WPP plc 20-F 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal year ended 31 December 2004
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 Registrants Name Into English)
(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:
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)
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuers 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 1,185,338,038, which includes the underlying ordinary shares represented by 20,359,863 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
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 Companys 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 Companys major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the worlds 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 Companys plans and objectives will be achieved.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
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 2004, the Group had approximately 60,000 employees. As at 31 March 2005, following the acquisition of Grey Global Group (Grey), the Group had approximately 71,000 employees, working in over 2,000 offices in 106 countries. Including employees of associated undertakings this figure is approximately 84,000. For the year ended 31 December 2004, the Group had revenue of approximately £4,300 million and operating income of approximately £485 million.
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 2004 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 2001 is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission as part of the Companys 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-30 to F-49 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.
Selected Consolidated Profit and Loss Account Data
Selected Consolidated Balance Sheet Data
Dividends on the Companys 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 Companys ordinary shares in respect of each fiscal year indicated. In the United States, the Companys 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.
The 2004 interim dividend was paid on 15 November 2004 to share owners on the register at 15 October 2004. The 2004 final dividend is expected to be paid on 4 July 2005 to share owners on the register at 3 June 2005.
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 Companys 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 2004 was:
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 2005, the Bloomberg Closing Mid Point rate was 1.8224.
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, which may reduce market shares and decrease profits.
The communications services industry is highly competitive and fragmented. At the parent company level, the Companys principal competitors are other large multinational communications services companies, as well as regional and national advertising and/or marketing services firms. In the communications services industry, service agreements with clients are generally terminable by the client upon 90 days notice. As such, clients may move their accounts to another agency on relatively short notice. In many cases, a WPP agency 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 the WPP agency against other agencies work. Many clients do not permit an agency working for it to represent competing accounts or product lines in the same market. A lesser number of companies will not permit any of the agencies owned by a communications service company to work on competing accounts or product lines in any market. These client conflict policies can and sometimes do prevent WPPs agencies from seeking and winning new clients and assignments. If WPPs agencies are unable to compete effectively in the markets in which they operate, WPPs market share and profits may decrease.
The Company receives a significant portion of its revenues from a limited number of large clients, and the loss of these clients could adversely impact the Companys prospects, business, financial condition and results of operations.
A relatively small number of clients contribute a significant percentage of the Companys consolidated revenues. The Companys ten largest clients accounted for approximately 31% of revenues in the year ended 31 December 2004. The Companys 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 Companys clients will continue to utilise the Companys 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 Companys largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Companys prospects, business, financial condition and results of operations.
The Company may be subject to certain regulations that could restrict the Companys 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 Companys 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 services businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among their businesses for talented personnel.
The Company is exposed to the risks of doing business internationally.
The Company operates in 106 countries throughout the world. The Companys international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to risks regarding:
The occurrence of any of these events or conditions could adversely affect the Companys ability to increase or maintain its operations in various countries.
Currency exchange rate fluctuations could adversely affect the Companys consolidated results of operations.
The Companys reporting currency is the UK pound sterling. However, the Companys significant international operations give rise to an exposure to changes in foreign exchange rates, since most of its revenues from countries other than the UK are denominated in currencies other than the UK pound
sterling, including the US dollar. Changes in exchange rates can reduce the Companys revenues when measured in UK pounds sterling.
The Company may have difficulty repatriating the earnings of its subsidiaries.
Any payment of dividends, distributions, loans or advances to the Company by its subsidiaries could be subject to restrictions on, or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which the Companys subsidiaries operate. If the Company is unable to repatriate the earnings of its subsidiaries it could have an adverse impact on the Companys ability to pay dividends or to redeploy earnings in other jurisdictions where they could be used more profitably.
The Company is subject to recessionary economic cycles.
The Companys business is affected by recessionary economic cycles. Recessionary economic cycles may adversely affect the businesses of the Companys clients, which can have the effect of reducing the amount of services they purchase for the Companys agencies and thus can materially adversely affect the Companys consolidated results of operations.
The Company may be unsuccessful in evaluating material risks involved in completed and future acquisitions.
The Company regularly reviews potential acquisitions of businesses that are complementary to its businesses. As part of the review the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite the Companys efforts, it may be unsuccessful in ascertaining or evaluating all such risks. As a result, it might not realise the intended advantages of any given acquisition. If the Company fails to realise the expected benefits from one or more acquisitions, the Companys business, results of operations and financial condition could be adversely affected.
The Company may be unsuccessful in integrating any acquired operations with its existing businesses.
The Company may experience difficulties in integrating operations acquired from other companies. These difficulties include the diversion of managements attention from other business concerns and the potential loss of key employees of the acquired operations. Acquisitions also frequently involve significant costs related to integrating information technology, accounting and management services and rationalising personnel levels. If the Company experiences difficulties in integrating one or more acquisitions, the Companys business, results of operations and financial condition could be adversely affected.
Goodwill recorded on the Companys 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 Companys financial condition and results of operations.
We may use ordinary shares, incur indebtedness, expend cash or use any combination of ordinary shares, 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 Companys balance sheet.
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 organised into four business segments. Our largest segment is Advertising and Media investment management where we operate the well-known advertising networks JWT, 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, Ogilvy Healthworld, OgilvyOne, Wunderman, 141 Worldwide and other companies).
The Companys 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 2005 the Company had a market capitalisation of £7.4 billion.
The Companys 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, Cordiant Communications Group plc (Cordiant) in 2003 and Grey in March 2005.
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,
Tempus core brand, merged operations to create Mediaedge:cia. Mediaedge:cias 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 Groups global communications and media network, although shortly after the acquisition the Group separately sold Cordiants 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 £224.5 million, £398.6 million (net of the £75 million in proceeds from the sale of Cordiants interest in Zenith Optimedia Group) and £343.4 million for acquisitions and investments in 2004, 2003 and 2002, 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 £95.6 million, £93.9 million and £100.5 million, respectively, and cash spent on share repurchases and cancellations was £88.7 million, £23.1 million and £75.9 million, respectively.
On 7 March 2005, the Company completed the acquisition of Grey in consideration for the issue of 78 million new WPP ordinary shares and $720 million in cash. Grey was consolidated into the results of WPP from 7 March 2005. Grey brings a number of strategic assets and strong people a planning and account handling advertising agency, a media investment management capability, a public relations capability, a healthcare capability and a direct, sales promotion, interactive and internet capability. Geographic strengths include the US and Europe (including Eastern Europe) in particular, as well as interesting bases in Asia Pacific, Latin America, Africa and the Middle East. From a client perspective there are also major opportunities to build on existing common client opportunities and explore new relationships.
B. Business Overview
In 2004 turnover increased 5.2% to £19.6 billion as compared to 2003. Revenues increased by 4.7% to £4.3 billion as compared to 2003. 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 over 4%. Excluding the acquisition of Cordiant, like-for-like revenues were up 5.6%. Reported operating profit (excluding income from associates) increased in 2004 by 16.7% to £484.6 million, including the effects of £36 million and £48 million of goodwill impairment charges taken on subsidiaries in 2004 and 2003, respectively. Reported profit before interest, taxes and fixed asset gains and write-downs was up over 25% to £529.2 million in 2004 from £421.5 million in 2003. Profit before tax in 2004 was up over 30% to £456.5 million as compared to 2003 and diluted earnings per share increased by over 37% to 25.0p.
The Companys business comprises the provision of communications services on a national, multinational and global basis. It operates from over 2,000 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).
Approximately 46% of the Companys reported revenues in 2004 were from Advertising and media investment management, with the remaining 54% 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. In 2004, certain of the Groups public relations and public affairs businesses, which were historically included in Advertising and Media investment management have been moved to Public relations and public affairs. As a result, the comparative figures for both Advertising and Media investment management and Public relations and public affairs have been restated to reflect this change.
The Companys principal activities within each of its business segments are described below.
Advertising and Media investment management
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 Companys advertising agencies include JWT, Ogilvy & Mather Worldwide, Y&R, Grey Worldwide, Red Cell and Bates Asia. The Company also owns interests in Asatsu-DK (20.9%), Chime
Communications (21.2%); LG Ad in Korea (28.2%); Singleton, Ogilvy & Mather in Australia (41.0%) and various interests in Dentsu, Young & Rubicam offices in Asia, with interests ranging from 27% to 67% of the total share capital.
JWT. JWT, one of the worlds first advertising agencies, was founded in 1864 and is a full service multinational advertising agency headquartered in New York. JWTs 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 markets new demands.
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&Rs clients also benefit from the brand knowledge developed over a 10 year period in Brand Asset Valuator®, its proprietary brand management tool.
Grey Worldwide. Grey commenced operations in 1917 and was incorporated in 1925 as Grey Advertising Inc. Grey Worldwide has offices in over 80 countries and was acquired in March 2005 as part of the Grey acquisition.
Red Cell. Red Cell, formed in January 2001, is WPPs micro-network, offering flexibility and entrepreneurial character to its clients. The Red Cell flagship network includes Berlin Cameron/Red Cell in the US, HHCL/Red Cell in London and Batey in Asia.
Bates Asia. Bates is an Asia-focused advertising network, with increasing strength in China and India. In 2004, Bates Asia created a new practice, Bates Asia Technology, in conjunction with other WPP technology agencies, and plans to merge 141 Asia with Ogilvy Activation to form a large activation network in Asia.
Dentsu Young & Rubicam. DY&R is operated by Y&R and 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 full service media investment management entity and the parent company for WPPs consolidated media assets which include Mediaedge:cia and Mindshare. These media investment management companies plan and buy media to communicate clients brand messages in the most effective manner on behalf of their clients using GroupMs scale in combination with its marketplace knowledge and vendor relationships. Scale also allows for greater investment in systems, research and insights, as well as in practice and talent development. In 2004, GroupM launched a new network, MAXUS, allowing GroupM to more effectively manage growth into the future. MAXUS enjoys the full advantage of the shared resources within the Group. With MediaCom, acquired with the acquisition of Grey in March 2005, GroupM is the largest media agency group in the world by a significant margin based on RECMA estimates.
MindShare. MindShare, formed from the merger of the media departments of JWT and Ogilvy & Mather, offers media planning, buying and research services for its clients, including existing JWT and Ogilvy & Mather clients. The MindShare network includes MindShare entertainment, based in Hollywood, and Performance, a sponsorship and sports marketing business.
Mediaedge:cia. Mediaedge:cia was formed following the Groups 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 major initiatives in 2004 included enhancing its Interaction (customer relationship management, online search and marketing services, including production) and Content services (sponsorship and event marketing, programming, branded content, entertainment and cause-related marketing) enhanced by a fast growing modelling business focused on return on investment.
Information, insight and consultancy
To help optimise its worldwide research offering to clients, the Companys 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 worlds 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.
KMR Group. KMR focuses on media planning databases and new product development projects. KMR has the following principal subsidiaries and investments:
AGBNielsen Media Research. AGBNielsen, a joint venture formed with VNU, is a leading provider of television audience measurement systems worldwide.
BMRB International. BMRB is one of Europes 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 Americas leading media research businesses, which services national and multinational clients throughout the region in measurement and analysis of television ratings and advertising expenditures.
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
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 Companys largest businesses in this
area are Burson-Marsteller, Hill & Knowlton Inc., Ogilvy Public Relations Worldwide, Cohn & Wolfe and GCI Group (acquired in March 2005 as part of the Grey acquisition).
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 communications services including corporate and financial public relations, marketing communications, internal communication, change management, crisis communications and public affairs counseling. The Hill & Knowlton network also includes the businesses of Penn, Schoen & Berland, Blanc & Otus, Wexler & Walker Public Policy Associates and Sparks & Noble and Dome Communications (both acquired in 2004).
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 and social marketing. The firm has offices in key financial, governmental and media centres as well as relationships with affiliates worldwide. The OPR network also includes the business of BWR, its entertainment offering, which created a new product placement division in 2004.
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.
GCI Group. GCI Group, a global public relations firm, has expertise in five practices: healthcare, corporate, consumer marketing, technology and media relations.
Others. The Group includes a number of other companies specialising in public relations and public affairs, including BKSH, Blanc & Otus, Buchanan Communications, Bulletin, Clarion Communications, Finsbury, Quinn Gillespie, Robinson Lerer & Montgomery and Timmons and Company.
Branding and identity, Healthcare and Specialist communications
The Companys 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
Enterprise IG. Enterprise IG is a global brand agency, with 27 offices in 20 countries.
Addison. Addison is a corporate marketing consultancy. It deals with the reputation management and communication requirements (outside public relations) of large organisations at the corporate or head office level.
Lambie-Nairn. Lambie-Nairn is a branding agency whose work extends from strategic brand consultancy, working with clients to define their brand architecture, positioning and strategy, to on-screen TV identity design to major corporate design work for major multinational clients.
Warwicks. Warwicks is a design and publishing company, specialising in the design and production of sales, promotion, public relations and service literature for a diverse range of companies.
BDG McColl. BDG McColl is an architecture and design practice specialising in the design of commercial buildings and interiors.
BDGworkfutures. BDGworkfutures is an international design consultancy focusing on strategy and design for working environments.
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. Landors 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. 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.
MJM Creative. MJM is a full-service communications company for live events, meetings, exhibits, trade shows, brand theater and training, serving clients around the world.
Healthcare marketing and communications
The Company has extensive expertise in healthcare marketing and communications services. CommonHealth, Sudler & Hennessey and Ogilvy Healthworld (formed by the merger of Ogilvy Healthcare and Healthworld Communications Group in 2004) offer three of the most comprehensive specialist healthcare communications networks in the world. Grey Healthcare Group was acquired in March 2005 as part of the Grey acquisition.
Interactive, promotion and relationship marketing
The Company has a number of operating businesses in this category, including:
Media & production services
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 Group plc
WPP, the parent company, develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The principal activity of the Group is the provision of communications services worldwide. WPP acts only as the parent company and does not trade. The parent company complements the operating companies in three distinct ways:
The parent company operates with a limited group of approximately 250 people at the centre in London, New York, Hong Kong and Sao Paolo.
The Group has three strategic priorities:
The Companys 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 three or more disciplines, more than 230 clients in four disciplines and nearly 200 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 Companys ten largest clients in 2004, measured by revenues, were Altria, American Express, BAT, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer, Unilever and Vodafone. Together, these clients accounted for approximately 31% of the Companys revenues in 2004. No client of the Company represented more than 8% of the Companys aggregate revenues in 2004. 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.
Total initial cash consideration spent on acquisitions and investments was £113 million in 2004. WPP or its operating companies acquired or made an investment in a number of companies in 2004, identified below:
In the first quarter of 2005, in addition to the completion of the acquisition of Grey, the Group made acquisitions or increased equity interests in advertising and media investment management in the United Kingdom, Denmark and Argentina; in information, insight and consultancy in Hong Kong; in public relations and public affairs in Denmark; in healthcare in the United States, Netherlands and Switzerland; and in direct, internet and interactive in the United States.
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.
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 Companys 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.
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 Groups financial position or on the results of its operations.
C. Organizational Structure
The Companys business comprises the provision of communications services on a national, multinational and global basis. It operates from 2,000 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). A listing of the Group brands operating within these business segments as at 10 May 2005 is set forth below.
D. Property, Plant and Equipment
The majority of the Companys 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:
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 5Operating and Financial Review and Prospects. As of 31 December 2004, the fixed asset value (cost less depreciation) representing properties, both owned and leased, as reflected in the Companys consolidated financial statements was approximately £177.0 million.
The task of improving property utilisation continues to be a priority for the Group, with a portfolio of approximately 14.5 million square feet worldwide. In December 2002, establishment cost as a percentage of revenue was 8.4%, with a goal of reducing this ratio to 7% in the medium term. At the end of 2003 the establishment cost to revenue ratio reduced to 7.9% and by December 2004 this ratio improved further to 7.6%, driven by better utilisation and higher revenues. There should be further opportunities to improve utilisation in the future, as we integrate 2.8 million square feet of property within Grey into the portfolio.
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 2004, under non-cancelable operating leases of the Company.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The Companys reporting currency has always been the UK pound sterling. However, the Companys 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 Groups debt is therefore denominated in 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 worlds 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 2004, 46% of the Companys consolidated revenues were derived from Advertising and media investment management, with the remaining 54% of its revenues being derived from the marketing services segments.
The Group has established the following financial and strategic objectives:
The following discussion is based on the Companys 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-30 to F-49 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 managements discussion and analysis:
We believe prospects for the industry in 2005 are good but not as strong as the quadrennial year of 2004, when a US Presidential election, the Olympic Games and European Football Championships all stimulated growth. We expect worldwide advertising and marketing services spending to grow at 2-3% in 2005, compared to 3-4% in 2004, with marketing services outpacing advertising.
As discussed earlier, management reviews the Groups 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.
Performance of the Groups 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 2004 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.
Further, management reviews the Groups 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 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 Companys revenue performance and trends because it allows for more meaningful comparisons of current period revenue to that of prior periods.
Advertising and media investment management like-for-like growth was over 3%, or almost 6% excluding the impact of the acquisition of Cordiant. Information, insight and consultancy seems to have been the most recession resistant communications service in the Group. Like-for-like revenues in this segment were up over 4%. The difficulties at Kantars call centre operations in the US have now been overcome, with significant improvement in 2004. Public relations and public affairs continued its recovery first seen in the last quarter of 2003, with like-for-like revenue growth of over 3%. In Branding and identity, Healthcare and Specialist communications the Groups healthcare and direct, internet and interactive businesses showed particularly strong revenue growth. Like-for-like revenues in this segment rose by over 5%.
Geographically, all regions showed revenue growth in 2004 on a constant currency basis, with Asia Pacific, Latin America, Africa and the Middle East growing fastest and crossing $1 billion of annual revenues for the second time.
2004 compared with 2003
RevenuesReported revenues were up almost 5% in 2004 to £4,299.5 billion from £4,106.0 billion in 2003. On a constant currency basis, revenue increased by over 11%, with all regions showing revenue growth, as detailed in the table above. For 2004, acquisitions completed during the year contributed revenue of £63.6 million in the aggregate. The contribution of aggregate acquisitions completed in 2003 to revenue in that year was £183.4 million. On a like-for-like basis revenues were up over 4.0%, or 5.6% excluding the impact of the acquisition of Cordiant. Like-for-like revenues were up over 2% in the first half of 2004 and up almost 6% in the second half. Sequential quarters in 2004 were up 1.8%, 3.0%, 5.7% and 5.7%.
Operating costsReported operating costs excluding goodwill amortisation and impairment, including direct costs, rose in 2004 by almost 4%, and by almost 11% in constant currency (over 3% on a like-for-like basis) from the previous year. Staff costs excluding incentives in 2004 were up almost 5%, with salaries and freelance costs up 5.1%. Charges for incentive payments totaled £160.6 million in 2004 (£130.4 million in 2003) or over 22% (compared with almost 21% in 2003) of operating profit before bonuses, taxes and income from associates. The reported staff cost to gross margin ratio increased in 2004 to 61.4% from 61.1% in 2003. Excluding incentives, this ratio fell 0.2 margin points in 2004 to 57.5% from 57.7% in 2003. Variable staff costs as a proportion of total staff costs increased to 12.2% in 2004 from 11.0% in 2003 and, as a proportion of revenues, increased to 7.1% from 6.3%. Non-staff costs fell as a proportion of revenues from 24.6% in 2003 to 23.4% in 2004 partly reflecting a reduction in the Groups property cost to revenue ratio following actions taken in 2003 and a reduction in information technology costs.
In 2003, goodwill amortisation and impairment of subsidiaries included £48.2 million taken as an impairment charge primarily reflecting accelerated amortisation of goodwill on first generation businesses which suffered in the recession. Although 2004 was a stronger year than 2003, some first generation businesses which had been acquired continued to suffer and an impairment charge of £36.0 million has been taken. Goodwill amortisation on subsidiaries was £39.0 million in 2004 as compared to £29.5 million in 2003.
Operating profitReported operating income was up over 16% to £484.6 million in 2004 from £415.3 million in 2003. Reported operating margins increased from 10.1% to 11.3%. Reported
operating income, including income from associates, was £532.7 million in 2004, also up over 16% from £455.8 million in 2003. Reported operating margins, including income from associates, were 12.4% and 11.1% in 2004 and 2003, respectively. Margins were negatively impacted by 1.7% in 2004 and 1.9% in 2003 due to goodwill amortisation and impairment taken on subsidiaries in each year. Therefore, operating margins, including income from associates, increased to 14.1% in 2004 from 13.0% in 2003 before goodwill amortisation and impairment. For 2004, acquisitions completed during the year contributed operating income of £12.9 million in the aggregate. For 2003, acquisitions completed during the year contributed operating income in that year of £16.4 million in the aggregate.
The Group has released £14.0 million in 2004 to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2003. At the same time, the Group includes within operating costs charges for one-off costs, severance and restructuring charges, including those resulting from integrating acquisitions. In 2003, £12.0 million of excess provisions were released in respect of acquisitions completed prior to 2002.
Goodwill amortisation and impairmentassociatesIn 2003, goodwill amortisation and impairment consisted of £30.8 million of impairment and £3.5 million of amortisation. In 2004, goodwill amortisation of £3.5 million was recorded.
Interest expenseNet interest expense (including charges for the early adoption of Financial Reporting Standard No. 17, Retirement Benefits, or FRS 17 of £9.5 million in 2004 and £11.5 million in 2003) decreased from £71.6 million in 2003 to £70.7 million in 2004, principally reflecting improved average net debt levels and a lower FRS 17 charge, largely offset by higher interest rates.
TaxesThe Companys tax rate on reported profits in 2004 was 30.7 % compared to 34.9% in 2003. This decrease is due to lower goodwill impairment charges in 2004. Goodwill amortisation and impairment, net interest charges on defined benefit pension schemes, and fixed asset gains and write-downs impacted the tax rate by 5.0% and 9.1%, in 2004 and 2003, respectively. Therefore, the tax rate excluding goodwill amortisation and impairment, and net interest charges on defined benefit pension schemes, in 2004 was 25.7%, similar to the 25.8% in 2003, reflecting the continued positive impact of the Groups tax planning initiatives.
Net incomeNet income available to ordinary share owners was £292.3 million in 2004 against £208.4 million in 2003. The increase was driven by improved operations, reduced interest charges, decreased goodwill impairment charges in 2004 and the effect of a reduced reported tax rate in 2004 as compared to 2003.
2003 compared with 2002
Following the implementation of UITF38, the Group has restated its consolidated profit and loss account for the year ended 31 December 2002 to increase operating costs by £12.4 million.
RevenuesReported 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 costsReported operating costs excluding goodwill amortisation and impairment, including direct costs, rose on a like-for-like basis in 2003 by 4%, and by almost 7% in constant currency (0.3% on a like-for-like basis) from the previous year. Staff costs excluding incentives on a like-for-like basis in 2003 were up 0.2%, with salaries and freelance costs down 0.9%. Charges for incentive payments totaled £130.4 million in 2003 (£102.5 million in 2002) or almost 21% (compared with 19% 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 60.8% 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 9.7% in 2002 and, as a proportion of revenues, increased to 6.3% from 5.6%. 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 Groups property costs following actions taken in 2002 to eliminate under-utilised property.
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 profitReported operating income was up almost 60% to £415.3 million in 2003 from £260.1 million in 2002. Reported operating margins increased from 6.7% to 10.1%. Reported operating income, including income from associates, was £455.8 million in 2003, up over 57% from £290.1 million in 2002. Reported operating margins, including income from associates, were 11.1% and 7.4% 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 12.0% 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 impairmentassociatesIn 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 expenseNet 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.
TaxesThe Companys tax rate on reported profits in 2003 was 34.9% compared to 53.6% in 2002. This decrease is due to lower goodwill impairment charges in 2003. Goodwill amortisation and impairment, net interest charges on defined benefit pension schemes, and fixed asset gains and write-downs impacted the tax rate by 9.1% and 27.0% in 2003 and 2002, respectively. Therefore, the tax rate excluding goodwill amortisation and impairment, and net interest charges on defined benefit pension schemes, in 2003 was 25.8%, compared to 26.6% in 2002, reflecting the continuing strength of the Groups tax planning initiatives.
Net incomeNet income available to ordinary share owners was £208.4 million in 2003 against £75.6 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.
Results of Operations Under US GAAP
The Companys 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 2004, net income under US GAAP was £149.3 million compared with net income of £110.3 million and £53.5 million, respectively, in 2003 and 2002. The corresponding figures under UK GAAP were net income of £292.3 million, £208.4 million and £75.6 million, respectively. See pages F-30 to F-49 of the Consolidated Financial Statements for a discussion and reconciliation of the principal differences between US GAAP and UK GAAP that affect the Groups financial statements. The resulting aggregate impact of US GAAP adjustments was to reduce net income by £143.0 million, £98.1 million and £22.1 million, respectively, in each year.
The negative impact of US GAAP adjustments on net income increased in 2004 by £44.9 million as compared to 2003. This variance is driven principally by a £46.6 million increase in contingent consideration deemed as compensation and a £16.1 million charge related to liabilities which had been derecognised under UK GAAP, partially offset by a lower charge for the change in market value of derivatives of £17.6 million.
The negative impact of US GAAP adjustments on net income increased in 2003 by £76 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.
B. Liquidity and Capital Resources
GeneralThe 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 Companys sources and uses of cash see the Consolidated Statements of Cash Flows included as part of the Companys Consolidated Financial Statements in Item 18 of this Report.
The Company spent £224.5 million, £398.6 million (net of the £75 million in proceeds from the sale of Cordiants interest in Zenith Optimedia Group) and £343.4 million for acquisitions and investments in 2004, 2003 and 2002, 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 £95.6 million, £93.9 million and £100.5 million, respectively, and cash
spent on share repurchases and cancellations was £88.7 million, £23.1 million and £75.9 million, respectively.
As we expect that necessary capital expenditure will remain equal to or less than the depreciation charge in the long-term, 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 2004, 13.4 million ordinary shares, or 1.1% of our share capital, were repurchased and cancelled at a total cost of £73.7 million and average price of 550p. An additional £15.0 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 final dividend on its ordinary shares by 20% to 5.28p per share, taking the full year dividend to 7.78p per share for 2004. 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 Groups liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate primarily to the turnover or gross billings figure which was 4.6 times the annual revenue of the Group in 2004. 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 Groups treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Groups bankers and other sources.
Liquidity risk managementThe 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 Groups major operations.
USA bondsDuring 2004, the Group issued $650 million of 5.875% bonds due 2014. Proceeds from this were applied to assist in the redemption of 350 million 5.125% bonds due 2004 and the Young & Rubicam 3% convertible bonds due January 2005. The Group also has in issue $200 million of 6.625% bonds due 2005 and $100 million of 6.875% bonds due 2008.
At 31 December 2004 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 London Interbank Offering Rate (LIBOR) plus a margin and receiving a fixed rate of 5.875%. These swaps expire in 2014 and have the effect of converting a portion of the 5.875% bonds due 2014 from a fixed to a floating rate of interest.
EurobondThe Group has in issue 650 million of 6.0% bonds due 2008 and during 2004, repaid 350 million of 5.125% bonds.
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 was deferred and is being recognised as interest income in the profit and loss account over the remaining life of the Eurobond.
At 31 December 2004 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.
Revolving credit facilityThe Groups debt is also funded by a five-year $750 million Revolving Credit Facility due September 2006. The Groups syndicated borrowings drawn down, predominantly in US dollars, under this agreement averaged $79.4 million during 2004 at an average interest rate of 1.5% inclusive of margin. Borrowings under the Revolving Credit Facility and certain of our other debt instruments are governed by certain financial covenants based on the results and financial position of the 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 £391 million at 31 December 2004.
Interest on the Companys 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 bondsIn October 2000, with the purchase of Young & Rubicam, the Group acquired $287.5 million of 3% convertible bonds which were redeemed on their due date, 15 January 2005.
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.
In March 2005, with the acquisition of Grey, the Group acquired $150 million of 5% convertible debentures due 2033. At the time of the acquisition, certain of the terms of the debentures were amended. These amendments included granting holders the right to redeem the debentures at par on 28 October 2008, 2010 and 2013. WPP has also guaranteed all of Greys obligations in the indenture agreement.
Working capital facilitiesWithin the Groups 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 resourcesAt 31 December 2004, the Group had £244.0 million (2003: £401.8 million, 2002: £190.4 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 Groups anticipated cash requirements based upon our current forecast funding requirement and our ability to access capital and bank markets to refinance maturing debt.
C. Research and Development, Patents and Licenses
D. Trend Information
The world economy continued to grow in 2004, after the pickup in 2003, driven by activity in the United States, Asia Pacific, Latin America, the Middle East, Russia and the CIS countries. While the Companys like-for-like revenues have grown beyond market expectations, like-for like average headcount has remained almost constant, up only 0.3%
The Companys budgets for 2005 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 the range of 3-4%, with balanced growth in the first and second half of the year. They also indicate similar growth for both advertising and marketing services revenues.
The Groups revenues for the first three months of 2005 were £1,114.5 million, increasing by over 16% over the first quarter of 2004. Constant currency revenues were up over 16% primarily reflecting strong organic growth and a first-time contribution from Grey from 7 March. The impact of currency in the first quarter of 2005 was minimal. On a like-for-like basis, excluding acquisitions and currency fluctuations, revenues were up almost 6%. Net debt at 31 March 2005 was £938 million, compared to £825 million at 31 March 2004 (at constant exchange rates). Average net debt in the first quarter of 2005 was £586 million compared to £826 million in the corresponding period in 2004, at 2005 exchange rates. In January 2005 the $288 million 3% convertible bond issued by Y&R Inc. in 2000 was redeemed at par from existing resources, resulting in the expiry of the associated rights into 16.3 million WPP shares. In the 12 months to 31 March 2005, the Groups free cash flow was £572 million. Over the same period, the Groups expenditure on capital, acquisitions, share repurchases and cancellations was £646 million (including a £384 million gross cash payment for Grey).
E. Off-Balance Sheet Arrangements
Within the Groups 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.
In the event the facility is terminated, 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.
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 £545.7 million, less non-returnable proceeds of £261.0 million, are included in debtors within the Groups working capital facilities at 31 December 2004, compared to £507.5 million of gross debts, less non-returnable proceeds of £280.4 million, at 31 December 2003. See the notes to the reconciliation to US accounting principles in Item 18 of this report for discussion of the accounting treatment for the securitisation under US GAAP.
F. Tabular Disclosure of Contractual Obligations
The following summarises the Companys estimated contractual obligations at 31 December 2004, 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.
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 the remaining expected funding period.
2004. As at 31 December 2004, the Groups net debt was £300 million, down £62 million from £362 million in 2003. Net debt averaged £810 million in 2004, down £412 million against £1,222 million in 2003 (down £323 million at 2004 exchange rates).
Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2004, operating profit before goodwill amortisation and impairment was £560 million, capital expenditure £96 million, depreciation £103 million, tax paid £101 million, returns on investments and servicing of finance of £73 million and other net cash inflows of £55 million. Free cash flow available for debt repayment, acquisitions, share buybacks and dividends was therefore £448 million. This free cash flow was partially absorbed by £218 million in net acquisition payments and investments, share repurchases and cancellations of £89 million and dividends of £82 million.
The Group bases its internal cash flow objectives on free cash flow. Free cash flow is a non-GAAP financial measure. Management believes free cash flow is meaningful to investors because it is the measure of our funds available for acquisition-related payments, dividends to shareowners, and share
repurchases. The purpose of presenting free cash flow is to indicate the ongoing cash generation within the control of the Group after taking account of the necessary cash expenditures of maintaining the capital and operating structure of the Group (in the form of payments of interest, corporate taxation and capital expenditure). Net working capital movements are excluded from this measure since these are principally associated with our media buying activities on behalf of clients and are not necessarily within the control of the Group. This computation may not be comparable to that of similarly titled measures presented by other companies.
2003. As at 31 December 2003, the Groups 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 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.
The Company more than met its objective of covering acquisition payments and share repurchases and cancellations from free cash flow, even after including dividends.
A tabular reconciliation of free cash flow is shown below.
At 31 December 2004, the Companys capital base was comprised of 1,185,338,038 ordinary shares of 10 pence each.
The task of improving property utilisation continues to be a priority for the Group with a portfolio of approximately 14.5 million square feet worldwide. There should be further opportunities to improve utilisation in the future, as we integrate 2.8 million square feet of property within Grey into the portfolio.
As in 2003 and 2002, in managements opinion the effect of inflation has not had a material impact on the Companys results for the year or financial position as at 31 December 2004.
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 Companys financial statements have been prepared in accordance with UK GAAP and reconciled to US GAAP. A summary of the Groups 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 about results of operations and cash flows that we make 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 Companys 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 2004, 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. £36.0 million was taken as an impairment charge in 2004, and £79.0 million and £145.7 million in 2003 and 2002, respectively, 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 the years ended 31 December 2003 and 2004. 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 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 Groups current weighted average cost of capital of 8.1%. Had the Groups weighted average cost of capital not been reduced from 8.5% in 2003 to 8.1% in 2004, a potential impairment would have existed.
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 2004, gross goodwill of £650 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 WPPs 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 £164.5 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 Companys 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 2004 would have been a charge of £260 million (2003: £250 million, 2002: £231 million) compared with a reported £42.5 million (2003: £33.0 million, 2002: £32.0 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. 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.
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.
Advertising and media investment management arrangements may include incentive-based revenue. 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.
In applying the proportional performance method of revenue recognition for both market research and other long-term contracts, management is required to make significant judgments, estimates and assumptions. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. Costs incurred as proportion of expected total costs is used as an initial proportional performance measure. The indicative proportional performance measure is always subsequently validated against other more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measure take precedence since these are output measures.
Since project costs can vary from initial estimates, the reliance on total project cost estimate represents an uncertainty inherent in the revenue recognition process. Individual project budgets are reviewed regularly with project leaders to ensure that cost estimates are based upon up to date and as accurate information as possible, and take into account any relevant historic performance experience. Also, the majority of contracted services subject to proportional performance method revenue recognition are in relation to short term projects, averaging approximately 3 months. Due to this close and frequent monitoring of budgeted costs and the preponderance of short term projects, the impact of variances between actual and budgeted project costs has historically been minimal. The Companys combined bad debt and work in process write-offs in the business segments where the proportional performance method of revenue recognition is applied was less than 1% of revenues in each of the three years ended December 31, 2004. The Company does not believe that the effect of these uncertainties, taken as a whole, will significantly impact their results of operations in the future.
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 2004.
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.
The Groups pension deficit was £202.3 million as at 31 December 2004, compared to £198.9 million as at 31 December 2003. The pension deficit on plans in the UK increased as result of the introduction of new mortality tables used in the assumptions underlying the present value of scheme liabilities. Also in the UK, the discount rate decreased from 5.5% to 5.3% due to changes in economic conditions and specifically the lower yields available on high-quality UK corporate debt. In North America, the pension deficit reduction reflects increased pension contributions, partially offset by a decrease in the discount rate from 6.3% to 5.7% reflecting the lower yields available on high-quality US corporate debt.
Most of the Groups pension scheme assets are held by its schemes in the United Kingdom and North America. In the United Kingdom, the forecasted weighted average return on assets decreased from 5.8% as at 31 December 2003 to 5.7% as at 31 December 2004, due to decreases in expected rates of return on corporate bonds. In North America, the Company reduced its expected rate of return on North American equities in light of the lower expected yields available in the market from 8.2% as at 31 December 2003, to 7.9% as at 31 December 2004. As a result, the forecasted weighted average return in North America decreased from 7.0% to 6.9%. Actual asset performance may differ from these assumptions and could have a material impact on the Companys 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 expected funding period.
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:
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 £311.2 million in 2004. Under US GAAP there was an additional £42.5 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:
(i) Adopted in the current year:
In December 2003, the FASB issued a revision to FASB Interpretation 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51 (FIN 46R) which requires a variable interest entity (VIE) to be consolidated by a company that will absorb a majority of the VIEs expected losses, receive a majority of the entitys expected individual returns, or both, as a result of ownership, contractual or other financial interest in the VIE.
Prior to the adoption of FIN 46R, VIEs were generally consolidated by companies owning a majority voting interest in the VIE. The consolidation requirements of FIN 46R applied immediately to VIEs created after 31 January 2003, however, the FASB deferred the effective date for VIEs created before 1 February 2003 to the first reporting period ended after 15 March 2004. Adoption of the provisions of FIN 46R prior to the deferred effective date was permitted. The adoption of FIN 46R did not have a material impact on the Group.
(ii) To be adopted in future periods:
In March 2004, the Emerging Issues Task Force 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 is applicable to (a) debt and equity securities within the scope of SFAS 115 (b) debt and equity securities within the scope of SFAS 124 and that are held by an investor that reports a performance indicator, and (c) equity securities not within the scope of SFAS 115 and not accounted for under APB 18s equity method (e.g. investments in private companies). EITF 03-01 provides a step model to determine whether an investment 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 aggregated with other types of investments. The effective date for the prospective application of the EITF 03-01 impairment model to all current and future investments has been delayed by FASB Staff Position EITF 03-01-1. The required disclosures have been included in our financial statements.
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognised in the financial statements at fair value and that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS 123R is effective for the group from 1 January 2006. SFAS 123R requires public
companies to account for shared-based payments using the modified-prospective method and permits public companies to also account for shared-based payments using the modified-retrospective method. Under the modified-prospective method, from the effective date, compensation cost is recognised based on the requirements of SFAS 123R for all new share-based awards and based on the requirements of SFAS 123 for all awards granted prior to the effective date of SFAS 123R that remain unvested on the effective date. The modified-retrospective method permits companies to restate, based on the amounts previously recognised under SFAS 123 for pro forma disclosure purposes, either all prior periods presented or prior interim periods in the year of adoption. The SFAS 123 pro forma disclosures given above show the impact of the Group adopting SFAS 123R in prior periods. The group has yet to determine whether it will adopt the modified-retrospective method.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets. SFAS 153 amends APB Opinion 29 for nonmonetary exchanges of similar productive assets with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for the first reporting period beginning after 15 June 2005. We do not believe that the adoption of SFAS 153 will have a material impact on the Groups consolidated results of operations or financial position.
New UK GAAP Accounting Pronouncements
Accounting for ESOP Trusts (UITF 38) requires the classification of the cost of shares held by the Groups ESOP trusts as a deduction from share owners funds; previously these were shown within fixed asset investments. Additionally, UITF 38 has changed the method of calculating the charge to the profit and loss account arising from certain of the Groups incentive plans, satisfied by the award of shares in the Group from one of the ESOPs. Previously, this charge was based on the cash cost to the Group of acquiring these shares in the open market, to be subsequently delivered to individuals on satisfactory completion of the performance criteria relating to the award. Under UITF 38, this charge should be based upon the intrinsic value (market value) of the shares at grant date.
Following the implementation of UITF 38, the Group has restated its consolidated profit and loss account for the year ended 31 December 2002 (to increase operating costs by £12.4 million), and its consolidated balance sheet for the years ended 31 December 2003 (to reduce net assets by £251.8 million) and 31 December 2002 (to reduce net assets by £280.7 million). There was no material impact on the profit and loss account for the year ended 31 December 2003. The consolidated cash flow statement for the years ended 31 December 2003 and 31 December 2002 has also been restated to show the purchase of own shares by the ESOP Trusts within financing activities. Previously these purchases were shown within capital expenditure and financial investment.
Adoption of IFRS
From 1 January 2005, the Group is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) including International Accounting Standards (IAS). The Groups first IFRS results will be its interim results for the six months ended 30 June 2005 and the Groups first Annual Report under IFRS will be for the year ending 31 December 2005.
The impact that the adoption of IFRS would have had on the Groups 2004 results, balance sheet and cash flows was published in the Companys trading statement on 22 April 2005 and is reproduced on pages F-50 to F-56. This unaudited information was prepared substantially on the basis of all IAS, IFRS and related interpretations, published by the International Accounting Standards Board (IASB) and in issue at that date.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The directors and executive officers of the Company as of 10 May 2005 are as follows:
Philip Lader, age 59: Non-executive chairman. Philip Lader was appointed chairman in 2001. The US Ambassador to the Court of St Jamess from 1997 to 2001, he previously served in several senior executive roles in the US Government, including as a Member of the Presidents 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 Goldsmiths 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 Lloyds (Insurance Market), a trustee of the British Museum and a member of the Council on Foreign Relations.
Sir Martin Sorrell, age 60: Chief executive. Sir Martin Sorrell joined WPP in 1986 as a director, becoming Group chief executive in the same year.
Paul Richardson, age 47: 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 Groups worldwide functions in finance, information technology, 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.
Howard Paster, age 60: 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 WPPs portfolio of public relations and public affairs businesses. He is also the director responsible for the Companys 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.
Mark Read, age 38: Strategy director. Mark Read was appointed a director in March 2005. He has been WPPs Director of Strategy since 2002. He worked at WPP between 1989 and 1995 in both parent company and operating company roles. Prior to rejoining WPP in 2002, he was a principal at the consultancy firm of Booz-Allen & Hamilton and founded and developed the company WebRewards in the UK.
Esther Dyson, age 53: Non-executive director. Esther Dyson was appointed a director in 1999. She recently sold her business, EDventure Holdings, to CNET Networks, the US-based interactive media company. She remains editor of her newsletter, Release 1.0, and continues to host the annual PC Forum conference under CNETs ownership. She is an acknowledged luminary in the information technology industry, highly influential for the past 20 years on the basis of her state-of-the-art knowledge of the online/information technology industry worldwide, as well as the emerging information technology markets of Central and Eastern Europe. An angel investor as well as an analyst/observer, she recently participated in the sale of Flickr to Yahoo!. She sits on the boards of other IT start-ups including EVDB, Meetup.com, NewspaperDirect (Canada), CV-Online (Hungary) and Yandex (Russia). She sat on the consumer advisory board of Orbitz until its recent sale to Cendant.
Orit Gadiesh, age 54: 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 a board member of the HBS Visiting Committee (Harvard Business School) and Deans Advisory Board (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.
David H Komansky, age 66: 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 50: 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, Russias leading investment bank and non-bank financial services group. He is also a board member of ALJ, Saudi Arabias largest non-government industrial group. Previously he was president and CEO of Trizec Properties and a company officer of GE, heading GE Capitals international business development.
Stanley (Bud) Morten, age 61: 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.
Koichiro Naganuma, age 60: Non-executive director. Koichiro Naganuma was appointed a director in February 2004. He is president and group chief operating officer of Asatsu-DK, also known as ADK. Joining the agency in 1981, he began his career with the international arm of the agency. His mandate thereafter expanded to the total operation of the group. He replaced ADK Chairman Masao Inagaki on the Board who retired upon the appointment of Mr. Naganuma. ADK is Japans third largest advertising and communications company, and ninth largest in the world. WPP took a 20% interest in ADK in 1998.
Lubna Olayan, age 49: Non-executive director. As CEO of Olayan Financing Company, Lubna Olayan is responsible for the Olayan Groups business and investments in Saudi Arabia and the Middle East. In December 2004, she was elected to the Board of Saudi Hollandi Bank, the first woman to be elected to the board of a Saudi listed company. From 1996 through 2004, she served on the board of Chelsfield, the UK property developer. She is a member of INSEADs International Council and a trustee of the Arab Thought foundation. She is also a member on the Arab Business Council and the Womens Leadership Initiative of the World Economic Forum.
John Quelch, age 53: 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 Quelchs writings focus 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 Pepsi Bottling Group Inc. He served previously on the boards of Blue Circle Industries plc, easyJet plc, Pentland Group plc and Reebok International Limited.
Jeffrey A. Rosen, age 57: Non-executive director. Jeffrey Rosen was appointed a director in December 2004. He is a deputy chairman and managing director of Lazard LLC. Previously, he was a managing director of Wasserstein Perella & Co., Inc. since its inception in 1988, and chairman of Wasserstein Perella International. He has over 30 years experience in international investment banking, and corporate finance. He is a member of the Council on Foreign Relations. In July 2005, he will become president of the Board of Trustees of the International Center of Photography in New York.
Paul Spencer, age 55: 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 PLC. 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. He is also chairman of the Association of Corporate Treasurers Advisory Board and of NS&I (National Savings), a UK government-owned retail savings institution. He is also on the boards of Nipponkoa Insurance Europe Ltd, Sovereign Reversions Group plc and Britannic Group plc. Paul is a governor of Motability, a UK charity for the disabled.
The following also served as directors during the year:
Beth Axelrodresigned 24 March 2005.
Jeremy Bullmoreretired 30 September 2004.
John Jacksonretired 30 September 2004.
Michael Jordanretired 28 June 2004.
Terms of Directors and Executive Officers
The Companys Articles of Association provide that directors appointed since the last Annual General Meeting must submit themselves for election by share owners. In addition, all directors are required to submit themselves for re-election by share owners at least every three years. In line with best practice under the Combined Code, directors who have held office for more than nine years now submit themselves for re-election by share owners every year. The following directors offer themselves for election and re-election at the forthcoming Annual General Meeting:
The key elements of short- and long-term remuneration are summarised in the following table:
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 TSR relative to a group of key comparators is the most appropriate measure for determining performance-based rewards for Group executive directors, as it most closely aligns rewards 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. This works to improve the operation of a rank-based TSR vesting schedule by recognising and rewarding the outperformance of close comparators. 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 currently comprise the following:
Pension, life assurance, health and disability and other benefits are also provided.
In light of changing market practice and tax and accounting environments, a full review of the current remuneration structures is currently being carried out.
The base salary is determined 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 JWT, 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 chief talent officer and the chief executive officer of the appropriate operating company.
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 participants 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 Companys Deferred Bonus Plan. The value of this share award at grant is equal to 125% of the bonus that would otherwise have been received earlier had it been taken in cash.
Each executives 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 currently no more than 50% of base salary and the maximum is currently 75%. Executive directors bonuses are determined principally by the achievement of financial performance goals by the Company and agreed strategic objectives. A process comparable to that described below for the Group chief executive is now in place for the remaining executive directors.
The target level for the Group chief executive is 100% of base fee/salary and the maximum is 200%. For 2004 Sir Martins bonus was determined by reference to three separate equal components. First, financial performance of the Company measured against budgeted operating profit before interest and taxes and budgeted cash flow. Secondly, the Companys performance relative to a peer group of major public advertising companies taking into account total shareholder return, increase in operating profit, increase in earnings per share and increase in operating margins. Thirdly, the achievement of key strategic objectives, which for 2004 included amongst others, strengthening the geographic positioning of Group companies in both developed and fast-growing markets, ensuring orderly and effective succession 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.
Executive Stock Option Plan and Worldwide Ownership Plan (WWOP). The Executive Stock Option Plan has been used annually since its adoption in 1996 to grant options to members of the WPP Group Leaders, Partners and the High Potential Group as well as key employees of the parent company, but currently excluding parent company executive directors and the Group chief executive. Howard Paster and Mark Read currently hold share options, but none of these were granted in respect of their services as executive directors of the Company.
The Compensation committee is currently considering alternatives (e.g. awards of restricted stock) to grants under the Executive Stock Option Plan, which will be more in line with current global practice and is also reviewing the level of grants to seek comparability with principal competitors such as Omnicom. It is anticipated that restricted stock awards using purchased shares in one of the Companys ESOPs rather than option grants will be made in respect of 2005.
In 1997 the Company broadened stock option participation by introducing the Worldwide Ownership Plan for 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 culture. Since its adoption, grants have been made annually under this plan and as at 10 May 2005 options under this plan had been granted to over 49,000 employees for approximately 23.6 million ordinary shares of the Company.
Operating companies: Long-term incentive plans. Currently senior executives of most Group operating companies participate in their respective companys 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 for 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.
The future composition of these plans forms part of the review referred to above.
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 to senior executives of 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 will be no more than 100% of base salary. The current peer companies comprise Digitas, Havas, IPG, Ipsos, Omnicom and Publicis.
Over the 2002-2004 performance period, WPP was below the median of the peer group companies, and consequently this award lapsed in full.
Awards were made in April 2004 in respect of the performance periods 2003-2005 and 2004-2006. The criteria for future awards, including the award in respect of the performance period 2005-2007, is currently under review.
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 (as defined below), an innovative long-term incentive plan introduced in 1999. As with Original LEAP the purpose of Renewed LEAP is to:
Awards are made on an annual basis, taking into account prevailing market and competitive conditions. Awards can be made in a variety of forms with the same economic effect, but allowing the Company flexibility to adapt to changing economic, financial, accounting and taxation environments.
Under Renewed LEAP, participants have to commit WPP shares (investment shares) in order to have the opportunity to earn additional WPP shares (matching shares). For each participants first LEAP award, at least one-third of these investment shares must be purchased in the market. The investment shares have to be committed for a fixed period (investment and performance period). The number of matching shares which a participant can receive at the end of the investment and performance period depends on the performance (based on the TSR) of the Company measured over five financial years (four years in the case of the awards made in 2004). It is expected that all matching shares to which participants become entitled will be provided from one of the Companys ESOPs.
The Compensation committee acknowledges that TSR may not always reflect the true performance of the Company and therefore may perform a fairness review (the fairness review) to vary the number of matching shares that will vest if, during an investment and performance period, it determines that there have been exceptional circumstances; factors that the Committee will consider in its fairness review of any awards will include, but are not limited to, various measures of the Groups financial performance, such as growth in revenues and in earnings per share.
The maximum possible number of matching shares is five (four in the case of awards made in 2004) for every investment share for which the Company would need to rank first or second within a group of comparator companies over the investment and performance period. The comparator companies for the award to be made in 2005 are currently being reviewed.
Under Renewed LEAP, in order to equalise the economic effect that different forms of award may take, participants (other than those who have not received a previous award under LEAP) may be entitled to receive a dividend fund equal to the value of the dividend on the shares that eventually vest. This is used to calculate a number of additional shares receivable at the end of the investment and performance period.
If the Companys performance is below the median of the comparator group then, for participants who have not received a previous award under LEAP, half a matching share will vest for every investment share held through the investment and performance period, in recognition of a participants maintenance of their personal investment throughout the period.
On a change of control, matching shares can be received based on the Companys performance to that date. Under the fairness review, the Compensation committee can also consider, in the light of exceptional financial circumstances during the performance period, whether the recorded TSR is consistent with the achievement of commensurate underlying performance.
Renewed LEAP adopted many of the principles of Original LEAP (e.g. co-investment) but a number of changes in design were made to improve the effectiveness as a remuneration tool, to conform with current best practice, and to increase alignment with share owners interests.
These changes include:
Under Renewed LEAP, Sir Martin Sorrell committed investment shares having a value of $10 million, namely 1,032,416 shares, for the award made for 2004. For future years and at the discretion of the Compensation committee he may be invited to commit up to a maximum amount of $2 million in respect of each of the annual awards that may be made in 2005 or thereafter.
Original Leadership Equity Acquisition Plan (Original LEAP). As noted above, Original LEAP was an incentive plan introduced in 1999. 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. This resulted 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.
The matching shares to which participants in Original LEAP (other than JMS) became entitled for the awards made by reference to 1999 were provided from one of the Companys employee share ownership plans (ESOPs) as will those for the remaining awards in Original LEAP. 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 was 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.
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 defined benefit plans, are closed to new entrants. All pension coverage for the Companys executive directors is currently 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 Directors remuneration section elsewhere in Item 6. During 2005, the committee will be reviewing the Groups policy on retirement benefits, in light of legislative changes in the US and UK.
Directors remuneration and interests
The following information on directors remuneration and interests is presented in accordance with UK reporting requirements.
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 Companys 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.
For the fiscal year ended 31 December 2004 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 £5,908,812. 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 £480,709 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 is advised by independent remuneration consultants as well as by Group
executives, particularly the Group chief executive, the chief talent officer, the Director of compensation and benefits and the Group General Counsel. During the year, the committee appointed Towers Perrin as joint external advisors with Deloitte & Touche LLP and received material assistance from these firms. Deloitte are also engaged as the external auditors to the Company. As such, the appointment as joint remuneration advisors is also subject to, and has received, pre-approval by the Audit committee. Information on other services provided by Deloitte is given in Item 16C of this report. All services performed by Deloitte are carried out in accordance with the requirements of the UK Auditing Practices Boards Ethical Standard 5, relating to non-audit services performed by a companys auditors, the US PCAOBs and the SECs requirements. Significant advice was also received from Hammonds solicitors on a number of legal and governance 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:
Other long-term incentive plan awards
Long-term incentive plan awards granted to directors comprise the Performance Share Plan (PSP), the WPP Leadership Equity Acquisition Plan (Original LEAP) and Renewed LEAP. The operation of the PSP, Original LEAP and Renewed LEAP are described elsewhere in Item 6.
Performance Share Plan awards to directors1,4
(i) For 2003 and 2004 awards: Aegis Communication Group, Arbitron, Dentsu, Digitas, Grey Global Group (delisted March 2005), GfK, Havas Advertising, Ipsos, Omnicom, Publicis, Taylor Nelson Sofres, The Interpublic Group of Companies, and VNU.
(ii) For 2002 awards: Aegis Communications Group, Cordiant Communications (delisted July 2003), Grey Global Group (delisted March 2005), Havas Advertising, Omnicom, Publicis, Taylor Nelson Sofres and The Interpublic Group of Companies.
(iii) For 2001 awards, in addition to those listed at (ii): True North Communications (delisted June 2002).
(iv) For 2000 awards, in addition to those listed at (ii) and (iii): AC Nielsen (delisted February 2001), Saatchi & Saatchi (delisted September 2000) and Young & Rubicam (delisted October 2000).
(v) For 1999 awards, in addition to those listed at (ii) to (iv) above: Nielsen Media Research (delisted October 1999) and Snyder Communications (delisted September 2000).
Renewed Leadership Equity Acquisition Plan1
Original Leadership Equity Acquisition Plan1,2
Awards satisfied and deferred by Sir Martin Sorrell
Notional Share Award Plan (NSAP) and Capital Investment Plan (CIP): Awards to JMS and Sir Martin Sorrell
Group chief executiveSir Martin Sorrell
Sir Martin Sorrells services to the Group outside the US have previously been provided under an agreement with JMS, although with effect from 1 April 2005 this was replaced by an executive service contract entered into directly between Sir Martin and the Company. He is also directly employed by WPP Group USA, Inc. for his activities in the US. Taken together, the current agreement in relation to his services to the Group outside the US (the UK Agreement) and to his services to the Group in the US (the US Agreement) provide for the following remuneration, including incentive awards, all of which is disclosed elsewhere in Item 6:
Contract provisions relating to Sir Martin Sorrell
The notice provisions in Sir Martin Sorrells contracts currently provide for a fixed term which is due to expire on 31 August 2005. Thereafter the contracts will continue on an at will basis.
Damages for loss of office and change of control
Sir Martin Sorrells current contracts (which expire on 31 August 2005) may be terminated by Sir Martin upon a change of control. With effect from 1 September 2005, Sir Martins contracts will not contain a change of control provision.
Earned Awards exercised by Sir Martin Sorrell since 1 January 2004
Since the publication of the accounts for 2003 a number of incentive plans in which Sir Martin Sorrell and/or JMS participated have vested or have been exercised following deferral over a number of years. Details of these are as follows:
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 four most highly compensated executive officers in the Group as at 31 December 2004 (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, or an executive who served as the chief executive officers of one of the Groups major operating companies.
This information covers compensation for services rendered in all capacities and paid in the financial year ended 31 December 2004 and in the previous two financial years. Incentive compensation paid in 2005 for performance in 2004 and previous years is not included in these tables. The bonus payments referred to below are payments made in 2004, 2003 and 2002 under the short-term incentive awards for performance in 2003, 2002 and 2001 respectively.
Summary Compensation Table
Options/SAR grants in 20041
Stock option, SAR and phantom stock exercises in last financial year and final year-end share option, SAR and phantom stock values