation tax, offset by higher working capital and interest
payments.
Additions to fixed assets were (pound)104 million, (pound)31 million lower than
the first half of 1998. Subscriber equipment expenditure declined (pound)24
million to (pound)34 million in the first half of 1999 as spending on millennium
and 3000 product upgrades declined. Other equipment additions fell (pound)7
million to (pound)70 million.
Reuters spent (pound)48 million on acquisitions and investments compared to
(pound)34 million in the first half of 1998. Proceeds from the sale of
investments was (pound)37 million, principally relating to Greenhouse fund
disposals.
Reuters paid dividends of (pound)155 million, (pound)15 million up on the first
half of 1998, reflecting an increase in dividends per share and a marginal
increase in the number of shares in issue.
Net funds at 30 June 1999 amounted to (pound)86 million, compared with net debt
of (pound)3 million at 31 December 1998. Net funds at 30 June 1999 comprised
cash and short-term investments of (pound)1,112 million offset by gross debt of
(pound)1,026 million.
Reuters expects to be able to finance its current business plans from existing
resources and facilities.
At 30 June 1999 Reuters Group PLC had syndicated loan facilities of (pound)500
million which expire in December 2002.
A Euro Commercial Paper Programme was established in April 1998 permitting the
company to raise up to (pound)1.5 billion in uncommitted finance, subject to
market conditions. At 30 June 1999, Reuters had raised funds of (pound)743
million under this programme, repayable at various dates through to December
1999.
In December 1998 Reuters established a Euro Medium Term Note Programme which
enables the company to raise up to (pound)1.0 billion of uncommitted facilities,
subject to market conditions. At 30 June 1999, Reuters had raised funds of
(pound)250 million under this programme, repayable at various dates from
February 2001 up to November 2004.
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
1999
Continental Europe
- euro currencies 74%
- other 15%
USdollar 51%
Japanese yen 13%
Sterling
- depreciation (54)%
- other (12)%
Other 13%
- ----------------------------------------
Total 100%
- ----------------------------------------
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 1999 mix of profits, the impact of an additional
unilateral 1% strengthening of sterling would have been a reduction of
approximately (pound)4 million on operating profits before hedging in the first
half of 1999 (1998: (pound)4 million).
15
STERLING TRADE WEIGHTED EXCHANGE RATE INDEX
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
--- --- --- --- --- ---- ---- --- --- --- --- ---
1997 94.4 98.3 98.0 100.1 99.3 102.1 104.6 102.2 100.4 102.3 105.0 104.4
1998 105.0 105.1 108.8 106.3 103.6 107.0 104.2 106.0 103.3 100.0 100.5 99.7
1999 100.8 100.9 102.9 104.2 104.6 103.9
Sterling strengthened during the first half of 1999 although on average it was
weaker than in the first half of 1998. As a result, reported revenue and
operating profit before hedging benefited. If 30 June 1999 exchange rates had
prevailed throughout the period, revenue would have been about (pound)4 million
higher and operating profit before currency hedging around (pound)1 million
lower.
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.
The main principles underlying currency hedging policies are as follows:
o Committed hedging cannot exceed the underlying cash flow exposure;
o Options may only be written against an underlying exposure;
o 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.
OPERATING PROFIT SENITIVITY TO
CURRENCY BASED ON VAR ANALYSIS
Probability
Profit ((pound)m) Without Hedging With Hedging
- ----------------- --------------- ------------
-140 3.81861E-06 1.29352E-14
-137 5.66828E-06 5.18816E-14
-133 8.33018E-06 2.00901E-13
-130 1.21203E-05 7.51069E-13
-126 1.74595E-05 2.71085E-12
-123 2.49004E-05 9.44624E-12
-119 3.51592E-05 3.1779E-11
-116 4.91504E-05 1.03217E-10
-112 6.80257E-05 3.23659E-10
-109 9.32128E-05 9.79836E-10
-105 0.000126455 2.86383E-09
-102 0.000169845 8.08108E-09
-98 0.000225853 2.2015E-08
-95 0.000297343 5.79025E-08
-91 0.000387566 1.47029E-07
-88 0.000500139 3.60444E-07
-84 0.000638988 8.531E-07
-81 0.000808261 1.94935E-06
-77 0.001012204 4.3004E-06
-74 0.001254993 9.15915E-06
-70 0.001540536 1.88334E-05
-67 0.00187223 3.7388E-05
-63 0.002252702 7.16577E-05
-60 0.002683522 0.000132593
-56 0.003164928 0.000236869
-53 0.003695553 0.00040853
-49 0.004272206 0.000680247
-46 0.004889697 0.001093547
-42 0.005540752 0.001697214
-39 0.006216023 0.002543102
-35 0.006904202 0.003678909
-32 0.007592267 0.005138098
-28 0.008265831 0.006928095
-25 0.008909608 0.009018894
-21 0.009507969 0.011334982
-18 0.010045555 0.013753601
-14 0.01050793 0.016111653
-11 0.01088222 0.018221825
-7 0.011157705 0.019896271
-4 0.011326332 0.020973919
0 0.011383105 0.021345953
4 0.011326332 0.020973919
7 0.011157705 0.019896271
11 0.01088222 0.018221825
14 0.01050793 0.016111653
18 0.010045555 0.013753601
21 0.009507969 0.011334982
25 0.008909608 0.009018894
28 0.008265831 0.006928095
32 0.007592267 0.005138098
35 0.006904202 0.003678909
39 0.006216023 0.002543102
42 0.005540752 0.001697214
46 0.004889697 0.001093547
49 0.004272206 0.000680247
53 0.003695553 0.00040853
56 0.003164928 0.000236869
60 0.002683522 0.000132593
63 0.002252702 7.16577E-05
67 0.00187223 3.7388E-05
70 0.001540536 1.88334E-05
74 0.001254993 9.15915E-06
77 0.001012204 4.3004E-06
81 0.000808261 1.94935E-06
84 0.000638988 8.531E-07
88 0.000500139 3.60444E-07
91 0.000387566 1.47029E-07
95 0.000297343 5.79025E-08
98 0.000225853 2.2015E-08
102 0.000169845 8.08108E-09
105 0.000126455 2.86383E-09
109 9.32128E-05 9.79836E-10
112 6.80257E-05 3.23659E-10
116 4.91504E-05 1.03217E-10
119 3.51592E-05 3.1779E-11
123 2.49004E-05 9.44624E-12
126 1.74595E-05 2.71085E-12
130 1.21203E-05 7.51069E-13
133 8.33018E-06 2.00901E-13
137 5.66828E-06 5.18816E-14
140 3.81861E-06 1.29352E-14
Reuters estimates that there is currently a 5% chance that profits forecast for
the coming 12 months will deteriorate by more than (pound)58 million as a result
of currency fluctuations before hedging and (pound)31 million after taking into
account hedging at 30 June 1999 (1998: (pound)60 million before hedging and
(pound)32 million after hedging). These figures represent the value at risk and
are graphically illustrated above.
During the first six months of 1999 the average value at risk on forecast
profits for the coming 12 months was as follows:
- ----------------------------------------------
VALUE AT RISK
Before After
((pound)m) Hedging Hedging
- ----------------------------------------------
1999 Average 61 35
High 72 40
Low 57 32
1998 Average 66 36
- ----------------------------------------------
16
The gain on hedging activities for the six months to 30 June 1999 and the fair
value of the unrecognised gain on the hedging book at 30 June are summarised
below:
- --------------------------------------------------
CURRENCY HEDGING GAINS/(LOSSES)
((pound)m) 1999 1998 1997
- --------------------------------------------------
Recognised gains
in the period 3 28 22
Unrecognised
(losses)/gains (1) 30 49
- --------------------------------------------------
Recognised currency hedging gains were lower in the first half of 1999 compared
with 1998 due mainly to the relative strength of sterling when hedging for 1999
was undertaken. Currency gains recognised in the first half of 1999 which
related to contracts in place at the end of 1998 amounted to (pound)5 million.
Unrecognised currency hedging losses of (pound)1 million at 30 June 1999
comprised unrecognised gains of (pound)1 million in respect of 1999 and hedging
losses of (pound)2 million in respect of 2000 and beyond. This compares with
unrecognised gains of (pound)30 million at 30 June 1998. The fall reflects the
strength of sterling during most of 1998, when the majority of cover was
arranged.
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. Interest rates are managed using a mix of financial
instruments which commence and mature at various dates through to November 2004.
The maturity of investments and debt are matched to minimise interest rate risk.
In broad terms, using the average net funds position, a 1% increase in global
interest rates would have reduced profit before tax in the first half of 1999 by
approximately (pound)1 million (1998: (pound)1 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 31 to 32. A discussion of the relevant US accounting policies
which differ materially from UKGAAP is given on page 79 of Reuters Group PLC
1998 annual report and accounts.
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.
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.
17
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 data feeds 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 1,700 of Reuters
proprietary software applications have been renovated.
5) Testing - verification of rectification. Testing is carried out at three
levels:-
Unit testing, Integration testing, and Product testing. As at 30 June 1999, all
of Reuters International products and its main local products had been
millennium certified.
6) Implementation - installation of tested products and systems. To date over
99% of the internal systems used to produce Reuters services have been upgraded.
In addition, Reuters has to date upgraded over 94% of client site applications,
installations of which are often dependent on customer and third party actions.
Reuters successfully participated in the "street-wide" testing programme in
February and May 1999 organised by the US Securities Industries Association.
During the third quarter of 1999, Reuters will be conducting further operational
assurance testing of its production systems to verify that the requirements of
millennium certification have been maintained. From 1 October Reuters will
implement a "millennium freeze" whereby it will institute tight change control
designed to stabilise its systems and networks before the end of 1999. This
freeze will remain in place in the year 2000 until day to day operational
conditions return to normal.
As part of the Millennium Programme, Reuters continues to actively participate
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. The focus of Reuters participation is now centred on
business continuity planning and communication over the millennium transition
period.
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 1999 and estimated for the full year are set
out below.
- ---------------------------------------------------
6 months to 1999 full year
Costs ((pound)m) 30 June 1999 estimate
- ---------------------------------------------------
Internal effort
- ---------------------------------------------------
Development/testing 3 5
- ---------------------------------------------------
Implementation 8 13
- ---------------------------------------------------
External effort
- ---------------------------------------------------
Development/testing 5 13
- ---------------------------------------------------
Implementation 5 10
- ---------------------------------------------------
Total 21 41
- ---------------------------------------------------
Estimated expenditure for 1999 of (pound)41 million compares with the budget of
(pound)28 million reported in February 1999. The increase principally reflects
additional expenditure on
18
training, enhanced staff coverage over the millennium weekend and investment in
continuity planning at Instinet.
Incremental capital expenditure arising as a direct result of the programme was
(pound)2 million in the first six months of 1999. No estimation of the cost of
assets replaced in the normal business cycle has been made.
Internal development effort in the first half of 1999 of (pound)3 million
represented 3% of total group development expenditure. The (pound)8 million of
implementation activity represented 7% 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
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 in some cases have been 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 continuing to be 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 have been
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 have been 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 forms part of the business
continuity plan to minimise this risk.
A business risk could arise if customers continue to use obsolete Reuters
products or uncertified versions of current Reuters products across the
millennium transition. Reuters communications have sought to encourage customers
to undertake the necessary upgrades.
19
Although Reuters continues to devote substantial resources to address its
millennium issues, there can be no assurance that its products will not contain
undetected Year 2000 problems.
Reuters business continuity plans aim to manage problems in an effective way.
However, some issues may be beyond Reuters ability to influence or control which
could delay resolution of certain problems.
Moreover, while Reuters business continuity plan requires 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.
However there may be additional risks arising from the change of millennium of
which Reuters is not now aware.
REUTERS CONTINUITY PLANS
Reuters has completed the design of its continuity plans and these are now being
implemented.
As part of Reuters day to day normal operations, there are plans that can be
executed in the event of certain service failures. These plans have been checked
against specific risks that might arise during the millennium transition period
and enhanced as appropriate, and form the basis of Reuters millennium continuity
plans.
There are five main continuity plans which cover Reuters operations globally,
and its infrastructure and customer sites in the UKI, Asia, Americas and Europe,
Middle East and North Africa. Each main plan will rely on supporting plans
covering development, communications, data, editorial and management information
systems.
A number of subsidiaries including Instinet and TIBCO have their own plans.
Reuters will conduct a number of rehearsals of its continuity plans, based on
simulated scenarios, during the fourth quarter of 1999.
The millennium transition within Reuters will be managed by a millennium command
centre based in London. This centre will be staffed on a 24 hour basis by a
multi-disciplined team of senior managers with responsibility for monitoring the
status of Reuters transition around the globe as well as coordinating any
significant incidents.
During the millennium weekend Reuters will enhance the normal staffing of key
parts of its business. This will range from help desk, field support, software
support and operational support, to incident monitoring and decision making.
20
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE SIX MONTHS TO 30 JUNE 1999 (UNAUDITED)
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- -----------------------------------------------------------------------------------
Revenue 1,562 1,453 2,469 2,295 3,032 4,791
Operating costs (1,284) (1,175) (2,030) (1,856) (2,482) (3,921)
- -----------------------------------------------------------------------------------
Operating profit 278 278 439 439 550 870
Profit on disposal of
fixed asset investments 29 -- 45 -- 26 41
(Loss)/profit from
associates (1) 2 (1) 4 (1) (1)
Income from fixed asset
investments -- 3 -- 4 3 4
Net interest (payable)/
receivable (6) 11 (9) 17 2 3
- -----------------------------------------------------------------------------------
Profit on ordinary
activities before taxation 300 294 474 464 580 917
Taxation on profit on
ordinary activities (98) (99) (155) (156) (196) (310)
- -----------------------------------------------------------------------------------
Profit after taxation
attributable to
ordinary shareholders 202 195 319 308 384 607
Dividend
Interim (52) (48) (82) (76) (48) (76)
Final (155) (245)
- -----------------------------------------------------------------------------------
Retained profit 150 147 237 232 181 286
- -----------------------------------------------------------------------------------
Basic earnings per
ordinary share 14.3p 13.3p 26.7p
- -----------------------------------------------------------------------------------
Fully diluted earnings
per ordinary share 14.1p 13.2p 26.6p
- -----------------------------------------------------------------------------------
21
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES FOR THE SIX MONTHS TO 30 JUNE 1999
(unaudited)
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- ------------------------------------------------------------------------------------------
Profit attributable to
ordinary shareholders 202 195 319 308 384 607
Translation differences
credited/(debited) directly
to reserves 14 4 23 6 (1) (1)
- ------------------------------------------------------------------------------------------
Total recognised gains
and losses relating to
the period 216 199 342 314 383 606
- ------------------------------------------------------------------------------------------
22
CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX
MONTHS TO 30 JUNE 1999 (unaudited)
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- -----------------------------------------------------------------------------------------------------
NET CASH INFLOW FROM
OPERATING ACTIVITIES 418 427 660 675 998 1,576
Dividends received from
associates -- 9 -- 14 9 15
RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE
Interest received 22 45 36 72 76 120
Interest paid (28) (32) (45) (51) (72) (114)
Income from fixed
asset investments -- 3 -- 4 3 4
- -----------------------------------------------------------------------------------------------------
NET CASH (OUTFLOW)/INFLOW FROM
RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE (6) 16 (9) 25 7 10
TAXATION PAID (66) (101) (103) (160) (219) (346)
CAPITAL EXPENDITURE AND
FINANCIAL INVESTMENTS
Purchase of tangible fixed assets (112) (151) (176) (239) (307) (484)
Sale of tangible fixed assets -- -- -- -- 2 3
Purchase of fixed asset investments (34) (12) (54) (19) (22) (34)
Sale of fixed asset investments 31 -- 48 -- 34 54
- -----------------------------------------------------------------------------------------------------
NET CASH OUTFLOW FROM
CAPITAL EXPENDITURE AND
FINANCIAL INVESTMENTS (115) (163) (182) (258) (293) (461)
ACQUISITIONS AND DISPOSALS
(INCLUDING ASSOCIATES) (9) (27) (15) (42) (138) (218)
EQUITY DIVIDENDS PAID (155) (140) (245) (220) (188) (296)
- -----------------------------------------------------------------------------------------------------
CASH INFLOW BEFORE USE OF
LIQUID RESOURCES AND FINANCING 67 21 106 34 176 280
MANAGEMENT OF LIQUID RESOURCES
Net (increase)/decrease in
short-term investments (10) 433 (16) 683 313 496
FINANCING
Return of surplus capital -- (1,482) -- (2,343) (1,482) (2,343)
Proceeds from issue of shares 15 11 24 17 13 19
Net increase in borrowings 3 983 5 1,554 972 1,536
- -----------------------------------------------------------------------------------------------------
NET CASH INFLOW/(OUTFLOW)
FROM FINANCING 18 (488) 29 (772) (497) (788)
- -----------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN CASH 75 (34) 119 (55) (8) (12)
- -----------------------------------------------------------------------------------------------------
23
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN
NET FUNDS FOR THE SIX MONTHS TO 30 JUNE 1999
(unaudited)
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- ---------------------------------------------------------------------------------------------
Increase/(decrease) in cash 75 (34) 119 (55) (8) (12)
Cash inflow from
movement in borrowings (3) (983) (5) (1,554) (972) (1,536)
Cash outflow/(inflow)
from movement in
liquid resources 10 (433) 16 (683) (313) (496)
- ---------------------------------------------------------------------------------------------
Change in net cash
resulting from cash flows 82 (1,450) 130 (2,292) (1,293) (2,044)
Translation difference 7 3 10 4 -- --
- ---------------------------------------------------------------------------------------------
Movement in net funds 89 (1,447) 140 (2,288) (1,293) (2,044)
Opening net (debt)/funds (3) 1,290 (5) 2,039 1,290 2,039
- ---------------------------------------------------------------------------------------------
Closing net funds/(debt) 86 (157) 135 (249) (3) (5)
- ---------------------------------------------------------------------------------------------
24
NET CASH INFLOW FROM OPERATING ACTIVITIES FOR THE
SIX MONTHS TO 30 JUNE 1999 (unaudited)
SIX MONTHS TO % SIX MONTHS TO YEAR TO
30 JUNE CHANGE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- ---------------------------------------------------------------------------------------------------------
Operating profit 278 278 0% 439 439 550 870
Depreciation 160 162 (1%) 252 256 331 522
Goodwill amortisation 24 25 (4%) 37 39 46 73
Decrease in stocks -- 1 -- -- 1 3 5
Increase in debtors (209) (255) (18%) (329) (403) (103) (164)
Increase in creditors 155 209 (26%) 245 331 171 271
Profit on disposal of
subsidiaries -- -- -- -- -- (5) (8)
Loss on disposal of
fixed assets 2 2 (5%) 3 4 3 5
Amortisation of interests
in own shares 5 5 (11%) 8 8 3 5
Miscellaneous, principally
translation differences 3 -- -- 5 -- (1) (3)
- ---------------------------------------------------------------------------------------------------------
418 427 (2%) 660 675 998 1,576
- ---------------------------------------------------------------------------------------------------------
25
CONSOLIDATED BALANCE SHEET AT 30 JUNE 1999
(unaudited)
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- --------------------------------------------------------------------------------------------
Fixed assets 1,071 1,017 1,693 1,606 1,098 1,735
NET CURRENT ASSETS
Stocks 6 12 9 19 6 9
Debtors 804 746 1,271 1,180 595 940
Cash and short-term
investments 1,112 945 1,758 1,493 1,006 1,589
Creditors: Amounts
falling due within
one year (2,051) (2,233) (3,242) (3,529) (2,174) (3,435)
- --------------------------------------------------------------------------------------------
NET CURRENT LIABILITIES (129) (530) (204) (837) (567) (897)
CREDITORS: AMOUNTS
FALLING DUE AFTER MORE
THAN ONE YEAR (265) (26) (420) (41) (16) (25)
PROVISIONS FOR LIABILITIES
AND CHARGES (109) (104) (172) (164) (126) (200)
- --------------------------------------------------------------------------------------------
NET ASSETS 568 357 897 564 389 613
- --------------------------------------------------------------------------------------------
CAPITAL AND RESERVES
Called-up share capital
and share premium 387 368 613 582 370 585
Other reserve (1,717) (1,717) (2,714) (2,714) (1,717) (2,714)
Profit and loss account
reserve 1,881 1,690 2,972 2,670 1,719 2,716
- --------------------------------------------------------------------------------------------
Shareholders' equity 551 341 871 538 372 587
- --------------------------------------------------------------------------------------------
Minority interest 17 16 26 26 17 26
- --------------------------------------------------------------------------------------------
CAPITAL EMPLOYED 568 357 897 564 389 613
- --------------------------------------------------------------------------------------------
26
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS'
FUNDS FOR SIX MONTHS TO 30 JUNE 1999 (unaudited)
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- -----------------------------------------------------------------------------------------
Retained profit 150 147 237 232 181 286
Translation differences
credited/(debited)
directly to reserves 14 4 23 6 (1) (1)
Return of surplus capital
to shareholders -- (1,482) -- (2,343) (1,482) (2,343)
Shares issued
during the period 15 11 24 17 13 19
- -----------------------------------------------------------------------------------------
Net addition/(reduction)
to shareholders' equity 179 (1,320) 284 (2,088) (1,289) (2,039)
Opening shareholders'
equity 372 1,661 587 2,626 1,661 2,626
- -----------------------------------------------------------------------------------------
Closing shareholders'
equity 551 341 871 538 372 587
- -----------------------------------------------------------------------------------------
27
NOTES TO UNAUDITED INTERIM RESULTS FOR THE SIX
MONTHS TO 30 JUNE 1999
1. BASIS OF PREPARATION
The above financial information has been prepared on a basis consistent with the
accounting policies set out on pages 77 and 78 of Reuters Group PLC 1998 annual
report and 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 interim periods presented.
The unaudited interim financial statements should be read in conjunction with
the 1998 annual accounts. The results for the year to 31 December 1998 do not
comprise statutory accounts within the meaning of section 240 of the 1985 UK
Companies Act but are an abridged version of the statutory accounts 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.
2. SEGMENTAL ANALYSIS
The segmental analysis of revenue, costs and contribution reflects the way in
which the company is managed following the company"s reorganisation which became
effective on 1 January 1999. The segmental analysis for 1998 has been restated
to conform with the current year format.
The company is managed on a divisional basis, comprising Reuters Information,
Reuters Trading Systems, Instinet and the Corporate/Media Information Group. The
geographical analysis of performance reflects the revenues earned and costs
incurred in each region excluding centrally managed costs which include
development, editorial and divisional and corporate support costs.
28
2. SEGMENTAL ANALYSIS
BY DIVISION SIX MONTHS TO % SIX MONTHS TO YEAR TO
3O JUNE CHANGE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- ------------------------------------------------------------------------------------------------------
REVENUE
Reuters Information 808 754 7% 1,277 1,192 1,531 2,419
Reuters Trading Systems 379 381 (1%) 599 602 827 1,307
Instinet 255 208 23% 403 328 446 704
Corporate/Media 105 101 4% 167 160 208 328
Tibco Software 21 14 57% 33 21 35 56
Intra-group revenue (6) (5) (10) (8) (15) (23)
- ------------------------------------------------------------------------------------------------------
1,562 1,453 8% 2,469 2,295 3,032 4,791
- ------------------------------------------------------------------------------------------------------
COSTS
Reuters Information 694 662 5% 1,097 1,045 1,373 2,168
Reuters Trading Systems 262 246 6% 414 390 541 855
Instinet 175 133 32% 277 210 291 460
Corporate/Media 111 121 (8%) 176 190 247 390
Tibco Software 27 15 84% 43 24 38 60
Intra-group costs (6) (5) (10) (8) (15) (23)
- ------------------------------------------------------------------------------------------------------
1,263 1,172 8% 1,997 1,851 2,475 3,910
- ------------------------------------------------------------------------------------------------------
CONTRIBUTION
Reuters Information 114 92 24% 180 147 158 251
Reuters Trading Systems 117 135 (13%) 185 212 286 452
Instinet 80 75 7% 126 118 155 244
Corporate/Media (6) (20) -- (9) (30) (39) (62)
Tibco Software (6) (1) -- (10) (3) (3) (4)
- ------------------------------------------------------------------------------------------------------
299 281 6% 472 444 557 881
Goodwill amortisation (24) (25) -- (37) (39) (46) (73)
Net currency gain 3 22 -- 4 34 39 62
- ------------------------------------------------------------------------------------------------------
Operating profit 278 278 0% 439 439 550 870
- ------------------------------------------------------------------------------------------------------
29
2. SEGMENTAL ANALYSIS (continued)
BY GEOGRAPHY SIX MONTHS TO % SIX MONTHS TO YEAR TO
3O JUNE CHANGE 30 JUNE 31 DECEMBER
1999 1998 1999 1998 1998 1998
(POUND)M (POUND)M US$M US$M (POUND)M US$M
- ------------------------------------------------------------------------------------------------------
REVENUE
Europe, Middle East
and Africa 781 756 3% 1,235 1,196 1,556 2,459
Asia/Pacific 237 232 2% 375 366 466 736
The Americas 248 225 11% 392 354 464 733
Instinet 255 208 23% 403 328 446 704
TIBCO 41 32 25% 64 51 100 159
- ------------------------------------------------------------------------------------------------------
1,562 1,453 8% 2,469 2,295 3,032 4,791
- ------------------------------------------------------------------------------------------------------
OPERATING COSTS
WHERE INCURRED
Europe, Middle East
and Africa 422 433 (3%) 666 685 886 1,400
Asia/Pacific 113 117 (4%) 179 185 234 369
The Americas 186 165 13% 294 260 351 554
Instinet 175 133 32% 277 210 291 460
TIBCO 59 36 66% 94 56 88 139
- ------------------------------------------------------------------------------------------------------
955 884 8% 1,510 1,396 1,850 2,922
- ------------------------------------------------------------------------------------------------------
CONTRIBUTION
Europe, Middle East
and Africa 359 323 11% 569 511 670 1,059
Asia/Pacific 124 115 9% 196 181 232 367
The Americas 62 60 4% 98 94 113 179
Instinet 80 75 7% 126 118 155 244
TIBCO (18) (4) -- (30) (5) 12 20
Central costs (308) (288) 7% (487) (455) (625) (988)
- ------------------------------------------------------------------------------------------------------
299 281 6% 472 444 557 881
Goodwill amortisation (24) (25) -- (37) (39) (46) (73)
Net currency gain 3 22 -- 4 34 39 62
- ------------------------------------------------------------------------------------------------------
Operating profit 278 278 0% 439 439 550 870
- ------------------------------------------------------------------------------------------------------
30
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 79 of Reuters
Group PLC 1998 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
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 1999 30 JUNE 1998 31 DECEMBER 1998
(POUND)M (POUND)M (POUND)M
- -------------------------------------------------------------------------------------------------------
Profit attributable to ordinary
shareholders in accordance with UK GAAP 202 195 384
US GAAP adjustments:
Software revenue recognition (see note (i) below) 2 (22) (2)
Goodwill and other acquisition
accounting adjustments (2) (1) (3)
Software development (1) (1) (2)
Employee costs (4) (2) (1)
Taxes 12 9 16
- -------------------------------------------------------------------------------------------------------
Approximate net income
in accordance with USGAAP 209 178 392
- -------------------------------------------------------------------------------------------------------
Earnings and dividends (see note (ii) below)
Basic earnings per ADS in accordance
with US GAAP 89.0p 76.1p 166.6p
Diluted earnings per ADS in accordance
with US GAAP 87.5p 75.7p 166.0p
Dividend paid per ADS (including
UK advance corporation tax credit) 74.0p 74.3p 99.8p
Deemed special dividend paid per ADS -- 627.7p 627.7p
- -------------------------------------------------------------------------------------------------------
Total dividend paid per ADS 74.0p 702.0p 727.5p
- -------------------------------------------------------------------------------------------------------
Weighted average number of shares used
in basic EPS calculation (millions) 1,411 1,408 1,411
- -------------------------------------------------------------------------------------------------------
(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 USGAAP. This policy has
not been adopted under UK GAAP.
31
(ii) Capital reorganisation
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
30 JUNE 1999 30 JUNE 1998 31 DECEMBER 1998
(POUND)M (POUND)M (POUND)M
- -------------------------------------------------------------------------------------------
Capital employed before minority
interest in accordance with UK GAAP 551 341 372
US GAAP adjustments:
Software revenue recognition -- (22) (2)
Goodwill and other acquisition
accounting adjustments 8 10 14
Capitalised software development
costs net of amortisation 5 7 6
Fixed asset investments 89 56 42
Shares held by employee share
ownership trusts (46) (39) (45)
Liabilities (28) (27) (28)
Taxes (14) (25) (10)
Dividends not formally declared or paid
during the year 52 48 155
- -------------------------------------------------------------------------------------------
Shareholders" equity in
accordance with US GAAP 617 349 504
- -------------------------------------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 1999 30 JUNE 1998 31 DECEMBER 1998
(POUND)M (POUND)M (POUND)M
- -------------------------------------------------------------------------------------------
Approximate net income in
accordance with US GAAP 209 178 392
Other comprehensive income, net of tax:
Movements on unrealised
gains arising on certain fixed asset
investments 30 25 18
Foreign currency translation differences 14 4 (1)
- -------------------------------------------------------------------------------------------
Approximate comprehensive income in
accordance with US GAAP 253 207 409
- -------------------------------------------------------------------------------------------
32
SUMMARISED BALANCE SHEET (US GAAP BASIS)
30 JUNE 1999 30 JUNE 1998 31 DECEMBER 1998
(POUND)M (POUND)M (POUND)M
- -------------------------------------------------------------------------------------------
Assets
Fixed tangible assets 886 879 859
Current assets 1,882 1,380 1,565
Other assets 46 54 42
Software development costs 5 7 6
Goodwill and other intangibles 238 168 250
- -------------------------------------------------------------------------------------------
Total assets 3,057 2,488 2,722
- -------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities 2,076 2,003 2,102
Long-term liabilities 320 78 75
Deferred taxes 27 42 24
Minority interest 17 16 17
Shareholders" equity before deductions 679 405 562
Shares held by employee share
ownership trusts (62) (56) (58)
- -------------------------------------------------------------------------------------------
Total shareholders" equity 617 349 504
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders" equity 3,057 2,488 2,722
- -------------------------------------------------------------------------------------------
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT UNDER US GAAP
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 JUNE 1999 30 JUNE 1998 31 DECEMBER 1998
(POUND)M (POUND)M (POUND)M
- -------------------------------------------------------------------------------------------
Net cash inflow from operating activities 346 351 795
Net cash outflow from investing activities (124) (190) (431)
Net cash outflow from financing activities (140) (579) (764)
- -------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and
cash equivalents 82 (418) (400)
- -------------------------------------------------------------------------------------------
33
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. The euro's
weakness in the first six months of 1999 has restricted revenue and earnings
growth. A continuation of the euro's weakness could further restrict reported
revenue and earnings for the remainder of 1999. Reuters currency exposure is
actively hedged. For additional information concerning currency fluctuations see
"Treasury Management" on page 15.
STATE OF FINANCIAL MARKETS
Reuters business is dependent upon the health of the financial markets and the
participants in those markets. Reuters business could also be adversely affected
by consolidations and rationalisations among clients in the banking and other
industries.
Reuters transactions products are 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 with an associated increase in dependence on third party software.
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.
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 operations rely on third party suppliers of data,
hardware, software, telecommunications, utilities and building services. A
business risk could arise if customers continue to use obsolete Reuters products
or uncertified versions of current products across the millennium transition. In
addition customers may defer orders of certain Reuters products in the second
half of 1999 in anticipation of the millennium. For further information
concerning Reuters Millennium Programme, see "Millennium Programme" on pages 17
to 19. Additional risks are described under the heading "Business Risks from
Year 2000 issues" on pages 19 to 20.
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 relating to the regulation of certain "alternative trading systems" (ATS).
The rules expand the SEC's interpretation of the definition of "exchange" under
the US securities laws to encompass certain electronic brokerage activities,
including those conducted by Instinet Corporation.
34
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 of the public display and access requirements. The current
phase-in schedule, promulgated on 16 April 1999, generally provides that an
alternative trading system must comply with the public display and access
requirements with respect to 50 Nasdaq securities chosen by the SEC by 23 August
1999; with respect to a total of 50% of Nasdaq securities by 28 September 1999;
with respect to a total of 75% of Nasdaq securities by 25 April 2000; and with
respect to a total of 100% of Nasdaq securities by 20 June 2000.
Implementation of Regulation ATS may have a significant impact on Instinet"s
business. Mandatory order display will result in an increased volume of message
traffic, with resulting additional costs associated with increasing network
capacity. Implementation of the Regulation has also required functional
modifications to Instinet Corporation's systems and its customers' interfaces.
SEC RULES ON ECN USAGE
Reuters and Instinet Corporation continue to monitor the operation of SEC rules
governing electronic communications networks (ECNs).
Most recently, by letter dated 19 February 1999, the SEC Division of Market
Regulation issued an extension, until 20 August 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 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 above.
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 Nasdaq securities, is considering a number of changes
to the Nasdaq marketplace.
Some of these changes could effectively limit the fees that Instinet is
permitted to charge market participants that access its order flow reflected in
the public quotation, enhance the ability of market makers and the NASD to
directly compete 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.
35
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 commercially reasonable by, inter alia,
security controls, systems and communications redundancy and elimination of
single points of failure where feasible.
INTERNET
The availability of the public Internet and internet technology is reducing
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.
36
GENERAL STATISTICS
JUNE DECEMBER % JUNE % CHANGE
1999 1998 CHANGE 1998 JUNE 1999 TO
JUNE 1998
- --------------------------------------------------------------------------------------------------------------
Total subscriber locations (000s) 57.7 57.9 0% 57.2 1%
- --------------------------------------------------------------------------------------------------------------
Information sources:
Contributors 5,008 4,982 1% 4,923 2%
Markets reported in real time 282 267 6% 292 (3%)
Journalists 1,946 2,072 (6%) 2,035 (4%)
Bureaux 183 182 1% 169 8%
- --------------------------------------------------------------------------------------------------------------
Infrastructure:
Countries in which services
distributed 157 157 0% 163 (4%)
Countries with offices 95 96 (1%) 91 (4%)
Cities 212 218 (3%) 215 (1%)
- --------------------------------------------------------------------------------------------------------------
Staff numbers 16,898 16,938 0% 16,699 1%
- --------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
JUNE DECEMBER JUNE
1999 1998 1998
- --------------------------------------------------------------------------------
Operating margin 17.8% 18.2% 19.1%
Pre-tax margin 19.2% 19.1% 20.2%
Post-tax margin 12.9% 12.7% 13.4%
EBITDA margin 29.5% 30.6% 31.9%
Earnings per share 14.3p 26.7p 13.3p
Free cash flow per ordinary share 16.6p 34.1p 13.6p
Book value per ordinary share 35.8p 23.3p 21.4p
Return on tangible fixed assets 53.8% 48.2% 48.6%
Return on equity 97.1% 78.5% 61.7%
The financial ratios are derived from UK GAAP data.
continued/
37
The definitions applied to each of the financial ratios are as follows:
EBITDA margin represents operating earnings before interest, taxation,
depreciation and amortisation of goodwill as a percentage of turnover.
Free cash flow per ordinary share represents operating cash flow, 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 the annualised 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.
Return on equity represents annualised profit attributable to ordinary
shareholders divided by the average adjusted shareholders' equity. In 1998 a
weighted average has been used to reflect the capital reorganisation
(annualised).
38
FOR FURTHER INFORMATION PLEASE CONTACT:
LONDON
GEOFF WICKS
DIRECTOR, CORPORATE RELATIONS
TEL: 0171 542 3717 OR 0171 542 8666
OR
PETER THOMAS
DIRECTOR, MEDIA RELATIONS
TEL: 0171 542 7094 OR 0171 542 4890
NEW YORK
NANCY BOBROWITZ
VICE PRESIDENT, INVESTOR RELATIONS
TEL: 212 603 3345 OR 212 603 3244
OR
ROBERT CROOKE
VICE PRESIDENT, MEDIA RELATIONS
TEL: 212 603 3587
http://www.reuters.com/