SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
or
For the Fiscal year ended 31 December 2003
For the transition period from to
Commission file number 0-16350
WPP Group plc
(Exact Name of Registrant as Specified in Its Charter)
(Translation of Registrant’s Name Into English)
United Kingdom
(Jurisdiction of Incorporation or Organization)
27 Farm Street, London W1J 5RJ England
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12 (b) of the Act:
Title of Each Class
Name of Each Exchange
On Which Registered
Securities registered or to be registered pursuant to Section 12 (g) of the Act:
Ordinary Shares of 10p each
(Title of Class)
American Depositary Shares, each representing five Ordinary Shares (“ADSs”)
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The number of outstanding ordinary shares is 1,187,432,353, which includes the underlying ordinary shares represented by 20,198,436 ADSs.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 x
Forward-Looking Statements
In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), the Company may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions and the like that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors which may cause actual results to differ include but are not limited to: the unanticipated loss of a material client or key personnel, delays or reductions in client advertising budgets, shifts in industry rates of compensation, government compliance costs or litigation, natural disasters or acts of terrorism, the Company’s exposure to changes in the values of other major currencies (because a substantial portion of its revenues are derived and costs incurred outside of the United Kingdom) and the overall level of economic activity in the Company’s major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the world’s advertising markets). In light of these and other uncertainties, the forward-looking statements included in the document should not be regarded as a representation by the Company that the Company’s plans and objectives will be achieved.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
Overview
WPP Group plc (“WPP”) and its subsidiaries and affiliates comprise one of the largest advertising and marketing businesses in the world. As of 31 December 2003, the Group had approximately 54,000 employees located in approximately 1,400 offices in 106 countries. For the year ended 31 December 2003, the Group had revenue of approximately £4,106 million and operating income of approximately £415 million. As of 31 May 2004, the number of employees was approximately 56,000.
Unless the context otherwise requires, the terms “Company”, “Group” and “Registrant” as used herein shall mean WPP and its subsidiaries.
A. Selected Financial Data
The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company, including the notes thereto.
The selected financial data for the three years ended 31 December 2003 is derived from the Consolidated Financial Statements of the Company, which appear elsewhere in this Form 20-F. The selected financial data for the two years ended 31 December 2000 is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission as part of the Company’s Annual Reports on Form 20-F.
The Consolidated Financial Statements of the Company are prepared in accordance with generally accepted accounting standards in the United Kingdom (UK GAAP), which differ in certain significant respects from generally accepted accounting principles in the United States (US GAAP). A reconciliation to US GAAP is set forth on pages F-27 to F-36 of the Consolidated Financial Statements.
The reporting currency of the Group is the pound sterling and the selected financial data has been prepared on this basis.
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Selected Consolidated Profit and Loss Account Data
Amounts in accordance with UK GAAP:
Turnover (or gross billings)
Revenue
Operating profit
Profit on ordinary activities before taxation
Profit attributable to ordinary share owners
Basic earnings per share
Diluted earnings per share
Dividends per ordinary share
Dividends per ADS (US dollars)
Amounts in accordance with US GAAP:
Operating profit1
Net income before the cumulative effect of change in accounting principle
Net income after the cumulative effect of change in accounting principle
Earnings per share before the cumulative effect of change in accounting principle:
Earnings per share after the cumulative effect of change in accounting principle:
Dividends declared per ordinary share2
Dividends declared per ADS (US dollars)2
Total assets
Net assets
Capital stock
Number of shares
Notes
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Dividends
Dividends on the Company’s ordinary shares, when paid, are paid to share owners as of a record date, which is fixed after consultation between the Company and The London Stock Exchange Limited (“The London Stock Exchange”).
The table below sets forth the amounts of interim, final and total dividends paid on the Company’s ordinary shares in respect of each fiscal year indicated. In the United States, the Company’s ordinary shares are represented by ADSs, which are evidenced by American Depositary Receipts (“ADRs”). The dividends are also shown translated into US cents per ADS using the average Bloomberg Closing Mid Point rate for pounds sterling, as shown below, for each year presented.
Year ended:
1999
2000
2001
2002
2003
The 2003 interim dividend was paid on 17 November 2003 to share owners on the register at 17 October 2003. The 2003 final dividend is expected to be paid on 5 July 2004 to share owners on the register at 4 June 2004.
Exchange rates
Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the dollar equivalent of the pound sterling prices of the Company’s ordinary shares on The London Stock Exchange and, as a result, are likely to affect the market price of the ADSs in the United States. US dollar amounts paid to holders of ADSs also depend on the sterling/US dollar exchange rate at the time of payment. The annual average of the daily Bloomberg Closing Mid Point rate for pounds sterling expressed in US dollars for each of the five years ended 31 December 2003 was:
Year ended 31 December
The following table sets forth for each of the most recent six months, the high and low Bloomberg Closing Mid Point rates. As of 31 May 2004, the Bloomberg Closing Mid Point rate was 1.8317.
Month ended
31 December 2003
31 January 2004
29 February 2004
31 March 2004
30 April 2004
31 May 2004
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B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
The Company competes for clients in a highly competitive industry.
The communications services industry is highly competitive and fragmented. At the parent company level, the Company’s principal competitors are other large multinational communications services companies, including Omnicom Group (“Omnicom”), the Interpublic Group of Companies (“IPG”), Publicis Groupe (“Publicis”), Grey Advertising, Havas and VNU. The actual competition for clients, however, normally takes place at the operating company level, within the different sectors of Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare, and Specialist communications. The Company’s principal competitors in the advertising and media investment management industries are large multinational agencies, including BBDO Worldwide, Carat, Leo Burnett Worldwide, DDB Worldwide Communications, Foote, Cone & Belding Worldwide, Lowe & Partners Worldwide, Magna Global, Inc., McCann-Erickson Worldwide, Omnicom Media Group (OMG), Saatchi & Saatchi, Starcom MediaVest Group, TBWA Worldwide and Zenith Optimedia, as well as numerous smaller agencies that operate in local markets. The Company’s agencies must compete with other agencies to maintain existing client relationships and to obtain new clients. Principal competitive factors include the agency’s creative reputation, knowledge of media alternatives and purchasing power, geographic coverage and diversity, quality of service and understanding of clients’ needs. Improved global communications and free trade, and more stable, less inflationary worldwide economic growth have contributed to increased competition in the communications services industry. At the same time, however, advertising and marketing services companies are consolidating, diversifying and growing market share through acquisitions.
Clients are not generally bound to an individual agency and may move their accounts to another agency, usually with 90 days notice. Clients may also reduce advertising and marketing budgets at any time and for any reason with no compensation to the agency. Larger clients may use more than one agency for their advertising requirements. In many cases, the Company represents a client for only a portion of its advertising or marketing services needs or only in particular geographic areas thus enabling the client to continually compare the effectiveness of its different agencies’ work. Industry practices in the other communications services businesses reflect similar concerns with respect to client relationships. Despite these circumstances, we believe that there is continued evidence that clients are moving towards the consolidation of their marketing activities.
An agency’s ability to compete for new advertising and marketing services clients and assignments is limited somewhat by the policy followed by many clients of not permitting agencies working for them to represent competing accounts or product lines in the same market. A lesser number of companies will not permit their advertising and/or marketing services firms to work on competing accounts in any market, although, increasingly, converging strategies seem to be reducing the incidence of this impediment. Client conflict policies can and sometimes do prevent our agencies from winning new clients and assignments.
The Company receives a significant portion of its revenues from a limited number of large clients.
A relatively small number of clients contribute a significant percentage of the Company’s consolidated revenues. The Company’s ten largest clients accounted for approximately 26% of
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revenues in the year ended 31 December 2003. The Company’s clients generally are able to reduce advertising and marketing spending or cancel projects at any time for any reason. There can be no assurance that any of the Company’s clients will continue to utilise the Company’s services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, the Company’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Company’s prospects, business, financial condition and results of operations.
The Company may be subject to certain regulations that could restrict the Company’s activities.
From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations and rulings that directly or indirectly affect the form, content and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. For further discussion of such regulations, see the discussion in the Government regulation section under Item 4B. Though the Company does not expect any existing or proposed regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.
The Company is dependent on its employees.
The advertising and marketing services businesses are highly dependent on the talent, creative abilities and technical skills of its personnel and the relationships its personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all service businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among these businesses for talented personnel.
The Company is exposed to international business risk.
The Company operates in 106 countries throughout the world. Its operations are exposed to the normal business risks and limitations caused by currency fluctuations, exchange control restrictions, restrictions on repatriation of earnings and investment of capital and political instability. In addition, the communications services industry is widely viewed as among the first industry sectors affected by changes in economic cycles. The Company is also subject to governmental and regulatory risks including taxation, nationalisation, inflation and protectionist measures that can affect its international business operations. In addition, the Company is subject to global economic impact from political and social upheaval risks. For details of the effect of the current economic environment on the Group, see the discussion under Item 5.
Future acquisitions, as well as acquisitions already completed, could subject us to a number of risks and/or result in us experiencing significant charges to earnings that may adversely affect our operating results and financial condition.
We regularly review potential acquisitions of businesses that are complementary to our businesses. As part of that review, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite our efforts, we may be unsuccessful in ascertaining or evaluating all such risks and, as a result, we might not realise the intended advantages of any given acquisition. We also must consolidate and integrate any acquired operations with our businesses. These integration efforts can take a significant amount of time, place a strain on our managerial, operational and financial resources and could prove to be more
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difficult and expensive than we predicted. If we fail to realise the expected benefits from an acquisition, whether as a result of unidentified risks, integration difficulties or otherwise, our business, results of operations and financial condition could be adversely affected.
Goodwill recorded on the Company’s balance sheet with respect to acquired companies may become impaired.
The Company has a significant amount of goodwill recorded on its balance sheet with respect to acquired companies. The Company annually tests the carrying value of goodwill for impairment. The estimates and assumptions about results of operations and cash flows made in connection with impairment testing could differ from future actual results of operations and cash flows. In addition, future events could cause the Company to conclude that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations.
We may use common stock, incur indebtedness, expend cash or use any combination of common stock, indebtedness and cash for all or part of the consideration to be paid in future acquisitions that would result in additional goodwill being recorded on the Company’s balance sheet.
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ITEM 4. INFORMATION ON THE COMPANY
The Company operates through a number of established global, multinational and national advertising and marketing services companies that are organized into four business segments. Our largest segment is Advertising and Media investment management where we operate the well-known advertising networks J. Walter Thompson Company, Ogilvy & Mather Worldwide, Red Cell, Y&R and Bates Asia as well as media investment management companies such as MindShare and Mediaedge:cia. Our other segments are Information, insight and consultancy (where our operations are conducted through Kantar Media Research, Millward Brown, Research International and other companies), Public relations and public affairs (where we operate through well-known companies such as Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton and Ogilvy Public Relations Worldwide) and Branding & identity, Healthcare and Specialist communications (where our operations are conducted by Enterprise IG, Landor Associates, Fitch Worldwide, CommonHealth, Sudler & Hennessey, Healthworld, OgilvyOne, Wunderman, 141 Worldwide and other companies).
The Company’s ordinary shares are admitted to the Official List of the UK Listing Authority and trade on The London Stock Exchange and American Depositary Shares (evidenced by American Depositary Receipts) representing deposited ordinary shares are quoted on the NASDAQ National Market (“NASDAQ”). At 31 May 2004 the Company had a market capitalisation of £6.4 billion.
The Company’s executive office is located at 27 Farm Street, London W1J 5RJ, England, Tel: (44) 20-7408-2204 and its registered office is located at Pennypot Industrial Estate, Hythe, Kent CT21 6PE, England.
A. History and Development of the Company
WPP Group plc was incorporated and registered in England and Wales in 1971 and is a public limited company under the Companies Act 1985, and until 1985 operated as a manufacturer and distributor of wire and plastic products. In 1985, new investors acquired a significant interest in WPP and changed the strategic direction of the Company from being a wire and plastics manufacturer and distributor to being a multinational communications services organisation. Since then, the Company has grown both organically and by the acquisition of companies, most significantly the acquisitions of JWT Group, Inc. in 1987, The Ogilvy Group, Inc. in 1989, Young & Rubicam Inc. (“Young & Rubicam” or “Young & Rubicam Brands”, as the group is now known) in 2000, Tempus Group plc (“Tempus”) in 2001, and Cordiant Communications Group plc (“Cordiant”) in 2003.
On 4 October 2000, the Company finalised its acquisition of Young & Rubicam. The value of the consideration, which was satisfied entirely by the issue of new WPP ordinary shares or WPP ADSs, was £3.0 billion. In accordance with UK GAAP, the consideration was calculated by reference to the opening WPP share price on 4 October 2000, which was £7.99. The merger with Young & Rubicam brought together two organisations sharing a common approach to the integration of advertising and marketing services for clients. Management believes that the companies complement one another in providing alternative operating brands in common business areas while adding the market research expertise of the Group to the Young & Rubicam businesses. The Young & Rubicam companies and other Group companies continue to share a large number of major clients including Ford and AT&T. Within the enlarged Group client conflicts can be managed more effectively through separate operating brands so that clients can be assured of confidentiality. In addition, the merger has strengthened the Group geographically, particularly in North America and Continental Europe.
On 6 November 2001, the Company finalised its acquisition of Tempus. The consideration was satisfied principally by £369 million in cash. Prior to the acquisition, the Group owned a 22% interest in the ordinary share capital of Tempus. Subsequent to the acquisition, The Media Edge and CIA,
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Tempus’ core brand, merged operations to create Mediaedge:cia. Mediaedge:cia’s geographically balanced network enables it to develop, manage and implement national, regional and global communications and media solutions for the benefit of its clients.
The acquisition of Cordiant was completed on 1 August 2003. WPP issued £11.3 million in new WPP shares as consideration for Cordiant and its shareholders, entering into a scheme of arrangement under Section 425 of the Companies Act of 1985 (the “Companies Act”). The Group also paid £265.5 million for the debt of Cordiant. £62.1 million of the debt was repaid prior to the acquisition date. Since the acquisition, Cordiant and its subsidiaries have been assimilated into the Group’s global communications and media network, although shortly after the acquisition the Group separately sold Cordiant’s interest in Zenith Optimedia Group Limited to Publicis for £75 million. Cordiant gave the Company reinforced relationships with a number of major multinational clients, strong agencies in Europe to develop Red Cell, Bates Asia (an Asian-based entity with local and multinational clients), a number of ex-Zenith media planning and buying operations, effective healthcare and retail-rooted branding and identity operations, and a number of specialist public relations and event management capabilities.
The Company spent £398.6 million (net of the £75 million in proceeds from the sale of Cordiant’s interest in Zenith Optimedia Group), £343.4 million and £736.0 million for acquisitions and investments in 2003, 2002 and 2001, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of tangible fixed assets was £93.9 million, £100.5 million and £118.1 million, respectively, and cash spent on share repurchases and cancellations was £23.1 million, £75.9 million and £103.3 million, respectively.
B. Business Overview
In 2003 turnover increased 3.3% to £18.62 billion as compared to 2002. Revenues increased over 5% to £4.1 billion as compared to 2002. On a like-for-like basis, under which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year results, adjusted to include the results of acquisitions for the commensurate period in the prior year, revenues were up by 0.7%. Excluding the acquisition of Cordiant, like-for-like revenues were up 1.5%. Reported operating profit (excluding income from associates) increased in 2003 by 52.4% to £415 million, including the effects of £48 million and £146 million of goodwill impairment charges taken on subsidiaries in 2003 and 2002, respectively. Reported profit before interest and taxes was up over 44% to £422 million in 2003 from £292 million in 2002. Profit before tax in 2003 was up 70% to £350 million as compared to 2002 and diluted earnings per share increased by almost 136% to 18.2p.
The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from 1,400 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare, and Specialist communications.
Approximately 47% of the Company’s reported revenues in 2003 were from Advertising and media investment management, with the remaining 53% of its revenues being derived from the business segments of Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare and Specialist communications. Over the past several years, the pattern of revenue growth varied by communications services sector and brand. The following table shows, for the last three fiscal years, reported revenue attributable to each business segment in which the Company operates.
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In 2003, certain of the Company’s Specialist communications companies in strategic marketing consulting were moved into the renamed Information, insight and consultancy sector. As a result, the comparative figures for both Information, insight and consultancy and Branding and identity, Healthcare and Specialist communications have been restated to reflect this change.
% of
Total in
Advertising and Media investment management
Information, insight and consultancy
Public relations and public affairs
Branding and identity, Healthcare and Specialist communications
TOTAL
The pattern of revenue growth also differed regionally. The following table shows, for the last three fiscal years, reported revenue attributable to each geographic area in which the Company operates and demonstrates the Company’s regional diversity.
United States
Continental Europe
Canada, Asia Pacific, Latin America, Africa and Middle East
The Company’s principal activities within each of its business segments are described below.
Advertising
The principal functions of an advertising agency are the planning and creation of marketing and branding campaigns and the design and production of advertisements for all types of media such as television, cable, the internet, radio, magazines, newspapers and outdoor locations such as billboards.
The Company’s advertising agencies include J. Walter Thompson Company, Ogilvy & Mather Worldwide, Y&R, Red Cell and Bates Asia. The Company also owns interests in Asatsu-DK (20.9%), Chime Communications (19.1%); LG Ad (28.2%); Singleton, Ogilvy & Mather in Australia (40.8%) and various joint ventures between Y&R and Dentsu in Asia with interests ranging from 20% to 67% of the total share capital.
J. Walter Thompson Company. J. Walter Thompson, one of the world’s first advertising agencies, was founded in 1864 and is a full service multinational advertising agency headquartered in New York. J. Walter Thompson’s relationships with a number of its major clients have been in existence for many years, exhibiting, management believes, an ability to adapt to meet the clients’ and market’s new demands.
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Ogilvy & Mather Worldwide. Ogilvy & Mather is a full-service multinational advertising agency. Ogilvy & Mather was formed in 1948 and is headquartered in New York. Its strategy includes an integrated service offering known as 360 Degree Brand Stewardship, through which it covers a range of offerings from sales promotion to healthcare communications, event and entertainment marketing, data mining and brand identity.
Y&R. Y&R was formed in 1923 and is a full-service multinational advertising agency network headquartered in New York. Y&R’s clients also benefit from the brand knowledge developed over a 10 year period in Brand Asset Valuator ®, its proprietary brand management tool.
Red Cell. Red Cell, formed in January 2001, is a global communications network offering full-service marketing solutions. The Red Cell network includes its New York flagship Berlin Cameron/Red Cell, HHCL/Red Cell in London and Batey in Asia. As part of WPP’s acquisition of Cordiant, Red Cell incorporated 18 of the former Bates agencies into the network.
Bates Asia. Bates is an independently operating Asia-based advertising network. Bates employs the expertise of 141 Worldwide and XM to provide integrated marketing and interactive services, respectively, to its clients.
Dentsu, Young & Rubicam. DY&R is operated on a joint venture basis with Dentsu in Asia. It is a full service advertising network operating in the Asia/Pacific region.
Media investment management
In 2003, the Company formed GroupM, a worldwide media parent company. GroupM brings together the operations of MindShare and Mediaedge:cia. These media investment management companies plan and buy media to communicate clients’ brand messages in the most effective manner using the buying power of GroupM to negotiate competitive rates for space and time using sophisticated consumer and media research tools. The greater scale created by GroupM allows for increased investment in leading-edge practices, processes and tools. These companies offer an integrated service covering conventional media like television, print and posters as well as digital and interactive media, sponsorship, event management and TV programming. They help clients to optimise their media spending through advice on the strategic benefit of each medium (e.g., TV, print, internet, radio, etc.), and passing economies of scale in the purchasing of media time and space through to clients. GroupM is progressing with plans for the formation of a third independent brand which will take its place alongside MindShare and Mediaedge:cia and allow GroupM to manage growth into the future.
MindShare. MindShare, formed from the merger of the media departments of J. Walter Thompson and Ogilvy & Mather, offers media planning, buying and research services for its clients, including existing J. Walter Thompson and Ogilvy & Mather clients. The MindShare network now comprises 87 agencies in 63 countries.
Mediaedge:cia. Mediaedge:cia was formed following the Group’s acquisition of Tempus in 2001 with the merger of its core brand CIA with The MediaEdge. Mediaedge:cia provides a core offer of media planning and placement and offers a range of fully integrated consultancy and implementation services to a client base that includes Y&R and Wunderman clients, independent clients and clients of other agencies. Mediaedge:cia also includes sponsorship and digital operations, as well as OHAL, an econometric modeling group.
Information, insight and consultancy, which we previously referred to as information and consultancy, was re-named following the transfer of the strategic marketing consultancy businesses
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from Specialist communications on 1 January 2003. Research activities include consumer, media, corporate communication and policy research, advertising research, pre-testing and tracking and evaluation of advertising and promotions, design and management of international market studies and new product development and testing.
To help optimise its worldwide research offering to clients, the Company’s separate global research and strategic marketing consultancy businesses, which are described below, are managed on a centralised basis under the umbrella of the Kantar Group, including BrandZ, the proprietary diagnostic and predictive research tool developed by the Group for managing brands. The principal interests comprising the Kantar Group are:
Research International. RI, a large custom research company, specialises in a wide range of business sectors and areas of marketplace information including strategic market studies, brand positioning and equity research, customer satisfaction surveys, product development, international research and advanced modeling.
Millward Brown. MB is one of the world’s leading companies in advertising research, including pre-testing, tracking and sales modeling, and offers a full range of services to help clients market their brands more effectively.
Kantar Media Research. KMR focuses on media planning databases and new product development projects. KMR has the following principal subsidiaries and investments:
BMRB International. BMRB is one of Europe’s largest and fastest growing full-service market research agencies. BMRB offers innovative research solutions through its network and partnerships with agencies worldwide.
IBOPE Media Information (the Company holds 31% of the total share capital). IBOPE is one of Latin America’s leading media research businesses, which services national and multinational clients throughout the region in measurement and analysis of television ratings and advertising expenditures.
AGB Italia (the Company holds 30% of the total share capital). AGB is a leading provider of television audience measurement systems worldwide.
IMRB International. IMRB is a leading market research business in India.
Lightspeed Research. Lightspeed provides online consumer panel access for tracking and ad hoc studies. Lightspeed also offers online proprietary panel products and solutions for such specialty consumer panels as healthcare, financial services, expectant and new mothers, automotive and family.
Public relations and public affairs companies advise clients who are seeking to communicate with consumers, governments and/or the business and financial communities. Public relations and public affairs activities include national and international corporate, financial and marketing communications, crisis management, public affairs and government lobbying. The Company’s largest businesses in this area are Burson-Marsteller, Hill & Knowlton Inc., Ogilvy Public Relations Worldwide and Cohn & Wolfe.
Burson-Marsteller. BM, founded in 1953, specialises in corporate and marketing communications, business-to-business services, crisis management, employee relations and government relations.
Hill & Knowlton. H&K, founded in 1927, is a worldwide public relations and public affairs firm headquartered in New York. H&K provides national and multinational clients with a wide range of
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communications services including corporate and financial public relations, marketing communications, crisis communications and public affairs counseling.
Ogilvy Public Relations Worldwide. OPR is a leading public relations and public affairs firm based in New York with practice areas in marketing, health and medical, corporate public affairs and technology. The firm has offices in key financial, governmental and media centres as well as relationships with affiliates worldwide.
Cohn & Wolfe. C&W, an international public relations agency, was established in 1970 and offers marketing-related public relations for its clients. C&W provides its clients with business results and marketing communications solutions.
Others. The Group includes a number of other companies specialising in public relations and public affairs, including BKSH, Blanc & Otus, Buchanan Communications, Bulletin, Clarion, Finsbury, Penn, Schoen & Berland, Quinn Gillespie, Robinson Lerer & Montgomery, Timmons and Company and Wexler & Walker Public Policy Associates.
The Company’s activities in this business area include branding and identity; direct marketing, sales promotions and relationship marketing; healthcare marketing and other sector marketing businesses; and specialist communications services including custom media, demographic and industry sector marketing, sports marketing, and media, technology and production services.
Branding and identity
The Company delivers a large range of identity and design services through its Brand Union, a co-operative group of certain of WPP’s specialist consulting brands, as well as a number of other operating subsidiaries including Landor Associates, the Partners and Fitch Worldwide. These companies provide complementary services, including space planning, retail and work interiors, point of sale displays, marketing literature, annual reports and corporate literature, packaging and brand and corporate identity.
The Brand Union. The goal of the Brand Union, formed in 2001, is to build a group of leading consulting brands capable of meeting all the brand, identity and design needs of the world’s most demanding brand owners. It comprises a diverse portfolio of consulting and creative businesses, including Enterprise IG, Addison Corporate Marketing, BDG McColl, Lambie-Nairn, MJM Creative Services and Warwicks UK.
Landor Associates. Landor is a leading branding consultancy and strategic design firm. Landor creates, builds and revitalises clients’ brands and helps position these brands for continued success. Landor’s branding and identity consultants, designers and researchers work with clients on a full range of branding and identity projects, including corporate identity, packaging and brand identity systems, retail design and branded environments, interactive branding and design, verbal branding and nomenclature systems, corporate literature, brand extensions and new brand development. Landor, headquartered in San Francisco, was founded in 1941.
Fitch Worldwide. Fitch is a leading brand and design consultancy, operating across the three main geographical areas (Europe, the United States, and Asia Pacific) for multinational clients and for those regional clients standing to benefit from a globally informed interdisciplinary approach. Through trends forecasting, strategy, and design, Fitch creates content and design solutions for its clients. Rodney Fitch, who founded the agency in 1972, rejoined in 2004 as Chairman and CEO of Fitch.
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Healthcare marketing and communications
The Company has extensive expertise in healthcare marketing and communications services. CommonHealth, Sudler & Hennessey and Healthworld offer three of the most comprehensive specialist healthcare communications networks in the world.
Specialist communications
Interactive, Relationship Marketing and Promotion
The Company has a number of operating businesses in this category, including:
Custom Media
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Demographic and Industry Sector Marketing
Sports Marketing
Media, Technology and Production Services
Manufacturing
The original business of the Company remains as the manufacturing division, which operates through subsidiaries of Wire and Plastic Products Limited. The division produces a wide range of products for commercial, industrial and retail applications.
WPP, the parent company, develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The principal activity of the Group is the
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provision of communications services worldwide. WPP acts only as the parent company and does not trade. The parent company complements the operating companies in two distinct ways. First, the parent company relieves them of much administrative work. Financial matters (such as planning, budgeting, reporting, control, treasury, tax, mergers, acquisitions, investor relations) are co-ordinated centrally. Secondly, and increasingly, the parent company encourages and enables operating companies of different disciplines to work together for the benefit of clients and our people. In the management of talent (including recruitment and training), property, procurement, information technology and knowledge sharing, the parent company also has a significant across-the-Group part to play. The parent company operates with a limited group of approximately 200 people at the centre, in London, New York, Hong Kong and Sao Paulo.
WPP Strategy
The Group has three strategic priorities. First, in the short term, having weathered the recession, we intend to build on the base we have established. Second, in the medium term, we need to continue to integrate successfully the acquisitions of Young & Rubicam Brands, Tempus and Cordiant. This task is largely completed, particularly at Tempus and at Cordiant as described in Item 4A of this report. At Young & Rubicam Brands, the job is largely done as well, the one remaining task being to strengthen further the Y&R advertising agency, which we believe is gaining momentum following recent changes in account and creative leadership. Finally, in the long term, we intend to increase the combined geographic share of revenues of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe from around 20% to one-third, and to increase the share of revenues of marketing services from around 53% to two-thirds, and to increase the share of more measurable marketing services—such as information, insight and consultancy, direct, interactive and internet—from around one-third of our total revenues to 50%.
Clients
The Company’s structure of independent, autonomous companies and associates allows it to provide a comprehensive and, when appropriate, integrated range of communications services to national, multinational and global clients and to serve their increasingly complex and diverse geographic needs. The Company serves over 330 clients in at least three service disciplines, more than 130 clients in four service disciplines and over 100 of our clients in six or more countries. All together, the Company now serves more than 300 of the Fortune Global 500, over one-half of the NASDAQ 100, and over 30 of the Fortune e-50. The Company’s ten largest clients in 2003, measured by revenues, were Altria, American Express, AT&T, Colgate-Palmolive, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer and Unilever. Together, these clients accounted for approximately 26% of the Company’s revenues in 2003. No client of the Company represented more than 8% of the Company’s aggregate revenues in 2003. The Group companies have maintained long-standing relationships with many of its clients, with an average length of relationship for the top 10 clients of approximately 50 years.
While the operating companies owned by the Company operate separately and independently of each other, and service different clients and/or business segments, they nevertheless have the opportunity to share certain corporate resources. The potential for cross-referral of clients among the Company’s subsidiaries is significant, and increasing, as contacts and introductions between the various subsidiaries of the Company often produce new ideas for services and new client opportunities, nationally, internationally and by service functions. To enhance this process, the Company has implemented incentive plans whereby a portion of the incentive compensation for senior executives in the Group is based upon their cooperation with, and cross referrals to, other Group companies.
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Acquisitions
Total initial cash consideration spent on acquisitions and investments was £260 million in 2003. WPP or its operating companies acquired or made an investment in a number of companies in 2003, including Cordiant and the companies identified below:
Name
Country
Shanghai Advertising
LG Ad
Guye & Benker
HHCL
Concept Media1
Fudgehouse1
O&M India1
Graell Graphics1
MDM
Promotions Italia1
Media Club
Goldsack Harris Partnership
Sadek Wynberg
Marktest1
Planners Communicacion1
Mattson Jack Group
HealthAnswers
MEDIApro Group
Civitas
Quinn Gillespie
H&K Sweden1
In the first quarter of 2004, the Group completed acquisitions or investments in Advertising and media investment management, including Stenstrom (Sweden), AdForce (Indonesia) and Ablea (South Korea), and increased its investment stake in Concept Media (Germany), AdVenture Worldwide (Korea) and, in Public relations and public affairs, Chime Communications (UK).
Government regulation
From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations, and rulings which directly or indirectly affect the form, content, and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. Some of the foregoing relate to privacy and data protection and general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms’ representation of foreign governments.
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In addition, there is an increasing tendency towards consideration and adoption of specific rules, prohibitions, and media restrictions, and labeling, disclosure and warning requirements, with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children.
Proposals have been made for the adoption of additional laws and regulations that could further restrict the activities of advertising, public relations and public affairs, and market research firms and their clients. Though the Company does not expect any existing, proposed or future regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.
Litigation
WPP and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The Company does not anticipate that the outcome of these proceedings and claims will have a material adverse effect on the Group’s financial position or on the results of its operations.
C. Organizational Structure
The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from 1,400 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare, and Specialist communications (including direct, promotion and relationship marketing). Set forth below is a listing of the Group brands operating within these business segments as at 10 May 2004.
Asatsu-DK1
Bates Asia
Batey/Red Cell
Berlin Cameron/Red Cell
The Campaign Palace
Dentsu Young & Rubicam (DY&R)1,2,4
Diamond Ad
Equus/Red Cell1
LG Ad1
J. Walter Thompson Company
Marsteller Advertising4
Ogilvy & Mather Worldwide
Red Cell
Soho Square
Y&R4
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Information, insight & consultancy
Public relations & public affairs
The Kantar Group:
Added Value
BPRI
Center Partners
Diagnostic Research
Fusion 5
Glendinning
The Henley Centre
icon brand navigation
IMRB International
Kantar Media Research
AGB Group1
BMRB International
IBOPE Media Information1
Mediafax
Lightspeed Research
Management Ventures
Millward Brown
pFour Consultancy
Research International
Ziment
Other marketing consultancies:
OHAL
Quadra Advisory1
Branding & identity
Direct, promotion & relationshipmarketing
CB’a
Enterprise IG
Landor Associates4
The Partners4
Addison Corporate Marketing
BDG workfutures
Coley Porter Bell
Dovetail
Fitch
Demographic marketing
The Bravo Group4
Lambie-Nairn
MJM Creative
Oakley Young
Walker Group
Warwicks
Maxx Marketing
OgilvyOne Worldwide
rmg:connect
RTC
Savatar
Face-to-face/event marketing
The Event Union MJM Creative
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Healthcare
CommonHealth
Feinstein Kean Healthcare
Healthworld Communications Group
Ogilvy Healthcare
Shire Health Group
Sudler & Hennessey4
syzygy1
ThompsonConnect Worldwide
VML
Wunderman4
141 Worldwide
Pro Deo
facts + fiction
Pci:Live
Foodservice
The Food Group
Sports marketing
Global Sportnet
MEDIApro Group1
Premiere Group
PRISM Group
Real estate
Pace
Technology
Banner Corporation4
Media and production services
Clockwork Capital1
The Farm Group
WPP Knowledge Communities
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D. Property, Plant and Equipment
The majority of the Company’s properties are leased, although certain properties which are used mainly for office space are owned in the United States (including the 370,000 net square foot Young & Rubicam headquarters office building located at 285 Madison Avenue in New York, New York), Argentina, Brazil, Mexico, Peru and Thailand, and manufacturing facilities are owned in the United Kingdom. Principal leased properties include office space at the following locations:
Location
Use
Worldwide Plaza, New York, NY
466 Lexington Avenue, New York, NY
230 Park Ave South, New York, NY
498 Seventh Avenue, New York, NY
900 North Michigan Avenue, Chicago, IL
500 Woodward Avenue, Detroit, MI
233 North Michigan Avenue, Chicago, IL
27-8 Chamwon-Dong Seochkuy, Seoul, South Korea
825 Seventh Avenue, New York, NY
10 Cabot Square, Canary Wharf, London, UK
Greater London House, London, UK
The Company considers its properties, owned or leased, to be in good condition and generally suitable and adequate for the purposes for which they are used. See also Item 5—Operating and Financial Review and Prospects. As of 31 December 2003, the fixed asset value (cost less depreciation) representing properties, both owned and leased, as reflected in the Company’s consolidated financial statements was approximately £180.6 million.
The task of eliminating under-utilised property costs continues to be a priority for the Group. At the beginning of 2002, the Group owned or leased approximately 14 million square feet of space worldwide. By the end of 2003, occupancy had fallen to 12.6 million square feet, a 10% reduction (excluding properties acquired with Cordiant). In addition, a further 600,000 square feet, or an additional 4%, is expected to be jettisoned by the end of 2004.
See note 2 to the Consolidated Financial Statements for a schedule by years of future minimum rental payments to be made and future sublease rental payments to be received, as of 31 December 2003, under non-cancelable operating leases of the Company.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Introduction
The Company’s reporting currency has always been the UK pound sterling. However, the Company’s significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or “functional”) currencies of its main operating units. Its principal borrowing currencies, therefore, are US dollars and euros, as these are the predominant currencies of revenues.
To neutralise foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency (current and prior year local currency results translated into US dollars at a budget, or “constant”, foreign exchange rate).
See Item 11 of this report for Quantitative and Qualitative Disclosures about Market Risk.
A. Operating Results
The Company is one of the world’s largest communications services groups. It operates through a number of established national, multinational and global advertising and marketing services companies. The Company offers services in four reporting segments:
In 2003, 47% of the Company’s consolidated revenues were derived from Advertising and media investment management, with the remaining 53% of its revenues being derived from the marketing services segments.
The Group has established the following financial and strategic objectives:
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The following discussion is based on the Company’s audited Consolidated Financial Statements beginning on page F-1 of this report. The Consolidated Financial Statements have been prepared in accordance with UK GAAP. See pages F-27 to F-36 of the Consolidated Financial Statements, which contain a discussion and reconciliation of the principal differences between UK and US GAAP relevant to the Company.
The following table summarises certain financial information for purposes of management’s discussion and analysis:
Constant
currency
+/(-)%
Operating costs excluding goodwill amortisation & impairment
Goodwill amortisation & impairment-subsidiaries
Operating costs
Income from associates
Operating income, including income from associates
Goodwill amortisation & impairment-associates
Net income available to ordinary share owners
The world economy, driven by activity in the United States and Asia Pacific region, started to improve in 2003. The positive quarterly revenue trend seen in the United States in the fourth quarter of 2002 continued into 2003, with all four quarters showing positive growth, and worldwide quarterly revenue growth in quarters three and four. Although 2003 was not an easy year, 2004 is expected to benefit from the positive impact of quadrennial factors such as the US Presidential election, the expected impact of political advertising in the United States on media rates, the Athens Olympics and the European Football Championships. We expect worldwide advertising and marketing services spending to rise by at least 3-4% in 2004. Given the US deficit spending and the weak dollar and their potential impact on interest rates and inflation, 2005 remains difficult to predict.
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Segment performance
As discussed earlier, management reviews the Group’s businesses in constant currency to better illustrate the underlying trends from one year to the next. To supplement the reportable currency segment information presented in note 1 to the Consolidated Financial Statements, the table below gives details of revenue growth by region and business segment both in reported and constant currency.
Reported
growth %+/(-)
Constant Currency
Canada, Asia Pacific, Latin America, Africa & the Middle East
Total Group
Constant CurrencyRevenue
Advertising & Media investment management
Branding & identity, Healthcare & Specialist communications
Performance of the Group’s businesses is reviewed by management based on profit on ordinary activities before interest, taxation, goodwill amortisation and impairment, fixed asset gains and write-downs. A table showing these amounts by segment for each of the three years ended 31 December 2003 is presented, in accordance with SFAS 131, in note 1 to the Consolidated Financial Statements. Related performance margins by region and business segment are shown below.
Branding and identity, Healthcare & Specialist communications
Further, management reviews the Group’s businesses on a like-for-like basis, in which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year results, adjusted to include the results of acquisitions for the
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commensurate period in the prior year. Supplemental references to like-for-like revenues are made where management believes these are meaningful to the discussion of the underlying trend of the business. Management believes that discussing like-for-like revenues provides a better understanding of the Company’s revenue performance and trends because it allows for more meaningful comparisons of current period revenue to that of prior periods.
The Group’s advertising and media investment management businesses continued the rebound which began in the second half of 2002, with media investment management the fastest growing part of the sector with strong organic growth. Advertising and media investment management like-for-like growth was over 2%, or over 3% excluding the impact of the acquisition of Cordiant. Information, insight and consultancy continued their strong growth despite issues at Kantar’s call centre operations. Like-for-like revenues in this segment were up over 1%. However, difficulties at Kantar’s call centre operations resulting in certain operational costs taken with respect to property and severance in the United States impacted overall sector performance. Branding and identity, healthcare and specialist communications also rebounded with healthcare and direct, internet and interactive (a part of Specialist communications) growing revenues particularly strongly. However, on a like-for-like basis, revenues were down just over 1%. Public relations and public affairs continued to be most affected by recent economic weakness, although the first signs of recovery came in the fourth quarter of 2003 which showed positive revenue growth for the first time for eleven quarters. Despite relatively flat revenues in 2003, the Public relations and public affairs businesses controlled costs effectively and margins rose by over two margin points to almost 13%.
Geographically, the Group’s financial performance in 2003 reflected the continuing improvement in economic conditions in the United States, Asia Pacific, Latin America, Africa and the Middle East, countered to a limited extent (in our case) by continuing weakness on a like-for-like basis in Europe, particularly in the United Kingdom. On a constant currency basis, all regions showed revenue growth in 2003, with both the United Kingdom and Continental Europe to some extent reflecting acquisition activity and Asia Pacific, Latin America, Africa and the Middle East representing the Group’s strongest growth areas.
2003 compared with 2002
Revenues—Reported revenues were up over 5% in 2003 to £4,106.0 million from £3,908.3 million in 2002. On a constant currency basis, revenue increased by over 7%, with all regions showing revenue growth, as detailed in the table above. For 2003, acquisitions completed during the year contributed revenue of £183.4 million in the aggregate. The contribution of aggregate acquisitions completed in 2002 to revenue was not material to revenues in 2002. On a like-for-like basis revenues were up 0.7%, or 1.5% excluding the impact of the acquisition of Cordiant. Like-for-like revenues were flat in the first half of 2003 and up over 1% in the second half. In the four sequential quarters of 2003, like-for-like revenues were flat, flat, up over 1% and up over 1%, respectively. Excluding Cordiant, the last two quarters were up over 2% and over 3%, respectively.
Operating costs—Reported operating costs excluding goodwill amortisation and impairment, including direct costs, rose in 2003 by over 4%, and by almost 7% in constant currency (0.5% on a like-for-like basis) from the previous year. Staff costs excluding incentives in 2003 were up 0.2%, with salaries and freelance costs down 0.9%. Incentive payments totaled £130.4 million in 2003 (£90.1 million in 2002) or almost 21% (compared with over 16% in 2002) of operating profit before bonuses, taxes and income from associates. The reported staff cost to gross margin ratio increased in 2003 to 61.1% from 60.4% in 2002. Excluding incentives, this ratio fell 0.3 margin points in 2003 to 57.7% from 58.0% in 2002. Variable staff costs as a proportion of total staff costs increased to 11.0% in 2003 from 9.2% in 2002 and, as a proportion of revenues, increased to 6.3% from 5.3%. Non-staff costs fell as a proportion of revenues from 25.7% in 2002 to 24.6% in 2003 primarily reflecting a reduction in the Group’s property costs following actions taken in 2002 to eliminate under-utilised property.
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In 2002, goodwill amortisation and impairment of subsidiaries included £145.7 million taken as an impairment charge primarily reflecting accelerated amortisation of goodwill on first generation businesses which suffered in the recession. Although 2003 was better than 2002, some first generation businesses which had been acquired, continued to suffer and an impairment charge of £48.2 million has been taken. The 2003 impairment charge relates to a number of under-performing businesses in the Information, insight and consultancy, and Branding and identity, Healthcare and Specialist communications sectors. Goodwill amortisation on subsidiaries was £29.5 million in 2003 as compared to £32.0 million in 2002.
Operating profit—Reported operating income was up over 52% to £415.3 million in 2003 from £272.5 million in 2002. Reported operating margins increased from 7.0% to 10.1%. Reported operating income, including income from associates, was £455.8 million in 2003, up over 50% from £302.5 million in 2002. Reported operating margins, including income from associates, were 11.1% and 7.7% in 2003 and 2002, respectively. Margins were negatively impacted by 1.9% in 2003 and 4.6% in 2002 due to goodwill amortisation and impairment taken on subsidiaries in each year. Therefore, operating margins, including income from associates, increased to 13.0% in 2003 from 12.3% in 2002 before goodwill amortisation and impairment. For 2003, acquisitions completed during the year contributed operating income of £16.4 million in the aggregate. The contribution of aggregate acquisitions completed in 2002 to operating income in 2002 was not material.
During 2003, the Group continued to take certain measures to reduce its fixed and variable cost base. These actions resulted in a number of charges which, although recurring in nature, were at a considerably higher level than would normally be expected and were included within operating costs. These items principally comprised property rationalisation costs and severance payments. In addition, amounts were written off trade receivables and other current assets. At the same time the Group released £12.0 million in 2003 to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2002. In 2002, £13.0 million of excess provisions were released in respect of acquisitions completed prior to 2001.
Goodwill amortisation and impairment—associates—In 2003, goodwill amortisation and impairment includes a £30.8 million charge taken on associates as a result of our annual impairment testing. The impact of the economic climate on the expected future earnings of these businesses was sufficiently severe to indicate a permanent diminution of the carrying value of goodwill. Goodwill amortisation on associates in 2002 was £3.5 million.
Interest expense—Net interest expense (including a charge for the early adoption of Financial Reporting Standard No. 17, Retirement Benefits, or “FRS 17”) decreased from £86.4 million in 2002 to £71.6 million in 2003, principally reflecting higher cash generated from operations, lower interest rates, and the impact of reduced levels of acquisition activity and lower share repurchases and cancellations in 2002.
Taxes—The Company’s tax rate on reported profits in 2003 was 34.9% compared to 50.3% in 2002. This decrease is due to lower goodwill impairment charges in 2003. Excluding goodwill amortisation and impairment, and net interest charges on defined benefit pension schemes, the tax rate in 2003 was 25.8%, the same level as in 2002, reflecting the continuing strength of the Group’s tax planning initiatives.
Net income—Net income available to ordinary share owners was £208.4 million in 2003 against £88.0 million in 2002. The increase was driven by improved operations, reduced interest charges, decreased goodwill impairment charges in 2003 and the effect of a reduced reported tax rate in 2003 as compared to 2002.
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2002 Compared with 2001
Revenues—Reported revenues were down almost 3% in 2002 to £3,908.3 million from £4,021.7 million in 2001. On a constant currency basis, revenue was up 0.7%, as detailed in the table above. Like-for-like revenues were down 5.9%. Information, insight & consultancy revenue growth was partly driven by acquisitions, but like-for-like revenues were still down in this segment by less than 1%. Geographically, North America and the United Kingdom were most affected by the recession, with Continental Europe and Asia Pacific, Latin America, Africa and the Middle East regions being the least affected. In the fourth quarter of 2002, North America exhibited revenue growth for the first time in almost two years.
Operating costs—Reported operating costs excluding goodwill amortisation and impairment, including direct costs fell by almost 1% in 2002, but rose by 3% in constant currency. On a like-for-like basis, total operating and direct costs were down 4.6% from the previous year. The staff costs to gross margin ratio increased to 60.4% in 2002 from 59.9% in 2001. Incentive payments totaled £90.1 million in 2002 or over 16% (under 14% in 2001) of operating profit before bonuses, taxes and income from associates. Excluding severance and incentives, the ratio increased to 56.9% in 2002 from 56.6% in 2001. Variable staff costs as a proportion of total staff costs increased to 9.2% in 2002 from 8.2% in 2001 and, as a proportion of revenues, increased to 5.3% from 4.6%.
During 2002, goodwill amortisation and impairment includes £145.7 million taken as an impairment charge relating to a number of under-performing businesses principally in the Information, insight and consultancy, and Branding and identity, Healthcare and Specialist communications segments. The impact of the economic climate in 2002 on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill. There was no goodwill impairment recorded in 2001. Goodwill amortisation was £32.0 million in 2002 as compared to £14.8 million in 2001.
Operating profit—Reported operating income was down 46% to £272.5 million in 2002 from £505.5 million in 2001. Reported operating margins decreased from 12.6% in 2001 to 7.0% in 2002. Reported operating income, including income from associates, was £302.5 million in 2002, down approximately 44% from £546.3 million in 2001. Reported operating margins, including income from associates, were 7.7% and 13.6% in 2002 and 2001, respectively. Margins were negatively impacted by 4.6% in 2002 and 0.4% in 2001 due to goodwill amortisation and impairment (2002 only) in each year. Therefore, operating margins, including income from associates, decreased to 12.3% in 2002 from 14.0% in 2001 before goodwill amortisation and impairment. During 2002 and 2001, the Group took measures to reduce its fixed and variable cost base in response to the global downturn in its core markets. These actions resulted in a number of charges which, although recurring in nature, were at a considerably higher level than would normally be expected and were included within operating costs. These items principally comprised property rationalisation costs, severance costs and amounts written off trade receivables and other current assets. At the same time the Group released £13.0 million in 2002 to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2001. In 2001, £22.5 million of excess provisions were released in respect of acquisitions completed in 1999 and prior.
Fixed asset gains and write-downs—In 2001, the Group wrote down the value of certain minority investments in new media and technology companies by £70.8 million following the decline in equity valuations in these sectors. 2002 saw further declines in these technology investments, many of which were in private companies. An additional write-down of £19.9 million was taken in 2002, mitigated in part by gains on asset disposals of £9.2 million. The carrying value of these investments was written down to £19.3 million as at 31 December 2002.
Interest expense—In reported currency, net interest expense (including an FRS 17 charge) increased from £71.3 million in 2001 to £86.4 million in 2002, reflecting lower cash generated from operations, the full-year impact of the increased level of acquisition activity in 2001 and share repurchases and cancellations in the current year.
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Taxes—The Company’s tax rate on reported profits in 2002 was 50.3% compared to 30.7% in 2001. This increase was due to significant additional fixed asset impairments and write-offs in 2002, for which no tax relief is available. Excluding goodwill amortisation and impairment, fixed asset gains and write-downs, and net interest charges on defined benefit pension schemes, the tax rate was 25.8% in 2002, down from 26.9% in 2001, reflecting the impact of further improvements in tax planning.
Net income—Net income available to ordinary share owners was £88.0 million in 2002 as compared to £271.2 million in 2001.
Results of Operations Under US GAAP
The Company’s Consolidated Financial Statements included elsewhere herein have been prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP.
For the year ended 31 December 2003, net income under US GAAP was £110.3 million compared with net income of £53.5 million and £79.2 million, respectively, in 2002 and 2001. The corresponding figures under UK GAAP were net income of £208.4 million, £88.0 million and £271.2 million, respectively. See pages F-27 to F-36 of the Consolidated Financial Statements for a discussion and reconciliation of the principal differences between US GAAP and UK GAAP that affect the Group’s financial statements. The resulting aggregate impact of US GAAP adjustments was to reduce net income by £98.1 million, £34.5 million and £192.0 million, respectively, in each year.
The negative impact of US GAAP adjustments on net income increased in 2003 by £63.6 million as compared to 2002. This variance is driven principally by the recognition of £48.9 million of income in 2002 reflecting the increase in market value of derivatives and £30.3 million of incremental tax expense recognised in 2003 under US GAAP but not under UK GAAP. The £17.9 million reduction in income recorded in 2003 principally reflects the subsequent reduction in market value of certain derivative financial instruments terminated during the year.
The negative impact of US GAAP adjustments on net income decreased in 2002 by £157.5 million as compared to 2001. This variance is primarily driven by the goodwill amortisation expense recorded in 2001 prior to the discontinuation of such amortisation under SFAS 142 “Goodwill and other Intangible Assets” (“SFAS 142”). Incremental US GAAP goodwill amortisation of £142.2 million was recorded in 2001. In 2002, reversal of UK GAAP goodwill amortisation, net of incremental intangibles amortisation recorded in accordance with SFAS 142, was £18.6 million. The £48.9 million of income on derivatives recognised in 2002 was offset by a £26.6 million increase in contingent consideration deemed as compensation and £25.7 million of impairment charges taken on the implementation of SFAS 142.
B. Liquidity and Capital Resources
General —The primary sources of funds for the Group are cash generated from operations and funds available under its credit facility. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. For a breakdown of the Company’s sources and uses of cash see the “Consolidated Statements of Cash Flows” included as part of the Company’s Consolidated Financial Statements in Item 18 of this Report.
The Company spent £398.6 million (net of the £75 million in proceeds from the sale of Cordiant’s interest in Zenith Optimedia Group), £343.4 million and £736.0 million for acquisitions and investments in 2003, 2002 and 2001, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases
29
of tangible fixed assets was £93.9 million, £100.5 million and £118.1 million, respectively, and cash spent on share repurchases and cancellations was £23.1 million, £75.9 million and £103.3 million, respectively.
As we expect that necessary capital expenditure will remain equal to or less than the depreciation charge, the Company has concentrated on examining potential acquisitions and on returning excess capital to share owners in the form of dividends or share buy-backs. In 2003, 5.6 million ordinary shares, or 0.5% of our share capital, were repurchased and cancelled at a total cost of £20.2 million and average price of 360p. An additional £2.9 million was spent on share purchases by the ESOPs. See Item 6 for a further description of the ESOPs.
The Company has decided to increase the dividend on its ordinary shares by 20% to 4.40p per share, taking the full year dividend to 6.48p per share for 2003. In addition, the Company intends to continue to repurchase up to 2% of its share base in the open market at an approximate cost of £150 million, when market conditions are appropriate. Such annual rolling share repurchases are believed to have a more significant impact in improving share owner value than sporadic buy-backs.
The Group’s liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate to the turnover or gross billings figure which was 4.5 times the annual revenue of the Group in 2003. The inflows and outflows associated with the media buying activity therefore represent significant cash flow within each month of the year and are forecast and re-forecast on a regular basis throughout the year by the Group’s treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Group’s bankers and other sources.
Liquidity risk management —The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net borrowing levels and debt maturities are closely monitored. Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group’s major operations.
Eurobonds—The Company has outstanding €350 million of 5.125% bonds due 2004 and €650 million of 6% bonds due 2008. During 2003, the Group re-issued €45 million of bonds carrying a coupon of 6% in the open market at a price of 105.18%. These bonds were purchased in the open market during 2002 at a price of 94.72%. The total proceeds received were €49.9 million including accrued interest. The gain on the transaction was €2.3 million and has been deferred and will be recognised as interest income in the profit and loss accounts over the remaining life of the Eurobond.
At 31 December 2003 the Group was party to interest rate swap agreements on an amount of €400 million under which it is paying floating rates based on the relevant European Interbank Offering Rate (“EURIBOR”) plus a margin and receiving a fixed rate of 6%. These swaps expire in 2008 and have the effect of converting a portion of the 6% Eurobonds due 2008 from a fixed to a floating rate of interest.
US bonds—The Company has outstanding $200 million of 6.625% Notes due 2005 and $100 million of 6.875% Notes due 2008.
Revolving credit facility—The Company’s operations are also funded with borrowings under a five-year $750 million Revolving Credit Facility due September 2006. The Company’s syndicated borrowings drawn down, predominantly in US dollars, under this agreement averaged $258.3 million during 2003 at an average rate of 1.75% inclusive of margin. Borrowings under the Revolving Credit Facility are governed by certain financial covenants based on the results and financial position of the
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Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreements. We are currently in compliance with both covenants. The Group had available undrawn committed facilities of £421 million at 31 December 2003.
Interest on the Company’s borrowings under the Revolving Credit Facility is payable at a rate equal to the relevant London Interbank Offered Rate (“LIBOR”) plus a margin of between 0.4% and 0.475%.
Convertible debt—At the time of its acquisition in October 2000, Young & Rubicam had approximately $287.5 million of 3% convertible bonds due 15 January 2005 outstanding. At the option of the holder, the bonds are convertible into an aggregate of 3,272,400 WPP ADSs at a conversion price of $87.856 per WPP ADS. The bonds were initially redeemable at the Company’s option on or after 20 January 2003, and are currently redeemable at a price of 100.6%. Interest on the bonds is payable on 15 January and 15 July of each year. The bonds are unsecured obligations of Young & Rubicam and are guaranteed by WPP.
In April 2002, the Group issued £450 million of 2% convertible bonds due April 2007 (a 3.07% yield to maturity, including the premium payable on redemption). At the option of the holder, the bonds are convertible into an aggregate of 41,860,465 WPP ordinary shares at an initial conversion price of £10.75 per share. As the bonds are redeemable at a premium of 5.35% over par, the effective conversion price increases during the life of the bonds to £11.33 per share into the same number of shares as above.
There are no investor put options on any outstanding debt instruments.
Working capital facilities—Within the Group’s overall working capital facilities, certain trade debts have been assigned as security against the advance of cash. For further details on working capital facilities refer to Item 5E below.
Current asset investments/liquid resources—At 31 December 2003, the Group had £401.8 million (2002: £190.4 million, 2001: £76.8 million) of cash deposits with a maturity greater than 24 hours.
We believe that cash provided by operations and funds available under our credit facility will be sufficient to meet the Group’s anticipated cash requirements based upon our current forecast funding requirement and our ability to access capital and bank markets to refinance maturing debt. The Company intends to seek financing from the capital markets and use the proceeds to repay certain outstanding indebtedness.
C. Research and Development, Patents and Licenses
D. Trend Information
The world economy, driven by activity in the United States and Asia Pacific region, has started to improve in 2003. While the Company’s like-for-like revenues have increased, driven primarily by growth in the United States since August 2002 and globally in the third and fourth quarters of 2003, like-for-like average headcount has continued to fall, by 4% in 2003 as compared to 2002.
The Company’s budgets for 2004 have been prepared by management on a conservative basis, largely excluding new business particularly in advertising and media investment management. They predict improvements in like-for-like revenues in comparison to 2003 with balanced growth in the first and second half of the year. They also indicate similar growth for both advertising and media investment management revenues and marketing services revenues.
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The Group’s revenues for the first three months of 2004 were £960.3 million, increasing by almost 6% over the first quarter of 2003. Revenues in the first three months of 2004 were up over 12% compared to the corresponding period in 2003 in constant currency and up almost 2% on a like-for-like basis. Excluding the acquisition of Cordiant, like-for-like revenues were up almost 4%. Net debt at 31 March 2004 was £797 million, compared to £1,335 million at 31 March 2003. Average net debt in the first quarter of 2004 was £730 million compared to £1,106 million in the corresponding period in 2003, at 2004 exchange rates. In the 12 months to 31 March 2004, the Group’s expenditure on capital acquisitions share re-purchases and cancellations was £458 million. The Company does not believe that there is any functional, geographic, account concentration or structural reason that should prevent the Group from achieving the revised objective set in 2002 of improving margins by one and one-half margin points by 2004, or 13.8% in 2004, excluding goodwill amortisation and impairment. Budgets for 2004 include this operating margin objective. Our long term objective remains a 20% margin over a period of time and improvement of the return on capital employed.
E. Off-Balance Sheet Arrangements
Within the Group’s overall working capital facilities, certain trade debts have been assigned as security against the advance of cash. This security is represented by the assignment of a pool of trade debts to a bankruptcy-remote subsidiary of the Company, with further assignment to the providers of this working capital facility. The financing provided against this pool takes into account the risks that may be attached to the individual debtors and the expected collection period. Securitising certain of its receivables in this way provides the Group with an additional and alternative source of funding in a highly developed and large market, giving the Group the ability to raise funds at lower rates than other available methods.
The Company is not obliged (and does not intend) to support any credit-related losses arising from the assigned debts against which cash has been advanced. The transaction documents stipulate that, in the event of default in payment by a debtor, the providers of the facility may only seek repayment of cash advanced from the remainder of the pool of debts in which they hold an interest and that recourse to the Group is not available.
The securitisation is accounted for under a linked presentation in accordance with UK GAAP, whereby the non-returnable proceeds are shown deducted from the related gross asset on the face of the balance sheet. Gross debts of £507.5 million, less non-returnable proceeds of £280.4 million, are included in debtors within the Group’s working capital facilities at 31 December 2003, compared to £385.7 million of gross debts, less non-returnable proceeds of £217.4 million, at 31 December 2002. See the notes to the reconciliation to US accounting principles in Item 18 this report for discussion of the accounting treatment for the securitisation under US GAAP.
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F. Tabular Disclosure of Contractual Obligations
The following summarises the Company’s estimated contractual obligations at 31 December 2003, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods. Certain obligations presented below held by one subsidiary of the Company may be guaranteed by another subsidiary in the ordinary course of business.
(£m)
Contractual obligations:
Long-term debt1
Eurobonds
Sterling Convertible Bonds
US Bonds
Y&R Convertible Note
Other
Subtotal
Operating leases
Capital Commitments
Investment Commitments
Estimated obligations under acquisition earnouts
Total
The Company expects to make annual contributions to its funded defined benefit schemes, as determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes will be paid as they fall due. Our advisors indicate that further average cash contributions of approximately £12-13 million per annum would be necessary to fully fund all funded pension schemes over their remaining lives. After 2004, required annual contributions may be higher unless the stock market, particularly in the United States, improves.
Cash Flows
2003. As at 31 December 2003, the Group’s net debt was £362 million, down £361 million from £723 million in 2002. Net debt averaged £1,222 million in 2003, down £121 million against £1,343 million in 2002 (down £125 million at 2003 exchange rates).
Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2003, operating profit before goodwill amortisation and impairment was £493 million, capital expenditure £94 million, depreciation £127 million, tax paid £94 million, net interest and similar charges paid £38 million (including minority dividends paid) and other net cash inflows of £53 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was therefore £447 million. This free cash flow was absorbed by £355 million in net acquisition payments and investments, share repurchases and cancellations of £23 million and dividends of £67 million. Free cash flow is calculated as profits before interest, taxation, goodwill amortisation and impairment, fixed asset gains and write-downs, equity income and depreciation (including dividends received from associates, proceeds from the issue of shares, and proceeds from disposal of tangible fixed assets and investments), less tax paid, returns on investments and servicing of finance and the purchase of
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tangible fixed assets. In 2003, free cash flow excludes £100.2 million of proceeds from share placement and proceeds from the disposal of interest in Zenith Optimedia Group. A tabular reconciliation of free cash flow is set forth below. The Company met its objective of covering acquisition payments and share repurchases and cancellations from free cash flow, even after including dividends.
2002. As at 31 December 2002, the Group had net debt of £723 million compared with net debt of £885 million at 31 December 2001, following net cash expenditure of £281 million on acquisitions and investments (including £94 million of loan note redemptions and £82 million of earnout consideration resulting from acquisitions in prior years) and £76 million on share repurchases and cancellations.
Net debt averaged £1,343 million in 2002, up £509 million from £834 million in 2001, primarily reflecting the full-year impact of the cost of acquisitions made in 2001.
In 2002, operating profit before depreciation and amortisation (including impairment) was £567 million, with capital expenditure of £101 million, tax paid of £85 million, interest and similar charges paid of £78 million and other net cash inflows of £46 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was therefore £349 million.
A tabular reconciliation of free cash flow is shown below.
Add back:
Depreciation and amortisation, including impairment
Plus:
Dividends received from associates
Proceeds from the issue of shares1
Proceeds from sale of tangible fixed assets
Proceeds from disposal of investments2
Less:
Purchase of tangible fixed assets
UK and overseas tax paid
Returns on investments and servicing of finance
Free Cash Flow3
Capital Structure
At 31 December 2003, the Company’s capital base was comprised of 1,187,432,353 ordinary shares of 10 pence each.
Property Costs
The task of eliminating under-utilised property costs continues to be a priority for the Group. At the beginning of 2002, the Group owned or leased approximately 14 million square feet of space
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worldwide. By the end of 2003, occupancy had fallen to 12.6 million square feet, a 10% reduction (excluding properties acquired with Cordiant). In addition, a further 600,000 square feet, or an additional 4%, is expected to be jettisoned by the end of 2004.
Inflation
As in 2002 and 2001, in management’s opinion the effect of inflation has not had a material impact on the Company’s results for the year or financial position as at 31 December 2003.
Use of Estimates
The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Critical Accounting Policies
The Company’s financial statements have been prepared in accordance with UK GAAP and reconciled to US GAAP. A summary of the Group’s principal accounting policies are described in the first section of notes to the Consolidated Financial Statements, entitled “Accounting Policies” with discussion of UK to US GAAP differences in Item 18. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgments and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our consolidated financial statements and notes thereto.
Goodwill and intangible fixed assets
The Company has a significant amount of goodwill and intangible fixed assets. In accordance with the guidance provided by SFAS 142, “Goodwill and Other Intangible Assets” under US GAAP and FRS 11, “Impairment of Fixed Assets and Goodwill” under UK GAAP, the Company annually tests the carrying value of indefinite life goodwill and other intangible assets for impairment. The estimates and assumptions made in connection with impairment testing, as described in more detail below, could differ materially from future actual results of operations and cash flows. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted to the recoverable amount if required.
The 2003 and 2002 impairment reviews assessed whether the carrying value of goodwill was supported by the net present value of future cash flows derived from the underlying assets using a projection period of up to five years for each income generating unit. After the projection period, growth rates of nominal gross domestic product (“GDP”) have been assumed for each income generating unit. £79.0 million was taken as an impairment charge in 2003 and £145.7 million in 2002 primarily reflecting accelerated amortisation of goodwill on first generation businesses which have suffered in the recession.
The impairment reviews relating to Young & Rubicam (goodwill of £2,498.3 million) and Mediaedge:cia (goodwill of £838.5 million) are based on reviews initially undertaken as at 31 December 2002 and then updated with respect to actual performance for 2003. These reviews were
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carried out using a 10 year projection period as the Group believes that this longer period is more appropriate to assess the carrying value of these global networks and reflect the economic cycles that occur within the global markets in which these companies operate. The projections for the initial three years were derived from existing budgets and three year plans and form the base period. Projections for the remaining seven years assume an annual 4.4% growth in revenues and an improvement in operating margins to 17% by 2007. At the end of the 10 year period growth is assumed to be in line with nominal GDP. The projections above include assumptions about payments for cash taxes and cash flows have therefore been discounted using the Group’s weighted average cost of capital of 8.5%.
For certain acquisitions, where the directors consider it appropriate, goodwill is amortised over its useful life up to a 20-year period, from the date of acquisition. At 31 December 2003, gross goodwill of £519.1 million was subject to amortisation under UK GAAP. The remaining goodwill and intangible assets of the Group are considered to have an indefinite economic life because of the institutional nature of the corporate brand names, their proven ability to maintain market leadership and profitable operations over long periods of time and WPP’s commitment to develop and enhance their value. Under US GAAP, in accordance with SFAS 141, “Business Combinations”, additional intangible assets have been identified in connection with acquisitions with a gross carrying amount of £156.6 million, which are being amortised over a weighted average period of 6 years.
The financial statements depart from the specific requirement of UK companies legislation to amortise goodwill over a finite period in order to give a true and fair view. The directors consider this to be necessary for the reasons given above and the Company’s approach is consistent with UK GAAP under FRS 10, “Goodwill and Intangible Assets”. Because of the indefinite life of these intangible assets, it is not possible to quantify its impact. However, for illustrative purposes only, if the Group were to change its accounting policy and regard all intangible assets as having a limited useful economic life, and the useful economic life it chose was 20 years, then the resulting impact on the profit and loss account in 2003 would have been a charge of £250 million (2002: £231 million, 2001: £182 million).
Future anticipated payments to vendors in respect of earnouts are based on the directors’ best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors’ estimates. A summary of earnout related obligations included in creditors is shown in note 20 to the Consolidated Financial Statements. WPP has also entered into agreements with certain share owners of partially owned subsidiaries and associate companies to acquire additional equity interests. These agreements typically contain options requiring WPP to purchase their shares at specified times up to 2009 on the basis of average earnings both before and after the exercise of the option. A summary of these contingent liabilities is shown in note 21 to the Consolidated Financial Statements. Actual performance may differ from the assumptions used resulting in amounts ultimately paid out with respect to these earnout and option agreements at more or less than the recorded liabilities or disclosed contingent liabilities, respectively.
Revenue recognition
Turnover comprises the gross amounts billed to clients in respect of commission-based income together with the total of other fees earned. Revenue comprises commissions and fees earned in respect of turnover. Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement.
Advertising and media investment management arrangements may include incentive-based revenue. Incentive-based revenue typically comprises both quantitative and qualitative elements; on
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the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received/receivable. Revenue is recognised on market research contracts in proportion to the level of service performed. Revenue is recognised on long-term contracts, if the final outcome can be assessed with reasonable certainty, by including in the profit and loss account revenue and related costs as contract activity progresses. The judgments used in the determination of revenue recognition significantly impact the Company’s results of operations.
Pension costs
Pension costs are accounted for in accordance with FRS 17, “Retirement Benefits” under UK GAAP and under US GAAP are determined in accordance with the requirements of SFAS 87, “Employers’ Accounting for Pensions”. Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2003.
The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an aging membership population. In accordance with FRS 17, the actuarial calculations have been carried out using the projected unit method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.
Most of the Company’s pension assets are held by its pension schemes in the United Kingdom and the United States. In the United Kingdom, the forecasted weighted average return on assets increased from 5.4% at 31 December 2002 to 5.8% at 31 December 2003, principally due to increases in expected bond yields and expected rates of return on insured annuities. In the United States, the Company reduced its expected rate of return on US equities in light of stock market declines and consequent lower equity investment returns from 10% to 8.2% at 31 December 2002. This rate remains unchanged at 31 December 2003. The expected return on bonds was reduced as at 31 December 2003 to 4.8%, to reflect the expected yields that could be obtained in the market at that time. As a result, the forecasted weighted average return in the US decreased from 7.2% to 7.0%. Actual asset performance may differ from these assumptions and could have a material impact on the Company’s financial condition and results of operations.
Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. Our advisors indicate that further average cash contributions of approximately £12-13 million per year would be necessary to fully fund all funded pension schemes over their remaining lives. After 2004, required annual contributions may be higher unless the stock market, particularly in the United States, improves.
Deferred taxes
We record deferred tax assets and liabilities using substantially enacted tax rates for the effect of timing differences between book and tax bases of assets and liabilities. Currently we have deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards, and deductible temporary differences, all of which will reduce taxable income in the future. We assess the realisation of these deferred tax assets to determine whether an income tax valuation allowance is required. Based on available evidence, both positive and negative, we determine whether it is more likely than not that all or a portion of the remaining net deferred tax assets will be realised. The main factors that we consider include:
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If it is our belief that it is more likely than not that some portion of these assets will not be realised, an income tax valuation allowance is recorded. Gross income tax valuation allowances under UK GAAP were £258.7 million in 2003. Under US GAAP there was an additional £46.0 million valuation allowance.
If market conditions improve and future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the net deferred tax assets are not realisable. As a result, we may need to establish additional tax valuation allowances for all or a portion of the net deferred tax assets, which may have a significant effect on our results of operations and financial condition.
New US GAAP Accounting Pronouncements
The Group has considered the following recent US GAAP accounting pronouncements for their potential impact on its results of operations and financial position:
In June 2002, SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. SFAS 146 requires that costs associated with exit or disposal activities, including restructuring charges, be recognised and measured initially at fair value only when the liability is incurred, and is effective for any such activities initiated after 31 December 2002. It has no effect on charges recorded for exit activities begun prior to this date. The adoption of SFAS 146 did not have a material impact on the Group’s consolidated results of operations or financial position.
In November 2002, Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) was issued. This interpretation elaborates on the existing disclosure requirements under US GAAP. It also requires (for guarantees issued after 1 January 2003) that a guarantor must recognise, at the inception of a guarantee, a liability for the fair value of obligations undertaken. The application of FIN 45 did not have a material impact on the Group’s consolidated results of operations or financial position.
In December 2002, SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, was issued as an amendment of SFAS 123. The Group has elected to continue with its current practice of applying the recognition and measurement principles of APB 25 under US GAAP and has adopted the disclosure requirements of SFAS 148.
In January 2003, the FASB issued FASB Interpretation 46, “Consolidation of Variable Interest Entities”, an interpretation of ARB 51. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46 requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”). Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, (b) eased some
38
implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after 15 March 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered “special-purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after 15 December 2003. As of 31 December 2003, the adoption of FIN 46R did not result in consolidation of any variable interest entities. Further, the Group does not expect the adoption of FIN 46R to have a material impact on its future consolidated results of operations or financial position.
In January 2003, the Emerging Issues Task Force reached a final consensus related to accounting for subsequent investments in an investee after suspension of equity method loss recognition (EITF 02-16). The consensus requires that if the additional investment, in whole or in part, represents, in substance, the funding of prior losses, the investor should recognise previously suspended losses. This guidance, which was ratified by the FASB on 5 February 2003, should be applied to additional investments in equity-method investees made after 5 February 2003 and previously suspended cumulative losses existing at the time of that investment. The Group has adopted EITF 02-16 for all additional investments made in equity-method investees subsequent to 5 February 2003. There were no previously suspended losses recognised as a result of the adoption of EITF 02-16.
In April 2003, the FASB issued SFAS 149, “Amendment to Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is applied prospectively and is effective for contracts entered into or modified after 30 June 2003, except for SFAS 133 implementation issues that have been effective prior to 15 June 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of SFAS 149 did not have a material impact on the Group’s consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity”. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial investments entered into or modified after 15 May 2003. The adoption of SFAS 150 did not have an impact on, or result in additional disclosure in, the Group’s consolidated results of operations or financial position.
In December 2003, SFAS 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, was revised (“SFAS 132R”). This statement requires additional disclosures concerning the assets, investment strategy, measurement dates, obligations, cash flows, and net periodic benefit costs of defined benefit schemes. The Company has adopted the disclosure requirements of SFAS 132R for its UK schemes. The disclosure requirements with respect to our non-UK schemes, as well as the disclosure of expected ten-year future benefit payments, are effective beginning with fiscal years ending after 15 June 2004.
In March 2004, the EITF reached a consensus on Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF 03-01”). EITF 03-01 provides a step model to determine whether an investment within the scope of the Issue is impaired and, if impairment is other-than-temporary. In addition, it requires that investors provide certain disclosures for cost method investments and, if applicable, other information related specifically to cost method investments, such as the aggregate carrying amount of cost method investments, the aggregate amount of cost method investments that the investor did not evaluate for impairment because an impairment indicator was not present, and the situations under which the fair value of a cost method investment is not estimated. The disclosures related to cost method investments should not be
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aggregated with other types of investments. The EITF 03-01 impairment model shall be applied prospectively to all current and future affected investments, effective in reporting periods beginning after 15 June 2004. The disclosure requirements are effective for annual periods for fiscal years ending after 15 June 2004.
New UK GAAP Accounting Pronouncements
Under current UK GAAP, stock based compensation settled by the delivery of stock acquired in the market by one of the Group’s ESOPs was charged to the profit and loss account based upon the cost to the Company of the stock delivered. UITF 38, “Accounting for ESOP Trusts”, requires that the charge to the profit and loss account be based upon the market value of the stock at the date an award is granted. UITF 38 further requires that stock held by the Group’s ESOPs be reclassified from the current presentation as an asset (shown as an investment in own shares) to a deduction in share owners’ equity. UITF 38 will become effective for the Group in the year ending 31 December 2004 and will result in the reclassification of comparative period balance sheets and in the restatement of comparative period results.
From 2005 onwards, all listed companies in the European Union, including WPP, will be required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). We have commenced a significant project to manage the transition from UK GAAP to IFRS and are currently in the process of interpreting the accounting standards that will apply from 2005 onwards, setting the Group’s future accounting policies in accordance with IFRS and identifying the detailed accounting and disclosure requirements that may necessitate changes to our financial information systems. As this project is still ongoing, we are not, as yet, in a position to quantify the full effect of the differences between IFRS and UK GAAP on the Group’s results or financial position. However, based on our work to date, we consider that significant differences will arise in the following areas:
Goodwill
Generally, the carrying amount of goodwill recognised under UK GAAP on past acquisitions will not be revisited under IFRS. However, in comparison to UK GAAP, where an element of the Group’s goodwill is currently amortised over its useful life, under IFRS, all goodwill will be subject to an annual impairment review.
Retirement benefits
Under IFRS, the method of accounting for retirement benefits is broadly similar to that under FRS 17 “Retirement Benefits”. However, whereas FRS 17 requires actuarial gains and losses be taken directly to equity through the statement of total recognised gains and losses, current IFRS has no equivalent equity statement and these gains and losses may be required to be recognised in the income statement.
Convertible bonds
Under UK GAAP convertible debt is reported as a liability unless conversion actually occurs, and no gain or loss is recognised on conversion. IFRS classification of compound instruments is performed according to the substance of the contractual arrangements and consequently, the Group’s compound instruments will be split into liability and equity elements on the basis of their initial fair values. The profit and loss account charge for the finance cost will be spread evenly over the term of the bonds so that at redemption the liability equals the redemption value. The main difference to UK GAAP is that the initial recognition of the liability may be for a lower value and consequently the finance cost over the period may be higher.
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Stock options
Under current UK GAAP, where the Group grants share options at a strike price equal to or greater than the market price on the date of the grant, no compensation expense is recognised. Under IFRS, the fair value of share options will be recognised in the profit and loss account, using a fair value option pricing model.
Associates
The approach to classification of investments is similar under IFRS and UK GAAP, but there is a difference on the application of what constitutes influence. Both UK GAAP and IFRS adopt the concept of significant influence, but IFRS stresses the power to influence, while UK GAAP stresses the actual exercise of influence. This may affect the classification of the Group’s associates and subsidiaries in certain cases. Moreover, IFRS suspends equity accounting for associate losses when the carrying value is nil and further losses are only accrued if the investor has a legal or constructive obligation for the losses.
Own Shares
Under UK GAAP, WPP records an investment in own shares, representing purchases of shares by the ESOPs which are held for the purpose of satisfying certain long term incentive plan obligations. Under IFRS, own shares will be reclassified as a deduction from equity. As a result, the treatment will be in line with UK GAAP from 2004 when the Group adopts UITF 38.
Derivatives and hedge accounting
Under UK GAAP, the derivative financial instruments that the Group uses to manage its currency and interest rate exposures are not recognised until the hedged transaction has itself been recognised in the financial statements. Under IFRS, derivatives are recognised as assets and liabilities stated at their fair values and changes in their fair values are recognised in the income statement. However, in certain circumstances, “hedge accounting” can be used to mitigate fluctuations in earnings.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The directors and executive officers of the Company as of 10 May 2004 are as follows:
Philip Lader, age 58: Non-executive chairman. Philip Lader was appointed chairman in 2001. The US Ambassador to the Court of St. James’s from 1997 to 2001, he previously served in several senior executive roles in the US Government, including as a Member of the President’s Cabinet and as White House Deputy Chief of Staff. Before entering government service, he was executive vice president of the company managing the late Sir James Goldsmith’s US holdings and president of both a prominent American real estate company and universities in the US and Australia. A lawyer, he is also a Senior Advisor to Morgan Stanley, a director of RAND, Marathon Oil and AES Corporations, a member of the Council of Lloyd’s (Insurance Market), a Trustee of the British Museum and a member of the Council on Foreign Relations.
Sir Martin Sorrell, age 59: Group chief executive. Sir Martin Sorrell joined WPP in 1986 as a director, becoming Group chief executive in the same year. He is a member of the NASDAQ board.
Paul Richardson, age 46: Group finance director. Paul Richardson became Group finance director of WPP in 1996 after four years with the Company as director of treasury. He is responsible for the Group’s worldwide functions in finance, information technology, taxation, treasury, procurement and property. Previously he spent six years with the central financial team of Hanson PLC. He is a chartered accountant and member of the Association of Corporate Treasurers. He is a non-executive director of Chime Communications PLC and STW Communications Group Limited in Australia, both of which are companies associated with the Group.
Beth Axelrod, age 41: Chief talent officer. Beth Axelrod joined WPP as chief talent officer in May 2002. She was appointed a director in September 2002. She is responsible for the recruitment, development, compensation, retention, performance management and succession planning of WPP’s executives. She leads the performance management and succession planning of WPP’s executives. Prior to WPP, she was a partner at McKinsey & Company. She co-led the consultancy’s Organisation and Leadership Practice and led the consultancy’s talent management research and client service efforts. She co-authored The War for Talent (Harvard Business School Press, 2001) and continues to be a frequent speaker on talent, performance and other organisation issues. Prior to McKinsey, she worked on mergers and acquisitions for First Boston, Inc. in New York and London.
Howard Paster, age 59: Director. Howard Paster was appointed a director in January 2003. He was previously chairman and chief executive officer of Hill & Knowlton, Inc. He joined the WPP parent company in August 2002, overseeing WPP’s portfolio of public relations and public affairs businesses. He is also the director responsible for the Company’s Corporate Social Responsibility policy. Prior to joining Hill & Knowlton Inc., he served as assistant to President Clinton and director of the White House Office of Legislative Affairs. He is a member of the board of trustees of Tuskegee University, president of the Little League Foundation and a member of the Council on Foreign Relations.
Jeremy Bullmore, age 74: Non-executive director. Jeremy Bullmore was appointed a director in 1988 after 33 years at J. Walter Thompson, London, the last 11 as chairman. In 2004 he was appointed president of the Market Research Society and he was chairman of the Advertising Association from 1981 to 1987. He continues to write and lecture extensively on marketing and advertising.
Esther Dyson, age 52: Non-executive director. Esther Dyson was appointed a director in 1999. She is chairman of EDventure Holdings, the pioneering US-based company focused on information
42
technology and new media. Having recently sold her business to CNET Networks, the US-based interactive media company, she is now their editor-at-large. She is an acknowledged luminary in the technology industry, highly influential in her field for the past 20 years, with a state-of-the-art knowledge of the online/information technology industry worldwide and the emerging information technology markets of Central and Eastern Europe. An investor as well as an analyst/observer, she sits on the boards of IBS Group, Meetup.com, NewspaperDirect, CV-Online and Graphisoft, and on the consumer advisory of Orbitz, among others.
Orit Gadiesh, age 53: Non-executive director. Orit Gadiesh was appointed a director in April 2004. She is chairman of Bain & Company, Inc. and a world-renowned expert on management and corporate strategy. She holds an MBA from Harvard Business School and was a Baker Scholar. She is an active board member at Harvard Business School and Kellogg School in the US and the Haute Ecole Commerciale in France. She sits on the Boards of the Federal Reserve Bank of New England and the Peres Institute for Peace and is a member of the Council of Foreign Relations.
John Jackson, age 74: Non-executive director. John Jackson was appointed a director in 1993. He is chairman or senior independent director of a number of public companies. He is non-solicitor chairman of Mishcon de Reya. He has extensive experience of a broad range of businesses, including biotechnology, electronics, high technology industries, pharmaceuticals, publishing, printing, retailing and television broadcasting.
Michael Jordan, age 67: Non-executive director. Michael Jordan was appointed a director in 2000 and had been a non-executive director of Young & Rubicam Inc. since December 1999. He is chairman and chief executive officer of EDS. He is chairman of the National Foreign Trade Council (US), a member and former chairman of the US-Japan Business Council and chairman of The United Negro College Fund. He serves on the board of Aetna, Inc. He retired as chairman and chief executive officer of the CBS Corporation in 1998 after having led one of the most comprehensive transformations of a major US corporation. Michael will retire from the Board of Directors (the “Board”) at the forthcoming Annual General Meeting.
David H Komansky, age 65: Non-executive director. David Komansky was appointed a director in January 2003. He was chairman of the Board of Merrill Lynch & Co, Inc, serving until his retirement on 28 April 2003. He served as chief executive officer from 1996 to 2002, having begun his career at Merrill Lynch in 1968. Among many professional affiliations, he serves as a director of Black Rock, Inc. and as a member of the International Advisory Board of the British American Business Council. Active in many civic and charitable organisations, he serves on the Boards of New York Presbyterian Hospital, the American Museum of Natural History and the National Academy Foundation.
Christopher Mackenzie, age 49: Non-executive director. Christopher Mackenzie was appointed a director in 2000. He is chief executive of Equilibrium, a London-based financial advisory partnership, and Executive Chairman of Brunswick Capital, Russia’s leading investment bank and non-bank financial services group. He is also a board member of ALJ, Saudi Arabia’s largest non-government industrial group. Previously he was president and CEO of Trizec Properties and a company officer of GE, heading GE Capital’s international business development.
Stanley (Bud) Morten, age 60: Non-executive director. Bud Morten was appointed a director in 1991. He is a consultant and private investor. He is currently the Independent Consultant to Citigroup/Smith Barney with responsibility for its independent research requirements. Previously he was the chief operating officer of Punk, Ziegel & Co, a New York investment banking firm with a focus on the healthcare and technology industries. Before that he was the managing director of the equity division of Wertheim Schroder & Co, Inc., in New York. He is a non-executive director of Register.com Inc. a NASDAQ-listed US public company.
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Koichiro Naganuma, age 59: Non-executive director. Koichiro Naganuma was appointed a director in 2004. He is president and group chief operating officer of Asatsu-DK. Mr. Naganuma joined Asatsu-DK in 1981 and his roles have included executive director of the International Division, managing director of Asatsu Worldwide Company and President of the Overseas Network. He replaces Masao Inagaki on the Board who retired upon the appointment of Mr. Naganuma. Asatsu-DK is Japan’s third largest advertising and communications company, in which WPP took a 20% interest in 1998.
John Quelch, age 52: Non-executive director. John Quelch was appointed a director in 1988. He is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School. Between 1998 and 2001 he was Dean of the London Business School. He also serves as chairman of the Massachusetts Port Authority. Professor Quelch is an expert on global business practice in emerging as well as developed markets, international marketing and the role of the multinational corporation and the nation state. He is a non-executive director of Inverness Medical Innovations, Inc. and served previously on the boards of Blue Circle Industries plc, easyJet plc, Pentland Group plc and Reebok International Limited.
Paul Spencer, age 54: Non-executive director. Paul Spencer was appointed a director in April 2004. He is a financier with 20 years’ experience in the financial management of a number of blue chip companies, including British Leyland PLC, Rolls-Royce PLC, Hanson PLC and Royal & Sun Alliance UK. He served as UK Chief Executive of Royal & Sun Alliance PLC between 1999 and 2002. He is the non-executive chairman of State Street Managed Pension Funds and of Goshawk Insurance Group PLC and a non-executive director of NS&I, a UK government-owned retail savings institution and of Britannic Group plc. He is also the chairman of the Association of Corporate Treasurers Advisory Board.
The Company considers that the following directors are independent within the meaning of Rule 4200 (a) (15) of NASDAQ’s rules as such rule currently applies to the Company: Philip Lader, Esther Dyson, Orit Gadiesh, Christopher Mackenzie, Bud Morten, John Jackson, David Komansky, Paul Spencer.
Terms of Directors and Executive Officers
The Company’s Articles of Association provide that a director appointed since the last Annual General Meeting, or who has held office for more than 30 months since his election or re-election by the Company in general meeting (whether annual or extraordinary) shall retire from office but shall be eligible for re-election. The Board has also decided that those directors who are aged 70 or over on the date of the Notice of Annual General Meeting or who have been directors for more than nine years will retire from office at the forthcoming Annual General Meeting but shall be eligible for re-election. The following directors, whether under the Articles of Association of the Company or otherwise, will retire from office but offer themselves for re-election at the forthcoming Annual General Meeting:
Jeremy Bullmore (16 years) and John Jackson (11 years) will retire from office on 30 September 2004 and will not offer themselves for re-election.
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B. Compensation
Executive remuneration
The key elements of short- and long-term remuneration are summarised in the following table:
Element
Objective
Performanceperiod
Performance conditions
Annual
Long-term
Achievement of specific operating company performance measures, such as:
•improvement in operating profit
•improvement in operating margin
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Total Shareholder Return (‘TSR’) represents the change in share price, together with the value of reinvested dividends, over the performance period. The Compensation committee of the Board (the “Compensation committee”) continues to believe that the growth in TSR relative to a group of key comparators is the most appropriate measure for determining performance-based rewards for Group executives, as it most closely aligns reward with the delivery of share owner value. Under Renewed LEAP (described elsewhere in Item 6), the committee has further improved the operation of a TSR based performance measure through the introduction of ‘Pro-Rata TSR’. For all incentive plans, TSR is calculated using external data sources, such as DataStream or Bloomberg and using an appropriate and recognised methodology.
As indicated in the table above, the principal elements of executive remuneration for the current year and, subject to review, for future years, comprise the following:
Pension, life assurance, health and disability and other benefits are also provided.
Base salary
The salary is based on individual performance and by reference to the market median for similar positions in directly comparable companies. In the case of the parent company, this includes other global communication services companies such as IPG and Omnicom. For J. Walter Thompson Company, Ogilvy & Mather Worldwide and Y&R, the competitive market includes other major multinational advertising agencies. For each of the other operating companies in the Group, a comparable definition of business competitors is used to establish competitive median salaries. Individual salary levels are targeted at a range of 15% above or below the competitive median, taking a number of relevant factors into account, including individual and business unit performance, level of experience, scope of responsibility and the competitiveness of total remuneration.
Salary levels for executives are reviewed at least every 18 or 24 months, depending on the level of base salary. Executive salary adjustments are made by the committee following consultation where appropriate with the Group chief executive, the Group chief talent officer and the chief executive officer of each operating company.
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Annual performance bonus
The annual performance bonus is paid under plans established for each operating company and for executives of the parent company. Challenging performance goals are established and these must be achieved before any bonus becomes payable.
In the case of the Group chief executive and other parent company directors and executives, the total amount of annual performance bonus payable is based on Group and individual performance.
In the case of operating companies, individual awards are paid on the basis of achievements against individual performance objectives, encompassing key strategic and financial performance criteria relating to the participant’s own operating company, division, client or functional responsibility, and as agreed by the committee including:
Those eligible to receive an annual performance bonus, may, subject to satisfying specific conditions, elect to defer their bonus for four years, converting it into an award of shares under the provisions of the Company’s Deferred Bonus Plan. The value of this share award is equal to 125% of the bonus that would otherwise have been received earlier had it been taken in cash.
Each executive’s annual incentive opportunity is defined at a ‘target’ level for the full achievement of objectives. Higher awards may be paid for outstanding performance in excess of target.
The target level for Group executive directors, (other than the Group chief executive) is 50% of base salary and the maximum is 75%.
The target level for the Group chief executive is 100% of base fee/salary and the maximum is 200%. For 2003 Sir Martin’s bonus was determined by reference to three separate equal components. First, financial performance of the Company measured against budgeted operating profit and cash flow. Secondly, the Company’s performance relative to a peer group of major public advertising companies taking into account total shareholder return, increase in operating profit and increase in earnings per share and/or operating margins. Thirdly, the achievement of key strategic objectives, which for 2003 included amongst others, strengthening the geographic positioning of Group companies in both developed and fast growing markets, ensuring orderly and effective transition of leadership for key operating company and parent company roles and developing collaboration amongst leaders of the various businesses and encouraging cross selling amongst Group companies, including client co-ordination initiatives. A comparable process was conducted for other executive directors in respect of their own specific areas of operation and responsibility.
Executive Stock Option Plan and Worldwide Ownership Plan. The Executive Stock Option Plan has been used annually since its adoption in 1996 to make option grants to high performers in the operating companies as well as key employees of the parent company, but currently excluding parent company executive directors and the Group chief executive. Howard Paster currently holds share options, but none of these were granted in respect of his services as an executive director of the Company. In 1997 the Company broadened stock option participation by introducing the Worldwide Ownership Plan for all employees (other than those participating in other option programs) of 100%-owned Group companies with at least two years’ service, in order to develop a stronger ownership
47
culture. Since its adoption, grants have been made annually under this plan and as at 10 May 2004 options under this plan had been granted to approximately 45,000 employees for over 21.0 million ordinary shares of the Company.
Operating companies: Long-term incentive plans. Senior executives of most Group operating companies participate in their respective company’s long-term incentive plans, which historically have provided awards in cash and restricted WPP stock based on the achievement of three-year financial performance targets. These plans operate on a rolling three-year basis. The value of payments earned by executives over each performance period is based on the achievement of targeted improvements in the following performance measures:
With effect from 2003 operating companies’ long-term incentive plans provide awards to be satisfied wholly in WPP stock to be paid in the March following the end of the three-year financial performance period, with no subsequent restriction on sale.
Parent company: Performance Share Plan (PSP). Annual grants of WPP performance shares are made to all executive directors (see the table entitled Performance Share Plan awards to directors elsewhere in Item 6) and other senior executives in the parent company. Vesting is dependent on the TSR performance relative to the comparator group. At median performance, 33% of the performance shares vest, with higher percentages vesting for superior performance up to 100% if WPP ranks at least equal to the second ranking peer company. Contingent grants of performance shares range from 25% to 100% of base salary. The current peer companies comprise Aegis, Arbitron, Dentsu, Digitas, GfK, Grey, Havas, IPG, Ipsos, Omnicom, Publicis, Taylor Nelson Sofres and VNU.
Over the 2001-2003 performance period, WPP was at the median among the peer group companies. Awards were made in April 2004 in respect of the performance period 2003-2005.
Original Leadership Equity Acquisition Plan (‘Original LEAP’). Original LEAP is an incentive plan introduced in 1999 to reward superior performance relative to WPP’s peer companies, to align the interests of executive directors and key executives with those of share owners through significant personal investment and ownership of stock and to ensure competitive total rewards. The performance period of Original LEAP for most participants expired on 31 December 2003 with the Company achieving sixth position in the comparator group of 15 companies resulting in an award of three matching shares for every investment share committed to the plan (60% of the maximum), subject to certain continuing conditions until September 2004. Awards made to executive directors under Original LEAP are set out elsewhere in Item 6.
Under Original LEAP, participants had to commit WPP shares (‘investment shares’) with a minimum of one third being satisfied with shares purchased in the market, in order to have the opportunity to earn additional WPP shares (‘matching shares’). The investment shares had to be committed for a five-year period (‘investment period’), which comes to an end for most participants in September 2004. The number of matching shares which a participant could receive at the end of the investment period depended on the performance of the Company measured over five financial years.
The maximum possible number of matching shares was five for every investment share, for which the Company would have needed to rank first or second within a group of 15 comparator companies over the performance period. If the Company’s performance had been below the median of the comparator group half a matching share would have vested for every investment share held throughout the investment period, in recognition of a participant’s maintenance of their personal investment throughout the period. The footnotes to the LEAP table elsewhere in Item 6 provide details of some reduced entitlements to matching shares.
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On a change of control, matching shares could be received based on the Company’s performance to that date. The Compensation committee could also consider, in the light of exceptional financial circumstances during the performance period, whether the recorded TSR was consistent with the achievement of commensurate underlying performance.
Sir Martin Sorrell, the Group chief executive, together with JMS Financial Services Limited (JMS), committed to Original LEAP investment shares worth $10 million, namely 1,073,814 shares calculated at a price of £5.685 per share of which investment shares worth at least $3 million were purchased in the market.
It is expected that the matching shares to which participants in Original LEAP (other than JMS) become entitled for the awards made by reference to 1999 and 2000 will be provided from one of the Company’s employee share ownership plans (‘ESOPs’). The ESOPs are trusts managed by an external party on behalf of the trustees for the purpose of accumulating ordinary shares for delivery to participants in certain of the Company’s various long-term incentive plans. Beth Axelrod’s Original LEAP award is made by reference to an investment and performance period commencing in January 2002 and expiring in January 2007. The ESOPs acquired the maximum potential number of matching shares in respect of the original awards at an average cost of £3.70 per share. Authority has been obtained from share owners to satisfy the entitlement of JMS to matching shares by an allotment of new shares.
No further awards will be made under Original LEAP.
Renewed Leadership Equity Acquisition Plan (‘Renewed LEAP’). At an Extraordinary General Meeting of the Company held on 16 April 2004, the Company obtained the approval of share owners for a renewal of Original LEAP under which the first investment and performance period commenced on 1 January 2004.
The Compensation committee has made a number of changes to the design of Renewed LEAP to improve its effectiveness as a remuneration tool, to conform with current best practice, and to increase alignment with share owners’ interests. These changes include:
49
In respect of Renewed LEAP, Sir Martin Sorrell has agreed to commit investment shares having a value of $10 million in respect of the award made for 2004 and at the discretion of the Compensation committee may be invited to commit up to a maximum amount of $2 million in respect of each of the four annual awards that may be made in 2005 or thereafter.
Retirement benefits. The form and level of Company-sponsored retirement programs varies depending on historical practices and local market considerations. The level of retirement benefits is regularly considered when reviewing total executive remuneration levels.
In the two markets where the Group employs the largest number of people, the US and the UK, pension provision generally takes the form of defined contribution plans, although the Group still maintains various defined benefit plans and arrangements primarily in the US and UK. In each case, these pension plans are provided for the benefit of employees in specific operating companies and, in the case of the UK plans, are closed to new entrants. All pension coverage for the Company’s executive directors is on a defined contribution basis and only base salary is pensionable under any Company retirement plan. Details of pension contributions for the period under review in respect of executive directors are set out in the Director’s remuneration section elsewhere in Item 6.
Directors’ remuneration and interests
The following information on directors’ remuneration and interests is presented in accordance with UK reporting requirements.
Non-executive directors
The shareholdings of non-executive directors are set out in Item 6E. Remuneration for non-executive directors consists of fees for their services in connection with Board and Board committee meetings and, where appropriate, for devoting additional time and expertise for the benefit of the Group in a wider capacity. Non-executive directors do not participate in the Company’s pension plans, share option or other incentive plans. Non-executive directors may receive a part of their fees in ordinary shares of the Company. The compensation of the chairman and other non-executive directors is determined by the Board, which is advised as described in more detail below.
Directors’ remuneration
For the fiscal year ended 31 December 2003 the aggregate compensation paid by WPP and its subsidiaries to all directors and officers of WPP as a group for services in all capacities was £5,506,593. Such compensation was primarily paid by WPP and its subsidiaries in the form of salaries, performance-related bonuses and a deferred share award.
The sum of £473,255 was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.
The compensation of all executive directors is determined by the Compensation committee which is comprised wholly of non-executive directors whom the Company considers to be independent.
The Compensation committee regularly consults with Group executives, particularly the chief executive (Sir Martin Sorrell), the chief talent officer (Beth Axelrod), the worldwide compensation and benefits director (Adrian Jackson) and the general counsel (David Calow). The committee appointed Deloitte & Touche LLP as external advisors and received material assistance in the form of technical support from that firm’s Executive Compensation Consulting Practice. Deloitte & Touche LLP are also engaged as the external auditors to the Company. As such the appointment as remuneration advisors
50
is also subject to, and has received, pre-approval by, the Audit committee. Information on other services provided by Deloitte & Touche LLP is given in Item 16C of this report. Advice was also received from Hammonds Solicitors concerning various legal issues which arose during the course of the year. Advice on the remuneration of the chairman and the non-executive directors was provided by the same advisors to the Board and not to the committee.
Remuneration of the directors was as follows:
benefits7
Short-term
incentive plans
(annual bonus)2
Chairman
P Lader5
Executive directors
M S Sorrell3,5
E L Axelrod5
H Paster
P W G Richardson5,6
J J D Bullmore4
E Dyson5
J B H Jackson
M H Jordan5
D Komansky1,5
C Mackenzie
S W Morten5
K Naganuma1
J A Quelch4,5
Total remuneration
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Other long-term incentive plan awards
Long-term incentive plan awards granted to directors comprise the Performance Share Plan (PSP) and the WPP Leadership Equity Acquisition Plan (Original LEAP). The operation of the PSP and Original LEAP are described elsewhere in Item 6.
Performance Share Plan awards to directors1,4
Granted
(lapsed)
(no. of
shares)2
E L Axelrod
P W G Richardson
M S Sorrell3
A full description of the PSP is provided elsewhere in Item 6. Details of the comparator groups which apply in respect of different awards are as follows (for companies which subsequently delisted, the date of delisting is shown in brackets). Details of the treatment of delisted companies for the purposes of TSR calculation are set out in note 1 to the table on Original LEAP immediately below.
(i) For 2002 awards: Aegis Group plc, Cordiant Communications (delisted July 2003), Grey Global Group, Havas Advertising, Omnicom, Publicis, Taylor Nelson Sofres and IPG.
(ii) For 2001 awards, in addition to those listed at (i): True North Communications (delisted June 2002).
(iii) For 2000 awards, in addition to those listed at (i) and (ii): AC Nielsen (delisted February 2001), Saatchi & Saatchi (delisted September 2000) and Young & Rubicam (delisted October 2000).
(iv) For 1999 awards, in addition to those listed at (i) to (iii) above: Nielsen Media Research (delisted October 1999) and Snyder Communications (delisted September 2000).
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Leadership Equity Acquisition Plan1,7
H Paster3
P W G Richardson2,3
M S Sorrell4
53
Awards earned and deferred by Sir Martin Sorrell
Notional Share Award Plan (NSAP) and Capital Investment Plan (CIP): Awards to JMS and Sir Martin Sorrell
NSAP1
CIP1
Phantom Options1
M S Sorrell
Group chief executive—Sir Martin Sorrell
Sir Martin Sorrell’s services to the Group outside the US are currently provided by JMS, although in 2005 it is anticipated that this will be replaced by an executive service contract to be entered into directly between Sir Martin and the Company. He is employed by WPP Group USA, Inc. for his activities in the US. Taken together, the agreement with JMS (‘the UK Agreement’) and the agreement with Sir Martin directly (‘the US Agreement’) provide for the following remuneration all of which is disclosed elsewhere in Item 6:
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Contract provisions relating to Sir Martin Sorrell
Term/Notice periods
The notice provisions in Sir Martin Sorrell’s contracts currently provide for a fixed term of three years renewable on or before 1 September each year. The contracts were renewed on 1 September 2002, but were not renewed on 1 September 2003 and consequently are due to expire on 31 August 2005. Thereafter the contracts will continue on a basis to be agreed between the Company and Sir Martin but in any event the periods of notice will not be in excess of 12 months.
Given the substantial investment commitment to WPP made by Sir Martin as detailed below, the committee believes that it has been appropriate that the term of Sir Martin’s contracts should continue for periods currently expiring approximately one year after the end of the Original LEAP Investment Period, namely August 2005.
Damages for loss of office and change of control
Both Sir Martin’s UK Agreement and US Agreement may be terminated by JMS or Sir Martin respectively upon a change of control. In these agreements ‘control’ is as defined respectively in section 416 of the Income and Corporation Taxes Act 1988 and Rule 13d-3 of the Securities Exchange Act 1934.
On a change of control or on a wrongful termination by the Company of the UK Agreement and the US Agreement, WPP is currently obliged to pay an amount equal to twice the annual salary and fee, target bonus and pension contribution due under the UK and US Agreements and also to continue certain benefits such as health insurance under the US Agreement. Both of these provisions relating to payments to be made on a change of control and on a wrongful termination will expire on 31 August 2005 and will not be renewed in their present form. Thereafter any such provision will be complementary to the notice period which is agreed with him and, therefore, will be calculated on the basis of a period not exceeding 12 months.
Covenants
In addition to the substantial investments in the Company made by Sir Martin, he has also entered into covenants, which apply for the period of 12 months following termination of the UK Agreement and the US Agreement, under which he has agreed not to compete with any business carried on by the Company or any member of the WPP Group, nor to solicit business or custom or services from major clients or clients with whom he was involved. The covenants also include an obligation not to induce employees to cease employment with the Company or any member of the WPP Group.
Sir Martin Sorrell has deferred the receipt by him of significant entitlements under various plans and the committee has welcomed and encouraged this, the details of which are set out below.
By September 1999 Sir Martin and JMS were entitled to a prospective benefit under a number of plans in respect of which the performance conditions had been satisfied prior to September 1999, namely the CIP; the NSAP and phantom options granted in 1993 and 1994. In September 1999 in addition to making a further substantial commitment to Original LEAP, Sir Martin also deferred the right to take the benefit of all of his outstanding awards on the basis that (other than the phantom options) they lapsed if he left the Group other than in special circumstances, such as good leaver, until the expiration of the Original LEAP Investment Period in September 2004.
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The CIP provided Sir Martin with a capital incentive initially over a five-year period with effect from 4 September 1994 and which matured in September 1999. Sir Martin agreed to defer taking his entitlement to the 4,691,392 Performance Shares which he would otherwise have been able to acquire in September 1999, subject to good leaver, change of control and other specified provisions, so as to correspond with the investment period under Original LEAP. Accordingly, subject to the provisions of the CIP, the rights to acquire the Performance Shares may be exercised in the period 30 September 2004 to 31 December 2004. These Performance Shares were acquired by an ESOP in 1994 at a total cost of approximately £5.5 million.
Sir Martin has agreed with the Company, subject to obtaining share owner approval at the forthcoming Annual General Meeting, to defer for an additional period his rights under the CIP to which he would otherwise become entitled in September 2004. An appropriate resolution to approve such deferral will be sought at the Annual General Meeting.
JMS’s right to receive a sum under the NSAP may be exercised in the period 30 September 2004 to 31 December 2004 and will be calculated by reference to the average price of a WPP share for the five dealing days before JMS’s right under the NSAP is exercised. The NSAP relates to 1,754,520 notional WPP shares.
Awards made to the Group chief executive or JMS under the CIP, the NSAP and the phantom options, become immediately exercisable on a change of control. Under these plans only, ‘change of control’ is currently defined as the acquisition by a person or persons of more than 20% of the issued share capital of WPP where this is followed within 12 months by the appointment of a director with neither the Group chief executive’s nor JMS’s approval. This definition of “change of control” is not embodied into any other contract provisions or plans relating to Sir Martin, executive directors of the Company or other senior executives in the Group.
The rights of the Group chief executive and JMS respectively under the CIP and the NSAP are also dependent on Sir Martin remaining interested until September 2004 in 747,252 shares acquired in September 1994.
Compensation of executive officers
The information comprised in the following four tables sets out the compensation details for the Group chief executive and each of the other five most highly compensated executive officers in the Group as at 31 December 2003 (the “executive officers”). The information is in addition to the disclosure required under UK legislation and regulations. As used in this statement, the “executive officers” are deemed to include executive directors of the Company and executives who served as the chief executive officers of the Group’s major operating companies.
This information covers compensation for services rendered in all capacities and paid in the financial year ended 31 December 2003 and in the previous two financial years. Incentive compensation paid in 2004 for performance in 2003 and previous years is not included in these tables. The bonus payments referred to below are payments made in 2003, 2002 and 2001 under the short-term incentive awards for performance in 2002, 2001 and 2000 respectively.
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2003 executive remuneration
All other
compensation4
Principal position
Other annual
compensation2
Shareoptions
SARs and
phantom
ADR3
Number
Restricted
ADR
LTIP
Payments5
S Lazarus
P Schweitzer
Group finance director
WPP
I Gotlieb
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Options granted in 20031
Stock optionsgranted(number ofADRs)
% of total optionsgranted by
Company
in 2003
Exercise
price ($per ADR)
Expiry
date
Potential realisable value atassumed annual rates of
stock price appreciation foroption term
0%
$
5%
10%
Stock option, SAR and phantom stock exercises in last financial year and final year-end share option, SAR and phantom stock values
Ordinaryshares
acquired onexercise
Marketvalue at
exercisedate ($)
Long-term incentive plan grants in relation to 2003
M S Sorrell1,2
P W G Richardson1
H Paster1
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C. Board Practices
Information regarding the expiration of the current term of each director and the period during which such director has served is set forth in Item 6A.
Compensation committee
The committee comprises non-executive directors, whom the Company considers to be independent. Throughout the year the members were: Bud Morten (chairman of the committee), Philip Lader and Christopher Mackenzie.
In 2003 the committee met four times on a formal basis and also held many additional ad hoc meetings. All members attended the formal meetings.
The role of the committee includes:
No current member of the committee has any personal financial interest, other than as a share owner, in the matters to be decided by the committee, no potential conflicts of interest arising from cross-directorships and no day-to-day involvement in running the Group’s businesses.
Scope of Compensation committee
The terms of reference for the Compensation committee are available on the Company’s website (www.wppinvestor.com) and will be on display as set out in the Notice of Annual General Meeting.
The Compensation committee regularly consults with Group executives, particularly the chief executive (Sir Martin Sorrell), the chief talent officer (Beth Axelrod), the worldwide compensation and benefits director (Adrian Jackson) and the general counsel (David Calow). The committee appointed Deloitte & Touche LLP as external advisors and received material assistance in the form of technical support from that firm’s Executive Compensation Consulting Practice. See further discussion in the Directors’ remuneration section of Item 6.
Advice is received by the committee on a wide range of relevant issues including:
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The Compensation committee determines awards under annual and long-term incentive plans and awards of WPP stock (the terms ‘stock’ and ‘share’ are used interchangeably) under a number of plans for Group employees. It is also responsible for reviewing the terms of employment of executive directors and senior executives of the operating companies including salary reviews and the terms of termination arrangements (if any) for these people.
In determining the remuneration, stock incentive arrangements and benefits for all of the current executive directors, the Board accepted the proposals and recommendations of the Compensation committee without change.
Policy on remuneration of executive directors and senior executives
The following policy applies for the financial year 2004 and, subject to review, for future years. The remuneration of executive directors and senior executives of the Group’s operating companies and the parent company is reviewed each year by the committee.
The policy is designed to attract, retain and motivate the best available talent, so that the Group can meet client and share owner objectives. In particular, the committee has regard to the levels of compensation in the Group and specific businesses with which the Group companies compete and is also sensitive to compensation levels in the wider business community.
With this in mind the committee places importance on remuneration practices in the global communications services sector, particularly in the US and the UK and also pays close attention to the structure of remuneration, and the proportion which is performance-related, both on a short-and long-term basis.
Principles of remuneration
To implement the Company’s policy, executive remuneration is designed to be consistent with the following principles:
The Company believes that a significant proportion of remuneration for executive directors and senior executives should be delivered through performance-related elements, such as the annual bonus awards and share-based incentive awards, as referred to below. For target performance the committee would expect at least 60% of an executive director’s remuneration to be performance-related. The Company has required senior executives to achieve stock ownership goals for many years, as a result of which award of stock options vary depending on whether individuals achieve and maintain specific levels of ownership of WPP stock.
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Principles governing long-term incentives
Long-term incentives, including stock awards, comprise a significant element of total remuneration for senior executives in the parent company and each operating company. During 2003, approximately 1,500 of those executives participated in some form of performance-related long-term incentive program.
The committee reviews each year the operation of the Group’s long-term incentive programs to ensure that the performance measures and levels of reward are appropriate and competitive.
Any long-term incentive program in which an executive director is entitled to participate is subject to performance conditions.
Principles governing WPP share-based awards and dilution
WPP is committed to aligning management and share owner interests by encouraging a culture of employee share ownership through equity based incentive arrangements.
At the same time, we recognise the need to strike a balance between achieving this objective and ensuring that share owner value is not unduly diminished through the issue of new shares to satisfy awards. The dilution as at 10 May 2004 was well below the 10% level recommended by the Association of British Insurers.
With regard to Renewed LEAP, as with Original LEAP (both of which are described elsewhere in Item 6), it is the intention of the committee to satisfy awards with shares held in the ESOPs, acquired by market purchase.
Policy on directors’ service contracts, notice periods and termination payments
The Compensation committee annually considers the Company’s policy on the duration of directors’ service contracts, the length of notice periods in executive directors’ service contracts and payments on termination of such contracts. The committee is agreed on the objective to reduce notice periods for executive directors to not more than 12 months. This can only be achieved when existing legal obligations permit and when the committee considers it appropriate to do so, taking into account circumstances which it believes to be important in the interests of the Company and its share owners for an exception to be made. There were no payments in 2003 in respect of termination of employment of executive directors, and there are no entitlements to receive such payments, other than as referred to below.
The notice periods for directors are as follows:
Executive Director
Contract date
Unexpired term/Notice period
Sir Martin Sorrell
14 July 2001
31 August 2005 thereafter not more than 12 months
Beth Axelrod
28 March 2002
12 months
Howard Paster *
1 Jan 2002
31 December 2005 then 6 months
Paul Richardson
25 June 2002
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Non-executive director*
Philip Lader
26 Feb 2001
Jeremy Bullmore**
10 July 1991
Ester Dyson
29 June 1999
Paul Spencer
28 April 2004
Orit Gadiesh
John Jackson**
28 September 1993
David Komansky
28 Jan 2003
Bud Morten
2 Dec 1991
John Quelch
Koichiro Naganuma
23 Jan 2004
Christopher Mackenzie
14 March 2000
Further details relating to the non-executive directors can be found elsewhere in Item 6. All new appointments of executive directors are intended to have 12-month notice periods, but it is recognised that, for some appointments, a longer period may initially be necessary for competitive and other reasons, reducing to 12 months thereafter. None of the parent company executive directors have liquidated damages provisions in their contracts other than Sir Martin Sorrell, details of which can be found elsewhere in Item 6.
Audit committee
The Audit committee currently comprises non-executive directors, whom the Company considers to be independent, namely: John Jackson (chairman of the committee), Michael Jordan, Bud Morten and Paul Spencer. It is intended that Paul Spencer will replace John Jackson as chairman of the committee in October 2004 and, following the Annual General Meeting, a replacement will be nominated in place of Michael Jordan.
The Company also meets the requirements of Rule 4350(d)(2) of NASDAQ’s rules relating to its qualitative listing requirements as such rule currently applies to the Company. In particular, each current member of the committee is considered to be independent under NASDAQ’s rules and has both the experience and background in corporate financial affairs resulting in their respective financial sophistication and therefore their appropriateness to serve on this committee. In particular, Paul Spencer is a former finance director of several listed companies.
In 2003 the committee met four times and all the then members attended the meetings (other than Michael Jordan who was unable to attend two meetings). The meetings are also attended at the invitation of the chairman of the committee, in whole or in part, by the auditors, the chairman of the Board, the Group finance director, the director of internal audit, the Company secretary and the Group general counsel.
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The terms of reference for the Audit committee are available on the Company’s website (www.wppinvestor.com) and will be on display as set out in the Notice of Annual General Meeting.
Auditors
In 2002, the Group appointed Deloitte & Touche as auditors to the Company following a thorough review of services offered by a number of the leading international accountancy firms.
D. Employees
The assets of communications services businesses are primarily its employees, and the Company is highly dependent on the talent, creative abilities and technical skills of its personnel and the relationships its personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all communications services businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among these businesses for talented personnel. On 31 December 2003 the Group had 54,324 employees located in approximately 1,400 offices in 106 countries compared with 49,439 and 51,009 employees on 31 December 2002 and 2001, respectively. Including all the Group’s affiliated companies, total employees were approximately 70,000 on 31 December 2003. The average number of employees in 2003 was 51,604 compared with 50,417 in 2002 and 50,487 in 2001. Their distribution by geographic area and operating sector was as follows:
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E. Share Ownership
Directors’ Interests
Ordinary Shares
Directors’ interests in the Company’s share capital, all of which were beneficial, were as follows:
At 01.01.031
Movement4during2003 inc.sharespurchasedin 2003
At
31.12.03
OtherinterestsacquiredincludingLEAPmatchingsharessince
10.05.0412
E L Axelrod4,7,8
J J D Bullmore
E Dyson
O Gadiesh
M H Jordan9
D Komansky
P Lader
S W Morten
K Naganuma5
H Paster7,8,10
J A Quelch
P W G Richardson4,7,8
P Spencer
M S Sorrell3,4,7,8
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Control of registrant
As of the dates shown below, the Company is aware of the following interests of 3% or more in the issued ordinary share capital of the Company:
WPP ESOP
Legg Mason
Legal & General
The disclosed interests of all of the above refer to the respective combined holdings of those entities and to interests associated with them. The Company has not been notified of any other holdings of ordinary share capital of 3% or more. None of these shareholders has voting rights that are different from those of the holders of the Company’s ordinary shares generally. As far as WPP is aware, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government, or by any other natural or legal persons severally or jointly.
The number of outstanding ordinary shares at 31 December 2003 is 1,187,432,353, which includes the underlying ordinary shares represented by 20,198,436 ADSs. 281 share owners of record of WPP ordinary shares were US residents at 31 December 2003.
The geographic distribution of our share ownership as of 31 December 2003 is presented below:
UK
US
Asia Pacific, Latin America, Africa & Middle East and Continental Europe
B. Related Party Transactions
None.
C. Interests of Experts and Counsel
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18.
Outstanding legal proceedings
The Company has claims against others and there are claims against the Company in a variety of matters arising from the conduct of its business. In the opinion of the management of the Company, the ultimate liability, if any, that is likely to result from these matters would not have a material effect on the Company’s financial position, or on the results of operations.
Dividend distribution policy
The Group continues to increase dividends. The profit on ordinary activities before tax for the year was £349.9 million (2002: £205.4 million). The directors of the Company recommended a final ordinary dividend of 4.40p (2002: 3.67p) per share to be paid on 5 July 2004 to share owners on the register at 4 June 2004 which, together with the interim ordinary dividend of 2.08p (2002: 1.73p) per share paid on 17 November 2003, makes a total of 6.48p for the year (2002: 5.40p). The retained profit for the year of £131.6 million (2002: £25.5 million) is transferred to reserves.
ADR holders are eligible for all stock dividends or other entitlements accruing on the underlying WPP Group plc shares and receive all cash dividends in US dollars. These are normally paid twice a year. Dividend cheques are mailed directly to the ADR holder on the payment date if ADRs are registered with WPP’s US depositary, Citibank N.A. Dividends on ADRs that are registered with brokers are sent to the brokers, who forward them to ADR holders.
B. Significant changes
There have been no significant changes since 31 December 2003.
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ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Share price history
The Company’s ordinary shares have been traded on The London Stock Exchange since 1971. At the Annual General Meeting in 2003 share owners passed a special resolution authorising the Company, in accordance with its Articles of Association, to purchase up to 115,732,564 of its own shares in the market. In the year under review, 5.6 million shares were purchased at an average price of £3.60 per share.
The following table sets forth, for the periods indicated, the reported high and low middle-market quotations for the Company’s ordinary shares on The London Stock Exchange, based on its Daily Official List.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
December
2004
January
February
March
April
May
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The ordinary shares have traded in the United States since 29 December 1987 in the form of ADSs, which are evidenced by ADRs. From 16 November 1999 onwards, each ADS represents 5 ordinary shares (previously 10 ordinary shares since 15 November 1995 and 2 ordinary shares prior to that date). The Depositary for the ADSs is Citibank, N.A. in New York. The following table sets forth, for the periods indicated, the reported high and low sales prices of the ADSs as reported by NASDAQ. High and low sales prices of the ADSs prior to 16 November 1999 have been restated for comparative purposes to represent one ADS for every 5 ordinary shares.
The Depositary held 100,992,180 ordinary shares as at 31 December 2003, approximately 8.45% of the outstanding ordinary shares, backing 20,198,436 outstanding ADSs.
B. Plan of Distribution
C. Markets
See the discussion under “Share Price History” in Item 9. A.
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
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ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
WPP is a public limited company incorporated under the name “WPP Group plc” in England and Wales with registered number 1003653.
The following summarises certain provisions of our memorandum and articles of association and applicable English law. This summary is qualified in its entirety by reference to the UK Companies Act 1985 and our memorandum and articles of association. A copy of our articles of association in the form adopted on 25 June 2001 was filed as an exhibit to the Company’s annual report on Form 20-F for the year ended 31 December 2000.
Objects and Purposes
Clause 4 of the Company’s memorandum of association provides that the Company’s principal objects are to carry on the business or businesses of media advertising, market research, public relations, sales promotion and specialist communications and to develop concepts for advertising, marketing, research, sales promotion and similar operations. The Company’s memorandum grants it a range of corporate capabilities to effect these objects.
Directors
Interested Transactions.Subject to any restrictions under the Companies Act 1985, and provided the director has disclosed the nature and extent of the interest to the board, the director may:
either alone, or through a firm with which the director is associated, do paid professional work other than as an auditor for WPP or another company in which WPP has an interest on terms and conditions decided by the board.
When a director knows that he or she is in any way interested in a contract with WPP he or she must disclose the nature of that interest at a meeting of the directors. A general notice given to the board that a director has an interest of the kind stated in the notice in a contract involving a person identified in the notice is treated as a standing disclosure that the director has that interest.
Subject to the provisions of our articles of association, a director shall not vote (or be counted in the quorum at the meeting) on a resolution about a contract in which the director, or a person who is connected with the director, to his knowledge has a material interest. The director can vote, however, if the interest is only an interest in WPP’s shares, debentures or other securities. In addition, a director can vote and be counted in the quorum on a resolution in which the director has a material interest, provided the material interest arises only because the resolution relates to:
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A director shall not vote or be counted in a quorum on a resolution relating to his own appointment (including fixing or varying its terms) or the termination of his own appointment, as the holder of any office or place of profit with WPP or a company in which WPP is interested.
Subject to any restrictions under the Companies Act 1985 and our articles of association, the board may exercise or arrange the exercise of the voting rights attached to any shares in another company held by WPP and may exercise voting rights which they have as directors of that company in any way they decide. This includes voting in favor of a resolution appointment any of them as directors or officers of that company and determining their remuneration.
Remuneration. The directors (other than any director who for the time being holds an executive office of employment with WPP or a subsidiary of WPP) shall be paid out of the funds of WPP by way of remuneration for their services as directors such fees not exceeding in aggregate £450,000 per annum or such larger sum as WPP may, by ordinary resolution, determine. Such remuneration shall be divided among the directors in such proportion and manner as the board may decide. The board may also make arrangements for such proportion of the fees payable to any director to be provided in the form of fully paid ordinary shares in the capital of WPP in accordance with the provisions of the articles of association.
The board may also repay to a director all expenses properly incurred in attending and returning from general meetings, board meetings or board committee meetings, or expenses arising in any other way in connection with WPP. A director may also be paid out of the funds of WPP all expenses incurred by him in obtaining professional advice in connection with the affairs of WPP or the discharge of his duties as a director.
The board may grant special remuneration to a director who performs any special or extra services which the board considers extends beyond the ordinary duties of a director. Such special remuneration may be paid by way of lump sum, salary, commission, profit sharing or otherwise as decided by the board and may be paid in addition to any other remuneration payable.
The board may decide whether to provide pensions, annual payments or other allowances or benefits to any person, including those who are or who were directors, their relations or dependants, or anyone connected to them. The board may also decide to contribute to a scheme, pension or fund or to pay premiums to a third party for these purposes.
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Appointment. Directors may be appointed by the share owners by ordinary resolution or by the board of directors. A director appointed by the board holds office only until the next annual general meeting but shall be eligible for reappointment. Unless otherwise determined by ordinary resolution, the number of directors shall not be less than six in number. There is no requirement of share ownership for a director’s qualification.
Retirement and Age Limit. At each annual general meeting, any director then in office who has been appointed by the board since the previous annual general meeting, or any director who at the date of the notice convening the annual general meeting has held office for more than 30 months since he was appointed or last reappointed by WPP in general meeting, shall retire from office but shall be eligible for reappointment. There is no age limit for directors.
Borrowing Powers. The board may exercise all the powers of WPP to borrow money, mortgage or charge all or part of its undertaking, property and assets (present and future) and uncalled capital and to issue debentures and other securities and give security either outright or as collateral security for any debt, liability or obligation of WPP or of any third party.
The board shall restrict the borrowings of WPP and exercise all voting and other rights or powers of control exercisable by WPP in relation to its subsidiary undertakings so as to secure that the aggregate amount of all borrowings at any time is not more than two and a half times adjusted capital and reserves. This affects subsidiary undertakings only to the extent the board can do this by exercising these rights or powers of control. This limit can be exceeded if the consent of the share owners has been given in advance by passing an ordinary resolution. The limit does not include the borrowings owing by one group company to another group company.
Indemnity of Directors. Subject to any restrictions under the Companies Act 1985, every director or other officer (excluding an auditor) of WPP shall be indemnified out of the assets of WPP against all liabilities incurred by him in the actual or purported execution or discharge of his duties, or the exercise or purported exercise of his powers or otherwise in relation to or in connection with his duties, powers or office. This indemnity shall not apply to any liability to the extent that it is recovered from any other person.
Each of the issued WPP ordinary shares is fully paid and not subject to any further calls or assessments by WPP. There are no conversion rights, redemption provisions or sinking fund provisions relating to any WPP ordinary shares. The WPP ordinary shares are issued in registered form.
WPP may, subject to the Statutes and the articles of association, issue share warrants with respect to fully paid shares. It may also, with the approval of share owners in general meeting, convert all or any of its paid up shares into stock and re-convert stock into paid up shares of any denomination.
Voting Rights and General Meetings. At a general meeting an ordinary resolution or any other question (other than a special or extraordinary resolution) put the vote shall be decided by a show of hands unless a poll is duly demanded. A poll may be demanded by:
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All special resolutions and extraordinary resolutions shall be decided on a poll.
Subject to disenfranchisement in the event of (i) non-payment of any call or other sum due and payable in respect of any shares or (ii) any non-compliance with any statutory notice requiring disclosure of the beneficial ownership of any shares, and subject to any special rights or restrictions as to voting for the time being attached to any shares on a show of hands, every holder of WPP ordinary shares who (being an individual) is present in person or (being a corporation) is present by a duly authorised representative at a general meeting of WPP will have one vote and every person present who has been appointed as a proxy shall have one vote, and on a poll, every holder of WPP ordinary shares who is present in person or by proxy will have one vote per share. In addition, any proxy who has been appointed by the ADS Depositary shall have such number of votes as equals the number of shares in relation to which such proxy has been appointed.
In the case of joint holders, the vote of the person whose name stands first in the register of members and who tenders a vote is accepted to the exclusion of any votes tendered by any other joint holders.
The necessary quorum for a general share owner meeting is a minimum of two persons entitled to vote on the business to be transacted, each being a share owner or a proxy for a share owner or a duly authorised representative of a corporate share owner. We received from NASDAQ an exemption from the requirement under NASDAQ Marketplace Rule 4350(f), pursuant to which a listed company has to provide in its by-laws that the quorum for any meeting of the holders of common stock shall not be less than 33 1/3% of the outstanding shares of the company’s common voting stock.
An annual general meeting and an extraordinary general meeting called for the passing of a special resolution or a resolution of which special notice is required by the Statutes or a resolution appointing any person (other than a retiring director) as a director shall be called by not less than twenty one clear days’ notice. All other extraordinary general meetings shall be called by not less than 14 clear days’ notice. Only those share owners entered in the register of members 48 hours prior to the date of the meeting are entitled to vote at that meeting and the number of shares then registered in their respective names shall determine the number of votes such share owner is entitled to cast at that meeting.
Dividends. WPP may, by ordinary resolution, declare a dividend to be paid to the share owners according to their respective rights and interests in profits, and may fix the time for payment of such dividend. No dividend may be declared in excess of the amount recommended by the directors. The directors may from time to time declare and pay to the share owners of WPP such interim dividends as appear to the directors to be justified by the profits of WPP available for distribution. There are no fixed dates on which entitlement to dividends arises on WPP ordinary shares.
The share owners may pass, on the recommendation of the directors, an ordinary resolution to direct all or any part of a dividend to be paid by distributing specific assets, in particular paid up shares or debentures of any other company.
The articles also permit a scrip dividend scheme under which share owners may be given the opportunity to elect to receive fully paid WPP ordinary shares instead of cash, or a combination of shares and cash, with respect to future dividends.
If a share owner owes any money to WPP relating in any way to shares, the board may deduct any of this money from any dividend on any shares held by the share owner, or from other money payable by WPP in respect of the shares. Money deducted in this way may be used to pay the amount owed to WPP.
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Unclaimed dividends and other money payable in respect of a share can be invested or otherwise used by directors for the benefit of WPP until they are claimed. A dividend or other money remaining unclaimed twelve years after it first became due for payment will be forfeited and cease to remain owing by WPP.
Return of capital. In the event of a winding-up or other return of capital of WPP, the assets of WPP available for distribution among the share owners will be divided, subject to the rights attached to any other shares issued on any special terms and conditions, between the holders of WPP ordinary shares according to the respective amounts of nominal (par) value paid up on those shares and in accordance with the provisions of the Companies Act 1985. The liquidator may, if authorised by an extraordinary resolution of share owners and subject to the Companies Act 1985, divide and distribute among the share owners, the whole or any part of the non-cash assets of WPP in such manner as he may determine.
The liquidator may also, with the same authority, transfer any assets to trustees upon any trusts for the benefit of share owners as the liquidator decides. No past or present share owner can be compelled to accept any shares or other property which could subject him or her to a liability.
Alteration of Share Capital. WPP may from time to time by ordinary resolution of our share owners:
Subject to the Statutes, WPP may purchase or enter into a contract to purchase any of its own shares of any class (including any redeemable shares, if we should decide to issue any) provided that the approval of either more than 50% (in the case of open market purchases) or 75% (in the case of private purchases) of attending share owners present in person or by proxy at a general meeting of share owners is given. However, shares may only be repurchased out of distributable profits or the proceeds of a fresh issue of shares made for that purpose, and, if a premium is paid it must be paid out of distributable profits.
WPP may, by special resolution, reduce its share capital or any capital redemption reserve, share premium account or other nondistributable reserve, subject in each case to confirmation by the English Courts.
Transfer of Shares
Unless the articles of association specify otherwise, a share owner may transfer some or all of his or her shares to another person in any manner which is permitted by the Statutes and is approved by
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the board. Transfers of uncertificated shares must be carried out using the relevant system. The instrument of transfer for certificated shares must be signed by or on behalf of the transferor and except in the case of a fully paid share, by or on behalf of the transferee and must be delivered to the registered office or any other place the directors decide.
The directors may refuse to register a transfer:
WPP may not refuse to register transfers of WPP ordinary shares if this refusal would prevent dealings in the shares which have been admitted to official listing by the UK Listing Authority from taking place on an open and proper basis. If the board refuses to register a transfer of a share, it shall, within two months after the date on which the transfer was lodged or the Operator-instruction was received, send to the transferee notice of the refusal. The registration of transfers may be suspended at any time and for any period as the directors may determine. The register of share owners may not be closed for more than 30 days in any year.
Variation of Rights
Subject to the provisions of the Companies Act 1985 and unless otherwise provided by the terms of issue of that class, the rights attached to any class of shares may be varied with the written consent of the holders of three-fourths in nominal (par) value of the issued shares of that class, or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the shares of that class. At any separate general meeting, the necessary quorum is two persons holding or representing by proxy not less than one-third in nominal (par) value of the issued shares of the class in question (but at any adjourned meeting, any person holding shares of the class or his proxy is a quorum).
Preemption Rights
Under the Companies Act 1985, the issuance of equity securities, that are, or are to be, paid for wholly in cash, except shares held under an employees’ share scheme, must be offered in the first instance to the existing equity share owners in proportion to the respective nominal (par) values of their holdings on the same or more favorable terms, unless a special resolution to the contrary has been passed in a general meeting of share owners. In this context, equity securities generally means, in relation to WPP, WPP ordinary shares, or shares with no restrictions on the amounts receivable in a distribution of dividends or capital, and all rights to subscribe for or convert into such shares.
Share Owner Notices
Record date for service. WPP may serve or deliver any notice, document or other communication by reference to the register of members at any time not more than 21 days before the date of service of delivery. No change in the register after that time shall invalidate that service or delivery.
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Untraced Share Owners. WPP may sell, in such manner as the board may determine, any shares (including any share issued in right of a share) if:
Notice to Share Owners with Foreign Addresses
A share owner whose registered address is outside the UK and who gives to WPP an address in the UK where notices, documents or communications may be given shall be entitled to have notices, documents or communications given to him at that address. Otherwise, the share owner is not entitled to receive any notices, documents or communications from WPP.
Limitations on Voting and Shareholding
There are no limitations imposed by English law or our memorandum or articles of association on the right of non-residents or foreign persons to hold or vote or transfer WPP’s ordinary shares or ADSs, other than limitations that would apply generally to all of the share owners.
Change of Control
There are currently no provisions in our memorandum or articles of association that would have an effect of delaying, deferring or preventing a change in our control and that would operate only with respect to a merger, acquisition or corporate restructuring involving WPP or any of its subsidiaries.
As an English public limited company we are, however, subject to the UK City Code on Takeovers and Mergers. The applicability of the City Code may make it difficult or undesirable for a purchaser to acquire a substantial percentage of WPP shares and could, under certain circumstances, have the effect of delaying, deferring or preventing a change in our control. The City Code does not have the force of law, but compliance with it is often required in practice by any public limited company considered to be resident in the United Kingdom, such as ourselves, and of any person wishing to use the facilities of the UK securities market.
Under the City Code, except with the consent of the UK panel on Takeovers and Mergers, any person or persons acting in concert who:
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Disclosure of interests in shares
The Companies Act 1985 gives WPP power to require persons who it knows, or reasonably believes are, or have been within the previous three years, interested in its relevant share capital to disclose prescribed particulars of those interests. For this purpose “relevant share capital” means issued share capital of WPP carrying the right to vote in all circumstances at a general meeting of WPP. Failure to provide the information requested within a prescribed period after the dates of sending of the notice may result in sanctions being imposed against the holder of the relevant shares as provided in the Companies Act 1985. Under our articles of association, WPP may also apply the following restrictions: the withdrawal of voting and certain other rights of such shares of the class, restrictions on the rights to receive dividends and to transfer such shares. In this context, the term “interest” is broadly defined and will generally include an interest of any kind in shares, including the interest of a holder of a WPP ordinary share.
In addition, under the Companies Act 1985, any person who acquires either alone or, in certain circumstances, with others a direct or indirect interest in the relevant share capital of WPP in excess of the “notifiable percentage”, currently 3% or 10% for certain types of interest, is obligated to disclose prescribed information to WPP with respect to those shares within two days. An obligation of disclosure also arises where such person’s notifiable interest subsequently falls below the notifiable percentage or where, above that level, the percentage, expressed in whole numbers of WPP’s relevant capital in which such person is interested increases or decreases.
C. Material Contracts
We did not enter into any material contracts outside the ordinary course of business during the two years immediately preceding publication of this report.
D. Exchange Controls
Until 21 October 1979, the rules issued under the United Kingdom Exchange Control Act of 1947 imposed restrictions on remittances by United Kingdom residents to persons not resident in the United Kingdom or certain other territories. These restrictions did not apply to remittances of dividends to persons resident or treated as resident in the United States or Canada who were not domiciled in the United Kingdom.
The legislation pursuant to which such exchange controls were imposed has been repealed and there are currently no such United Kingdom foreign exchange control restrictions on remittances of dividends on the ordinary shares or on the conduct of the Registrant’s operations.
E. Taxation
The taxation discussion set forth below is intended only as a descriptive summary and does not purport to be a complete technical analysis or listing of all potential tax effects relevant to a decision to purchase, hold or in any way transfer ordinary shares or ADSs. The statements of United Kingdom and United States tax laws set out below are based on the laws in force as of the date of this Annual Report, and are subject to any changes in United States or United Kingdom law, and in any double taxation convention between the United States and the United Kingdom, occurring after that date. The most recent double taxation convention between the United States and the United Kingdom (“US-UK Income Tax Treaty”) entered into force on 31 March 2003 and applies to taxes withheld at source on or after 1 May 2003. However, individuals may elect for a period of 12 months after 1 May 2003 to be subject to the old US-UK Income Tax Treaty with respect to taxes withheld at source. Whether this is beneficial will depend on individual circumstances and therefore shareholders are advised to consult their professional advisors. In addition, new U.S. tax legislation was signed into law on 28 May 2003,
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which provides capital gain and dividend tax relief. The pertinent sections of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) relating to capital gains and dividends will be discussed below.
The following summary of certain United States and United Kingdom tax consequences is not exhaustive of all possible tax considerations and should not be considered legal or tax advice. Prospective purchasers of ADSs are advised to satisfy themselves as to the overall tax consequences of their ownership of ADSs and the ordinary shares represented thereby by consulting their own tax advisors. In addition, this summary does not address the taxation of a United States shareholder (either corporate or individual) where the shareholder controls, or is deemed to control, 10% or more of the voting stock of the Company.
As used herein, the term “United States corporation” means any corporation organised under the laws of the United States or any state or the District of Columbia.
For the purposes of the current US-UK Income Tax Treaty and for the purposes of the United States Internal Revenue Code of 1986, as amended (the “Code”), discussed below, the holders of ADSs will be treated as the owners of the underlying ordinary shares represented by the ADSs that are evidenced by such ADSs.
Taxation of Dividends
United Kingdom Residents. In respect of dividends paid after 6 April 1999, the notional tax credit that will be available for an individual shareholder resident in the United Kingdom will be 1/9th of the dividend. Tax credits are no longer repayable to UK holders with no tax liability. Individuals whose income is not within the higher income tax band are liable to tax at 10% on the dividend income and the notional tax credit will continue to satisfy their income tax liability on UK dividends. The higher rate of tax on dividend income was also reduced to 32.5% from 6 April 1999.
For dividends paid prior to 1 May 2003 to an individual who is a United States citizen and a resident of the United Kingdom and those individuals that elect for a period of 12 months to be subject to the old US-UK Income Tax Treaty; the dividend must be reported as income in the shareholder’s United States taxable income and the notional United Kingdom tax credit attached to the dividend and any further United Kingdom taxes suffered on the dividend income will be eligible to be claimed as a credit against the individual shareholder’s United States income tax liability, subject to certain limitations. For Dividends paid on or after 1 May 2003 and individuals who did not elect to be taxed under the old US-UK Income Tax Treaty, there will be no withholding tax on the distribution and there will no longer be any entitlement to offset any part of the UK taxation credit against any US taxation liability The dividend received (without any gross up for withholding tax suffered or tax credits) will be subject to US taxation. According to the JGTRRA, certain dividends received from domestic corporations and qualifying foreign corporations (e.g., WPP Group plc) will be taxed at a maximum rate of 15%. To be eligible for the 15% rate, the stock must be held by the shareholder for more than 61 days during the 121-day period beginning 60 days before the ex-dividend date. The new dividend rate is effective for dividends received after 31 December 2002.
For dividends paid to United States Residents prior to 1 May 2003 or those individuals that elect for a period of 12 months to be subject to the old UK-US Income Tax Treaty: In the case of an individual who is a United States citizen and not a resident of the United Kingdom, the dividend (i.e. the cash dividend exclusive of any notional tax credit in respect of such dividend) must be reported as income in the shareholder’s United States taxable income and the United Kingdom tax (including withholding taxes) actually paid or accrued to the Inland Revenue will be eligible to be claimed as a credit against the individual shareholder’s United States income tax liability, subject to certain
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limitations. For dividends paid on or after 1 May 2003 and individuals who did not elect to be taxed under the old US-UK Income Tax Treaty, there will be no withholding tax on the distribution and there will no longer be any entitlement to offset any part of the UK taxation credit against any US taxation liability. The dividend received (without any gross up for withholding tax suffered or tax credits) will be subject to US taxation. As discussed above, subject to certain limitations, the JGTRRA will tax dividends received from domestic corporations and qualifying foreign corporations (e.g., WPP Group plc) at a rate not to exceed 15%.
Implications of the Shareholder Status under the Old Income Tax Convention between the United States and the United Kingdom
A shareholder who is a United States resident individual or a United States corporation (other than a corporation which controls at least 10% of the voting stock of the Company), and whose holding is not effectively connected with (i) a permanent establishment through which the shareholder carries on business in the United Kingdom or (ii) a fixed base regularly available and situated in the United Kingdom from which the shareholder performs independent personal services, is entitled to a payment equal to the tax credit to which a United Kingdom resident individual would have been entitled in respect of such dividend, subject to a withholding tax of 15% of the net dividend plus credit. Since 6 April 1999, this payment is effectively reduced to nil (as withholding tax is greater than the tax credit).
However, a portfolio investor (i.e. all investors holding less than 10% of the voting stock of the Company) may elect to report the gross dividend amount as received on the date of distribution and then apply the foreign tax credit for the amount of UK withholding actually suffered by indicating the election on a timely filed form 8833 for the relevant year. The amount of the creditable tax may be reduced due to a limitation calculation. Alternatively, portfolio investors can choose to be taxed on the net dividend received and utilise the amount of withholding tax actually suffered, as a deduction. Shareholders should consult with their tax advisor to determine, based on their particular tax posture, whether such UK withholding tax should be utilised as a credit or a deduction.
Implications of the Shareholder Status under the New Income Tax Convention between the United States and the United Kingdom.
For dividends paid on or after 1 May 2003 and subject to the new US-UK Income Tax Treaty no withholding tax will be imposed on dividends paid to ADS holders and there will no longer be any entitlement to offset any part of the United Kingdom taxation credit against any United States taxation liability. The dividend received (i.e. without any gross up for withholding tax suffered or tax credits) will be subject to United States taxation.
Distribution Ordering Rules
The gross dividend (the sum of the dividend paid by the Company plus any related United Kingdom tax credit) will be treated as foreign source dividend income for United States Federal income tax purposes provided that such dividend is paid out of the Company’s earnings and profits, as defined for United States Income Tax purposes. If the dividend is not paid out of earnings and profits, it will be treated as a return of capital (up to the holders’ tax basis in their shares). Any excess above the combination of the amounts treated as dividends and returns of capital will be treated as a capital gain.
In certain cases the tax treatment under the Income Tax Convention described above may be limited or denied if the holder acquired the ADSs or ordinary shares primarily to secure the benefits of the Convention and not for bona fide commercial reasons.
Taxation of Capital Gains
An individual shareholder resident in the United Kingdom will be liable to United Kingdom taxation on capital gains realised on the disposal of their ADSs or ordinary shares.
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Holders of ADSs or ordinary shares who are United States resident individuals or United States corporations, and who are not resident or ordinarily resident in the United Kingdom, will not be liable to United Kingdom taxation of capital gains realised on the disposal of their ADSs or ordinary shares unless the ADSs or ordinary shares are used or held for the purposes of a trade carried on in the United Kingdom through a permanent establishment. However, a holder of ADSs or ordinary shares who is a United States citizen or a United States resident (as defined above) will be liable to taxation on such capital gains under the laws of the United States. The JGTRRA lowers the maximum tax rate on capital gains from 20% to 15% for regular tax and alternative minimum tax purposes. The rate applies to capital assets (i.e., ADSs and ordinary shares) held for more than one year. The new rate is effective for taxable years ending on or after 6 May 2003, and beginning before 1 January 2009, with special rules for taxable years including 6 May 2003.
Estate and Gift Tax
The current Estate and Gift Tax Convention between the United States and the United Kingdom generally relieves from United Kingdom inheritance tax (the equivalent of United States estate and gift tax) the transfer of ordinary shares or of ADSs where the shareholder or holder of the ADS’s making the transfer is domiciled for the purposes of the Convention in the United States and is not a national of the United Kingdom. This will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment in the United Kingdom or are related to the fixed base in the United Kingdom of a person providing independent personal services.
If no relief is given under the Convention, inheritance tax will be charged at a rate worked out on a cumulative basis on the amount by which the value of the transferor’s estate is reduced as a result of any transfer (unless the transfer is exempt or “potentially exempt”) made by way of gift or other gratuitous transaction by an individual or on the death of an individual or into certain defined trusts.
Potentially exempt transfers are transfers made to certain specified classes of person and become wholly exempt if made at least more than seven years before the death of the transferor and it becomes chargeable if not so made. Special rules apply to gifts made subject to a reservation of benefit. In the unusual case where ordinary shares or ADSs are subject to both United Kingdom inheritance tax and United States gift or estate tax, the Convention generally provides for tax paid in the United Kingdom to be credited against tax payable in the United States or for tax paid in the United States to be credited against tax payable in the United Kingdom based on priority rules set forth in the Convention.
Stamp Duty and Stamp Duty Reserve Tax
No UK Stamp Duty will be payable on any transfer of an ADS or on any delivery or negotiation of an ADS, provided that the instrument of transfer is executed and remains outside the UK nor will there be any liability to Stamp Duty Reserve Tax in respect of any agreement for the transfer of ADSs. Dealings in ADSs in bearer form outside the UK will be free of Stamp Duty, but certain bearer dealings within the UK may attract Stamp Duty at the rate of 1.5%.
There will be a charge to ad valorem Stamp Duty on any instrument transferring ordinary shares to a nominee or agent for a depositary which then issues depositary receipts (such as the ADSs). Where the instrument is liable to Stamp Duty as a “conveyance on sale” then the rate of duty is 1.5% of the consideration for the sale implemented by the instrument. Where the instrument of transfer is not stampable as a conveyance on sale, then the rate of duty is 1.5% of the market value of the security transferred by the instrument.
There is a charge to Stamp Duty Reserve Tax where ordinary shares are transferred or issued to, or appropriated by, a depositary or a nominee or agent for a depositary under an arrangement under
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which the depositary issues ADSs. Stamp Duty Reserve Tax, which is payable by the depositary, is charged at a rate of 1.5% of the consideration for the transfer. Where there is no such consideration, the rate of Stamp Duty Reserve Tax is 1.5% of the market value of the securities transferred. The charge to Stamp Duty Reserve Tax will, however, be reduced by the amount, if any, of ad valorem Stamp Duty paid on any instrument transferring the ordinary shares.
There will be a charge to ad valorem Stamp Duty on any instrument transferring ordinary shares to a nominee or agent for a clearance service if the clearance service has not elected to pay Stamp Duty Reserve Tax within its system. Where the instrument is liable to Stamp Duty as a “conveyance on sale” then the rate of duty is 1.5% of the consideration for the sale implemented by the instrument. Where the instrument of transfer is not stampable as a conveyance on sale, then the rate of duty is 1.5% of the market value of the security transferred by the instrument.
There is a charge to Stamp Duty Reserve Tax where ordinary shares are transferred or issued to a clearance service or a nominee or agent for a clearance service if the clearance service has not elected to pay Stamp Duty Reserve Tax within its system. Stamp Duty Reserve Tax, which is payable by the clearance service, is charged at a rate of 1.5% of the consideration for the transfer. Where there is no such consideration, the rate of Stamp Duty Reserve Tax is 1.5% of the market value of the securities transferred. The charge to Stamp Duty Reserve Tax will, however, be reduced by the amount, if any, of ad valorem Stamp Duty paid on any instrument transferring the ordinary shares.
In the case of conveyances or transfers of ordinary shares, the rate of duty is 0.5% of the consideration, if any, for the transfer. There is a charge to Stamp Duty Reserve Tax at a rate of 0.5% of the consideration for the transaction where there is an agreement for the sale of ordinary shares. The Stamp Duty Reserve Tax will in general be payable by the purchaser of the ordinary shares but regulations have been made which provide for the tax to be collected in certain circumstances from persons other than the purchaser (e.g., brokers). The charge to Stamp Duty Reserve Tax will, however, be reduced by the amount, if any, of ad valorem Stamp Duty paid on the instrument transferring the ordinary shares.
A gift for no consideration of ordinary shares (other than as part of ADS or clearance service arrangements) will not attract a Stamp Duty charge if appropriately certified and is not liable to Stamp Duty Reserve Tax. A transfer of ordinary shares (other than as part of ADS or clearance service arrangements) for no consideration between nominees for the same beneficial owner will attract a fixed Stamp Duty charge of £5 and is exempt from Stamp Duty Reserve Tax.
A transfer of ordinary shares from a depositary or its agent or nominee to a person purchasing the ordinary shares from an ADS holder on cancellation of an ADS is liable to duty as a “conveyance on sale” because it completes a sale of such ordinary shares and will be liable to ad valorem Stamp Duty, payable by the purchaser.
A transfer of ordinary shares from a depositary or its agent or nominee to an ADS holder on cancellation of an ADS which is not liable to duty as a “conveyance on sale” is liable to a fixed Stamp Duty of £5.
Generally speaking, Stamp Duty is payable where shares are transferred by a document; Stamp Duty Reserve Tax is payable if the shares are in dematerialised form (e.g., in CREST, the system for the transfer of shares electronically in London) or no document is executed and stamped. Interest and penalties are payable for late payment.
F. Dividends and Paying Agents
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G. Statements by Experts
H. Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the United States Securities and Exchange Commission. You may read and copy any materials filed with the SEC at the Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.
I. Subsidiary Information
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s principal market risks are changes in interest rates and currency exchange rates. Following evaluation of these positions, the Company selectively enters into derivative financial instruments to manage its risk exposure. The fair value of derivatives held by the Company, based on the amount that would be receivable or payable if the Company had sought to enter into such transactions, at 31 December 2003 is £15.8 million (£7.3 million with respect to interest rate swaps and £8.5 million for cross-currency swaps), based on quoted market prices where possible.
Interest rate risk
The Group’s interest rate management policy recognises that fixing rates on all its debt eliminates the possibility of benefiting from rate reductions and similarly, having all its debt at floating rates unduly exposes the Group to increases in rates. The Group enters into interest rate swap agreements to manage its proportion of fixed and floating rate debt.
The Group’s principal borrowing currencies are US dollars, pounds sterling, and euros. Borrowings in these currencies, including amounts drawn under the working capital facility, and taking into account the Company’s cross-currency swaps, represented 97% of the Group’s gross indebtedness at 31 December 2003 (at $1,163 million, £318 million and €1,050 million, respectively) and 97% of the Group’s average gross debt during the course of 2003 (at $1,424 million, £212 million and €1,031 million, respectively). 51% of the year-end US$ debt is at fixed rates averaging 4.9% for an average period of 22 months. 100% of the sterling debt is at a fixed rate of 2.8% (including the effect of the redemption premium on the £450 million 2% convertible bonds) for an average period of 40 months. 57% of the euro debt is at fixed rates averaging 5.49% for an average period of 26 months.
Other than fixed rate debt, the Group’s other fixed rates are achieved principally through interest rate swaps with the Group’s bankers. The Group also uses forward rate agreements and interest rate caps to manage exposure to interest rate changes. At 31 December 2003, no forward rate agreements or interest rate caps were outstanding.
These interest rate derivatives are used only to hedge exposures to interest rate movements arising from the Group’s borrowing and surplus cash balances arising from its commercial activities and are not traded independently.
The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given the Group’s policy of selecting only counterparties with high credit ratings.
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The following tables set forth the Company’s fixed and floating rate debt by currency, including the effect of interest rate swaps, as of 31 December 2003 and 2002, respectively:
31 December 2003 Currency
$ -Fixed
-Floating
£ -Fixed
€ -Fixed
¥ -Floating
31 December 2002 Currency
The significant terms of the interest rate swaps agreement in place at 31 December 2003, 2002 and 2001, respectively, are summarized below:
Notional principal amount
Average pay rate
Average receive rate
Average term
Latest maturity date
The variable rate payable on€200 million of the euro interest rate swaps is based on three-month EURIBOR and on six-month EURIBOR for the remaining €200 million. The three and six-month EURIBOR rates at 31 December 2003 were 2.123% and 2.168%, respectively. The weighted average variable rate payable includes a weighted margin of 2.185%, while the fixed rate receivable is 6%.
The relevant LIBOR and EURIBOR rates are not forecast in the table above.
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Currency exchange risk
The Group’s significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or “functional”) currencies of its main operating units. The majority of the Group’s debt is therefore denominated in US dollars and euros, as these are the predominant currencies of revenues. The Group also enters into cross-currency swap agreements to match the currency of its debt with the currency of its cash flows.
In April 2002 the Group issued £450 million of convertible bonds. £295 million of the proceeds were converted into US dollars, Euros and Japanese Yen through cross-currency swap agreements with the Group’s bankers. £163 million of cross-currency swaps were terminated during 2003. The remaining cross-currency swaps expire in April 2007. The following table sets forth detail on the cross currency swaps by currency:
Cross currency swaps
£ Principal receivable
Currency principal payable
Currency rate payable
£ rate receivable
The Group’s operations conduct the majority of their activities in their own local currency and consequently the Group has no significant transactional foreign exchange exposures. Any significant cross-border trading exposures are hedged by the use of forward foreign exchange contracts. There were no such material contracts in place at 31 December 2003. No speculative foreign exchange trading is undertaken.
No hedging is undertaken in relation to the accounting translation of overseas balance sheets. In 2003 this resulted in an increase of £75 million (2002: increase of £82 million) in the sterling value of share owners’ funds due to movements in exchange rates.
Non-derivative financial instruments
The Group estimates that the aggregate fair value of non-derivative financial instruments (excluding the debt discussed below) at 31 December 2003 does not differ materially from their aggregate carrying values recorded in the consolidated balance sheet.
The Group has used the methods and assumptions detailed below to estimate the fair values of the Group’s financial instruments.
Cash, accounts receivable, accounts payable, overdrafts and short-term borrowings (including those drawn under the Revolving Credit Facilities) are considered to approximate fair value because of the short maturity of such instruments.
The fair value of our $300 million bonds, €1 billion Eurobonds, $287.5 million convertible bonds and £450 million convertible bonds at 31 December 2003 was £1,521 million. This is calculated by reference to market prices at 31 December 2003. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that could be realised in a current market exchange.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. We performed an evaluation under the supervision and with the participation of our management, including our Group Chief Executive and our Group Finance Director, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of 31 December 2003. Following that evaluation, our management, including the Group Chief Executive and Group Finance Director, concluded that based on the evaluation, the design and operation of our disclosure controls and procedures were effective at that time to ensure the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
(b) Not yet applicable
(c) Not yet applicable
(d) Changes in Internal Control Over Financial Reporting. There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 16A. Audit Committee Financial Expert
WPP does have a financial expert, Paul Spencer, serving on its audit committee. It is also intended that Paul Spencer will replace John Jackson as chairman of the audit committee in October 2004.
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ITEM 16B. Code of Ethics
WPP has in place a Code of Business Conduct that applies to all of its employees, including its principal executive officer, principal financial officer and principal accounting officer. During 2003, amendments were made to the Code of Business Conduct explicitly prohibiting the use of illegal drugs, among other minor revisions. A copy of the WPP Code of Business Conduct may be obtained free of charge by contacting the Company’s investor relations department in London or NY at the following addresses or telephone numbers:
London:
Group Communications Director
27 Farm Street
London W1J 5RL England
Tel: +44 (0)20 7408 2204
Fax: +44 (0)20 7493 6819
New York:
Investor Relations
125 Park Avenue
New York, New York 10017-5529
Tel: (212) 632-2235
Fax: (212) 632-2493
C. Principal Accountant Fees and Services
Auditors’ remuneration:
Services as auditors
Further assurance services2,3
Non-audit services2:
Tax advisory
Consulting
Auditors other than Deloitte & Touche LLP or Arthur Andersen were paid £0.5 million in 2003 (2002: £0.2 million). In 2003 fees paid to auditors in respect of due diligence and transaction services, included in further assurance and other non-audit services above, of £0.5 million (2002: £1.5 million) were capitalized.
ITEM 17. FINANCIAL STATEMENTS
The Registrant has responded to Item 18 in lieu of responding to this item.
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PART III
ITEM 18. FINANCIAL STATEMENTS
The Consolidated Financial Statements of WPP Group plc as at 31 December 2003, 2002, and 2001 are included in this report beginning on page F-1.
ITEM 19. EXHIBITS.
Exhibit Title
87
88
89
90
Signatures
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
By:
/S/ P W G RICHARDSON
Paul W G Richardson
Group Finance Director
11 June 2004
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WPP GROUP plc
INDEX TO FINANCIAL STATEMENTS
ITEM 18.
Consolidated Financial Statements of WPP Group plc as of the years ended 31 December 2003, 2002 and 2001
(i)
Report of Independent Registered Public Accounting Firm
(ii)
Accounting policies
(iii)
Consolidated income statements for the years ended 31 December 2003, 2002 and 2001
(iv)
Consolidated cash flow statements for the years ended 31 December 2003, 2002 and 2001
(v)
Consolidated statements of total recognised gains and losses for the years ended 31 December 2003, 2002 and 2001
(vi)
Consolidated balance sheets at 31 December 2003, 2002 and 2001
(vii)
Consolidated statements of share owners’ funds for the years ended 31 December 2003, 2002 and 2001
(viii)
Notes to the consolidated financial statements
(ix)
Reconciliation to US Accounting Principles
(x)
Notes to the Reconciliation to US Accounting Principles
F-1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT TO THE SHAREHOLDERS OF WPP GROUP PLC
We have audited the accompanying consolidated balance sheets of WPP Group plc and its subsidiaries as of 31 December 2003, 2002 and 2001, and the related consolidated statements of income, cash flows, total recognised gains and losses, and share owners’ funds for each of the three years in the period ended 31 December 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Companies Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of 31 December 2003, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2003, in conformity with accounting principles generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for each of the three years ended 31 December 2003 and the determination of share owners’ funds at 31 December 2003, 2002, and 2001 to the extent summarized on pages F-27 to F-36 below.
Deloitte & Touche LLP
London, England
10 May 2004
F-2
The financial statements have been prepared in accordance with applicable accounting standards in the UK (UK GAAP). A summary of the Group’s principal accounting policies, which have been applied consistently throughout the year and the preceding year is set out below.
Basis of accounting and presentation of financial statements
The financial statements are prepared under the historical cost convention.
Basis of consolidation
The consolidated financial statements include the results of the Company and all its subsidiary undertakings made up to the same accounting date. The results of subsidiary undertakings acquired or disposed of during the year are included or excluded from the profit and loss account from the effective date of acquisition or disposal.
Intangible fixed assets comprise goodwill and certain acquired separable corporate brand names.
Goodwill represents the excess of the fair value attributed to investments in businesses or subsidiary undertakings over the fair value of the underlying net assets at the date of their acquisition. In accordance with FRS 10, for acquisitions made on or after 1 January 1998, goodwill has been capitalised as an intangible asset. Goodwill arising on acquisitions prior to that date was written off to reserves in accordance with the accounting standard then in force. On disposal or closure of a business, the attributable amount of goodwill previously written off to reserves is included in determining the profit or loss on disposal.
Corporate brand names acquired as part of acquisitions of business are capitalised separately from goodwill as intangible fixed assets if their value can be measured reliably on initial recognition.
For certain acquisitions, where the directors consider it appropriate, goodwill is amortised over its useful life up to a 20-year period, from the date of acquisition. The remaining goodwill and intangible assets of the Group are considered to have an indefinite economic life because of the institutional nature of the corporate brand names, their proven ability to maintain market leadership and profitable operations over long periods of time and WPP’s commitment to develop and enhance their value. The carrying value of these intangible assets will continue to be reviewed annually for impairment and adjusted to the recoverable amount if required.
Goodwill impairment is assessed by comparing the carrying value of goodwill to the net present value of future cashflows derived from the underlying assets using a projection period of up to five years for each income generating unit. After the projection period, growth rates of nominal GDP are generally assumed for each income generating unit. In certain instances, projection periods of up to 10 years may be used if management believes the longer period is more appropriate to assess the carrying value of goodwill and reflect the economic cycles that occur within the global markets in which the Group operates.
The financial statements depart from the specific requirement of companies legislation to amortise goodwill over a finite period in order to give a true and fair view. The directors consider this to be necessary for the reasons given above. Because of the indefinite life of these intangible assets, it is not possible to quantify its impact. However, for illustrative purposes only, if the Group were to change its accounting policy and regard all intangible assets as having a limited useful economic life, and the useful economic life it chose was 20 years, then the resulting impact on the profit and loss account in 2003 would have been a charge of £250.0 million (2002: £231.0 million, 2001: £182.0 million).
Future anticipated payments to vendors in respect of earnouts are based on the directors’ best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors’ estimates. When earnouts are to be settled by cash consideration, the fair value of the consideration is obtained by discounting to present value the amounts expected to be payable in the future. The resulting interest charge is included within net interest payable and similar charges.
F-3
Accounting policies (continued)
Tangible fixed assets
Tangible fixed assets are shown at cost less accumulated depreciation and any provision for impairment with the exception of freehold land which is not depreciated. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset on a straight-line basis over its estimated useful life, as follows:
Investments
Except as stated below, fixed asset investments are shown at cost less impairment.
Impairment of goodwill on associate undertakings, included within fixed asset investments, represents a permanent diminution of the carrying value of that goodwill. WPP considers the market value of listed investments and other business and economic factors in determining whether a permanent diminution of value has occurred.
The Group’s share of the profits less losses of associate undertakings is included in the consolidated profit and loss account and the Group’s share of net assets is shown within fixed asset investments in the consolidated balance sheet. The Group’s share of the profits less losses and net assets is based on current information produced by the undertakings, adjusted to conform with the accounting policies of the Group.
Current asset investments are stated at the lower of cost and net realisable value.
Stocks and work in progress
Work in progress is valued at cost or on a percentage of completion basis. Cost includes outlays incurred on behalf of clients and an appropriate proportion of direct costs and overheads on incomplete assignments. Provision is made for irrecoverable costs where appropriate. Stocks are stated at the lower of cost and net realisable value.
Debtors
Debtors are stated net of provisions for bad and doubtful debts.
Derivative financial instruments
The Group uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes.
For a forward foreign exchange contract to be treated as a hedge the instrument must be related to actual foreign currency assets or liabilities or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the Group’s operations. Gains and losses arising on these contracts are deferred and recognised in the profit and loss account or as adjustments to the carrying amount of fixed assets, only when the hedged transaction has itself been reflected in the Group’s financial statements.
For an interest rate swap to be treated as a hedge the instrument must be related to actual assets or liabilities or a probable commitment and must change the nature of the interest rate by converting a fixed rate to a variable rate or vice versa. Interest differentials under these swaps are recognised by adjusting net interest payable over the periods of the contracts.
Debt
Debt is initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the finance cost in respect of the accounting period and reduced by payments made in the period. Convertible debt is reported as a liability unless conversion actually occurs. No gain or loss is recognised on conversion.
Turnover, cost of sales and revenue recognition
Turnover comprises the gross amounts billed to clients in respect of commission-based income together with the total of other fees earned. Cost of sales comprises media payments and production costs. Revenue comprises commission and fees earned in respect of turnover. Direct costs include fees paid to external suppliers where they are retained to perform part or all of a specific project for a client and the resulting expenditure is directly attributable to the revenue earned. Turnover and revenue are stated exclusive of VAT, sales taxes and trade discounts.
F-4
Revenue is typically derived from commissions on media placements and fees for advertising services. Traditionally, the Group’s advertising clients were charged a standard commission on their total media and production expenditure. In recent years, however, this has tended to become a matter of individual negotiation. Revenue may therefore consist of various arrangements involving commissions, fees, incentive-based revenue or a combination of the three, as agreed upon with each client.
Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement. Incentive-based revenue typically comprises both quantitative and qualitative elements; on the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received/receivable.
Revenue is recognised on each market research contract in proportion to the level of service performed. Costs, including an appropriate proportion of overheads relating to contracts in progress at the balance sheet date, are carried forward in work in progress. Losses are recognised as soon as they are foreseen.
Public relations & public affairs and Branding & identity, Healthcare and Specialist communications
Revenue is typically derived from retainer fees and services to be performed subject to specific agreement. Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement. Revenue is recognised on long-term contracts, if the final outcome can be assessed with reasonable certainty, by including in the profit and loss account revenue and related costs as contract activity progresses.
Current taxation
Corporate taxes are payable on taxable profits at current rates.
Deferred taxation
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more taxation in the future or a right to pay less taxation in the future have occurred at the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in taxation assessments in periods different from those in which they are recognised in the financial statements. A net deferred taxation asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Deferred taxation is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred taxation is measured on a non-discounted basis.
Incentive plans
The Group’s share based incentive plans are accounted for in accordance with Urgent Issues Task Force (‘UITF’) Abstract 17 ‘Employee Share Schemes’. The cost of shares acquired by the Group’s ESOP trusts or the fair market value of the shares at the date of the grant, less any consideration to be received from the employee, is charged to the Group’s profit and loss account over the period to which the employee’s performance relates. Where awards are contingent upon future events (other than continued employment) an assessment of the likelihood of these conditions being achieved is made at the end of each reporting period and an appropriate provision made.
The Group accounts for pension schemes in accordance with FRS 17 (Retirement Benefits).
For defined contribution schemes, contributions are charged to the profit and loss account as payable in respect of the accounting period.
For defined benefit schemes the amounts charged to operating profit are the current service costs and gains and losses on settlements and curtailments.
F-5
They are included as part of staff costs. Past service costs are recognised immediately in the profit and loss account if the benefits have vested. If the benefits have not vested immediately, the costs are recognised over the period until vesting occurs. The interest cost and the expected return on assets are shown as a net amount of other finance costs or credits adjacent to interest. Actuarial gains and losses are recognised immediately in the statement of total recognised gains and losses.
Where defined benefit schemes are funded, the assets of the scheme are held separately from those of the Group, in separate trustee administered funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The resulting defined benefit asset or liability, net of the related deferred taxation, is presented separately after other net assets on the face of the balance sheet.
Finance leases
Where assets are financed by leasing agreements that give rights approximating to ownership (‘finance leases’) the assets are treated as if they have been purchased outright and the corresponding liability to the leasing company is included as an obligation under finance leases. Depreciation on leased assets is charged to the profit and loss account on the same basis as owned assets. Leasing payments are treated as consisting of capital and interest elements and the interest is charged to the profit and loss account as it is incurred.
Operating lease rentals are charged to the profit and loss account on a systematic basis. Any premium or discount on the acquisition of a lease is spread over the life of the lease or until the date of the first rent review.
Translation of foreign currencies
Foreign currency transactions arising from normal trading activities are recorded at the rates in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are translated at the year-end exchange rate. Foreign currency gains and losses are credited or charged to the profit and loss account as they arise. The profit and loss accounts of overseas subsidiary undertakings are translated into pounds sterling at average exchange rates and the year-end net assets of these companies are translated at year-end exchange rates. Exchange differences arising from retranslation of the opening net assets, and on foreign currency borrowings to the extent that they hedge the Group’s investment in such operations, and results for the year are reported in the Statement of Total Recognised Gains and Losses.
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Consolidated income statements
For the years ended 31 December 2003, 2002 and 2001
UK GAAP refers to the income statement as the “profit and loss account”. The accompanying notes form an integral part of this profit and loss account.
There is no material difference between the results disclosed in the profit and loss account and the historical cost profit as defined by FRS 3. Movements in share owners’ funds are set out in note 25.
No operations with a material impact on the Group’s results were acquired or discontinued during 2003, 2002 or 2001. In 2003, acquisitions contributed revenue of £183.4 million, operating profit of £16.4 million and profit on ordinary activities before interest, taxation, fixed asset gains and write-downs of £22.3 million.
3 Basic and diluted earnings per ADR have been calculated using the same method as earnings per share, multiplied by a factor of five.
F-7
Consolidated cash flow statements
The accompanying notes form an integral part of this cash flow statement.
Consolidated statements of total recognised gains and losses
The accompanying notes form an integral part of this statement of total recognised gains and losses.
F-8
Consolidated balance sheets
At 31 December 2003, 2002 and 2001
Corporate brands
Gross debts
Non-returnable proceeds
The accompanying notes form an integral part of this balance sheet.
Signed on behalf of the Board on 10 May 2004:
F-9
Consolidated statements of share owners’ funds
For the years ended 31 December 2003, 2002, 2001
Movements during the year were as follows:
Ordinary
share
capital
£m
Share
premium
account
Shares
to be
issued
Merger
reserve
reserves
Profit
and loss
The accompanying notes form an integral part of this statement of share owners’ funds.
Other reserves at 31 December 2003 comprise: currency translation deficit £181.0 million (2002: £255.8 million, 2001: £338.1 million) and capital redemption reserve £2.1 million (2002:£1.5 million, 2001: £1.3 million).
The cumulative amount of goodwill written off against the Group’s reserves, net of that relating to undertakings disposed of, is £1,157.2 million (2002: £1,158.4 million, 2001: £1,158.4 million).
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1 Segment information
The Group is a leading worldwide communications services organisation offering national and multinational clients a comprehensive range of communications services.
These services include Advertising and Media investment management, Information, insight & consultancy, Public relations & public affairs, and Branding & identity, Healthcare and Specialist communications. The Group derives a substantial proportion of its revenue and operating income from the US, the UK and Continental Europe and the Group’s performance has historically been linked with the economic performance of these regions.
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Notes to the consolidated financial statements (continued)
2 Operating costs
All of the operating costs of the Group are related to administrative expenses.
The impairment charge relates to a number of under-performing businesses in the Information, insight & consultancy, and Branding & identity, Healthcare and Specialist communications sectors. The impact of the current economic climate on these businesses is sufficiently severe to indicate an impairment to the carrying value of goodwill. Note 13 gives further information on the Group’s 2003 impairment review.
Audit fees paid to the auditors include £0.5 million (2002: £0.5 million, 2001:£0.4 million) in respect of the parent company. Auditors other than Deloitte & Touche LLP or Arthur Andersen were paid £0.5 million (2002: £0.2 million, 2001: £0.5 million). In 2003 fees paid to auditors in respect of due diligence and transaction services, included in further assurance and other non-audit services above, of £0.5 million (2002: £1.5 million, 2001: £6.5 million) were capitalised.
2 Operating costs (continued)
Depreciation segment information
The following table shows depreciation expense attributable to each of the Company’s operating sectors:
Goodwill amortisation segment information
The following table shows goodwill amortisation attributable to each of the Company’s operating sectors:
Minimum committed annual rentals
Amounts payable (net of taxation) in 2004 under the foregoing leases will be as follows:
Future minimum annual amounts payable (net of taxation) under all lease commitments in existence at 31 December 2003 are as follows:
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3 Our people
Our staff numbers averaged 51,604 against 50,417 in 2002, including acquisitions. Their geographical distribution was as follows:
At the end of 2003 staff numbers were 54,324 compared with 49,439 in 2002.
Total staff costs were made up as follows:
Directors’ emoluments are disclosed in Item 6.
4 Fixed asset gains, write-down of fixed asset investments and other items impacting Quality of Earnings
Disposal of freehold properties and fixed asset investments
The profits on disposal of fixed assets comprise:
In 2002 and 2001, profits were realised on the disposal of two freehold properties in the UK and on a number of minority investments in new media and marketing services companies in the US and the UK.
Write-down of fixed asset investments
Amounts written off fixed asset investments of £nil million (2002: £19.9 million, 2001: £70.8 million) relate to write-downs on certain non-core minority investments in new media companies and other technology ventures in light of the decline in technology equity valuations that was prevalent in 2002 and 2001.
These transactions did not have a material effect on the Group’s tax charge (2002: £ nil, 2001: £8.6 million) or minority interest (2002 and 2001: £nil).
Other items
During the year, the Group continued to take measures to reduce its fixed and variable cost base in response to the continuing global downturn in its core markets. These actions resulted in a number of charges which, although recurring in nature, were at a considerably higher level than would normally be expected. These items principally comprised property rationalisation costs and severance payments. In addition, due to the above market factors, amounts were written off trade receivables and other current assets.
At the same time the Group has released £12.0 million (2002: £13.0 million, 2001: £22.5 million) to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2002.
Management consider that the combination of the above charges and releases, when taken together, does not materially impact the Group’s quality of earnings.
5 Net interest payable and similar charges
Interest payable on the Group’s borrowings, other than the bonds, is payable at a margin of between 0.4% and 0.475% over relevant LIBOR.
The majority of the Group’s long-term debt is represented by $300 million of USA bonds at a weighted average of 6.71%, €1 billion of Eurobonds at a weighted average rate of 5.69% (prior to interest rate swaps), £450 million of convertible bonds at 3.07% (including redemption premium accrual and prior to the cross-currency swaps) and $287.5 million of convertible bonds at a rate of 3%(note 9).
Average borrowings under the Syndicated Revolving Credit Facilities (note 9) amounted to $258.3 million at an average interest rate of 1.75% (2002: 2.6%, 2001: 4.7%) inclusive of margin.
£/€
£/$
£/Yen
The Group enters into interest rate swap agreements to manage its proportion of fixed and floating rate debt. The Group also entered cross-currency swap agreements to match the currency of its debt with the currency of its cash flows.
The differential paid or received by the Group on the interest element of the swap agreements is charged/(credited) to interest expense in the year to which it relates.
The term of such instruments is not greater than the term of the debt being hedged and any anticipated refinancing or extension of the debt.
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5 Net interest payable and similar charges (continued)
Other than the above, the Group has no significant utilisation of interest rate derivative financial instruments.
The fair value of derivatives is disclosed in note 23. The Group’s policy on derivatives and financial instruments is discussed in Item 11.
6 Tax on profit on ordinary activities
The tax charge is based on the profit for the year and comprises:
7 Ordinary dividends
8 Earnings per ordinary share
Basic and diluted earnings per share have been calculated in accordance with FRS 14 ‘Earnings per Share’.
Basic earnings per share have been calculated using earnings of £208.4 million (2002: £88.0 million, 2001: £271.2 million) and weighted average shares in issue during the period of 1,115,319,576 shares (2002: 1,110,556,878 shares, 2001:1,101,937,750 shares).
Diluted earnings per share have been calculated using earnings of £208.4 million (2002: £88.0 million, 2001: £271.2 million). The weighted average number of shares used was 1,145,014,508 shares (2002: 1,136,548,459 shares, 2001: 1,157,080,255). This takes into account potentially issuable ordinary shares arising from the exercise of employee share options, certain incentive schemes and convertible debt where these are expected to dilute earnings per share. For the years ended 31 December 2003 and 31 December 2002, both the $287.5 million convertible loan note and the £450 million convertible bond were accretive to earnings per share and therefore excluded from the calculation.
At 31 December 2003 there were 1,187,432,353 ordinary shares in issue.
9 Sources of finance
The following table is a supplementary disclosure to the consolidated cash flow statement, summarising the equity and debt financing of the Group, and changes during the year:
The above table excludes bank overdrafts which fall within cash for the purposes of the consolidated cash flow statement.
At 31 December 2003, the Company’s share base was entirely composed of ordinary equity share capital and share premium of £1,074.0 million (2002: £952.3 million, 2001: £920.2 million), further details of which are disclosed in notes 24 and 25.
USA bondThe Group has in issue $200 million of 6.625% bonds due 2005 and $100 million of 6.875% bonds due 2008.
Eurobond The Group has in issue €350 million of 5.125% bonds due 2004 and €650 million of 6.0% bonds due 2008.
During 2003, the Group re-issued €45 million of bonds in the open market at a price of 105.18%. These bonds were purchased in the open market during 2002 at a price of 94.72%. The total proceeds received were €49.9 million including accrued interest. The gain on the transaction of €2.3 million has been deferred and will be recognised as interest income in the profit and loss accounts over the remaining life of the Eurobond.
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9 Sources of finance (continued)
Revolving Credit Facilities The Group’s debt is also funded by a five-year $750 million Revolving Credit Facility due September 2006. The Group’s syndicated borrowings drawn down, predominantly in US dollars, under this agreement averaged $258.3 million (2002: $388.7 million, 2001: $533.7 million). The Group had available undrawn committed facilities of £421 million at 31 December 2003 (2002: £466 million, 2001: £664 million).
Borrowings under the Revolving Credit Facility are governed by certain financial covenants based on the results and financial position of the Group.
Convertible debt
In October 2000, with the purchase of Young & Rubicam Inc (‘Young & Rubicam’), the Group acquired $287.5 million of 3% convertible bonds due 15 January 2005. At the option of the holder, the bonds are convertible into 3,272,400 WPP ADRs at a conversion price of $87.856. The bonds may be redeemed at WPP’s option on or after 20 January 2003. Interest on the bonds is payable on 15 January and 15 July of each year, beginning on 15 July 2000. The bonds are unsecured obligations of Y&R and are guaranteed by WPP.
In April 2002, the Group issued £450 million of 2% convertible bonds due April 2007. At the option of the holder, the bonds are convertible into 41,860,465 WPP ordinary shares at an initial share price of £10.75. As the bonds are redeemable at a premium of 5.35% over par, the conversion price increases during the life of the bonds to £11.33 per share into the same number of shares as above.
Current asset investments/liquid resources
At 31 December 2003, the Group had £401.8 million (2002: £190.4 million, 2001: £76.8 million) of cash deposits with a maturity greater than 24 hours.
The following table is an analysis of net debt with debt analysed by year of repayment:
Analysis of fixed and floating rate debt by currency including the effect of interest rate and cross-currency swaps:
$ – fixed
– floating
£ – fixed
€ – fixed
¥ – fixed
¥ – floating
£ – floating
10 Reconciliation of operating profit to net cash inflow from operating activities
The following table analyses the changes in working capital and provisions that have contributed to the net cash inflow from operating activities in the consolidated cash flow statement:
The main reconciliation is disclosed along with the cash flow statement on page F-8.
F-15
11 Analysis of non-operating cash flows
The following tables analyse the items included within the main cash flow headings on page F-8.
12 Segment information
Net assets by geographical area were as follows:
Certain items, including the amounts in respect of corporate brand names, have been allocated within the above analyses on the basis of the revenue of the subsidiary undertakings to which they relate.
13 Intangible fixed assets
Corporate brand names represent J. Walter Thompson Company, Hill & Knowlton, Ogilvy & Mather Worldwide and the Young & Rubicam Group. These assets are carried at historical cost in accordance with the Group’s accounting policy for intangible fixed assets as stated on page F-3.
Additions represent goodwill arising on the acquisition of subsidiary undertakings. Goodwill arising on the acquisition of associate undertakings is shown within fixed asset investments in note 15.
Gross goodwill (in respect of subsidiary and associate undertakings) of £519.1 million (2002: £572.3 million, 2001: £340.0 million) is subject to amortisation over periods of up to 20 years.
F-16
13 Intangible fixed assets (continued)
In accordance with the Group’s accounting policy, the Group annually tests the carrying value of indefinite life goodwill and other intangible assets for impairment. Goodwill subject to periodic amortisation is tested for impairment if there is a change in circumstances that suggests that the carrying value may not be recoverable.
The 2003 impairment review was initially undertaken as at 30 June 2003 and then updated as at 31 December 2003. The review assessed whether the carrying value of goodwill was supported by the net present value of future cashflows derived from assets using a projection period of up to five years for each income generating unit. After the projection period, growth rates of nominal GDP have been assumed for each income generating unit.
The impairment reviews relating to Young & Rubicam (goodwill of £2,498.3 million) and Mediaedge:cia (goodwill of £838.5 million) are based on reviews initially undertaken as at 31 December 2002 and then updated with respect to actual performance for the year ended 31 December 2003. These reviews were carried out using a 10 year projection period as the Group believes that this longer period is more appropriate to assess the carrying value of these global networks given current economic volatility. The projections for the initial three years were derived from existing budgets and three year plans and form the base period. Projections for the remaining seven years assume an annual 4.4% growth in revenues and an improvement in operating margins to 17% by 2007. At the end of the 10 year period growth is assumed to be in line with nominal GDP. The projections above include assumptions about payments for cash taxes and cashflows have therefore been discounted using the Group’s weighted average cost of capital of 8.5%.
The estimates and assumptions made in connection with impairment testing could differ from future actual results of operations and cash flows. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted to the recoverable amount if required.
14 Tangible fixed assets
The movements in 2003 and 2002 were as follows:
Leased assets (other than leasehold property) included above have a net book value of £2.3 million (2002: £3.8 million, 2001: £3.8 million). Future obligations in respect of these leased assets were £0.8 million at 31 December 2003 and are included in other creditors.
At the end of the year, capital commitments contracted, but not provided for in respect of tangible fixed assets were:
F-17
15 Fixed asset investments
The following are included in the net book value of fixed asset investments:
Associate
under-takings£m
The Group’s principal associate undertakings include:
The Company’s holdings of own shares are stated at cost and represent purchases by the Employee Share Ownership Plan (‘ESOP’) trust of shares in WPP Group plc for the purpose of funding certain of the Group’s long-term incentive plan liabilities, details of which are disclosed in Item 6.
The trustees of the ESOP purchase the Company’s ordinary shares in the open market using funds provided by the Company. The Company also has an obligation to make regular contributions to the ESOP to enable it to meet its administrative costs.
The number and market value of the ordinary shares of the Company held by the ESOP at 31 December 2003 was 57,439,271 (2002: 58,210,657, 2001: 48,716,092) and £315.1 million (2002: £276.2 million, 2001: £370.2 million) respectively. The trust received dividends on the shares held, as the right to dividends has not been waived by the trustees.
The market value of the Group’s shares in its principal listed associate undertakings at 31 December 2003 was as follows: Asatsu-DK: £148.7 million, Chime Communications PLC: £10.9 million, High Co S.A.: £14.2
15 Fixed asset investments (continued)
million and LG Ad Inc £33.6 million. The carrying value (including goodwill) of these equity interests in the Group’s balance sheet at 31 December 2003 was as follows: Asatsu-DK: £132.9 million, Chime Communications PLC: £3.7 million, High Co S.A.: £11.0 million and LG Ad Inc: £37.9 million. The Group’s investments in its principal associate undertakings are represented by ordinary shares.
Summarised financial information
The following tables present a summary of the aggregate financial performance and net asset position of the Group’s principal associate undertakings. These have been estimated and converted, where appropriate, to a UK GAAP presentation based on information provided by the relevant companies at 31 December 2003. Total revenue generated by all the Group’s associates is estimated to be £1.0 billion for the year ended 31 December 2003.
Associate segment information
The following table shows the carrying value of associate undertakings (including goodwill) attributable to each of the Company’s operating sectors:
The following table shows the income (before interest and taxation) attributable to associate undertakings in each of the Company’s operating sectors:
At the end of the year, capital commitments contracted, but not provided for in respect of fixed asset investments were:
Capital commitments for fixed asset investments generally comprise capital calls, amounts due under agreements to purchase shares of partially owned subsidiaries or associated companies, where notice of intent to exercise options has been given to WPP by the seller, and cash in escrow committed for acquisitions. 2002 commitments included £39.9 million of cash held in escrow in respect of the acquisition of a 36% equity investment in LG Ad, Korea’s second largest advertising agency. This transaction subsequently completed in January 2003.
F-18
16 Stocks and work in progress
The following are included in the net book value of stocks and work in progress:
17 Debtors
The following are included in debtors:
Movements on bad debt provisions were as follows:
To costs and expenses
Exchange adjustments
The allowance for bad and doubtful debts is equivalent to 3.2% (2002: 3.0%, 2001: 3.1%) of gross trade accounts receivable.
In addition to the deferred tax asset above, the potential tax benefit that may be available to the Group in respect of tax losses carried forward and timing differences is £258.7 million (2002: £270.1 million; 2001: £191.1 million). The Group has not recognised any additional deferred tax asset as there is insufficient evidence that there would be enough taxable profits in the entities concerned such that any additional asset could be considered recoverable. A potential deferred tax liability of £8.5 million is required by FRS 19 to be offset against the Group’s tax attributes although this deferred tax liability would only crystallise in the unlikely event that the Group disposed of certain acquired entities in a manner that gave rise to a taxable transaction.
18 Debtors within working capital facility
The following are included in debtors within the Group’s working capital facilities:
18 Debtors within working capital facility (continued)
Within the Group’s overall working capital facilities, certain trade debts have been assigned as security against the advance of cash. This security is represented by the assignment of a pool of trade debts to a bankruptcy remote subsidiary of the Group, with further assignment to the providers of this working capital facility. The financing provided against this pool takes into account, inter alia, the risks that may be attached to the individual debtors and the expected collection period.
The Group is not obliged (and does not intend) to support any credit-related losses arising from the assigned debts against which cash has been advanced. The transaction documents stipulate that, in the event of default in payment by a debtor, the providers of the facility may only seek repayment of cash advanced from the remainder of the pool of debts in which they hold an interest and that recourse from the Group is not available.
19 Creditors: amounts falling due within one year
The following are included in creditors falling due within one year:
Bank loans and overdrafts include overdrafts of £302.1 million (2002: £188.2 million, 2001:£319.9 million).
20 Creditors: amounts falling due after more than one year
The following are included in creditors falling due after more than one year:
The following table sets out the directors’ best estimates of future earnout related obligations:
F-19
20 Creditors: amounts falling due after more than one year (continued)
The corporate bonds, convertible bonds, bank loans and overdrafts included within short-term and long-term creditors fall due for repayment as follows:
21 Provisions for liabilities, charges and contingent liabilities
post-
retirement
benefits
Long-
term
incentive
plans
Property
and
other
Other post-retirement benefits
These include provisions in respect of certain unfunded retirement benefit schemes which are defined contribution in nature.
Long-term incentive plans
Long-term incentive plans are operated by certain of the Group’s operating companies, the provision representing accrued compensation to 31 December 2003 that may become payable after more than one year, as described in Item 6. Transfers comprises amounts transferred to creditors: amounts falling due within one year following the satisfactory completion of the performance period relating to a long-term incentive plan.
Property and other
Property and other provisions comprise other liabilities where there is uncertainty about the timing of settlement, but where a reliable estimate can be made of the amount. These include certain onerous lease obligations and contingent liabilities where the likelihood of settlement is considered probable.
The Company and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings and claims will have a material adverse effect on the Group’s financial position or on the results of its operations.
Contingent liabilities in respect of option agreements
WPP has entered into agreements with certain share owners of partially owned subsidiaries and associate companies to acquire equity interests. These agreements typically contain options requiring WPP to purchase their shares at specified times up to 2009 on the basis of average earnings both before and after the exercise of the option.
21 Provisions for liabilities, charges and contingent liabilities (continued)
All arrangements contain clauses that cap the maximum amount payable by WPP. The table below shows the illustrative amounts that would be payable by WPP in respect of these options, on the basis of the relevant companies’ current financial performance, if all the options had been exercised at 31 December 2003.
22 Pension provisions and pension arrangements
Companies within the Group operate a large number of pension schemes, the forms and benefits of which vary with conditions and practices in the countries concerned. The Group’s pension costs are analysed as follows:
Defined benefit schemes
The pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2003.
The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an ageing membership population. In accordance with FRS 17, the actuarial calculations have been carried out using the Projected Unit Method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.
Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. The total contributions (for funded schemes) and benefit payments (for unfunded schemes) paid for 2003 amounted to £23.1 million (2002: £21.5 million, 2001: £13.5 million).
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22 Pension provisions and pension arrangements (continued)
(a) Assumptions
The main weighted average assumptions used for the actuarial valuations at 31 December are shown in the following table:
(b) Assets and liabilities
At 31 December, the fair value of the assets in the schemes, and the assessed present value of the liabilities in the schemes are shown in the following table:
Some of the Group’s defined benefit schemes are unfunded (or largely unfunded) by common custom and practice in certain jurisdictions.
In the case of these unfunded schemes, the benefit payments are made as and when they fall due. Pre-funding of these schemes would not be typical business practice.
The following table shows the split of the deficit at 31 December 2003 and 2002 between funded and unfunded schemes.
The average period over which the under funding would typically be payable (working lifetimes for schemes with active members or lifetimes for schemes with predominantly retired members) is also shown in the table.
Deficit
Funding
period
years
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(c) Pension expense
The following table shows the breakdown of the pension expense between amounts charged to operating profit, amounts charged to net interest payable and similar charges and amounts recognised in the statement of total recognised gains and losses (STRGL):
(d) Movement in scheme deficit
The following table shows an analysis of the movement in the scheme deficit for each accounting period:
(e) History of experience gains and losses
23 Fair value of financial instruments
The fair value of derivatives, based on the amount that would be receivable or payable if the Group had sought to enter into such transactions, based on quoted market prices where possible, was as follows:
31 Dec 2003
Swaps
31 Dec 2002
31 Dec 2001
The book value above represents net accrued interest and the foreign translation difference on the principal amounts.
As explained in Item 11, the Group’s policy is to hedge the following exposures: interest rate risk – using interest swaps, caps and collars; currency swaps; and forward foreign currency contracts; structural and transactional currency exposures, and currency exposures on future expected sales – using currency swaps and forward foreign currency contracts.
Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows:
Gains
Losses
net
gains
The fair value of the above swaps has been obtained from a market data source.
The Group estimates that the aggregate fair value of non-derivative financial instruments at 31 December 2003 does not differ materially from their aggregate carrying values recorded in the consolidated balance sheet.
The fair value of our $300 million bonds, €1 billion Eurobonds, $287.5 million convertible bond and £450 million convertible bond at 31 December 2003 was £1,521 million. This is calculated by reference to market prices at 31 December 2003. Considerable judgement is required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that could be realised in a current market exchange.
F-22
24 Authorised and issued share capital
Authorised:
Equity ordinary shares of 10p each
Issued:
During the year the Group allotted 36 million shares with a nominal value of £3.6 million and cancelled 5.6 million shares with a nominal value of £0.6 million. Movements in each year are shown in note 25.
Share options
WPP Executive Share Option Scheme
As at 31 December 2003, unexercised options over ordinary shares of 28,182,693 and unexercised options over ADRs of 9,063,785 have been granted under the WPP Executive Share Option Scheme as follows:
Exercise price
per share (£)
24 Authorised and issued share capital (continued)
Number of ADRs
under option
per ADR ($)
F-23
WPP Worldwide Share Ownership Program
As at 31 December 2003, unexercised options over ordinary shares of 5,887,900 and unexercised options over ADRs of 702,650 have been granted under the WPP Worldwide Share Ownership Program as follows:
Tempus Group plc 1998 Long Term Incentive Plan
As at 31 December 2003, unexercised options over ordinary shares of 417,394 have been granted under the Tempus Group plc 1998 Long Term Incentive Plan as follows:
Number of ordinary
shares under option
The aggregate status of the WPP Share Option Schemes during 2003 was as follows:
Movement on options granted (represented in ordinary shares)
1 January
number
Exercised
Lapsed
Options outstanding over ordinary shares
Options outstanding over ADRs
The weighted average fair value of options granted in the year calculated using the Black-Scholes model, was as follows:
UK Risk-free interest rate
US Risk-free interest rate
Expected life (months)
Expected volatility
Dividend yield
Options are issued at an exercise price equal to market value on the date of grant.
The weighted average fair value of the option element of the awards made under the Leadership Equity Acquisition Plan (‘LEAP’) in the year, calculated using the Black-Scholes model, was as follows:
Risk-free interest rate
The option element was granted at an exercise price equal to market value on the date of grant.
F-24
25 Share owners’ funds
Reconciliation of movements in consolidated share owners’ funds for the year ended 31 December 2003
26 Acquisition of Cordiant Communications Group plc
On 1 August 2003 the Company finalised its acquisition of Cordiant Communications Group plc (‘Cordiant’). The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Group:
Book
value at
Acquisition
Account-
ing policy
alignments1
Fairvalue
adjust-
ments2
Fair
value
toGroup
26 Acquisition of Cordiant Communications Group plc (continued)
These comprise adjustments to bring the assets and liabilities of Cordiant into compliance with WPP Group plc’s accounting policies:
These comprise adjustments to bring the book value of the assets and liabilities of Cordiant to fair value:
Net cash inflows/(outflows) in respect of Cordiant comprised:
Cordiant contributed £85.4 million to the Group’s net operating cash flows, paid £15.9 million in respect of net returns and servicing of finance, paid £1.3 million in respect of taxation and utilised £1.9 million for capital expenditure.
The summarised profit and loss accounts and statements of total recognised gains and losses of Cordiant for the period from 1 January to 31 July 2003 and the year ended 31 December 2002 are summarised below. These amounts are shown on the basis of the accounting policies and reporting formats of Cordiant prior to the acquisition. The post-acquisition contribution of Cordiant was not material to the Group’s profit and loss account on page F-7.
F-25
Period ended
31 July
Year ended
31 December
Other acquisitions
The Group undertook a number of other acquisitions in the year. Goodwill arising on these acquisitions and reforecasts to initial goodwill calculations for acquisitions completed in prior periods was calculated as follows:
value of
net assets
Acquired
ments
Cost of
acquisi-
tion
Goodwill above of £191.9 million includes £111.1 million in respect of the acquisition of subsidiary undertakings and £80.8 million in respect of associate undertakings. Cash consideration for acquisitions is analysed in note 11.
Fair value adjustments of £4.2 million arising on these acquisitions include £1.9 million of additional tax liabilities and £2.3 million of other liabilities.
27 Principal operating subsidiary undertakings
The principal subsidiary undertakings of the Group are:
With the exception of WPP Finance Co. Limited, which is involved in financing arrangements with other Group companies and WPP Group Services S.A. which acts as a co-ordination centre, all of these subsidiaries are operating companies. All of the above companies are 100% owned by the Group.
A more detailed list of the operating subsidiary undertakings is given in Item 4. The Company directly or indirectly holds controlling interests in the issued share capital of these undertakings with the exception of those specifically identified.
Advantage has been taken of Section 231(5) of the Companies Act 1985 to list only those undertakings required by that provision, as an exhaustive list would involve a statement of excessive length.
F-26
The following is a summary of the significant adjustments to net income and share owners’ funds which would be required if US Generally Accepted Accounting Principles (US GAAP) had been applied.
A reconciliation from UK to US GAAP in respect of earnings per share is shown in note 2.
Movement in share owners’ funds under US GAAP
F-27
The Group’s financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) applicable in the UK which differ in certain significant respects from those applicable in the US. These differences relate principally to the following items:
(a) Goodwill and other intangibles
Capitalisation of goodwill
Under US and UK GAAP, purchase consideration in respect of subsidiaries acquired is allocated on the basis of fair values to the various net assets, including intangible fixed assets, at the dates of acquisition and any net balance is treated as goodwill. Under UK GAAP, and in accordance with Financial Reporting Standard No. 10 (FRS 10) (Goodwill and Intangible Assets), goodwill arising on acquisitions on or after 1 January 1998 has been capitalised as an intangible asset. For certain acquisitions, where the directors consider it more appropriate, goodwill is amortised over its useful life, up to a 20-year period from the date of acquisition. The remaining goodwill and intangible assets of the Group are considered to have an indefinite economic life for the reasons described in the note on accounting policies in the financial statements. Goodwill arising on acquisitions before 1 January 1998 was fully written off against share owners’ funds, in accordance with the then preferred treatment under UK GAAP.
Under US GAAP, for periods ending on or before 31 December 2001 goodwill was amortised on a straight-line basis over the useful economic life, not to exceed 40 years. Effective 1 January 2002, goodwill has been accounted for under SFAS 142 “Goodwill and other Intangible Assets”. SFAS 142 directs that goodwill that has an indefinite useful life will not be amortised but rather will be tested at least annually for impairment. Intangible assets that have finite lives will continue to be amortised over their useful lives, but without constraint of an arbitrary ceiling. Therefore, in 2003 and 2002, the amortisation of intangibles adjustment represents amortisation of intangible assets that have finite lives. In 2001, the amortisation of intangibles adjustment principally represents amortisation of goodwill.
Under UK GAAP, the share consideration for the acquisition of Young & Rubicam Inc was measured by reference to the opening share price on 4 October 2000 of £7.99, which was when the acquisition became effective. The relevant measurement date for US GAAP was 12 May 2000, being the date of the announcement of the proposed acquisition and its recommendation to share owners by the respective Boards of directors of WPP Group plc and Young & Rubicam Inc. The opening share price on 12 May 2000 was £8.45. This resulted in a purchase price which differed by £265 million and a corresponding difference in goodwill. The impact of this adjustment is reflected in goodwill amortisation through 31 December 2001.
Implementation of SFAS 142
In accordance with SFAS 142, the Group carries out an annual impairment test. Impairment charges recorded under UK GAAP amounted to £79.0 million and £145.7 million respectively, in 2003 and 2002. The impairment charges relate to a number of under-performing businesses in the Information, insight & consultancy, and Branding & identity, Healthcare and Specialist communications sectors. The impact of the current economic climate on these businesses is sufficiently severe to indicate an impairment to the carrying value of goodwill. For further details on the Company’s annual impairment review, see note 13 to the consolidated financial statements.
Additional impairment charges of £16.9 million and £25.7 million were recorded under US GAAP in 2003 and 2002, respectively. The 2003 charge was taken in connection with the annual impairment test. The 2002 charge was taken on the implementation of SFAS 142. Under UK GAAP, all such impaired goodwill had been amortised or included in the write-off against share owners’ funds as of 1 January 1998, as more fully described in the note on accounting policies in the financial statements.
1 Significant differences between UK and US Accounting Principles (continued)
The following analysis shows the impact on the Company’s statement of operations of discontinuing goodwill amortisation had SFAS 142 been in effect at the beginning of 2001:
Business combinations
Under UK GAAP, the Group carries corporate brand names as intangible fixed assets in the balance sheet. The initial recognition of the J. Walter Thompson corporate brand was booked as a revaluation in the year following acquisition and is not recognised under US GAAP. The Ogilvy & Mather and Young & Rubicam Inc brand names, acquired as part of The Ogilvy Group, Inc and Young & Rubicam Inc respectively, were booked as acquisition adjustments to balance sheet assets acquired. These corporate brand names have been determined to have an indefinite useful life based on their institutional nature, their proven ability to maintain market leadership and profitable operations over long periods of time and WPP’s commitment to develop and enhance their value.
F-28
Notes to the Reconciliation to US Accounting Principles (continued)
Under US GAAP, in accordance with the provisions of SFAS 141, Business Combinations, the allocation of purchase consideration should include recognition of the fair value of identifiable intangible assets, as applicable, such as corporate brand and trade names, customer relationships and proprietary tools. The Company generally assesses the fair value of identifiable intangible assets based on the net present value of expected future cash flows to be derived. As of 31 December 2003 and 2002, the components of our intangible assets were as follows:
Weightedaverageamorti-
sationperiod
Accum-
ulatedamorti-
sation£m
The estimated aggregate amortisation expense for each of the next five years is as follows: £30.0 million in 2004, £19.7 million in 2005, £13.7 million in 2006, £11.7 million in 2007 and £9.0 million in 2008.
Under UK GAAP, goodwill arising on acquisitions is calculated at the historical exchange rate when each transaction is initially accounted for, and is therefore not retranslated at the period end. Under US GAAP, goodwill is retranslated at the end of each period presented, resulting in foreign exchange translation loss of £336.5 million in 2003 (2002: loss of £408.6 million, 2001: gain of £81.4 million) being recognised in share owners’ funds.
The Group evaluates the carrying value of its tangible fixed assets whenever events or circumstances indicate their carrying value may exceed their recoverable amount, in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss would be recognised when the estimated future cash flows (undiscounted and without interest) expected to result from the use of an asset are less than the carrying amount of the asset. Measurement of an impairment loss is based on fair value of the asset computed using discounted cash flows if the asset is expected to be held and used.
(b) Contingent consideration deemed as compensation
Under UK GAAP, the Group provides for contingent consideration as a liability when it considers the likelihood of payment as probable. Under US GAAP, contingent consideration is not recognised until the underlying contingency is resolved and consideration is issued or becomes issuable. At 31 December 2003, the Group’s liabilities for vendor payments under UK GAAP totalled £215.7 million (2002: £237.8 million, 2001: £288.2 million). As these liabilities are represented by goodwill arising on acquisitions, there is no net effect on share owners’ funds. Under US GAAP, however, a balance sheet classification difference arises such that liabilities and goodwill would each be reduced by the amount indicated as of each year end.
In certain transactions the Group considers that there is a commercial need to tie in vendors to the businesses acquired; however the directors believe that, in substance, payments made under earnouts represent purchase consideration rather than compensation for services. Under US GAAP, payments made to vendors which are conditional upon them remaining in employment with the company under earnout are required to
be treated as compensation, except in rare instances, and the anticipated compensation expense is therefore accrued on a systematic basis over the earnout period. This gives rise to recognition of additional compensation expense of £43.9 million (2002: £49.7 million; 2001: £23.1 million) under US GAAP.
(c) Executive compensation
UK and US GAAP accounting for stock-based remuneration differ in certain circumstances. The principal differences are:
Under UK GAAP, the part of executive compensation satisfied in stock is charged through the profit and loss account at the cost to the Group of acquiring the stock. Under US GAAP such compensation is measured at the fair value of WPP common stock at the date the performance condition is met or the award vests with the employee. Differences occur under US GAAP as the WPP ESOP acquires stock before the liability to the employee arises. These differences amounted to £3.7 million in 2003 (2002: £11.0 million, 2001: £7.0 million).
Additionally, under UK GAAP stock options granted with performance criteria do not give rise to a profit and loss account charge provided that the exercise price is equal to the fair value of the stock at the date of grant. Under US GAAP stock options granted with performance criteria (other than a requirement for employment to continue) are subject to variable plan accounting under APB Opinion 25. Under variable plan accounting any appreciation in stock value from the date of grant to the date upon which the performance conditions are satisfied is charged to the profit and loss account on a systematic basis over the vesting period. The US GAAP net income adjustment with respect to executive compensation in 2001 includes a £19.9 million charge related to such performance options.
(d) Accounting for Derivative Instruments and Hedging Activities
Effective 1 January 2001, the Group adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. It also requires that changes in the derivative’s fair value be recognised currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
(e) Pension accounting
Under UK GAAP, pension costs are accounted for in accordance with FRS 17. Under US GAAP, pension costs are determined in accordance with the requirements of Statement of Financial Accounting Standards No 87, Employers’ Accounting for Pensions (SFAS 87) and SFAS 88, Employers’ Accounting and Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.
The differences in accounting policy are primarily due to differing treatment of actuarial gains and losses which arise over the accounting period (as a result of investment returns and demographic assumptions differing from those previously assumed, and also the effect of changing actuarial assumptions). Under FRS 17, these actuarial gains and losses are immediately recognised in the Statement of Total Recognised Gains and Losses (‘STRGL’), whereas under SFAS 87 the actuarial gains and losses that at the beginning of the year exceed 10% of the greater of the value of the assets and the projected benefit obligation, are amortised over the future working lifetime of the scheme members. Similarly, any related deferred tax effect recognised in the STRGL under UK GAAP is reversed under US GAAP. In 2003, deferred taxes recognised in the STRGL amounted to £10.0 million (2002: £nil; 2001: £nil).
FRS 17 also requires the cost of prior service costs to be expensed over the period in which the benefit vests, whereas SFAS 87 provides for these costs to be amortised over the future service periods of those employees active at the date of the amendment who are expected to receive benefits under the plan.
Further, SFAS 87 requires the recognition of an additional liability to the extent that the liability in respect of any scheme does not cover the unfunded accumulated benefit obligation for that scheme.
The 2003 financial statements reflect a £9.8 million (2002: £5.5 million; 2001: £nil) difference in the defined benefit pensions charge between UK
F-29
GAAP and US GAAP. This is largely due to the fact that the Group’s defined benefit schemes have recently experienced actuarial losses, primarily due to poor investment returns. The 2003 and 2002 US GAAP charges therefore include an amortisation component in respect of these losses, which is not reflected in the UK GAAP charge.
(f) Accounting for associates
Under UK GAAP, the consolidated profit and loss account includes the Group’s share of the profits less losses of associated undertakings. Under US GAAP, the application of equity method accounting is ordinarily discontinued when the investment is reduced to zero and additional losses are not provided for unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee. In 2003, £1.1 million (2002: £nil; 2001: £nil) of associate losses were reversed.
(g) Employer payroll taxes
Under UK GAAP, provisions for National Insurance contributions are required to be measured initially at the date of grant of share options and recognised over the vesting period. Under US GAAP, National Insurance contributions are to be recognised on the date of the event triggering the measurement and payment of the contribution, which is generally the exercise date. In 2003, this adjustment was £2.0 million (2002: £nil; 2001: £nil).
(h) Tax items
Under UK GAAP, the Group accounts for deferred tax in accordance with FRS 19 (Deferred Tax) as described in the note on accounting policies in the financial statements. Under US GAAP, deferred taxes are accounted for on all temporary differences and a valuation allowance is established in respect of those deferred tax assets where it is more likely than not that some portion will remain unrealised.
Treatment of pre-acquisition losses
Under UK GAAP, the tax effect of the utilisation of pre-acquisition losses may be taken to the profit and loss account in certain circumstances. Under US GAAP, the tax effect of the utilisation of pre-acquisition losses is recorded to goodwill. In 2003, the adjustment for tax items includes £30.3 million (2002: £nil; 2001: £nil) of tax expense resulting from the utilisation of pre-acquisition losses. A corresponding adjustment was recorded to goodwill.
(i) Listed investments
Under UK GAAP, the carrying value of listed investments, where these represent an interest of less than 20%, is determined as cost less any provision for permanent impairment. Under US GAAP, such investments are marked to market and any resulting unrealised gain or loss is taken to share owners’ funds. Where the decline in value is other than temporary, the resulting loss would be taken to the profit and loss account under both UK and US GAAP. The listed investments of the Group are generally considered to be ‘available for sale’ securities under US GAAP.
(j) Shares owned by Employee Share Ownership Plan (ESOP)
Under UK GAAP, shares purchased by the ESOP are recorded as fixed asset investments at cost less amounts written off. Under US GAAP, these shares are recorded at cost and deducted from share owners’ equity.
The Group’s ESOP comprises trusts which acquire WPP shares in the open market to fulfill obligations under the Group’s stock-based compensation plans. These trusts do not meet the definition of an ‘ESOP’ under US GAAP.
(k) Proposed final ordinary dividend, not yet declared
Under UK GAAP, final ordinary dividends are provided in the financial statements on the basis of recommendation by the directors. This requires subsequent approval by the share owners to become a legal obligation of the Group. Under US GAAP, dividends are provided only when the legal obligation to pay arises.
2 Earnings per share – reconciliation from UK to US GAAP
Both basic and diluted earnings per share under US GAAP have been calculated by dividing the net income as adjusted for US GAAP differences by the weighted average number of shares in issue during the year. For the years ended 31 December 2003 and 2002 both the $287.5 million convertible bonds and the £450 million convertible bonds were accretive to earnings per share and therefore excluded from the calculation. Had the convertible bonds been dilutive to earnings per share, incremental shares attributable to the assumed conversion of the bonds would have increased diluted shares outstanding by 58.2 million shares as at the end of each year. In addition, options to purchase 33.6 million and 19.8 million ordinary shares were outstanding at 31 December 2003 and 2002, respectively but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the shares and, therefore, the effect would be antidilutive. For the year ended 31 December 2001 the $287.5 million convertible bond was dilutive and earnings were consequently adjusted by £3.6 million. The calculation of the weighted average number differs for UK and US GAAP purposes as follows:
Basic
earnings
per share No.
Diluted
F-30
3 Accounting for stock options
The Company applies US Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations when accounting for its stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards under those plans consistent with the method of SFAS 123, Accounting for Stock-Based Compensation, the Company’s net income and earnings per share under US GAAP would have been reduced to the pro forma amounts indicated below:
The Company has adopted the disclosure requirements of SFAS148, “Accounting for Stock-Based Compensation – Transition and Disclosure” an amendment of FASB Statement No. 123. This disclosure requirement did not have an impact on our consolidated results of operations or financial position. The FASB recently indicated that they will issue a new accounting standard that will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. We will continue to monitor the progress of the FASB with regard to the issuance of this standard. Information about our specific awards and stock plans can be found in note 24 to the consolidated financial statements.
4 Reconciliation of consolidated statements of cash flows
The consolidated statement of cash flows prepared under UK GAAP in accordance with FRS 1 presents substantially the same information as that required under US GAAP. Under US GAAP, however, there are certain differences from UK GAAP with regard to classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. Cash flow under UK GAAP represents increases and decreases in cash, which comprises both cash in hand and overdrafts. Under US GAAP, cash flow represents increases or decreases in “cash and cash equivalents”, which includes short-term, highly liquid investments with original maturities of less than 90 days, and excludes overdrafts.
4 Reconciliation of consolidated statements of cash flows (continued)
Under UK GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends, management of liquid resources and financing activities. Under US GAAP, however, only three categories of cash flow activity are reported, being operating activities, investing activities and financing activities.
A reconciliation between the consolidated statements of cash flows presented in accordance with UK GAAP and US GAAP is shown below:
5 New US GAAP Accounting Pronouncements
The Group has considered the following recent US GAAP accounting pronouncements for their potential impact on our results of operations and financial position:
In June 2002, SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. SFAS 146 requires that costs associated with exit or disposal activities, including restructuring charges, be recognised and measured initially at fair value only when the liability is incurred, and is effective for any such activities initiated after 31 December 2002. It has no effect on charges recorded for exit activities begun prior to this date. The adoption of SFAS 146 did not have a material impact on the Group’s consolidated results of operations or financial position.
In November 2002, Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) was issued. This interpretation elaborates on the existing disclosure requirements under US GAAP. It also requires (for guarantees issued after 1 January 2003) that a guarantor must recognise, at the inception of a guarantee, a liability for the fair value of obligations undertaken. The application of FIN 45 did not have a material impact on our consolidated results of operations or financial position or result in additional disclosure.
F-31
5 New US GAAP Accounting Pronouncements (continued)
In December 2002, SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, was issued as an amendment of SFAS 123. The Group has elected to continue with its current practice of applying the recognition and measurement principles of APB 25 under US GAAP and has adopted the disclosure requirements of SFAS 148.
In January 2003, the FASB issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46 requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
In December 2003, the FASB issued a revision to FIN 46 (FIN 46R). Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after 15 March 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered “special-purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after 15 December 2003. As of 31 December 2003, the adoption of FIN 46R did not result in consolidation of any variable interest entities. Further, the Group does not expect the adoption of FIN 46R to have a material impact on its future consolidated results of operations or financial position.
In April 2003, the FASB issued SFAS 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is applied prospectively and is effective for contracts entered into or modified after 30 June 2003, except for SFAS 133 implementation issues that have been effective prior to 15 June 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of SFAS 149 did not have a material impact on the Group’s consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial investments entered into or modified after 15 May 2003. The adoption of SFAS 150 did not have an impact on, or result in additional disclosure in, our consolidated results of operations or financial position.
In December 2003, SFAS 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, was revised (SFAS 132R). This statement requires additional disclosures concerning the assets, investment strategy, measurement dates, obligations, cash flows, and net periodic benefit costs of defined benefit schemes. The Company has adopted the disclosure requirements of SFAS 132R for its UK schemes. The disclosure requirements with respect to our non-UK schemes, as well as the disclosure of expected 10 year future benefit payments, are effective beginning with fiscal years ending after 15 June 2004.
In March 2004, the EITF reached a consensus on Issue 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). EITF 03-01 provides a step model to
determine whether an investment within the scope of the Issue is impaired and if an impairment is other-than-temporary. In addition, it requires that investors provide certain disclosures for cost method investments and, if applicable, other information related specifically to cost method investments, such as the aggregate carrying amount of cost method investments, the aggregate amount of cost method investments that the investor did not evaluate for impairment because an impairment indicator was not present, and the situations under which the fair value of a cost method investment is not estimated. The disclosures related to cost method investments should not be aggregated with other types of investments. The EITF 03-01 impairment model shall be applied prospectively to all current and future affected investments, effective in reporting periods beginning after 15 June 2004. The disclosure requirements are effective for annual periods for fiscal years ending after 15 June 2004.
6 – Supplemental discussion of presentational differences
Income statement
Pension accounting. The 2003 UK GAAP defined benefit pensions charge includes interest charges of £11.5 million (2002: £6.8 million, 2001: £3.8 million) that would be recognised as an operating expense under US GAAP.
Equity accounting. Under UK GAAP, the Group’s share of the profits less losses of associate undertakings before interest and taxes is included in the consolidated income statement, shown above profit on ordinary activities before interest, taxation, and fixed asset gains and write-downs. Under US GAAP, equity in pre-tax earnings of unconsolidated subsidiaries and 50% or less owned entities is presented between income tax expense and income from continuing operations. Net interest expense recognised in 2003, 2002 and 2001, respectively, includes £1.0 million, £0.4 million and £1.0 million of the Group’s share of investees’ net interest income.
Amounts written off fixed asset investments. UK GAAP permits the presentation of amounts written off fixed asset investments below operating profit. Under US GAAP, these write-offs would be presented within operating profit. Fixed asset investment write-offs of £19.9 million and £70.8 million were recognised in 2002 and 2001, respectively.
Revenue. Under UK GAAP the Group presents both turnover and revenue in its consolidated income statements. Turnover comprises the gross amounts billed to clients in respect of commission-based income together with the total of other fees earned. Revenue comprises commission and fees earned in respect of turnover. Under US GAAP, revenue comprises those amounts shown under revenue for UK GAAP.
Balance Sheet
Transfers of financial assets. The Group has certain trade receivable securitisation facilities which provide for the advance of approximately $500 million on a pool of trade debts, for which the Company entered into a new agreement with various conduit and bank purchasers effective in November 2002. In connection with these facilities, the Group sells, on a revolving and non-recourse basis, certain of its trade receivables to a qualifying special purpose entity (SPE), which in turn transfers a beneficial interest in the receivables to a third-party commercial paper conduit, which serves as security for the proceeds advance to the Group. These transactions are accounted for as a sale under US GAAP, in accordance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Accordingly, accounts receivable sold under these facilities would be excluded from trade debtors in the balance sheet. As proceeds for the receivables sold to the SPE, the Group receives cash and an interest-bearing note receivable, which would be included in trade debtors in the balance sheet. Because the receivables underlying the notes receivable are short term in nature among other considerations, the fair value of the notes receivable approximated their carrying value at both 31 December 2003 and 2002. Under UK GAAP, the securitisation is accounted for under a linked presentation, whereby the non-returnable proceeds are shown deducted from the related gross asset on the face of the balance sheet.
Current assets. The balance sheet caption of ‘Debtors’ presented within current assets includes amounts expected to be realised after more than one year, in accordance with UK GAAP. Under US GAAP, these amounts would be presented as non-current assets. The amount of debtors falling due after more than one year was £51.0 million, £35.6 million and £62.1 million at 31 December 2003, 2002 and 2001, respectively.
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7 – Additional US GAAP pension disclosures
The following tables and accompanying information show the information required to be disclosed in accordance with SFAS 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS 132), as revised (SFAS 132R), concerning the funded status of the Group’s defined benefit scheme at 31 December 2003, 2002 and 2001:
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7 – Additional US GAAP pension disclosures (continued)
The total UK GAAP defined benefit pension cost for 2001 was £18.1 million, including a charge of £1.5 million relating to certain benefit contracts not accounted for under SFAS 87. A number of plans have an unfunded accumulated benefit obligation. The breakdown is as follows:
The Company uses a measurement date of 31 December for its defined benefit schemes.
For the Group’s UK plans, the plans’ assets are invested with the objective of being able to meet current and future benefit payment needs, while controlling balance sheet volatility and future contributions. Plan assets are invested with a number of investment managers, and assets are diversified among equities, bonds, insured annuities, property and cash or other liquid investments. The primary use of bonds as an investment class is to match the anticipated cash flows from the plans to pay pensions. Various insurance policies have also been bought historically to provide a more exact match for the cash flows, including a match for the actual mortality of specific plan members. These insurance policies effectively provide protection against both investment fluctuations and longevity risks. The strategic target allocation varies among the individual schemes. The 2004 weighted-average target allocations are shown below.
The asset allocations as at 31 December 2003, 2002 and 2001, by asset category, are as follows:
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£7.7 million of employer contributions are expected to be made with respect to our UK plans in 2004, substantially all of which are required contributions.
The main weighted-average assumptions used for the actuarial valuations are shown in note 22 to the Consolidated Financial Statements.
Establishing the expected long-term rates of investment return on pension assets is a judgmental matter. Management considers the types of investment classes in which our pension plan assets are invested and the expected compound return we can reasonably expect the portfolio to earn over time, which reflects forward looking economic assumptions.
Management reviews the expected long-term rates of return on an annual basis and revises them as appropriate. Also, we periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries, which generate probability-adjusted expected future returns on those assets. These studies also project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories. The studies performed at the time we set these assumptions supported the reasonableness of our return assumptions based on the target allocation of investment classes and the then current market conditions.
8 – Supplemental tax disclosures
The following table details the UK GAAP deferred tax asset balances as shown in note 17 to the Consolidated Financial Statements:
Unutilised Tax Losses
Deferred Compensation
Acquisition Related Provisions
Valuation Allowance
Accelerated Capital allowances
Accelerated Interest expense
No material deferred income tax liabilities are expected to arise on distributions of earnings of foreign subsidiaries as the Group intends to reinvest undistributed earnings that would otherwise give rise to such liabilities.
Net operating losses totalling £632 million will expire as follows: 2013 – £30 million, 2017—£11 million, 2018—£32 million, 2020—£225 million and 2021 and thereafter—£334 million.
An analysis of the US GAAP adjustment to share owners’ funds related to deferred tax items is presented below, all of which relate to differences arising as a consequence of the US GAAP adjustments disclosed above:
9 – Acquisitions of Cordiant Communication Group plc and Tempus Group plc
On 1 August 2003, the Company completed its acquisition of Cordiant Communications Group plc. Refer to note 26 to the Consolidated Financial Statements for further details.
Amounts included in note 1 above for other intangible assets recognised under US GAAP relating to Cordiant are tradenames for £42.9 million and customer relationships for £44.4 million. These intangible assets will be
9 – Acquisitions of Cordiant Communication Group plc and Tempus Group plc (continued)
amortised over an average life of 14 years and 4 years, respectively. At 31 December 2003 we have recorded amortisation on tradenames of £1.3 million and on customer relationships of £5.5 million.
The following table sets forth certain pro forma financial information for WPP as if the acquisition of Cordiant had occurred as of the beginning of each reported period. The pro forma financial information is stated in accordance with UK GAAP.
The financial information for Cordiant for the year ended 31 December 2002 has been extracted without material adjustment from the audited financial statements contained in Cordiant’s annual report filed on Form 20-F with the SEC for the year ended 31 December 2002.
The Cordiant profit and loss account for the period from 1 January to 31 July 2003 includes £49.0 million of goodwill impairment and £42.5 million of exceptional items. In the year ended 31 December 2002, the Cordiant profit and loss account included £171.1 million of goodwill impairment and £45.6 million of exceptional items. Exceptional items comprise gains on the disposal of businesses and other costs incidental to a restructuring of operations and investment write offs.
Year ended31 December 2003
£
This unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which would have actually resulted had the combinations been in effect as of the dates presented.
On 6 November 2001 the Company finalised its acquisition of Tempus Group plc. Prior to the acquisition, the group owned a 22% interest in the ordinary share capital of Tempus.
The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the Group:
These comprise adjustments to bring the assets and liabilities of Tempus into compliance with WPP’s accounting practices and policies. These primarily arise from applying the Group’s depreciation policies to tangible fixed assets acquired.
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These comprise adjustments to bring the book value of the assets and liabilities of Tempus to fair value:
10 – Supplemental Segment Disclosures
The Company organises its businesses generally based on the nature of the services provided by each operating company. Where appropriate, operating companies are aggregated into the operating sectors shown below. The following table details the goodwill additions under UK GAAP as shown in note 13 to the Consolidated Financial Statements by operating sector.
The following table shows long-lived assets attributable to each of the Company’s geographical areas:
Goodwill impairment charges taken with respect to subsidiaries in 2003 and 2002 consisted of:
The incremental impairment charge of £16.9 million taken under US GAAP in 2003 included £10.4 million related to Information, insight and consultancy and £6.5 million related to Branding & identity, Healthcare and Specialist communications. The SFAS 142 adoption charge of £25.7 million recorded in 2002 under US GAAP related entirely to the Branding & identity, Healthcare and Specialist communications sector.
Goodwill impairment charges of £30.8 million were taken with respect to associates in 2003 and related entirely to Branding & identity, Healthcare and Specialist communications. Goodwill amortisation on associates of £3.5 million related entirely to Branding & Identity, Healthcare and Specialist communications.
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