As filed with the Securities and Exchange Commission on July 15, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-13119
CORDIANT COMMUNICATIONS GROUP PLC
(Exact name of registrant as specified in its charter)
ENGLAND
(Jurisdiction of incorporation or organization)
1 - 5 MIDFORD PLACE
LONDON WIT 5BH, ENGLAND
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered:
------------------- ------------------------------------------
American Depositary Shares, each representing five New York Stock Exchange*
Ordinary Shares of 50p each
Ordinary Shares of 50p each** New York Stock Exchange*
---------------------------
* Trading in the American Depositary Shares and Ordinary Shares on the New
York Stock Exchange ceased at the close of business on June 25, 2003. The
New York Stock Exchange has announced that an application to the Securities
and Exchange Commission to delist the American Depositary Shares and
Ordinary Shares is pending subject to the completion of applicable
procedures.
** Listed, not for trading or quotation purposes, but only in connection with
the registration of American Depositary Shares pursuant to the requirements
of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each
of the issuer's classes of capital or common stock as
of the close of the period covered by the annual
report: 400,880,111 Ordinary shares
-------------
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]
TABLE OF CONTENTS
Page
INTRODUCTION...................................................................2
PART I.........................................................................3
Item 1. Identity of Directors, Senior Management and Advisers.............3
Item 2. Offer Statistics and Expected Timetable...........................3
Item 3. Key Information...................................................3
Item 4. Information on the Company.......................................12
Item 5. Operating and Financial Review and Prospects.....................26
Item 6. Directors, Senior Management and Employees.......................63
Item 7. Major Shareholders and Related Party Transactions................75
Item 8. Financial Information............................................76
Item 9. The Offer and Listing............................................79
Item 10. Additional Information..........................................79
Item 11. Quantitative and Qualitative Disclosures About Market Risk......92
Item 12. Description of Securities Other than Equity Securities..........94
PART II.......................................................................95
Item 13. Defaults, Dividend Arrearages and Delinquencies.................95
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds...............................................95
Item 15. Controls and Procedures.........................................95
Item 16. [Reserved]......................................................95
PART III......................................................................96
Item 17. Financial Statements............................................96
Item 18. Financial Statements............................................96
Item 19. Exhibits........................................................96
(i)
INTRODUCTION
References
In this Annual Report, "Cordiant" and "Group" refer to Cordiant
Communications Group plc and, unless the context otherwise requires, its
consolidated subsidiaries. References to "Saatchi & Saatchi" or "Saatchi &
Saatchi Group" are to Saatchi & Saatchi Limited (formerly Saatchi & Saatchi plc)
and, unless the context otherwise requires, its subsidiaries.
References in this document to the "Companies Act" are to the Companies Act
1985, as amended, of Great Britain and references to the "Articles" are to
Cordiant Communications Group plc's Memorandum and Articles of Association.
Currency Translation
Cordiant publishes its consolidated financial statements in pounds sterling
("(pound)"). References to "US dollars" or "$" are to United States dollars and
references to "pounds sterling," "(pound)," "pence" or "p" are to UK currency.
For the reader's convenience, some financial information in this document
has been translated from pounds sterling into US dollars. Unless otherwise
specified, translations into US dollars contained in this report are made at
(pound)1.00 to $1.6095, the noon buying rate in the City of New York for cable
transfers in foreign currencies as certified by the Federal Reserve Bank of New
York for customs purposes on December 31, 2002. The New York noon buying rate on
July 11, 2003 was (pound)1.00 to $1.6323. The convenience translations do not
mean that the UK currency amounts actually represent the corresponding US dollar
amounts stated or could be converted into US dollars at the assumed rate.
Forward-Looking Information
This report contains certain "forward-looking statements" and information
that are based on the current expectations, estimates and projections of
Cordiant's management and information currently available to Cordiant. These
statements reflect the current views of Cordiant with respect to future events,
but are not guarantees of future performance and involve certain risks and
uncertainties that are difficult to predict. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate.
These statements include statements in "Item 5. Operating and Financial
Review and Prospects--Industry Background" relating to trends in the advertising
and marketing services industry, particularly with respect to anticipated
advertising expenditures in the world's advertising markets. Actual advertising
expenditures may differ materially from the estimates contained therein
depending on, among other things, regional, national and international political
and economic conditions, technological changes and the availability of media and
regulatory regimes in the world's advertising markets. Additionally, this report
contains a number of forward-looking statements relating to the Group's
prospects and performance, particularly in "Item 4. Information on the Company -
Organization and Services," "Item 4. Information on the Company - Recent
Developments" and "Item 5. Operating and Financial Review and Prospects." This
report also contains a number of forward-looking statements relating to a
proposed scheme of arrangement under Section 425 of the Companies Act of 1985 of
Great Britain which is subject to a number of conditions which may or may not be
satisfied. The Group's actual results could differ materially from those
anticipated depending on, among other things, gains to or losses from its client
base, the amount of revenue derived from clients, the Group's exposure to
changes in the exchange rates of major currencies against the pound sterling
(because a substantial portion of its revenues are derived and costs incurred
outside of the United Kingdom), the general level of advertising expenditures in
the Group's markets referred to above, the overall level of economic activity in
the Group's major markets as discussed above and other factors discussed in
"Item 3. Key Information-Risk Factors." In addition the implementation of the
scheme of arrangement is subject to a number of factors
-2-
discussed in "Item 3. Key Information-Risk Factors" and "Item 4. Information on
the Company-Recent Developments."
Many of the factors named above are macroeconomic in nature or are
otherwise dependent on the actions of third parties and are, therefore, beyond
the control of Cordiant's management. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. Cordiant does not
intend, and does not assume any obligation, to update the forward-looking
statements contained in this document.
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
Selected Financial Data
The selected financial data set forth below is derived from the
consolidated financial statements of Cordiant.
The Group's auditors, KPMG Audit plc, audited the Group's consolidated
financial statements and notes thereto for the year ending December 31, 2002
(the "U.K. Financial Statements"). The U.K. Financial Statements were included
in the Group's annual report to shareholders in accordance with Section 235 of
the U.K. Companies Act 1985 which was filed with the Securities and Exchange
Commission on July 15, 2003 under cover of Form 6-K. However, KPMG Audit plc
have not provided an audit report on the financial statements included in this
Annual Report ("U.S. Financial Statements"). At the date that the U.K Financial
Statements were drawn up, Cordiant had not yet brought its consideration of the
strategic options available to the Group to the stage where the implications for
the Group's future funding structure and the extent and nature of any disposal
program to be put in place were sufficiently clear, and as such there remained
considerable uncertainty about the appropriateness of a going concern basis of
preparation. See "Item 4. Information on the Company - Recent Developments." In
their audit opinion on the U.K. Financial Statements, KPMG Audit plc brought
attention to this uncertainty, and because of the significance of the resulting
limitation in evidence available to them they were unable to form an opinion as
to whether the U.K. Financial Statements gave a true and fair view of the state
of affairs the Group as at December 31, 2002 or of the loss of the Group for the
year then ended. KPMG Audit plc stated that in their opinion the U.K. Financial
Statements in all other respects were properly prepared in accordance with the
U.K. Companies Act 1985.
The U.S. Financial Statements included in this Annual Report have been
prepared on a going concern basis. The U.S. Financial Statements do not reflect
any adjustments that would be required if the going concern presentation were
not appropriate. Nevertheless, as of the date of this Annual Report, there
continues to be fundamental uncertainty as to the going concern basis of
presentation primarily because the interim support agreement, pursuant to which
Cordiant's primary lender, WPP, agreed to waive noncompliance with certain debt
covenants, expires on July 15, 2003, at which time the Group will be dependent
on the continued support of WPP. Given the uncertainty surrounding the Group, it
is not currently possible to determine the extent and quantification of such
adjustments, but these might include the reclassification of creditors due in
more than one year to less than one year, the writedown of the carrying value of
goodwill in the balance sheet to the best estimate of its net realizable value
on disposal, the writedown of certain assets carried on a value in use basis to
net realizable value, and the disclosure of the provision for additional
liabilities.
Due to the uncertainty regarding the appropriateness of the going concern
basis of preparation described above, and consequentially, because KPMG has not
provided an audit report on the U.S. Financial Statements for inclusion in this
Annual Report, Cordiant was unable to provide the certifications required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. If possible, Cordiant
currently intends to amend this Annual Report so that it will be accompanied by
an audit opinion from KPMG Audit plc and the certifications required by Sections
302 and 906 of the Sarbanes-Oxley Act of 2002, at such time as there is
sufficient certainty about the Group's future as to enable its auditors to
provide an audit opinion regarding the Group's 2002 financial statements and the
notes thereto. Such financial statements may be subject to the adjustments
described in the previous paragraph.
-3-
Year Ended December 31,
-----------------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$(1) (pound) (pound) (pound) (pound) (pound)
(in millions, except per share data)
CONSOLIDATED INCOME STATEMENT DATA:
Amounts in Accordance with UK GAAP
Revenue
Continuing operations 856.3 532.7 584.6 392.3 326.2 301.8
Acquisitions(2) - - 20.4 120.7 9.6 -
----------------------------------------------------------------------------
Total 856.3 532.7 605.0 513.0 335.8 301.8
----------------------------------------------------------------------------
(Loss)/profit on ordinary activities before tax
historically reported(3) (367.3) (228.2) (270.8) 57.5 32.3 25.9
Adjustment for provisions(4) - - - - - (1.2)
----------------------------------------------------------------------------
(Loss)/profit on ordinary activities before tax -
restated(3) (367.3) (228.2) (270.8) 57.5 32.3 24.7
----------------------------------------------------------------------------
Net (loss)/profit historically reported (376.0) (233.6) (277.6) 33.6 18.6 13.8
Adjustment for deferred tax(5) - - - 2.5 1.6 -
----------------------------------------------------------------------------
Net (loss)/profit - restated (376.0) (233.6) (277.6) 36.1 20.2 13.8
----------------------------------------------------------------------------
Net (loss)/profit per Cordiant Ordinary Share-Basic (92.7)(cent) (57.6)p (71.3)p 12.3p 8.9p 6.2p
Net (loss)/profit per Cordiant Ordinary Share-
Diluted (92.7)(cent) (57.6)p (71.3)p 11.4p 8.4p 6.2p
Amounts in Accordance with US GAAP
(Loss)/profit before change in accounting
principles (397.1) (246.7) (260.0) 4.9 (6.3) 4.6
Cumulative effect of change in accounting
principles(6) - - - - (14.9) -
Net (loss)/profit (397.1) (246.7) (260.0) 4.9 (21.2) 4.6
----------------------------------------------------------------------------
Net (loss)/profit per Cordiant Ordinary Share-Basic (97.9)(cent) (60.8)p (66.8)p 1.7p (9.5)p 2.1p
----------------------------------------------------------------------------
Net (loss)/profit per ADS-Basic (489.5)(cent) (304.0)p (334.0)p 8.5p (47.6)p 10.3p
December 31,
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$(1) (pound) (pound) (pound) (pound) (pound)
(in millions)
CONSOLIDATED BALANCE SHEET DATA:
Amounts in Accordance with UK GAAP
Working capital asset/(deficiency)(7) 8.0 5.0 11.2 (149.1) (4.6) 11.8
Total assets 1334.9 829.4 1,177.9 1,401.3 591.2 386.7
Long term liabilities, including minority interests 491.4 305.3 314.8 192.2 185.0 136.9
Net assets/(liabilities)(8) 130.2 80.9 317.1 476.2 (38.6) (68.9)
Shareholder's funds/(deficiency)-historically 111.9 69.5 306.8 463.3 (45.8) (71.5)
reported
Adjustment for provisions(4) - - - - - 7.6
Adjustment for deferred tax(5) - - - 4.1 1.6 -
----------------------------------------------------------------------------
Shareholder's funds/(deficiency)-restated 111.9 69.5 306.8 467.4 (44.2) (63.9)
----------------------------------------------------------------------------
Total liabilities and shareholders' funds 1334.9 829.4 1,177.9 1,400.7 591.2 386.7
-4-
December 31,
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
$(1) (pound) (pound) (pound) (pound) (pound)
(in millions)
Capital Stock(9) 330.4 205.3 200.4 182.3 114.4 112.7
Number of shares outstanding at year end 410.7 410.7 400.9 364.6 228.8 225.5
Amounts in Accordance with US GAAP ----------------------------------------------------------------------------
Shareholders' funds 66.7 41.5 292.8 500.3 20.6 18.6
----------------------------------------------------------------------------
OTHER DATA:
Weighted Average Number of Shares Outstanding
Basic........................................ 405.5 405.5 389.2 294.0 226.6 222.4
Diluted in Accordance with UK GAAP........... 405.5 405.5 389.2 318.0 226.6 223.3
Diluted in Accordance with US GAAP(10)....... 405.5 405.5 389.2 328.6 239.6 223.3
-----------------
(1) The 2002 figures have been translated into US dollars for the convenience
of the reader at the noon buying rate of (pound)1.00 to $1.6095 in the City
of New York for cable transfers in foreign currencies as certified by the
Federal Reserve Bank of New York for customs purposes on December 31, 2002.
(2) Acquisitions are operations of the reporting entity that have been acquired
and in accordance with UK GAAP are only disclosed as acquisitions in the
year that they are completed.
(3) The profit on ordinary activities before tax reflects: (a) goodwill
amortization of (pound)28.9 million in 2002 and (pound)44.1 million in
2001, exceptional goodwill impairment charges of (pound)171.1 million in
2002 and (pound)224.8 million in 2001 and exceptional operating expenses of
(pound)45.6 million in 2002 and (pound)27.6 million in 2001 (details of
which are set forth in Notes 6 and 14 in the Notes to the Consolidated
Financial Statements). There were no such items in 1998, 1999 or 2000.
(4) Due to a change in UK GAAP, in 1999, the Group discounts its property
provisions for the purposes of UK GAAP, and has restated the results of
prior years as if this accounting had been in effect for those years.
(5) FRS 19 "Deferred Taxation" was adopted during 2001 for UK GAAP, purposes
and consequently deferred tax is recognized in respect of all timing
differences that have originated but not reversed at the balance sheet
date. An adjustment was recorded in 2000 and 1999 to reflect the
recognition of deferred tax assets.
(6) During 1999, the Group reviewed its accounting for property provisions
under US GAAP and determined that it is preferable under US GAAP to record
property provisions on a gross basis rather than on a discounted basis. The
cumulative effect of this change in accounting policy for periods through
December 31, 1998 was a charge to profit under US GAAP of (pound)14.9
million (6.6p per ordinary share).
(7) "Working capital" represents current assets minus debtors due in more than
one year minus current liabilities.
(8) "Net assets" represents total assets minus total liabilities. For UK
reporting and disclosure purposes, total liabilities exclude minority
interests.
(9) "Capital stock" represents authorized, allotted called-up and fully paid
ordinary share capital.
(10) Under US GAAP, the dilutive effect of equity-based contingent earnouts on
acquisitions is restricted to those which have met their performance
criteria at the balance sheet date. Under UK GAAP, the full dilutive effect
is taken. However, in 2002, 2001 and 1999, the impact was anti-dilutive.
Equity based contingent earnouts are based on the contractual terms of the
purchase agreements and are estimated based on forecasts of future results.
-5-
Dividends
Dividends recommended by Cordiant's Board of Directors in respect of a
particular fiscal year are paid in the following fiscal year if approved by
Cordiant's shareholders. Under UK company law, the ability to pay a dividend is
dependent on whether Cordiant has distributable reserves. At December 31, 2002,
Cordiant had no distributable reserves.
Under its agreement with its senior bank lenders, referred to as the
Amended and Restated Loan Agreement, and its agreements with its senior
noteholders, referred to as the Amended and Restated Note Purchase Agreement,
prior to May 15, 2003, the Group was permitted to pay annual (but not interim)
dividends out of its available excess cash flow in respect of any fiscal year
after December 31, 2001, provided that it satisfied certain financial
conditions, particularly with respect to debt ratios, and provided that there
were no events of default under those agreements. In view of the Group's
requirements to preserve cash resources to support its operations and the
restrictions agreed with the Group's senior bank lenders and noteholders, the
Board did not recommend the payment of a dividend in respect of 2001 or 2002. On
May 15, 2003, the Group and certain of its subsidiaries entered into an
agreement, referred to as the Interim Support Agreement, with its senior bank
lenders and senior noteholders, among others. The Interim Support Agreement
amended the provisions of the Amended and Restated Loan Agreement and the
Amended and Restated Note Purchase Agreement prohibiting Cordiant from paying
dividends.
The following table shows the dividend amounts in pounds sterling, together
with US dollar equivalent, for each of the years indicated:
Year Dividend per Ordinary Share
---- ---------------------------
(in pence) (cents)(1)
1998 1.4 2.2
1999 1.8 2.7
2000 2.1 2.9
2001 - -
2002 - -
--------------------
(1) Dividend amounts were translated into dollars at the noon buying rate in
the City of New York for cable transfers in pounds sterling as certified by
the Federal Reserve Bank of New York for customs purposes.
See "Item 10--Material Contracts" for a more detailed discussion of the
Amended and Restated Loan Agreement, a copy of which is filed as Exhibit 4.2 to
this Annual Report, the Amended and Restated Note Purchase Agreement, a copy of
which is filed as Exhibit 4.3 to this Annual Report, and the Interim Support
Agreement, a copy of which is filed as Exhibit 4.7 to this Annual Report. The
table shows the dividend amounts in pounds sterling, together with the US dollar
equivalent, for each of the years indicated.
For a further description of the Group's dividend policy, see "Item 8.
Financial Information--Dividend Policy."
Exchange Rate Information
Fluctuations in the exchange rate between the pound sterling and the US
dollar affect the dollar equivalent of the pound sterling prices of the Cordiant
ordinary shares on the London Stock Exchange and as a result, are likely to
affect the market price of the American Depositary Shares, or ADSs, in the
United States, to the extent that any trading market the Cordiant ordinary
shares and American Depository Shares exists in the future. See "Item 4.
Information on the Company--Recent Developments--Delisting of Ordinary Shares
and ADSs." Such fluctuations will also affect the dollar amounts received by
holders of ADSs on conversion by the depositary of cash dividends paid in pounds
sterling on the Cordiant ordinary shares represented by the ADSs.
-6-
The following table sets forth, for the periods indicated, the average,
high, low and period-end noon buying rate in the City of New York for cable
transfers in pounds sterling as certified by the Federal Reserve Bank of New
York for customs purposes expressed in US dollars per (pound)1.00.
Average* High Low Period End
------- ---- --- ----------
1998....................................... 1.66 1.72 1.61 1.66
1999....................................... 1.62 1.68 1.55 1.61
2000....................................... 1.51 1.65 1.40 1.50
2001....................................... 1.44 1.50 1.39 1.45
2002 1.51 1.61 1.41 1.61
December................................ 1.51 1.56 1.61
2003
January................................. 1.65 1.60 1.64
February................................ 1.65 1.57 1.61
March................................... 1.61 1.56 1.58
April................................... 1.60 1.55 1.60
May..................................... 1.65 1.59 1.64
June.................................... 1.68 1.63 1.65
July (through July 11, 2003)............ 1.67 1.63 1.63
--------------------
* The average exchange rate is based on the average of the exchange rates
on the last business day of each month during the relevant period.
The noon buying rate in the City of New York for cable transfers in pounds
sterling as certified by the Federal Reserve Bank of New York for customs
purposes on July 11, 2003 was (pound)1.00 =$1.6323.
Risk Factors
You should carefully consider all of the information set forth in this
Annual Report and the following description of risks and uncertainties that the
Group currently believes may exist. The Group's business, financial condition,
results of operations or prospects could be adversely affected by any of these
risks. Additional risks of which the Group is unaware or that it currently deems
immaterial may also impair its business operations. This Annual Report also
contains forward-looking statements that involve risks and uncertainties. The
Group's results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those
described below and elsewhere in this Annual Report. See
"Introduction--Forward-Looking Information."
Risks Related to Recent Developments
The Group faces fundamental uncertainty regarding its future and prospects.
The Group has experienced a significant decline in revenues during the last
two years. During the course of 2002, in addition to the negative impact on
revenues from the reduction in global advertising spending, the Group lost two
of its largest U.S. clients, Hyundai and Wendy's. In response to these
conditions, significant management action was taken to restructure the Group,
and to reduce costs substantially to create a structure better suited to the
difficult market conditions. Nevertheless, the Group has suffered further loss
of clients in 2003.
In February 2003, Cordiant entered into negotiations with its senior bank
lenders and noteholders to revise the financial covenants in those borrowing
arrangements. At that time, Cordiant also announced a program of non-core
disposals to reduce debt. Before these negotiations had been concluded, in April
2003, Cordiant was notified that Allied Domecq, the second largest of its global
clients, was terminating its contract with Cordiant with effect from October
2003. Allied Domecq was responsible for $7.8 million and $28.0 million of
revenues in 2001 and 2002, respectively. This client loss, therefore, will have
a substantial impact
-7-
on operating profit from 2004 onwards. Cordiant thereafter reached an agreement,
referred to as the Interim Support Agreement, with its senior bank lenders and
noteholders for the continuation of its existing bank and note financing
arrangements through July 15, 2003, notwithstanding the breach of certain
covenants.
On June 19, 2003, WPP Group plc ("WPP") and Cordiant announced the terms of
a recommended proposed acquisition of Cordiant by means of a scheme of
arrangement under Section 425 of the U.K. Companies Act of 1985. The proposed
acquisition of Cordiant is subject to a number of conditions, including the
approval of the scheme at a meeting of Cordiant shareholders by a majority in
number of shareholders voting, representing at least 75% of the shares voted.
Many of the conditions to which the transaction is subject are beyond the
control of Cordiant. There can be no assurance that the scheme of arrangement
will be approved by the required shareholders' vote or, if approved, will be
completed. Investment funds advised by Active Value Advisors Limited have
informed Cordiant that as of July 11, 2003, they hold 28.74% of Cordiant's
issued share capital. Although Cordiant cannot speculate about whether or not
Active Value will vote for or against the scheme of arrangement, shareholders
should be aware that a notice was served on Cordiant on behalf of funds advised
by Active Value Advisors, requesting an extraordinary general meeting of
Cordiant for the purpose of voting on a number of resolutions, including the
replacement of Cordiant's existing senior management team with a new management
team supported by Active Value. If Active Value continues to hold its Cordiant
shares at the same level and votes against the scheme of arrangement, the scheme
of arrangement will not be approved by the requisite shareholder vote.
As a result of these developments, the Group faces fundamental uncertainty
regarding its future and prospects. In light of the foregoing, Cordiant
considers the value of its ordinary shares and American Depositary Shares to be
highly speculative and cautions shareholders that the ordinary shares and
American Depositary Shares may ultimately be determined to have no value.
Accordingly, the Group urges that appropriate caution be exercised with respect
to existing and future investments in its ordinary shares and American
Depositary Shares.
The report of the Group's auditors on the statutory consolidated financial
statements included in the 2002 United Kingdom Annual Report and Accounts
includes a disclaimer on the view given by those financial statements
In their report included in the Group's 2002 United Kingdom Annual Report
and Accounts, filed with the United Kingdom Registrar of Companies, the Group's
auditors, KPMG Audit plc, have stated that, because at the date of that audit
report, April 30, 2003, the Board of Directors had not yet brought their
consideration of the strategic options available to the Group to the stage where
the implications for the Group's future funding structure and the extent and
nature of any disposal program to be put in place were sufficiently clear, the
evidence available to the auditors was limited and in consequence they were
unable to carry out auditing procedures necessary to obtain adequate assurance
regarding the Directors' assessment of the appropriateness of preparing the
financial statements on a going concern basis. As a result, the auditors have
stated that they are unable to form an opinion as to whether the Group's 2002
statutory financial statements included in the 2002 United Kingdom Annual Report
and Accounts give a true and fair view of the state of affairs of the Group as
at December 31, 2002 or of the loss of the Group for the year then ended.
The financial statements do not reflect any adjustments which would be
required if the going concern assumption was not appropriate. Given the
uncertainty regarding the appropriateness of preparing the financial statements
on a going concern basis it is not possible to determine the extent and
quantification of such adjustments but these might include the reclassification
of creditors due in more than one year to less than one year, the write down of
the carrying value of goodwill in the balance sheet to the best estimate of its
net realizable value on disposal, the write down of certain assets carried on a
value in use basis to net realizable value, and the disclosure of or provision
for additional liabilities.
The Group is reliant on the continued support of WPP, its lender.
On May 15, 2003, due to an inability to comply with the covenants contained
in the Amended and Restated Loan Agreement and the Amended and Restated Note
Purchase Agreement, Cordiant and its senior bank lenders and noteholders entered
into the Interim Support Agreement pursuant to which the lenders agreed to waive
compliance with certain covenants through July 15, 2003. On June 19 and July 1,
2003, a subsidiary of WPP acquired the Group's indebtedness under its bank
facility and senior notes so that WPP now holds all of the debt. As of July 11,
2003, the total
-8-
indebtedness acquired by WPP was (pound)224.3 (translated at the New York noon
buying rate on July 11, 2003 of $1.6323). The WPP Group has agreed to continue
to allow Cordiant access to its committed overdraft facilities of up to
(pound)6.0 million following July 15, 2003, although such access would terminate
in the event that WPP exercises its right to give an acceleration notice calling
for repayment of the debt. As a result, following July 15, 2003 when the Interim
Support Agreement expires, the Group will remain dependent on the continued
support of WPP, its primary lender. If such support were to be withdrawn, and if
additional sources of financing were not made available to the Group, it is
likely that an administrator or administrative receiver would be appointed in
respect of the Group. Cordiant expects that the administrator or administrative
receiver would seek to liquidate or sell the Group, with the proceeds of the
sale to be used to satisfy the Group's obligations and the remainder, if any,
distributed to shareholders. In these circumstances, WPP, as the Group's primary
lender and a secured creditor, would be entitled to receive the principal of its
outstanding loans of approximately (pound)224.3 million, together with
make-whole and certain other payments of approximately (pound)40 million in the
aggregate, in priority to any distribution to Cordiant shareholders. The Group's
unsecured creditors would also rank ahead of Cordiant shareholders in the
circumstances. Under these circumstances, Cordiant believes that unless the
scheme of arrangement were to be approved and completed, shareholders and
holders of American Depositary Shares would be highly unlikely to receive any
value for their shares or American Depositary Shares.
The implementation of the scheme of arrangement is subject to a number of
conditions and there can be no assurance that these conditions will be satisfied
on or before August 31, 2003.
The proposed acquisition of Cordiant by WPP by means of a scheme of
arrangement is subject is subject to a number of conditions, including, but not
limited to:
o the approval of the scheme at a meeting of Cordiant shareholders by a
majority in number of shareholders voting, representing at least 75%
of the shares voted;
o the approval by shareholders of Cordiant, representing at least 75% of
the shares voted, of a resolution to amend Cordiant's articles of
association in connection with the implementation of the scheme;
o the sanction of the scheme by the English High Court; and
o cancellation of the listing of Cordiant's ordinary shares by the U.K.
Listing Authority and the cancellation of trading in such shares on
the London Stock Exchange before the shareholder meetings referred to
above.
If the scheme of arrangement does not become effective on or before August
31, 2003, or such later date as WPP and Cordiant may agree and the High Court
may permit, it is not capable of becoming effective at a later date. There can
be no assurance that the conditions necessary for the scheme of arrangement to
become effective, including those listed above, will be satisfied on or before
August 31, 2003.
Trading in the Group's American Depositary Receipts on the New York Stock
Exchange has been suspended and is not expected to resume, and delisting of the
Group's ordinary shares from the London Stock Exchange is expected to take
effect on July 16, 2003.
Trading in the Group's American Depositary Receipts on the New York Stock
Exchange was suspended on the close of business on June 25, 2003, and the New
York Stock Exchange has announced that an application to the Securities and
Exchange Commission to delist the American Depositary Shares from the New York
Stock Exchange is pending subject to the completion of application procedures.
Furthermore, it is a condition to the scheme of arrangement that Cordiant's
ordinary shares cease to be listed on the London Stock Exchange and the last day
for dealings in Cordiant's ordinary shares is expected to be July 15, 2003. As a
result holders of the Group's American Depositary Receipts or ordinary shares
may not be able to sell their securities at all or the price may be adversely
impacted due to a lack of liquidity.
-9-
There are put and call options over Cordiant's 25 percent interest in
Zenith Optimedia Group Limited ("Zenith"), the exercise price of which may, in
certain circumstances, be subject to material reduction if exercised while
Cordiant remains subject to the Listing Rules of the U.K. Listing Authority. By
delisting Cordiant's ordinary shares at this stage, Cordiant is seeking to
ensure that the value of its interest in Zenith would not be less than (pound)75
million. A letter was sent to Cordiant shareholders on June 19, 2003 giving
notice of the proposed cancellation of listing. See more detailed discussion
under "Item 4. Information on the Company--Media Services--Zenith Optimedia
Group Limited."
Risks Related to the Group's Operations and Business
The following risk factors will be relevant only if Cordiant is not sold to WPP
pursuant to the scheme of arrangement and is not put into administration or
administrative receivership.
Cordiant's future viability depends on its ability to attract, and retain, large
clients.
Cordiant's five largest clients accounted for 19% of revenues in 2002 and
18% of revenues in 2001. In 2002, two of the Group's largest U.S. clients,
Hyundai and Wendy's, announced that they would be terminating their contracts
with the Group in the United States, effective September and October 2002. In
April 2003, the Group's second largest global client, Allied Domecq announced
that it was terminating its contract with the Group, effective October 2003. In
addition to the projected loss of revenues that these terminations will cause,
the terminations, together with perceptions regarding the Group's future
viability, have significantly impacted the Group's ability to attract alternate
large clients. The Group's future viability depends on its ability to attract
and retain other large clients. There is material uncertainty as to the Group's
ability to do so under these circumstances.
Cordiant's ability to reduce costs quickly in response to revenue decreases may
be limited.
If advertising expenditures by Cordiant's clients decrease, Cordiant's
revenues will be adversely affected. Cordiant has a limited ability to reduce
its fixed cost base in the short term in response to such decreases. The most
significant component of Cordiant's operating expenses is staff costs (64.4
percent of revenue in 2002). The Group's ability to reduce in the short term its
operating expenses in response to decreased advertising expenditures by clients
is limited because: severance and other costs reduce the impact of such actions;
there is usually a delay between the decreases in expenditures and cost
reduction actions; such actions may result in excess property that cannot be
used or leased by Cordiant on acceptable terms although Cordiant remains liable
for the lease payments; the Group's overhead and infrastructure costs cannot
easily be reduced despite the decreases in advertising expenditures; business
acquisition agreements entered into by Cordiant may limit its ability to reduce
costs in those businesses in the short term; and there is a need to maintain
sufficient staffing to service ongoing projects as well as to be prepared to
respond to increases in clients' advertising expenditures. If Cordiant's
revenues decrease further and Cordiant is unable to reduce expenses
proportionately, Cordiant's losses will increase.
Exclusivity arrangements with the Group's clients may limit its ability to
provide services to others.
It is customary in the marketing communications services industry to enter
into exclusivity arrangements with clients. The Group has entered into these
arrangements with a number of its clients, restricting its ability to provide
services to their competitors. Cordiant has in the past been, and may in the
future be, unable to take on new clients because such opportunities would
require the Group to provide services to direct competitors of its existing
clients. In addition, the Group risks harming relationships with existing
clients if it agrees to provide services to their direct and indirect
competitors. Prospective clients may also choose not to retain Cordiant for
reasons of actual or perceived conflicts of interest .
Cordiant generally does not have long-term contracts with its clients.
The Group's advertising clients generally appoint the Group on an annual
contractual basis with a 90-day notice period. Other clients generally appoint
the Group on a project by project basis with the right to terminate their
relationships with Cordiant without penalty and with relatively short or no
notice. Once a project is completed, there can be no assurance that a client
will engage Cordiant for further services.
Cordiant's international operations expose it to the risk of fluctuations in
currency exchange rates.
The results of operations and financial position of most of Cordiant's
non-UK subsidiaries are reported in the currencies of countries in which those
subsidiaries are located. That financial information is
-10-
then translated into pounds sterling at the applicable exchange rates for
inclusion in Cordiant's Consolidated Financial Statements. In 2002, 79.3 percent
of Cordiant's consolidated revenues were generated in local currencies and
translated into pounds sterling.
The exchange rate between these local currencies and the pound sterling
fluctuates substantially, which has a significant translation effect on
Cordiant's reported consolidated results of operations and financial position.
Appreciation of the pound sterling against these currencies will result in the
reduction of reported revenues and earnings before interest and taxes when
consolidated and translated into pounds sterling. See "Item 11. Quantitative and
Qualitative Disclosures About Market Risk--Foreign Exchange."
Cordiant may encounter difficulty in managing its business due to the global
nature of its operations.
Cordiant operates in more than 70 countries around the world. As of
December 31, 2002, Cordiant had approximately 19.4 percent of its 8,019
employees located in the United Kingdom, approximately 29.9 percent in
Continental Europe, approximately 14.9 percent in North America and
approximately 35.8 percent in Asia and Latin America. To manage its day-to-day
operations, Cordiant must overcome cultural and language barriers and assimilate
different business practices. In addition, Cordiant is required to create
compensation programs, employment policies and other administrative programs
that comply with the laws of multiple countries. Cordiant also must communicate
and monitor group-wide policies across its global network. Cordiant's failure to
successfully manage its geographically diverse operations could impair its
ability to react quickly to changing business and market conditions.
Cordiant is dependent on key personnel.
Cordiant is dependent on the efforts and abilities of its senior management
and senior creative personnel. The loss of the services of any of these key
employees could have a material adverse effect on the Group. In addition, while
a number of executive officers of the Group have entered into employment
agreements and confidentiality and non-solicitation agreements with Cordiant,
there is no assurance that Cordiant would be able to retain the services of such
individuals or prevent the unauthorized disclosure or use of its knowledge,
practices, procedures or client lists.
Cordiant may be unable to recruit and retain qualified experienced
professionals.
The Group competes with other companies to recruit and hire from a limited
pool of qualified, experienced marketing and communications professionals. Even
if Cordiant continues as a going concern, the considerable uncertainty about its
viability will undoubtedly have a negative impact on the ability to attract and
retain skilled personnel. If Cordiant is unable to hire and retain qualified
personnel, its business results would suffer. In addition, the Group's ability
to generate revenues directly relates to its personnel, both in terms of the
number and expertise of the personnel that Cordiant has to service the clients
and the mix of full-time employees, temporary employees and contract service
providers that it utilizes. As a result, if Cordiant fails to retain existing
employees or hire new employees, it may not be able to complete or retain
existing engagements or bid for new engagements of similar scope or revenues and
its business, financial condition and operating results could be materially and
adversely affected.
Cordiant may face increased competition and increasing industry consolidation.
The marketing and communications industry is highly competitive. Cordiant
competes with other marketing and communications firms, including international
and local full-service and specialized marketing and communications firms and
other contract sales and marketing organizations. A number of the Group's
competitors have substantially greater financial resources, personnel and
facilities than the Group. In addition, uncertainty regarding the Group's future
prospects and viability due to its financial position have harmed its
competitive position in 2002 and the first half of 2003. The Group expects that,
even if it is able to continue as a going concern, it will face substantial
challenges from competitors who would seek to use the Group's uncertainties as a
means to attract clients away from the Group. If the current trend toward
consolidation of
-11-
communications firms continues, Cordiant may have to compete for clients against
larger firms that enjoy greater economies of scale and that can devote more
resources to bidding for work. There can be no assurance that Cordiant will be
able to regain and maintain its competitive position in the industry.
Changes in government regulations could adversely affect Cordiant's business.
A number of the services that the Group provides are subject to extensive
government regulation, both domestic and foreign, with respect to the truth in
and fairness of advertising and other marketing-related regulations. In
addition, certain industries in which some of the Group's clients operate are
subject to regulations in the United States and in other jurisdictions that
restrict the nature and method of advertising for products in those industries.
If the regulation of advertising for products in these industries is made more
stringent in the future, Cordiant's ability to earn revenues from its clients in
these industries could be adversely affected.
Item 4. Information on the Company.
Organization
Cordiant Communications Group plc is a public limited company organized
under the laws of England in 1977. Cordiant comprises the ongoing businesses of
Cordiant plc after the demerger of the Saatchi & Saatchi Group from Cordiant
plc.
Cordiant's principal corporate offices are located at 1 - 5 Midford Place,
London W1T 5BH, England, telephone number 011-44-20-7262-4343. Information about
Cordiant can be found on its website, www.cordiantww.com. Cordiant's agent for
US federal securities law purposes is Michael J. Kopcsak, Esq., Cordiant US
Holdings, Inc., 498 Seventh Avenue, New York, New York 10018.
Cordiant is a global advertising and marketing communications group. At the
start of 2002, the Group comprised:
o Bates Worldwide, an integrated advertising and marketing
communications network, which includes Diamond Ad Ltd., one of the
largest advertising agencies in Korea, of which the Group owns 80
percent, and 141 Worldwide, the marketing services network of Bates
Worldwide;
o Scholz & Friends A.G., a leading German-based multinational
communications network, with operations throughout Europe, of which
the Group owned 77 percent;
o Healthworld, a global provider of strategic marketing and
communications services to healthcare marketers;
o Business Communications International, a leading business
communications consultancy;
o Fitch: Worldwide, a global branding and design network; and
o Zenith Optimedia Group Limited, a global specialist media services and
planning agency, of which the Group owns 25 percent.
In order to enhance the Group's competitive offering by combining
advertising, branding and design and healthcare marketing, Cordiant established
the Bates Group in September 2002 through the integration of Bates Worldwide,
141 Worldwide, Fitch: Worldwide and Healthworld. This integration maintained the
brands of the individual networks so that specialist skills can be accessed by
clients on a stand-alone basis as required. Additionally, as discussed in the
"--Recent Developments," Cordiant has disposed of its principal Australian
business, The Communications Group, but retained a 30% minority interest in the
buyer, and its 77 percent
-12-
interest in Scholz & Friends A.G., and has entered into a conditional agreement
to dispose of the FD International Group of companies, which form the majority
of Business Communications International.
As a result of the formation of the Bates Group and the dispositions
described above, and following the disposal of the FD International Group of
companies, which is expected to be completed by the end of July 2003, the Group
will principally comprise
o The Bates Group business which is a single integrated communications
offering comprising the Bates Worldwide advertising network, marketing
services network 141 Worldwide, branding and design group Fitch:
Worldwide and specialist medical communications network Healthworld;
o a 25 percent interest in the media business, Zenith Optimedia Group
Limited, the remaining 75 percent being owned by Publicis Groupe S.A.;
and
o a 29.999 percent interest in The Communications Group Holdings Pty
Limited, the immediate holding company of TCG.
History
The origins of Bates Worldwide date back to 1940 when Ted Bates & Company
was founded in New York by Theodore Bates and Rosser Reeves. Ted Bates & Company
grew rapidly in the 1960s and 1970s, developing a worldwide network through
acquisitions and organic growth. In 1964, Ted Bates & Company acquired the
largest advertising agency in Australia, the George Patterson Advertising
Agency. In 1985, the German agency Scholz & Friends was acquired.
In 1986, Ted Bates Worldwide was acquired by Cordiant plc. Earlier that
year, Cordiant plc had acquired a US agency, Backer and Spielvogel and, in 1987,
the two agencies were merged to form Backer Spielvogel Bates Worldwide. The
network was later rebranded Bates Worldwide, although Scholz & Friends was
preserved as a separately branded advertising agency.
In 1988, Cordiant plc formed a single media buying operation in the UK
called Zenith Media Buying Services. The operation was renamed Zenith Media
Worldwide in 1991 and in 1992 extended its services to include media planning.
In December 1997, Saatchi & Saatchi was demerged from Cordiant plc, with the
remaining businesses renamed Cordiant. Following the demerger, Cordiant and
Saatchi & Saatchi each retained a 50 percent shareholding in Zenith, which was
accounted for as a joint venture, until October 2001, when Zenith was
transferred into Zenith Optimedia Group Limited, of which Cordiant owns 25
percent (see below for a more detailed discussion).
In 1993, 141 Worldwide was established as a separately branded network
within Bates Worldwide, specializing in sales promotion, direct marketing,
interactive media and associated activities. Since the demerger, 141 Worldwide
has expanded rapidly and now operates 90 offices in 60 countries.
As a result of the demerger, Cordiant and Saatchi & Saatchi became separate
publicly traded companies operating independently of each other. Neither company
had any interest in the shares of the other. However, certain companies within
the Group entered into certain agreements and arrangements with Saatchi &
Saatchi and Zenith to enable the demerger to be carried out, allocate
responsibility for certain obligations, provide for certain transitional
arrangements and otherwise define their relationship following the demerger. In
2000 Saatchi & Saatchi was acquired by Publicis Groupe SA.
In December 1999, Cordiant acquired 80 percent of Diamond Ad Ltd. Diamond
Ad was previously the in-house agency for Hyundai Group, and Hyundai retained a
20 percent interest in Diamond Ad. The acquisition of Diamond Ad significantly
strengthened the Group's position in South Korea. Diamond Ad now forms part of
the Bates Worldwide advertising network.
-13-
In March 2000, Cordiant completed the acquisition of Healthworld
Corporation, an international healthcare marketing agency. Healthworld provides
multinational pharmaceutical clients with a wide range of communication services
including advertising and promotion, medical education, contract sales, direct
marketing, market research and interactive services.
In September 2000, Cordiant acquired Lighthouse Global Network, Inc. an
international network of specialist communications and marketing businesses. The
transaction led to the creation of two new business networks, Fitch:Worldwide
and Business Communications International (BCI). Fitch:Worldwide works for
clients on a global and local basis across a range of design and branding
services. BCI offers financial and corporate public relations, internal
communications, M&A communications and investor relations.
During December 2000, Cordiant increased its interest in Newcomm Bates
Group, a marketing communications Group in Brazil from 32 percent to 51 percent,
and during 2001, Cordiant acquired MicroArts Corporation, a U.S. brand and
business development agency, Gallagher & Kelly Public Relations Limited, a
business communications consultancy in Ireland, Bulletin International Limited,
an international broadcast public relations consultancy, Corplan, K.K.,
International Business Information, K.K. and IBI, K.K., a Japanese business
communications agency, and Presentation Communications International Limited, a
live communications specialist.
In July 2001, Publicis Groupe S.A. and Cordiant entered into a definitive
agreement to consolidate certain of their media communications operations into a
UK based holding company, Zenith Optimedia Group Limited, of which Publicis
Groupe S.A. owns a 75 percent stake and Cordiant owns a 25 percent stake. The
legal transfer was completed in October 2001 whereby Cordiant transferred shares
of Zenith Media Worldwide, and Publicis Groupe S.A. transferred shares of Zenith
Media Worldwide and Optimedia Networks to Zenith Optimedia Group Limited. See
more detailed discussion under "--Media Services--Zenith Optimedia Group
Limited."
-14-
In October 2001, Cordiant executed a series of transactions, including the
transfer of Scholz & Friends GmbH to Scholz & Friends A.G. and the merger of
Scholz & Friends A.G. with United Visions Entertainment. The merged entity,
Scholz & Friends A.G. was then listed on the Geregelter Markt, the principal
German regulated market of the Frankfurt Stock Exchange. The effect of these
transactions was to dispose of 26 percent of Cordiant's holding in Scholz &
Friends Group GmbH and 11 percent of Cordiant's holding in Scholz & Friends
Berlin GmbH in exchange for 74 percent of the merged entity, Scholz & Friends
A.G.. Subsequent share acquisitions increased Cordiant's holding to 77 percent
of Scholz & Friends A.G.. On July 11, 2003, Cordiant disposed of its interest
in Scholz & Friends A.G.. See "Item 4: Information on the Company" under the
caption "Recent Developments - Disposals."
Recent Developments
Background
Against a rapidly deteriorating industry background, in April 2002,
Cordiant had to renegotiate its financing arrangements with its primary lenders.
During the course of 2002, in addition to the negative impact on revenues from
the reduction in global advertising spending, Cordiant lost two of its largest
U.S. clients, Hyundai and Wendy's. As a result, significant management action
was taken to restructure the Group, and to reduce costs substantially, in order
to create a structure better suited to the difficult market conditions. However,
despite achieving some important new business wins in the final quarter of 2002,
the Group suffered further loss of clients in 2003.
In February 2003, Cordiant reopened discussions with its lenders to
renegotiate its financial covenants. At that point, Cordiant announced a program
of non-core disposals to reduce debt. Cordiant expected to agree to new
financing terms with its primary lenders during the spring and intended
thereafter to raise new equity to establish a firm financial footing for the
business. By the end of April 2003, Cordiant was well advanced in the agreement
of new financing terms with its primary lenders. However, at this time Cordiant
was notified that Allied Domecq, the second largest of its global clients, was
terminating its contract with Cordiant with effect from October 2003. Cordiant
immediately re-entered into discussions with its lenders to secure new short
term financing and to determine a new plan to address its longer term financing
needs. As a result, Cordiant and its senior bank lenders and noteholders entered
into an Interim Support Agreement pursuant to which the lenders agreed to waive
compliance with certain covenants through July 15, 2003.
Since the end of April 2003, the Board of Directors has reviewed a range of
strategic alternatives, including the issue of new equity, a debt for equity
swap, further asset disposals and the sale of the entire business. This review
has concluded that, in the light of the increasing difficulty in winning new
business and retaining revenue from existing clients and of the views of
Cordiant's lenders and leading clients, the best interests of Cordiant are
likely to be served through a combination with a major industry player. In the
absence of such a transaction, the Board of Directors believes that it would
become even more difficult to retain Cordiant's clients and staff, and to
continue the Group's operations. The uncertain revenue outlook, and the
requirement for continued support of its lenders, led the Board of Directors to
the view that there was insufficient certainty of achieving an acceptable return
to shareholders to justify seeking to raise the large amount of new equity
capital that would have been required to rectify Cordiant's financial position.
As a result, discussions took place with all of the major agency groups and
others. It became clear that no prospective purchaser would be willing to assume
the full level of secured debt, including entitlements to make-whole and other
payments, within the Group, leaving the prospect that Cordiant's shareholders
would receive no payment at all. Nevertheless, if the scheme of arrangement
becomes effective Cordiant will have achieved an outcome that provides some
value to shareholders.
Scheme of Arrangement
On June 19, 2003, Cordiant and WPP announced the terms of a proposed
acquisition of Cordiant by WPP by means of scheme of arrangement under Section
425 of the Companies Act of 1985 of Great Britain.
-15-
Under the scheme of arrangement, which is subject to a number of conditions
including approval by Cordiant's shareholders and by the English High Court, WPP
will acquire the entire issued ordinary share capital of Cordiant. Cordiant's
shareholders will, in consideration, receive one ordinary share of WPP for every
205 ordinary shares of Cordiant. Based on the closing mid market price of 513.25
pence per WPP share on July 11, 2003, the scheme of arrangement values the
entire issued ordinary share capital of Cordiant at approximately (pound)10
million and each Cordiant ordinary share at approximately 2.5 pence. Where
fractional entitlements to WPP shares arise from the implementation of the
scheme of arrangement, these will be aggregated and sold and the proceeds paid
to Cordiant shareholders entitled thereto.
In addition, on June 19, 2003, WPP acquired the Group's indebtedness from
its bank lenders, except one lender, under its Amended and Restated Loan
Agreement, and from its senior noteholders, with the same exception, under its
Amended and Restated Note Purchase Agreement, for (pound)177 million
representing an amount equal to the par value of the principal obligations
purchased. The remaining lender holding such debt with a par value of
approximately (pound)79 million, transferred its debt to WPP on July 1, 2003, so
that WPP now holds all of the debt. As a result, following July 15, 2003 when
the Interim Support Agreement expires, the Group will remain dependent on the
continued support of WPP, its primary lender.
Ordinary shares of WPP issued pursuant to the scheme of arrangement will be
issued credited as fully paid and will rank pari passu in all respects with the
existing shares of WPP, including the right to receive and retain in full future
dividends and other distributions (if any) declared, made or paid after June 19,
2003, except for the final dividend in respect of the year ended December 31,
2002 of 3.67p per WPP share payable on July 7, 2003 to WPP shareholders
appearing on the WPP register of members as at June 6, 2003.
Each Cordiant ADS will come to represent the right to receive WPP ADSs and
each holder of Cordiant ADSs will be required to exchange his or her Cordiant
ADSs for WPP ADSs based on the exchange ratio of one new WPP ADS for every 205
Cordiant ADSs. Fractional entitlements to new WPP ADSs will not be issued to any
holder of a Cordiant ADS and all fractions to which holders of Cordiant ADSs
would otherwise have been entitled will be aggregated and sold by Citibank,
N.A., as exchange agent appointed by WPP, on the Nasdaq National Market. Holders
of Cordiant ADSs will receive their pro rata portion, if any, of the net
proceeds from the sale of the fractional entitlements upon surrender of their
Cordiant ADRs in exchange for WPP ADRs.
The implementation of the scheme of arrangement is subject to a number of
conditions, including, but not limited to:
o the approval of the scheme at a meeting of Cordiant shareholders by a
majority in number of shareholders voting, representing at least 75%
of the shares voted;
o the approval by shareholders of Cordiant, representing at least 75% of
the shares voted, of a resolution to amend Cordiant's articles of
association in connection with the implementation of the scheme;
o the sanction of the scheme by the English High Court; and
o cancellation of the listing of Cordiant's ordinary shares by the U.K.
Listing Authority and the cancellation of trading in such shares on
the London Stock Exchange before the shareholder meetings referred to
above.
Investment funds advised by Active Value Advisors Limited have informed
Cordiant that as of July 11, 2003, they hold 28.74% of Cordiant's issued share
capital. Although Cordiant cannot speculate about whether or not Active Value
will vote for or against the scheme of arrangement, notice was served on
Cordiant on behalf of funds advised by Active Value Advisors, requesting an
-16-
extraordinary general meeting of Cordiant for the purpose of voting on a number
of resolutions, including the replacement of the existing senior management team
with a new management team supported by Active Value. If Active Value continues
to hold its Cordiant shares at the same level and votes against the scheme of
arrangement, the scheme of arrangement will not be approved by the requisite
shareholder vote.
Assuming the necessary approval from Cordiant's shareholders is obtained
and the other conditions have been satisfied, or waived, the scheme of
arrangement will become effective upon the delivery to the U.K. Registrar of
Companies of a copy of the order of the English High Court sanctioning the
scheme. This is expected to occur by August 31, 2003.
The Group is currently able to pay its debts as they fall due. The Interim
Support Agreement, pursuant to which the Group's lenders agreed to waive
compliance with certain covenants through July 15, 2003, was adopted by WPP upon
its acquisition of Group's debt. After July 15, 2003, Cordiant will be dependent
on the continued support of WPP, as lender. The WPP Group has agreed to continue
to allow Cordiant access to its committed overdraft facilities of up to
(pound)6.0 million following July 15, 2003, although such access would terminate
in the event that WPP exercises its right to give an acceleration notice calling
for repayment of the debt. If such support were to be withdrawn, and if
additional sources of financing were not made available to the Group, it is
likely that an administrator or administrative receiver would be appointed in
respect of the Group. Cordiant expects that the administrator or administrative
receiver would seek to liquidate or sell the Group, with the proceeds of the
sale to be used to satisfy the Group's obligations and the remainder, if any,
distributed to shareholders. In these circumstances, WPP, as the Group's primary
lender and a secured creditor, would be entitled to receive the principal of its
outstanding loans of approximately (pound)224.3 million as of July 11, 2003,
together with make-whole and certain other payments of approximately (pound)40
million in the aggregate, in priority to any distribution to Cordiant
shareholders. The Group's unsecured creditors would also rank ahead of Cordiant
shareholders in the circumstances. Under these circumstances, Cordiant believes
that shareholders and holders of American Depositary Shares would be highly
unlikely to receive any value for their shares or American Depositary Shares.
If the scheme of arrangement does not become effective on or before August
31, 2003, or such later date as WPP and Cordiant may agree and the High Court
may permit, it shall not thereafter be capable of becoming effective.
The scheme of arrangement and the transactions contemplated thereunder are
more fully described in the scheme proposal document. Nothing contained in this
Form 20-F is intended to be, nor should it be construed as, a solicitation for a
vote on the scheme of arrangement, which can only occur based on the scheme
proposal document that, as described above, was mailed to Cordiant's
shareholders on or about June 28, 2003.
Disposals
As part of the strategy of the Board of Directors to reduce debt through a
program of non-core asset disposals, in 2003 the Group disposed of the following
material interests:
o On June 30, 2003, Cordiant disposed of its principal Australian
businesses, The Communications Group, which includes George Patterson
Bates. Pursuant to the transaction, The Communications Group was
acquired by The Communications Group Holdings, a new corporate entity,
owned 55% by funds advised by Pacific Equity Partners, 15% by The
Communications Group management and 30% by Cordiant. Cordiant received
cash proceeds in respect of the disposal of A$60.2 million
((pound)24.2 million) which, after deduction of transaction costs,
were used to repay debt. Prior to completion, Cordiant extracted from
The Communications Group surplus cash of A$41.0 million ((pound)16.5
million) which was also used to repay debt.
-17-
o On July 11, 2003, Cordiant disposed of its 77.3 percent interest in
Scholz & Friends A.G. Pursuant to the transaction Cordiant's interest
was acquired by a new corporate entity owned by Electra European Fund
LP and Scholz & Friends A.G.'s management. The cash proceeds payable
to Cordiant in respect of the disposal of Scholz were (euro)22.4
million ((pound)15.8 million) which, after deduction of transaction
costs, were used to repay debt. A further (euro)1.5 million
((pound)1.0 million) may become payable in March 2004 dependant upon
the performance of Scholz & Friends A.G. for the year ended December
31, 2003. This amount will also be used to reduce borrowings. Scholz &
Friends A.G. will repay loans made to it by Cordiant totaling
approximately (euro)7.5 million ((pound)5.3 million) by no later than
December 31, 2003.
In addition, on July 4, 2003, the Group entered into an agreement to
dispose of FD International. Under the agreement, it is proposed that the shares
of the companies that comprise FD International will be acquired by new legal
entities (a U.S. purchaser and a U.K. purchaser) owned and financed principally
by Advent International, the global private equity firm. The cash proceeds
payable to Cordiant at completion in respect of the disposal are (pound)26.0
million. The (pound)26.0 million is subject to upwards or downwards adjustment
on a pound for pound basis based on a completion statement of working capital
and net indebtedness both as of May 31, 2003. In addition, Cordiant is entitled
to further consideration equal to 25 percent of any post tax capital gain made
by Advent International on its investment if Advent International disposes of
its interest in FD International within eighteen months of completion. The
agreement is conditional on approval of Cordiant's shareholders, to the extent
required under the Listing Rules of the U.K. Listing Authority, and the German
Federal Cartel Office having cleared the acquisition pursuant to the applicable
provisions of the German Act against Restraint of Competition. If completion
does not occur by August 6, 2003 because Cordiant's shareholders fail to approve
the transaction (to the extent they are required to do so), Cordiant is required
to pay the U.K. purchaser (pound)600,000 plus any applicable value added tax.
This amount is intended to cover the U.K. purchaser's transaction costs. A
shareholder meeting seeking approval of the sale of FD International has been
called for July 23, 2003.
Delisting of Ordinary Shares and ADSs
Delisting of Cordiant's ordinary shares from the U.K. Listing Authority is
expected to take effect at 8.00 a.m. on July 16, 2003 and the last day for
dealings in Cordiant's ordinary shares on the London Stock Exchange is expected
to be July 15, 2003.
On June 26, 2003, Cordiant's ADRs were suspended from trading on the New
York Stock Exchange prior to the opening of trading. The New York Stock Exchange
also announced that an application to the SEC to delist the Cordiant ADRs is
pending the completion of applicable procedures.
Organization and Services
Historically, the Group was organized on a geographic basis. During 2000
and 2001, the Group expanded by acquiring healthcare and other specialist
communications and marketing businesses. As a result of this expansion, in 2002
the Group's principal activities were organized as follows:
Advertising and Integrated Marketing
Bates Worldwide Advertising and marketing communications
Diamond Ad(1) Advertising and marketing communications
141 Worldwide Marketing services
Scholz & Friends A.G.(2) Advertising and marketing communications
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Advertising and Integrated Marketing
Specialist Communications
Healthworld Healthcare marketing
Business Communications International Business communications consulting
Fitch: Worldwide Branding and design services
Media Services
Zenith Optimedia Group Limited(3) Media services
In September 2002, the Bates Group was established through the integration
of advertising network Bates Worldwide, marketing services network 141
Worldwide, branding and design group Fitch Worldwide and the specialist
healthcare marketing network Healthworld.
-------------
1 Owned 80 percent by Cordiant, 20 percent by Hyundai Group.
2 Owned 77 percent by Cordiant, 23 percent by management and other
shareholders. Sold on July 11, 2003.
3 Owned 25 percent by Cordiant, 75 percent by Publicis Groupe S.A.
During 2002, advertising and integrated marketing services accounted for
approximately 77 percent of the Group's revenues and specialist communications
accounted for approximately 23 percent. Advertising services accounted for
approximately 51 percent of the Group's revenues and non-advertising services
accounted for approximately 49 percent.
During 2001, advertising and integrated marketing services accounted for
approximately 76 percent of the Group's revenues and specialist communications
accounted for approximately 24 percent. During 2000, advertising and integrated
marketing services accounted for approximately 86 percent of the Group's total
reported revenues and marketing services accounted for approximately 14 percent.
In 2002, the Group's largest five clients accounted for 19 percent of revenues.
The two largest clients accounted for 5.6 percent and 5.2 percent, respectively,
of total reported revenues.
Advertising and Integrated Marketing
The Group's advertising agencies are principally involved in the creation
of advertising and marketing programs for products, services, brands, companies
and organizations. These programs involve various media such as television,
magazines, newspapers, cinema, radio, outdoor, electronic and interactive media,
as well as techniques such as direct marketing, sales promotion and design. The
creation of advertising and marketing materials includes the writing, designing
and development of concepts. When the concepts have been approved by the client,
the agency supervises the production of materials necessary to implement that
program. These include film, video, print and electronic materials, which are
produced externally.
The agencies often perform a strategic planning function, which involves
analysis of the particular product, service, brand, company or organization
against its competitors and the market. The Group's agencies also evaluate the
choice of media to reach the desired market most efficiently. In the case of
global and regional campaigns, the Group's networks, Bates Worldwide and Scholz
& Friends, plan and coordinate the implementation of their programs through
their networks of national agencies. The Group's agencies are involved in buying
media space and time for their clients. This is executed by Zenith Optimedia
Group Limited, by the agencies' in-house teams or sourced from external
suppliers.
-19-
Bates Worldwide
Bates Worldwide is a global advertising and marketing communications
network with 180 offices in 70 countries, including affiliates. Expanding from a
base as an international advertising network, Bates Worldwide employs the
expertise of 141 Worldwide to provide marketing services to its clients where
requested.
141 Worldwide
141 Worldwide is a global network specializing in marketing services,
offering expertise in a wide range of activities including sales promotion,
direct marketing, event marketing, merchandising, sponsorship, design and
interactive media. Launched in 1993 as a separately branded network within Bates
Worldwide, 141 Worldwide has grown rapidly and now comprises over 90 offices in
60 countries. CCG.XM, Cordiant's interactive operation, was restructured in 2001
and now forms part of the operations of 141 Worldwide.
Diamond Ad
Diamond Ad was established in 1983 by the Hyundai Group to provide Hyundai
companies with a full range of advertising and marketing services. Other
industrial groups in Korea followed a similar strategy and each of the three
largest agencies in Korea is linked to one of the major industrial groups. The
Group acquired 80 percent of Diamond Ad from Hyundai Group in December 1999,
with Hyundai Merchant Marine retaining the remaining 20 percent. Headquartered
in Seoul, the agency has branch offices in Pusan (Korea) and Beijing. Diamond Ad
is part of the Bates Worldwide global network.
Scholz & Friends A.G.
Scholz & Friends A.G. is a leading German-based multinational
communications network with 14 offices operating across Europe. Scholz & Friends
A.G. provides clients with a wide range of marketing communications services
including advertising, sales promotion, public relations, direct marketing,
design, consulting and interactive media. On October 1, 2001, Cordiant executed
a series of transactions, including the consolidation of its Scholz & Friends
subsidiaries under Scholz & Friends A.G. and the merger of Scholz & Friends A.G.
with United Visions Entertainment, a specialist in the production of live
entertainment programs for television and the internet. The merged entity,
Scholz & Friends A.G., was then listed on the Geregelter Markt, the principal
German regulated market of the Frankfurt Stock Exchange. As of December 31,
2002, Cordiant owned 77 percent of Scholz & Friends A.G.. On July 11, 2003,
Cordiant disposed of its interest in Scholz & Friends A.G. See "Item 4:
Information on the Company" under the caption "Recent Developments - Disposals."
Healthcare Marketing
Healthworld
Healthworld is an international healthcare marketing and contract sales
organization headquartered in New York. Acquired by the Group in March 2000,
Healthworld provides its pharmaceutical and healthcare clients with a
comprehensive range of integrated marketing services, including professional and
direct-to-consumer advertising and promotion, contract sales, consulting,
medical education, public relations, marketing research, interactive multimedia
and database marketing. Healthworld offers its clients international
capabilities through its operations spanning 18 countries, including affiliates.
In September 2002, Healthworld was integrated into the Bates Group.
-20-
Business Communications Consulting
Business Communications International
Cordiant created the Business Communications International ("BCI") network
after it acquired Lighthouse in September 2000. BCI offers financial and
corporate public relations, internal communications, M&A communications and
investor relations. The division comprises Financial Dynamics, FD:Morgen-Walke
Associates, FD Ireland, IBI and Corporate & Financial Design. On July 4, 2003,
Cordiant entered into an agreement to dispose of its interest in the FD Group,
which comprises Financial Dynamics, FD:Morgen-Walke Associates, FD Ireland and
Corporate & Financial Design. See "Item 4: Information on the Company" under the
caption "Recent Developments - Disposals."
Branding and Design Services
Fitch:Worldwide
As part of Cordiant's strategy of establishing leading positions in
marketing communications it has built, through strategic acquisitions,
Fitch:Worldwide, a global branding and design network. In September 2002,
Fitch:Worldwide was integrated into the Bates Group.
Media Services
Zenith Optimedia Group Limited
Zenith Optimedia Group Limited ("Zenith"), the UK-based holding company for
the Zenith Media Worldwide and Optimedia Networks, is a leading media
communications group. In July 2001, Publicis Groupe S.A. and Cordiant entered
into a definitive agreement to consolidate certain of their media communications
operations into Zenith Optimedia Group Limited, of which Publicis Groupe S.A.
would own a 75 percent stake and Cordiant would own a 25 percent stake. The
legal transfer was completed in October 2001 whereby Cordiant transferred shares
of Zenith Media Worldwide and Publicis Groupe S.A. transferred shares of Zenith
Media Worldwide and Optimedia Networks to Zenith Optimedia Group Limited
pursuant to a Joint Venture Agreement (the "Zenith JV Agreement"). Prior to
October 2001, Zenith Media Worldwide had been a joint venture operation owned
equally by Cordiant and Saatchi & Saatchi, a wholly-owned subsidiary of Publicis
Groupe S.A.
The Zenith JV Agreement makes provision for the operation of Zenith
Optimedia Group Limited ("Zenith") including:
o matters that require the approval of the Directors elected by each
shareholder before they can be undertaken by Zenith (including, assets
or real estate acquisitions or disposals exceeding (pound)3,000,000,
incurrence of debt outside the ordinary course of its business,
matters affecting capital and corporate governance, contracts out of
the ordinary course of its business or not at arm's length terms,
change in auditors or accounting practices);
o the transfer of shares of Zenith; and
o resolution of disputes both between shareholders and Zenith and
clients of the shareholders and Zenith.
Seventy-five percent of the balance of the distributable profits of Zenith,
after deducting amounts identified by the Directors to be retained by Zenith,
are distributed to shareholders.
The Zenith JV Agreement prohibits the transfer of shares in Zenith, except:
-21-
o in connection with or following the admission of all the issued shares
of Zenith to trading on the London Stock Exchange;
o in connection with put and call options described below; or
o to members of either the Group or Publicis.
Pursuant to the Zenith JV Agreement, Cordiant received put options whereby:
o Cordiant may require Publicis to purchase all the shares of Zenith
owned by any member of the Group provided that (1) the shares of
Zenith have not been admitted to trading on the London Stock Exchange
("Admission") by December 31, 2003 and (2) Cordiant has not pursued
certain defined activities which are in competition with Zenith;
o Cordiant may require Publicis to purchase all the shares of Zenith
owned by any member of the Group within 60 days after any person or
group has acquired control of Cordiant;
o Cordiant may require Publicis to purchase all the shares of Zenith
owned by any member of the Group within 60 days after the approval of
the annual accounts of Zenith by the annual general meeting of Zenith,
if Zenith has fallen short by more than 10 percent of the profit
targets set out in the budget approved by the Board of Directors of
Zenith for the relevant year.
Pursuant to the Zenith JV Agreement, Publicis received call options
whereby:
o Publicis has the option to require Cordiant to sell to Publicis all of
the shares the Group owns in Zenith, in the event Admission has not
occurred by December 31, 2003 due to Cordiant's refusal to agree to
the admission of the shares under certain circumstances; or
o Publicis has the option to acquire all the shares Cordiant owns in
Zenith within 60 days of Publicis becoming aware of (1) any person or
group acquiring control of Cordiant, (2) Cordiant pursuing certain
defined activities which are in competition with Zenith, (3) Cordiant
becoming unable to pay its debts as they fall due, or (4) a moratorium
having been declared with respect to a material part of the total
indebtedness of the Group.
o The Zenith JV Agreement provides that the price payable on any
exercise of these options is the "Option Price", in cash, except that
if Cordiant has blocked Admission despite Zenith's investment bank
advising that it would be appropriate to seek Admission and the board
of Zenith having resolved to seek Admission prior to December 31,
2003, then the price payable on exercise of certain options would be
the Option Price reduced by 15 percent but not less than (pound)75
million. The Zenith JV Agreement defines "Option Price" as the great
of (pound)75 million and an amount calculated by applying the average
price earnings multiple of Publicis and Cordiant to the average
profits of Zenith for the previous two years times 25 percent. In
certain circumstances, the Zenith JV Agreement provides that for so
long as Cordiant is subject to the Listing Rules of the U.K. Listing
Authority, the Option Price will not be higher than 25 percent of the
market capitalization of Cordiant at the time the relevant option is
exercised, or such other percentage as would require Cordiant under
such rules to procure the approval of its shareholders to the exercise
of the relevant option.
The Zenith JV Agreement will remain in force until (1) the dissolution of
Zenith, (2) Admission has occurred, (3) neither Publicis nor Cordiant own shares
of Zenith, (4) all parties to the agreement agree that it be terminated or (5)
the date on which Cordiant ceases to hold, directly or indirectly, at least 15
percent of Zenith's issued shares.
Each of the Group and Publicis entered into media services agreements with
Zenith in September 2001. Under the terms of the agreements, Publicis and
Cordiant each appointed Zenith as the exclusive supplier of media buying, media
planning and certain related services for all of the clients, subject to certain
exceptions, of each of Publicis and Cordiant. The media services agreements also
set out the duties of Zenith in respect of each country in which Zenith
operates.
Each of the media services agreements will terminate (1) upon the
termination of the Zenith JV Agreement, (2) in the event of breach of the Media
Services Agreement or insolvency of either party or (3) if the parties are
unable to find an alternative arrangement to the Media Services Agreement
following a force majeure event which has continued for more than six months.
The Zenith Media Worldwide Shareholders Agreement and Media Services
Agreements previously entered into in December 1997 by Saatchi & Saatchi, a
wholly-owned subsidiary of Publicis Groupe S.A., and
-22-
Cordiant were terminated on September 27, 2001 in connection with the Zenith JV
Agreement and the Media Services Agreement described above.
Significant Subsidiaries
The following table sets forth the individual significant subsidiaries
owned, directly or indirectly, by Cordiant at December 31, 2002:
Country Name of Company Included Within Percentage Owned
------- --------------- --------------- -----------------
England Bates UK Limited Bates Worldwide 100%
England Financial Dynamics Limited(1) Business Communications 100%
International
Australia George Patterson Pty Ltd(2) Bates Worldwide 100%
Germany Scholz & Friends A.G.(3) Scholz & Friends 77%
Korea Diamond Ad Limited Bates Worldwide 80%
US Bates Advertising USA, Inc. Bates Worldwide 100%
US Bates Healthworld, Inc. Healthworld 100%
-------------
1 Subject to sale pursuant to an agreement dated July 4, 2003.
2 Sold on June 30, 2003. 29.999% minority interest retained.
3 Sold on July 11, 2003.
Acquisitions and Disposals
Acquisitions
In recent years, acquisitions have been an integral part of the Group's
strategy to extend beyond advertising into the growth areas of marketing
services and specialist communications. The determination of the purchase price
of an acquisition depended on, among other things, how the business complemented
Cordiant's existing structure and the future value it was believed it could
generate by being part of Cordiant.
The Group made no material acquisitions in the period from January 1, 2002
to July 15, 2003. The Group continues to have earnout obligations for
acquisitions made prior to January 1, 2002.
Disposals
As part of the strategy of the Board of Directors to reduce debt through a
program of non-core asset disposals, in the period from January 1, 2003, to July
15, 2003, the Group entered into agreements to make disposals of the following
material interests:
-23-
On June 30, 2003, the Group disposed of its principal Australian
businesses, The Communications Group, which includes George Patterson Bates, but
retained a 29.999% minority interest in the buyer. On July 11, 2003, the Group
disposed of its 77.3 per cent interest in Scholz & Friends A.G. On July 4, 2003,
the Group entered into agreement, subject to shareholder approval, to dispose of
its 100 per cent interest in the FD Group. See Item 4. Information on the
Company under the Caption "Recent Developments-Disposals."
Between January 1, 2002 and July 15, 2003, the Group disposed of its
interests in Interactive Edge, MicroArts Corporation, Ideaworks and Diamond
Bates Korea Limited.
Geographic Coverage
Cordiant serves clients in all of the world's major advertising markets.
Geographic analysis of Group revenue
Percentage of
Consolidated Group Revenue
2002 2001 2000
-------------------------------------
UK 21 20 16
North America 27 31 29
Continental Europe, Africa and India 25 24 26
Asia Pacific and Latin America 27 25 29
Business Segments
Cordiant's principal activities are organized into the Advertising and
Integrated Marketing Services and the Specialist Communications Services.
Business segment analysis of Group revenue
Percentage of
Consolidated Group Revenue
2002 2001 2000
-------------------------------------
Advertising and Integrated Marketing 77 76 86
Specialist Communications 23 24 14
-24-
Competition
The advertising industry is highly competitive at both an international and
local level. Cordiant's principal competitors in the advertising industry are
the large multi-national agencies based in the United States, the United Kingdom
and France, as well as smaller agencies, which operate in local markets. The
principal competitive factors include an agency's reputation, its creative
strength and quality of client service, its ability to perceive clients' needs
accurately, the commercial effectiveness of its ideas, its geographic coverage
and diversity, its understanding of advertising media and its media buying
power. In addition, an agency's ability to maintain its existing clients and
develop new relationships depends to a significant degree on factors such as the
interpersonal skills of the individuals managing client accounts. Normal
practice in the industry is for agency contracts to have a three month
termination period.
Regulation
Governments, government agencies and industry self-regulatory bodies in the
various countries in which the Group operates continue to adopt legislation and
regulations which directly or indirectly affect the form, content and scheduling
of advertising and other communications services, or otherwise affect the
activities of such businesses and their clients. Certain of the legislation and
regulations relate to considerations such as truthfulness, substantiation,
interpretation of claims made and comparative advertising. In addition, there is
a tendency toward restrictions or prohibitions relating to advertising for such
products as pharmaceuticals, tobacco and alcohol.
Seasonality of Results
In the year ended December 31, 2002, 52 percent of revenues and 49 percent
of operating profit (before goodwill amortization, exceptional goodwill
impairment and exceptional operating expenses) was earned in the six months to
June 30, 2002. In the year ended December 31, 2001, 51 percent of revenues and
72 percent of operating profit (before goodwill amortization, exceptional
goodwill impairment and exceptional operating expenses) was earned in the six
months to June 30, 2001. Cordiant believes that the reported seasonality of
profits in 2001 and 2002 was not representative of the Group's usual performance
but reflected the impact of the economic downturn in the marketing and
communications industry.
The seasonality of revenues and operating profits reflects the spending
pattern of the Group's clients and the industries that they operate in.
Property
Cordiant leases all its premises. At December 31, 2002 the principal
properties leased by Cordiant were as follows:
------------------------------------------------------------------------------------------
Location Area Annual Base Next Rent Expiration
Sq. Ft. Rental-Millions Review Date of Lease
------------------------------------------------------------------------------------------
498 Seventh Avenue 239,000 $7.0 2004 2014
New York, New York
121-141 Westbourne Terrace 62,500 (pound)2.0 2008 2025
London, England
------------------------------------------------------------------------------------------
In addition, as of the year ending December 31, 2002, in respect of
Landsdowne House, Berkeley Square, London, England, Cordiant leased 151,000
square feet at an annual rental of (pound)9.3 million (2001: (pound)7.7
million), which is sublet for mainly coterminous periods at an average
annualized rental of approximately (pound)8.0
-25-
million during 2002. A further 19,000 square feet at an annual rental of
(pound)1.2 million is sublet on a short-term basis at an average annualized
rental of approximately (pound)0.6 million during 2002.
At December 31, 2002, Cordiant's owned and leased properties and fixtures
(including furniture and equipment) had a net book value of (pound)28.5 million.
Cordiant considers its offices and other facilities to be in good
condition. However, it has surplus office space based on the needs of its
current business. At December 31, 2002, (pound)24.6 million had been reserved by
the Group for potential costs of surplus space, primarily in London and New York
City.
The following outstanding property guaranty by Cordiant companies over
obligations of certain companies in the Saatchi & Saatchi Group was not released
in connection with the demerger in 1997: the Saatchi & Saatchi Group's lease of
premises at 375 Hudson Street, New York, for a term expiring on January 31,
2013, at a current annual base rent of $21.4 million subject to periodic rent
reviews.
There are no material plans to construct, expand or improve the existing
property facilities.
Environmental and Social Policy
As a marketing communications group, the Group is primarily a service-based
operation. Whilst the Board believes that the effect of the Group's activities
on the environment is minimal, it recognizes that it has an impact on the
environment both directly through the consumption of energy and other resources
used throughout its business operations, and indirectly through its supply
chain. Every effort its made to ensure that local operations conduct themselves
with consideration to environmental and social issues, in accordance with the
Group's Policies and Procedures Manual and Standards of Business Conduct. In
order to monitor the environmental impact of its operations, a number of
objectives have been set out in the Group's environmental policy, a copy of
which can be found on the Cordiant website www.cordiantww.com.
The key areas relevant to the Group include electronic communication,
recycling and social investment. Every Group employee is connected via e-mail
and the Group's intranet, and major offices are connected via video-conferencing
facilities. Offices are required by Group policy to minimise waste production,
responsibly dispose of waste and maximise the recycling of materials. As a
minimum standard all operating companies are expected to comply with local
environmental regulations.
Group policy sets out clear commitments to human rights in the terms on
which staff are employed. As an international group with operations in over 70
countries, the Group seeks to ensure that each of its operations adopt
responsible business practices that avoid contributing to, or perpetuating human
rights abuses in countries governed by repressive regimes. The Group fully
supports the stance being taken by institutional investors on countries with
poor human rights records and adopts Group policies designed to ensure that its
operations maintain high standards and adopt responsible business practices.
Item 5. Operating and Financial Review and Prospects.
General
The information in "Operating and Financial Review and Prospects"
concerning the results of operations and the financial condition of Cordiant
refers to the Consolidated Financial Statements included in this Annual Report
which are prepared in accordance with UK GAAP.
Cordiant's revenue is generated from commissions and fees paid by clients.
In each of the last three years, between 22 and 29 percent of revenue was
commission based and varied with the level of media and production expenditure.
The remainder was derived from fees, which were project or time based, as agreed
with the client. With certain clients, an additional element of remuneration can
be earned by meeting certain performance criteria set in conjunction with the
client. The Group's advertising businesses generally have
-26-
ongoing relationships with their clients which last a number of years. In
contrast, the majority of revenue from clients of a number of the Group's
marketing communications businesses are based on project specific assignments,
although there is often a relationship with the same client over many years.
Revenue in any year is dependent primarily on the level of expenditure by
clients on existing assignments and to a lesser degree on business gains and
losses. When business is won or lost there is usually a delay of some months
before revenue is affected. This is primarily because it is usual in the
advertising industry for contracts to have a three month termination clause. In
the case of new commission based work the delay is longer as the agency is not
paid until the advertisement has appeared in the media. Additionally, the
revenues actually earned from new business wins may vary significantly from
revenues anticipated at the outset of any new business win because the level of
expenditure that a client ultimately determines is most appropriate can vary
significantly from the budgeted amounts.
The majority of Cordiant's net operating costs are staff related and over
the past three years the Group's staff cost to revenue ratio (including
temporary staff and freelancers) was approximately 65.6 percent. When revenue
growth is slow or declining in any particular operating unit, Cordiant is able
over time to reduce headcount, although this can result in severance costs.
Conversely, staffing can be increased to handle sustained periods of increased
business activity. The remainder of net operating costs relate to leased
properties, depreciation and other administrative costs.
The profitability of new business varies depending on the terms of
remuneration negotiated and on the nature of the assignment. In particular,
profitability depends on whether revenue is generated by increased spending on
existing assignments, new or existing clients or product categories and on the
number of offices involved in the assignment.
Cordiant has offices or affiliated agencies in over 70 countries and its
revenues and costs are denominated in a number of currencies. Consequently,
exchange rate movements between pounds sterling and several other currencies
have an impact on the operating result. Cordiant's costs are generally
denominated in the same currency as the associated revenue, thereby mitigating
the impact of exchange rate movements on operating profit. At the net profit
level, the impact of exchange rate movements is also affected by the currency in
which debt is denominated and the countries in which Cordiant's tax charges
arise.
Industry Background
Spending in the advertising and marketing communications industry has
historically been closely linked with growth in gross domestic product. With the
economic slowdown in the United States and other economies, there was a
continuing weakness in levels of spending across the advertising industry during
2002 and the first half of 2003. Global major media advertising increased by 0.2
percent in 2002.* This compares to global major media advertising decline of 3.5
percent in 2001 and an average advertising industry growth rate of approximately
7.6 percent per annum over the preceding five years. This substantial
industry-wide slowdown in levels of spending has had a significant impact on the
Group's results in 2001 and 2002.
Current Trading and Prospects
In order to enhance the Group's competitive offering by combining
advertising, branding and design and healthcare marketing, Cordiant established
the Bates Group in September 2002 through the integration of Bates Worldwide,
141 Worldwide, Fitch: Worldwide and Healthworld. The significant steps taken
created a cost base better aligned to the generally prevailing market conditions
and, in part, mitigated the impact of significant account losses in the United
States during 2002, in particular Hyundai and Wendy's. The loss of Allied Domecq
from October 2003 is not expected to have a material impact on revenue in the
current year,
--------------
* Source: Zenith Optimedia Advertising Expenditure Forecasts December 2002
-27-
although there will be associated restructuring costs. However,
there will be a substantial impact on operating profit from 2004 onwards.
The Group traded broadly in line with expectations in the first three
months of 2003, but since then has found it increasingly difficult in the
current circumstances to win new business and retain revenue from existing
clients due primarily to its current financial position. In view of the
continued uncertainty, the 2003 outlook for the Group is difficult to predict.
However, it is likely to be below Cordiant's original expectations,
notwithstanding the benefits of the restructuring which will mitigate to some
extent the adverse impact of the revenue shortfalls.
Recent Developments
Background
Against a rapidly deteriorating industry background, in April 2002,
Cordiant had to renegotiate its financing arrangements with its primary lenders.
During the course of 2002, in addition to the negative impact on revenues from
the reduction in global advertising spending, Cordiant lost two of its largest
U.S. clients, Hyundai and Wendy's. As a result, significant management action
was taken to restructure the Group, and to reduce costs substantially, in order
to create a structure better suited to the difficult market conditions. However,
despite achieving some important new business wins in the final quarter of 2002,
the Group suffered further loss of clients in 2003.
In February 2003, Cordiant reopened discussions with its lenders to
renegotiate its financial covenants. At that point, Cordiant announced a program
of non-core disposals to reduce debt. Cordiant expected to agree to new
financing terms with its primary lenders during the spring and intended
thereafter to raise new equity to establish a firm financial footing for the
business. By the end of April 2003, Cordiant was well advanced in the agreement
of new financing terms with its primary lenders. However, at this time Cordiant
was notified that Allied Domecq, the second largest of its global clients, was
terminating its contract with Cordiant with effect from October 2003. Cordiant
immediately re-entered into discussions with its lenders to secure new short
term financing and to determine a new plan to address its longer term financing
needs. As a result, Cordiant and its senior bank lenders and noteholders entered
into an Interim Support Agreement pursuant to which the lenders agreed to waive
compliance with certain covenants through July 15, 2003.
Since the end of April 2003, the Board of Directors has reviewed a range of
strategic alternatives, including the issue of new equity, a debt for equity
swap, further asset disposals and the sale of the entire business. This review
has concluded that, in the light of the increasing difficulty in winning new
business and retaining revenue from existing clients and of the views of
Cordiant's lenders and leading clients, the best interests of Cordiant are
likely to be served through a combination with a major industry player. In the
absence of such a transaction, the Board of Directors believes that it would
become even more difficult to retain Cordiant's clients and staff, and to
continue the Group's operations. The uncertain revenue outlook, and the
requirement for continued support of its lenders, led the Board of Directors to
the view that there was insufficient certainty of achieving an acceptable return
to shareholders to justify seeking to raise the large amount of new equity
capital that would have been required to rectify Cordiant's financial position.
As a result, discussions took place with all of the major agency groups and
others. It became clear that no prospective purchaser would be willing to assume
the full level of secured debt, including entitlements to make-whole and other
payments, within the Group, leaving the prospect that Cordiant's shareholders
would receive no payment at all. Nevertheless, if the scheme of arrangement
becomes effective Cordiant will have achieved an outcome that provides some
value to shareholders.
Scheme of Arrangement
On June 19, 2003, Cordiant and WPP announced the terms of a proposed
acquisition of Cordiant by WPP by means of scheme of arrangement under Section
425 of the Companies Act of 1985 of Great Britain. Under the scheme of
arrangement, which is subject to a number of conditions including approval by
Cordiant's shareholders and by the English High Court, WPP will acquire the
entire issued ordinary share capital of Cordiant. Cordiant's shareholders will,
in consideration, receive one ordinary share of WPP for every 205 ordinary
shares of Cordiant. Based on the closing mid market price of 513.25 pence per
WPP share on July 11, 2003, the scheme of arrangement values the entire issued
ordinary share capital of Cordiant at approximately (pound)10 million and each
Cordiant ordinary share at approximately 2.5 pence. Where fractional
entitlements to WPP shares arise from the implementation of the scheme of
arrangement, these will be aggregated and sold and the proceeds paid to Cordiant
shareholders entitled thereto.
In addition, on June 19, 2003, WPP acquired the Group's indebtedness from
its bank lenders, except one lender, under its Amended and Restated Loan
Agreement, and from its senior noteholders, with the same exception under its
Amended and Restated Note Purchase Agreement, for (pound)177 million
representing an amount equal to the par value of the principal obligations
purchased. The remaining lender holding such debt with a par value of
approximately (pound)79 million, transferred its debt to WPP on July 1, 2003, so
that WPP now holds all of the debt. As a result, following July 15, 2003 when
the Interim Support Agreement expires, the Group will remain dependent on the
continued support of WPP, its primary lender.
Ordinary shares of WPP issued pursuant to the scheme of arrangement will be
issued credited as fully paid and will rank pari passu in all respects with the
existing shares of WPP, including the right to receive and retain in full future
dividends and other distributions (if any) declared, made or paid after June 19,
2003, except for the final dividend in respect of the year ended December 31,
2002 of 3.67p per WPP share payable on July 7, 2003 to WPP shareholders
appearing on the WPP register of members as at June 6, 2003.
Each Cordiant ADS will come to represent the right to receive WPP ADSs and
each holder of Cordiant ADSs will be required to exchange his or her Cordiant
ADSs for WPP ADSs based on the exchange ratio of one new WPP ADS for every 205
Cordiant ADSs. Fractional entitlements to new WPP ADSs will not be issued to any
holder of a Cordiant ADS and all fractions to which holders of Cordiant ADSs
would otherwise have been entitled will be aggregated and sold by Citibank,
N.A., as exchange agent appointed by WPP, on the Nasdaq National Market. Holders
of Cordiant ADSs will receive their pro rata portion, if any, of the net
proceeds from the sale of the fractional entitlements upon surrender of their
Cordiant ADRs in exchange for WPP ADRs.
The implementation of the scheme of arrangement is subject to a number of
conditions, including, but not limited to:
o the approval of the scheme at a meeting of Cordiant shareholders by a
majority in number of shareholders voting, representing at least 75%
of the shares voted;
o the approval by shareholders of Cordiant, representing at least 75% of
the shares voted, of a resolution to amend Cordiant's articles of
association in connection with the implementation of the scheme;
o the sanction of the scheme by the English High Court; and
o cancellation of the listing of Cordiant's ordinary shares by the U.K.
Listing Authority and the cancellation of trading in such shares on
the London Stock Exchange before the shareholder meetings referred to
above.
Investment funds advised by Active Value Advisors Limited have informed
Cordiant that as of July 11, 2003, they hold 28.74% of Cordiant's issued share
capital. Although Cordiant cannot speculate about whether or not Active Value
will vote for or against the scheme of arrangement, notice was served on
Cordiant on behalf of funds advised by Active Value Advisors, requesting an
extraordinary general meeting of Cordiant for the purpose of voting on a number
of resolutions, including the replacement of the existing senior management team
with a new management team supported by Active Value. If Active Value continues
to hold its Cordiant shares at the same level and votes against the scheme of
arrangement, the scheme of arrangement will not be approved by the requisite
shareholder vote.
Assuming the necessary approval from Cordiant's shareholders is obtained
and the other conditions have been satisfied, or waived, the scheme of
arrangement will become effective upon the delivery to the U.K. Registrar of
Companies of a copy of the order of the English High Court sanctioning the
scheme. This is expected to occur by August 31, 2003.
The Group is currently able to pay its debts as they fall due. The Interim
Support Agreement, pursuant to which the Group's lenders agreed to waive
compliance with certain covenants through July 15, 2003, was adopted by WPP upon
its acquisition of Group's debt. After July 15, 2003, Cordiant will be dependent
on the continued support of WPP, as lender. The WPP Group has agreed to continue
to allow Cordiant access to its committed overdraft facilities of up to
(pound)6.0 million following July 15, 2003, although such access would terminate
in the event that WPP exercises its right to give an acceleration notice calling
for repayment of the debt. However, if such support were to be withdrawn, and if
additional sources of financing were not made available to the Group, it is
likely that an administrator or administrative receiver would be appointed in
respect of the Group. Cordiant expects that the administrator or administrative
receiver would seek to liquidate or sell the Group, with the proceeds of the
sale to be used to satisfy the Group's obligations and the remainder, if any,
distributed to shareholders. In these circumstances, WPP, as the Group's primary
lender and a secured creditor, would be entitled to receive the principal of its
outstanding loans of approximately (pound)224.3 million as of July 11, 2003,
together with make-whole and certain other payments of approximately (pound)40
million in the aggregate, in priority to any distribution to Cordiant
shareholders. The Group's unsecured creditors would also rank ahead of Cordiant
shareholders in the circumstances. Under these circumstances, Cordiant believes
that shareholders and holders of American Depositary Shares would be highly
unlikely to receive any value for their shares or American Depositary Shares.
If the scheme of arrangement does not become effective on or before August
31, 2003, or such later date as WPP and Cordiant may agree and the High Court
may permit, it shall not thereafter be capable of becoming effective.
The scheme of arrangement and the transactions contemplated thereunder are
more fully described in the scheme proposal document. Nothing contained in this
Form 20-F is intended to be, nor should it be construed as, a solicitation for a
vote on the scheme of arrangement, which can only occur based on the scheme
proposal document that, as described above, was mailed to Cordiant's
shareholders on or about June 28, 2003.
Goodwill
The impact of a second year of economic slow down on the marketing
communications sector and underperformance of certain businesses resulted in a
groupwide impairment review of the goodwill as at December 31, 2002. In
conducting the impairment review, Cordiant compared the net present value of the
investment to its carrying value by discounting the estimated future net cash
flows of the relevant business. The discount rates used were between 11.6
percent and 16 percent and were based on the weighted average cost of capital
calculated for the Group and adjusted to take account of the differing levels of
geographical and business risks within the Group. The goodwill impairment review
indicated that in the case of a number of acquisitions the goodwill carrying
value was not supported and a write-down of (pound)171.1 million (2001:
(pound)224.8 million) was taken. These are recorded as exceptional charges
because they are material in relation to the accounts, and not to disclose them
separately on the face of the profit of loss account could distort the reader's
understanding of the financial statements.
In years prior to 2001, Cordiant believed that the intangible fixed assets
of the Group, which comprise goodwill, had an indefinite economic life due to
the durability of the Group's brand names, their ability to sustain long-term
profitability and the Group's commitment to develop and enhance their value.
However, the change in the economic climate led Cordiant to take a more cautious
approach to accounting for goodwill by moving to amortization. This is also in
line with developing best practice within the industry. As a result, from
January 1, 2001, goodwill arising from acquisitions completed on and after
January 1, 1998 is amortized over its estimated useful life up to a 20 year
period from date of acquisition. The useful economic life of goodwill arising
from acquisitions has been assessed taking into account various factors,
including, among other things, dependence on key management and clients,
competitive factors that the business faces, durability of the business,
existence of contracts binding management and earnout periods. The goodwill
amortization charge for the full year 2002 was (pound)28.9 million.
In addition, in their opinion regarding the Group's 2002 United Kingdom
Annual Report and Accounts, the Group's auditors, KPMG Audit plc, have stated
that they were unable to carry out the auditing procedures necessary to obtain
adequate assurances as to the correctness of the Board's determination that the
2002 financial statements should be prepared on a going concern basis. In the
event that it is determined that the Group's financial statements should have
been prepared on a basis other than that of a going concern, there could be a
significant impact on the Group's assets and liabilities as at December 31,
2002, including a further write down of the carrying value of goodwill in the
balance sheet to the best estimate of its net realizable value on disposal.
Differences Between US GAAP and UK GAAP
Cordiant's Consolidated Financial Statements are prepared in accordance
with UK GAAP. UK GAAP, differs in certain significant respects from US GAAP. The
Consolidated Financial Statements contain a reconciliation of net profit/(loss)
and shareholders' funds/(deficit) to US GAAP for each of the years in the three
year period ended December 31, 2002. The principal differences between the net
profit/(loss)
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attributable to shareholders and shareholders' funds/(deficit)
under UK and US GAAP for 2002 are set out below (and discussed more fully in
Note 33 in the Notes to the Consolidated Financial Statements).
o There are differences in the recognition of goodwill, amortization and
impairment between UK and US GAAP. Under UK GAAP, goodwill on
acquisitions made prior to January 1, 1998 has been written off to
reserves while goodwill on acquisitions made after January 1, 1998 has
been capitalized and amortized. Under US GAAP, goodwill on all
acquisitions has been capitalized as an intangible fixed asset and, to
the extent arising on acquisitions up to June 30, 2001, amortized over
its useful economic life. Goodwill on acquisitions made after January
1, 1998 has been amortized under UK GAAP, over 10 to 20 years since
January 1, 2001, but under US GAAP, goodwill has been amortized from
the date of acquisition up to December 31, 2001 with the exception of
goodwill arising on acquisitions made after June 30, 2001 which is not
amortized. Under UK GAAP, goodwill is tested for impairment in the
first year of acquisition, when certain 'trigger' circumstances occur,
or when that goodwill has been tested for impairment in the prior
year, and impairment has been made to the goodwill balance. Under US
GAAP, for periods after December 31, 2001, goodwill is not amortized
but is tested for impairment. Goodwill is tested for impairment on an
annual basis and such impairment tests may be performed any time
during the fiscal year provided the test is performed at the same time
every year, although impairment tests may be required more frequently
if circumstances require. Different reporting units may be tested for
impairment at different times. For the purposes of reporting on a US
GAAP basis, Cordiant has chosen to undertake impairment reviews on
December 31 on an annual basis. Under US GAAP there is a(pound)19.7
million adjustment to increase the loss on the income statement and
the cumulative effect on shareholders' funds is a decrease
of(pound)22.5 million.
o The Zenith Optimedia Group Limited transaction and the Scholz &
Friends A.G. and United Visions Entertainment transaction are treated
differently under US GAAP. Under UK GAAP, unrealized gains on disposal
arose. Under US GAAP, neither a gain nor loss arose on these
transactions.
o Under UK GAAP, no compensation is recognized for certain performance
based share options, but under US GAAP compensation expense is
recorded for all performance based share options which resulted in a
charge to the income statement under US GAAP of (pound)0.5 million in
2002 The cumulative effect on shareholders' funds is nil.
o Under UK GAAP, the Group's property provision is discounted to its net
present value, and this discount is amortized over the life of the
provision. Under US GAAP, provisions are made on a gross basis and the
amortization has been credited back to the 2002 net loss resulting in
a decrease of (pound)0.5 million in the net loss. The cumulative
effect on shareholders' funds is a reduction in funds of (pound)3.9
million as of December 31, 2002.
o Under UK GAAP, research and development costs may be capitalized and
amortized over their estimated useful life. Under US GAAP, these costs
are written off as incurred. Consistent with UK GAAP, Cordiant has
fully amortized research and development costs and the write-off
previously included as a charge against income to arrive at US GAAP
figures has been reversed in the reconciliation to avoid double
counting the expense. Thus there is a credit to the 2002 income
statement of (pound)0.8 million. The cumulative effect on
shareholders' funds nil.
o Under UK GAAP, ordinary dividends proposed are provided for in the
year in respect of which they are recommended by the Board of
Directors for approval by the shareholders. Under US GAAP, such
dividends are not provided for until declared by the Board of
Directors. As no dividend has been proposed in respect of 2002, there
is no cumulative effect on shareholders' funds as of December 31, 2002
-29-
o Under UK GAAP, derivative instruments are held off balance sheet.
Under US GAAP, all derivative instruments are required to be held on
the balance sheet at fair value. This has resulted in a credit to the
2002 income statement of (pound)3.6 million. The cumulative effect on
shareholders' funds is an increase of (pound)4.0 million as of
December 31, 2002.
o Under UK GAAP, the expected cost of defined benefit schemes is
recognized on a systematic and rational basis over the relevant
employees' service period. Under US GAAP, the projected benefit
obligation (or pension liability) is compared with the market value of
the underlying plan assets and the difference is adjusted to reflect
any unrecognized obligations or assets in determining the pension cost
or credit for the period. The actual method and assumptions used in
determining the pension expense can be significantly different from
those usedunder UK GAAP. This resulted in a reduction in the loss for
2002 of(pound)0.3 million and a reduction in shareholders' funds
of(pound)5.1 million as of December 31, 2002.
o Under UK GAAP, investments in own shares of (pound)2.4 million are
capitalized and held on the balance sheet as fixed or current assets.
Under US GAAP, such shares are netted off against equity. Under UK
GAAP, an amount of (pound)1.6 million was provided against the
investment in own shares during the year. No such provision was
required under US GAAP.
o Under UK GAAP, exceptional items are defined in FRS 3 "Reporting
Financial Performance" as material items which derive from events or
transactions that fall within the ordinary activities of the Group and
which individually or, if of a similar type, in aggregate, need to be
disclosed by virtue of their size or incidence if the financial
statements are to give a true and fair view. Under US GAAP,
exceptional items are considered both unusual in nature and infrequent
in occurrence. In practice, exceptional items are rarely presented
under US GAAP.
Under UK GAAP, FRS 12 "Provisions, contingent liabilities and
contingent assets" allows provision to be made for moving and
reorganisation costs to be incurred in a restructuring plan initiated
before the year end. Under US GAAP, EITF 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)"
requires that provision for exit costs can only be made when they do
not benefit future activities of the group. As a result, (pound)1.0
million of costs relating to moving and reorganisation provisions
recognized under UK GAAP, have been deferred to future years as these
costs had not been incurred at December 31, 2002.
Under UK GAAP, if a decision is taken that an asset is to be scrapped,
an impairment charge can be recognized immediately. Under US GAAP, FAS
144 "Accounting for the Impairment or disposal of Long Lived Assets"
requires that when a company has a specific plan for disposition by
abandonment of an asset and the time period for abandonment is less
than the useful life, the depreciation amounts should be adjusted to
reflect the shorter useful life of the asset. As a result (pound)1.5
million of the asset write downs recognized in 2002 under UK GAAP,
have been reversed under US GAAP and deferred to 2003 as the relevant
assets are still in use in 2003.
o Under UK GAAP, UITF 28 "Operating Lease Incentives" inflationary
increases in property leases are not required to be smoothed over the
life of the lease. Under US GAAP, FASB Technical Bulletin No. 85-3
states that a straight-line method over the life of the lease should
be used to account for such scheduled rent increases. An adjustment
has been made to charge the income account under US GAAP in the year
ended December 31, 2002 with (pound)1.5 million relating to such
inflationary rent increases.
o Under UK GAAP, there is no requirement to book a liability for future
compensated absences Under US GAAP, SFAS No. 43 "Accounting for
compensated absences" states that vesting
-30-
and accumulating rights to future compensated absences should be
accrued. Hence a liability of (pound)1.2 million has been accrued
under US GAAP in 2002.
o Under UK GAAP, UITF 25 "National Insurance Contributions on share
option gains" requires that a provision is made for National Insurance
contributions at the date of the grant of share options. Under US
GAAP, EITF 00-16 "Recognition and Measurement of Employer Payroll
Taxes on Employee Stock-Based Compensation" requires that National
Insurance Contributions be charged to the income statement when the
option is exercised. Hence an adjustment for (pound)0.5 million has
been made in 2002 to credit the income statement under US GAAP.
o Under UK GAAP, the Group's consolidated cash flow statement is
prepared in accordance with FRS 1 (revised) `Cash Flow Statements'
"FRS 1". Its objectives and principles are similar to those set out
under US GAAP in SFAS No. 95. The principal difference between the
standards relates to classification. Under FRS 1, the Group presents
its cash flows for: (a) operating activities; (b) dividends from
associated undertakings; (c) dividends from joint ventures; (d)
returns on investments and servicing of finance; (e) taxation; (f)
capital expenditure and financial investment; (g) acquisitions and
disposals; (h) equity dividend paid; and (i) financing. SFAS No. 95
requires only three categories of cash flow activity: (a) operating;
(b) investing; and (c) financing. Cash flows from exceptional
non-operating items, dividends from associated undertakings, returns
on investments and servicing of finance, and taxation shown under FRS1
would be included as operating activities under SFAS No. 95. The
payment of dividends would be included as a financing activity under
SFAS No. 95. changes in bank overdrafts are included within cash
equivalents under FRS1 and would be considered a financing activity
under SFAS No. 95. If bank overdrafts had been shown as a financing
activity in the consolidated cash flow statement, net cash inflow from
financing (including foreign exchange) would have decreased by
(pound)2.4 million in the year ended December 31, 2002 (December 31,
2001:(pound)1.4 million increase), (December 31, 2000:(pound)5.4
million increase). Under UK GAAP, short term investments include short
term money market deposits of(pound)0.4 million in 2002,(pound)0.6
million in 2001 and(pound)1.3 million in 2000, that would be
classified as cash equivalents under US GAAP.
Critical Accounting Policies
The preparation of the financial statements requires the Group's management
to make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
The Group believes that the critical accounting policies and areas that are
key to the businesses and require the most significant judgments and estimates
to be used in the preparation of the Consolidated Financial Statements are
described below:
Appropriateness of Going Concern Basis for Financial Statements
In February 2003, Cordiant entered into negotiations with its senior bank
lenders and noteholders to revise the financial covenants in those borrowing
arrangements consistent with current trading conditions and the planned disposal
program. Before these negotiations had been concluded, in April 2003, Cordiant
was notified that Allied Domecq, the second largest of its global clients, was
terminating its contract with Cordiant with effect from October 2003. Whilst the
direct impact of this client loss on revenue in 2003 is not expected to be
material, the Group will incur associated restructuring costs in the current
year and there will be a substantial impact on operating profit from 2004
onwards.
-31-
The Group does not expect, notwithstanding the completion of the sale of FD
International, Scholz & Friends A.G. and The Communications Group, to have
sufficient working capital for at least 12 months from the date of this report.
The Group is currently able to pay its debts as they fall due. The Interim
Support Agreement was adopted by WPP upon its acquisition of Group's debt. After
July 15, 2003, Cordiant will be dependent on the continued support of WPP, as
lender. The WPP Group has agreed to continue to allow Cordiant access to its
committed overdraft facilities of up to (pound)6.0 million following July 15,
2003, although such access would terminate in the event that WPP exercises its
right to give an acceleration notice calling for repayment of the debt. If such
support were to be withdrawn, and if additional sources of financing were not
made available to the Group, it is likely that an administrator or
administrative receiver would be appointed in respect of the Group.
The financial statements (which have been extracted from the United Kingdom
Annual Report and Accounts dated April 30, 2003) have been prepared on a going
concern basis and do not reflect any adjustments that would be required if the
going concern presentation were not appropriate. Nevertheless, as of the date of
this Annual Report, there continues to be fundamental uncertainty as to the
going concern basis of presentation for the reasons outlined above. Given the
uncertainty surrounding the Group, it is not currently possible to determine the
extent and quantification of such adjustments, but these might include the
reclassification of creditors due in more than one year to less than one year,
the writedown of the carrying value of goodwill in the balance sheet to the best
estimate of its net realizable value on disposal, the writedown of certain
assets carried on a value in use basis to net realizable value, and the
disclosure of or provision for additional liabilities.
Revenue Recognition
Approximately 74 percent of revenue is derived from fee income with the
rest being sourced from commissions. Revenue is recognized when the service is
performed. For project based businesses, revenue is derived from a mixture of
fees for services performed and retainer fees, which are specific to the
contract with the client. In such cases, revenue is recognized when the service
has been performed, in accordance with the stage of completion of the work. The
stage of completion of projects is determined by comparison of actual output to
a pre-agreed project delivery schedule.
Goodwill
Goodwill arises where the acquisition costs exceeds the fair values
attributable to the net assets acquired and it is capitalised as an intangible
asset on the balance sheet. Determining the fair value of the assets acquired
and liabilities assumed requires judgement and often involves the use of
significant estimates and assumptions, including assumptions with respect to
future cashflows, discount rates and asset lives, among other items.
FRS 10, "Goodwill and Intangible Assets", provides that the cost is
amortized on a straight-line basis over the estimated life, of up to 20 years.
All goodwill currently held on Cordiant's balance sheet is being amortized over
lives ranging between 10 and 20 years. The choice of amortisation period is
subject to judgement, being based upon consideration of factors such as the
nature and size of the business acquired. These factors have a significant
impact on the annual amortisation charge. At December 31, 2002, the carrying
value of goodwill amounted to (pound)263.5 million (2001: (pound)478.3 million).
The amortisation charge for 2002 was (pound)28.9 million (2001: (pound)44.1
million).
Goodwill on the acquisition of individual businesses is assessed for
impairment in its value if there are events or changes in circumstances that
indicate that the carrying value may not be fully recoverable and also after the
first full year in which an acquisition of a business is made. These events
include a current period operating loss or cash outflow combined with past
operating losses or cash outflows and a significant adverse
-32-
change in the business or the market in which the goodwill is involved. The
carrying value of the income generating unit and its associated goodwill is
compared to the recoverable amount of the related business. The method used to
conduct this review and to measure any potential impairment charge is prescribed
in FRS 11 "Impairment of Fixed Assets and Goodwill" and is undertaken by
calculating the discounted estimated future net cash flows of the businesses.
The growth rates are estimates based on market information and discount rates
used are based on the Group's weighted average cost of capital. Fluctuations in
these estimates can affect the estimated recoverable amount of the assets. These
estimated future cash flows are based on the most recent forecast for that
business. Impairment reviews were undertaken at December 31, 2002 and resulted
in an impairment charge of (pound)171.1 million (2001: (pound)224.8 million).
Goodwill is accounted for in the segments of the business that have made
acquisitions.
Goodwill impairment reviews require judgment on the choice of the
parameters used in the calculation of the discounted cash flows. For example, if
the long term weighted average cost of capital were to be higher than estimated
and/or growth rates were to be lower than estimated, then the level of the
impairment charge would have been higher at December 31, 2002.
Goodwill includes estimates of contingent consideration due in respect of
acquisitions. These are based on the contractual terms of the purchase
agreements, and are estimated based on forecasts of future results.
Property
The Group has a number of properties which have become excess to the
Group's requirements and are currently not planned to be used for ongoing
operations and are either vacant or are sublet at a loss. In accordance with FRS
12 "Provisions, contingent liabilities and contingent", provisions have been
made to cover the expected shortfalls. Assumptions are made about future
rentals, occupancy and inflation based on market information and expert advice
available at the time. Under UK GAAP, these provisions have been discounted,
using a risk-free rate, to the present value of future net lease obligations.
The periodic unwinding of the discount is treated as an imputed interest charge
and is disclosed under net financial items.
The net property provision at the December 31, 2002 was (pound)24.6
million. Of this the majority of the provision relates to properties in North
America and the United Kingdom, and in the Advertising and Integrated Marketing
business segment.
The underlying assumptions are constantly revised, and they are
particularly affected by changes in tenancy conditions and hence, occupation.
Deferred Taxation
Deferred taxation is provided in full on all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a right to
pay less tax in the future have occurred at the balance sheet date. Deferred tax
assets are recognized only when, based on the short term forecasts and the
assumption that tax rates will remain stable, it can be regarded as more likely
than not that there will be suitable taxable profits from which the future
reversal of the underlying timing differences can be deducted A careful
assessment is made of the available evidence, both positive and negative, and
then judgment is used to assess the portion of the deferred tax asset for which
it is more likely than not that a deferred tax asset will be realized.
At the year-end December 31, 2002 there was a net deferred tax asset of
(pound)7.5 million. This is comprised of a gross deferred tax asset of
(pound)105.7 million, a valuation allowance against this of (pound)93.6 million
and deferred tax liabilities of (pound)4.6 million.
Discussions with the Audit Committee
-33-
The critical accounting policies and the estimates arising have been
discussed with the Audit Committee.
New and Prospective US GAAP Accounting Changes
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that an obligation that is
unavoidable as a result of either the acquisition or the normal operation of a
long-lived asset be recognized as a liability when incurred. The amount of the
liability should initially be measured at fair value. Subsequent to initial
measurement, an entity should recognize changes in the amount of the liability
resulting from (a) the passage of time and (b) revisions to either the timing or
amount of estimated cash flows. SFAS No. 143 also requires that, upon initial
recognition of a liability for an asset retirement obligation, an entity
capitalize that cost by recognizing an increase in the carrying amount of the
related long-lived asset. The Group wass required to adopt the provisions of
SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not
have a material impact on the 2002 consolidated financial statements.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No.145 "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections." SFAS No. 145 provides for the rescission of several
previously issued accounting standards, new accounting guidance for the
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. SFAS No. 145 will
be adopted beginning January 1, 2003, except for the provisions relating to the
amendment of SFAS No. 13, which will be adopted for transactions occurring
subsequent to May 15, 2002. The adoption of SFAS No. 145 will not have a
material impact on the consolidated financial statements.
In June 2002, the FASB issued SFAS No 146 "Accounting for Costs Associated
with Exit or Disposal Activities". This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and requires
that a liability for a costs associated with an exit or disposal activity is
recognized when the liability is incurred. The group is required to adopt the
provisions of SFAS No. 146 for exit of disposal activities initiated after
December 31, 2002. The Group is reviewing the impact of SFAS No. 146.
In December 2002, the FASB issued SFAS No. 148 "Accounting for share-based
compensation - transition and disclosures". It amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation. In addition, this
statement amends the disclosure provision of SFAS No. 123. The Group is
reviewing the impact of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45 " FIN 45:
Guarantor's accounting and disclosure requirements for guarantees, including
indirect guarantees of indebtedness of others". It addresses disclosure
requirements for guarantors in respect of guarantees issued (including
guarantees embedded in other contracts) and requires a liability to be
recognized for the fair value of the obligations assumed under guarantees
issued. The disclosure requirements are effective for periods ending after 15
December 2002 and the measurement requirements are effective for guarantees
issued from January 1, 2003. FIN 45 has not had an impact on these consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46 "FIN 46:
Consolidation of variable interest entities". It addresses the criteria to be
applied when determining whether certain special purpose entities (variable
interest entities) should be consolidated and requires disclosures to be made if
the involvement with an unconsolidated variable interest entity is significant.
Variable interest entities are entities for which control is achieved through
means other than through voting rights. The interpretation is effective for
interests in entities acquired after January 31, 2003, and applies in the first
fiscal year beginning after June 15, 2003 to variable interest entities in which
an enterprise holds a variable interest that is acquired before February 1,
2003. The Group is currently reviewing the impact of FIN 46 on the consolidated
financial statements.
-34-
The EITF clarified the provisions of Issue No. 00-21 "Revenue Arrangement
with Multiple Deliverables". This Issue discusses the accounting for
arrangements with customers that involve the delivery or performance of multiple
products, services and/or rights to use assets, where performance by the vendor
may occur at different points in time or over different period of time. The
guidance in Issue 00-21 is effective for revenue arrangements entered into in
reporting periods beginning after June 15, 2003.
The EITF clarified the provisions of Issue No. 02-16 "Accounting by a
customer (including a reseller) for Certain Consideration Received from a
vendor". The consensus is that cash consideration received by a customer from a
vendor is presumed to be a reduction of the price of the vendors' product or
services, and should be recognized as a reduction of cost of sales in the
customer's income statement, unless the consideration is a cost reimbursed or a
payment for assets or services delivered to the vendor. The EITF concluded that
the consensus should be applied to arrangements entered into after December 31,
2002.
Results of Operations
Explanatory Note
The Group's operating profits and margins for 2002, 2001 and 2000 are
presented below. Also discussed are the Group's operating profits and operating
margins before goodwill amortization, exceptional goodwill impairment charges
and exceptional operating expenses. Amounts related to goodwill amortization and
goodwill impairment are determined in accordance with the critical accounting
policies described above. In accordance with UK GAAP, Cordiant considers a
goodwill impairment charge to be "exceptional" when it is a material item which
derives from events or transactions that fall within the ordinary activities of
the reporting entity and which individually or, if of a similar type, in
aggregate, needs to be disclosed by virtue of its size or incidence if the
financial statements are to give a true and fair view of the reporting entity.
Additionally, in accordance with UK GAAP, Cordiant considers an operating
expense to be "exceptional" when it is considered to be a material item which
derives from events or transactions that fall within the ordinary activities of
the reporting entity and which individually or, if of a similar type, in
aggregate, needs to be disclosed by virtue of its size or incidence if the
financial statements are to give a true and fair view of the reporting entity.
In addition, the Group has also presented its comparative revenue and
operating expense information on a "constant currency" basis and on an
"underlying" basis. Comparative revenues or operating expenses on a constant
currency basis mean that the revenues or operating expenses for the most recent
year under review and the preceding year have been translated using the exchange
rates relating to the most recent year under review. Constant currency revenues
or operating expenses therefore eliminates the effects of changes in exchange
rates. Comparative revenues or operating expenses on an underlying basis is
calculated at constant exchange rates and after comparing revenues or operating
expenses generated in the most recent year by companies acquired in the most
recent year to revenues or operating expenses generated by such companies in the
preceding year assuming such companies had been owned for an equivalent period
of the preceding year.
Cordiant believes that for 2002 and 2001 operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses provides a clearer representation of the underlying performance of its
business. In 2000, the Group did not incur any goodwill amortization,
exceptional impairment or exceptional operating expenses. Similarly, Cordiant
believes that presentation of comparative revenues or operating expenses on a
constant currency and an underlying basis provide an additional basis for
comparing the performance of the Group's business from year to year without the
distorting effect of exchange rate movements and acquisitions which do not
reflect performance of the business. Nevertheless, neither of these bases of
presentation should be considered an alternative to UK or US GAAP as a measure
of operating profit, revenue or operating expenses. Operating profit before
goodwill amortization, exceptional goodwill impairment charges and exceptional
operating expenses, and comparative revenues or operating expenses on a constant
currency and underlying basis, are not a measure of financial performance under
UK or US GAAP. Additionally, these measures may not be comparable to other
similar titled measures for other companies.
-35-
The business segment analysis for 2001 has been restated to reflect the
transfer of certain businesses, including CCG.XM, between Advertising and
Integrated Marketing and Specialist Communications. The effect of this has been
(1) to increase revenues and decrease profits for Advertising and Integrated
Marketing in 2001 by (pound)10.1 million and (pound)4.4 million respectively,
and to decrease revenues and increase operating profits for Specialist
Communications by (pound)10.1 million and (pound)4.4 million respectively, and
(2) to increase and decrease respectively the net assets of Advertising and
Integrated Marketing and Specialist Communications in 2001 by (pound)10.0
million before goodwill and investments, deferred and contingent consideration,
and net financial items.
Year Ended December 31, 2002 vs Year Ended December 31, 2001
The challenging market conditions that existed in 2001 continued in 2002.
Revenues declined by 11.9 percent in 2002 to (pound)532.7 million primarily as a
result of a (pound)47.5 million decline in revenues in North America due to
client losses in the advertising business and reduced levels of activity in the
Specialist Communications business. In September 2002, Cordiant announced a
wide-ranging program to reduce costs and the formation of the Bates Group. These
initiatives resulted in a 12.8 percent decrease in operating expenses before
goodwill amortisation, exceptional goodwill impairment charges and exceptional
operating expenses, derived primarily from reduced staff costs, the co-location
of operations, elimination of duplicated support functions and the closure or
sale of under-performing operations. Total operating expenses decreased 14.3
percent in 2002 to (pound)741.3 million primarily as a result of a (pound)72.8
million decrease in operating expenses before goodwill amortisation, exceptional
goodwill impairment charges and exceptional operating expenses, and a
(pound)53.7 million decrease in exceptional goodwill impairment charges.
Despite the decrease in revenues, operating profit before goodwill
amortisation, exceptional goodwill impairment charges and exceptional operating
expenses increased by 1.4 percent in 2002 to (pound)37.0 million, primarily as a
result of a 12.8 percent decrease in operating expenses before goodwill
amortisation, exceptional goodwill impairment charges and exceptional operating
expenses described above. As a result, operating margin before goodwill
amortisation, exceptional goodwill impairment charges and exceptional operating
expenses increased in 2002 to 6.9 percent from 6.0 percent in 2001. Because of
the significant operating losses reported in 2002 and 2001, operating margins
were not meaningful in those years.
As a result of the program to align the Group's cost base with business
conditions and the formation of the Bates Group, exceptional operating expenses
increased 65.3 percent in 2002 to (pound)45.6 million, consisting of (pound)21.6
million of severance costs, including costs related to senior management
changes, (pound)20.5 million attributable to relocation costs, property
provisions, asset write-downs, disposals and closure costs, and (pound)3.5
million relating to exceptional financing expenses from the refinancing that was
completed in April 2002. In addition, the Group incurred an exceptional goodwill
impairment charge of (pound)171.1 million in 2002 and goodwill amortization of
(pound)28.9 million.
The Group's operating loss was (pound)208.6 million in 2002 compared to
(pound)260.0 million in 2001. The decrease in operating loss was attributable to
a decrease of (pound)123.7 million in operating expenses, which exceeded the
decrease in revenues of (pound)72.3 million.
Geographical Analysis
Revenue
Revenue by geographical area was as follows:
Total % of Total Total % of Total
------- ------------- --------- ------------
2002 2002 2001 2001
Revenue by geographical area (pound)m % (pound)m %
---------------------------------------------------
United Kingdom 110.4 20.7 118.6 19.6
North America 142.8 26.8 190.3 31.5
Continental Europe, Africa and India 135.2 25.4 143.6 23.7
Asia Pacific and Latin America 144.3 27.1 152.5 25.2
---------------------------------------------------
Total 532.7 100.0 605.0 100.0
===================================================
-36-
Comparative revenues by geographical area and revenue by geographical area
were as follows:
Revenue Decline in 2002
-----------------------
Constant
Reported Currency Underlying
----------------------------
% % %
United Kingdom (6.9) (6.9) (10.5)
North America (25.0) (21.8) (21.9)
Continental Europe, Africa and India (5.8) (6.8) (8.6)
Asia Pacific and Latin America (5.4) (0.4) (1.4)
--------------------------------------
Group (11.9) (9.9) (11.3)
======================================
In the UK, reported revenues declined by 6.9%, and by 10.5% on an
underlying basis, to (pound)110.4 million, principally due to reduced client
spending and difficult market conditions at the Group's branding, design,
business communications and field marketing operations, which was only partly
offset by growth from the advertising and sales promotion agencies.
In North America, reported revenues declined by 25.0%, and by 21.9% on an
underlying basis, to (pound)142.8 million, primarily as a result of the lower
levels of activity in the Specialist Communications businesses and the impact of
the loss of Hyundai and Wendy's as clients in the advertising business.
In Continental Europe, reported revenues declined by 5.8% to (pound)135.2
million. On an underlying basis revenues declined by 8.6%, reflecting
significant reductions in client spending in response to the difficult
macroeconomic conditions experienced by the region in 2002.
Asia Pacific and Latin American reported revenues decreased by 5.4%, and by
1.4% on an underlying basis, to (pound)144.3 million. Growth in Brazil and many
Asian markets was offset by reduced spending in Korea and Greater China.
Operating Profit/(Loss)
Operating profit/(loss) by geographical area was as follows:
Goodwill
Operating Profit Amortization,
Before Goodwill Exceptional
Amortization, Goodwill
Exceptional Goodwill Impairment
Impairment Charges and Charges and
Exceptional Operating Exceptional
Expenses Operating Expenses Operating Loss
------------------------------------------------------------------------
2002 2002 2002 2001
Operating profit/(loss) by geographical (pound)m (pound)m (pound)m (pound)m
area
------------------------------------------------------------------------
United Kingdom 14.4 (110.6) (96.2) (45.2)
North America 7.0 (95.3) (88.3) (160.4)
Continental Europe, Africa and India 4.0 (29.4) (25.4) (10.3)
Asia Pacific and Latin America 11.6 (10.3) (1.3) (44.1)
------------------------------------------------------------------------
Group 37.0 (245.6) (208.6) (260.0)
========================================================================
-37-
All results relate to existing operations. There were no acquisitions in
2002.
The following tables contain an analysis of goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses by
geographical region in 2002 and 2001:
Exceptional Exceptional
Goodwill Goodwill Operating Expenses
Amortization Impairment Charges Total
2002 2002 2002 2002
----------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
United Kingdom 10.9 87.1 12.6 110.6
North America 10.8 61.1 23.4 95.3
Continental Europe, Africa and India 4.1 18.1 7.2 29.4
Asia Pacific and Latin America 3.1 4.8 2.4 10.3
----------------------------------------------------------------------------
Group 28.9 171.1 45.6 245.6
============================================================================
Exceptional Exceptional
Goodwill Goodwill Operating Expenses
Amortization Impairment Charges Total
2001 2001 2001 2001
-----------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
United Kingdom 12.8 42.0 4.1 58.9
North America 21.2 140.7 10.8 172.7
Continental Europe, Africa and India 4.0 6.2 5.9 16.1
Asia Pacific and Latin America 6.1 35.9 6.8 48.8
-----------------------------------------------------------------------------
Group 44.1 224.8 27.6 296.5
=============================================================================
The following table compares, by geographical region, declines in operating
profit/(loss) before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses in 2002 and 2001 and declines in
operating profit/(loss) in 2002 and 2001. Additionally the table below
indicates, for each geographical region, for 2002 and 2001, such region's
percentage of operating profit/(loss) before goodwill amortization, exceptional
goodwill impairment charges and exceptional operating expenses and also, for
2002 and 2001, such region's percentage of operating profit/(loss).
-38-
Operating Profit/(Loss) Percentage of Group
Before Goodwill Operating Profit/(Loss)
Amortization, Exceptional Before Goodwill
Goodwill Impairment Amortization, Exceptional
Charges and Exceptional Operating Goodwill Impairment
Operating Expenses Profit/(Loss) Charges and Exceptional Percentage of Group
Growth/(Decline) Growth/(Decline) Operating Expenses Operating Loss
-------------------------------------------------------------------------------------------------
2002 2002 2002 2001 2002 2001
% % % % % %
-------------------------------------------------------------------------------------------------
United Kingdom 5.1 (112.8) 38.9 37.5 46.1 17.4
North America (43.1) 45.0 18.9 33.7 42.3 61.7
Continental Europe, (31.0) (146.6) 10.8 15.9 12.2 3.9
Africa and India
Asia Pacific and 146.8 102.9 31.4 12.9 (0.6) 17.0
Latin America
-------------------------------------------------------------------------------------------------
Group 1.4 19.8 100.0 100.0 100.0 100.0
=================================================================================================
Margins
Operating margins were not meaningful for 2002 because most regions
experienced losses in 2002. The 2002 and 2001operating margins (based on
operating profits before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses) and the 2002 and 2001operating
margins by geographical area were as follows:
Operating Margins Before
Goodwill Amortization,
Exceptional Goodwill
Impairment Charges and
Exceptional Operating Expenses Operating Margins
----------------------------------------------------------------------
2002 2001 2002 2001
% % % %
----------------------------------------------------------------------
United Kingdom 13.0 11.6 (87.1) (38.1)
North America 4.9 6.5 (61.8) (84.3)
Continental Europe, Africa and India 3.0 4.0 (18.8) (7.2)
Asia Pacific and Latin America 8.0 3.1 0.9 (28.9)
----------------------------------------------------------------------
Group 6.9 6.0 (39.2) (43.0)
======================================================================
The Group experienced an operating loss of (pound)208.6 million in 2002.
Group operating profit before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses was (pound)37.0 million in
2002, which was 1.4 percent more than the Group operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses of (pound)36.5 million in 2001.
In the UK, there was an operating loss of (pound)96.2 million in 2002
compared to an operating loss of (pound)45.2 million in 2001. This increased
operating loss was primarily due to an increase in exceptional goodwill
impairment charges in 2002 of (pound)45.1 million. Operating profit before
goodwill amortization, exceptional goodwill impairment charges and exceptional
operating expenses was (pound)14.4 million in 2002, which was 5.1 percent higher
than operating profit before goodwill amortisation, exceptional goodwill
impairment charges and exceptional operating expenses of (pound)13.7 million in
2001. UK performance in 2002 primarily reflected the control over
non-exceptional operating expenses, which decreased by 8.5 percent to
(pound)96.0 million. On an
-39-
underlying basis, non-exceptional operating expenses decreased by 11.2 percent.
The operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) in
2002 was 13.0 percent, which is 1.4 percent higher than the operating margin
(based on an operating profit before goodwill amortisation, exceptional goodwill
impairment charges and exceptional operating expenses) of 11.6 percent in 2001.
In North America, there was an operating loss of (pound)88.3 million in
2002 compared to an operating loss of (pound)160.4 million in 2001. This
decrease in operating loss was primarily due to a reduction in exceptional
goodwill impairment charges of (pound)79.6 million and a decrease in goodwill
amortization of (pound)10.4 million, offset by increased exceptional operating
expenses of (pound)12.6 million. Operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses was
(pound)7.0 million in 2002, which amount was 43.1 percent lower than operating
profit before goodwill amortisation, exceptional goodwill impairment charges and
exceptional operating expenses of (pound)12.3 million in 2001. The performance
in 2002 primarily reflects the lower levels of activity in the Specialist
Communications businesses and the impact of client losses, particularly Hyundai
and Wendy's, in the advertising business. Although non-exceptional operating
expenses fell by 23.7 percent, and by 20.7 percent on an underlying basis, to
(pound)135.8 million, this only partially offset the effects of reduced revenue.
The operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) in
2002 was 4.9 percent, which is 1.6 percent lower than the operating margin
(based on an operating profit before goodwill amortisation, exceptional goodwill
impairment charges and exceptional operating expenses) of 6.5 percent in 2001.
In Continental Europe, there was an operating loss of (pound)25.4 million
in 2002 compared to an operating loss of (pound)10.3 million in 2001. This
increase in operating loss was primarily due to an increase in exceptional
goodwill impairment charges of (pound)11.8 million in 2002. Operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses was (pound)4.0 million in 2002, which was 31.0
percent lower than operating profit before goodwill amortisation, exceptional
goodwill impairment charges and exceptional operating expenses of (pound)5.8
million in 2001. The performance in 2002 primarily reflected significant
reductions in client spending in response to the difficult market conditions
experienced in the region in 2002. On an underlying basis, non-exceptional
operating expenses decreased by 7.8 percent primarily due to tight cost control
measures. Operating margin (based on operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses) in 2002 was 3.0 percent, which margin is 1.0 percent lower than the
operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) of
4.0 percent in 2001.
In Asia Pacific and Latin America, there was an operating profit of
(pound)1.3 million in 2002 compared to an operating loss of (pound)44.1 million
in 2001. The operating profit was primarily due to a decrease in exceptional
goodwill impairment charges of (pound)31.0 million in 2002. Operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses was (pound)11.6 million in 2002, which was 146.8
percent higher than operating profit of (pound)4.7 million in 2001.
Non-exceptional operating expenses decreased by 10.2 percent to (pound)132.7
million. On an underlying basis operating expenses were reduced by 7.4 percent,
primarily reflecting cost reductions in the Group's Australian and Korean
operations. Operating margin (based on operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses) in 2002 was 8.0 percent, which is 4.9 percent higher than the
operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) of
3.1 percent in 2001.
Net Assets
The primary reasons for the decrease in net assets set forth in the table
below were exceptional goodwill impairment charges of (pound)171.1 million,
exceptional operating expenses of (pound)45.6 million and goodwill amortization
charges of (pound)28.9 million, offset by an increase in net assets of
(pound)9.4 million. Exceptional goodwill impairment charges of (pound)87.1
million were incurred in the United Kingdom and (pound)61.1 million in North
America, both of which primarily related to the Specialist Communications
business. Exceptional operating expenses of (pound)23.4 million were incurred in
North America which related to both the Advertising and Integrated Marketing,
and Specialist Communications businesses:
-40-
2002 2001
Net assets by geographical area (pound)m (pound)m
--------------------------------------
United Kingdom 86.5 187.3
North America 64.6 155.5
Continental Europe, Africa and India 60.7 72.6
Asia Pacific and Latin America 20.8 44.7
--------------------------------------
232.6 460.1
Net financial items(1) (151.7) (143.0)
--------------------------------------
Net assets 80.9 317.1
======================================
Business Segments Analysis
Revenue
Revenue by business segment was as follows:
Total % of Total Total % of Total
2002 2002 2001 2001
Revenue by business segment (pound)m % (pound)m %
-------------------------------------------------------------
Advertising & Integrated Marketing 410.1 77.0 458.0 75.7
Specialist Communications 122.6 23.0 147.0 24.3
-------------------------------------------------------------
Total 532.7 100.0 605.0 100.0
=============================================================
All results relate to existing operations. There were no acquisitions in
2002.
Revenue decline by business segment was as follows:
Revenue Decline in 2002
Constant
------------------------------------------
Reported Currency Underlying
% % %
------------------------------------------
Advertising & Integrated Marketing (10.5) (8.3) (9.0)
Specialist Communications (16.6) (14.8) (18.1)
------------------------------------------
Group (11.9) (9.9) (11.3)
==========================================
Advertising and Integrated Marketing revenues decreased by 10.5 percent,
and by 9.0 percent on an underlying basis to (pound)410.1 million The reduction
reflected the significant client losses in North America, reductions in client
spending in Continental Europe and Korea reflected challenging market
conditions, which were only partially offset by growth in Brazil and some Asian
markets.
-------------------
1 Net financial items include cash at banks, cash deposits included in
current asset investments, loans and overdrafts, and obligations under
finance leases and hire purchase commitments.
-41-
Specialist Communications revenues decreased by 16.6 percent, and by 18.1
percent on an underlying basis to (pound)122.6 million, primarily reflecting
reduced activity levels in branding and design, pricing pressure in healthcare
in North America, and the impact of reduced capital markets activity on
project-related assignments in business communications.
Operating Profit(Loss)
Operating profit/(loss) by business segment was as follows:
Operating Profit/(Loss)
Before Goodwill
Amortization, Goodwill Amortization,
Exceptional Goodwill Exceptional Goodwill
Impairment Charges and Impairment Charges and
Exceptional Operating Exceptional Operating
Expenses Expenses Operating Profit/(Loss)
---------------------- ----------------------- ------------------------
2002 2002 2002 2001
Operating profit/(loss) by (pound)m (pound)m (pound)m (pound)m
segment -----------------------------------------------------------------------------
Advertising & Integrated
Marketing 27.1 (89.0) (61.9) (98.1)
Specialist Communications 9.9 (156.6) (146.7) (161.9)
------------------------------------------------------------------------------
Group 37.0 (245.6) (208.6) (260.0)
==============================================================================
The following tables contains an analysis of goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses by
segment in 2002 and 2001:
Exceptional
Goodwill Goodwill Exceptional
Amortization Impairment Charges Operating Expenses Total
------------ ------------------ ------------------ -----
2002 2002 2002 2002
-----------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------
Advertising & Integrated Marketing 10.7 46.2 32.1 89.0
Specialist Communications 18.2 124.9 13.5 156.6
-----------------------------------------------------------------------
Group 28.9 171.1 45.6 245.6
=======================================================================
-42-
Exceptional
Goodwill Goodwill Exceptional
Amortization Impairment Charges Operating Expenses Total
------------ ------------------ ------------------ ------
2001 2001 2001 2001
--------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Advertising & Integrated Marketing 17.5 75.9 21.6 115.0
Specialist Communications 26.6 148.9 6.0 181.5
--------------------------------------------------------------------------
Group 44.1 224.8 27.6 296.5
==========================================================================
The following table compares, by business segment, declines in operating
profit/loss before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses in 2002 and 2001 and declines in
operating profit/loss in 2002 and 2001. Additionally, the table below indicates,
for each business segment, for 2002 and 2001, such business segment's percentage
of operating profit/loss before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses and also, for 2002 and
2001, such business segment's percentage of operating profit/loss before
goodwill amortization, exceptional goodwill impairment charges and exceptional
operating expenses.
Operating Profit/(Loss) Percentage of Group
Before Goodwill Operating
Amortization, Profit/(Loss) Before
Exceptional Goodwill Goodwill Amortization,
Impairment Charges and Operating Exceptional Goodwill
Exceptional Operating Profit/(Loss) Impairment Charges and Percentage of
Expenses Growth/ Exceptional Operating Group Operating
Growth/(Decline) Decline Expenses Loss
---------------------- ------------- ----------------------- ---------------
2002 2002 2002 2001 2002 2001
% % % % % %
---------------------------------------------------------------------------------
Advertising & Integrated Marketing 60.4 36.9 73.2 46.3 29.7 37.7
Specialist Communications (49.5) 9.4 26.8 53.7 70.3 62.3
----------------------------------------------------------------------------------
Group (1.4) (19.8) 100.0 100.0 100.0 100.0
==================================================================================
Margins
Operating margins were not meaningful for 2002 because both segments
experienced losses in 2002. The 2002 operating margins (based on operating
profits before goodwill amortization, exceptional goodwill impairment charges
and exceptional operating expenses) and the 2002 operating margins by business
segment were as follows:
-43-
Operating Margins Before Goodwill
Amortization, Goodwill Impairment
Charges and Exceptional Operating
Expenses Operating Margins
-----------------------------------------------------------------------
2002 2001 2002 2001
% % % %
-----------------------------------------------------------------------
Advertising & Integrated Marketing 6.6 3.7 (15.1) (21.4)
Specialist Communications 8.1 13.3 (119.7) (110.1)
-----------------------------------------------------------------------
Group 6.9 6.0 (39.2) (43.0)
=======================================================================
Within the Advertising & Integrated Marketing business, there was an
operating loss of (pound)61.9 million in 2002 compared to an operating loss of
(pound)98.1 million in 2001. This decrease in operating loss was primarily due
to a reduction of (pound)29.7 million in exceptional goodwill impairment
charges. Non-exceptional operating expenses decreased by 13.2% on a reported
basis and 11.8% on an underlying basis, which were in excess of the rates of
revenue decline. Operating profit before goodwill amortization, exceptional
goodwill impairment charges and exceptional operating expenses was (pound)27.1
million in 2002, which amount was 60.4 percent higher than operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses of (pound)16.9 million in 2001. Operating margin
(based on operating profit before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses) in 2002 was 6.6 percent,
which is 2.9 percent higher than the operating margin (based on operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses) of 3.7 percent in 2001.
Within the Specialist Communications business, there was an operating loss
of (pound)146.7 million in 2002 compared to an operating loss of (pound)161.9
million in 2001. This decrease in operating loss was primarily due to a
reduction of (pound)24.0 million in exceptional goodwill impairment charges.
Despite a reduction of 11.5% operating expenses on a reported basis, and 13.8%
on an underlying basis, the significant revenue decline resulted in operating
profit before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses falling to (pound)9.9 million in 2002, which was
49.5 percent lower than operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses of
(pound)19.6 million in 2001. Operating margin (based on operating profit before
goodwill amortization, exceptional goodwill impairment charges and exceptional
operating expenses) in 2002 was 8.1 percent, which is 5.2 percent lower than the
operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) of
13.3 percent in 2001.
Net Assets
The primary reasons for the decrease in net assets set forth in the table
below were exceptional goodwill impairment charges of (pound)171.1 million,
exceptional operating expenses of (pound)45.6 million and goodwill amortization
charges of (pound)28.9 million, offset by an increase in net assets of
(pound)9.4 million. Exceptional goodwill impairment charges of (pound)87.1
million were incurred in the United Kingdom and (pound)61.1 million in North
America, both which primarily related to the Specialist Communications business.
Exceptional operating expenses of (pound)23.4 million were incurred in North
America which related to both the Advertising and Integrated Marketing, and
Specialist Communications businesses:
-44-
2002 2001
Net assets by business segment (pound)m (pound)m
--------------------------------------
Advertising & Integrated Marketing 89.1 147.0
Specialist Communications 143.5 313.1
--------------------------------------
232.6 460.1
Net financial items* (151.7) (143.0)
--------------------------------------
Net assets 80.9 317.1
======================================
-----------------
* Net financial items include cash at banks, cash deposits included in
current asset investments, loans and overdrafts, and obligations under
finance leases and hire purchase commitments.
Year Ended December 31, 2001 vs. Year Ended December 31, 2000
In 2001, there was an unprecedented decline in marketing expenditures
resulting in the most difficult trading conditions the industry has experienced
in many years. The economic slowdown which began in North America, spread
rapidly to Asia and Europe. The Group experienced revenue declines in most of
the markets in which it operates, with clients changing spending plans at short
notice.
In the first half of 2001, the Group showed flat underlying revenues. In
the second half of the year, a continued decline in media spending, and
cancellations in the Group's project-based operations resulted in a full year
underlying revenue decline of 8.0 percent. The Group's ability to mitigate the
impact of these declines on profitability was limited in the short term and, as
a result, operating margins were significantly reduced in 2001.
Action was taken throughout the Group's operations to reduce operating
costs and restore the Group's ongoing margin prospects. The implementation of a
wide ranging program, including headcount reductions and a number of other cost
related initiatives, resulted in an exceptional operating expense of (pound)27.6
million in 2001. The Group targeted incremental cost savings from these actions
in excess of (pound)30.0 million in 2002.
Exceptional operating items in 2001 related to a wide-ranging program
implemented in 2001, which involved headcount reductions and other cost-related
measures, including the merger or consolidation of a number of the Group's
operating units and the closure or re-organization of certain loss-making
operations. In 2000, the Group did not incur any goodwill amortization,
exceptional goodwill impairment charges or exceptional operating expenses.
Therefore, in those years, operating profit was the same as operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses. For the purpose of comparing operating profits
and operating margins in 2001 and 2000, the discussion below compares operating
profit before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses in 2001 to Group operating profit in 2000.
Geographical Analysis
Revenue
Revenue by geographical area was as follows:
Existing Acquisitions Total % of Total Total % of Total
-------- ------------ ----- ----------- ----- ----------
2001 2001 2001 2001 2000 2000
Revenue by geographical area (pound)m (pound)m (pound)m % (pound)m %
------------------------------------------------------------------------------------------------------------------------
United Kingdom 113.1 5.5 118.6 19.6 84.1 16.4
North America 186.2 4.1 190.3 31.5 148.5 29.0
Continental Europe, Africa and India 138.1 5.5 143.6 23.7 133.1 25.9
Asia Pacific and Latin America 147.2 5.3 152.5 25.2 147.3 28.7
---------------------------------------------------------------------------------
Total 584.6 20.4 605.0 100.0 513.0 100.0
=================================================================================
-45-
Comparative revenues by geographical area were as follows:
Revenue Growth 2001
Constant
Reported Currency Underlying
% % %
-------------------------------------
United Kingdom 41.0 41.0 (3.3)
North America 28.1 21.6 (14.5)
Continental Europe, Africa and India 7.9 6.3 (1.9)
Asia Pacific and Latin America 3.5 8.4 (8.2)
-------------------------------------
Group 17.9 17.1 (8.0)
=====================================
Group revenue increased by 17.9 percent to (pound)605.0 million in 2001
from (pound)513.0 million in 2000. On an underlying basis, revenue decreased by
8.0 percent. Acquisitions made in 2001 contributed revenue of (pound)20.4
million.
In the UK revenues increased by 41.0 percent to (pound)118.6 million,
representing 19.6 percent of Group revenues (2000: 16.4 percent), primarily
reflecting a full year contribution from the acquired Specialist Communications
operations. United Kingdom revenues decreased by 3.3 percent on an underlying
basis.
In North America, revenues increased by 21.6 percent on a constant currency
basis to (pound)190.3 million. On an underlying basis revenues decreased by 14.5
percent. The region represented 31.5 percent of the Group's revenues in 2001
(2000: 29.0 percent). Significant declines were experienced in the Specialist
Communications business, especially in project-based areas and in servicing
technology clients. The Group's principal Advertising and Integrated Marketing
businesses showed greater resistance, experiencing a more modest decline
overall. Hyundai represented revenues of $30.0 million in the United States in
2001.
In Continental Europe, revenues increased by 6.3 percent on a constant
currency basis to (pound)143.6 million and decreased by 1.9 percent on an
underlying basis. This region (which includes revenues derived from Africa and
India) represented 23.7 percent of the Group's revenues (2000: 25.9 percent).
Underlying revenue growth in the first six months of 2001 was offset by a rapid
deterioration in media spending across the region in the second half of the
year.
Asia Pacific and Latin American revenues increased by 8.4 percent on a
constant currency basis to (pound)152.5 million and decreased by 8.2 percent on
an underlying basis. In 2001, this region accounted for 25.2 percent of the
Group's revenues (2000: 28.7 percent). Growth in Bates Asia was offset by
difficult trading conditions in South Korea and Australia with both markets
experiencing substantial cutbacks in client spending.
Operating Profit/(Loss)
Operating profit/(loss) by geographical area was as follows:
-46-
Operating Profit Goodwill
Before Goodwill Amortization,
Amortization, Exceptional
Exceptional Goodwill Goodwill
Impairment Charges Impairment Charges
and Exceptional and Exceptional Operating
Existing Acquisitions Operating Expenses Operating Expenses Profit/(Loss)
-------- ------------ -------------------- ------------------ -------------
2001 2001 2001 2001 2001 2000
Operating profit/(loss) by (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
geographical area
-----------------------------------------------------------------------------------------
United Kingdom 12.0 1.7 13.7 (58.9) (45.2) 7.9
North America 12.0 0.3 12.3 (172.7) (160.4) 15.9
Continental Europe, Africa and India 4.7 1.1 5.8 (16.1) (10.3) 16.0
Asia Pacific and Latin America 3.5 1.2 4.7 (48.8) (44.1) 21.6
-----------------------------------------------------------------------------------------
32.2 4.3 36.5 (296.5) (260.0) 61.4
=========================================================================================
Goodwill amortization, exceptional
goodwill impairment charges and
exceptional operating expenses (261.5) (35.0)
-------------------------
Total (229.3) (30.7)
=========================
The following tables contains an analysis of goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses by
geographical region in 2001. There were not such costs in 2000:
Exceptional Exceptional
Goodwill Goodwill Operating
Amortization Impairment Charges Expenses Total
2001 2001 2001 2001
------------------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
United Kingdom 12.8 42.0 4.1 58.9
North America 21.2 140.7 10.8 172.7
Continental Europe, Africa and India 4.0 6.2 5.9 16.1
Asia Pacific and Latin America 6.1 35.9 6.8 48.8
------------------------------------------------------------------------------
Group 44.1 224.8 27.6 296.5
==============================================================================
The following table compares, by geographical region, declines in operating
profit/loss before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses in 2001 and 2000 and declines in
operating profit/loss in 2001 and 2000 Additionally the table below indicates,
for each geographical region, for 2001 and 2000, such region's percentage of
operating profit/loss before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses and also, for 2001 and
2000, such region's percentage of operating profit/loss.
-47-
Operating
Profit/(Loss) Before Percentage of Group
Goodwill Operating Profit/(Loss)
Amortization, Before Goodwill
Exceptional Goodwill Amortization,
Impairment Charges Exceptional Goodwill
and Exceptional Operating Impairment Charges Percentage of
Operating Expenses Profit/(Loss) and Exceptional Group Operating
Growth/(Decline) Decline Operating Expenses Profit/(Loss)
-------------------- ------------- ----------------------- -----------------
2001 2001 2001 2000 2001 2000
% % % % % %
-----------------------------------------------------------------------------------
United Kingdom 73.0 (672.2) 37.5 12.9 17.4 12.9
North America (22.6) (1,108.8) 33.7 25.9 61.7 25.9
Continental Europe, Africa and (63.8) (164.4) 15.9 26.0 3.9 26.0
India
Asia Pacific and Latin America (78.2) (304.2) 12.9 35.2 17.0 35.2
-----------------------------------------------------------------------------------
Group (40.6) (523.5) 100.0 100.0 100.0 100.0
===================================================================================
Margins
Operating margins were not meaningful for 2001 because each region
experienced losses in 2001. The 2001 operating margins (based on operating
profits before goodwill amortization, exceptional goodwill impairment charges
and exceptional operating expenses) and the 2000 operating margins by
geographical area were as follows:
Operating Margins Before Goodwill
Amortization, Exceptional Goodwill
Impairment Charges and Exceptional
Operating Expenses Operating Margins
------------------ -----------------
2001 2000 2001 2000
% % % %
-----------------------------------------------------------------------------------------
United Kingdom 11.6 9.4 (38.1) 9.4
North America 6.5 10.7 (84.3) 10.7
Continental Europe, 4.0 12.0 (7.2) 12.0
Africa and India
Asia Pacific and Latin 3.1 14.7 (28.9) 14.7
America
-----------------------------------------------------------------------------------------
Group 6.0 12.0 (43.0) 12.0
=========================================================================================
The Group experienced an operating loss of (pound)260.0 million in 2001.
Group operating profit before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses was (pound)36.5 million in
2001, which was 40.6 percent lower than Group operating profit of (pound)61.4
million in 2000. Acquisitions in 2001 contributed operating profits of
(pound)4.3 million.
In the UK, there was an operating loss of (pound)45.2 million in
2001compared to operating profit of (pound)7.9 million in 2000. This decrease in
operating profit was primarily due to a charge for exceptional goodwill
impairment of (pound)42.0 million and goodwill amortization of (pound)12.8
million. Operating profit before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses was (pound)13.7 million in
2001, which was 73.0 percent higher than operating profit of (pound)7.9 million
in 2000. The performance in
-48-
2001 primarily reflected the contribution from acquisitions, new business wins
and improved profitability in the Group's UK advertising businesses. The UK
operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) in
2001 was 11.6 percent, which is 2.2 percent higher than the operating margin of
9.4 percent in 2000.
In North America, there was an operating loss of (pound)160.4 million in
2001 compared to an operating profit of (pound)15.9 million in 2000. This
decrease in operating profit was primarily due to a charge for exceptional
goodwill impairment of (pound)140.7 million and goodwill amortization of
(pound)21.2 million. Operating profit before goodwill amortization, exceptional
goodwill impairment charges and exceptional operating expenses was (pound)12.3
million in 2001, which was 22.6 percent lower than operating profit of
(pound)15.9 million in 2000. The performance in 2001 primarily reflected reduced
revenue in the Advertising and Integrated Marketing and Specialist
Communications businesses as a result of the challenging business environment.
Operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) in
2001 was 6.5 percent, which is 4.2 percent lower than the operating margin of
10.7 percent in 2000.
In Continental Europe, there was an operating loss of (pound)10.3 million
in 2001compared to an operating profit of (pound)16.0 million in 2000. This
decrease in operating profit was primarily due to a goodwill impairment charge
of (pound)6.2 million and exceptional operating expenses of (pound)5.9 million.
Operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses was (pound)5.8 million in 2001, which
was 63.8 percent lower than operating profit of (pound)16.0 million in 2000. The
performance in 2001 primarily reflected significantly reduced spending plans by
clients in the second half of 2001, particularly in the advertising business.
Operating margin (based on operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses) in
2001 was 4.0 percent, which margin is 8.0 percent lower than the operating
margin of 12.0 percent in 2000.
In Asia Pacific and Latin America, there was an operating loss of
(pound)44.1 million in 2001 compared to an operating profit of (pound)21.6
million in 2000. This decrease in operating profit was primarily due to goodwill
impairment charges of (pound)35.9 million, goodwill amortization of (pound)6.1
million, exceptional operating expense of (pound)6.8 million and a significant
decrease in trading performance. Operating profit before goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses was
(pound)4.7 million in 2001, which was 78.2 percent lower than operating profit
before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses of (pound)21.6 million in 2000. The performance
in 2001 primarily reflected weak trading conditions in South Korea and
Australia. Operating margin (based on operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses) in 2001 was 3.1 percent, which margin is 11.6 percent lower than the
operating margin of 14.7 percent in 2000.
Net Assets
The most significant change in net assets year on year was in North
America. This was almost entirely due to an exceptional goodwill impairment
charge of (pound)140.7 million incurred in 2001.
2001 2000
Net assets by geographical area (pound)m (pound)m
--------------------------------------
United Kingdom 187.3 179.7
North America 155.5 279.0
Continental Europe, Africa and India 72.6 69.1
Asia Pacific and Latin America 44.7 60.3
--------------------------------------
460.1 588.1
Net financial items* (143.0) (111.9)
--------------------------------------
Net assets 317.1 476.2
======================================
--------------
* Net financial items include cash at banks, cash deposits included in
current asset investments, loans and overdrafts, and obligations under
finance leases and hire purchase commitments.
-49-
Business Segments Analysis
Revenue
Revenue by business segment was as follows:
Existing Acquisitions Total % of Total Total % of Total
2001 2001 2001 2001 2000 2000
Revenue by business segment (pound)m (pound)m (pound)m % (pound)m %
------------------------------------------------------------------------------
Advertising & Integrated Marketing 454.3 3.7 458.0 75.7 441.5 86.1
Specialist Communications 130.3 16.7 147.0 24.3 71.5 13.9
----------------------------------------------------------------------------
Total 584.6 20.4 605.0 100.0 513.0 100.0
============================================================================
Revenue growth by business segment and revenue by business segment as a
percentage of Group revenue were as follows:
Revenue Growth in 2001
Constant
Reported Currency Underlying
% % %
-----------------------------------------
Advertising & Integrated Marketing 3.7 3.5 (7.8)
Specialist Communications 105.6 103.1 (8.9)
-----------------------------------------
Group 17.9 17.1 (8.0)
=========================================
Group revenue increased by 17.9 percent to (pound)605.0 million in 2001
from (pound)513.0 million in 2000. On an underlying basis, revenue decreased by
8.0 percent. Acquisitions in 2001 contributed revenue of (pound)20.4 million.
Advertising and Integrated Marketing revenues increased by 3.7 percent to
(pound)458.0 million, representing 75.7 percent of Group revenues (2000: 86.1
percent). On an underlying basis, Advertising and Integrated Marketing revenues
declined by 7.8 percent reflecting significant revenue reductions in the second
half of 2001 across the Group's major markets.
Specialist Communication revenues increased by 105.6 percent to
(pound)147.0 million, representing 24.3 percent of Group revenues (2000: 13.9
percent). The increase reflects the full year impact of 2000 acquisitions. On an
underlying basis, Specialist Communications revenues declined by 8.9 percent
with North America units particularly affected due to the deferral and
cancellation of project-based assignments.
-50-
Operating Profit(Loss)
Operating profit/(loss) by business segment was as follows:
Profit Before Amortization,
Goodwill Exceptional
Amortization, Goodwill
Exceptional Impairment
Goodwill Charges and
Impairment Charges Exceptional
and Exceptional Operating Operating
Existing Acquisitions Operating Expenses Expenses Profit/(Loss)
-------- ------------ ------------------ ------------ -------------
2001 2001 2001 2001 2001 2000
Operating (loss)/profit by (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
business segment ---------------------------------------------------------------------------------
Advertising & Integrated Marketing 16.7 0.2 16.9 (115.0) (98.1) 45.3
Specialist Communications 15.5 4.1 19.6 (181.5) (161.9) 16.1
---------------------------------------------------------------------------------
32.2 4.3 36.5 (296.5) (260.0) 61.4
=================================================================================
Goodwill amortization, exceptional
goodwill impairment charges and
exceptional operating expenses (261.5) (35.0)
-------------------------
Total (229.3) (30.7)
=========================
The following tables contains an analysis of goodwill amortization,
exceptional goodwill impairment charges and exceptional operating expenses by
segment in 2001. There were not such expenses in 2000:
Exceptional
Goodwill Goodwill Exceptional
Amortization Impairment Charges Operating Expenses Total
2001 2001 2001 2001
-----------------------------------------------------------------------
(pound)m (pound)m (pound)m (pound)m
Advertising & Integrated Marketing 17.5 75.9 21.6 115.0
Specialist Communications 26.6 148.9 6.0 181.5
-----------------------------------------------------------------------
Group 44.1 224.8 27.6 296.5
=======================================================================
The following table compares, by business segment, declines in operating
profit/loss before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses in 2001 and 2000 and declines in to
operating profit/loss in 2001 and 2000. Additionally, the table below indicates,
for each business segment, for 2001, such business segment's percentage of
operating profit/loss before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses and also, for 2001 and
2000, such business segment's percentage of operating profit/loss.
-51-
Operating
Profit/(Loss) Before
Goodwill Percentage of Group
Amortization, Operating Profit/(Loss)
Exceptional Goodwill Before Goodwill
Impairment Charges Amortization, Exceptional
and Exceptional Operating Goodwill Impairment Percentage of
Operating Expenses Profit/(Loss) Charges and Exceptional Group Operating
Growth/(Decline) Growth/(Decline) Operating Expenses Profit/(Loss)
--------------------- ---------------- ------------------------- ----------------
2001 2001 2001 2000 2001 2000
% % % % % %
----------------------------------------------------------------------------------------
Advertising & Integrated (62.7) (316.6) 46.3 73.8 37.7 73.8
Marketing
Specialist Communications 21.7 (1,105.6) 53.7 26.2 62.3 26.2
----------------------------------------------------------------------------------------
Group (40.6) (523.5) 100.0 100.0 100.0 100.0
========================================================================================
Margins
Operating margins were not meaningful for 2001 because each business
segment experienced operating losses in 2001. The 2001 operating margins (based
on operating profit before goodwill amortization, exceptional goodwill
impairment charges and exceptional operating expenses) and the 2000 operating
margins by business segment were as follows:
Operating Margins Before Goodwill
Amortization, Exceptional Goodwill
Impairment Charges and Exceptional
Operating Expenses Operating Margins
2001 2001 2000
% % %
---------------------------------------------------------------------
Advertising & Integrated Marketing 3.7 (21.4) 10.3
Specialist Communications 13.3 (110.1) 22.5
---------------------------------------------------------------------
Group 6.0 (43.0) 12.0
=====================================================================
Within the Advertising & Integrated Marketing business, there was an
operating loss of (pound)98.1 million in 2001 compared to an operating profit of
(pound)45.3 in 2000. This decrease in operating profit was primarily due to an
exceptional goodwill impairment charge of (pound)75.9 million and goodwill
amortization of (pound)17.5 million. Operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses was (pound)16.9 million in 2001, which was 62.7 percent lower than
operating profit of (pound)45.3 million in 2000. Operating margin (based on
operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses) in 2001 was 3.7 percent, which is
6.6 percent lower than the operating margin of 10.3 percent in 2000. Operating
profit and operating margin were adversely affected by reductions in client
spending in the second half of 2001. These declines were generally attributable
to challenging economic conditions across most of Cordiant's major markets.
Within the Specialist Communications business, there was an operating loss
of (pound)161.9 million in 2001 compared to an operating profit of (pound)16.1
million in 2000. This decrease in operating profit was primarily due
-52-
to exceptional goodwill impairment charges of (pound)148.9 million and goodwill
amortization of (pound)26.6 million. Group operating profit before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses was (pound)19.6 million in 2001, which amount was 21.7 percent greater
than operating profit of (pound)16.1 million in 2000. Operating margin (based on
operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses) in 2001 was 13.3 percent, which is
9.2 percent lower than the operating margin of 22.5 percent in 2000. Operating
profit and operating margin were adversely affected by revenue reductions as a
result of the deferral and cancellation of project based assignments, in
particular in North America.
Net Assets
The most significant change in net assets year on year was in the
Specialist Communications business. This was almost entirely due to the
exceptional goodwill impairment charge of (pound)148.9 million incurred in 2001.
2001 2000
Net assets by geographical area (pound)m (pound)m
------------------------------------
Advertising and Integrated Marketing 154.7 130.4
Specialist Communications 305.4 457.7
------------------------------------
460.1 588.1
Net financial items* (143.0) (111.9)
------------------------------------
Net assets 317.1 476.2
====================================
------------------
* Net financial items include cash at banks, cash deposits included in
current asset investments, loans and overdrafts, and obligations under
finance leases and hire purchase commitments.
Joint Ventures and Associates
The Group's share of operating profits from joint ventures and associated
undertakings, after goodwill amortization ((pound)1.9 million in 2002,
(pound)0.4 million in 2001 and nil in 2000) primarily for Zenith Optimedia Group
Limited, and before October 1, 2001, Zenith Media Worldwide Limited, decreased
to (pound)3.4.million in 2002 from (pound)6.1 million in 2001 and (pound)5.6
million in 2000. The Group's share of Zenith Optimedia's operating profits
decreased to (pound)3.8 in 2002 million from (pound)5.1 million in 2001 (before
goodwill amortisation) Zenith Optimedia incurred an exceptional operating charge
in 2002 of (pound)1.7 million, in relation to restructuring costs in respect of
the integration of Zenith Media and Optimedia businesses. The Group's share of
this charge was (pound)0.4 million.
In October 2001, Cordiant and Publicis Group S.A. completed the creation of
a new media communications group; Zenith Optimedia Group by the transfer of
units of Optimedia Networks and Zenith Media Worldwide into the Zenith Optimedia
Group Limited, a new UK based holding company. Cordiant holds 25 percent and
Publicis Group S.A. holds 75 percent of Zenith Optimedia Group Limited.
Net Interest Expense and Similar Items
Net interest expense and similar items and the FRS 12 finance charge for
Cordiant amounted to (pound)21.4 million in 2002, (pound)16.9 million in 2001
and (pound)9.5 million in 2000. The increase in the charge in 2002 is primarily
due to the full year impact of the debt renegotiations completed in April 2001
and the higher interest rates that the Group has incurred. This is further
described under "-- Liquidity and Capital Resources." The increase in the charge
in 2001 is primarily due to the full year impact of the additional debt incurred
in September 2000 principally to fund cash payments for acquisitions and debt
assumed with the acquisition of Lighthouse Global Network Inc.
-53-
Taxation
In 2002, the Group's tax charge for the year was (pound)1.4 million. The
Group's tax charge is based on the results before goodwill amortization and
impairment. In 2001, the Group's tax charge for the year was (pound)4.5 million.
The reduction in the tax charge in 2002 reflects the utilization of losses in
the United States and the reduced tax charge associated with joint ventures
because of the lower level of profitability. In 2000, the Group's tax charge for
the year was (pound)15.6 million, reflecting the higher levels of profitability
and the international mix of profits in that year.
The tax effect of the exceptional operating items was an estimated credit
of (pound)1.1 million in 2002 and (pound)5.2 million in 2001.
During 2001, Cordiant adopted the new accounting standard FRS 19 "Deferred
Taxation." The 2000 results have been restated to reflect this, which has led to
prior year adjustments of (pound)4.1 million. Of this amount, (pound)2.5 million
is reflected as a reduction in the tax charge shown in the 2000 profit and loss
account, with the remaining (pound)1.6 million recorded in the year ended
December 31, 1999. The balance sheet as at December 31, 2000 has also been
restated to show the creation of a deferred tax asset of (pound)4.1 million.
Equity Minority Interests
Equity minority interests amounted to (pound)4.0 million in 2002, an
increase of 73.9 percent from 2001 ((pound)2.3 million), due to improved results
from Diamond AD in Korea and Brazil.
Equity minority interests amounted to (pound)2.3 million in 2001, a
decrease of 60.3 percent from 2000 ((pound)5.8 million). This decrease was
principally due to the weaker trading of Diamond Ad in Korea. The impact of
Diamond Ad in 2000 was only partially offset by Cordiant's purchase of the
outstanding 10 percent minority in Scholz & Friends A.G. at the start of 2000.
Return Attributable to Shareholders
The Group's net loss attributable to ordinary shareholders for 2002 was
(pound)233.6 million as compared to a net loss of (pound)277.6 million for 2001.
The Group's net loss reflects the continuing decline in economic conditions
encountered across the Group's major markets and the resulting impact of
goodwill amortization, exceptional goodwill impairment charges and exceptional
operating expenses. It also reflects the continued efforts of the Group to
address these issues via restructuring and costs cutting initiatives. These
plans have resulted in exceptional operating expenses being incurred in 2002 of
(pound)45.6 million (2001: (pound)27.6 million). The basic and diluted loss per
share was 57.6p as compared to 71.3p in 2001. The increase reflects the lower
goodwill amortisation and impairment charges in 2002 and a 4 percent increase in
the diluted weighted average number of shares, primarily for payments of
contingent consideration.
The Group's net loss attributable to ordinary shareholders for 2001 was
(pound)277.6 million as compared to a net profit of (pound)36.1 million for
2000. The Group's net loss reflects the decline in operating profit arising from
the difficult economic conditions encountered across the Group's major markets
and the impact of goodwill amortization, exceptional goodwill impairment charges
and exceptional operating expenses. The diluted loss per share was 71.3p in 2001
as compared to a diluted earnings per share of 11.4p for 2000. The decrease
reflects a net loss in 2001 and a 22 percent increase in the diluted weighted
average number of shares, primarily due to shares issued in acquisitions.
In view of the Group's requirements to preserve cash resources to support
its operations and the restrictions agreed with the Group's principal lender,
the Board has not recommended the payment of a dividend in respect of 2002
(2001: (pound)nil). A dividend of 2.1p per share in respect of 2000 was approved
at the Annual General Meeting of shareholders held on June 12, 2001.
-54-
US GAAP
Under UK GAAP, the loss for the year ended December 31, 2002 was
(pound)233.6 million. After taking account of the differences in UK and US GAAP
(which are discussed at the beginning of this Item 5 and more fully in Note 33
in the Notes to the Consolidated Financial Statements), the loss under US GAAP,
was (pound)246.7 million.
Liquidity and Capital Resources
General
The Group's primary liquidity sources are cash flows generated from its
operations, the issuance of equity and debt securities and its banking
facilities. In July 2000, Cordiant entered into a Loan Agreement (the "Loan
Agreement") pursuant to which certain banks (the "Bank Lenders") led by The Bank
of New York and HSBC Investment Bank plc, as arrangers, agreed to advance to
Cordiant and certain of its subsidiaries loan facilities (the "Bank Facility")
of up to $400 million to be used for the purposes of re-financing existing
facilities, other general corporate purposes and paying costs and expenses
incurred in connection with the acquisition of Lighthouse Global Network, Inc.
described below.
The Group's capital structure consists of both senior debt and equity.
Prior to April 2002, the Bank Facility provided committed credit facilities at a
rate between 0.7 to 1.25 percent over LIBOR, depending upon the Group's ability
to achieve certain financial ratios. The Bank Facility initially consisted of
two tranches: (i) $175.0 million ((pound)119.9 million) initially maturing in
November 2000 which was extended to November 2001 at Cordiant's option and
subsequently repaid and cancelled in April 2001, and (ii) $225.0 million
((pound)154.1 million) maturing in November 2004. The Bank Facility required the
Group to comply with financial and other covenants. It also contained provisions
whereby, on the occurrence of certain specified events of default, the amount
made available could be declared immediately due and payable. These events of
default included breach of covenants, cross default by certain companies in the
Group in respect of indebtedness over a specified amount, and a change of
control of Cordiant.
On April 5, 2001, the Group issued $175.0 million ((pound)119.9 million) of
7.61% Guaranteed Senior Notes (the "Notes"), in a private placement to
institutional investors (the "Noteholders"). At original issuance, the Notes
were due to mature in April 2011 and had an average life of eight years taking
into account scheduled repayments of $35.0 million ((pound)24.3 million) per
year, beginning in April 2007. The proceeds of the issue were used to repay and
cancel $175.0 million ((pound)121.5 million) of borrowings under the Bank
Facility which was due to mature in November 2001.
On April 19, 2002, Cordiant and the Bank Lenders and Noteholders completed
the re-negotiation of certain terms of the Bank Facility and the Notes. The
renegotiation was required because of a rapid deterioration of market conditions
that was making it difficult for Cordiant to maintain compliance with the
financial covenants in the Bank Facility and the Notes. The annual coupon
payable on the Notes was increased to 9.25 percent from 7.61 percent. The annual
interest payable on each advance under the Bank Facility was increased to 3.25
percent over LIBOR (or, in the case of euro advances, EURIBOR). Other fees are
payable, the level of which is dependent on Cordiant's financial performance.
The Bank Facility and Notes are secured by guarantees from Cordiant and a number
of its subsidiaries, general debentures over assets of Cordiant and a number of
its U.K. subsidiaries, a Dutch pledge over certain bank accounts of Cordiant
Finance BV, and pledges of shares in certain subsidiaries. In addition, Cordiant
is subject to certain restrictions on its use of cash flow, including
acquisition payments, dividends and its use of proceeds from asset disposals.
The Bank Facility also includes events of default, pursuant to which the amounts
available under the Bank Facility could be declared immediately due and payable.
The events of default include non payment of interest, principal or fees,
certain uncured breaches of the Bank Facility, cross-default to other
indebtedness, bankruptcy or insolvency and material adverse changes. The
Noteholders will be entitled to require Cordiant to pre-pay the Notes in
November 2004 or upon any refinancing in full of the Bank Facility, if earlier,
with a make-whole
-55-
penalty, unless the Group meets certain financial tests at that time. These are
not currently expected to be met. See "Item 10. Additional Information -
Material Contracts."
In February 2003, Cordiant entered into negotiations with its Bank Lenders
and Noteholders to revise the financial covenants in the Bank Facility and the
Notes. Before these negotiations had been concluded, in April 2003, Cordiant was
notified that Allied Domecq, the second largest of its global clients, was
terminating its contract with Cordiant with effect from October 2003. On May 15,
2003, due to an inability to comply with certain financial covenants, the Group
and the Bank Lenders and Noteholders reached an agreement (the "Interim Support
Agreement") pursuant to which the Bank Lenders and Noteholders agreed to waive
through July 15, 2003 compliance with certain covenants which would otherwise
have prevented the Group from having access to its committed undrawn facilities
under the Bank Facility. Access to these funds until July 15, 2003 however
remains subject to certain conditions, including no new event of default
occurring under the Bank Facility, Notes or Interim Support Agreement. The
Interim Support Agreement also amends certain provisions of both the Bank
Facility and the Notes to clarify the terms of payment of certain fees under the
Bank Facility, further restricts the payment of dividends and the making of
acquisitions and conforms certain events of default under both the Bank Facility
and the Notes. On June 19 and July 1, 2003, as described above, WPP acquired the
Group's indebtedness from all of its lenders for (pound)267 million.
Cash Flows from Operating Activities
Cash generated from operating activities in 2002 was (pound)20.4 million
compared to (pound)43.4 million in 2001, a decrease of (pound)23.0 million. This
reflects the decrease in cash generated from operating activities,
pre-exceptional items, which was (pound)46.2 million in 2002 compared to
(pound)52.7 million in 2001 and the impact of exceptional items. There was a net
inflow of working capital of (pound)11.1 million in 2002 compared to a net
inflow of (pound)15.4 million in 2001, where working capital is the net of the
movement in work in progress, debtors and creditors (ignoring interest, tax and
contingent consideration accruals). In 2002, the net cash outflow from
exceptional items was (pound)25.8 million, compared to an outflow from
exceptional items of (pound)9.3 million in 2001.
Cash generated from operating activities in 2001 was (pound)43.4 million
compared to (pound)45.3 million in 2000, a decrease of (pound)1.9 million. The
non-cash charges for depreciation and amortization and goodwill impairment in
2001 were greater than the operating loss. There was a net inflow of working
capital of (pound)16.5 million in 2001 compared to a net outflow of working
capital of (pound)17.4 million in 2000.
Cash Outflows from Returns on Investments and Servicing of Finance
In 2002, cash outflows from returns on investments and servicing of
financing were (pound)23.8 million compared to (pound)17.2 million in 2001. Net
interest paid by the Group increased from (pound)14.2 million in 2001 to
(pound)17.9 million in 2002. This was mainly due to the impact of increased
interest rates on debt as a result of the renegotiated borrowings agreed in
April 2002. Bank fees paid in the year also increased to (pound)3.6 million from
(pound)1.5 million as a result of the refinancing in April 2002. Dividends to
minorities increased from (pound)1.5 million in 2001 to (pound)2.3 million in
2002.
In 2001, cash outflows from returns on investments and servicing of
financing were (pound)17.2 million compared to (pound)11.5 million in 2000. Net
interest paid by the Group increased from (pound)7.1 million in 2000 to
(pound)14.2 million in 2001, largely due to the full year impact of the
additional borrowing incurred in September 2000. Dividends to minorities
decreased from (pound)2.1 million in 2000 to (pound)1.5 million in 2001.
Taxation Paid
Net tax paid by the Group decreased from (pound)13.4 million in 2001 to
(pound)4.7 million in 2002 principally as a result of unrelieved losses in the
Group arising in 2001.
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Cash Flows from Capital Expenditure and Financial Investment
In 2002, payments for the acquisitions of tangible fixed assets, net of
receipts from disposals, amounted to (pound)4.7 million compared to (pound)20.0
million in 2001 due to restraints on capital expenditure in 2002. . In 2002, the
net cash outflow from the acquisition and disposal of miscellaneous investments
was (pound)0.6 million compared with a net cash outflow of (pound)4.7 million in
2001.
In 2001, payments for the acquisitions of tangible fixed assets, net of
receipts from disposals, amounted to (pound)20.0 million compared to (pound)18.1
million in 2000. In 2001, the net cash outflow from the acquisition and disposal
of miscellaneous investments was (pound)4.7 million compared with a net cash
outflow of (pound)5.4 million in 2000.
Cash Flows from Acquisitions and Disposals
Payments for the acquisition of investments in subsidiary and associated
undertakings in 2002 net of cash acquired with companies was (pound)8.4 million
compared with (pound)13.6 million in 2001. In 2002, this mainly related to the
payment of contingent and deferred consideration from acquisitions completed
prior to 2002. Contingent and deferred consideration of (pound)6.3 million was
satisfied by the issuance of 7.6 million Cordiant ordinary shares and a further
payment for contingent consideration of (pound)9.4 million was paid in cash. At
the year end an accrual of (pound)14.0 million remained. This accrual is
expected to result in cash payments of (pound)6.3 million and the issue of
shares with a value of (pound)7.7 million in future years.
Payments for the acquisition of investments in subsidiary and associated
undertakings in 2001 net of cash acquired with companies was (pound)13.6 million
compared with (pound)46.8 million in 2000. Additional acquisition consideration
of (pound)70.8 million was satisfied by the issuance of 30.8 million Cordiant
ordinary shares in respect of the acquisitions of the Group's 100 percent
interest in Microarts Corp., Gallagher and Kelly Public Relations Limited,
Bulletin International Limited, Presentation Communications International
Limited and International Business Information Inc., and earnouts paid in 2001.
Additional costs of approximately (pound)53.0 million relating to deferred
contingent consideration and associated costs relating to acquisitions were also
accrued during 2001, and at the year end an accrual of (pound)24.6 million
remained. These accruals were expected to result in cash payments of (pound)13.0
million and the issue of shares with a value of (pound)11.6 million in future
years.
Proceeds from the sale of subsidiaries during 2002 amounted to (pound)0.6
million. There were no proceeds from the sale of subsidiaries during 2001 and
2000. In 2000, however, an investment was reclassified as a subsidiary as a
result of an increase in the Group's ownership.
Equity Dividends Paid
In 2002, no dividend was paid to the equity shareholders. In 2001, a
dividend to equity shareholders of (pound)8.1 million was paid in relation to
2000 profits. In 2000, a dividend to equity shareholders of (pound)5.1 million
was paid in relation to 1999 profits.
Cash Flows from Financing Activities
In 2002, no shares were issued for cash. In 2002, the net draw down of
Group borrowing facilities was (pound)4.3 million (2001: (pound)70.1 million)
and repayments of finance lease borrowings were (pound)1.0 million (2001:
(pound)1.8 million).
In 2001, shares were issued for a cash value of (pound)4.1 million (2000:
(pound)8.3 million) in connection with the exercise of employee share options.
In 2001, the net draw down of Group borrowing facilities was (pound)70.1 million
(2000: (pound)53.4 million) and repayments of finance lease borrowings were
(pound)1.8 million (2000: (pound)0.4 million). In 2001, the (pound)70.1 million
net draw down of loans consisted of loans drawn of (pound)49.8 million and
repayments of (pound)119.9 million representing the restructuring of the Group's
financing arrangements during the
-57-
year. In 2001, a cash inflow resulted from the issue of $175.0 million
((pound)119.9 million) Guaranteed Senior Notes in a private placement in the
United States which was used to repay bank debt as detailed above.
Material Commitments
At December 31, 2002, the Group had nil (2001: (pound)0.7 million; 2000:
(pound)1.6 million) capital expenditure committed, but not provided for,
relating to expenditure on information technology equipment, furniture and other
equipment.
The Group is committed to make capital payments in future years as a result
of contracts entered into to acquire additional interests in subsidiaries and
associated companies. Such payments are contingent on the levels of profits
achieved by those companies and may be partially paid by the issue of shares at
the Group's option. In addition, the Group is committed to make certain capital
payments in the form of deferred consideration. The Group's best estimate of
commitments, totaling (pound)14.0 million as at December 31, 2002 (2001:
(pound)24.6 million; 2000: (pound)79.4 million), have been accrued in the
balance sheet. Of this amount, (pound)6.3 million is payable in cash with the
remainder of (pound)7.7 million being payable in new Cordiant ordinary shares.
Working Capital
The Group does not expect, notwithstanding the completion of the sale of FD
International, Scholz & Friends A.G. and The Communications Group, to have
sufficient working capital for at least 12 months from the date of this report.
The Group is currently able to pay its debts as they fall due. The Interim
Support Agreement was adopted by WPP upon its acquisition of Group's debt. After
July 15, 2003, Cordiant will be dependent on the continued support of WPP, as
lender. The WPP Group has agreed to continue to allow Cordiant access to its
committed overdraft facilities of up to (pound)6.0 million following July 15,
2003, although such access would terminate in the event that WPP exercises its
right to give an acceleration notice calling for repayment of the debt. If such
support were to be withdrawn, and if additional sources of financing were not
made available to the Group, it is likely that an administrator or
administrative receiver would be appointed in respect of the Group.
See "Item 4: Information on the Company" and the caption: "Recent
Developments - Disposals."
Contractual Obligations and Commercial Commitments
The following table summarizes the principal financial obligations which
are described in Notes 21, 22, 23 and 27 in the Notes to the Consolidated
Financial Statements. This table is based on the financial statements of the
Group which have been prepared on a going concern basis. In the event that it is
determined that the Group's financial statements should have been prepared on a
basis other than that of a going concern, there could be a significant impact on
the amount and timing of the Group's commitments from those set forth in the
table below:
Contractual Obligations and Other Less than
Commercial Commitments Total 1 year 1-3 years 4-5 years After 5 years
-------- ---------- ---------- ---------- -------------
(pound)m (pound)m (pound)m (pound)m (pound)m
Short-term borrowings and current
portion of long-term borrowings 16.3 16.3 - - -
Long-term borrowings 231.8 - 123.1 27.9 80.8
Unconditional cash purchase obligations 4.3 4.3 - - -
Operating lease commitments 170.0 28.9 48.7 31.5 60.9
Other guarantees 191.0 60.3 29.1 29.1 72.5
Total contractual obligations and other
commercial commitments 613.4 109.8 200.9 88.5 214.2
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Short-Term Borrowings and Current Portion of Long-Term Borrowings
At December 31, 2002, the Group's short term borrowings and current portion
of long term borrowings comprised bank loans and overdrafts of (pound)14.9
million (bank loans of (pound)6.9 million; bank overdrafts of (pound)8.0
million) and finance leases of (pound)1.4 million. Bank loans consist primarily
of drawings under the Bank Facility, which by its terms matures in November
2004.
At December 31, 2002, the Group had committed bank facilities of
(pound)155.9 million, of which (pound)126.6 million was drawn at December 31,
2002 (2001: (pound)111.2 million). The Group also had other committed borrowing
facilities of (pound)3.9 million, none of which was drawn at December 31, 2002
(2001: other committed facilities of (pound)8.8 million, none of which were
drawn at December 31, 2001). Borrowings under the Group's committed borrowing
facilities incurred interest at a weighted average rate of 6.78 percent during
2002.
A total of (pound)11.2 million of other Group borrowings were outstanding
at December 31, 2002 (2001: (pound)22.9 million). These are uncommitted
borrowings, and as such could have become repayable on demand at December 31,
2002. An allowance for repayment of uncommitted borrowings is made when
evaluating the Group's liquidity against committed facilities. Other Group
borrowings incurred interest at a weighted average rate of 7.95 percent during
2002.
Long-Term Borrowings
In April 2001, the Group issued $175.0 million ((pound)119.9 million) of
7.61% Guaranteed Senior Notes in a private placement in the United States. At
original issuance, the Notes were due to mature in April 2011 and had an average
life of eight years taking into account scheduled repayments of $35.0 million
((pound)24.3 million) per annum from April 2007. The proceeds of this issue were
used to repay and cancel committed bank facilities of $175.0 million
((pound)121.5 million) which matured in November 2001. Bank loans consist of
drawings under the Group's $225.0 million Bank Facility, which by its terms
matures in November 2004. As disclosed in Note 21 in the Notes to the
Consolidated Financial Statements, certain terms of the Notes were re-negotiated
in April 2002. The coupon payable on the Notes was increased to 9.25 percent per
annum from 7.61 percent.
Under the Interim Support Agreement, the Group's lender has waived
compliance through July 15, 2003 with covenants which would otherwise have
prevented the Group from having access to its committed undrawn facilities under
the Bank Facility. Access to these funds until July 15, 2003 however remains
subject to certain conditions, including no new event of default occurring under
the Bank Facility, Notes or Interim Support Agreement. In addition, following
July 15, 2003, Cordiant will be dependent on the continued support of WPP, as
its primary lender.
The Interim Support Agreement also amends certain provisions of both the
Bank Facility and the Notes to clarify the terms of payment of certain fees
under the Bank Facility, further restricts the payment of dividends and the
making of acquisitions and conforms certain events of default under both the
Bank Facility and the Notes.
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Unconditional Cash Purchase Obligations
The Group is committed to make certain capital payments in the form of
deferred consideration and earnouts with respect to businesses acquired. At
December 31, 2002, the unconditional obligations payable in cash were (pound)4.3
million, and these have been accrued in the balance sheet.
Operating Lease Commitments (Guaranteed and Unguaranteed)
Operating lease commitments relates to leasehold property and other. The
leases are for various periods up to the year 2013.
Capital Expenditure
At December 31, 2002, the Group has no commitments in respect of capital
expenditure.
Other Guarantees
The obligations under other guarantees are discussed below:
(1) Guarantees in respect of obligations by Saatchi & Saatchi plc
companies, which remain in force. Saatchi & Saatchi Limited (formerly Saatchi &
Saatchi plc) has undertaken to indemnify Cordiant for any liability under these
guarantees. These guarantees include operating lease commitments relating to a
leasehold property in New York. The lease expires in the year 2013 and the total
obligations at December 31, 2002 were (pound)145.3 million (2001: (pound)174.9
million).
(2) Guarantees given by Cordiant that were incurred in the normal course of
business amounting to (pound)36.6 million at December 31, 2002 (2001:
(pound)107.6 million) in the aggregate. These guarantees incurred in the normal
course of business primarily relate to the guarantee over Group forward foreign
exchange contracts.
(3) Other guarantees given by Group companies to third parties amounting to
(pound)9.5 million at December 31, 2002 (2001: (pound)5.8 million).
Item 6. Directors, Senior Management and Employees.
Directors and Executive Officers
The current Executive and Non-executive Directors, and Executive Officer of
Cordiant are as follows:
Name Position Age
---- -------- ---
Nigel Stapleton(1) Chairman 56
David Hearn Chief Executive Officer 47
Andrew Boland Finance Director 33
Peter M. Schoning Director 57
Dr. Rolf Stomberg(1)(2) Senior Independent Non-executive Director 63
Jean de Yturbe Non-executive Director 56
Dudley Fishburn(1)(2) Non-executive Director 57
James Tyrrell(1)(2) Non-executive Director 62
Denise Williams Company Secretary 45
-------------------------
(1) Member of Remuneration and Nominations Committee.
(2) Member of Audit Committee.
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Executive Directors
Nigel Stapleton, Chairman. Mr. Stapleton was appointed to the Board as
Non-executive Chairman on March 1, 2003. Prior to joining Reed International plc
in 1986, Mr Stapleton spent 18 years at Unilever where he held a number of
senior finance, corporate development and general management positions. He
worked at Reed International, and subsequently Reed Elsevier plc, for 13 years
and during that time held a number of positions including Chief Financial
Officer and Co-Chairman. Mr Stapleton also spent two years from 1999 with the
U.S.-based media investment bank Veronis, Suhler, Stevenson as Chairman of its
European affiliate. He is also currently a Non-executive Director of Reliance
Security Group plc and the London Stock Exchange plc, and Chairman of Uniq plc.
David Hearn, Chief Executive Officer. Mr. Hearn joined Bates in April 2002
as Chairman and Chief Executive Officer of Bates Worldwide Inc and became Group
Chief Executive Officer on January 1, 2003. He was Chief Executive Officer and
Managing Director of Goodman Fielder Ltd, Australia's largest food manufacturing
company from 1995 to 2001. Between 1991 and 1995 he was a Main Board Director at
United Biscuits plc, and Chief Executive, UB Snackfoods Europe. From 1989 to
1990 he was Vice President at Pepsico's European Snackfoods Division, from 1986
to 1989 he was Managing Director, Smiths Crisps and from 1984 to 1986 he was
Managing Director of Del Monte UK. He was appointed to the Board on April 29,
2002.
Andrew Boland, Group Finance Director. Mr. Boland joined Cordiant in 1998
and became Deputy Finance Director and Group Treasurer in 2001. After qualifying
as a chartered accountant, he spent three years in the WPP corporate finance
team prior to joining Cordiant. He was appointed Group Finance Director in
December 2002 and joined the Board on January 1, 2003.
Peter Schoning, Director. Mr. Schoning joined Scholz & Friends in 1984 as
Managing Director. He was named Managing Partner in 1987. In 1993 he was
appointed Chief Executive Officer of Scholz & Friends and since 1995 he has led
the agency as Chairman and Chief Executive Officer. He was appointed to the
Cordiant Board in December 1997 and appointed Chairman of the Supervisory Board
of Scholz & Friends A.G. in 2001.
Non-executive Directors
Dr. Rolf Stomberg, Senior Independent Non-executive Director. Mr. Stomberg
worked for The British Petroleum Company plc from 1970 to 1997 where he was
Chief Executive Officer for B.P. Oil International and a B.P. Group Managing
Director. He is Chairman of Management Consulting Group plc and serves on a
number of UK and continental boards. He is also a Visiting Professor at Imperial
College Management School, London. He was appointed to the Board in May 1998.
Jean de Yturbe, Non-executive Director. Mr. de Yturbe joined Bates in July
1993 as Chief Executive Officer of Bates France and was named Chairman of Bates
Europe in January 1995. He was appointed to the Board in December 1997 and
became Group President Bates Worldwide in December 1999. He relinquished his
Bates role and was appointed Deputy President of Cordiant in March 2002. He
became a Non-executive Director on 5 March 2003.
Dudley Fishburn, Non-executive Director. Mr. Fishburn is Chairman of H.F.C.
Bank plc and a director of Philip Morris Inc. He is also on the board of Beazley
Group plc. He was previously Member of Parliament for Kensington and Executive
Editor of The Economist. He was appointed to the Board in May 1996.
James Tyrrell,Non-executive Director. Mr. Tyrrell was Group Finance
Director of London International Group until November 1997 and then Executive
Director until August 1998. Previously, he was Group Finance Director of Abbey
National Plc. Prior to joining Abbey National Plc in 1982, he served in a
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number of senior executive positions with Thorn-EMI plc culminating as Managing
Director of HMV Shops Limited. He was appointed to the Board in May 1998.
Executive Officers
Denise Williams joined Cordiant in March 1998 as Deputy Company Secretary.
Prior to that she was Group Secretary at Jacques Vert plc from 1992 to 1998. She
was appointed Company Secretary in March 2000.
Changes in Executive Directors since December 31, 2002
The following individuals were Executive Directors as of December 31, 2002,
but ceased to be so during 2003 and, accordingly, are not listed above: Charles
Scott (formerly Chairman of Cordiant), Michael Bungey (formerly Director and
Chief Executive Officer of Cordiant) and Arthur D'Angelo (formerly Finance
Director of Cordiant).
Re-election of Directors
Cordiant's Articles require the Directors to retire by rotation at least
once in every three-years at the Annual General Meeting, such that each Director
offers himself for re-election at least once every three years. A retiring
Director shall be eligible for re-election. Any Director not re-elected at the
Annual General Meeting shall retain office until the Meeting appoints another
person in his place, or if it does not appoint a replacement, until the end of
the Meeting.
On June 4, 2003, a nominee for funds advised by Active Value Advisors
Limited served a notice on Cordiant, requesting an extraordinary general meeting
of Cordiant for the purpose of voting on a number of resolutions, including the
replacement of Cordiant's existing senior management team with a new management
team supported by Active Value. The extraordinary general meeting has been
called for July 23, 2003, immediately following the meetings that have been
called to approve the scheme of arrangement. Active Value informed Cordiant that
as of July 11, 2003, investment funds advised by Active Value hold 28.74% of
Cordiant's issued share capital.
Corporate Governance
Statement of Compliance
The Board is committed to high standards of corporate governance and has
complied throughout the year with the provisions set out in Section 1 of the
Principles of Good Governance and the Code of Best Practice ("the Combined
Code") with the exception that, for the reasons outlined under "- Service
Agreements," the Board continues to regard it as appropriate that certain
Executive Directors have contractual arrangements in excess of one year or
providing for payment on termination in certain circumstances by reference to
more than one year's remuneration. Also with effect from the retirement of
Professor Theodore Levitt in December 2001, and until the resignation of Ian
Smith and William Whitehead on March 31, 2002, Non-executive Directors comprised
less than one third of the Board. This statement describes how the principles of
corporate governance set out in the Combined Code have been applied within the
Group.
The Board
The Board comprises three Executive Directors, including the Chief
Executive Officer who has overall responsibility for running the Group's
business, and five Non-executive members, including the Chairman who is
responsible for running the Board. With the exception of Jean de Yturbe, the
Board considers all Non-executive Directors to be independent of management and
free from any business or other relationship which could materially interfere
with the exercise of their independent judgement. In accordance
-62-
with the recommendations of the Combined Code, Dr Rolf Stomberg is the appointed
Senior Independent Non-executive Director.
The Board, which met on 10 occasions in 2002, manages overall control of
the Group's affairs via a schedule of matters reserved for its decision. These
include approval of the annual budget, major capital expenditure, significant
acquisitions and disposals, risk management policies and the approval of
financial statements. The Board is supplied in a timely manner with information
in a form and of a quality to enable it to discharge its duties. The Board
delegates certain of its responsibilities to Board committees with clearly
defined authority and terms of reference. The composition and functions of these
committees are described below.
The Audit Committee
The Audit Committee comprises three non-executive Directors only and was
chaired during the year by James Tyrrell. The main duties of the Audit Committee
are to:
o review, on behalf of the Board, the financial statements and
preliminary and interim results;
o review the nature and scope of the external audit and the findings of
the external auditors;
o review, on behalf of the Board, the Group's systems of internal
control;
o review and direct the internal audit function; and
o make recommendations to the Board concerning the appointment and
remuneration of the external auditors.
The Audit Committee met on five occasions during 2002.
The ultimate responsibility for reviewing and approving the financial
statements and preliminary and interim results remains with the Board.
The Remuneration and Nominations Committee
The principal functions of the Remuneration and Nominations Committee are
to determine, on behalf of the Board and the shareholders, the Group's policy
for executive remuneration and the remuneration packages of the Executive
Directors and other senior executives. It also considers new appointments to the
Board of Directors and makes recommendations in this respect to the Board. The
Committee, which met on eight occasions in 2002, comprises four non-executive
Directors only and is chaired by Dudley Fishburn.
The Risk Management Committee
The Risk Management Committee comprises both Executive and Non-executive
Directors. During the year, the Committee was chaired by Charles Scott who
retired from the board on February 28, 2003. The purpose of the Committee is to
assist the Directors in discharging their responsibilities in respect of the
internal control aspects of the Combined Code. The Committee is now chaired by
Nigel Stapleton. The other Committee members are David Hearn, Andrew Boland and
James Tyrrell. The main duties of the Risk Management Committee are to:
o establish on behalf of the Board, a risk-based approach to maintaining
a sound system of internal control which is embedded in the business
processes of the Group;
o review regular reports from management, focusing on an assessment of
the significant risks and the effectiveness of the system of internal
control in managing those risks;
-63-
o undertake an annual assessment of the significant risks facing the
Group and the internal controls to manage those risks;
o undertake an annual review for the purpose of making its public
statement on internal control; and
o review and direct the risk management services function. Major risks
faced by the Group are addressed as part of the regular Board meeting
agendas. During the year, the Risk Management Committee met on two
occasions.
Internal Controls
The Board is responsible for the Group's system of internal control and for
reviewing its effectiveness, while the role of management is to implement Board
policies on risk and control. The system of internal control is designed to
manage rather than eliminate the risk of failure to achieve business objectives,
and can only provide reasonable and not absolute assurance against material
misstatement or loss. There is a continuous process for identifying, evaluating
and managing the significant risks faced by the Group. This has been in place
for the year under review. The Risk Management Committee, on behalf of the
Board, regularly reviews this process. The Group's management operates a risk
management process that identifies the key risks facing the Group as well as the
risks facing individual operating units. This is overseen by the Risk Management
Committee on behalf of the Board. The processes used by the Board to review the
effectiveness of the system of internal control include:
Risk Management Committee
o approving the scope of the annual Group risk management program;
o reviewing the results of the risk identification process;
o providing input on risks and internal controls into the annual Board
strategy discussions; and
o reviewing the effectiveness of the risk management process and
discussing significant risk issues with the Board.
Audit Committee
o considering reports from internal and external audit on the system of
internal control and any material control weaknesses; and
o reviewing the internal audit and external audit work plans.
Other procedures
o The Group has guidelines for capital expenditure, which include annual
budgets and appraisal and review procedures. Where businesses are
being acquired, there are established authority levels and due
diligence requirements. Post investment appraisals are performed for
major investments.
o The Group has a comprehensive system of financial reporting which
includes an annual budget process, monthly reporting with rolling
forecasts, half year and annual reporting to enable the Group to meet
its public financial reporting requirements and bi-annual self
certification by operating unit management on internal controls and
compliance with Group policies.
o The Group has certain centralized functions that are staffed by
appropriately qualified individuals who draw on external professional
advice. These include finance, tax, treasury, management information
services, legal, company secretarial,risk management services and
investor relations.
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At the year end, before producing the statement in the consolidated
financial statements filed with the U.K. Registrar of Companies ("Annual Report
and Accounts"), the Board, through the Audit and Risk Management Committees,
considers the following:
o self certification received from all operating units that, inter alia,
they have maintained appropriate systems of internal control during
the period under review and complied with Group policies; and
o reports from internal and external audit on any major issuesthat have
occurred during the year.
Relations with Shareholders
The Directors place a high importance on maintaining good relationships
with both institutional and private investors and, via an Investor Relations
department, endeavor to ensure that shareholders are kept informed of
significant Group developments. Shareholders can access information on the
financial statements and other up-to-date information on the Group via the
Group's website at www.cordiantww.com. Information contained in the Group's
website is not incorporated into, or considered part of, this Annual Report.
Members of the Board meet regularly with institutional shareholders and
analysts, and the Directors welcome the opportunity to meet with private
investors at the Group's Annual General Meeting.
Compensation
In 2002, the aggregate amount of compensation paid or accrued for all
Directors and executive officers as a group (12 persons) who served during the
year was (pound)3,953,000. Such compensation was mainly in the form of salaries
and fees and included (pound)138,000 set aside for pension plans. This includes
amounts paid in respect of Directors and executive officers who served for only
part of 2002.
The table below reports the Directors' remuneration for the year ended
December 31, 2002:
Salary Long-term Compensation
and Bonus incentive Benefits for early
Fees Bonus as % of plans in kind termination
(pound)'000 (pound)'000 salary (pound)'000 (pound)'000 (pound)'000
------------------------- ----------- ----------- --------- ------------ ------------ --------------
Executive Directors*
Charles Scott (Chairman) 200 - - - 25 -
Michael Bungey (CEO) 659(2) - - - 80 -
Arthur d'Angelo 324 - - - 16 -
Jean de Yturbe 315 - - - 36 -
David Hearn(4) 410 150 37 - 77 -
Peter Schoning 249 - - - 10 -
Ian Smith(5) 75 - - - 25 -
William Whitehead(6) 107 - - - 14 872
Non-executive Directors*
Dudley Fishburn 33 - - - - -
Dr Rolf Stomberg 32 - - - - -
James Tyrrell 36 - - - - -
------------------------- ----------- ----------- --------- ------------ ------------ --------------
TOTAL 2,440 150 - - 283 872
------------------------- ----------- ----------- --------- ------------ ------------ --------------
Pension Total
Sub-total Costs(1) remuneration
(pound)'000 (pound)'000 (pound)'000
-------------------------- ----------- ----------- --------------
Executive Directors*
Charles Scott (Chairman) 225 32 257
Michael Bungey (CEO) 739 71(3) 810
Arthur d'Angelo 340 9 349
Jean de Yturbe 351 21 372
David Hearn(4) 637 - 637
Peter Schoning 259 - 259
Ian Smith(5) 100 1 101
William Whitehead(6) 993 1 994
Non-executive Directors*
Dudley Fishburn 33 - 33
Dr Rolf Stomberg 32 - 32
James Tyrrell 36 - 36
-------------------------- ----------- ----------- --------------
TOTAL 3,745 135 3,880
-------------------------- ----------- ----------- --------------
-------------------
* Except as otherwise noted below, each Executive Director and Non-executive
Director served for the entire 2002 calendar year. The table does not
include Executive Directors and Non-executive Directors who commenced
serving in 2003.
(1) The amounts for pension costs disclosed in the Executive Directors'
remuneration are based on the cash cost to the employing company of defined
contribution schemes. Apart from the six Directors noted above, no other
Director accrued pension entitlements during 2002.
(2) Mr. Bungey's salary includes an amount of (pound)9,846 paid under a tax
equalisation scheme in respect of tax paid on his remuneration under U.S.
tax law.
(3) Mr. Bungey's pension costs include a special payment of (pound)29,133 in
respect of benefits due under the Cordiant Group Pension Scheme.
-65-
(4) Mr. Hearn was appointed to the Board on April 29, 2002. In addition to the
costs in the above analysis, in connection with Mr. Hearn's appointment,
the Group paid certain one-off costs totalling (pound)109,000 relating to
Mr. Hearn's and his family's relocation from Australia to the United
States.
(5) Mr. Smith and Mr. Whitehead ceased to be directors with effect from March
31, 2002. The figures set out above reflect their salary and benefits until
that date. Mr. Smith continued as an employee of Cordiant until the sale of
The Communications Group and received salary and benefits accordingly. Mr.
Whitehead subsequently received compensation totalling $1,308,214
((pound)872,000) in connection with the termination of his employment.
Executive Directors and Executive Officer
The basic salary for each Executive Director is determined by taking into
account the Director's experience, responsibilities and market value. Salaries
are reviewed annually. The compensation for Executive Directors for 2002 was
approved by the Remuneration and Nominations Committee.
In addition to salary, all Executive Directors and Executive Officers are
eligible for an annual non-pensionable performance-related bonus. The bonus is
designed to provide an incentive to achieve and exceed targets set by the
Committee and to ensure that annual remuneration is aligned to the Group's
performance. The bonus entitlement of each Executive Directors and Executive
Officers is as follows:
Mr. Hearn. Mr. Hearn is entitled to a bonus equivalent to up to 70 percent
of his annual salary payable upon satisfaction of performance targets set by the
Remuneration and Nominations Committee. If performance targets are exceeded in
any year, Mr. Hearn is entitled to a further bonus calculated by reference to a
bonus grid approved by the Remuneration and Nominations Committee for that year
(which, together, with the Target Bonus may not exceed 100 per cent of Mr.
Hearn's salary for any given year). If performance targets for any year are not
met, Mr. Hearn is entitled to receive his proportion of his bonus as is set out
in the bonus grid for that particular year.
Performance criteria have been set by the Remuneration Committee in respect
of the year ending December 31, 2003 as advised to Mr. Hearn in a letter dated
June 4, 2003, which describes payment of the a bonus on the earlier of February
1, 2004 and two months after a change of control. These are a direct replacement
of the bonus arrangements put in place in March 2003 for Mr. Hearn; the
Remuneration Committee considered it necessary to make the changes reflected in
the letter of June 4, 2003 in the light of the changed circumstances of the
Group. The bonus is forfeited if Mr. Hearn leaves Bates USA of his own volition
before the earlier of February 1, 2004 or within two months of a change of
control. The bonus is calculated according to "recovery of value" criteria and
is payable as follows (up to a maximum bonus of 100 percent of Mr. Hearn's base
salary):
(i) 50 percent of salary if a major recapitalization of the Group occurs,
such that it could issue a clean working capital statement for the
purposes of the U.K. Listing Authority Rules. This includes (A) any
repayment or waiver of debt owed to the lenders, whether or not in
consideration of the issue of Cordiant shares; and (B) the issue of
new Cordiant shares for cash; and
(ii) 2 percent of salary for each (pound)10 million of "recovery of value"
up to (pound)150 million and 6.4 percent of salary for each (pound)10
million of "recovery of value" over (pound)150 million, with "recovery
of value" being defined as the aggregate of pre-tax proceeds (net of
deal costs) from any share or business disposals including the Zenith
Optimedia put and pre-tax proceeds (net of deal costs) for any sale of
the whole Cordiant enterprise (shares or business ) other than by way
of transaction as described in paragraph (i) above.
For severance purposes Mr. Hearn's target bonus under his employment
contract is 70 percent of base salary.
Pursuant to a letter dated June 19, 2003, from WPP to Mr. Hearn, in
consideration for Mr. Hearn continuing to work for Bates USA for a period of
three months after the effective date of the scheme of arrangement and assisting
with any handover to another executive, WPP has agreed to procure the
termination of Mr. Hearn's employment at the end of that period, the payment to
Mr. Hearn of the sum to which he is
-66-
entitled under his existing service agreement with Bates USA on termination
following a change of control (comprising (pound)548,000 pursuant to the 2003
bonus performance criteria described above plus (pound)1,427,000 pursuant to the
change of control severance provisions described above) and the payment of rent
on Mr. Hearn's New York property, in accordance with the agreements described
above. Following the effective date of the scheme of arrangement, WPP will also
pay (pound)1,000 by way of contribution to Mr. Hearn's legal costs in connection
with his termination arrangements. Similar provisions apply in the event that
WPP acquires substantially all the businesses and assets of Cordiant other than
pursuant to the scheme of arrangement.
Mr. Boland. Mr. Boland is entitled to participate in an annual
discretionary bonus arrangements based on performance targets set by the
Remuneration Committee. Performance criteria have been set by the Remuneration
Committee in respect of the year ending December 31, 2003, as advised to Mr.
Boland in a letter dated June 4, 2003, which describes payment of the a bonus on
the earlier of February 1, 2004 and two months after a change of control. The
bonus is forfeited if Mr. Boland leaves Cordiant of his own volition before the
earlier of February 1, 2004 or within two months of a change of control. The
bonus is calculated according to "recovery of value" criteria and is payable as
follows (up to a maximum bonus of 75 per cent of Mr. Boland's base salary):
(i) 40 percent of salary if a major recapitalization of the Group occurs,
such that it could issue a clean working capital statement for the
purposes of the U.K. Listing Authority Rules. This includes (A) any
repayment or waiver of debt owed to the lenders, whether or not in
consideration of the issue of Cordiant shares; and (B) the issue of
new Cordiant shares for cash; and
(ii) 1.5 percent of salary for each (pound)10 million of "recovery of
value" up to (pound)150 million and 4.3 percent of salary for each
(pound)10 million of "recovery of value" over (pound)150 million, with
"recovery of value" being defined as the aggregate of pre-tax proceeds
(net of deal costs) from any share or business disposals including the
Zenith Optimedia put and pre-tax proceeds (net of deal costs) for any
sale of the whole Cordiant enterprise (shares or business ) other than
by way of transaction as described in paragraph (i) above.
For severance purposes Mr. Boland's target bonus under his employment
contract is 55 percent of base salary.
Pursuant to a letter dated June 19, 2003, from WPP to Mr. Boland, in
consideration for Mr. Boland continuing to work for Cordiant for a period of
three months after the effective date of the scheme of arrangement and assisting
with any handover to another executive, WPP has agreed to procure the
termination of Mr. Boland's employment at the end of that period and the payment
to Mr. Boland of the sum to which he is entitled under his existing service
agreement with Cordiant on termination following a change of control (comprising
(pound)175,000 pursuant to the 2003 bonus performance criteria described above
plus (pound)641,000 pursuant to the change of control severance provisions
described above). Following the effective date of the scheme of arrangement, WPP
will also pay (pound)1,000 by way of contribution to Mr. Boland's legal costs in
connection with his termination arrangements. Similar provisions apply in the
event that WPP acquires substantially all the businesses and assets of Cordiant
other than pursuant to the Scheme.
Mr. Schoning. Mr Schoning relinquished his entitlement to a bonus based on
the performance of Scholz & Friends A.G. with effect from 2001 in exchange for
an option over 214,599 shares in Scholz & Friends A.G. The option was
exercisable on payment of DM1.0 and subject to the shares having a market value
of more than Euro 1.0 per share on the option exercise date. Mr. Schoning waived
his rights under the option agreement on completion of the disposal of Scholz &
Friends A.G.
Miss. Williams. Miss Williams participates in a discretionary bonus scheme
based on the performance of Cordiant.
-67-
The Group operates pension and retirement benefit schemes for its employees
in a number of countries. The Executive Directors and Executive Officer are
eligible to participate in the Group's pension arrangements operating in the
jurisdiction in which they work. For all Executive Directors and Executive
Officers only basic salary is pensionable and no Director participates in a
defined benefit scheme.
Non-executive Directors
The Board (excluding the relevant Director in each case) determines the
remuneration of the Non-executive Directors for their services as members of the
Board and its Committees in accordance with Cordiant's Articles of Association.
The Board retains discretion to approve additional payments for special
services.
The Non-executive Directors do not participate in any of the incentive or
benefit schemes of the Group with the exception of Mr. de Yturbe, who retains an
interest in options granted in connection with his former executive contract.
Mr Stapleton's appointment agreement provides for an annual salary of
(pound)200,000 per annum (inclusive of Non-executive Director's fees) and may be
terminated at any time on 12 months' notice. Mr. Stapleton's appointment has
been varied by a letter dated May 30, 2003, pursuant to which Cordiant has
agreed to pay him a daily rate of (pound)2,000 (subject to deductions of tax and
national insurance contributions) for each additional day worked above two days
per week on average during that month. This arrangement became effective on
March 1, 2003.
In addition to his letter of appointment as a Non-executive Director, Mr.
de Yturbe has a commission agreement pursuant to which he will receive
commission in the event that any member of the Group is awarded new business
primarily or materially through his efforts. Under the agreement, he will
receive up to 5% of the revenue generated by such new business during the 12
consecutive calendar months.
Service Agreements
It is Cordiant's general policy that no Executive Director should have a
service agreement containing a notice period exceeding one year. Details of the
service agreements of current Executive Directors and those who served during
2002 are included in the table below:
Executive Director Date of Notice Provision for
Agreement Period Compensation(1)
--------------------------------------------------------------------------------
Andrew Boland January 2003 12 months 18 months
David Hearn (2) March 2002 12 months 18 months
Peter Schoning(3) June 2000-October 2001 12 months 18 months
Jean de Yturbe(4) July 2002-December 2002 12 months 18 months
Charles Scott* February 1999 12 months 24 months
Ian Smith* March 1998 12 months 18 months
William Whitehead* September 1997 12 months 18 months
Michael Bungey* September 1997 12 months 24 months
Arthur D'Angelo* September 1997 12 months 24 months
-------------------
* Resigned during 2002 or subsequently.
(1) Compensation is payable in the event of termination of the Executive
Director's employment within two years of a change of control.
(2) Notice not to be served before April 29, 2004.
(3) Mr. Schoning's agreements with Network Atlas GmbH and Fitch Worldwide
Limited have been terminated but Mr. Schoning remains a director of
Cordiant.
(4) Mr. de Yturbe relinquished his executive duties and was subsequently
appointed as a Non-executive Director under a letter of appointment dated
March 20, 2003.
Non-executive Directors do not have a service agreement, but are engaged
under a letter of appointment. Details of the letter of appointment of the
Non-executive Directors are included in the table below:
-68-
Non-executive Director Date of Agreement Term
------------------------------------------------------------------------------
Nigel Stapleton(1) January 2003 --
Jean de Yturbe(2) March 2003 One year from March 5, 2003
Dudley Fishburn January 2001 Three years from December 15, 2000
Dr Rolf Stomberg March 2001 Three years from May 1, 2001
James Tyrrell March 2001 Three years from May 1, 2001
-------------------
(1) Mr. Stapleton was appointed pursuant to an Appointment Agreement dated
January 25, 2003. Unlike other Non-executive Directors, Mr. Stapleton is
entitled to 12 months notice of termination of this appointment.
(2) Mr. de Yturbe relinquished his executive duties and was subsequently
appointed as a Non-executive Director under a letter of appointment dated
March 20, 2003.
Cordiant continues to believe that the notice periods and termination
arrangements are appropriate for the Executive Directors given their seniority
and value to Cordiant and the changes undergone by the Group in recent years.
Given that Mr. Hearn and his family moved from Australia to the United States,
the Committee considered it reasonable for the Group to make a longer initial
contractual commitment in order to ensure that he felt able to relocate. Also,
service contracts provided for severance terms in excess of 12 months are common
in the United States. Cordiant believes that the contract arrangements
facilitate the relocation of a key executive and his deployment in the most
effective manner for the benefit of the Group.
The arrangements for termination of a senior executive's contract are
decided by the Committee following consultation with the Chief Executive
Officer. In some cases, the Remuneration and Nominations Committee will
recommend a clean break with the individual concerned and a one-off payment will
be made at the time of termination based on that individual's contract. In other
cases, the Remuneration and Nominations Committee may recommend that the
contractual entitlement of the individual be paid in instalments following
termination.
Share Ownership
The following table lists, as of July 11, 2003, the Executive and
Non-executive Directors', and Officer's, interests in Cordiant ordinary shares,
ordinary share options and equity participation rights:
Beneficially Owned Ordinary Share Equity Participation
Ordinary Shares Options Rights
---------------------------------------------------------------------------------------------
Executive Directors
Nigel Stapleton - - -
David Hearn - 166,667 250,000
Andrew Boland - 100,000 -
Peter Schoning 358,110 55,000 50,000
Non-executive Directors
Dr. Rolf Stomberg - - -
Jean de Yturbe 298,184 215,996 140,000
Dudley Fishburn - - -
James Tyrrell - - -
Executive Officer
Denise Williams 2,600 20,000 -
Executive Share Option Scheme
Options granted to participants who are not Directors of Cordiant will only
be exercisable if the annual percentage growth in Cordiant's earnings per share
(EPS) over the performance period exceeds both (a) the annual growth in the UK
Retail Price Index over the same period by more than 3%, and (b) 5% per annum.
The options will only be exercisable in full if Cordiant's EPS growth exceeds
20% per annum.
-69-
Seventy-five percent of options granted to individual Directors are
exercisable in accordance with the above EPS target. The remaining 25% are
exercisable based on the total shareholder return (TSR) performance of Cordiant
measured against a comparator group initially comprising the following companies
from the advertising and media sector - Grey Advertising, Havas Advertising,
Interpublic, Omnicom, Publicis, True North Communications, WPP, Aegis, Taylor
Nelson Sofres, GWR, Scoot.Com, BskyB, Capital Radio, Carlton Communications,
Chime, EMI, Incepta, Maiden, Pearson, Reed International, Tempus, United
Business Media, Future Network and Scottish Media. If Cordiant's performance
places it in the top quartile among that group of companies, all of the latter
part of the option will be exercisable. If Cordiant's performance places it
below the median, that part of the option is not exercisable at all.
Equity Participation Plan
Participants are eligible to receive shares if Cordiant's EPS growth is
higher than the annual increase in the UK Retail Price Index plus 2% over a
fixed three year period. If growth is below this hurdle rate, participants lose
their investment. Above this level, shares to a maximum of eight times the
number of shares that could have been acquired with the original investment, can
be issued on a pro-rata basis depending on EPS performance. To achieve maximum
allocation requires EPS growth of 25% compound per annum. Half of the vested
options are normally exercisable by participants three years after grant with
the remainder exercisable one year later.
Awards to Cordiant's Directors vest as to one half depending on EPS growth
as described above. The other half is determined on total shareholder return
(TSR) compared to a group of major publicly quoted advertising groups initially
comprising of GGT Group, Grey Advertising, Havas, Omnicom, Publicis, Saatchi &
Saatchi, Interpublic, True North Communications and WPP.
Performance Share Option Scheme
Participants are eligible to exercise their options dependant on the
performance of the Group over a three year period. If EPS growth is higher than
the UK Retail Price Index plus 2%, participants may exercise options on a
pro-rata basis depending on EPS performance. Full exercise requires EPS growth
of 25% compound per annum over three years. One half of the eligible options
become exercisable after three years and the remainder one year later.
Other Schemes
Under the 1995 Performance Share Option Scheme and the Demerger Performance
Share Option Scheme, ordinary options are exercisable only if, over any three
year period from the date of grant, there is an increase in the EPS of Cordiant
of 6% more than the increase in the UK Retail Price Index. Super options cannot
be exercised before the fifth anniversary of the date of grant and only then if
the growth in EPS from the date of grant has been sufficient to place the Group
in the top quartile of the FTSE 100 companies ranked by reference to growth in
earnings per share.
The Zenith Executive Incentive Plan was set up on the basis that a fixed
monetary amount of benefit is determined which will be delivered by a
combination of options over Cordiant shares and, if necessary, cash. Actual
entitlement was determined by measuring the growth in Zenith's operating profit
over a three year period.
Employee Benefits Plans
Cordiant employees are members of a number of pension schemes throughout
the world, but principally in the UK and the US. Cordiant currently operates two
principal UK pension schemes: a defined benefits scheme (the Cordiant Group
Pension Scheme) and a defined contribution scheme (the Cordiant Group Money
Purchase Plan).
-70-
Employees of Zenith continued their membership in both schemes during 2002
pursuant to U.K. Inland Revenue approval.
As of July 11, 2003, the number of Cordiant ordinary shares subject to
options granted to the Directors and executive officers of Cordiant was 997,663.
The table below describes the various share options awarded to the
Directors and Executive Officers of Cordiant as of July 11, 2003:
Exercise Price Number of
Date of Grant (pence) Underlying Shares Exercise Period
----------------------------------------------------------------------------------------------------------
David Hearn 20/09/02 50 166,667 Sep 05-Sep 12
20/09/02 50 250,000 Sep 05-Sep 12
Andrew Boland 20/09/02 50 100,000 Sep 05-Sep 12
Jean de Yturbe 03/05/1995 73 40,498 May 98-May 05
11/08/1995 95 40,498 Aug 98-Aug 05
19/04/1996 130 45,000 Apr 99-Apr 06
23/04/1997 132 45,000 Apr 00-Apr 07
23/04/1997 132 45,000 Apr 02-Apr 07
25/06/2001 198 140,000 Jun 04-Jun 11
Peter Schoning 23/04/1997 132 27,500 Apr 00-Apr 07
23/04/1997 132 27,500 Apr 02-Apr 07
25/06/2001 198 50,000 Jun 04-Jun 11
Denise Williams 23/04/2002 78 20,000 Apr 05-Apr-12
Mr. Schoning exercised options over a total of 298,184 shares on October
14, 2002, which based on a market value of 33.5p on that day, gave rise to a
gain of (pound)22,008. On November 5, 2002, Mr. de Yturbe exercised options over
298,184 shares, which based on a market value of 37.5p on that day, gave rise to
a gain of (pound)33,935. Both Messrs. Schoning and de Yturbe retained the
resulting shares.
Certain options held by Messrs. Bungey and Scott lapsed underwater ten
years after the date of grant. Other options held by Mr. Scott lapsed underwater
seven years after the date of grant. Mr. Whitehead surrendered 175,000
discounted options on termination of his employment in May 2002.
Other than as disclosed above, no options were granted to, or exercised by,
serving Directors during the year, and no options lapsed during the year in
respect of such Directors. All exercise prices for the share option schemes have
been rounded to the nearest penny.
During the year, Cordiant's ordinary shares traded on the London Stock
Exchange opening at 94.5p, with a high of 110.5p and a low of 31.0p during the
year, closing at 33.0p on December 31, 2002.
Employees and Labor Relations
As of December 31, 2002, Cordiant had approximately 8,603 employees
worldwide. The following table sets forth the average number of employees by
geographical region and segment during for each year ended December 31, 2002,
2001 and 2000.
-71-
2002 2001 2000
---- ---- ----
United Kingdom 1,621 1,720 1,271
North America 1,492 2,016 1,491
Continental Europe 2,478 2,486 2,286
Asia Pacific and Latin America 3,012 3,198 2,712
---------------------------------
Average number of employees of the Group 8,603 9,420 7,760
2002 2001 2000
---- ---- ----
Advertising and Integrated Marketing 7,322 7,932 6,658
Specialist Communications 1,281 1,488 1,102
---------------------------------
Average number of employees of the Group 8,603 9,420 7,760
The success of Cordiant's business, like that of all other communication
groups, depends largely on the skill and creativity of their personnel and their
relationships and clients.
Item 7. Major Shareholders and Related Party Transactions.
Major Shareholders
The Company is not owned or controlled by any government or by any other
corporation.
There are three holders of 5 percent or more of the issued Ordinary Share
capital of Cordiant as of July 11, 2003:
--------------------------------------------------------------------------------
Name Ordinary Share Capital Percentage Held
--------------------------------------------------------------------------------
UK Active Value Fund 99,888,099 28.74
--------------------------------------------------------------------------------
Nahed Ojjeh 42,170,000 10.06
--------------------------------------------------------------------------------
Artemis Investment Management Ltd. 36,110,500 8.63
--------------------------------------------------------------------------------
Cordiant believes that, as of July 11, 2003, 4.80 percent of the
outstanding Cordiant ordinary shares, which are represented by 4,018,378
American Depositary Shares, were held in the United States by approximately 629
record holders and 6.31 percent of the Cordiant ordinary shares were held in the
United States by approximately 17 record holders. Cordiant estimates that, as of
July 11, 2003, an additional 0.90 percent of Cordiant ordinary shares are owned
beneficially by U.S. persons giving an aggregate U.S. holding of 12.01 percent.
There have been significant changes in Cordiant's major shareholders during
the past three years. All of the above shareholders have built up their
investments since mid-2002.
Related Party Transactions
During the first six months of 2003, the Group entered into a First Debt
Transfer Agreement, dated June 19, 2003, a Scheme Transaction Agreement, dated
June 19, 2003 and a Second Debt Transfer Agreement, dated June 26, 2003, each
with WPP or its affiliates. WPP does not currently hold more than 10% of the
voting power of the Group; however, WPP is the Group's primary lender and, by
reason of the Group's financial position, may be deemed to exert significant
influence over the Group. See "Item 3. Key Information-Risk Factors," "Item 4.
Information on the Company-Recent Developments" and "Item 10. Additional
Information-Material Contracts."
On June 30, 2003, Cordiant disposed of its principal Australian businesses,
The Communications Group. Pursuant to the transaction, The Communications Group
was acquired by The Communications Group
-72-
Holdings, a new corporate entity, owned 15 percent by The Communications Group
management. Ian Smith, a former director of Cordiant, heads The Communications
Group management team. See "Item 4 Information on the Company-Recent
Developments-Disposals."
On July 11, 2003, Cordiant disposed of its 77.3 percent interest in Scholz
& Friends A.G. Pursuant to the transaction, Scholz & Friends A.G. was acquired
by a new corporate entity owned by Electra European Fund LP and Scholz & Friends
A.G.'s management. Peter Schoning, a director of Cordiant, had an option to
purchase 1 percent of the equity of Scholz & Friends A.G. held by Cordiant. In
additional, Mr. Schoning is a member of the Supervisory Board of Scholz &
Friends A.G. See "Item 4 Information on the Company-Recent
Developments-Disposals."
Cordiant has entered into service agreements with each of its Executive
Directors and Executive Officer, and letters of appointment with each of its
Non-executive Directors. Please see "Item 6. Directors, Senior Management and
Employees - Compensation" for information regarding each such agreement. Each
service agreement and letter of appointment is filed as Exhibits 4.18 through
4.27 to this Annual Report. As of the date of this annual report, Cordiant does
not have any loans outstanding to Directors or Executive Officers and has not
granted any guarantees or other security in their favor. Furthermore, other than
as described above, there are no interests of Directors or Executive Officers in
transactions effected by the Group which are or were unusual in their nature or
conditions or are or were not on terms we consider to be at arm's length.
Item 8. Financial Information.
Consolidated Financial Statements
See "Item 18. Financial Statements."
Legal Proceedings
No company in the Group is, nor has it been, involved in any legal or
arbitration proceedings which may have, or have had during the twelve months
preceding the date of this report, a significant effect on the Group's financial
position, nor is Cordiant aware of any such proceedings pending by or against
any company in the Group.
Dividend Policy
Dividends recommended by Cordiant's Board in respect of a particular fiscal
year are paid in the following fiscal year if approved by Cordiant's
shareholders. Under UK company law, the ability to pay a dividend is dependent
on whether Cordiant has distributable reserves. At December 31, 2002, Cordiant
had no distributable reserves. The Board of Directors makes dividend
determinations taking into account the Group's results of operations, investment
requirements, cash flow after repayment of debt and legal and contractual
restrictions, if any. Consideration is given to the declaration of foreign
income dividends, if appropriate.
Under the Amended and Restated Loan Agreement and the Amended and Restated
Note Purchase Agreement, prior to May 15, 2003, the Group was permitted to pay
annual (but not interim) dividends out of its available excess cash flow in
respect of any fiscal year after December 31, 2001, provided that it satisfied
certain financial conditions, particularly with respect to debt ratios, and
provided that there were no events of default under those agreements. On May 15,
2003, the Group and certain of its subsidiaries entered into an the Interim
Support Agreement with its senior bank lenders and noteholders, among others.
The Interim Support Agreement amended the provisions of the Amended and Restated
Loan Agreement and the Amended and Restated Note Purchase Agreement prohibiting
Cordiant from paying dividends.
-73-
Significant Changes
Acquisitions
The material acquisitions that Cordiant has made in the period from
December 31, 2001 to June 30, 2003 are described in "Item 4. Information on the
Company--Acquisitions and Dispositions."
Current Trading
The performance of the Group in 2003 is discussed in "Item 5. Operating and
Financial Review and Prospects--Current Trading and Prospects."
Financing
See Item 4. "Information on the Company--Recent Developments" and Item 10.
"Additional Information--Amended and Restated Loan Agreement and the Amended and
Restated Note Purchase Agreement" and "--Interim Support Agreement."
Item 9. The Offer and Listing.
Currently, Cordiant ordinary shares are quoted on the London Stock
Exchange. On June 19, 2003, a circular was issued to shareholders informing them
of Cordiant's intention to cancel the listing of Cordiant shares, as a result of
which shares will cease to be traded on the London Stock Exchange. The last day
for dealings in Cordiant shares is expected to be July 15, 2003. The table below
sets forth, for the quarters indicated, the reported high and low middle market
quotations for the Cordiant ordinary shares on the London Stock Exchange based
on its Daily Official List. Such quotations have been translated in each case
into US dollars at the New York noon buying rate on each of the respective dates
of such quotations.
Pence Per Translated into
Ordinary Share US Dollars
-------------- ----------
High Low High Low
---- --- ---- ---
Annual highs and lows
1998 136.0 88.5 2.27 1.46
1999 301.5 107.0 4.89 1.77
2000 406.0 230.5 6.46 3.40
2001 293.5 54.5 4.38 0.81
2002 115.0 29.5 1.66 0.46
Quarterly highs and lows
2001 First Quarter 293.5 240.0 4.38 3.43
Second Quarter 273.5 177.5 4.44 2.50
Third Quarter 192.5 60.0 2.75 3.43
Fourth Quarter 122.0 54.5 1.72 2.50
2002 First Quarter 115.0 62.0 1.66 0.88
Second Quarter 103.0 76.5 1.49 1.16
Third Quarter 82.5 38.5 1.28 0.60
Fourth Quarter 46.5 29.5 0.74 0.46
2003 First Quarter 35.0 23.5 0.56 0.39
Second Quarter 27.5 2.7 0.44 0.04
Third Quarter 3.9 2.4 0.06 0.04
(through July 11, 2003)
-74-
Pence Per Translated into
Ordinary Share US Dollars
-------------- ----------------
High Low High Low
---- --- ---- ---
Monthly highs and lows
2002 December 40.5 31.5 0.64 0.50
2003 January 35.0 23.5 0.56 0.39
February 29.5 25.0 0.46 0.41
March 29.5 23.5 0.46 0.37
April 27.5 7.5 0.44 0.12
May 14.0 5.5 0.22 0.09
June 7.8 2.7 0.13 0.04
July (through July 11, 2003) 3.9 2.4 0.06 0.04
Until June 25, 2003, Cordiant ordinary shares traded in the United States
on the New York Stock Exchange in the form of American Depositary Shares
("ADSs") which are evidenced by American Depositary Receipts. Each ADS
represents five Cordiant ordinary shares. The depositary for the ADSs is The
Bank of New York. On June 25, 2003, Cordiant ADSs were suspended from trading on
the New York Stock Exchange and an application for delisting is pending with the
Securities and Exchange Commission. The table below sets forth the high and low
sales prices for the ADSs as reported in the New York Stock Exchange-Composite
Transactions.
US dollars per
ADS
---
High Low
---- ---
Annual highs and lows
1998 12 1/4 7
1999 24 1/2 9 1/4
2000 32 3/8 17 1/8
2001 21 1/5 4 1/6
2002 8 2/5 2
Quarterly highs and lows
2001
First Quarter 21 1/5 18 1/5
Second Quarter 19 4/9 12 6/7
Third Quarter 13 3/4 5
Fourth Quarter 8 2/5 4 3/5
2002
First Quarter 8 2/5 4 1/6
Second Quarter 7 5/8 5 5/7
Third Quarter 6 3/8 3 1/3
Fourth Quarter 3 2/3 2
2003
First Quarter 2 3/4 1 8/9
Second Quarter 2 1/4 1/4
Third Quarter (through July 13, 2003) 2/7 1/10
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US dollars per
ADS
---
High Low
---- ---
Monthly highs and lows
2002 December 3 1/7 2 1/2
2003 January 2 3/4 2 1/9
February 2 1/4 2
March 2 1/7 1 8/9
April 2 1/4 2/3
May 1 1/2
June 5/8 1/4
July (through July 13, 2003) 2/7 1/10
Item 10. Additional Information.
Memorandum and Articles of Association
Cordiant is registered in England and Wales and its registered number at
the Registrar of Companies for England and Wales is 1320869. The principal
objects of Cordiant are set out in Clause 4 of its Memorandum of Association and
are, among other things, to carry on the businesses of a holding company.
The Articles of Association of Cordiant (the "Articles") contain
provisions, among other things, to the following effect:
Directors
Voting by Directors on Proposals with Material Interest
A Director may not vote, or count towards the quorum in respect of any
contract or arrangement or other proposal in which he (or any person "connected
with" him, as defined in the Companies Act) has any material interest, otherwise
than by virtue of his interests in shares or other securities of, or otherwise
in or through Cordiant. This prohibition does not apply to any of the following
matters, in the absence of some other material interest:
(i) the giving of any security, guarantee or indemnity in respect of money
lent or obligations incurred by the Director or any other person at the request
of, or for the benefit of, Cordiant or any of its subsidiaries;
(ii) any proposal concerning an offer of shares or other securities of
Cordiant or any of its subsidiaries in which the Director or connected person is
entitled to participate as a holder of securities, or is interested as a
participant in the underwriting;
(iii) any proposal concerning any other company in which the Director is
interested, provided that he is not the holder of or beneficially interested in
one percent or more of any class of the equity shares of that company or of the
voting rights in that company;
(iv) any proposal concerning the adoption, modification or operation of any
arrangement for the benefit of employees of Cordiant or any of its subsidiaries
(including a retirement benefits scheme or employee share scheme under which he
may benefit) and which does not confer on any Director any privilege or
advantage not generally accorded to the employees to whom such arrangement
relates; and
(v) any proposal concerning the purchase or maintenance of any insurance
policy under which he may benefit.
The Companies Act requires a Director of a company who is in any way
interested in a contract or proposed contract with the company to declare the
nature of his interest at a meeting of the Directors.
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Under the Articles, the Directors have power to determine the remuneration
paid to Executive Directors for their services as employees of Cordiant and to
determine the fees payable to Non-executive Directors, provided that unless
otherwise approved by shareholders, Non-executive Directors' fees may not exceed
a basic fee of (pound)20,000 per Director per annum, together with specified
amounts for attendance at meetings/service on committees. Pursuant to the
Combined Code appended to the Listing Rules of the UK Listing Authority, the
Directors' powers of determining the remuneration of Executive Directors have
been delegated to the Remuneration and Nominations Committee of the Board,
consisting solely of Non-executive Directors.
Borrowing Power Exercisable by Directors
The Directors may exercise all of the powers of Cordiant to borrow money,
provided that the Articles require the Directors to restrict the borrowings of
Cordiant, and to exercise all voting and other rights or powers of control in
relation to its subsidiaries, so as to procure (as far as they are able in the
case of subsidiaries) that the aggregate principal amount for the time being
outstanding of all monies borrowed by Cordiant and its subsidiaries (exclusive
of intra-group borrowings) shall not at any time, without the approval of an
ordinary resolution of shareholders, exceed four times the aggregate of the
amount paid up or credited as paid up on the share capital of Cordiant and the
amount standing to the credit of the consolidated capital and revenue reserves
of Cordiant and its subsidiaries, all as shown by the latest audited
consolidated balance sheet of Cordiant and its subsidiaries, but after making
certain adjustments prescribed by the Articles.
Qualification of Director
There is no age limit applicable to the Directors of Cordiant. There is no
requirement that a person hold any shares in Cordiant in order to qualify as a
Director.
Election of Directors
At the Annual General Meeting of Cordiant in every year, one third of the
Directors (or the nearest to one third if their number is not a multiple of
three), are required to retire from office, but are eligible for re-election.
The Directors to retire in each year are those who have been longest in office
since their last election, but as between persons who became Directors on the
same day, those to retire are determined by lot or as otherwise agreed among
themselves. Directors appointed since the last Annual General Meeting are also
required to retire from office, but are eligible for re-election.
Rights of Cordiant ordinary shares
i. as to voting: subject to disenfranchisement in the event of (a)
non-payment of calls or other monies due and payable in respect
of Cordiant ordinary shares and (b) non-compliance with a
statutory notice requiring disclosure as to beneficial ownership,
and subject to any special terms as to voting upon which any
shares may for the time being be held (as to which there are none
at present), upon a show of hands every member present in person
or (in the case of a corporate member) by representative, shall
have one vote and upon a poll every member present in person, by
representative (in the case of a corporate member) or by proxy
shall have one vote for every share held by him;
ii. as to dividends: subject to the Statutes (as defined in the
Articles) and to the rights of the holders of any shares entitled
to any priority, preference or special privileges and the terms
of issue of any shares, all dividends shall be declared and paid
to the members in proportion to the amounts paid up or credited
as paid up on the shares held by them respectively;
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iii. as to return of capital: on a winding-up, the assets remaining
after payment of the debts and liabilities of Cordiant and the
costs of the liquidation, shall, subject to the rights of the
holders of shares (if any) issued upon special conditions, be
applied first in repaying to the members the amounts paid up on
such shares held by them, and the balance (if any) shall be
distributed among the members in proportion to the number of
shares held by them;
iv. as to liability to further capital calls: the Directors may make
calls upon the shareholders in respect of any amounts unpaid on
their shares, while shares that are fully paid, or credited as
fully paid, are not subject to further calls.
Modification of the share rights
If at any time the capital is divided into different classes of shares, the
rights attached to any class or any of such rights (unless otherwise provided by
the terms of issue of the shares of that class) may, subject to the provisions
of the Companies Act, be modified, abrogated or varied with the consent in
writing of the holders of three-fourths of the issued shares of that class or
with the sanction of an extraordinary resolution passed at a separate general
meeting of the holders of the shares of that class, but not otherwise.
Changes in share capital
Cordiant may by ordinary resolution increase its capital by the creation of
new shares, consolidate its share capital, cancel any unissued shares and
sub-divide its shares. Cordiant may by special resolution reduce its share
capital, any capital redemption reserve and any share premium account in any
manner authorized by law.
Transfer of shares: certificated
All transfers of certificated shares must be in writing in the usual common
form or in any other form permitted by the Stock Transfer Act 1963 or approved
by the Directors. The instrument of transfer must be signed by or on behalf of
the transferor and, if the shares being transferred are not fully paid, by or on
behalf of the transferee. The Directors may in their absolute discretion and
without giving any reason refuse to register any transfer of certificated shares
which are not fully paid or on which Cordiant has a lien, provided that where
any such shares are admitted to the Official List, the Directors may impose only
such restrictions on transfer as are permitted by the London Stock Exchange.
Transfers of shares: uncertificated
Subject to the Uncertificated Securities Regulations 1995 (SI 1995
No.95/3272) and the Articles, a member may transfer uncertificated shares in any
manner, which is permitted by the Statutes and is from time to time approved by
the Directors. The Directors may, in their absolute discretion and without
giving any reason, refuse to register a transfer of uncertificated shares when
permitted by the Statutes.
Unclaimed dividends
Any dividend unclaimed after a period of 12 years from the date such
dividend became due for payment shall be forfeited and shall revert to Cordiant.
Untraced shareholders
Subject to the provision of the Statutes, Cordiant may, after advertising
its intention and fulfilling various other requirements, sell at the best price
reasonably obtainable, any shares of a member or person entitled to those shares
by transmission provided that, for a period of 12 years during which period
Cordiant has paid at least three dividends none of which has been claimed, no
cheque or warrant sent by Cordiant to
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such member has been cashed and Cordiant has not received any communication from
the member in question or the person so entitled during that 12 year period and
during the further period of three months after the date of the advertisement.
Upon such sale, Cordiant shall be regarded as indebted to the former member or
to any other person so entitled in an amount equal to the net proceeds of sale.
Non-UK shareholders
There are no limitations in the Memorandum or the Articles on the rights of
non-UK shareholders to hold or exercise voting rights attaching to Cordiant
ordinary shares. However, a member who has no registered address within the
United Kingdom and has not given notice to Cordiant of an address for notices in
the United Kingdom shall not be entitled to receive any notices from Cordiant.
Restrictions on shareholders
Cordiant may disenfranchise any holder of its shares of Cordiant if it has
not received the information required in any notice issued by Cordiant requiring
the disclosure of interests in the shares specified in the notice, within 14
days after service from such holder or any other person appearing to be
interested in those shares. If a shareholder holding 0.25 percent or more in
nominal value of such shares has not complied with the notice within 14 days
after service, Cordiant may impose restrictions on such shareholder which
include not only disenfranchisement but also the withholding of the right to
receive dividends or other monies payable and, subject to the Statutes,
restrictions on the transfer of the shares in question. For shareholders holding
less than 0.25 percent in nominal value of such shares, disenfranchisement is
the only restriction, which Cordiant may impose.
Shareholder meetings
Cordiant is required to hold a general meeting each year as its Annual
General Meeting, in addition to other meetings (called "Extraordinary General
Meetings") as the Directors think fit. The type of meeting will be specified in
the notice calling it. Not more than 15 months may elapse between the date of
one Annual General Meeting and the next.
In the case of an Annual General Meeting, or an Extraordinary General
Meeting at which a Special Resolution will be proposed, 21 clear days' notice is
required. In other cases, 14 clear days' notice is required. A notice must
specify the place, the date and the hour of the meeting and the general nature
of the business to be transacted.
Disclosure of share holdings
The Articles do not require shareholders to disclose their share holdings.
However, the Companies Act requires persons who are interested in shares of a
public company carrying voting rights to disclose certain information about
their interests if they are interested in shares carrying 3 percent or more of
the company's voting rights. In addition, under Section 212 of the Companies
Act, a company has power to issue notices requiring persons it knows or has
reasonable cause to believe to be interested in its shares (or to have been so
interested within the past three years) to provide certain information about
their interests.
Material Contracts
Following is a summary of each contract, other than any contract entered
into in the ordinary course of business, for the two years immediately preceding
the date of this report that is material to Cordiant.
Loan Agreement
On July 4, 2000, Cordiant entered into a Loan Agreement (the "Loan
Agreement") pursuant to which certain banks (the "Bank Lenders") led by The Bank
of New York and HSBC Investment Bank plc, as
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arrangers, agreed to advance to Cordiant and certain of its subsidiaries loan
facilities (the "Bank Facility") of up to $400 million to be used for the
purposes of re-financing existing facilities, other general corporate purposes
and paying costs and expenses incurred in connection with the acquisition of
Lighthouse Global Network, Inc. described below. The Loan Agreement provided for
committed credit facilities at a rate of between 0.7 to 1.25 percent over LIBOR,
depending upon the Group's ability to achieve certain financial ratios. Of these
facilities, $225 million are available until November 8, 2004, and the remaining
$175 million of the loan facilities were initially available until November 7,
2000, which was extended at Cordiant's option to November 7, 2001. The $175
million loan facility was subsequently repaid and canceled in April 2001 using
the proceeds of Cordiant's private placement of 7.61% notes described below.
Note Purchase Agreement
On April 5, 2001, pursuant to a Note Purchase Agreement (the "Note Purchase
Agreement") the Group issued $175.0 million ((pound)119.9 million) of 7.61
percent guaranteed senior notes (the "Notes") in a private placement to
institutional investors (the "Noteholders"). The proceeds of the private
placement were used to repay and cancel $175 million outstanding under the Loan
Agreement dated July 4, 2002, described above.
Amended and Restated Loan Agreement and the Amended and Restated Note
Purchase Agreement
On April 19, 2002, Cordiant and the Bank Lenders and Noteholders completed
the re-negotiation of certain terms of the Loan Agreement and the Note Purchase
Agreement. Each agreement was amended and restated and is referred to below
separately as the "Amended and Restated Loan Agreement" and the "Amended and
Restated Note Purchase Agreement, and together as the "Credit Agreements."
The annual coupon payable on the Notes was increased to 9.25 percent from
7.61 percent. The maximum amount of the Bank Facility provided under the Amended
and Restated Loan Agreement was restated at approximately (pound)155.9 million
and the annual interest payable on advances thereunder was increased to 3.25
percent over LIBOR (or, in the case of euro advances, EURIBOR). Other fees are
payable, the aggregate level of which is dependent on the Group's financial
performance.
The Bank Facility is repayable in November 2004. The Notes are repayable in
installments between April 2007 and April 2011. Further, the Noteholders have
the right to require prepayment of the Notes in November 2004 (or upon any
refinancing in full of the Bank Facility, if earlier), with an additional
"make-whole" payment, unless certain financial tests are met by Group prior to
that date. Net proceeds of permitted disposals are to be applied in prepayment
of the Bank Facility and Notes. Similar mandatory prepayment provisions apply to
the proceeds of rights issues and equity raisings. The make-whole payment is
calculated in accordance with the detailed provisions in the Amended and
Restated Note Purchase Agreement based on a discounted calculation of interest
payable on the prepaid debt at the applicable coupon rate as against the
available market rate at the time of U.S. Treasury Stock plus a margin of 0.5
percent.
The Bank Facility and Notes are secured by guarantees from Cordiant and a
number of its subsidiaries, general debentures over assets of Cordiant and a
number of its U.K. subsidiaries, a Dutch pledge over certain bank accounts of
Cordiant Finance BV, and pledges of shares in certain subsidiaries.
The Credit Agreements include certain financial covenants, tested at least
quarterly, which are required to be satisfied by the Group. These covenants
include the requirement that the Group not exceed certain ratios for net
interest cover, leverage and not breach certain limits in respect of capital
expenditure and minimum net worth. The Credit Agreements also include a number
of affirmative and negative covenants, including, but not limited to,
restrictions on dividends, acquisitions, disposals, and other borrowings,
guarantees and encumbrances. The Restructuring Deed implementing the above
amendments, the Amended and Restated Loan Agreement, and the Amended and
Restated Note Purchase Agreement have been filed as Exhibits 4.1, 4.2 and 4.3,
respectively, to this Annual Report.
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Interim Support Agreement
On May 15, 2003, Cordiant, certain of its subsidiaries, the lenders and
HSBC Bank plc, as Agent, the Security Trustee and the Common Security Trustee,
entered into an Interim Support Agreement. Under the Interim Support Agreement,
the lenders waived until July 15, 2003, various specified breaches of the
Amended and Restated Loan Agreement and Amended and Restated Note Purchase
Agreement which would otherwise have prevented the Group from having access to
its committed undrawn facilities under the Amended and Restated Loan Agreement
during that period. Access to these funds until July 15, 2003, however remains
subject to certain conditions, including no new event of default occurring under
the Amended and Restated Loan Agreement, the Amended and Restated Note Agreement
and the Interim Support Agreement.
The Interim Support Agreement also amends certain provisions of both the
Amended and Restated Loan Agreement and the Amended and Restated Note Purchase
Agreement to clarify the terms of payment of certain fees under the Loan
Agreement, further restricts the payment of dividends the making of acquisitions
and conforms certain events of default under both the Amended and Restated Loan
Agreement and the Amended and Restated Note Purchase Agreement. The Group also
provides certain undertakings to the lenders relating, for example, to the
provision of additional financial and certain other information, limitations on
the capital expenditure of the Group for the period to July 15, 2003, and as to
continuing to pursue actively the disposal program and other strategic options
for the Group. The Interim Support Agreement was adopted by WPP in connection
with the First Debt Transfer Agreement described below. The Interim Support
Agreement has been filed as Exhibit 4.7 to this Annual Report.
First Debt Transfer Agreement
Pursuant to a Debt Transfer Agreement, dated June 19, 2003, (the "First
Debt Transfer Agreement"), WPP No. 2337 Limited, an affiliate of WPP, acquired
all of the debt (the "Debt") owing by the Group to certain Bank Lenders and
Noteholders under the Credit Agreements. The consideration for the transfer was
the aggregate of the principal debt owing to those Bank Lenders and Noteholders
as at June 20, 2003 (the "Completion Date") under the Credit Agreements,
together with the amount of accrued interest owing as of the closing date. In
addition, the WPP No. 2337 Limited agreed to pay (i) any amounts owing as at
closing to any lender under the coordinating committee engagement letters dated
May 15, 2003 and (ii) (pound)250,000 in respect of certain other fees owing to
the transferring Noteholders.
On the closing date (i) the aggregate of the principal debt and accrued
interest owing to the Bank Lenders and Noteholders under the Credit Agreements
was (pound)176,958,059.02 and (ii) the aggregate amount due under the
co-ordinating committee engagement letters was (pound)362,350. On the closing
date, with the exception of the original overdraft bank which continued to make
available the overdraft facility, WPP No. 2337 Limited assumed all of the rights
and obligations of the Bank Lenders and the Noteholders in respect of the Debt
and the Bank Lenders and the Noteholders were released from those obligations
and ceased to have any of those rights.
Under the First Debt Transfer Agreement, WPP (i) guarantees to each Bank
Lender and Noteholder punctual performance by WPP No. 2337 Limited of its
obligations; (ii) undertakes to pay, as if it were the principal obligor, any
amount which the WPP No. 2337 Limited fails to pay when due; and (iii)
undertakes to indemnify each Bank Lender and Noteholder against any loss
suffered by the Bank Lenders and Noteholders if any of the guaranteed
obligations becomes unenforceable, invalid or illegal.
The First Debt Transfer Agreement has been filed as Exhibit 4.4 to this
Annual Report.
Scheme Transaction Agreement
Pursuant to a Scheme Transaction Agreement, dated June 19, 2003 (the
"Scheme Transaction Agreement"), WPP and Cordiant agree to use all reasonable
endeavors, so far as they are each able, to complete the acquisition of Cordiant
by WPP on the terms and subject to the conditions set forth in the scheme
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of arrangement and to give effect to the matters specified in, and to act in
accordance with, the announcement of the scheme of arrangement and the circular
issued to shareholders on June 19, 2003, in order that the effective date of the
scheme of arrangement be no later than August 31, 2003. Cordiant undertakes that
the Cordiant's Directors (subject to their fiduciary duties) will recommend the
acquisition and the scheme of arrangement to Cordiant's shareholders.
WPP further undertakes to procure that all amounts payable under the terms
of the employee retention arrangements of the Group are duly paid as and when
due, and to maintain, for a period of 6 years after the effective date of the
scheme of arrangement, for the benefit of Cordiant's current directors and
officers who are entitled to such cover, directors' and officers' insurance
cover in respect of acts or omissions prior to the effective date, such cover to
be no less favorable than that provided under Cordiant's existing group policy.
The Scheme Transaction Agreement may be terminated by either party at any
time prior to the time the Scheme becomes effective if (i) the board of Cordiant
determines not to give, or to withdraw or modify, its recommendation of the
acquisition, (ii) the scheme of arrangement is not approved by the U.K. High
Court or the Extraordinary General Meeting of shareholders or if the U.K. High
Court does not sanction the Scheme, (iii) any of the conditions to the scheme of
arrangement are incapable of satisfaction on or before August 31, 2003, or (iv)
the parties so agree in writing.
The Scheme Transaction Agreement has been filed as Exhibit 4.5 to this
Annual Report.
Second Debt Transfer Agreement
Pursuant to a Debt Transfer Agreement, dated June 26, 2003, (the "Second
Debt Transfer Agreement"), WPP No. 2337 Limited, an affiliate of WPP, acquired
the balance of the Debt owing by the Group to the Bank Lenders and Noteholders
under the Credit Agreements. The consideration for the acquisition of such debt
was approximately (pound)90 million. This amount included accrued interest
costs, make-whole and certain other payments of approximately (pound)11 million
in aggregate.
WPP No. 2337 Limited assumed all of the rights and obligations of the
transferring Bank Lenders and Noteholders in respect of the Debt acquired and
the transferring Bank Lenders and Noteholders were released from those
obligations and cease to have any of those rights. Under the Second Debt
Transfer Agreement, WPP (i) guarantees to each Bank Lender and Noteholder
punctual performance by WPP No. 2337 Limited of its obligations; (ii) undertakes
to pay, as if it were the principal obligor, any amount which the WPP No. 2337
Limited fails to pay when due; and (iii) undertakes to indemnify each Bank
Lender and Noteholder against any loss suffered by the Bank Lenders and
Noteholders if any of the guaranteed obligations becomes unenforceable, invalid
or illegal.
The Second Debt Transfer Agreement has been filed as Exhibit 4.6 to this
Annual Report.
Consolidation with Zenith Optimedia Group Limited
In July 2001, Publicis Groupe S.A. and Cordiant entered into a definitive
agreement to consolidate certain of their media communications operations into
Zenith Optimedia Group Limited, of which Publicis Groupe S.A. would own a 75
percent stake and Cordiant would own a 25 percent stake. The legal transfer was
completed in October 2001 whereby Cordiant transferred shares of Zenith Media
Worldwide and Publicis Groupe S.A. transferred shares of Zenith Media Worldwide
and Optimedia Networks to Zenith Optimedia Group Limited pursuant to a Joint
Venture Agreement (the "Zenith Agreement"). See "Item 4. Information on the
Company--Media Services--Zenith Optimedia Group Limited" for a more detailed
discussion of the Zenith Agreement. The Zenith Agreement has been filed as
Exhibit 4.9 to this Annual Report.
Acquisition of Lighthouse Global Network
In September 2000, Cordiant entered into an agreement to acquire Lighthouse
Global Network,
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Inc., an international network of specialist communications and marketing
businesses. The purchase price for the acquisition included a payment of
(pound)283.1 million paid by the issuance of Cordiant ADSs and Cordiant ordinary
shares and conversion of Lighthouse's employee options into options over
Cordiant ordinary shares. Cordiant made a deferred cash payment in April 2002 of
(pound)3.7 million, which had been accrued at December 31, 2001. Cordiant may be
required to make contingent payments of (pound)2.5 million, due in the years
2002 through 2005 based on average earnings before interest, tax, depreciation,
and amortization for the preceding years for certain subsidiaries previously
acquired by Lighthouse. The Agreement and Plan of Merger and Amendment No. 1 to
the Agreement and Plan of Merger have been filed as Exhibits 4.10 and 4.11 to
this Annual Report.
Disposal of The Communications Group
On May 28, 2003, Cordiant entered into an Investment Agreement for the
disposal of The Communications Group. See "Item 4. Information on the
Company--Recent Events--Disposals." The Investment Agreement and related
agreements have been filed as Exhibits 4.13, 4.14 and 4.15 to this Annual
Report.
Disposal of Scholz & Friends A.G.
On June 6, 2003, Cordiant entered into a Share Sale Agreement for the
disposal of Scholz & Friends A.G. See "Item 4. Information on the
Company--Recent Events--Disposals." The Share Sale Agreement has been filed as
Exhibits 4.16 to this Annual Report.
Disposal of the FD International Group of Companies
On July 4, 2003, Cordiant entered into a Share Sale Agreement for the
disposal of the Federal Dynamic Group of companies. See "Item 4. Information on
the Company--Recent Events--Disposals." The Share Sale Agreement has been filed
as Exhibit 4.16 to this Annual Report.
Exchange Controls
There are no limitations on the rights of nonresident or foreign persons to
hold or vote Cordiant ordinary shares imposed by the laws of the UK or by
Cordiant's Articles other than those which are customary and generally
applicable to all shareholders. In particular, Article 151 of Cordiant's
Articles provides that a member who has no registered address within the UK and
has not notified Cordiant in writing of an address within the UK for the service
of notice, shall not be entitled to receive notice from Cordiant.
Taxation
US Federal Income Taxation
The following is a summary of the principal US federal income tax
consequences that may be relevant with respect to the acquisition, ownership and
disposition of Cordiant ordinary shares or ADSs. This summary addresses only the
US federal income tax considerations of holders that will hold the Cordiant
ordinary shares or ADSs as capital assets. This summary does not address tax
considerations applicable to holders that may be subject to special tax rules,
such as financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, grantor trusts, dealers or traders in
securities or currencies, tax-exempt entities, persons that received the
Cordiant ordinary shares or ADSs as compensation for the performance of
services, persons that will hold the Cordiant ordinary shares or ADSs as part of
a "hedging" or "conversion" transaction or as a position in a "straddle" for US
federal income tax purposes, persons that have a "functional currency" other
than the US dollar or holders that own (or are deemed to own) 10 percent or more
(by voting power or value) of the stock of Cordiant. Moreover, this summary does
not address the US federal estate and gift or alternative minimum tax
consequences, or any state, local or foreign tax consequences, of the
acquisition, ownership and disposition of Cordiant ordinary shares or ADSs.
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This summary (i) is based on the Internal Revenue Code of 1986, as amended,
existing, proposal and temporary US Treasury Regulations and judicial and
administrative interpretations thereof, in each case as in effect and available
on the date of this Annual Report and (ii) is based in part on the
representations of the Depositary and the assumption that each obligation in the
Deposit Agreement and any related agreement will be performed in accordance with
its terms. All of the foregoing are subject to change, which change could apply
retroactively and could affect the tax consequences described below.
The US Treasury Department has expressed concern that depositaries for
American depositary receipts, or other intermediaries between the holders of
shares of an issuer and the issuer, may be taking actions that are inconsistent
with the claiming of US foreign tax credits by US holders of such receipts or
shares. Accordingly, the analysis regarding the availability of a US foreign tax
credit for UK taxes and sourcing rules described below could be affected by
future actions that may be taken by the US Treasury Department.
For purposes of this summary, a "US Holder" is a beneficial owner of
Cordiant ordinary shares or ADSs that, for US federal income tax purposes, is:
(i) a citizen or resident of the US, (ii) a partnership or corporation created
or organized in or under the laws of the US or any state thereof (including the
District of Columbia), (iii) an estate the income of which is subject to US
federal income taxation regardless of its source or (iv) a trust if such trust
validly elects to be treated as a US person for US federal income tax purposes
or if (x) a court within the US is able to exercise primary supervision over its
administration and (y) one or more US persons have the authority to control all
of the substantial decisions of such trust. A "Non-US Holder" is a beneficial
owner of Cordiant ordinary shares or ADSs that is not a US Holder.
If a partnership (or any other entity treated as a partnership for U.S.
federal income tax purposes) holds Cordiant ordinary shares or ADSs, the tax
treatment of such partnership and a partner in such partnership generally will
depend on the status of the partner and the activities of the partnership. Such
a partnership or partner should consult its own tax advisor as to its tax
consequences.
Each holder should consult its own tax advisor with respect to the US
federal, state, local and foreign tax consequences of acquiring, owning or
disposing of Cordiant ordinary shares or ADSs.
Ownership of ADSs in General
For US federal income tax purposes, a holder of ADSs generally will be
treated as the owner of the Cordiant ordinary shares represented by such ADSs.
Distributions
The gross amount of any distribution by Cordiant of cash or property (other
than certain distributions, if any, of Cordiant ordinary shares distributed pro
rata to all shareholders of Cordiant, including holders of ADSs) with respect to
Cordiant ordinary shares or ADSs, before reduction for any UK taxes withheld
therefrom, will be includible in income by a US Holder as dividend income to the
extent such distributions are paid out of the current or accumulated earnings
and profits of Cordiant as determined under US federal income tax principles.
Individuals who are UK Holders may be taxed on certain dividends receivable in a
taxable year ending after December 31, 2002 at the lower rates applicable to
long-term capital gains. Such dividends will not be eligible for the dividends
received deduction generally allowed to corporate US Holders. To the extent, if
any, that the amount of any distribution by Cordiant exceeds Cordiant's current
and accumulated earnings and profits as determined under US federal income tax
principles, it will be treated first as a tax-free return of the US Holder's
adjusted tax basis in the Cordiant ordinary shares or ADSs and thereafter as
capital gain. Cordiant does not maintain calculations of its earnings and
profits under US federal income tax principles.
Any such dividend paid in pounds sterling will be included in the gross
income of a US Holder in an amount equal to the US dollar value of the pounds
sterling on the date of receipt, which in the case of ADSs, is the date they are
received by the depository. Any gain or loss subsequently realized by a US
Holder that sells
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or otherwise disposes of pounds sterling (or any currency other than US dollars)
will be ordinary income or loss. The amount of any distribution of property
other than cash will be the fair market value of such property on the date of
distribution.
Dividends received by a US Holder with respect to Cordiant ordinary shares
or ADSs will be treated as foreign source income, which may be relevant in
calculating such holder's foreign tax credit limitation. Subject to certain
conditions and limitations, UK tax withheld on dividends may be deducted from
taxable income or credited against a US Holder's US federal income tax
liability. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by Cordiant generally will constitute "passive income,"
or, in the case of certain US Holders, "financial services income."
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a Non-US Holder of Cordiant ordinary shares
or ADSs generally will not be subject to US federal income or withholding tax on
dividends received on Cordiant ordinary shares or ADSs, unless such income is
effectively connected with the conduct by such Non-US Holder of a trade or
business in the US.
Sale or Exchange of Ordinary Shares or ADSs
A US Holder generally will recognize gain or loss on the sale or exchange
of the US Holder's Cordiant ordinary shares or ADSs equal to the difference
between the amount realized on such sale or exchange and the US Holder's
adjusted tax basis in the Cordiant ordinary shares or ADSs. Such gain or loss
will be capital gain or loss. In the case of a non-corporate US Holder, the
maximum marginal US federal income tax rate applicable to such gain will be
lower than the maximum marginal US federal income tax rate applicable to
ordinary income (other that certain dividends received in a taxable year ending
after December 31, 2002) if such US Holder's holding period for such Cordiant
ordinary shares or ADSs exceeds one year. Gain or loss, if any, recognized by a
US Holder generally will be treated as US source income or loss for US foreign
tax credit purposes. The deductibility of capital losses is subject to
limitations.
The initial tax basis of Cordiant ordinary shares or ADSs to a US Holder
will be the US dollar value of the pounds sterling denominated purchase price
determined on the date of purchase. If the Cordiant ordinary shares are treated
as traded on an "established securities market," a cash basis US Holder (or, if
it elects, an accrual basis US Holder) will determine the dollar value of the
cost of such Cordiant ordinary shares or ADSs by translating the amount paid at
the spot rate of exchange on the settlement date of the purchase. The conversion
of US dollars to pounds sterling and the immediate use of that currency to
purchase Cordiant ordinary shares or ADSs generally will not result in taxable
gain or loss for a US Holder.
With respect to the sale or exchange of Cordiant ordinary shares, the
amount realized generally will be the US dollar value of the payment received
determined on (i) the date of receipt of payment in the case of a cash basis US
Holder and (ii) the date of disposition in the case of an accrual basis US
Holder. If the Cordiant ordinary shares or ADSs are treated as traded on an
"established securities market," a cash basis taxpayer (or, if it elects, an
accrual basis taxpayer) will determine the US dollar value of the amount
realized by translating the amount received at the spot rate of exchange on the
settlement date of the sale.
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a Non-US Holder of Cordiant ordinary shares
or ADSs generally will not be subject to US federal income or withholding tax on
any gain realized on the sale or exchange of such Cordiant ordinary shares or
ADSs unless (i) such gain is effectively connected with the conduct by such
Non-US Holder of a trade or business in the US or (ii) in the case of any gain
realized by an individual Non-US Holder, such holder is present in the US for
183 days or more in the taxable year of such sale or exchange and certain other
conditions are met.
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Backup Withholding Tax and Information Reporting Requirements
US backup withholding tax and information reporting requirements generally
apply to certain payments to certain non-corporate holders of stock. Information
reporting generally will apply to payments of dividends on, and to proceeds from
the sale or redemption of, Cordiant ordinary shares or ADSs made within the US
to a holder of Cordiant ordinary shares or ADSs (other than an "exempt
recipient," including a corporation, a payee that is not a US person that
provides an appropriate certification and certain other persons). A payor will
be required to withhold backup withholding tax from any payments of dividends
on, or the proceeds from the sale or redemption of, Cordiant ordinary shares or
ADSs within the US to a holder (other than an "exempt recipient") if such holder
fails to furnish its correct taxpayer identification number or otherwise fails
to comply with, or establish an exemption from, such backup withholding tax
requirements. The backup withholding tax rate was 30 percent for the year 2002
and 28 percent for years 2003 through 2010.
In the case of such payments made within the US to a foreign simple trust,
a foreign grantor trust or a foreign partnership (other than payments to a
foreign simple trust, a foreign grantor trust or a foreign partnership that
qualifies as a "withholding foreign trust" or a "withholding foreign
partnership" within the meaning the applicable US Treasury Regulations and
payments to a foreign simple trust, a foreign grantor trust or a foreign
partnership that are effectively connected with the conduct of a trade or
business in the US), the beneficiaries of the foreign simple trust, the persons
treated as the owners of the foreign grantor trust or the partners of the
foreign partnership, as the case may be, will be required to provide the
certification discussed above in order to establish an exemption from backup
withholding tax and information reporting requirements. Moreover, a payor may
rely on a certification provided by a payee that is not a US person only if such
payor does not have actual knowledge or a reason to know that any information or
certification stated in such certificate is incorrect.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL
TAX CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND DISPOSITION OF CORDIANT
ORDINARY SHARES OR ADSs. HOLDERS OF CORDIANT ORDINARY SHARES OR ADSs SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR
PARTICULAR SITUATIONS.
UK Tax Consequences
The following is a summary of certain UK tax consequences generally
applicable to a beneficial owner of American Depository Receipts ("ADRs") or
Cordiant ordinary shares held as an investment who is resident in the United
States and not resident in the United Kingdom (a "US Holder") for the purposes
of the double taxation convention on income and capital gains between the United
States and the UK signed on 24 July 2001 (the "Convention").
Where any person entitled to benefits under the previous double taxation
convention on income and capital gains between the United States and the UK
signed on 31 December 1975 would have been entitled to greater benefits
thereunder than under the Convention, the previous convention continues to have
effect, at the election of such person, in its entirety with respect to that
person for a 12 month period from the date on which the provisions of the
Convention would otherwise have effect under article 29 of the Convention. This
summary does not contain any discussion of the previous convention.
Although the benefits of the Convention are generally accorded only to
residents of the United States or (as the case may be) the UK, their
availability is generally subject to specified conditions and, in addition, to
the general limitations set out in article 23 of the Convention. This summary
does not contain any discussion of these conditions or limitations.
This summary is based on current UK tax law and practice as of the date of
this filing, and is subject to any changes in UK tax law and practice (including
changes in the Convention) occurring after that date. It assumes that the
Finance Bill 2003 will be enacted as originally drafted.
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As the following discussion is only a general summary, it does not purport
to address all potential tax consequences for all types of investors and,
consequently, its applicability will depend upon the particular circumstances of
individual investors. Investors should, therefore, consult their own tax
advisers about their UK tax position in relation to Cordiant including the
particular tax consequences to them of owning and disposing of ADRs or Ordinary
Shares.
United Kingdom Taxation of Dividends
For the purposes of the Convention, the holders of the ADRs should be
treated as the owners of the underlying Ordinary Shares represented by the
American Depository Shares ("ADSs") that are evidenced by such ADRs.
Under the Convention, the UK is permitted to charge income tax on dividends
paid by Cordiant in accordance with UK domestic tax law but, if the dividends
are beneficially owned by a US Holder, the income tax charged cannot exceed
(subject to certain exceptions and modifications in particular cases) 15 per
cent of the gross amount of the dividend.
Moreover, a US Holder's liability to UK income tax on dividends paid by
Cordiant may be further limited by the provisions of section 128 of the Finance
Act 1995 or, in the case of companies, clause 150 of the Finance Bill 2003
(limit on income chargeable on non-UK residents).
United Kingdom Taxation of Capital Gains
Under UK domestic tax law, holders of ADRs or Ordinary Shares who are
neither resident nor ordinarily resident in the United Kingdom for UK income tax
purposes will not normally be liable to UK taxation on capital gains arising on
the disposal or deemed disposal of their ADRs or Ordinary Shares, unless the
ADRs or Ordinary Shares are held in connection with a trade, profession or
vocation carried on in the UK through a branch or agency (or, in the case of a
company, a permanent establishment) or, in certain circumstances, their non-UK
residence is only temporary.
To the above extent, UK domestic tax law is not affected by the provisions
of the Convention. Accordingly, those provisions are not discussed in this
summary.
United Kingdom Inheritance and Gift Tax
UK Inheritance Tax ("IHT") is a tax charged, broadly, on the value of an
individual's estate at his death, upon certain transfers of value (eg gifts)
made by individuals during their lifetime and on certain transfers of value
involving trusts and closely held companies. A transfer of value made during an
individual's lifetime may lead to an immediate liability to IHT (eg a transfer
into discretionary trust), or it may be potentially exempt (eg an outright gift
to another individual), in which case it will only become chargeable if the
donor dies within 7 years. The transfer of value which is deemed to occur on
death is an immediately chargeable transfer of value. Special rules apply to
assets held in trusts, gifts out of which the donor reserves a benefit and gifts
to or from closely held companies, which are not discussed herein.
Many chargeable transfers of value do not in fact result in a charge to tax
because IHT is charged at a "zero-rate" on transfers of value up to
(pound)255,000 (for chargeable transfers made on or after 6 April 2003). In
simple terms, the value of all immediately chargeable transfers made within the
seven year period before the transfer under consideration are aggregated with
the value of that transfer in determining whether the limit of the
(pound)255,000 "zero-rate band" has been reached. For transfers of value which
(in accordance with the aggregation principle) go beyond the limit of the
zero-rate band, the rates of tax are 20% on lifetime chargeable transfers (more
than seven years before the donor's death) and 40% on transfers on, or within
the period of three years before, death (with modified rules applying to
transfers within the period from seven to three years before death).
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IHT is generally chargeable upon the worldwide assets of individuals who
are domiciled or deemed for IHT purposes to be domiciled in the United Kingdom,
and upon the UK situate assets of individuals domiciled outside the United
Kingdom.
Accordingly, an individual who is domiciled in the United States and is not
deemed to be domiciled in the United Kingdom for IHT purposes is only within the
scope of IHT to the extent of his UK situate assets. These will include Ordinary
Shares in Cordiant which are registered in the United Kingdom. It is understood
to be the Inland Revenue's normal practice to treat ADRs representing shares in
UK companies as assets situated in the United Kingdom for IHT purposes.
The rules outlined above will, in many cases, be modified by the US-UK
Convention on Inheritance and Gift Taxes. In general, an individual who is
domiciled in the US for the purposes of that convention and who is not a UK
national will not be subject to IHT in relation to Ordinary Shares in a UK
company or ADRs representing Ordinary Shares in a UK company on death or on a
lifetime gift, provided that any gift or estate tax due in the USA is paid and
that the Ordinary Shares or ADRs are not part of the business property of a
permanent establishment in the UK or part of the assets of a fixed UK base used
by the holder for the performance of services.
In the exceptional case where the Ordinary Shares or ADRs are subject both
to IHT and to US federal gift or estate tax, the gift tax convention provides a
credits system designed to avoid double taxation.
United Kingdom Stamp Duty and Stamp Duty Reserve Tax
Transfers of Ordinary Shares for a consideration
UK stamp duty is payable ad valorem on certain documents or instruments
conveying or transferring shares or securities (including Ordinary Shares in
Cordiant) on sale and UK stamp duty reserve tax ("SDRT") is imposed on
agreements for the transfer of certain shares and securities (including Ordinary
Shares in Cordiant) for a consideration in money or money's worth. The charge is
normally at the rate of 0.5 per cent of the amount or value of the consideration
given for the transfer (with rounding up, in the case of stamp duty, to the
nearest multiple of (pound)5). Stamp duty and SDRT are generally payable by the
purchaser but SDRT can in certain circumstances be collected from persons other
than the purchaser (eg certain brokers and market makers). The charge to SDRT is
normally incurred on the day ("the relevant day") on which the agreement is made
or, if later, becomes unconditional and it normally becomes payable on the
seventh day of the month following that in which it is incurred. However, if the
SDRT is paid and at any time on or within six years after the relevant day the
agreement is completed by a duly stamped transfer, a claim can be made within
that six year period for repayment of the SDRT and, to the extent that it has
not been paid, the charge will be cancelled.
Consequently, transfers of, or agreements to transfer, Ordinary Shares in
Cordiant will normally be subject to ad valorem stamp duty or SDRT.
The electronic transfer system known as CREST permits shares to be held in
uncertificated form and to be transferred without a written instrument. The
absence of a written instrument of transfer results in such paperless transfers
generally being liable to SDRT rather than stamp duty. Special rules apply to
the collection of SDRT on paperless transfers settled within CREST.
Transfers of Ordinary Shares into ADS form
UK stamp duty or SDRT will normally be payable on any transfer of Ordinary
Shares to the Depositary or its nominee, or where the Depositary issues an ADR
in respect of Ordinary Shares hitherto held for another purpose by it or its
nominee. The charge is at the rate of 1.5 per cent:
(i) in the case of a transfer of Ordinary Shares for consideration, of
the amount or value of the consideration for the transfer, and
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(ii) in the case of a transfer of Ordinary Shares other than for
consideration and in the case of the issue of an ADR in respect of Ordinary
Shares hitherto held for another purpose, of the value of the Ordinary
Shares.
In the case of stamp duty, the charge is rounded up to the nearest multiple
of (pound)5.
Transfers of Ordinary Shares within the depositary arrangements
UK stamp duty is chargeable on an instrument transferring an ADR or on a
written agreement to transfer an ADR.
No SDRT will be payable in respect of an agreement to transfer an ADR
(whether made in or outside the UK).
Transfers of Ordinary Shares out of ADS form
Where no sale is involved, a transfer of Ordinary Shares by the Depositary
or its nominee to the holder of an ADR upon cancellation of the ADR is not
subject to any ad valorem stamp duty or SDRT, though it will generally be
subject to a fixed UK stamp duty of (pound)5 per instrument of transfer. By
contrast, a transfer of, or agreement to transfer, Ordinary Shares underlying an
ADR by the Depositary or its nominee at the direction of the ADR seller directly
to a purchaser for a consideration may give rise to a liability to ad valorem
stamp duty or SDRT generally by reference to the amount or value of the
consideration for the transfer.
Gifts of Ordinary Shares
A transfer of Ordinary Shares for no consideration whatsoever is not
chargeable to ad valorem stamp duty or SDRT, nor would it normally give rise to
the fixed stamp duty of (pound)5 per instrument of transfer.
Additional Information
Cordiant is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements,
Cordiant files reports and other information with the U.S. Securities and
Exchange Commission (the "Commission"). These materials, including this Annual
Report and the exhibits thereto, may be inspected and copied at prescribed rates
at the Commission's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Further information on the operation of the public reference room
may be obtained by calling the Commission at 1-800-SEC-0330. The Commission also
maintains a web site at http://www.sec.gov that contains reports and other
information regarding registrants that file electronically with the Commission.
Cordiant's Annual Reports and some of the other information submitted by
Cordiant to the Commission may be accessed through this web site.
Documents concerning Cordiant that are referred to in this Annual Report
may be inspected at the principal executive offices of Cordiant at 1-5, Midford
Place, London W2 6BH, England, telephone number 011-44-20-7262-4343.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
The Group's policy relating to the use of financial instruments, including
types of instruments used and amounts invested, is determined by the Board. The
instruments used by the Group in 2002 are fixed and floating rate borrowings,
forward foreign currency contracts and foreign currency swaps. The main risks
arising from the Group's financial instruments are interest rate risks,
liquidity risks and foreign currency risks. The Group does not trade in
derivatives and does not enter into transactions of a speculative nature or
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unrelated to the Group's investment activities. Derivatives are used only to
manage the risks arising from the underlying business activities.
Foreign Exchange
The Group publishes its consolidated financial statements in pounds
sterling. The Group's profits are spread over a variety of currencies with the
largest being the US dollar (which represents 38.9 percent of 2002 operating
profit before goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses). As a result, the Group is subject to foreign
exchange risk due to the effects that foreign currency movements have on the
Group's translation of results.
The Group has significant and diverse investments in foreign operations.
The Group's balance sheet and profit and loss can therefore be materially
affected by movements in exchange rates. It is not the Group's policy to manage
net assets by balance sheet hedging, or to hedge international profits. The
Group seeks to mitigate the effect of currency exposures by borrowing in the
same currencies as the currencies in which it lends and by using currency swaps
to match the currencies in which it lends. In addition, the Group uses forward
exchange contracts to hedge known cross-currency cash flows.
Part of the Group's long term debt is denominated in US dollars, and as
such is subject to foreign exchange risks due to currency movements. The
long-term debt at December 31, 2002 was $366.6 million ((pound)227.7 million).
The following sensitivity shows the impact on the reported value of long
term debt of an instantaneous 10 percent change in the foreign currency rate
between sterling and US dollar from their levels at December 31, 2002, with all
other variables held constant.
Fair value reported at Impact of a + 10 percent Impact of a - 10 percent
December 31, 2002 movement in exchange rate movement in exchange rate
(pound) million (pound) million (pound) million
-----------------------------------------------------------------------------------
Long term debt 242.6 (9.9) 12.1
Interest Rates
The Group is exposed to increases in interest rates on floating rate
borrowings and to decreases in interest rates on fixed rate borrowings. The
majority of the Group's fixed and floating rate borrowings are denominated in
pounds sterling or US dollars. This exposure is primarily managed via interest
rate swaps, which seek to produce a balance of fixed and floating rate debt in
both sterling and US dollars in line with Group policy. The Group also uses
interest rate caps to hedge the cost of floating rate borrowings.
As at December 31, 2002, pounds sterling swaps with maturities between
March and August 2003, and a US dollar swap with maturity in 2011 in line with
expected maturity of the Notes were in place.
The Group's weighted average interest rate for 2002 was 9.46 percent.
Cordiant estimates that if the 2001 interest rates had been 1 percentage point
higher, the net interest expense would have increased by (pound)1.8 million.
See Note 30 of the Consolidated Financial Statements for more information
on the Group's risk profile, which has been provided in accordance with FRS 13.
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Item 12. Description of Securities Other than Equity Securities.
Not applicable.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
On May 15, 2003, due to an inability to comply with the covenants contained
in its senior bank facilities and notes, Cordiant and its senior bank lenders
and note holders entered into the Interim Support Agreement pursuant to which
the lenders agreed to waive compliance with certain covenants through July 15,
2003. Following July 15, 2003 when the Interim Support Agreement expires, the
Group will be in default of the covenants contained in its senior bank
facilities and notes. At that time, the Group will be dependent on the continued
support of WPP, its primary lender. In these circumstances, WPP, as the Group's
primary lender and a secured creditor, would be entitled to receive the
principal of its outstanding loans of approximately (pound)224.3 million,
together with make-whole and certain other payments of approximately (pound)40
million in the aggregate, in priority to any distribution to Cordiant
shareholders.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
None.
Item 15. Controls and Procedures
Under the supervision and with the participation of Cordiant's management,
including the Cordiant's Chief Executive Officer and Chief Financial Officer,
Cordiant has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Exchange Act Rules 13(a) and
15(d), within 90 days of the filing date of this Annual Report. As at the date
of that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that these disclosure controls and procedures were effective.
In designing and evaluating Cordiant's disclosure controls and procedures,
Cordiant's management, including the Chief Executive Officer and Chief Financial
Officer, recognized that any controls and procedures, no matter how well
designed and operated, can only provide reasonable assurance of achieving the
desired control objectives. Cordiant's management necessarily was required to
apply its judgement in evaluating the cost-benefit relationship of possible
controls and procedures. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Cordiant have been
detected.
Subsequent to the date of the most recent evaluation of the Cordiant's
internal controls, there were no significant changes in the Cordiant's internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Item 16. [Reserved]
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PART III
Item 17. Financial Statements.
Cordiant has elected to provide financial statements and the related
information pursuant to Item 18.
Item 18. Financial Statements.
See pages F-1 to F-48.
Item 19. Exhibits.
Exhibit Description
1.1 Memorandum and Articles of Association (incorporated by reference to
Exhibit 1.1 of Cordiant's Annual Report on Form 20-F for the year ended
December 31, 2000 (File No. 0-13119)).
4.1 Restructuring Deed, dated as of April 19, 2002, by and among Cordiant,
each of the companies listed in Part A of Schedule 1 thereto, as
Original Borrowers, the company listed in Part B of Schedule 1 thereto
as Swingline Borrower, the companies listed in Part C of Schedule 1
thereto as the Overdraft Borrowers, the companies listed in Part A of
Schedule 2 as Original Guarantors, the companies listed in Part B of
Schedule 2 as the Overdraft Guarantors, the companies listed in
Schedule 3 thereto as the Additional Overdraft Borrowers, The Bank of
New York and HSBC Investment Bank plc as Arrangers, the Banks and
Financial Institutions listed in Schedule 4 thereto as Banks, HSBC
Investment Bank plc as Agent and Security Trustee and Common Security
Trustee, The Bank of New York as Swingline Bank and HSBC Bank PLC as
Overdraft Bank (incorporated by reference to Exhibit 4.1 of Cordiant's
Annual Report on Form 20-F for the year ended December 31, 2001 (File
No. 0-13119)).
4.2 Amended and Restated Loan Agreement, dated as of April 19, 2002, by and
among certain banks led by The Bank of New York and HSBC Investment
Bank plc, as Arrangers, and Cordiant (incorporated by reference to
Schedule 6 of Exhibit 4.1 of Cordiant's Annual Report on Form 20-F for
the year ended December 31, 2001 (File No. 0-13119)).
4.3 Amended and Restated Note Purchase Agreement, dated as of April 19,
2002, by and among Cordiant Finance, Inc., as Issuer, Cordiant, as
Parent Guarantor, and each of the Purchasers listed in Schedule A
attached thereto (incorporated by reference to Exhibit 4.3 of
Cordiant's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 0-13119)).
4.4 First Debt Transfer Agreement, dated June 19, 2003, by and among
Cordiant, Cordiant Finance, Inc. as the Note Issuer, the Transferring
Noteholders (as defined in the agreement), the Transferring Banks (as
defined in the agreement), HSBC Bank plc as Common Security Trustee,
HSBC Bank plc as Agent and Security Trustee, HSBC Bank plc as Original
Overdraft Bank, Fleet National Bank as Original Swingline Bank, HSBC
Bank plc as Paying Agent, WPP No. 2337 Limited and WPP as Guarantor.
4.5 Scheme Transaction Agreement, dated June 19, 2003, by and between
Cordiant and WPP.
4.6 Second Debt Transfer Agreement, dated June 26, 2003, by and among
Cordiant, Cordiant Finance, Inc. as the Note Issuer, Deutsche Bank AG,
London and Cerberus Partners, L.P., HSBC Bank plc as Agent, WPP No.
2337 Limited and WPP as Guarantor.
4.7 Interim Support Agreement, dated May 15, 2003, by and among Cordiant,
certain of its subsidiaries, Cordiant's lenders, and HSBC Bank plc as
Agent, the Security Trustee and the Common Security Trustee.
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4.8 Side Letter from WPP Group plc to Cordiant, dated July 4, 2003.
4.9 Joint Venture Agreement Relating to Mediavista Limited dated as of
September 27, 2001, by and among Cordiant, Publicis Group SA and
Mediavista Limited (incorporated by reference to Exhibit 4.4 of
Cordiant's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 0-13119)).
4.10 Agreement and Plan of Merger, dated as of July 4, 2000, by and among
Cordiant, Lighthouse Acquisition, Inc. and Lighthouse Global Network,
Inc. (incorporated by reference to Exhibit 2.1 to Cordiant's
Registration Statement on Form F-3 (File No. 333-46570)).
4.11 Amendment No. 1 to Agreement and Plan of Merger, dated as of September
5, 2000, by and among Cordiant, Lighthouse Acquisition, Inc. and
Lighthouse Global Network, Inc. (incorporated by reference to Exhibit
2.2 to Cordiant's Registration Statement on Form F-3 (File No.
333-46570)).
4.12 Rules of the Cordiant Communications Group Executive Share Option
Scheme (incorporated by reference to Exhibit 4.7 to Cordiant's Annual
Report on Form 20-F for the year ended December 31, 2000 (File No.
333-02130)).
4.13 Investment Agreement, dated May 28, 2003, by and among Cordiant,
Cordiant Communications (Australia) Pty Ltd., Bain Pacific Associates
and others, Pacific Equity Partners Pty Limited, certain employees of
The Communications Group, The Communications Group Holdings Pty
Limited, and a management trust.
4.14 Shareholders Agreement, dated May 28, 2003 by and among The
Communications Group Holdings Pty Limited, Cordiant Communications
(Australia) Pty Ltd., certain employees of The Communications Group,
Bain Pacific Associates and others, and a management trust.
4.15 Network Agreement, dated June 30, 2003, by and among Bates Worldwide,
Inc., Fitch Design Consultants Limited, Cordiant, Healthworld
Corporation, and certain subsidiaries of The Communications Group
Holdings Pty Limited.
4.16 Share Sale Agreement, dated June 6, 2003, by and among Baumwall "7"
Einhundertachtundachtzigste Verwaltungsgesellshaft mbH, Electra
European Fund L.P., Bates Deutschland Holdings GmbH and Cordiant.
4.17 Share Sale Agreement, dated July 4, 2003, by and among Cordiant,
Lighthouse Global Network, Inc., 3319th Single Member Shelf Trading
Company Limited and FD MWA Holdings, Inc.
4.18 Appointment Agreement, dated January 29, 2003, and amendment thereto,
dated May 30, 2003, by and between Cordiant and Nigel Stapleton.
4.19 Employment Agreement, dated March 11, 2002, and amendment thereto,
dated March 18, 2003, by and between Bates Advertising USA, Inc. and
David Hearn.
4.20 Service Agreement, dated January 29, 2003, by and between Cordiant and
Andrew Boland.
4.21 Employment Contract, dated March 6, 2000, by and between Cordiant and
Peter Schoning.
4.22 Letters of Appointment from Cordiant to Dr. R. Stomberg, dated March
31, 1998 and March 21, 2001, regarding appointment to Cordiant's Board
of Directors.
4.23 Letter from Cordiant to Jean de Yturbe, dated March 20, 2003, regarding
appointment to Cordiant's Board of Directors.
-94-
4.24 Commission Agreement, dated March 10, 2003, by and between Cordiant and
Jean de Yturbe.
4.25 Letter of Appointment from Cordiant to Dudley Fishburn, dated September
17, 1997 and January 19, 2001, regarding to Cordiant's Board of
Directors.
4.26 Letters from Cordiant to James Tyrrell, dated April 8, 1998 and March
12, 2001, regarding appointment to Cordiant's Board of Directors.
8.0 Significant subsidiaries as of the end of the year covered by this
report: See "Significant Subsidiaries" under "Item 4. Information on
the Company."
-95-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
CORDIANT COMMUNICATIONS GROUP PLC
By: /s/ Andrew Boland
-------------------------------------
Name: Andrew Boland
Title: Financial Director
Date: July 15, 2003
Exhibit Index
Exhibit Description
1.1 Memorandum and Articles of Association (incorporated by reference to
Exhibit 1.1 of Cordiant's Annual Report on Form 20-F for the year ended
December 31, 2000 (File No. 0-13119)).
4.1 Restructuring Deed, dated as of April 19, 2002, by and among Cordiant,
each of the companies listed in Part A of Schedule 1 thereto, as
Original Borrowers, the company listed in Part B of Schedule 1 thereto
as Swingline Borrower, the companies listed in Part C of Schedule 1
thereto as the Overdraft Borrowers, the companies listed in Part A of
Schedule 2 as Original Guarantors, the companies listed in Part B of
Schedule 2 as the Overdraft Guarantors, the companies listed in
Schedule 3 thereto as the Additional Overdraft Borrowers, The Bank of
New York and HSBC Investment Bank plc as Arrangers, the Banks and
Financial Institutions listed in Schedule 4 thereto as Banks, HSBC
Investment Bank plc as Agent and Security Trustee and Common Security
Trustee, The Bank of New York as Swingline Bank and HSBC Bank PLC as
Overdraft Bank (incorporated by reference to Exhibit 4.1 of Cordiant's
Annual Report on Form 20-F for the year ended December 31, 2001 (File
No. 0-13119)).
4.2 Amended and Restated Loan Agreement, dated as of April 19, 2002, by and
among certain banks led by The Bank of New York and HSBC Investment
Bank plc, as Arrangers, and Cordiant (incorporated by reference to
Schedule 6 of Exhibit 4.1 of Cordiant's Annual Report on Form 20-F for
the year ended December 31, 2001 (File No. 0-13119)).
4.3 Amended and Restated Note Purchase Agreement, dated as of April 19,
2002, by and among Cordiant Finance, Inc., as Issuer, Cordiant, as
Parent Guarantor, and each of the Purchasers listed in Schedule A
attached thereto (incorporated by reference to Exhibit 4.3 of
Cordiant's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 0-13119)).
4.4 First Debt Transfer Agreement, dated June 19, 2003, by and among
Cordiant, Cordiant Finance, Inc. as the Note Issuer, the Transferring
Noteholders (as defined in the agreement), the Transferring Banks (as
defined in the agreement), HSBC Bank plc as Common Security Trustee,
HSBC Bank plc as Agent and Security Trustee, HSBC Bank plc as Original
Overdraft Bank, Fleet National Bank as Original Swingline Bank, HSBC
Bank plc as Paying Agent, WPP No. 2337 Limited and WPP as Guarantor.
4.5 Scheme Transaction Agreement, dated June 19, 2003, by and between
Cordiant and WPP.
4.6 Second Debt Transfer Agreement, dated June 26, 2003, by and among
Cordiant, Cordiant Finance, Inc. as the Note Issuer, Deutsche Bank AG,
London and Cerberus Partners, L.P., HSBC Bank plc as Agent, WPP No.
2337 Limited and WPP as Guarantor.
4.7 Interim Support Agreement, dated May 15, 2003, by and among Cordiant,
certain of its subsidiaries, Cordiant's lenders, and HSBC Bank plc as
Agent, the Security Trustee and the Common Security Trustee.
4.8 Side Letter from WPP Group plc to Cordiant, dated July 4, 2003.
4.9 Joint Venture Agreement Relating to Mediavista Limited dated as of
September 27, 2001, by and among Cordiant, Publicis Group SA and
Mediavista Limited (incorporated by reference to Exhibit 4.4 of
Cordiant's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 0-13119)).
4.10 Agreement and Plan of Merger, dated as of July 4, 2000, by and among
Cordiant, Lighthouse Acquisition, Inc. and Lighthouse Global Network,
Inc. (incorporated by reference to Exhibit 2.1 to Cordiant's
Registration Statement on Form F-3 (File No. 333-46570)).
4.11 Amendment No. 1 to Agreement and Plan of Merger, dated as of September
5, 2000, by and among Cordiant, Lighthouse Acquisition, Inc. and
(i)
Lighthouse Global Network, Inc. (incorporated by reference to Exhibit
2.2 to Cordiant's Registration Statement on Form F-3 (File No.
333-46570)).
4.12 Rules of the Cordiant Communications Group Executive Share Option
Scheme (incorporated by reference to Exhibit 4.7 to Cordiant's Annual
Report on Form 20-F for the year ended December 31, 2000 (File No.
333-02130)).
4.13 Investment Agreement, dated May 28, 2003, by and among Cordiant,
Cordiant Communications (Australia) Pty Ltd., Bain Pacific Associates
and others, Pacific Equity Partners Pty Limited, certain employees of
The Communications Group, The Communications Group Holdings Pty
Limited, and a management trust.
4.14 Shareholders Agreement, dated May 28, 2003 by and among The
Communications Group Holdings Pty Limited, Cordiant Communications
(Australia) Pty Ltd., certain employees of The Communications Group,
Bain Pacific Associates and others, and a management trust.
4.15 Network Agreement, dated June 30, 2003, by and among Bates Worldwide,
Inc., Fitch Design Consultants Limited, Cordiant, Healthworld
Corporation, and certain subsidiaries of The Communications Group
Holdings Pty Limited.
4.16 Share Sale Agreement, dated June 6, 2003, by and among Baumwall "7"
Einhundertachtundachtzigste Verwaltungsgesellshaft mbH, Electra
European Fund L.P., Bates Deutschland Holdings GmbH and Cordiant.
4.17 Share Sale Agreement, dated July 4, 2003, by and among Cordiant,
Lighthouse Global Network, Inc., 3319th Single Member Shelf Trading
Company Limited and FD MWA Holdings, Inc.
4.18 Appointment Agreement, dated January 29, 2003, and amendment thereto,
dated May 30, 2003, by and between Cordiant and Nigel Stapleton.
4.19 Employment Agreement, dated March 11, 2002, and amendment thereto,
dated March 18, 2003, by and between Bates Advertising USA, Inc. and
David Hearn.
4.20 Service Agreement, dated January 29, 2003, by and between Cordiant and
Andrew Boland.
4.21 Employment Contract, dated March 6, 2000, by and between Cordiant and
Peter Schoning.
4.22 Letters of Appointment from Cordiant to Dr. R. Stomberg, dated March
31, 1998 and March 21, 2001, regarding appointment to Cordiant's Board
of Directors.
4.23 Letter from Cordiant to Jean de Yturbe, dated March 20, 2003, regarding
appointment to Cordiant's Board of Directors.
4.24 Commission Agreement, dated March 10, 2003, by and between Cordiant and
Jean de Yturbe.
4.25 Letter of Appointment from Cordiant to Dudley Fishburn, dated September
17, 1997 and January 19, 2001, regarding to Cordiant's Board of
Directors.
4.26 Letters from Cordiant to James Tyrrell, dated April 8, 1998 and March
12, 2001, regarding appointment to Cordiant's Board of Directors.
8.0 Significant subsidiaries as of the end of the year covered by this
report: See "Significant Subsidiaries" under "Item 4. Information on
the Company."
(ii)
Consolidated profit & loss account
------------------------------------------------------------------------------------------------------------------------------------
Continuing Operations
---------------------------------------------------
2000
Restated
2002 2001 (see note 1)
Note (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Turnover
Group and share of joint ventures 3,246.3 3,499.8 3,223.0
Less: Share of joint ventures (1,107.4) (1,064.8) (881.5)
------------------------------------------------------------------------------------------------------------------------------------
Group turnover 2,138.9 2,435.0 2,341.5
Cost of sales (1,606.2) (1,830.0) (1,828.5)
Revenue
------------------------------------------------------------------------------------------------------------------------------------
Group and share of joint ventures 569.6 639.9 538.4
Less: Share of joint ventures (36.9) (34.9) (25.4)
------------------------------------------------------------------------------------------------------------------------------------
Group revenue 2 532.7 605.0 513.0
------------------------------------------------------------------------------------------------------------------------------------
Operating expenses before goodwill amortization, (495.7) (568.5) (451.6)
exceptional goodwill impairment charges and exceptional operating
expenses
Goodwill amortization 14 (28.9) (44.1) -
Exceptional goodwill impairment charges 14 (171.1) (224.8) -
Exceptional operating expenses 6 (45.6) (27.6) -
------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (741.3) (865.0) (451.6)
------------------------------------------------------------------------------------------------------------------------------------
Group operating profit before goodwill amortization, exceptional
goodwill impairment charges and exceptional operating expenses 37.0 36.5 61.4
Goodwill amortization, exceptional goodwill impairment charges and
exceptional operating expenses (245.6) (296.5) -
------------------------------------------------------------------------------------------------------------------------------------
Group operating (loss)/profit (208.6) (260.0) 61.4
Share of operating profits:
------------------------------------------------------------------------------------------------------------------------------------
Joint ventures 3 3.8 5.1 3.4
Associated undertakings 3 1.5 1.4 2.2
Goodwill amortization on joint venture 3 (1.9) (0.4) -
------------------------------------------------------------------------------------------------------------------------------------
3.4 6.1 5.6
------------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit on ordinary activities before interest and tax (205.2) (253.9) 67.0
Net interest payable and similar items 7 (20.8) (16.0) (8.4)
FRS 12 - finance charge 24 (0.6) (0.9) (1.1)
Amounts written off investments 17 (1.6) - -
------------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit on ordinary activities before tax (228.2) (270.8) 57.5
Tax on (Loss)/profit on ordinary activities 8 (1.4) (4.5) (15.6)
------------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit on ordinary activities after tax (229.6) (275.3) 41.9
Equity minority interests (4.0) (2.3) (5.8)
(Loss)/profit attributable to Ordinary Shareholders (233.6) (277.6) 36.1
Dividends 9 - - (8.4)
------------------------------------------------------------------------------------------------------------------------------------
Retained (loss)/profit for the financial year 26 (233.6) (277.6) 27.7
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss)/earnings per Ordinary share 10 (57.6)p (71.3)p 12.3p
Diluted (loss)/earnings per Ordinary share 10 (57.6)p (71.3)p 11.4p
------------------------------------------------------------------------------------------------------------------------------------
The results for 2002, 2001 and 2000 are all derived from continuing operations.
See accompanying notes to the consolidated financial statements.
F-1
Consolidated cash flow statement
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Note (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities pre exceptional items 46.2 52.7 45.3
Net cash outflow from exceptional operating items (25.8) (9.3) -
------------------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 11 20.4 43.4 45.3
Dividends from associated undertakings and joint ventures 2.0 5.3 1.6
Returns on investments and servicing of finance 12 (23.8) (17.2) (11.5)
Taxation 12 (4.7) (13.4) (11.3)
Capital expenditure and financial investment 12 (5.3) (24.7) (23.5)
Acquisitions and disposals 12 (8.4) (13.6) (46.8)
Equity dividends paid - (8.1) (5.1)
------------------------------------------------------------------------------------------------------------------------------------
Cash outflow before financing (19.8) (28.3) (51.3)
------------------------------------------------------------------------------------------------------------------------------------
Management of liquid resources 12 0.2 0.6 5.2
Issue of ordinary share capital - 4.1 8.3
External loans drawn less repaid (4.3) (70.1) 53.4
Guaranteed senior loan notes due after one year - 119.9 -
Capital element of finance lease payments (0.9) (1.7) 0.5
------------------------------------------------------------------------------------------------------------------------------------
Net cash (outflow)/ inflow from financing (5.0) 52.8 67.4
------------------------------------------------------------------------------------------------------------------------------------
(Decrease)/ increase in cash for the year (24.8) 24.5 16.1
------------------------------------------------------------------------------------------------------------------------------------
Reconciliation of net cash flow to movement in net debt
(Decrease)/ increase in cash for the year (24.8) 24.5 16.1
Cash outflow/ (inflow) from debt financing 5.2 (48.7) (56.3)
Cash inflow from cash deposits (0.2) (0.6) (5.2)
Loans acquired with subsidiaries - (6.8) (66.2)
Translation difference and non-cash movements 11.1 0.5 (2.7)
------------------------------------------------------------------------------------------------------------------------------------
Movement in net debt in the year (8.7) (31.1) (114.3)
Net debt at beginning of year 13 (143.0) (111.9) 2.4
------------------------------------------------------------------------------------------------------------------------------------
Net debt at end of year 13 (151.7) (143.0) (111.9)
------------------------------------------------------------------------------------------------------------------------------------
Consolidated statement of total recognized gains and losses
2000
Restated
2002 2001 (see note 1)
Note (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Loss attributable to Ordinary shareholders (233.6) (277.6) 36.1
Translation adjustment 26 (6.1) 3.7 (1.3)
Unrealized gain on disposal of joint venture and subsidiary undertaking 26 - 44.4 -
------------------------------------------------------------------------------------------------------------------------------------
Total recognized losses relating to the year (239.7) (229.5) 34.8
------------------------------------------------------------------------------------------------------------------------------------
Prior year adjustment recognized in prior year accounts on adoption of FRS 19 - 4.1 -
------------------------------------------------------------------------------------------------------------------------------------
Total recognized losses since previous annual report (239.7) (225.4) 34.8
------------------------------------------------------------------------------------------------------------------------------------
Of the (pound)4.1 million prior year adjustment for deferred tax, (pound)2.5
million arose in the year ended 31 December 2000 and (pound)1.6 million was
recorded in the year ended 31 December 1999.
See accompanying notes to the consolidated financial statements.
F-2
Consolidated balance sheet
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
Note (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Fixed assets
Intangible assets - goodwill 14 263.5 478.3
Tangible assets 16 41.4 60.6
Investments 17 15.8 17.9
Investments in joint venture
------------------------------------------------------------------------------------------------------------------------------------
Share of gross assets 18 148.9 152.9
Goodwill 18 36.8 38.2
Share of gross liabilities 18 (158.7) (164.9)
------------------------------------------------------------------------------------------------------------------------------------
27.0 26.2
------------------------------------------------------------------------------------------------------------------------------------
347.7 583.0
Current assets
Work in progress 24.6 24.8
Debtors - due within one year 19 338.3 418.3
Debtors - due after one year 19 22.1 27.4
Investments 20 0.7 0.9
Cash at bank and in hand 13 96.0 123.5
------------------------------------------------------------------------------------------------------------------------------------
481.7 594.9
Creditors - due within one year 21 (454.6) (556.3)
------------------------------------------------------------------------------------------------------------------------------------
Net current assets 27.1 38.6
------------------------------------------------------------------------------------------------------------------------------------
Total assets less current liabilities 374.8 621.6
Creditors - due after one year 21 (251.8) (264.0)
Provisions for liabilities and charges 24 (42.1) (40.5)
------------------------------------------------------------------------------------------------------------------------------------
Net assets 80.9 317.1
------------------------------------------------------------------------------------------------------------------------------------
Capital and reserves
Called up share capital: 410,687,875 Ordinary shares of 50p each (2001: 400,880,110) 25,26 205.3 200.4
Share premium account 26 174.4 178.4
Other reserves 26 119.9 214.4
Profit and loss account 26 (430.1) (286.4)
------------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds 69.5 306.8
Equity minority interests 11.4 10.3
------------------------------------------------------------------------------------------------------------------------------------
80.9 317.1
------------------------------------------------------------------------------------------------------------------------------------
The reconciliation of movements in equity shareholders' funds is given in note 26 on page _.
See accompanying notes to the consolidated financial statements.
F-3
Notes to the financial statements
1. Principal accounting policies
Basis of accounting
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards in the United Kingdom and
with the Companies Act 1985.
The preparation of the financial statements requires the Group's management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
In February 2003 the Group commenced negotiations with its principal lenders
designed to reset the terms of its principal lending facilities consistent with
current trading conditions and the planned disposal program. Prior to the
expected agreement of new financing terms with its lenders on 29 April 2003, one
of its major clients, Allied Domecq plc, notified Cordiant of its intention to
terminate its contract with the Group with effect from October 2003. While the
direct impact of this client loss on revenue in 2003 is not expected to be
material, the Group will incur associated restructuring costs in the current
year and there will be a substantial impact on operating profit from 2004
onwards.
Following Allied Domecq's decision, Cordiant is now working actively with its
lenders to amend the financing terms and, in addition, the Board is also
actively investigating its strategic options for the Group which include,
amongst other actions, the realization of value through disposals, and
alternative financing arrangements to reflect its revised circumstances.
Discussions with the lenders have progressed well and Cordiant has reached an
agreement in principle, subject to contract, for continuing financing
arrangements to 15 July 2003 while the Board concludes its review of strategic
options and agrees new financing terms consistent with the outcome of that
process. These financing arrangements incorporate a waiver of existing financial
covenants and continued access to existing committed undrawn facilities.
Cordiant expects to make a further announcement once documentation has been
signed.
The financial statements have been presented on a going concern basis. However,
until the outcome of the of the Group's evaluation of its strategic options and
negotiations with its lenders, and the implications of this for the Group's
future funding structure are known, there is considerable uncertainty about the
appropriateness of this basis of presentation.
The financial statements do not reflect any adjustments which would be required
if the going concern assumption was not appropriate. Given the uncertainty
described above it is not currently possible to determine the extent and
quantification of such adjustments but these might include the reclassification
of creditors due in more than one year to less than one year, the write down of
the carrying value of goodwill in the balance sheet to the best estimate of its
net realizable value on disposal, the write down of certain assets carried on a
value in use basis to net realizable value, and the disclosure of the provision
for additional liabilities.
The following principal accounting policies have been applied consistently in
dealing with items which are considered material in relation to the Group's
financial statements.
Companies Act 1985
The Form 20-F containing Consolidated Financial Statements does not constitute
"statutory accounts" within the meaning of the Companies Act 1985 of England and
Wales for any of the three years ended 31 December 2002. Statutory accounts for
2000 and 2001 have been filed in the United Kingdom's registrar of Companies;
the statutory accounts 2002 will be filed following the Company's Annual General
Meeting. The auditor has reported on those accounts.
Consolidation
The consolidated financial statements incorporate the financial statements of
Cordiant Communications Group plc and all its subsidiary undertakings made up to
31 December 2002. The results of subsidiary undertakings acquired or disposed of
in the year are included in the consolidated profit and loss account from the
date of acquisition and up to the date of disposal. In accordance with the
Companies Act 1985, s230 (4), a separate company profit and loss account of
Cordiant Communications Group plc is not presented although it was approved by
the Directors on 30 April 2003.
Turnover, cost of sales and revenue
Turnover comprises the gross amounts billed to clients in respect of
commission-based income together with the total of other fees earned. Cost of
sales comprises media payments and production costs. Turnover and revenue are
stated exclusive of VAT, sales taxes and trade discounts.
Advertising and Media investment management
Revenue is typically derived from commissions on media placements and fees for
advertising services. Traditionally, the Group's advertising clients were
charged a standard commission on their total media and production expenditure.
In recent years, however, this frequently has tended to become a matter of
individual negotiation. Revenue may therefore consist of various arrangements
involving commissions, fees, incentive-based revenue or a combination of the
three, as agreed upon with each client.
F-4
Revenue is recognized when the service is performed. Incentive-based revenue
typically comprises both quantitative and qualitative elements; on the element
related to quantitative targets, revenue is recognized when the quantitative
targets have been achieved; on the element related to qualitative targets,
revenue is recognized when the incentive is received/receivable. In both cases,
incentives are recognized only when the client has agreed that the performance
conditions have been met, and the revenue can be considered to be no longer
contingent on performance.
Public relations & public affairs and Branding & identity, Healthcare and
Specialist communications
Revenue is typically derived from retainer fees and services to be performed
subject to specific agreement. Revenue is recognized when the service is
performed. Revenue is recognized on long-term contracts, if the final outcome
can be assessed with reasonable certainty, by including in the profit and loss
account revenue and related costs as contract activity progresses. The stage of
completion of such long-term contracts is determined by comparison of actual
output to a pre-agreed project delivery schedule.
Pension costs
Retirement benefits for employees of most companies in the Group are provided by
either defined contribution or defined benefit schemes, which are funded by
contributions from Group companies and employees.
The Group's share of contributions to defined contribution schemes is charged
against profits of the year for which they are payable and the cost of providing
defined benefits is charged against profit, in accordance with the
recommendations of independent actuaries, in such a way as to provide for the
liabilities evenly over the remaining working lives of the employees.
Employee share schemes
Payments made by participants to acquire options under the Equity Participation
Plan and the Executive Share Option Scheme (together the Plans) are credited to
capital as 'Shares to be issued'. The estimated cost of awards, which is
calculated as the difference between the fair value of the shares at the date
the award is made and the amount of the advance payment, if any, that
participants may be required to pay for the shares, is expensed as a charge to
the profit and loss account on a straight-line basis over the period to which
the performance criteria of the Plans relate. In compliance with UITF abstract
17 "Employee share schemes", the periodic charge to the profit and loss account
is credited to reserves. On exercise of options under the Plans the original
cash paid by employees to participate in the scheme is transferred from shares
to be issued to share capital and share premium.
Leases
Where the Group enters into a lease which entails taking substantially all the
risks and rewards of ownership of an asset, the lease is treated as a finance
lease. The asset is recorded in the balance sheet as a tangible fixed asset and
is depreciated over the shorter of its estimated useful life and the lease term.
Future installments under such leases, net of finance charges, are included in
creditors. Rentals payable are apportioned between the finance element, which is
charged to the profit and loss account as interest, and the capital element,
which reduces the outstanding obligation for future installments.
All other leases are operating leases and the rental charges are taken to the
profit and loss account on a straight-line basis over the life of the lease.
Goodwill
Purchased goodwill arising in respect of acquisitions before 1 January 1998
(including any additional goodwill estimated to arise from contingent capital
payments) was written off to reserves in the year of acquisition. Goodwill
written off directly to reserves and not previously charged to the Group's
profit and loss account is included in determining the profit or loss on
disposal of a subsidiary or on closure of a business.
Purchased goodwill arising from acquisitions on and after 1 January 1998 has
been capitalized as an intangible fixed asset.
From January 2001, goodwill arising from acquisitions on and after 1 January
1998 has been amortized on a straight-line basis over its remaining useful life
up to a 20 year period, from the date of acquisition.
In 2000, the financial statements departed from the specific requirement of
companies legislation to amortize goodwill over a finite period, in order to
give a true and fair view. The impact in 2000 of the change in amortization
policy has not been quantified.
Capitalized goodwill is reviewed for impairment at the end of the first full
financial year following the acquisition, and in other periods if events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Contingent consideration payments are calculated in accordance with the
acquisition agreement. Where the payments are based on the future results of the
business, the most recent budget and projections for the business are used in
the estimation process. Such estimated future contingent payments are recorded
as part of the acquisition. Revisions to such estimates are recorded as changes
in goodwill and accruals.
Fixed assets
Tangible fixed assets are stated at historical cost less accumulated
depreciation. Additions, improvements and major renewals are capitalized.
Maintenance repairs and minor renewals are expensed as incurred. The cost of
tangible fixed assets less the estimated residual value is written off by equal
annual installments over the expected useful lives of the assets as follows:
Long leasehold properties:-50 years.
Short leasehold properties
With terms of less than 50 years:-Period of lease.
Furniture and equipment:-Between 4 and 10 years.
Motor vehicles:- 4 years.
Long-term investments are valued at cost, less amounts provided for any
permanent diminution in value.
F-5
Joint ventures and associated undertakings
The Group's share of the profits less losses of all significant joint ventures
and associated undertakings is included in the Group profit and loss account.
The carrying value of significant joint ventures and associated undertakings in
the Group balance sheet is calculated by reference to the Group's equity in the
net assets of such undertakings. A joint venture is an entity in which the
reporting entity holds an interest on a long-term basis is jointly controlled
by the reporting entity and one or more other ventures under a contractual
arrangement. Joint control exists if none of the entities alone can control that
entity but altogether can do so and decisions in financial performance and
financial position of that venture require each venturer's consent. An associate
is an undertaking in which the reporting entity has a participating interest and
over whole operating and financial policy it exercises a significant influence.
A participating interest is an interest held by an undertaking in the shares of
another undertaking which it holds on a long term basis for the purpose of
securing a contribution to its activities by the exercise of control or
influence arising from that interest.
Cash and cash equivalents
Cash and cash equivalents are defined as cash at bank and in hand, cash deposits
held that mature within 24 hours and bank overdrafts that are repayable on
demand or within in 24 hours.
Work in progress
Work in progress is stated at the lower of cost and net realizable value, and
comprises mainly outlays incurred on behalf of clients, and work in progress
under project arrangements. Provision is made for irrecoverable costs where
appropriate.
Deferred taxation
Deferred tax is recognized in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in future or a right to pay
less tax in future have occurred at the balance sheet date. Timing differences
are differences between the Group's taxable profits and its results as stated in
the financial statements that arise from the inclusion of gains and losses in
tax assessments in periods different from those in which they are recognized in
the financial statements. A net deferred tax asset is regarded as recoverable
and therefore recognized only when, on the basis of all available evidence, it
can be regarded as more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing differences can
be deducted.
A prior year adjustment arose on the implementation of FRS 19.
The impact on the year ended 31 December 2000 was to increase profit after tax
and retained profits by (pound)2.5 million.
Property provisions
In accordance with FRS 12 "Provisions, Contingent Liabilities and Contingent
Assets", the Group's property provisions have been discounted, using a
risk-free rate, to the present value of future net lease obligations and
related costs of leasehold property (net of estimated sublease income and
certain risk factors) where the space is vacant or currently not planned to be
used for ongoing operations. The periodic unwinding of the discount is treated
as an imputed interest charge and is disclosed as "FRS 12 - finance charge".
Debt finance costs
Finance costs associated with the issuance of debt and other capital instruments
are charged to the profit and loss account over the term of the instrument.
Derivatives
Interest rate swaps
The net interest paid or received under interest rate swaps is recorded on an
accruals basis and included within net interest in the profit and loss account.
Forward exchange contracts
Forward exchange contracts are used by the Group to hedge known cross-currency
cash flows. These instruments are accounted for as hedges from the inception of
the contract.
Where the instrument is used to hedge against future settlement of transactions,
gains and losses are recognized at the inception of the hedge in the profit and
loss account.
If the underlying exposure changes, or ceases to exist, the contract is
terminated and the exchange gain or loss on termination is recognized in the
profit and loss account immediately.
Note 29 sets out all related FRS 13 "Derivatives and Other Financial
Instruments" disclosures.
Exchange gains and losses
Profit and loss accounts and cash flow statements in foreign currencies are
translated into sterling at the average rate during the year, with the year-end
adjustment to closing rates being taken to reserves. Assets and liabilities in
foreign currencies are translated using the rates of exchange ruling at the
balance sheet date.
Gains and losses on translation of the opening net assets of overseas
subsidiaries and those arising from the retranslation of long-term foreign
currency borrowing used to finance foreign currency investments, are taken to
reserves.
All other exchange differences are taken to the profit and loss account. The
Group's principal trading currencies and the exchange rates used against (pound)
sterling are as follows:
--------------------------------------------------------------------------------
Average rates Closing rates
----------------------------------------------------
2002 2001 2000 2002 2001 2000
US Dollar 1.50 1.44 1.52 1.61 1.46 1.49
Euro 1.59 1.61 1.64 1.53 1.63 1.59
Australian Dollar 2.82 2.79 2.61 2.86 2.84 2.69
Korean Won (000s) 1,880 1,860 1,710 1,910 1,910 1,890
--------------------------------------------------------------------------------
F-6
2. Segmental information
The Group's operations fall within two segments:
o Advertising and Integrated Marketing
o Specialist Communications
Within those segments, the Group is structured into networks according to
geography and the services provided. The result of the networks is presented
according to the business segment served by that network.
Operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses is presented to show a clearer
representation of the underlying performance of the business. It should not be
considered an alternative to UK or US GAAP as a measure of operating profit.
Operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses is not a measure of financial
performance under UK and US GAAP and may not be comparable to other similar
titled measures for other companies.
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group revenue by business segment (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Advertising and Integrated Marketing 410.1 458.0 440.6
Specialist Communications 122.6 147.0 72.4
------------------------------------------------------------------------------------------------------------------------------------
Total 532.7 605.0 513.0
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group operating profit by business segment pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Advertising and Integrated Marketing 27.1 16.9 46.3
Specialist Communications 9.9 19.6 15.1
------------------------------------------------------------------------------------------------------------------------------------
Group operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses 37.0 36.5 61.4
Goodwill amortization and exceptional goodwill impairment charges (200.0) (268.9) -
Exceptional operating expenses (45.6) (27.6) -
------------------------------------------------------------------------------------------------------------------------------------
Group operating (loss)/profit (208.6) (260.0) 61.4
------------------------------------------------------------------------------------------------------------------------------------
The directors consider that it is more appropriate to show a business segment
analysis of revenue than turnover.
Total Group operating (loss)/profit after goodwill amortization, exceptional
impairment charges and exceptional operating expenses by business segment are:
Advertising and Integrated Marketing (pound)(61.9) million 2001: (pound)(98.1)
million, 2000: (pound)46.3 million and Specialist Communications (pound)(146.7)
million 2001: (pound)(161.9) million, 2000: (pound)15.1 million.
The business segment analysis for 2001 and 2000 has been restated to reflect the
transfer of certain businesses, including CCG.XM, between Advertising and
Integrated Marketing and Specialist Communications. The effect of this has been
to increase revenues and decrease operating profits for Advertising and
Integrated Marketing in 2001 by (pound)10.1 million and (pound)4.4 million,
decrease revenues and increase operating profit for Advertising and Integrated
Marketing in 2000 by (pound)0.9 million and (pound)1.0 million and to decrease
revenues and increase operating profits for Specialist Communications in 2001 by
(pound)10.1 million and (pound)4.4 million, increase revenues and decrease
operating profit for Specialist Communications in 2000 by (pound)0.9 million and
(pound)10 million, respectively.
2002 2001 2000
Net assets by business segment pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Advertising and Integrated Marketing (37.3) (28.1) (58.9)
Specialist Communications (21.2) (10.4) 9.4
------------------------------------------------------------------------------------------------------------------------------------
(58.5) (38.5) (49.5)
Goodwill and investments in joint ventures and associates 297.4 511.6 705.4
Deferred and contingent cash consideration (6.3) (13.0) (67.8)
Net financial items (151.7) (143.0) (111.9)
------------------------------------------------------------------------------------------------------------------------------------
Net assets 80.9 317.1 476.2
------------------------------------------------------------------------------------------------------------------------------------
Net financial items represent cash at bank, cash deposits included in current
asset investments, loans and overdrafts, and obligations under finance leases
and hire purchase commitments.
Net assets before financial items by business segment are: Advertising and
Integrated Marketing(pound)89.1 million 2001: (pound)147.0 million,
2000:(pound)132.2 million and Specialist Communications (pound)143.5 million
2001:(pound)313.1 million, 2000: (pound)455.9 million.
The business segment analysis for 2001 and 2000 has been restated to reflect the
transfer of certain businesses, including CCG.XM, between Advertising and
Integrated Marketing and Specialist Communications. The effect of this has been
to respectively increase and decrease the net assets before goodwill and
investments, deferred and contingent consideration and net financial items of
Advertising and Integrated Marketing and Specialist Communications in 2001 and
2000 by (pound)10.0 million and (pound)1.8 million.
F-7
2. Segmental information (continued)
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group revenue by geographical area (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 110.4 118.6 84.1
North America 142.8 190.3 148.5
Continental Europe, Africa and India 135.2 143.6 133.1
Asia Pacific and Latin America 144.3 152.5 147.3
------------------------------------------------------------------------------------------------------------------------------------
Total 532.7 605.0 513.0
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group operating profit by geographical area pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 14.4 13.7 7.9
North America 7.0 12.3 15.9
Continental Europe, Africa and India 4.0 5.8 16.0
Asia Pacific and Latin America 11.6 4.7 21.6
------------------------------------------------------------------------------------------------------------------------------------
Group operating profit before goodwill amortization, exceptional goodwill impairment
charges and exceptional operating expenses 37.0 36.5 61.4
Goodwill amortization and exceptional goodwill impairment charges (200.0) (268.9) -
Exceptional operating expenses (45.6) (27.6) -
------------------------------------------------------------------------------------------------------------------------------------
Group operating loss (208.6) (260.0) 61.4
------------------------------------------------------------------------------------------------------------------------------------
The Directors consider that it is more appropriate to show a geographical
analysis of revenue than turnover. Revenue by geographic destination is not
materially different from revenue by geographic origin.
Total Group operating (loss)/profit after goodwill amortization, exceptional
goodwill impairment charges and exceptional operating expenses by geographical
area is: United Kingdom (pound)(96.2) million 2001: (pound)(45.2) million, 2000:
(pound)7.9 million, North America (pound)(88.3) million 2001: (pound)(160.4)
million, 2000: (pound)15.9 million, Continental Europe, Africa and India
(pound)(25.4) million 2001: (pound)(10.3) million, 2000: (pound)16.0 million and
Asia Pacific and Latin America (pound)1.3 million 2001: (pound)(44.1) million,
2000: (pound)21.6 million.
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Net assets by geographical area (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom (25.2) (17.0) (30.7)
North America (41.6) (34.0) (25.6)
Continental Europe, Africa and India 26.9 20.1 24.0
Asia Pacific and Latin America (18.6) (7.6) (17.2)
------------------------------------------------------------------------------------------------------------------------------------
(58.5) (38.5) (49.5)
Goodwill and investments in joint ventures and associates 297.4 511.6 705.4
Deferred and contingent cash consideration (6.3) (13.0) (67.8)
Net financial items (151.7) (143.0) (111.9)
------------------------------------------------------------------------------------------------------------------------------------
Net assets 80.9 317.1 476.2
------------------------------------------------------------------------------------------------------------------------------------
Net financial items represent cash at bank, cash deposits included in current
asset investments, loans and overdrafts, and obligations under finance leases
and hire purchase commitments.
Net assets before net financial items by geographical area are: UK (pound)86.5
million 2001: (pound)187.3 million, 2000: (pound)179.7 million, North America
(pound)64.6 million 2001: (pound)155.5 million, 2000: (pound)279.0 million,
Continental Europe, Africa and India (pound)60.7 million 2001: (pound)72.6
million, 2000: (pound)69.1 million and Asia Pacific and Latin America(pound)20.8
million 2001: (pound)44.7 million, 2000: (pound)60.3 million.
F-8
2. Segmental information (continued)
The Bates Group was established in the final quarter of 2002. The table below
sets out the segmented results of the Group as if the Bates Group structure had
been in place for 2002, 2001 and 2000.
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group revenue by geographical area (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 86.4 88.9 72.6
Americas 145.7 190.4 147.7
Continental Europe, Africa and India 96.3 101.1 91.7
Asia Pacific 125.8 132.8 141.8
------------------------------------------------------------------------------------------------------------------------------------
Bates Group 454.2 513.2 453.8
Other businesses 78.5 91.8 59.2
------------------------------------------------------------------------------------------------------------------------------------
Total 532.7 605.0 513.0
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Group operating profit by geographical area (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 12.6 6.9 5.0
Americas 7.9 10.0 14.7
Continental Europe, Africa and India 2.3 (0.1) 10.2
Asia Pacific 10.1 6.1 21.9
------------------------------------------------------------------------------------------------------------------------------------
Bates Group 32.9 22.9 51.8
Other businesses 4.1 13.6 9.6
------------------------------------------------------------------------------------------------------------------------------------
Group operating profit before goodwill amortization, 37.0 36.5 61.4
exceptional goodwill impairment charges and
exceptional operating expenses
Goodwill amortization and exceptional goodwill (200.0) (268.9) -
Impairment charges
Exceptional operating expenses (45.6) (27.6) -
------------------------------------------------------------------------------------------------------------------------------------
Group operating (loss)/profit (208.6) (260.0) 61.4
------------------------------------------------------------------------------------------------------------------------------------
F-9
3. Joint venture and associated undertakings
------------------------------------------------------------------------------------------------------------------------------------
Group's share of joint venture and associated undertaking's operating profits by 2002 2001 2000
geographical area (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 1.2 1.5 1.2
North America 2.1 2.8 1.9
Continental Europe, Africa and India 1.2 1.4 0.8
Asia Pacific and Latin America 0.8 0.8 1.7
------------------------------------------------------------------------------------------------------------------------------------
Operating profit before goodwill amortization 5.3 6.5 5.6
Goodwill amortization on joint venture (1.9) (0.4) -
------------------------------------------------------------------------------------------------------------------------------------
Total operating profit 3.4 6.1 5.6
------------------------------------------------------------------------------------------------------------------------------------
Group's share of joint venture and associated undertakings' operating profits by business 2002 2001 2000
segment (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Advertising and Integrated Marketing 5.0 6.5 5.6
Specialist Communications 0.3 - -
------------------------------------------------------------------------------------------------------------------------------------
Operating profit before goodwill amortization 5.3 6.5 5.6
Goodwill amortization on joint venture (1.9) (0.4) -
------------------------------------------------------------------------------------------------------------------------------------
Total operating profit 3.4 6.1 5.6
------------------------------------------------------------------------------------------------------------------------------------
4. Employees
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Number Number Number
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom 1,621 1,720 1,271
North America 1,492 2,016 1,491
Continental Europe, Africa and India 2,478 2,486 2,286
Asia Pacific and Latin America 3,012 3,198 2,712
------------------------------------------------------------------------------------------------------------------------------------
Average number of Group employees 8,603 9,420 7,760
------------------------------------------------------------------------------------------------------------------------------------
Advertising and Integrated Marketing 7,322 7,932 6,658
Specialist Communications 1,281 1,488 1,102
------------------------------------------------------------------------------------------------------------------------------------
Average number of Group employees 8,603 9,420 7,760
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Wages and salaries 273.6 318.7 244.7
Social security costs 26.7 29.3 22.0
Pension costs - see note 32 10.0 10.9 8.1
------------------------------------------------------------------------------------------------------------------------------------
Total (pre exceptional) - see note 5 310.3 358.9 274.8
------------------------------------------------------------------------------------------------------------------------------------
F-10
5. Operating expenses
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Staff and other associated costs (pre exceptional) - see note 4 310.3 358.9 274.8
Depreciation of owned fixed assets (pre exceptional) - see note 16 15.9 17.3 13.4
Depreciation of assets held under finance leases - see note 16 0.9 0.6 0.2
Profit/(loss) on sale of tangible fixed assets (0.1) 0.9 -
Operating leases
- plant and machinery 2.6 3.1 0.2
- leasehold property net of sublease income 28.0 32.5 22.3
Auditor's remuneration-audit* 1.6 1.7 1.5
- other fees paid to the auditors and their associates (pre exceptional) 0.4 2.1 1.4
Other operating expenses (pre exceptional) 136.1 151.4 137.8
Goodwill amortization 28.9 44.1 -
Exceptional goodwill impairment charges 171.1 224.8 -
Exceptional operating expenses - see note 6 45.6 27.6 -
------------------------------------------------------------------------------------------------------------------------------------
741.3 865.0 451.6
------------------------------------------------------------------------------------------------------------------------------------
* The Company audit fee was (pound)2,000 (2001:(pound)2,000),
(2000:(pound)2,000).
Within the Exceptional operating expenses is an amount of (pound)l.3 million
paid to the auditors for services provided in connection with the Group's
renegotiation of its financing arrangements in April 2002. No other fees, other
than those disclosed in the table above, were paid to the auditors and their
associates in the year.
In 2001 (pound)l.8 million (2000: (pound)0.9 million) was paid to the auditors
in relation to services provided in connection with acquisitions. An amount of
(pound)l.0 million (2000: (pound)1.7 million) was also paid to the auditors,
which was capitalized as part of the goodwill arising on acquisitions.
Net operating expenses are all administrative expenses.
The total depreciation and amortization of all tangible and intangible assets is
(pound)53.6 million (2001: (pound)66.0 million), (2000: (pound)l3.6 million) and
this is comprised of (pound)22.8 million (2001: (pound)21.5 million), (2000:
(pound)13.6 million) of depreciation, (pound)28.9 million (2001: (pound)44.1
million), (2000: nil) of amortization on goodwill held in respect of subsidiary
undertakings and (pound)l.9 million (2001: (pound)0.4 million), (2000: nil) of
amortization in respect of goodwill held in respect of the joint venture.
6. Exceptional operating expenses
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Severance 21.6 20.9 -
Property provisions (a) 8.0 2.9 -
Asset write-downs - exceptional depreciation 6.0 3.6 -
Moving and reorganization costs (a) 4.9 - -
Disposals and closure costs 1.6 - -
Other - 0.2 -
------------------------------------------------------------------------------------------------------------------------------------
42.1 27.6 -
Financing expenses 3.5 - -
------------------------------------------------------------------------------------------------------------------------------------
Total exceptional operating expenses 45.6 27.6 -
------------------------------------------------------------------------------------------------------------------------------------
In the first half of 2002, the Group incurred exceptional severance costs of
(pound)2.3 million as a result of the loss of a key client in North America. In
September 2002, Cordiant's management announced a wide-ranging program to
reduce the Group's cost base. The principal element of this exercise was the
integration of Bates Worldwide, 141 Worldwide, Fitch Worldwide and Healthworld
to form the Bates Group and involved headcount reductions, property
rationalization, co-location initiatives and asset write-downs. In addition to
the Bates Group integration, there were other cost reduction initiatives
throughout the Group which led to changes in senior management, further
reductions in headcount and property costs as well as the disposal, closure or
reorganization of certain loss making operations.
F-11
During the year, gross headcount reductions through severance were 894.
Of the total exceptional costs (pound)32.1 million related to Advertising and
Integrated Marketing and (pound)13.5 million related to Specialist
Communications.
The Group also incurred an exceptional financing charge of (pound)3.5 million in
respect of the legal and professional costs associated with the renegotiation of
its principal financing arrangements in April 2002.
The tax effect of the exceptional operating items is an estimated credit of
(pound)l.1 million (2001: (pound)5.2 million) and (2000: nil). The tax credit is
relatively low because the majority of the exceptional items arise in countries
with unrelieved tax losses.
(a) Property provisions are stated after a credit of (pound)3.3 million
(2001: nil), (2000: nil) relating to excess property accruals established
in respect of acquisitions completed prior to 2001. Moving and
reorganization costs are also stated after a similar credit of (pound)0.6
million, (2001: nil), (2000: nil).
Net interest payable and similar items
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Interest payable and similar items
Bank loans and overdrafts 9.6 10.6 11.2
Other borrowings 10.1 8.6 1.1
Finance leases and hire purchase 0.1 0.1 0.1
Bank fees 4.1 1.7 1.3
Foreign exchange 0.5 0.2 -
------------------------------------------------------------------------------------------------------------------------------------
24.4 21.2 13.7
Interest receivable and similar items
Cash and deposits (2.1) (2.9) (3.7)
------------------------------------------------------------------------------------------------------------------------------------
Group net interest payable and similar items 22.3 18.3 10.0
Joint ventures (1.5) (2.2) (1.7)
Associated undertakings - (0.1) 0.1
------------------------------------------------------------------------------------------------------------------------------------
Net interest payable and similar items 20.8 16.0 8.4
------------------------------------------------------------------------------------------------------------------------------------
8. Tax on ordinary activities
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
UK corporation tax at 30% (2001: 30%), (2000: 30%) 0.1 0.7 1.6
Less: Relief for overseas tax (0.1) (0.2) (0.1)
UK prior year adjustment (0.2) (0.9) (2.4)
UK deferred tax - (0.3) 0.4
------------------------------------------------------------------------------------------------------------------------------------
Group UK taxation (0.2) (0.7) (0.5)
Overseas taxation 6.2 6.1 15.2
Overseas deferred tax (1.5) (1.2) (1.4)
Overseas adjustment in respect of prior year (5.4) (3.2) (0.2)
------------------------------------------------------------------------------------------------------------------------------------
Group taxation (0.9) 1.0 13.1
Joint ventures 2.0 3.0 2.0
Associated undertakings 0.3 0.5 0.5
------------------------------------------------------------------------------------------------------------------------------------
Tax on ordinary activities 1.4 4.5 15.6
------------------------------------------------------------------------------------------------------------------------------------
Reconciliation of the Group's total tax charge to the United Kingdom
statutory rate:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Tax on pre tax (loss)/profit at 30% (2001: 30%), (2000: 30%) (68.4) (81.2) 17.3
Effects of:
Other timing differences not recognized 7.7 3.8 (2.7)
Permanent differences between expenditures charged in arriving at income and
expenditures allowed for tax purposes including goodwill:
UK 2.1 0.5 2.4
US (3.5) 0.6 (0.9)
Rest of World 1.3 2.4 1.0
Goodwill 60.5 80.6 -
Current year losses not relieved 7.9 2.5 (1.9)
Differences between UK and overseas standard tax rates (0.6) (0.6) 3.0
Adjustments in respect of prior years (5.6) (4.1) (2.6)
------------------------------------------------------------------------------------------------------------------------------------
Total tax charge 1.4 4.5 15.6
------------------------------------------------------------------------------------------------------------------------------------
The components of (loss)/profit before taxation are as follows:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Domestic (UK) (107.9) (53.2) 1.7
Foreign (120.3) (217.6) 55.8
------------------------------------------------------------------------------------------------------------------------------------
(228.2) (270.8) 57.5
------------------------------------------------------------------------------------------------------------------------------------
At 31 December 2002 the Group had (pound)99.8 million of operating loss
carryforwards expiring between 2003 and 2019. Of these losses, (pound)35.9
million expire between one and five years, (pound)36.7 million expire between
five and ten years and (pound)27.2 million expire thereafter. Additionally, the
Group had (pound)31 .9 million of operating loss carryforwards, which had no
expiration date. It is possible that all or part of the operating loss
carryforwards expiring between 2003 and 2019 may be restricted under any of
several statutory/regulatory provisions or judicially created doctrines.
Moreover, the operating loss carryforwards are generally only available to
offset future income of the group within the tax jurisdiction where the
operating loss arose and are not transferable between jurisdictions.
Refer to note 24 for deferred taxation.
F-12
9. Dividend
The Board does not recommend the payment of a dividend for the year ended 31
December 2002. The dividend for the year ended 31 December 2001 was nil, and for
the year ended 31 December 2000 was 2.1p per Ordinary share at a cost of
(pound)8.4 million.
10. (Losses)/earnings per share
------------------------------------------------------------------------------------------------------------------------------------
2000 2000
2002 2002 2001 2001 2000 Basic Diluted
(pound)m (pound)m (pound)m pence (pound)m Pence Pence
------------------------------------------------------------------------------------------------------------------------------------
(Losses)/earnings attributable to Ordinary
shareholders (233.6) (57.6) (277.6) (71.3) 36.1 12.3 11.4
Goodwill amortization and impairment* 201.9 49.8 269.3 69.2 - - -
Amounts written off investments 1.6 0.4 - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Headline (losses)/earnings ** (30.1) (7.4) (8.3) (2.1) 36.1 12.3 11.4
Exceptional operating items (tax effected) 44.5 11.0 22.4 5.7 - - -
------------------------------------------------------------------------------------------------------------------------------------
Adjusted earnings*** 14.4 3.6 14.1 3.6 36.1 12.3 11.4
------------------------------------------------------------------------------------------------------------------------------------
Shares Shares Shares
m m m
Weighted average number of shares 405.5 389.2 294.0
Dilutive effect of options and contingent consideration - - 24.0
------------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 405.5 389.2 318.0
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss)/earnings per share is calculated using losses attributable to
Ordinary shareholders and weighted average number of shares. Diluted earnings
per share is calculated using profits attributable to Ordinary shareholders and
weighted average number of shares.
Basic headline (loss)/earnings per share is calculated using headline losses and
weighted average number of shares. Diluted headline earnings per share is
calculated using headline earnings and diluted weighted average number of
shares.
In accordance with FRS 14 `Earnings per share", no dilutive effect is shown in
respect of share options and contingent consideration as a result of the basic
loss per share for 2002 and 2001.
* Includes(pound)1.9 million 2001:(pound)0.4 million, 2000: nil amortization of
goodwill on the joint venture.
** The definition of headline earnings is given in the Statement of Investment
Practice No.1 published by the United Kingdom Society of Investment
Professionals. Amongst other items, Headline earnings excludes items relating to
the amortization and impairment of goodwill capitalized on the balance sheet,
and has been disclosed to assist the reader's understanding of the Group's
performance.
***Adjusted earnings per share is based on continuing operating profits before
goodwill charges and exceptional operating expenses and is presented to show a
clearer representation of the results of the business going forward. Adjusted
basic earnings per share is calculated using adjusted earnings and weighted
average number of shares. Diluted adjusted earnings per share is calculated
using adjusted earnings and diluted weighted average number of shares.
Adjusted headline earnings per share is calculated on earnings before goodwill
amortization, exceptional goodwill impairment charges and exceptional operating
expenses and is presented to show a clearer representation of the underlying
performance of the business. It should not be considered an alternative to UK or
US GAAP as a measure of operating profit. Adjusted headline earnings per share
is not a measure of financial performance under UK and US GAAP and may not be
comparable to other similar titled measures for other companies.
11. Reconciliation of Group operating loss to net cash inflow from operating
activities
------------------------------------------------------------------------------------------------------------------------------------
2002 2002 2002
Pre-exceptional Exceptional Total 2001 2000
(pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Group operating profit/(loss) 8.1 (216.7) (208.6) (260.0) 61.4
Depreciation 16.8 6.0 22.8 21.5 13.6
Goodwill amortization and impairment 28.9 171.0 200.0 268.9 -
(Profit)/loss on sale of tangible fixed assets (0.1) (0.1) 0.9 -
Profit on sale of business - (0.4) (0.4) - -
(Increase)/decrease in work in progress (0.7) - (0.7) 10.6 1.4
Decrease in debtors 70.0 - 70.0 51.5 (10.1)
(Decrease)/increase in creditors and provisions
(excluding the utilization of property provisions) (74.4) 16.2 (58.2) (46.7) (17.0)
Utilization of property provisions (2.4) (2.0) (4.4) (3.3) (4.0)
------------------------------------------------------------------------------------------------------------------------------------
Net cash inflow/(outflow) from operating activities 46.2 (25.8) 20.4 43.4 45.3
------------------------------------------------------------------------------------------------------------------------------------
F-13
12. Analysis of cash flow items
2002 2001 2000
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Returns on investments and servicing of finance
Interest received 2.1 2.7 3.7
Interest paid (19.9) (16.8) (10.7)
Interest element of finance lease rental payments (0.1) (0.1) (0.1)
Bank fees (3.6) (1.5) (2.3)
Dividends paid to minorities (2.3) (1.5) (2.1)
------------------------------------------------------------------------------------------------------------------------------------
Net cash outflow from returns on investments and servicing of finance (23.8) (17.2) (11.5)
------------------------------------------------------------------------------------------------------------------------------------
Taxation paid
UK corporation tax received/ (paid) 1.6 (3.2) (1.3)
Overseas tax paid (6.3) (10.2) (10.0)
------------------------------------------------------------------------------------------------------------------------------------
Net tax paid (4.7) (13.4) (11.3)
------------------------------------------------------------------------------------------------------------------------------------
Capital expenditure and financial investment
Purchase of tangible fixed assets (6.6) (21.5) (19.6)
Sale of tangible fixed assets 1.9 1.5 1.5
Purchase of other fixed asset investments (0.7) (4.9) (5.6)
Sale of other fixed asset investments 0.1 0.2 0.2
------------------------------------------------------------------------------------------------------------------------------------
Net cash outflow from capital expenditure and financial investment (5.3) (24.7) (23.5)
------------------------------------------------------------------------------------------------------------------------------------
Acquisitions and disposals
Purchase of subsidiary undertakings (9.4) (23.0) (70.2)
Sale of subsidiary undertaking 0.6 - -
Purchase of joint venture and associated undertakings (0.2) (0.7) (1.0)
Sale of associated undertaking 0.6 (0.6) -
Net cash acquired with subsidiaries - 10.7 24.4
------------------------------------------------------------------------------------------------------------------------------------
Net cash outflow from acquisitions and disposals (8.4) (13.6) (46.8)
------------------------------------------------------------------------------------------------------------------------------------
Management of liquid resources
Cash deposits 0.2 0.6 5.2
------------------------------------------------------------------------------------------------------------------------------------
Net cash inflow from management of liquid resources 0.2 0.6 5.2
------------------------------------------------------------------------------------------------------------------------------------
F-14
13.Analysis of net debt
------------------------------------------------------------------------------------------------------------------------------------
Exchange
At and At
1 January Cash non-cash 31 December
2002 flows movements 2002
(pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Cash at bank and in hand 123.5 (26.3) (1.2) 96.0
Bank overdrafts (10.4) 1.5 0.9 (8.0)
------------------------------------------------------------------------------------------------------------------------------------
113.1 (24.8) (0.3) 88.0
------------------------------------------------------------------------------------------------------------------------------------
External debt due within one year (18.9) 12.0 - (6.9)
External debt due after one year (235.3) (7.7) 11.4 (231.6)
Finance leases (2.5) 0.9 - (1.6)
------------------------------------------------------------------------------------------------------------------------------------
(256.7) 5.2 11.4 (240.1)
------------------------------------------------------------------------------------------------------------------------------------
Cash deposits-current asset investments 0.6 (0.2) - 0.4
------------------------------------------------------------------------------------------------------------------------------------
Net debt (143.0) (19.8) 11.1 (151.7)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
At Exchange and At
1 January Cash non-cash 31 December
2001 flows Acquisitions* movements 2001
(pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Cash at bank and in hand 99.8 26.0 - (2.3) 123.5
Bank overdrafts (9.0) (1.5) - 0.1 (10.4)
------------------------------------------------------------------------------------------------------------------------------------
90.8 24.5 - (2.2) 113.1
------------------------------------------------------------------------------------------------------------------------------------
External debt due within one year (127.3) 114.4 (6.8) 0.8 (18.9)
External debt due after one year (73.0) (164.2) - 1.9 (235.3)
Finance leases (3.7) 1.1 - 0.1 (2.5)
------------------------------------------------------------------------------------------------------------------------------------
(204.0) (48.7) (6.8) 2.8 (256.7)
------------------------------------------------------------------------------------------------------------------------------------
Cash deposits-current asset investments 1.3 (0.6) - (0.1) 0.6
------------------------------------------------------------------------------------------------------------------------------------
Net debt (111.9) (24.8) (6.8) 0.5 (143.0)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
At Exchange and At
1 January Cash non-cash 31 December
2000 flows Acquisitions* movements 2001
(pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Cash at bank and in hand 80.0 21.5 - (1.7) 99.8
Bank overdrafts (3.2) (5.4) - (0.4) (9.0)
------------------------------------------------------------------------------------------------------------------------------------
76.8 16.1 - (2.1) 90.8
------------------------------------------------------------------------------------------------------------------------------------
External debt due within one year (4.3) (56.8) (66.2) - (127.3)
External debt due after one year (75.8) 3.5 - (0.7) (73.0)
Finance leases (0.7) (3.0) - - (3.7)
------------------------------------------------------------------------------------------------------------------------------------
(80.8) (56.3) (66.2) (0.7) (204.0)
------------------------------------------------------------------------------------------------------------------------------------
Cash deposits-current asset investments 6.4 (5.2) - 0.1 1.3
------------------------------------------------------------------------------------------------------------------------------------
Net debt 2.4 (45.4) (66.2) (2.7) (111.9)
------------------------------------------------------------------------------------------------------------------------------------
*excluding cash and overdrafts
F-15
14. Intangible assets -goodwill
--------------------------------------------------------------------------------
2002
(pound)m
--------------------------------------------------------------------------------
Cost
At beginning of year 743.4
Additions 5.6
Disposals (0.4)
Translation adjustment (51.8)
--------------------------------------------------------------------------------
At end of year 696.8
--------------------------------------------------------------------------------
Amortization
At beginning of year (265.1)
Disposals 0.1
Amortization (28.9)
Impairment (171.1)
Translation adjustment 31.7
--------------------------------------------------------------------------------
At end of year (433.3)
--------------------------------------------------------------------------------
Net book value
At beginning of year 478.3
--------------------------------------------------------------------------------
At end of year 263.5
--------------------------------------------------------------------------------
The additions to goodwill during the year ended 31 December 2002 relate to
movements in contingent consideration.
The Group has continued to monitor the goodwill values in the light of poor
growth prospects in the industry and in accordance with FRS 11. In conducting
the impairment review at 31 December 2002, the Group compared the net present
value to the carrying value of the investments by discounting the estimated
future net cash flows of the business. The discount rates used were between 11
..6% and 16% and were based on the weighted average cost of capital calculated
for the Group and adjusted to take account of the different levels of
geographical and business risks within the Group. The review indicated that, in
the case of a number of acquisitions, the carrying value was not supported in
full. As a result, a write-down of (pound)171.1 million, has been reflected for
the year ended 31 December 2002.
As described in note 1 these financial statements have been prepared on an going
concern basis. There is considerable uncertainty about the appropriateness of
this basis of presentation. If the going concern assumption was not appropriate
there could be a write down of the carrying value of the goodwill in the balance
sheet.
F-16
15.The effects of the acquisition of subsidiaries
Year ended 31 December 2002
The Group has not made any material acquisitions during the year.
Year ended 31 December 2001
During the year the Group acquired the following subsidiaries:
------------------------------------------------------------------------------------------------------------------------------------
Name of the acquisition Date of acquisition
------------------------------------------------------------------------------------------------------------------------------------
Microarts Corporation Inc. 5 January 2001
Gallagher and Kelly Public Relations Limited 3 April 2001
Bulletin International Limited 3 May 2001
International Business Information Inc. 16 July 2001
Presentation Communications International Limited 26 July 2001
------------------------------------------------------------------------------------------------------------------------------------
It is not considered that these are individually material acquisitions to the
Group and therefore, in accordance with the prescribed accounting standards,
they have been aggregated in the tables below.
The table below summarizes the aggregate of subsidiaries acquire by the Group during 2001:
------------------------------------------------------------------------------------------------------------------------------------
(pound)m
------------------------------------------------------------------------------------------------------------------------------------
Goodwill capitalized 80.3
Tangible fixed assets 3.4
Work in progress 1.6
Debtors 14.3
Current investments 0.1
------------------------------------------------------------------------------------------------------------------------------------
99.7
------------------------------------------------------------------------------------------------------------------------------------
Loans and finance leases 6.8
Creditors 20.8
Cost of acquisitions:
Acquisition costs less cash acquired (2.0)
Ordinary shares issued 62.5
Contingent earnout accruals 11.6
------------------------------------------------------------------------------------------------------------------------------------
99.7
------------------------------------------------------------------------------------------------------------------------------------
F-17
15.The effects of the acquisition of subsidiaries (continued)
The following table sets out the book values of the identifiable assets and
liabilities of all acquisitions made in 2001 and their fair value to the Group:
--------------------------------------------------------------------------------
Book and Fair value
to Group
(pound)m
--------------------------------------------------------------------------------
Fixed assets 3.4
Current assets 27.2
--------------------------------------------------------------------------------
Total assets 30.6
--------------------------------------------------------------------------------
Creditors (28.1)
--------------------------------------------------------------------------------
Net Assets 2.5
--------------------------------------------------------------------------------
Goodwill 80.3
--------------------------------------------------------------------------------
82.8
--------------------------------------------------------------------------------
Satisfied by:
Shares issued 62.5
Acquisition costs and cash consideration 8.7
Contingent earnout accruals 11.6
--------------------------------------------------------------------------------
Total consideration 82.8
--------------------------------------------------------------------------------
No provisional material fair value adjustments were made to the book value of
the identifiable assets and liabilities acquired.
The contingent earnout accruals are based on management's
forecasts of the earnings of various underlying units.
Net cash flows in respect of the acquisitions comprised:
--------------------------------------------------------------------------------
2001
(pound)m
--------------------------------------------------------------------------------
Acquisition cost and cash consideration 8.7
Cash at bank and in hand (11.2)
Bank overdrafts acquired 0.5
--------------------------------------------------------------------------------
Total (2.0)
--------------------------------------------------------------------------------
F-18
16.Tangible fixed assets
Leasehold Leasehold Information Furniture
Freehold improvements improvements Technology and other Motor
property -long - short Equipment equipment vehicles Total
Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Cost
At beginning of year 1.4 3.8 31.0 43.1 34.6 3.7 117.6
Translation adjustment - (0.3) (1.0) (1.7) (0.9) - (3.9)
Additions 0.5 1.0 2.8 1.8 0.5 6.6
Disposals - (0.3) (4.0) (10.8) (5.8) (2.0) (22.9)
Reclassification - (0.2) 0.4 1.0 (1.2) - -
------------------------------------------------------------------------------------------------------------------------------------
At end of year 1.4 3.5 27.4 34.4 28.5 2.2 97.4
------------------------------------------------------------------------------------------------------------------------------------
Depreciation
At beginning of year 0.1 0.6 10.5 24.2 19.9 1.7 57.0
Translation adjustment - (0.2) (0.7) (1.1) (1.0) 0.1 (2.9)
------------------------------------------------------------------------------------------------------------------------------------
Charge for the year - ongoing 0.1 0.3 3.0 8.0 4.7 0.7 16.8
Charge for the year - exceptional 0.1 1.2 0.9 1.6 2.2 - 6.0
------------------------------------------------------------------------------------------------------------------------------------
Charge for the year - total 0.2 1.5 3.9 9.6 6.9 0.7 22.8
Disposals - (0.3) (3.4) (10.3) (5.5) (1.4) (20.9)
Reclassification - (0.1) 0.7 0.2 (0.8) - -
------------------------------------------------------------------------------------------------------------------------------------
At end of year 0.3 1.5 11.0 22.6 19.5 1.1 56.0
------------------------------------------------------------------------------------------------------------------------------------
Net book value
At beginning of year 1.3 3.2 20.5 18.9 14.7 2.0 60.6
------------------------------------------------------------------------------------------------------------------------------------
At end of year 1.1 2.0 16.4 11.8 9.0 1.1 41.4
------------------------------------------------------------------------------------------------------------------------------------
Net book value of assets held under
finance leases included above
At beginning of year - - - 0.5 0.1 - 0.6
------------------------------------------------------------------------------------------------------------------------------------
At end of year - - - 0.1 - - 0.1
------------------------------------------------------------------------------------------------------------------------------------
Net book value of land and buildings, which includes freehold property and
leasehold improvements, at 31 December 2002 was (pound)19.5 million (2001:
(pound)25.0 million).
17. Investments
------------------------------------------------------------------------------------------------------------------------------------
Associated undertakings
---------------------------------------
Share of Long-term
net assets Goodwill Sub-total Own shares Investments* Total
Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Cost
At beginning of year 4.0 3.1 7.1 2.4 8.4 17.9
Additions 0.2 - 0.2 - - 0.2
Disposals (0.7) (0.1) (0.8) - (0.2) (1.0)
Share of retained earnings for the financial year 0.4 - 0.4 - - 0.4
----------------------------------------------------------------------------------------------------------------------------------
At end of year 3.9 3.0 6.9 2.4 8.2 17.5
----------------------------------------------------------------------------------------------------------------------------------
Provision
------------------------------------------------------------------------------------------------------------------------------------
At beginning of year - - - - - -
Additions - - - 1.7 - 1.7
------------------------------------------------------------------------------------------------------------------------------------
At end of year - - 1.7 - 1.7
------------------------------------------------------------------------------------------------------------------------------------
Net book value
At beginning of year 4.0 3.1 7.1 2.4 8.4 17.9
------------------------------------------------------------------------------------------------------------------------------------
At end of year 3.9 3.0 6.9 0.7 8.2 15.8
------------------------------------------------------------------------------------------------------------------------------------
* All long-term investments are unlisted.
The total for all investments, including investments in joint ventures is
(pound)42.8 million (2001:(pound)44.1 million).
F-19
17. Investments (continued)
The Cordiant Communications Group 2001 Employee Benefit Trust was established on
21 June 2001 to encourage and facilitate the holding of shares by or for the
benefit of the employees of the Group. The trust purchases the company's shares
in the market, and it may use discretionary powers to grant options over these
shares to selected employees under certain employees' share schemes or to
provide benefits to the Group's employees in other ways. The trust has an
independent, professional trustee, Ogier Employee Benefit Trustee Limited, and
is currently financed by advances from the Group. The Group accounts for its own
shares as a fixed asset investment. Costs of administering the scheme are
charged to the profit and loss account as they are incurred. At 31 December 2002
the Cordiant Communications Group 2001 Employee Benefit Trust owned 1.2 million
(2001: 1.2 million) shares with a nominal value of (pound)0.6 million (2001:
(pound)0.6 million) and a market value of (pound)0.4 million (2001: (pound)1.1
million) and these are held for the long term benefit of the employees of the
Group. The Trustee has agreed under the Trust Deed dated 21 June 2001 to waive,
at the company's discretion, all rights to any future dividends which may be
payable on any shares in the Company held in trust. Such waivers of dividends
payable during the year ended 31 December 2002 amounted to (pound) nil.
(pound)0.1 million has been charged as an operating cost in the year to 31
December 2002 to reflect the cost of compensation of those share options which
have been granted and are expected to vest in the future.
In the light of the fall in the price of the Company's shares during the current
year, the Board has reconsidered the value at which the Cordiant Communications
Group 2001 Employee Benefit Trust's investment in the Company's shares should be
stated in the balance sheet. As a result of this review, the Board has concluded
that it is prudent to make provision of (pound)1.6 million against the
investment, to reflect the market value of these shares at 31 December 2002.
F-20
18. Joint venture
The share of the assets of the joint venture at 31 December 2002 is disclosed
below:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Goodwill 36.8 38.2
Share of fixed assets 1.9 2.1
Share of current assets 147.0 150.8
------------------------------------------------------------------------------------------------------------------------------
Share of gross assets (including goodwill) 185.7 191.1
------------------------------------------------------------------------------------------------------------------------------
Share of liabilities due within one year (156.1) (162.2)
Share of liabilities due after one year (2.6) (2.7)
------------------------------------------------------------------------------------------------------------------------------
Share of gross liabilities (158.7) (164.9)
------------------------------------------------------------------------------------------------------------------------------
Share of joint venture 27.0 26.2
------------------------------------------------------------------------------------------------------------------------------
Under the terms of the Group's contractual agreement with Publicis Groupe SA the
directors consider Zenith Optimedia Group Limited to be a joint venture. Zenith
Optimedia Group Limited is an investment holding company with subsidiary groups
carrying on the business of media planning and buying in the advertising
industry. The Group owns 25% of the class 'A' shares and controls 25% of the
Zenith Optimedia Group Limited. The class 'A' shares have a nominal value of
50p. The class B shares have a nominal value of (pound)1 and 'A' and 'B' shares
rank pari passu in all respects as if they constituted one class of shares.
The goodwill on the acquisition of Zenith Optimedia Group Limited is being
amortized over 20 years and amortization for the year ended 31 December 2002 was
(pound)1.9 million (2001: (pound)0.4 million). During the year a fair value
adjustment of (pound)0.5 million was made to increase the goodwill in respect of
an additional liability incurred in connection with the transaction.
19. Debtors
Group
-------------------
2002 2001
Due within one year: (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Trade debtors 289.2 358.1
Amounts due from joint venture and associated undertakings 0.4 0.3
Deferred tax 7.6 6.5
Other debtors 18.5 27.0
Prepayments and accrued income 22.6 26.4
------------------------------------------------------------------------------------------------------------------------------
Total 338.3 418.3
------------------------------------------------------------------------------------------------------------------------------
Due after one year:
------------------------------------------------------------------------------------------------------------------------------
Deferred tax 0.5 -
Other debtors 3.9 6.3
Prepayments and accrued income 17.7 21.1
------------------------------------------------------------------------------------------------------------------------------
Total 22.1 27.4
------------------------------------------------------------------------------------------------------------------------------
Total debtors 360.4 445.7
------------------------------------------------------------------------------------------------------------------------------
Total Group other debtors amounted to(pound)22.4 million (2001:(pound)33.3
million). Total Group prepayments and accrued income amounted to(pound)40.3
million (2001:(pound)47.5 million).
The deferred tax debtor is comprised as follows:
------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Tax losses 2.1 0.5
Other timing losses 6.0 6.0
------------------------------------------------------------------------------------------------------------------------------
Total 8.1 6.5
------------------------------------------------------------------------------------------------------------------------------
A deferred tax asset of (pound)93.6 million (2001: (pound)83.0 million) relating
to carried forward losses and other timing differences has not been recognized.
The tax benefit of these losses and timing differences can only be realized
through the offset against particular types of future income, for example,
capital gains, and in particular taxation jurisdictions. In the opinion of the
Directors, there is not sufficient evidence presently available that such income
will be generated to support the recognition of all such assets.
F-21
19. Debtors (continued)
Valuation and Qualifying accounts
Balance at Balance at
beginning Profit and end of
of period loss charge Utilized period
(pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December 2002
Provision for bad and doubtful debts (deducted from trade debtors) 16.4 0.7 (4.9) 12.2
Provision for non recoverable work in progress (deducted from work in
progress) 0.7 0.3 (0.2) 0.8
------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December 2001
Provision for bad and doubtful debts (deducted from trade debtors) 18.3 - (1.9) 16.4
Provision for non recoverable work in progress (deducted from work in
progress) 1.1 - (0.4) 0.7
------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December 2000
Provision for bad and doubtful debts (deducted from trade debtors) 11 .2 7.1 - 18.3
Provision for non recoverable work in progress (deducted from work in
progress) 0.7 0.4 - 1.1
------------------------------------------------------------------------------------------------------------------------------
20. Current asset investments
------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Cash deposits 0.4 0.6
Other - unlisted 0.3 0.3
------------------------------------------------------------------------------------------------------------------------------
Total 0.7 0.9
------------------------------------------------------------------------------------------------------------------------------
21. Creditors
Group
----------------------
2002 2001
Due within one year: (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Bank loans 6.9 18.9
Bank overdrafts 8.0 10.4
Finance leases and hire purchase 1.4 2.2
Tax and social security 33.8 39.2
Trade creditors 272.6 325.4
Amounts due to subsidiary undertakings - -
Amounts due to joint venture and associated undertakings 2.2 5.0
Accruals and deferred income 115.7 135.4
Other creditors 14.0 19.8
------------------------------------------------------------------------------------------------------------------------------
Total 454.6 556.3
------------------------------------------------------------------------------------------------------------------------------
Due after one year:
Bank loans 122.9 115.4
Guaranteed Senior Notes 108.7 119.9
Finance leases and hire purchase 0.2 0.3
Tax and social security 10.9 18.8
Accruals and deferred income 5.3 3.7
Other creditors 3.8 5.9
------------------------------------------------------------------------------------------------------------------------------
Total 251.8 264.0
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Maturity of bank loans, overdrafts and Guaranteed Senior Notes
------------------------------------------------------------------------------------------------------------------------------
In one year or less 14.9 29.3
In more than one year but not more than two years 122.9 4.2
In more than two years but not more than five years 27.9 111.2
In more than five years 80.8 119.9
------------------------------------------------------------------------------------------------------------------------------
Total 246.5 264.6
------------------------------------------------------------------------------------------------------------------------------
F-22
21. Creditors (continued)
As at 31 December 2002, an amount of (pound)0.8 million (2001: (pound)2.0
million) included in bank loans and overdrafts was secured by charges over
assets. In addition an amount of (pound)235.3 million of Guaranteed Senior Notes
and bank loans was secured by guarantees by certain subsidiaries, a general
debenture over assets in the United Kingdom and pledges of shares of certain
subsidiaries. As at 31 December 2001 an amount of (pound)231.0 million of the
Group's borrowings was secured by guarantees from certain subsidiaries.
Liabilities under finance leases are secured on the assets leased.
In April 2002, the Group completed the re-negotiation of certain terms of its
syndicated credit facility and Guaranteed Senior Notes. The coupon payable on
Guaranteed Senior Notes was increased to 9.25% per annum from 7.61%. Interest
payable on each advance under the syndicated credit facility is now LIBOR or
EURIBOR plus a margin of 3.25% per annum. Certain other deferred fees are
payable depending on financial performance. The syndicated credit facility and
the Guaranteed Senior Notes are secured by guarantees from certain subsidiaries,
a general debenture over assets in the United Kingdom and pledges of shares of
certain subsidiaries. In addition, the Group is subject to certain restrictions
on its use of cash flow, including acquisition payments, capital expenditure,
dividends and the use of disposal proceeds. The Guaranteed Senior Notes mature
in April 2011 and had an average life of eight years at issue in April 2001
taking into account scheduled repayments of $35.0 million ((pound)21.7 million)
per annum from April 2007. The holders of the Guaranteed Senior Notes are
entitled to require the Company to pre-pay the Notes in November 2004 (or upon
any refinancing of the Group's syndicated bank facilities if earlier) with a
'make-whole' penalty, unless the Group meets certain financial tests at that
time (see note 27).
Pursuant to the Amended and Restated Loan Agreement dated as of April 19, 2002,
the Group may pay annual (not interim dividends) out of its available excess
cash flow in respect of any fiscal year after 31 December 2001, provided that
the Group satisfies certain financial conditions, particularly with respect to
debt ratios, so long as there are no events of default under the Amended and
Restated Loan Agreement.
In April 2003, due to an anticipated inability to comply with certain financial
covenants, the Group and its lenders reached an agreement (the "Support
Agreement") pursuant to which the lenders agreed to waive through July 15, 2003
compliance with certain covenants which would otherwise have prevented the Group
from having access to its committed undrawn facilities under the Loan Agreement.
Access to these funds until July 15, 2003 however remains subject to certain
conditions, including no new event of default occurring under the Loan
Agreement, Note Agreement or Support Agreement. The Support Agreement also
amends certain provisions of both the Loan Agreement and the Note Agreement to
clarify the terms of payment of certain fees under the Loan Agreement, further
restricts the payment of dividends and the making of acquisitions and conforms
certain events of default under both the Loan Agreement and the Note Agreement.
22. Finance leases
------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
Gross obligations under finance leases due after more than one year
------------------------------------------------------------------------------------------------------------
Within one to two years 0.2 0.3
------------------------------------------------------------------------------------------------------------
23. Guarantees
In 1997 the Group gave guarantees in respect of obligations by Saatchi & Saatchi
plc companies, which remain in force. Saatchi & Saatchi Limited (formerly
Saatchi & Saatchi plc) has undertaken to indemnify Cordiant Communications Group
plc for any liability under these guarantees. These guarantees include operating
lease commitments relating to a leasehold property in New York. The lease
expires in the year 2013 and the total obligations at 31 December 2002 were
(pound)145.3 million (2001: (pound)174.9 million).
Other guarantees given by Group companies to third parties amounted to
(pound)9.5 million at 31 December 2002 (2001: (pound)5.8 million).
F-23
24. Provisions
--------------------------------------------------------------------------------------------------------------------------------
Pensions and
Deferred similar
Taxation employment
restated Property obligations Other Total
Provisions for liabilities and charges (pound)m (pound)m (pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Gross provisions
At beginning of the year 0.5 24.4 18.8 1.2 44.9
Translation adjustment - (0.5) (1.4) - (1.9)
Profit and loss account 0.1 9.0 2.8 (0.9) 11.0
Utilized - (4.4) (3.6) - (8.0)
-------------------------------------------------------------------------------------------------------------------------------
At end of the year 0.6 28.5 16.6 0.3 46.0
-------------------------------------------------------------------------------------------------------------------------------
Discount
At beginning of the year - 4.4 - - 4.4
Profit and loss account - 0.1 - - 0.1
Unwinding of discount utilization - (0.6) - - (0.6)
-------------------------------------------------------------------------------------------------------------------------------
At end of the year - 3.9 - - 3.9
-------------------------------------------------------------------------------------------------------------------------------
Net book value
At beginning of the year 0.5 20.0 18.8 1.2 40.5
-------------------------------------------------------------------------------------------------------------------------------
At end of the year 0.6 24.6 16.6 0.3 42.1
-------------------------------------------------------------------------------------------------------------------------------
Further disclosures regarding the deferred tax asset are shown in note 19.
The property provision is the estimated future cost of the Group's vacant
properties based on known and estimated rental subleases. The cost includes
provisions for required dilapidation costs and any anticipated future rental
shortfalls. Other provisions comprise certain contingent liabilities where the
timing and nature of the settlement is uncertain but considered probable.
Of the provisions for pensions and similar employment obligations, (pound)1.0
million (2001: (pound)1.1 million) relates to defined contribution schemes,
(pound)0.3 million (2001: (pound)0.3 million) relates to the defined benefit
scheme, (pound)2.7 million (2001: (pound)3.0 million) relates to an unfunded
deferred compensation plan (see note 32), (pound)10.3 million (2001: (pound)11.4
million) relates to a separate arrangement to provide post-retirement benefits
(see note 32) and (pound)2.3 million (2001: (pound)3.0 million) relates to other
overseas statutory requirements.
-------------------------------------------------------------------------------------------------------------------------------
2002 2001
Analysis of leasehold property provisions by years: (pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Within one year 7.6 3.8
One to two years 6.3 2.5
Two to five years 6.6 7.6
After five years 4.1 6.1
-------------------------------------------------------------------------------------------------------------------------------
Total 24.6 20.0
-------------------------------------------------------------------------------------------------------------------------------
Deferred Taxation
-------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Provisions for UK deferred taxation - - 1.0
Provisions for overseas deferred taxation 1.5 0.5 -
-------------------------------------------------------------------------------------------------------------------------------
1.5 0.5 1.0
-------------------------------------------------------------------------------------------------------------------------------
The Group has no material deferred tax liabilities unprovided in respect of
accelerated capital allowances.
Unremitted earnings of subsidiaries which have been or are intended to be
permanently reinvested to meet media accreditation and working capital
requirements, exclusive of amounts which if remitted in the near future would
result in little or no tax by operation of relevant statutes normally in effect,
aggregated (pound)76.0 million (2001: (pound)76.0 million), (2000: 80.0
million).
F-24
24. Provisions (continued)
Temporary differences at the appropriate tax rate at 31 December 2002 and 2001
are as follows:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset
Accrued property rental expense 7.8 7.3
Accrued compensation 4.8 6.4
Capital loss carryforwards 13.9 13.9
Operating loss carryforwards * 51.8 47.6
Interest expense deferred for tax 7.3 --
Other 20.1 16.3
-------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 105.7 91.5
Valuation allowance (93.6) (83.0)
-------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset 12.1 8.5
-------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Other (4.6) (2.5)
-------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 7.5 6.0
-------------------------------------------------------------------------------------------------------------------------------
*See note 8 for a discussion of potential restrictions on operating loss
carryforwards.
A valuation allowance is provided to reduce the deferred tax assets to a level
which, based on weight of available evidence, will more likely than not be
realized based on this criteria.
The net change in the valuation allowance for deferred tax assets during 2002
amounted to an increase of (pound)10.6 million.
The portion of the valuation allowance for which subsequently recognized tax
benefits will be allocated to reduce goodwill or other non current intangible
assets is (pound)1.1 million.
25. Share capital
2002 2001
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Authorized share capital of the Company 260.0 260.0
-------------------------------------------------------------------------------------------------------------------------------
Allotted, called up and fully paid:
410,687,875 Ordinary shares of 50p each (2001: 400,880,110) 205.3 200.4
-------------------------------------------------------------------------------------------------------------------------------
During the year the Company issued 2.2 million Ordinary shares of 50p each for
consideration of (pound)1.7 million pursuant to receipt of notices to exercise
options from employees of the Group. In addition, the Company issued 7.6 million
Ordinary shares of 50p each for a total consideration of (pound)6.3 million in
respect of the settlement of contingent consideration on previous transactions.
26. Movement in shareholders' funds
------------------------------------------------------------------------------------------------------------------------------------
Profit
Share Share Merger Shares to Special Warrant Other and loss
capital premium reserve be issued reserves reserve reserves account Total
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
At 31 December 1999 114.4 3.2 3.4 1.4 25.7 - - (193.9) (45.8)
Prior year adjustment - deferred tax - - - - - - - 1.6 1.6
------------------------------------------------------------------------------------------------------------------------------------
114.4 3.2 3.4 1.4 25.7 - - (192.3) (44.2)
Issues of Ordinary Shares net of
expenses 67.9 134.0 247.3 33.7 - - - - 482.9
Options for payments for employee
share scheme - - - - - - - (1.7) (1.7)
Goodwill arising on acquisitions made
in previous periods - - - - - - - (0.1) (0.1)
Profit retained for the period - - - - - - - 25.2 25.2
Reversal of imputed employee share
scheme cost - - - - - - - 4.1 4.1
Translation adjustment - - - - - - - (1.3) (1.3)
------------------------------------------------------------------------------------------------------------------------------------
At 31 December 2000
Prior year adjustment- 182.3 137.2 250.7 35.1 25.7 - - (166.1) 464.9
deferred tax - - - - - - - 2.5 2.5
------------------------------------------------------------------------------------------------------------------------------------
At beginning of year - restated 182.3 137.2 250.7 35.1 25.7 - - (163.6) 467.4
Consideration for acquisitions in the
year 13.6 33.4 15.5 - - - - - 62.5
Adjustments to contingent
consideration 1.8 1.7 - (21.8) - 20.8 - - 2.5
Exercising of employee share
schemes 2.7 6.1 - (0.2) - - - (4.5) 4.1
Transfer of merger reserve - - (231.0) - - - 231.0 - -
Release of reserves against
Investments and loan provisions - - (5.4) - - - (150.0) 155.4 -
Loss retained for the year - - - - - - - (277.6) (277.6)
Gain on sale of joint venture and
subsidiary undertakings - unrealized - - - - - - 44.4 - 44.4
Realization of gain on sale of joint
venture and subsidiary undertakings - - - - - - (0.4) 0.4 -
Translation adjustment - - - - - - - 3.7 3.7
Other movements - - - - - - - (0.2) (0.2)
------------------------------------------------------------------------------------------------------------------------------------
At 31 December 2001 200.4 178.4 29.8 13.1 25.7 20.8 125.0 (286.4) 306.8
------------------------------------------------------------------------------------------------------------------------------------
Adjustments to contingent
consideration 3.8 0.1 2.4 (3.9) - - - - 2.4
Exercising of employee share
schemes 1.1 0.6 - (0.4) - - - (1.3) -
Release of reserves against
investments and loan provisions - - (14.1) - - - (81.0) 95.1 -
Loss retained for the year - - - - - - - (233.6) (233.6)
Realization of gain on sale of joint
venture and subsidiary undertaking - - - - - - (2.2) 2.2 -
Reclassification of reserves - (4.7) 4.7 - - - - - -
Translation adjustment - - - - - - - (6.1) (6.1)
------------------------------------------------------------------------------------------------------------------------------------
At 31 December 2002 205.3 174.4 22.8 8.8 25.7 20.8 41.8 (430.1) 69.5
------------------------------------------------------------------------------------------------------------------------------------
F-25
26. Movement in shareholders' funds (continued)
Group other reserves at 31 December 2002 comprise merger reserve (pound)22.8
million (2001: (pound)29.8 million), shares to be issued (pound)8.8 million
(2001: (pound)l3.1 million), special reserve (pound)25.7 million (2001:
(pound)25.7 million), warrant reserve (pound)20.8 million, an unrealized gain on
the sale of joint venture an subsidiary undertaking of (pound)41.8 million
(2001: (pound)44.0 million) and other reserves of (pound)nil (2001: (pound)81.0
million).
The total movement in the merger reserve in 2002 of (pound)7.0 million arose
following the adjustments to contingent consideration which increased the merger
reserve by (pound)2.4 million, the transfer of (pound)14.1 million to the profit
and loss reserve following the provision made against investments made in prior
years and also the re-classification of (pound)4.7 million of the share premium
to the merger reserve.
The total movement in the merger reserve in 2001 of (pound)220.9 million arose
following the acquisition, by issue of the Company's shares, of the Group's
100% interest in Bulletin International Limited, Gallagher & Kelly Public
Relations Limited and Presentation Communications International Limited which
increased the merger reserve by (pound)15.5 million, the transfer of (pound)5.4
million to the profit and loss reserve following the provision made against
investments made in prior years and also the re-designation of (pound)231.0
million of the merger reserve to other reserves following Group restructuring.
The movement in the merger reserve in 2000 of (pound)247.3 million arose
following the acquisition, by issue of the Company's shares of the Group's 100%
interest in PSD Associates Limited, Arcom Limited, and Bamber Forsyth Limited in
the United Kingdom, and Lighthouse Global Network, Inc. in the United States.
Where equity shares are issued at a premium in excess of par value in
consideration for such an acquisition, there is relief from the requirement to
credit the premium to "Premiums in Excess of Par Value."
As at 31 December 2002 the cumulative goodwill written off on acquisitions prior
to 1 January 1998 amounted to (pound)115.5 million (2001: (pound)15.5 million).
The special reserve is also non distributable other than for the purposes of
paying up shares in a bonus issue of fully paid shares.
The reclassification of reserves relates to the issues of share in respect of
certain earnout payments made in 2001 and should have been taken to the merger
reserve.
As at 31 December 2002, the Profit and loss Account included cumulative exchange
translation losses of (pound)33.4 million (2001:(pound)27.3 million; 2000:
(pound)31.0 million).
F-26
27. Commitments and contingent liabilities
The Group is committed to make certain capital payments in the form of deferred
consideration and earnouts. The Directors' best estimate of commitments,
totalling (pound)14.0 million (2001: (pound)24.6 million) have been accrued in
the balance sheet. Of this amount (pound)6.3 million (2001: (pound)13.0 million)
is payable in cash with the remaining (pound)7.7 million (2001: (pound)11.6
million) being payable in new Ordinary shares. Actual share based payments and
cash based payments made in the year were (pound)6.3 million and (pound)9.5
million, respectively. The calculations for the earnouts accrued at the year end
are based on the Group's contractual obligations and the Directors' best
estimate of future obligations, which are dependent on the future performance of
the interests acquired. At 31 December 2002 the Group had the following other
commitments in respect of capital expenditure and non-cancellable operating
leases chargeable to the profit and loss account for the following year:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
Capital expenditure: (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Committed but not provided for - 0.7
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Land and
buildings Other 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Non-cancellable operating leases which expire: (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Within one year 1.5 1.5 3.0 4.1
Within two to five years 5.5 2.1 7.6 8.6
Over five years 14.8 - 14.8 16.3
------------------------------------------------------------------------------------------------------------------------------------
Total 21.8 3.6 25.4 29.0
------------------------------------------------------------------------------------------------------------------------------------
Future minimum cash lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum cash
capital lease payments as of December 31, 2002 are:
--------------------------------------------------------------------------------
Finance Operating
leases leases
(pound)m (pound)m
Year ending December 31:
2003 1.4 28.9
2004 0.2 26.9
2005 - 21.8
2006 - 17.3
2007 - 14.2
Later years, through 2013 - 60.9
--------------------------------------------------------------------------------
Total minimum lease payments 1.6 170.0
--------------------------------------------------------------------------------
Contingent Liabilities
Make whole penalty
The make whole penalty arises on any prepayment of the Guaranteed Senior Notes
(Notes).
The make whole penalty, if triggered under certain circumstances, is calculated
as the discounted interest differential on the level of prepaid debt at the
applicable coupon rate and the available market rate on US treasury stock at the
time of redemption plus a margin of 0.5 %. In the case of a change of control
situation triggering the make-whole penalty, the coupon rate applicable to the
make-whole calculation is 9.25% per annum. For all other make-whole calculations
the coupon rate is 7.61% per annum. The discount calculation is calculated on
the basis of the redeemed Notes and is performed over the remaining life of such
Notes. The total Guaranteed Senior Notes of $175.0 million mature in April 2011
and annual repayments of $35.0 million are due from April 2007 until maturity.
F-27
Put options
The Group has entered into agreements with certain shareowners of the partially
owned subsidiaries to acquire additional equity interests in the future. These
agreements typically contain options requiring the Group to purchase their
shares at specified times up to 2011 for consideration calculated on the basis
of average earnings both before and after the exercise of the option.
All agreements contain clauses that cap the maximum consideration payable by the
Group. On the basis of the relevant companies' current financial performance the
estimated amount that would be payable by the Group in respect of these options,
if all such options were exercised, is (pound)13.7 million, all of which is
payable in cash.
For those agreements that have caps on the liability exposure, the total capped
amount is (pound)22.7 million.
At 31 December 2002, none of the options were exercised.
F-28
28. Transactions with related parties
During the year turnover billed to the Group in the ordinary course of business
by the joint venture: Zenith Optimedia Group Limited and the associated
undertaking: The Facilities Group Limited was as follows:
--------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
--------------------------------------------------------------------------------
Media services 33.0 79.7
Production 0.9 1.0
--------------------------------------------------------------------------------
Total 33.9 80.7
--------------------------------------------------------------------------------
The balances with joint ventures and associated undertakings at 31 December 2002
are disclosed in Notes 19 and 21.
No Director had any material interest in any contracts with the Company or any
of its subsidiaries or owned shares in any subsidiary.
29. Derivatives and other financial instruments
Set out below is an outline of the objectives, policies and strategies pursued
by the Group in relation to financial instruments:
Financial instruments - Group policy
The Group finances its operations by a mixture of retained earnings, bank
borrowings and fixed rate long-term loans. The bank borrowings comprise
borrowings under the central (pound)155.9 million bank facility (2001: $225.0
million, (pound)154.1 million) and other short-term bank overdraft borrowings.
All bank borrowings incur floating rates of interest.
Group policy relating to the use of financial instruments, including types of
instruments used and amounts invested, is determined by the Board. The
instruments used by the Group in the year under review are fixed and floating
rate borrowings, interest rate swaps and forward foreign currency contracts. The
main risks arising from the Group's financial instruments are interest rate
risks, liquidity risks and foreign currency risks. The Group does not enter into
transactions of a speculative nature or unrelated to the Group's trading
activities.
Interest rate risk
The Group is exposed to increases in interest rates on floating rate borrowings
and to decreases in interest rates on fixed rate borrowings. The majority of the
Group's fixed and floating rate borrowings are denominated in sterling or US
dollars. The Group's policy is to manage this exposure primarily via interest
rate swaps, which seek to produce a balance of fixed and floating rate debt in
line with Group policy.
As at 31 December 2002, a fixed to floating US dollar swap with maturity in
2011, in line with the expected maturity of the Guaranteed Senior Notes, was in
place.
Liquidity risk
The Group's objective is to maintain a balance between continuity of financing
and flexibility through the use of borrowings with a range of maturities.
Targets for minimum liquidity against committed banking facilities are managed
on a daily basis, and performance is regularly reported to the Board.
Foreign currency risk
The Group has significant and diverse investments in foreign operations. The
Group's balance sheet and profit and loss account can therefore be materially
affected by movements in exchange rates. It is not the Group's policy to manage
net assets via balance sheet hedging, or to hedge the translation of
international profits. The Group seeks to mitigate the effect of translation
currency exposures by borrowing in the same currencies as the profits used to
service the borrowings where practicable.
The Group uses foreign exchange contracts to hedge transaction exposures on cash
repatriations from its international operations and cross-border trading.
The following numerical disclosures relate to the Group's financial assets and
financial liabilities as defined in FRS 13 "Derivatives and Other Financial
Instruments".
For the purpose of the disclosures which follow in this note, short-term debtors
and creditors, which arise directly from the Group's operations, apart from the
currency disclosures, have been excluded as permitted under FRS 13. As defined,
short-term intragroup debtors, creditors, financing, pensions and other
post-retirement benefit assets and liabilities that fall within the scope of
SSAP 24 are also excluded from the analysis. The disclosures therefore focus on
those financial instruments, which play a significant medium to long term role
in the financial risk profile of the Group. An analysis of the carrying value of
all financial assets and liabilities is given in the fair value table on page
F-32.
F-29
29. Derivatives and other financial instruments (continued)
Foreign exchange and Interest rate management
Foreign exchange and interest rate exposures are managed centrally by the
Group's treasury operations based in London. The Board determines policies
governing the use of financial instruments.
The Group's interest rate management policy is to protect a significant
proportion of the Group's borrowing requirement from material movements in
interest rates. As at 31 December 2002, a fixed to floating US dollar swap with
maturity in 2011 in line with the expected maturity of the Guaranteed Senior
Notes was in place.
Interest rate profile
The interest rate profile of the financial liabilities of the Group was:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
Financial Financial
Floating Fixed liabilities Floating Fixed liabilities
rate rate on which rate rate on which
financial financial no interest financial financial no interest
liabilities liabilities is paid Total liabilities liabilities is paid Total
------------------------------------------------------------------------------------------------------------------------------------
Currency (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
Sterling 123.0 - 0.6 123.6 91.9 20.1 3.8 115.8
US Dollars 33.6 80.7 0.1 114.4 36.6 89.1 2.4 128.1
Korean Won - - - - - 10.4 - 10.4
Other 7.5 3.4 5.6 16.5 12.2 6.8 6.8 25.8
------------------------------------------------------------------------------------------------------------------------------------
Total 164.1 84.1 6.3 254.5 140.7 126.4 13.0 280.1
------------------------------------------------------------------------------------------------------------------------------------
Fixed rate financial liabilities
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------
Weighted Weighted
Weighted average Weighted average
average period average period
interest rate to maturity interest rate to maturity
Currency % months % months
-------------------------------------------------------------
Sterling - - 5.3 19
US Dollars 9.3 70 7.6 82
Korean Won - - 11.0 1
Other 3.4 26 12.1 19
------------------------------------------------------------------------------------------------------------------------------------
Total 9.0 68 7.8 62
------------------------------------------------------------------------------------------------------------------------------------
The floating rate financial liabilities comprise bank borrowings under the
Group's revolving credit facility and amounts swapped from fixed rate to
floating rate. These liabilities bear interest at rates set in advance for
periods ranging from one week to six months by reference to LIBOR for the
sterling and US dollar liabilities, or the applicable inter-bank offer rates or
prime lending rates for all other liabilities.
The fixed rate liabilities comprise amounts outstanding under the Guaranteed
Senior Notes (net of amounts swapped to floating rate).
The financial liabilities, on which no interest is paid, are liabilities
relating to committed future acquisition cash payments due after one year. The
weighted average period to maturity of these liabilities is 10 months (2001: 16
months).
F-30
29. Derivatives and other financial instruments (continued)
The interest rate profile of the financial assets of the Group was:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------
Floating Fixed Floating Fixed
rate rate rate rate
financial financial financial financial
assets assets Total assets assets Total
Currency (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Sterling 0.1 - 0.1 0.2 - 0.2
Korean Won 0.2 - 0.2 0.2 - 0.2
Other 2.0 0.1 2.1 2.1 0.2 2.3
------------------------------------------------------------------------------------------------------------------------------------
Total 2.3 0.1 2.4 2.5 0.2 2.7
------------------------------------------------------------------------------------------------------------------------------------
Fixed rate financial assets
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------
Weighted Weighted
Weighted average Weighted average
average period average period
interest rate to maturity interest rate to maturity
Currency % months % months
------------------------------------------------------------------------------------------------------------------------------------
Other 5.1 3 2.4 2
------------------------------------------------------------------------------------------------------------------------------------
The floating rate financial assets comprise loans to employees and other third
parties, on which interest is fixed quarterly on an arms length basis by
reference to the appropriate inter-bank rate and short-term money market
deposits and investment funds bearing interest at rates fixed on an overnight
basis by reference to the applicable inter-bank reference rates where
appropriate.
Currency exposures
The Group's currency exposures, that give rise to the net currency gains and
losses recognized in the profit and loss account, comprise the financial assets
and financial liabilities of the Group which are not denominated in the
functional currency of the individual operating entity to the extent that these
are not matched. As at 31 December 2002, after taking into account forward
contracts, the Group had no material currency exposures.
The Group enters into foreign currency contracts primarily for the purpose of
hedging the remaining known cross-currency cash flows. Certain other items,
which could materially impact the Group's profit and loss account if unhedged,
are also covered by foreign currency contracts. Foreign exchange contracts with
a total nominal value of (pound)34.6 million were outstanding at 31 December
2002 (2001: (pound)l06.2 million). It is Group policy to hedge only known
exposures and not to speculate on foreign currency movements.
Maturity of financial liabilities
The maturity profile of the Group's financial liabilities, excluding
short-term creditors as defined, is as follows:
--------------------------------------------------------------------------------
2002 2001
Expiring (pound)m (pound)m
--------------------------------------------------------------------------------
In one year or less, or on demand 21.4 37.2
In more than one year but not more than two years 124.0 9.7
In more than two years but not more than five years 22.1 113.3
In more than five years 87.0 119.9
--------------------------------------------------------------------------------
Total 254.5 280.1
--------------------------------------------------------------------------------
As described in Notes 1 and 21, in February 2003 the Group commenced
negotiations with its principal lenders designed to reset the terms of its
principal lending facilities consistent with current trading conditions and the
planned disposal program.
F-31
29. Derivatives and other financial instruments (continued)
Borrowing facilities
The Group has various borrowing facilities available to it. The undrawn
committed facilities available in respect of which all conditions precedent had
been met at that date were as follows:
--------------------------------------------------------------------------------
2002 2001
Expiring (pound)m (pound)m
--------------------------------------------------------------------------------
In one year or less 3.9 8.8
In more than two years but not more than five years 29.3 42.9
--------------------------------------------------------------------------------
Total 33.2 51.7
--------------------------------------------------------------------------------
In addition to the Guaranteed Senior Notes ($175.0 million, fully drawn), the
Group had committed central bank facilities of (pound)l55.9 million, of which
(pound)l26.6 million was drawn at 31 December 2002 (2001: (pound)111.2 million).
The Group also had other committed borrowing facilities of (pound)3.9 million,
none of which was drawn at 31 December 2002 (2001: other committed facilities of
(pound)8.8 million, none of which was drawn at 31 December 2001). The maturity
profile of the Guaranteed Senior Notes and committed central bank facilities is
as follows:
--------------------------------------------------------------------------------
2001 2002
Expiring (pound)m (pound)m
--------------------------------------------------------------------------------
In one year or less 3.9 19.3
In more than one year but not more than two years 155.9 -
In more than two years but not more than five years - 154.1
In more than five years 108.7 119.9
--------------------------------------------------------------------------------
Total 268.5 293.3
--------------------------------------------------------------------------------
Group borrowings other than those disclosed above are uncommitted borrowings,
and as such could become repayable on demand at 31 December 2002. A total of
(pound)11.2 million of such borrowings were outstanding at 31 December 2002
(2001: (pound)22.9 million). An allowance for repayment of uncommitted
borrowings is made when evaluating the Group's liquidity against central
committed facilities.
Fair values of financial assets and liabilities
Set out below is a comparison by category of the book values of the Group's financial assets and liabilities:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
Book Fair Book Fair
values values values values
Primary instruments held to finance the Group's operations: (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings and current portion of long-term borrowings (139.5) (139.5) (147.2) (147.2)
Long-term borrowings (108.7) (123.6) (119.9) (126.9)
Cash deposits 0.5 0.5 0.6 0.6
Other financial liabilities (6.3) (5.6) (13.0) (11.0)
Other financial assets 1.9 1.9 1.9 1.9
------------------------------------------------------------------------------------------------------------------------------------
Derivative instruments held to manage the interest rate and currency profile:
Interest rate swap - 3.8 - 0.1
Foreign currency contracts - 0.1 - 0.3
------------------------------------------------------------------------------------------------------------------------------------
Market values have been used to determine the fair value of forward foreign
currency contracts. The fair values of interest rate swaps have been calculated
using indicative bank valuations of applicable contracts outstanding as at 31
December 2002. The Group had various interest rate and foreign exchange hedging
contracts outstanding at the year end in relation to underlying currency and
interest rate exposures. The Group had no material unrecognized gains or losses
on such hedges at either 31 December 2002 or 31 December 2001.
F-32
30. Directors' Emoluments
The total emoluments, including pension costs, for the year ended December 31,
2002 were (pound) 3,880,000 (2001: (pound) 3,070,000).
The emoluments, excluding pension costs, of the Chairman and Highest paid
Director, were:
Year ended December 31, 2002
Charles Scott (Chairman) (pound) 225,000
Michael Bungey (Highest paid (pound) 739,000
Director)
Year ended December 31, 2001
Charles Scott (Chairman) (pound) 220,000
Michael Bungey (Highest paid (pound) 763,000
Director)
31. Employee share schemes
Options outstanding at 31 December 2002 under the Company's share option schemes are shown below:
------------------------------------------------------------------------------------------------------------------------------------
Date of Number Exercise Options
grant of shares price exercisable
------------------------------------------------------------------------------------------------------------------------------------
Performance Option Scheme May 1995 189,635 73p May 1998 to May 2005
Aug 1995 189,634 95p Aug 1998 to Aug 2005
Apr 1996 192,500 130p Apr 1999 to Apr 2006
Apr 1996 477,500* 130p Apr 2001 to Apr 2003
Apr 1997 420,000 132p Apr 2000 to Apr 2007
Apr 1997 572,500* 132p Apr 2003 to Apr 2007
------------------------------------------------------------------------------------------------------------------------------------
Demerger Performance Option Scheme May 1995 41,462 73p May 1998 to Dec 2004
Aug 1995 41,463 95p Aug 1998 to Dec 2004
Apr 1996 98,750 130p Apr 1999 to Dec 2004
Apr 1996 248,750* 130p Apr 2001 to Apr 2003
Apr 1997 165,000 132p Apr 2000 to Dec 2004
Apr 1997 186,250* 132p Apr 2003 to Dec 2004
------------------------------------------------------------------------------------------------------------------------------------
Performance Share Option Scheme Dec 1997 3,034,129 105p Dec 2000 to Dec 2004
May 1998 559,138 124p May 2001 to May 2005
Mar 1999 1,061,013 165p Mar 2002 to Mar 2006
Aug 1999 62,322 177p Aug 2002 to Aug 2006
Mar 2000 162,621 359p Mar 2003 to Mar 2007
Aug 2000 60,230 347p Aug 2003 to Aug 2007
Dec 2000 89,248 247p Dec 2003 to Dec 2007
------------------------------------------------------------------------------------------------------------------------------------
Equity Participation Plan Dec 1997 3,537,999 105p Dec 2000 to Dec 2004
Mar 1999 80,029 165p Mar 2002 to Mar 2006
------------------------------------------------------------------------------------------------------------------------------------
Zenith Executive Incentive Plan Apr 1999 30,823 161p Apr 2002 to Apr 2006
------------------------------------------------------------------------------------------------------------------------------------
Healthworld Grants Nov 1997 69,314 129p Mar 2000 to Nov 2004
Nov 1997 337,165 130p Mar 2000 to Nov 2007
Nov 1997 108,305 143p Mar 2000 to Nov 2007
Feb 1998 64,991 216p Mar 2000 to Feb 2003
Feb 1998 30,324 217p Mar 2000 to Feb 2008
Feb 1998 31,503 238p Mar 2000 to Feb 2003
Feb 1998 11,809 239p Mar 2000 to Feb 2003
Jul 1998 129,966 218p Mar 2000 to Jul 2008
Jul 1998 28,148 216p Mar 2000 to Jul 2005
Dec 1998 34,903 155p Mar 2000 to Dec 2008
Dec 1998 243,021 156p Mar 2000 to Dec 2008
Jan 1999 10,830 198p Mar 2000 to Jan 2006
Feb 1999 90,255 209p Mar 2000 to Feb 2006
F-33
Apr 1999 8,664 173p Mar 2000 to Apr 2006
Aug 1999 58,050 180p Mar 2000 to Aug 2009
Nov 1999 866,440 252p Apr 2001 to Nov 2009
------------------------------------------------------------------------------------------------------------------------------------
F-34
31. Employee share schemes (continued)
------------------------------------------------------------------------------------------------------------------------------------
Date of Number Exercise Options
grant of shares price exercisable
------------------------------------------------------------------------------------------------------------------------------------
1999 Lighthouse Global Network Grants Jan 1999 62,538 31p Sep 2000 to Jan 2009
------------------------------------------------------------------------------------------------------------------------------------
2000 Lighthouse Global Network Grants Apr 2000 1,405,101 165p Sep 2000 to Apr 2010
Apr 2000 75,893 190p Sep 2000 to Apr 2010
Apr 2000 26,992 216p Sep 2000 to Apr 2010
Apr 2000 36,481 241p Sep 2000 to Apr 2010
Apr 2000 7,818 165p Sep 2000 to Apr 2010
Apr 2000 20,847 165p Sep 2000 to Apr 2010
Apr 2000 2,606 165p Sep 2000 to Apr 2010
Apr 2000 16,846 216p Sep 2000 to Apr 2010
Apr 2000 30,227 165p Sep 2000 to Apr 2010
Apr 2000 31,270 216p Sep 2000 to Apr 2010
Apr 2000 51,666 165p Sep 2000 to Apr 2010
Apr 2000 10,423 165p Sep 2000 to Apr 2010
Apr 2000 5,212 165p Sep 2000 to Apr 2010
Apr 2000 26,058 190p Sep 2000 to Apr 2010
May 2000 52,117 165p Sep 2000 to Jan 2010
May 2000 11,356 216p Sep 2000 to Jan 2010
May 2000 289,718 241p Sep 2000 to May 2010
May 2000 31,269 165p Sep 2000 to May 2010
May 2000 2,606 165p Sep 2000 to May 2010
May 2000 13,717 241p Sep 2000 to May 2010
May 2000 2,606 165p Sep 2000 to May 2010
May 2000 43,291 241p Sep 2000 to May 2010
Ju1 2000 2,606 165p Sep 2000 to Jul 2010
Ju1 2000 149,185 241p Sep 2000 to Jul 2010
Aug 2000 7,818 241p Sep 2000 to Aug 2010
Aug 2000 114,654 318p Sep 2000 to Aug 2010
------------------------------------------------------------------------------------------------------------------------------------
Executive Share Option Scheme Jun 2001 790,000 198p Jun 2004 to Jun 2011
Apr 2002 8,279,546 78p Apr 2005 to Apr 2012
Apr 2002 99,906 85p Apr 2005 to Apr 2012
Apr 2002 205,318 85p Apr 2005 to Apr 2012
Sep 2002 516,667 50p Sep 2005 to Sep 2012
------------------------------------------------------------------------------------------------------------------------------------
The options marked * are super options, which are defined on page _.
Exercise prices have been rounded to the nearest penny. In the case of the
demerger scheme, the date of grant shown is that of the original option
replaced under the demerger scheme.
Long Term incentive Scheme
Executive Share Option Scheme
Two types of options may be granted under the Scheme - market value options (for
the majority of participants) and discounted options (mainly, but not
exclusively, for Executive Directors of the Company). The market value options
have an exercise price equivalent to the market value of the Ordinary shares at
the date of grant. Participants who are granted discounted options must make a
non-refundable advance payment at the time of the grant equivalent to not less
than 12.5% of the market value of the Ordinary shares at the time of grant. No
further amount will be paid by such participants on exercise of the option.
Options lapse ten years after the date of grant.
In September 2002, options over 516,667 shares were granted to executives. Of
these, 416,667, including 250,000 discounted options, were granted to an
Executive Director.
F-35
Equity Participation Plan
Participants in the Plan pay a cash sum equivalent to 12.5% of the market value
of the Ordinary shares at the date of grant. No further amount is paid on
exercise of the option. The plan expired in December 2000 and no further options
may be granted thereunder.
Performance Share Option Scheme
Options granted under the scheme have an exercise price equal to market price at
the time of grant. Participants are required to agree to a salary or bonus
sacrifice of up to (pound)50,000 over a three year period. The sum payable is
one eleventh of the exercise price of the options. This sacrifice is not offset
against the exercise price payable. The scheme expired in December 2000 and no
further options may be granted thereunder.
Other Schemes
The Company also has an Executive Share Option Scheme (the 1995 Performance
Share Option Scheme), which expired in 1997, under which there are subsisting
options - ordinary and super options. Options were granted to participants at
market value at the time of grant.
At the year end, a small number of options remained under the Zenith Executive
Incentive Plan, which was set up by the Company for senior executives of its
former joint venture, Zenith. To participate, executives invested in the Scheme
by cash payment or salary or bonus sacrifice. The Plan expired in December 2000
and no further options may be granted thereunder. The awards which vested during
the year were paid wholly in cash.
Performance Criteria Applicable to Share Options and Equity Participation Rights
Executive Share Option Scheme
Options granted to participants who are not Directors of the Company will only
be exercisable if the annual percentage growth in the Company's earnings per
share (EPS) over the performance period exceeds both (a) the annual growth in
the UK Retail Price Index over the same period by more than 3% and (b) 5% per
annum. The options will only be exercisable in full if the Company's EPS growth
exceeds 20% per annum.
75% of the options granted to individual Directors will be exercisable in
accordance with the above EPS target. The remaining 25% will be exercisable
based on the total shareholder return (TSR) performance of the Company measured
against a comparator group initially comprising the following companies from the
advertising and media sector - Grey Advertising, Havas Advertising, Interpublic,
Omnicom, Publicis, True North Communications, WPP, Aegis, Taylor Nelson Sofres,
GWR, Scoot.Com, BskyB, Capital Radio, Carlton Communications, Chime, EMI,
Incepta, Maiden, Pearson, Reed International, Tempus, United Business Media,
Future Network and Scottish Media.
If the Company's performance places it in the top quartile among that group of
companies, all of the latter part of the option will be exercisable. If the
Company's performance places it below the median, that part of the option will
not be exercisable at all.
Equity Participation Plan
Participants are eligible to receive shares if the Company's EPS growth is
higher than the annual increase in the UK Retail Price Index plus 2% over a
fixed three year period. If growth is below this hurdle rate, participants lose
their investment. Above this level, shares to a maximum of eight times the
number of shares that could have been acquired with the original investment, can
be issued on a pro-rata basis depending on EPS performance. To achieve maximum
allocation requires EPS growth of 25% compound per annum. Half of the vested
options are normally exercisable by participants three years after grant with
the remainder exercisable one year later.
Awards to Directors of the Company vest as to one half depending on EPS growth
as described above. The other half is determined on total shareholder return
(TSR) compared to a group of major publicly quoted advertising groups initially
comprising of GGT Group, Grey Advertising, Havas, Omnicom, Publicis, Saatchi &
Saatchi, Interpublic, True North Communications and WPP.
Performance Share Option Scheme
Participants are eligible to exercise their options dependent on the
performance of the Group over a three-year period. If EPS growth is higher than
the UK Retail Price Index plus 2%, participants may exercise options on a
pro-rata basis depending on EPS performance. Full exercise requires EPS growth
of 25% compound per annum over three years. One half of the eligible options
become exercisable after three years and the remainder one year later.
F-36
Other Schemes
Under the 1995 Performance Share Option Scheme, ordinary options are exercisable
only if, over any three-year period from the date of grant, there is an increase
in the EPS of the Company of 6% more than the increase in the UK Retail Price
Index. Super options cannot be exercised before the fifth anniversary of the
date of grant and only then if the growth in EPS from the date of grant has been
sufficient to place the Company in the top quartile of the FTSE 100 companies
ranked by reference to growth in earnings per share.
The Zenith Executive Incentive Plan was set up on the basis that a fixed
monetary amount of benefit is determined which will be delivered by a
combination of options over Cordiant shares and, if necessary, cash. Actual
entitlement was determined by measuring the growth in Zenith's operating profit
over a three-year period.
F-37
31. Employee share schemes (continued)
Changes in the number of Ordinary shares issuable under executive share schemes are as follows:
------------------------------------------------------------------------------------------------------------------------------------
Weighted
Number of average
shares exercise price
(pence)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 33,997,735 143
Options granted 1,005,506 198
Options exercised (5,062,842) 81
Options lapsed (6,731,117) 136
-------------------------------------
Balance at December 31, 2001 23,209,282 144
Options granted 10,254,416 76
Options exercised (2,248,559) 104
Options lapsed (5,168,097) 136
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 26,047,042 121
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002, the range of exercise prices and weighted average
remaining contractual life of outstanding options was 31p to 359p and 6 years,
respectively.
At December 31, 2002 and 2001, the number of options exercisable was 13,790,990
and 18,167,672, respectively, and the weighted average exercise price of those
options was 121p and 144p, respectively.
Changes in the number of Ordinary Shares issuable under options outstanding
under Sharesave 1995 during the three year period ended 31 December 2002 were as
follows:
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of the year - - 1,080,256
Options exercised - - (592,976)
Options granted - - -
Options lapsed - - (487,280)
------------------------------------------------------------------------------------------------------------------------------------
At end of the year - - -
------------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year - - -
------------------------------------------------------------------------------------------------------------------------------------
32. Post retirement benefits
The Group operates a number of pension schemes throughout the world. The
majority of the schemes are externally funded and the assets are held in
separately administered trusts or are insured. None of the externally funded
schemes holds investments in, or has made loans to, the Company or any of its
subsidiary undertakings. The major schemes, which cover the majority of scheme
members, are defined contribution schemes.
Cordiant participates in the Cordiant Group Pension Scheme, which is a
multi-employer defined benefit scheme. Cordiant (together with Bates UK and
related employers) is financially responsible for approximately 80% of the
Scheme. This has been used as the basis of preparing the FIRS 17 disclosures
below. Insured pensioners and AVC benefits that are matched by insurance
policies have been excluded from both the assets and the liabilities and this is
consistent with the prior year treatment.
The Cordiant Group Pension Scheme section was last valued by an independent
qualified actuary at 31 March 2002. The financial position of the section has
been projected forward based on changes in membership and investment values. The
Projected Unit method was used for this valuation.
Contributions to the scheme during the period were (pound) 0.4 million. The
funding level (ratio of assets to liabilities) was 60% as at 31 December 2002.
The deficit will be principally borne by the Group over the remaining service
lives of the existing employees.
The Group also operates funded and unfunded deferred compensation plans. Under
the unfunded deferred compensation plan the accumulated liability at 31 December
2002 was (pound) 2.7 million (2001: (pound) 3.0 million) which is included in
provisions for pensions and similar employment obligations (see note 24).
Under the funded deferred compensation plans the fair value of the assets and
liabilities are reflected in these financial statements. The obligation at 3l
December 2002 was (pound) 10.3 million (2001: (pound) 11.4 million) and are
included in provisions for pensions and similar employment obligations (see note
24). The corresponding assets are included in prepayments due after one year
(see note 19). Administration expenses are charges as they are managed.
F-38
32. Post retirement benefits (continued)
The pension expense for the year was as follows:
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Defined benefit schemes 0.4 0.9
Defined contribution schemes 9.6 10.0
------------------------------------------------------------------------------------------------------------------------------------
Total 10.0 10.9
------------------------------------------------------------------------------------------------------------------------------------
The additional disclosures required by FRS 17 for defined benefit schemes are
based on the Cordiant Fund section of the Cordiant Group Pension Scheme and are
set out below:
------------------------------------------------------------------------------------------------------------------------------------
At At
31 December 31 December
(per annum) 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
The assumptions made were:
Discount rate 5.6% 6.0%
Price inflation 2.4% 2.5%
Rate of increase in salaries 3.9% 4.0%
Rate of increase in pensions in payment* - -
------------------------------------------------------------------------------------------------------------------------------------
*The rate of increase in pensions in payments is in line with the scheme rules.
The statutory increase is 2.4% on pensions accrued after 5 April 1997. There is
no allowance for discretionary increases, as there is no custom of awarding such
increases.
The assumptions used by the Group are the best estimates chosen from a range of
possible actuarial assumptions, which, due to the timescale covered may not
necessarily be borne out in practice.
The fair value of the Scheme's assets which are not intended to be realized in
the short term and may be subject to significant change before they are
realized, and the present value of the Scheme's liabilities, which are derived
from cash flow projections over long periods and thus are inherently uncertain,
were:
------------------------------------------------------------------------------------------------------------------------------------
Long term rate Long term rate
of return of return
expected as at expected as at
31 December 2002 31 December 2001
2002 (pound)m 2001 (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Equities 7.1% 5.7 7.5% 6.9
Corporate Bonds 5.6% 1.5 6.0% 1.4
Gifts and cash 4.6% 1.3 5.0% 1.1
------------------------------------------------------------------------------------------------------------------------------------
Total market value of assets 8.5 9.4
Present value of scheme liabilities (14.2) (13.3)
------------------------------------------------------------------------------------------------------------------------------------
Deficit in the scheme and net pension liability (5.7) (3.9)
------------------------------------------------------------------------------------------------------------------------------------
It is not expected that a deferred tax asset on the deficit will be recoverable.
The amount of this net pension liability would have a consequential effect on
reserves if FRS 17 were fully adopted.
---------------------------------------------------------------------------------------------------------------------------------
2002
Movement in deficit during the year (pound)m
---------------------------------------------------------------------------------------------------------------------------------
Deficit in scheme at beginning of year (3.9)
Current service cost (0.1)
Contributions paid 0.4
Past service cost -
Other finance cost (0.1)
Actuarial loss (2.0)
---------------------------------------------------------------------------------------------------------------------------------
Deficit in the scheme at the end of the year (5.7)
---------------------------------------------------------------------------------------------------------------------------------
F-39
32. Post retirement benefits (continued)
If FRS 17 had been fully adopted in these financial statements the pension costs
for defined benefit schemes would have been:
------------------------------------------------------------------------------------------------------------------------------
2002
Analysis of other pension costs charged in arriving at operating loss (pound)m
------------------------------------------------------------------------------------------------------------------------------
Current service cost 0.1
Past service cost -
Previously unrecognized surplus deducted from past service cost -
Gains/losses on settlements or curtailments -
Previously unrecognized surplus deducted from the settlement or curtailment losses -
------------------------------------------------------------------------------------------------------------------------------
0.1
The projected unit method has been used for calculating the disclosure in
accordance with FRS 17. As the defined benefit scheme is closed, under the
projected unit method the current service costs will increase as the members of
the scheme approach retirement.
------------------------------------------------------------------------------------------------------------------------------
2002
Analysis of amounts included in other finance costs (pound)m
------------------------------------------------------------------------------------------------------------------------------
Expected return on pension scheme assets 0.7
Interest on pension scheme liabilities (0.8)
------------------------------------------------------------------------------------------------------------------------------
(0.1)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
2002 2002
Analysis of amount recognized in Statement of Total Recognized Gains and Losses % (pound)m
------------------------------------------------------------------------------------------------------------------------------
Actual return less expected return on scheme assets (1.9)
Percentage of scheme assets (22.0)
Experience gains and losses arising on scheme liabilities 0.6
Percentage of the present value of scheme liabilities 4.0
Changes in assumptions underlying the present value of scheme liabilities (0.7)
Percentage of the present value of scheme liabilities (5.0)
------------------------------------------------------------------------------------------------------------------------------
Actuarial loss recognized in statement of total recognized gains and losses (2.0)
------------------------------------------------------------------------------------------------------------------------------
Percentage of the present value of scheme liabilities (14.0)
------------------------------------------------------------------------------------------------------------------------------
F-40
33. Reconciliation to US GAAP
The consolidated financial statements have been prepared in accordance with UK
generally accepted accounting principles (UK GAAP) which differ in certain
significant respects from US generally accepted accounting principles (US GAAP).
A summary of material adjustments to profit and shareholders' funds, which would
be required if US GAAP had been applied instead of UK GAAP, is set out below.
a) Dividends
Under UK GAAP, ordinary dividend proposed are provided for in the year in
respect of which they are recommended by the Board of Directors for approval by
the shareholders. Under US GAAP, such dividends are not provided for until
declared by the Board of Directors.
b) Goodwill and US purchase accounting
Under US GAAP, goodwill (which excludes contingent capital payments) and
identifiable intangible assets acquired are capitalized. Until 31 December 2000,
goodwill on acquisitions made in the year ending 31 December 2000 was amortized
over 20 years and goodwill on acquisitions made prior to 1 January 2000 was
amortized over 40 years. In the year ended 31 December 2001, the economic life
of all acquisitions made up to 30 June 2001 was revised and the goodwill arising
from these acquisitions was amortized over its useful economic life up to a 20
year period, from date of acquisitions. The Group had not acquired any
identifiable intangible assets.
SFAS 141 "Business Combinations" (SFAS 141") was adopted by the Group on July 1,
2001. SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after 30 June 2001. It also specifies criteria
that intangible assets must meet in order to be recognized separately from
goodwill.
From 1 January 2002, SFAS 142 "Goodwill and Intangible Assets" ("SFAS 142") was
adopted by the Group. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS 142. In
accordance with transitional arrangements, goodwill and intangible assets
acquired in business combinations completed before 1 July 2001 were amortized in
the year ended 31 December 2001. Goodwill acquired after 30 June 2001 has not
been subject to amortization.
Upon adoption of SFAS 142, the Group was required to evaluate its existing
intangible assets and goodwill and to make any reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
This did not result in any significant reclassifications.
In accordance with SFAS 142 the Group performed an assessment of whether there
was an indication that goodwill and equity method goodwill was impaired at 1
January 2002. To accomplish this, the Group identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities including the existing goodwill to those reporting units as at 1
January 2002. At 1 January 2002, the Group determined the fair value of each
reporting unit and compared it to the carrying value of the reporting unit. In
all cases, the carrying value was equal to or less than the fair value, and
there was no indicator of impairment and no transitional impairment loss.
Cordiant has chosen to undertake impairment reviews at 31 December on an annual
basis. At 31 December 2002, the Group again performed an assessment of whether
there was an indication that goodwill and equity method goodwill was impaired.
To the extent that the carrying value of reporting units exceeded the fair value
of reporting units, there was an indication that goodwill was impaired at
reporting unit level. The Group then performed the second step of the impairment
test, by comparing the implied fair value of the reporting unit goodwill with
the carrying value of the reporting unit goodwill. The implied fair value of
goodwill was determined by allocating the fair value of the reporting unit to
all of the assets (recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation, in accordance with SFAS
141. The residual fair value after this allocation is the implied fair value of
the reporting unit goodwill.
The impairment charge recognized under SFAS 142 in 2002 was (pound)221.6
million. The total carrying value of goodwill held by the Group under US GAAP
(including goodwill on Joint Venture and Associates) amounted to (pound)277.8
million as of 31 December 2002 (2001: (pound)514.6 million).
The following analysis shows the impact on the Group's statement of operations
of discontinuing goodwill amortization had SFAS 142 been effective for all
periods presented:
F-41
-------------------------------------------------------------------------------------------------------------
For the year ended 31 December
-------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------------------------
(pound)m (pound)m (pound)m
Reported net (loss)/income under US GAAP (246.7) (260.0) 5.6
Add back: Amortization of goodwill - 47.8 19.0
-------------------------------------------------
Proforma net (loss)/income under US GAPP (246.7) (212.2) 24.6
-------------------------------------------------
Pence per Pence per Pence per
share share share
Basic (loss)/earnings per share under US GAPP (60.8) (66.8) 1.9
Add back: Amortization of goodwill - 12.3 6.5
-------------------------------------------------
Proforma (loss)/earnings per share under US GAAP (60.8) (54.5) 8.4
-------------------------------------------------
Diluted (loss)/earnings per share under US GAPP (60.8) (66.8) 1.7
Add back: Amortization of goodwill - 12.3 5.8
-------------------------------------------------
Proforma diluted earnings per share under US GAPP (60.8) (54.5) 7.5
-------------------------------------------------
Under UK GAAP, purchased goodwill arising in respect of acquisitions before 1
January 1998 (including any additional goodwill estimated to arise from
contingent capital payments), when FRS 10 was adopted, was written off to
reserves in the year of acquisition. Purchased goodwill arising from
acquisitions on or after 1 January 1998 has been capitalized as an intangible
fixed asset and amortized over its useful economic life. Difficult trading
conditions were experienced industry wide in 2001, and the declining revenues
and forecasts reported by the subsidiary management in December 2001 triggered a
Group-wide impairment review for the goodwill in 2001. The Group has continued
to monitor the goodwill values in the light of poor growth prospects in the
industry and in accordance with FRS 11, and at 31 December 2002, a Group wide
impairment review of capitalized goodwill was performed. In conducting the
impairment review, Cordiant compared the net present value of the investments to
their carrying value by discounting the estimated future net cash flows of the
business. The discount rates were between 11.6% and 16% and were based on the
weighted average cost of capital calculated for the Group and adjusted to take
account of the different levels of geographical and business risks within the
Group.
In the years to 31 December 2000 Cordiant believed that the Group's goodwill had
an indefinite economic life due to the durability of the Group's brand names,
their ability to sustain long term profitability and the Group's commitment to
develop and enhance their value. However the change in the economic climate led
Cordiant to take a more cautious approach to accounting for goodwill under UK
GAAP by moving to amortization. This is also in line with best practice within
the industry. As a result, from 1 January 2001, goodwill arising from
acquisitions on and after 1 January 1998 is amortized on a straight-line basis
over its useful life up to a 20 year period, from date of acquisition. The
useful economic life of goodwill arising from acquisitions has been assessed
taking into account various factors, including among other things, dependence on
key management and clients, competitive factors that the business faces,
durability of the business, existence of contracts binding management and
earnout periods.
Under UK GAAP the gain or loss on disposal is calculated after taking account of
goodwill previously written off to reserves for acquisitions prior to 1 January
1998. Under US GAAP, the gain or loss on disposal is calculated after taking
account of any related unamortized goodwill and intangible assets. For
acquisitions on or after 1 January 1998 the profit or loss on disposal under
both US and UK GAAP is calculated after taking account of unamortized goodwill
and intangible assets. Under both UK and US GAAP no separate intangible assets
have been identified.
Under UK GAAP purchase consideration issued in the form of shares or options is
valued based on the market price of the share at the date of transfer of
control. Under US GAAP the consideration is valued based on the market price of
the share for a reasonable period before and after the date the terms of the
acquisition are agreed to and announced.
c) Scholz & Friends AG and Zenith Optimedia Group transactions
On 1 October 2001, a series of transactions, including the transfer of Scholz &
Friends Group GmbH to Scholz & Friends AG and the merger of Scholz & Friends AG
with United Visions Entertainment AG ("UVE") were executed. Scholz & Friends AG
was then listed on
F-42
the Frankfurt Stock Exchange. The effect of these transactions was to dispose of
26.0% of Cordiant's holding in Scholz & Friends Group GmbH and 11.0% of
Cordiant's holding in Scholz & Friends Berlin GmbH in exchange for 74.0% of UVE.
On 1 October 2001, Zenith Media and certain Optimedia businesses merged to form
Zenith Optimedia Group Limited. The effect of this transaction was to dispose of
half of Cordiant's 50.0% interest in Zenith Media in exchange for 25.0% of the
Optimedia business.
Under UK GAAP, both of these transactions were accounted for in accordance with
UITF 31 "Exchanges of Businesses or Other Non-monetary Assets for an Interest
in a Subsidiary, Joint venture or Associate." UITF 31 requires that to the
extent that Cordiant retains an interest in Zenith and Scholz & Friends after
the transactions, even if those interests are now held through a new subsidiary
and joint venture respectively, those interests should be included at their
pre-transaction carrying amounts. The assets acquired through the interests in
the new subsidiary and joint venture have been accounted for at fair value and
the goodwill arising recorded. This treatment has given rise to unrealized gains
in the Consolidated Statement of Total Recognized Gains and Losses.
33. Reconciliation to US GAAP (continued)
Under US GAAP, these transactions have been accounted for in accordance with APB
29 "Accounting for Non-monetary Transactions" as interpreted by EITF 01-2
"Interpretation of APB Opinion 29" as the exchange of productive assets not held
for sale in the ordinary course of business for equivalent interests in the same
or similar productive assets. APB 29 requires that the cost of the net assets or
liabilities acquired be based on the recorded amount of the net assets or
liabilities relinquished. This treatment does not, therefore, give rise to gains
on these two transactions. Differences also arise because the amount of
unamortized goodwill associated with the interests disposed of differed between
UK GAAP and US GAAP.
d) Deferred taxation
The Group adopted FRS 19 ("Deferred Tax") for UK GAAP purposes during the year
ended 31 December 2001 and consequently deferred tax is recognized in respect of
all timing differences that have originated but not reversed at the balance
sheet date. Deferred tax assets are recognized if their realization is
considered to be more likely than not. An adjustment has been recorded in 2001
and 2000 to reflect the recognition of such deferred tax assets.
US GAAP requires full provision of deferred taxation liabilities and requires
deferred tax assets to be recognized and reduced by a valuation allowance to an
amount considered to be more likely than not to be realized.
e) Relocation costs
Under UK GAAP, a fair value adjustment was made in 2000 for committed costs
relating to the relocation of acquired enterprises prior to the acquisition by
Cordiant Communications Group plc.
Under US GAAP, costs that have a future economic benefit to the combined company
are expensed as incurred.
f) Employee share schemes
Under US GAAP the Company has adopted SFAS No.123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No.123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for share option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No.123 had been
applied. The Directors have elected to continue to apply the provisions of APB
Opinion No.25 and provide the pro forma disclosures required by SFAS No.123.
Under SFAS No.123 the calculation of the option value is made using an
acceptable pricing model to include certain expected parameters.
In accordance with APB Opinion No. 25 compensation expense is recorded over the
vesting period for the excess of the market price of underlying shares over the
exercise price. Such compensation expense is measured at the date both (1) the
number of shares that an employee is entitled to receive and (2) the exercise
price are known. For the year ended 31 December 2002 there is a charge/(credit)
to the profit and loss account under US GAAP of (pound)0.5 million (2001:
(pound)(21.4) million, 2000:(pound)11.4 million).
If the compensation cost of the options had been determined for 2002 and 2001
based on the fair value at the grant dates consistent with the method prescribed
by SFAS No.123, the Group's US GAAP net profit and earnings per share would have
been adjusted to the revised amounts indicated below. The revised amounts were
determined based on employee share scheme awards in 1995 to 2002. Compensation
cost is recognized over the vesting period of the option (i.e. between 3.5 and
6.5 years). The revised amounts for
F-43
compensation cost may not be indicative of the effects on net earnings and
earnings per share for future years. Under SFAS No.123, the weighted average
fair value of each option grant is estimated to be 42.4p, 162.5p and 96.7p for
options granted during the year ended 31 December 2002, year ended 31 December
2001 and year ended 31 December 2000, respectively. The fair values have been
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2002, 2001 and 2000
respectively; dividend yield of nil, nil and nil per cent, expected volatility
of 61%, 57% and 35%, risk-free interest rate of 4.9%, 4.8% and 4.9% and expected
lives of between 3.5 and 7.0 years.
------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Net profit/(loss) under US GAPP (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------
Reported (246.7) (260.0) 4.9
Proforma (248.3) (283.5) 16.6
(Loss)/earnings per Ordinary share (in pence)
Basic (60.8)p (66.8)p 1.6p
Diluted (60.8)p (66.8)p 1.5p
Basic - proforma (61.2)p (72.8)p 5.6p
Diluted - proforma (61.2)p (72.8)p 5.lp
------------------------------------------------------------------------------------------------------------------------------
g) Long term property provisions
Under UK GAAP the Group's property provisions have been discounted using a risk
free rate to the present value of future net lease obligations and related costs
of leasehold property (net of estimated sublease income) where the space is
vacant or currently not planned to be used for on going operations. The periodic
unwinding of the discount is treated as an imputed interest charge.
Under US GAAP, provisions are made on a gross basis for properties which are
vacant and surplus to requirements after allowing for estimated sub-rental
income.
Sub-rental income is calculated based on the market estimate of rental income
per square foot, expected vacant periods, estimated associated costs, such as
marketing and legal costs, and known break clauses and rent review dates.
33.Reconciliation to US GAAP (continued)
h) Research and development costs
Under UK GAAP research and development costs may be capitalized, and amortized
over their estimated useful lives. Under US GAAP research and development costs
are written off as incurred.
Under UK GAAP research and development costs are now fully written off, and the
write off previously included as a charge against income to arrive at US GAAP
figures has been reversed in the reconciliation to avoid double counting the
expense.
i) Cash flows
The Consolidated Cash Flow Statement is prepared in accordance with FRS 1
(revised) 'Cash Flow Statements' "FRS 1". Its objectives and principles are
similar to those set out under US GAAP in SFAS No. 95. The principal difference
between the standards relates to classification. Under FRS 1, the Group presents
its cash flows for: (a) operating activities; (b) dividends from associated
undertakings; (c) dividends from joint ventures; (d) returns on investments and
servicing of finance; (e) taxation; (f) capital expenditure and financial
investment; (g) acquisitions and disposals; (h) equity dividend paid; and (i)
financing. SFAS No. 95 requires only three categories of cash flow activity: (a)
operating; (b) investing; and (c) financing. Cash flows from exceptional
non-operating items, dividends from associated undertakings, returns on
investments and servicing of finance, and taxation shown under FRS1 would be
included as operating activities under SFAS No. 95. The payment of dividends
would be included as a financing activity under SFAS No. 95. Changes in bank
overdrafts are included within cash equivalents under FRS1 and would be
considered a financing activity under SFAS No. 95. If bank overdrafts had been
shown as a Financing activity in the Consolidated Cash Flow Statement, Net cash
inflow from Financing (including foreign exchange) would have decreased by
(pound)2.4 million in the year ended 31 December 2002 (31 December 2001:
(pound)1.4 million increase), (31 December 2000: (pound)5.4 million increase).
Under UK GAAP, short term investments include short term money market deposits
of (pound)0.4 million in 2002, (pound)0.6 million in 2001 and (pound)1.3 million
in 2000, that would be classified as cash equivalents under US GAAP.
F-44
j) Derivative Instruments and Hedging Activities
The Group adopted SFAS No.133 at 1 January 2001. In accordance with SFAS No.133,
entities are required to carry all derivative instruments on the balance sheet
at fair value. The accounting for movements in the fair value of derivatives
depends upon whether it has been designated and qualifies as part of a hedging
relationship and, if so, the reason for holding it. If certain conditions are
met, the Group may elect to designate a derivative instrument as a hedge of
exposures. If the hedged exposure is a fair value exposure, movements in fair
value are recognized in earnings with the changes in fair value of the hedged
item attributable to the hedged risk. If the hedged exposure is a cash flow
exposure, the effective portion of the movement in fair value of the derivative
instrument is initially reported as a component of other comprehensive income
and subsequently reclassified into earnings at the time the forecasted
transaction impacts earnings. Amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of movements in fair value of
the derivative instrument are reported in earnings in the current period.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If a derivative instrument is not designated as a
hedge, movements in the fair value of the derivative instrument are recognized
in earnings.
The Group has identified the following types of derivative instruments which
were recorded on the balance sheet under US GAAP at 31 December 2002.
>Interest rate swap agreements used to manage the Group's exposures to interest
rate movements;
>Short term forward foreign exchange contracts used to hedge foreign currency
exposures arising from specific transactions such as temporary loans to or from
subsidiary companies which are recognized on the balance sheet as assets or
liabilities and re-measured at the spot rate at the year end.
The Group's derivative instruments do not meet the criteria of a hedging
relationship stipulated in SFAS No.133. For US GAAP purposes all derivative
contracts are recognized at fair value in the balance sheet. The changes in the
fair value of these derivative contracts have been recorded in earnings.
The net fair value of these derivative instruments recorded as assets/
(liabilities) on 31 December may be analyzed as follows:
--------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
--------------------------------------------------------------------------------------------------------
Fair value of interest rate swaps recorded as assets 3.8 0.1
Fair value of foreign exchange derivatives recorded as assets 0.4 1.0
Fair value of foreign exchange derivatives recorded as liabilities (0.3) (0.7)
--------------------------------------------------------------------------------------------------------
Net fair value 3.9 0.4
--------------------------------------------------------------------------------------------------------
The impact of the recognition of foreign exchange derivative instruments as
assets/(liabilities) at fair value on earnings resulted in a gain of
approximately (pound)0.1 million (2001: (pound)0.3 million). The gain of
(pound)0.3 million on recognition of foreign exchange derivative instruments at
fair value at 31 December 2001 has been recognized as income in the UK GAAP
accounts in the year ended 31 December 2002. The net effect of the changes in
the fair value of the foreign exchange and swap derivatives on earning under US
GAAP is (pound)3.6 million (2001: (pound)0.3 million).
If SFAS No. 133 had been adopted in the year ended 31 December 2000, the effect
would have been a reduction in earnings of (pound)0.3 million and consequently a
gain of (pound)0.6 million in the year ended 31 December 2001.
F-45
33. Reconciliation to US GAAP (continued)
k) Pensions
Under current UK GAAP (SSAP 24), pension costs comprise the regular cost of
providing the benefits as a level percentage of current and expected future
earnings of the employees covered. Variations from the regular pension cost are
spread on a systematic basis over the estimated average remaining service lives
of current employees in the plans.
FRS 17 "Retirement Benefits", which replaces the current UK accounting standard
for pensions, was introduced during the year ended 31 December 2001. The
transitional disclosures required by the standard are applied, resulting only in
extra disclosures in the notes to the balance sheet prepared under UK GAAP.
Under US GAAP SFAS, No. 87 "Employers' Accounting for Pensions" requires that
the projected benefit obligation (pension liability) be compared with the market
value of the underlying plan assets, and the difference may be adjusted to
reflect any unrecognized obligations or assets in determining the pension cost
or credit for the period. The actual method and assumptions used in determining
the pension expense can be significantly different from that computed under
current UK GAAP. US GAAP also requires the actuarial valuation to be prepared as
at a more recent date than UK GAAP.
Under SFAS 87, the Net Periodic Pension Cost (NPPC) for 2002 was as follows:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Service cost (net of member contributions) 0.2 0.2
Interest cost 1.8 1.8
Expected return on assets (0.8) (0.7)
Recognized net loss 0.1 0.1
-------------------------------------------------------------------------------------------------------------------------------
Net Periodic Pension cost 1.3 1.4
-------------------------------------------------------------------------------------------------------------------------------
The actual assumptions used were:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.5% 6.2%
Return on investments 6.5% 7.0%
Salary inflation 3.9% 4.0%
Pension increases in payment 2.4% 2.5%
Price inflation 2.4% 2.5%
-------------------------------------------------------------------------------------------------------------------------------
The disclosures required under SFAS 132 "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" are as follows:
-------------------------------------------------------------------------------------------------------------------------------
(pound)m
-------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at 31 December 2001 28.1
Service cost 0.2
Member contributions 0.1
Interest cost 1.8
Benefits paid (1.4)
Actuarial loss/(gain) -
-------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at 31 December 2002 28.8
-------------------------------------------------------------------------------------------------------------------------------
(pound)m
-------------------------------------------------------------------------------------------------------------------------------
Fair value of assets at 31 December 2001 9.5
Actual return on plan assets (1.2)
Company contribution 1.5
Member contributions 0.1
Benefits paid (1.4)
-------------------------------------------------------------------------------------------------------------------------------
Fair value of assets at 31 December 2002 8.5
-------------------------------------------------------------------------------------------------------------------------------
(pound)m
-------------------------------------------------------------------------------------------------------------------------------
Funded status of the plan at 31 December 2002 (20.3)
Unrecognized net loss 4.5
-------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost (15.8)
-------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position consist of:
-------------------------------------------------------------------------------------------------------------------------------
(pound)m
-------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost (19.8)
Accrued benefit liability -
Intangible asset -
Accumulated other comprehensive income 4.0
-------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (15.8)
-------------------------------------------------------------------------------------------------------------------------------
F-46
33. Reconciliation to US GAAP (continued)
(I) Investment in own shares
Under UK GAAP, investments in own shares are capitalized and held on the balance
sheet as fixed or current assets.
Under US GAAP, such shares are netted off against equity.
Under UK GAAP an amount was provided against the investment in own shares during
the year. No such provision was required under US GAAP.
m) Exceptional items
Under UK GAAP, exceptional items are defined in FRS 3 "Reporting Financial
Performance" as material items which derive from events or transactions that
fall within the ordinary activities of the Group and which individually or, if
of a similar type, in aggregate, need to be disclosed by virtue of their size or
incidence if the financial statements are to give a true and fair view. Under US
GAAP, exceptional items are considered both unusual in nature and infrequent in
occurrence. In practice, exceptional items are rarely presented under US GAAP.
Under UK GAAP, FRS 12 "Provisions, contingent liabilities and contingent
assets" allows provision to be made for moving and reorganization costs to be
incurred in a restructuring plan initiated before the year end.
Under US GAAP, EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" requires that provision for exit costs can
only be made when they do not benefit future activities of the Group. As a
result (pound)1.0m of costs relating to moving and reorganization provisions
recognized under UK GAAP have been deferred to future years. Under US GAAP these
costs had not been incurred at 31 December 2002.
Under UK GAAP, if a decision is taken that an asset is to be scrapped, an
impairment charge can be recognized immediately.
Under US GAAP, FAS 144 "Accounting for the Impairment or disposal of Long Lived
Assets" requires that when a company has a specific plan for disposition by
abandonment of an asset and the time period for abandonment is less than the
useful life, the depreciation amounts should be adjusted to reflect the shorter
useful life of the asset. As a result (pound)1.5m of the asset write downs
recognized under UK GAAP have been reversed under US GAAP and deferred to 2003
as the relevant assets are still in use in 2003.
n) Operating lease
Under UK GAAP, UITF 28 "Operating Lease Incentives" inflationary increases in
property leases are not required to be smoothed over the life of the lease.
Under US GAAP, FASB Technical Bulletin No. 85-3 states that a straight-line
method over the life of the lease should be used to account for such scheduled
rent increases.
An adjustment has been made to charge the income account under US GAAP in the
year ended 31 December 2002 with (pound)1.5 million relating to such
inflationary rent increases.
o) Compensated absences
Under UK GAAP, there is no prescribed requirement to book a liability for future
compensated absences.
Under US GAAP, SFAS No. 43 "Accounting for compensated absences" states that
vesting and accumulating rights to future compensated absences should be
accrued. A liability of (pound)1.2 million has been accrued under US GAAP.
p) Employer payroll taxes
Under UK GAAP, UITF 25 "National Insurance Contributions on share option gains"
requires that a provision is made for National Insurance contributions at the
date of the grant of share options.
Under US GAAP, EITF 00-16 "Recognition and Measurement of Employer Payroll
Taxes on Employee Stock-Based Compensation" requires that National Insurance
Contributions be charged to the income statement when the option is exercised.
An adjustment for (pound)0.5 million has been made to credit the income account
under US GAAP.
F-47
33.Reconciliation to US GAAP (continued)
q) Statement of comprehensive income
Under UK GAAP, the Company presents a Statement of Total Recognized Gains and
Losses, which is equivalent to a Statement of Comprehensive Income under US
GAAP.
Effect on net earnings of differences between US and UK GAAP
---------------------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2000
US$m** (pound)m (pound)m (pound)m
---------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit attributable to Ordinary shareholders in conformity with UK
GAAP (376.0) (233.6) (277.6) 36.1
US GAAP adjustments:
Amortization of goodwill and other intangibles (b) 49.6 30.8 (3.3) (19.0)
Impairment of goodwill (b) (81.3) (50.5) (2.2) -
Deferred taxation (d) - - 2.3 (0.7)
Relocation provision (e) - - - (0.4)
Compensation costs (f) (0.8) (0.5) 21.4 (11.4)
Amortization of discount on property provisions (g) 0.8 0.5 0.8 1.1
Write off of research and development costs capitalized (h) 1.3 0.8 - (0.8)
Fair value of derivative instruments (j) 5.8 3.6 0.3 -
Pensions (k) 0.4 0.3 (1.7) -
Investment in own shares (l) 2.6 1.6 - -
Exceptional items (m) 4.0 2.5 - -
Operating lease (n) (2.4) (1.5) - -
Compensated absences (o) (1.9) (1.2) - -
Employer payroll taxes (p) 0.8 0.5 - -
---------------------------------------------------------------------------------------------------------------------------------
Net (loss)/profit attributable to Ordinary shareholders in conformity with
US GAAP (397.1) (246.7) (260.0) 4.9
---------------------------------------------------------------------------------------------------------------------------------
Net (loss)/profit per Ordinary share - basic (97.9)c (60.8)p (66.8)p l.6p
Average number of Ordinary shares (in millions) 405.5 405.5 389.2 294.0
Net (loss)/profit per Ordinary share - diluted* (97.9)c (60.8)p (66.8)p l.5p
Average number of Ordinary shares - diluted (in millions)* 405.5 405.5 389.2 328.6
---------------------------------------------------------------------------------------------------------------------------------
* As there is a basic loss per share, options and contingent consideration have
no dilutive effect in the year ended 31 December 2002 and in the year ended
31 December 2001.
Deferred taxes have not been recognized on the US GAAP adjustments. To the
extent any additional deferred tax assets would be recorded, it would be fully
provided with a valuation allowance and the net impact would be nil. To the
extent an additional deferred tax liability would be recorded, an equal and
offsetting amount of the current valuation allowance would be released and the
net impact would be nil.
Cumulative effect on shareholders' funds of differences between US and UK GAAP
---------------------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2000
US$m** (pound)m (pound)m (pound)m
---------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds in conformity with UK GAAP 111.9 69.5 306.8 467.4
US GAAP adjustments:
Dividends (a) - - - 8.4
Goodwill and US purchase accounting in respect of acquisitions (b) 35.2 21.9 40.9 32.8
Scholz & Friends AG and Zenith Optimedia Group transactions (c) (71.5) (44.4) (44.4) -
Deferred taxation (d) - - - (2.3)
Discount on property provisions (g) (6.3) (3.9) (4.4) (5.2)
Write off of research and development costs capitalized (h) - - (0.8) (0.8)
Fair Value of derivative instruments (j) 6.4 4.0 0.4 -
Pensions (k) (8.2) (5.1) (3.3) -
Investment in own shares (l) (1.3) (0.8) (2.4) -
Exceptional items (m) 4.0 2.5 - -
Operating lease (n) (2.4) (1.5) - -
Compensated absences (o) (1.9) (1.2) - -
Employer payroll taxes (p) 0.8 0.5 - -
---------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds in conformity with US GAAP 66.7 41.5 292.8 500.3
---------------------------------------------------------------------------------------------------------------------------------
** These figures have been translated for the convenience of the reader at the
New York Noon Buying Rate on 31 December 2002 ((pound): $1.6095).
F-48
33. Reconciliation to US GAAP (continued)
New and prospective accounting changes
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires that an obligation that is unavoidable as a
result of either the acquisition or the normal operation of a long-lived asset
be recognized as a liability when incurred. The amount of the liability should
initially be measured at fair value. Subsequent to initial measurement, an
entity should recognize changes in the amount of the liability resulting from
(a) the passage of time and (b) revisions to either the timing or amount of
estimated cash flows. SFAS No. 143 also requires that, upon initial recognition
of a liability for an asset retirement obligation an entity capitalize that cost
by recognizing an increase in the carrying amount of the related long-lived
asset. The Group is required to adopt the provisions of SFAS No. 143 effective 1
January 2003. The adoption of SFAS No. 143 is not expected to have a material
impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 provides for the rescission of several previously issued accounting
standards, new accounting guidance for the accounting for certain lease
modifications and various technical corrections that are not substantive in
nature to existing pronouncements. SFAS No. 145 will be adopted beginning 1
January 2003, except for the provisions relating to the amendment of SFAS No. 1
13, which have been adopted for transactions occurring subsequent to 15 May
2002. The adoption of SFAS No. 145 has not had a material impact on the
consolidated financial statements.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities". This
statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and requires that a liability for a costs associated
with an exit or disposal activity is recognized when the liability is incurred.
The Group is required to adopt the provisions of SFAS No. 146 for exit or
disposal activities initiated after 31 December 2002. The Group is reviewing the
impact of SFAS No. 146.
In December 2002, the FASB issued SFAS No. 148 "Accounting for share-based
compensation - transition and disclosures". It amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation. In addition, this
statement amends the disclosure provision of SFAS 123. The Group is reviewing
the impact of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45 "FIN 45: Guarantor's
accounting and disclosure requirements for guarantees, including indirect
guarantees of indebtedness of others". It addresses disclosure requirements for
guarantors in respect of guarantees issued (including guarantees embedded in
other contracts) and requires recognition of a liability for the fair value of
the obligations assumed under guarantees issued. The disclosure requirements are
effective for periods ending after 15 December 2002 and the measurement
requirements are effective for guarantees issued from 1 January 2003. FIN 45 has
not had an impact on these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 "FIN 46: Consolidation of
variable interest entities". It addresses the criteria to be applied when
determining whether certain special purpose entities (variable interest
entities) should be consolidated and requires disclosures to be made if the
involvement with an unconsolidated variable interest entity is significant.
Variable interest entities are entities for which control is achieved through
means other than through voting rights. The interpretation is effective for
interests in entities acquired after 31 January 2003, and applies in the first
fiscal year beginning after 15 June 2003 to variable interest entities in which
an enterprise holds a variable interest that is acquired before 1 February 2003.
The Group is currently reviewing the impact of FIN 46 on the consolidated
financial statements.
The EITF clarified the provisions of Issue No. 00-21 "Revenue Arrangement with
Multiple Deliverables". This Issue discusses the accounting for arrangements
with customers that involve the delivery or performance of multiple products,
services and/or rights to use assets, where performance by the vendor may occur
at different points in time or over different periods of time. The guidance in
Issue 00-21 is effective for revenue arrangements entered into in reporting
periods beginning after 15 June 2003.
The EITF clarified the provisions of Issue No. 02-16 "Accounting by a customer
(including a reseller) for Certain Consideration Received from a vendor". The
consensus is that cash consideration received by a customer from a vendor is
presumed to be a reduction of the price of the vendors' product or services, and
should be recognized as a reduction of cost of sales in the customer's income
statement, unless the consideration is a cost reimbursed or a payment for assets
or services delivered to the vendor. The EITF concluded that the consensus
should be applied to arrangements entered into after 31 December 2002.
F-49
34. Subsequent events
Disposals of businesses
As part of the strategy of the Board of Directors to reduce debt through a
program of non-core asset disposals, in 2003 the Group disposed of the following
material interests:
On June 29, 2003, Cordiant disposed of a 70 per cent interest in its principal
Australian business, The Communications Group, which includes George Patterson
Bates. Cordiant received cash proceeds in respect of the disposal of A$60.2
million ((pound)24.2 million) which, after deduction of transaction costs, were
used to repay debt. Prior to completion, Cordiant extracted from The
Communications Group surplus cash of A$41.0 million ((pound)16.5 million) which
was also used to repay debt.
On July 11, 2003, Cordiant disposed of its 77.3 per cent interest in Scholz &
Friends A.G. The cash proceeds payable to Cordiant in respect of the disposal of
Scholz were (euro)22.4 million ((pound)15.8 million) which will, after deduction
of transaction costs, be used to repay debt. A further (euro)1.5 million
((pound)1.0 million) may become payable in March 2004 dependent upon the
performance of Scholz & Friends A.G. for the year ended December 31, 2003. This
amount will also be used to reduce borrowings. Scholz & Friends A.G. will repay
loans made to it by Cordiant totaling approximately (euro)7.5 million
((pound)5.3 million) by no later than December 31, 2003.
On July 4, 2003, the Group entered into an agreement to dispose of the FD
International group of companies. The cash proceeds payable to Cordiant at
completion in respect of the disposal are (pound)26.0 million. The (pound)26.0
million is subject to upwards or downwards adjustment based on a completion
statement to be agreed or determined following completion. In addition, Cordiant
is entitled to further consideration equal to 25 percent of any post tax capital
gain made by the purchaser on its investment if the purchaser disposes of its
interest in FD International within eighteen months of completion. The agreement
is conditional on approval of Cordiant's shareholders at a meeting on July 23,
2003 and clearance by the German Federal Cartel Office. If completion does not
occur by August 6, 2003 because Cordiant's shareholders fail to approve the
transaction, Cordiant is required to pay the purchaser (pound)600,000 plus any
applicable value added tax. In addition, Cordiant has undertaken to pay all
rental obligations of Morgen-Walke Associates, Inc. in respect of its tenancy of
certain leased New York premises until termination of the lease in accordance
with its terms (whether or not Morgen-Walke Associates remains in occupation).
In addition, Cordiant and Lighthouse Global Network, Inc. have undertaken to pay
$500,000 into a bank account controlled by the purchaser from which the
purchaser may draw its funds in the event that Cordiant fails to comply with its
undertaking to satisfy Morgen-Walke Associates rental obligations under the
lease.
Bank overdrafts, loans and Guaranteed Senior Notes
On June 19, 2003, WPP Group plc ("WPP") acquired the Group's indebtedness from
its bank lenders, except one lender, under its Amended and Restated Loan
Agreement, and from its senior notes lenders under its Amended and Restated Note
Purchase Agreement, for (pound)177 million representing an amount equal to the
par value of the principal obligations purchased. The remaining bank lender
holding such debt with a par value of approximately (pound)79 million,
transferred its debt to WPP on July 1, 2003, so that WPP now holds all of the
debt.
F-50