20-F 1 d20f.htm FORM 20-F FOR THE FISCAL YEAR ENDED 31 DECEMBER 2005 Form 20-F for the fiscal year ended 31 December 2005

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (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 31 December 2005

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report                     

 

For the transition period from              to             

 

Commission file number 0-16350

 

WPP Group plc

(Exact Name of Registrant as specified in its charter)

 

(Translation of Registrant’s name into English)

 

United Kingdom

(Jurisdiction of incorporation or organization)

 

27 Farm Street, London W1J 5RJ England

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class


 

Name of each exchange on which registered


Not applicable   Not applicable

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

Ordinary Shares of 10p each


(Title of Class)

 

American Depositary Shares, each representing five Ordinary Shares (“ADSs”)


(Title of Class)

 

 

 

 


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None


(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

The number of outstanding ordinary shares is 1,252,899,372 which includes the underlying ordinary shares represented by 24,317,649 ADSs.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  x    NO  ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YES  ¨    NO  x

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17  ¨    Item 18  x

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

 

 

 



Forward-Looking Statements

 

In connection with the provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), the Company may include forward-looking statements (as defined in the Reform Act) in oral or written public statements issued by or on behalf of the Company. These forward-looking statements may include, among other things, plans, objectives, projections and anticipated future economic performance based on assumptions and the like that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. Important factors which may cause actual results to differ include but are not limited to: the unanticipated loss of a material client or key personnel, delays or reductions in client advertising budgets, shifts in industry rates of compensation, government compliance costs or litigation, natural disasters or acts of terrorism, the Company’s exposure to changes in the values of other major currencies (because a substantial portion of its revenues are derived and costs incurred outside of the United Kingdom) and the overall level of economic activity in the Company’s major markets (which varies depending on, among other things, regional, national and international political and economic conditions and government regulations in the world’s advertising markets). In light of these and other uncertainties, the forward-looking statements included in the document should not be regarded as a representation by the Company that the Company’s plans and objectives will be achieved.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

Overview

 

WPP Group plc (“WPP”) and its subsidiaries and affiliates comprise one of the largest communication services businesses in the world. As of 31 December 2005, the Group had approximately 75,000 employees. Including employees of associated undertakings this figure is approximately 92,000. For the year ended 31 December 2005, the Group had revenue of approximately £5.4 billion and operating profit of approximately £653 million.

 

Unless the context otherwise requires, the terms “Company”, “Group” and “Registrant” as used herein shall mean WPP and its subsidiaries.

 

A. Selected Financial Data

 

The selected financial data should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company, including the notes thereto.

 

WPP prepared its primary financial statements under UK Generally Accepted Accounting Practice (“UK GAAP”) extant in respect of 2004 (“2004 UK GAAP”) for the years up to and including the year ended 31 December 2004. For periods beginning on or after 1 January 2005, all listed companies in the European Union, including WPP, are required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards including International Accounting Standards (“IFRS”). WPP’s date of transition to IFRS is 1 January 2004. The selected financial data under IFRS is presented for two years, as permitted by the Securities and Exchange Commission as

 

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an accommodation for foreign private issuers in their first year of reporting under IFRS. IFRS differ in certain significant respects from generally accepted accounting principles in the United States (“US GAAP”). A reconciliation to US GAAP for these periods is set forth on pages F-41 to F-61 of the Consolidated Financial Statements.

 

The selected financial data under IFRS and US GAAP as of and for the two years ended 31 December 2005 is derived from the Consolidated Financial Statements of the Company, which appear elsewhere in this Form 20-F. The selected financial data under 2004 UK GAAP as of and for the three years ended 31 December 2003 has been presented in a separate table for informational purposes. The 2004 UK GAAP information, together with the US GAAP information as of and for the three years ended 31 December 2003 is derived from the Consolidated Financial Statements of the Company previously filed with the Securities and Exchange Commission as part of the Company’s Annual Reports on Form 20-F.

 

The reporting currency of the Group is the pound sterling and the selected financial data has been prepared on this basis.

 

Selected Consolidated Income Statement Data under IFRS1

 

     Year ended
31 December
 
     2005     2004  
     £m     £m  

Revenue

   5,373.7     4,299.5  

Operating profit

   652.8     475.5  

Profit attributable to equity holders of the parent

   363.9     273.0  

Earnings per ordinary share:

            

Basic

   30.3 p   24.0 p

Diluted

   29.7 p   23.4 p

Earnings per ADS2:

            

Basic

   151.5 p   120.0 p

Diluted

   148.5 p   117.0 p

Cash dividends per ordinary share

   8.28 p   6.90 p

Cash dividends per ADS (US dollars)

   75.7 c   58.9 c

 

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     Year ended 31 December  
     2005     2004     2003     2002     2001  
     £m     £m     £m     £m     £m  

Amounts in accordance with US GAAP3:

                              

Operating profit

   506.2     327.8     294.7     187.0     210.1  

Net income before the cumulative effect of change in accounting principle

   251.4     126.4     86.6     51.3     66.9  

Net income after the cumulative effect of change in accounting principle

   251.4     126.4     86.6     25.6     66.9  

Earnings per ordinary share before the cumulative effect of change in accounting principle:

                              

Basic

   20.9 p   11.1 p   7.8 p   4.6 p   6.4 p

Diluted

   20.5 p   10.9 p   7.6 p   4.5 p   6.1 p

Earnings per ordinary share after the cumulative effect of change in accounting principle:

                              

Basic

   20.9 p   11.1 p   7.8 p   2.3 p   6.4 p

Diluted

   20.5 p   10.9 p   7.6 p   2.3 p   6.1 p

Earnings per ADS before cumulative effect of change in accounting principle2:

                              

Basic

   104.5 p   55.5 p   39.0 p   23.0 p   32.0 p

Diluted

   102.5 p   54.5 p   38.0 p   22.5 p   30.5 p

Earnings per ADS after the cumulative change in accounting principle2,4:

                              

Basic

   104.5 p   55.5 p   39.0 p   11.5 p   32.0 p

Diluted

   102.5 p   54.5 p   38.0 p   11.5 p   30.5 p

Cash dividends per ordinary share

   8.28 p   6.90 p   5.75 p   4.79 p   3.99 p

Cash dividends per ADS (US dollars)

   75.7 c   58.9 c   44.6 c   35.0 c   29.7 c

 

Selected Consolidated Profit and Loss Account Data under 2004 UK GAAP2

 

     Year ended 31 December  
     2003
Restated5
    2002
Restated5
    2001  
     £m     £m     £m  

Revenue

   4,106.0     3,908.3     4,021.7  

Operating profit

   415.3     260.1     505.5  

Profit on ordinary activities before taxation

   349.9     193.0     411.0  

Profit attributable to ordinary share owners

   208.4     75.6     271.2  

Earnings per ordinary share:

                  

Basic

   18.7 p   6.8 p   24.6 p

Diluted

   18.2 p   6.7 p   23.7 p

Earnings per ADS:

                  

Basic

   93.5 p   34.0 p   123.0 p

Diluted

   91.0 p   33.5 p   118.5 p

Cash dividends per ordinary share

   6.48 p   5.40 p   4.50 p

Cash dividends per ADS (US dollars)

   53.0 c   40.6 c   32.4 c

 

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Selected Consolidated Balance Sheet Data under IFRS1

 

     As of 31 December
     2005    2004
     £m    £m

Total assets

   14,389.1    10,689.2

Net assets

   3,985.8    3,065.7

Capital stock

   125.3    118.5

Number of shares (in millions)

   1,252.9    1,185.3

 

     As of 31 December
     2005    2004    2003    2002    2001
     £m    £m    £m    £m    £m

Amounts in accordance with US GAAP:

                        

Total assets

   14,591.0    10,657.5    10,412.3    9,799.6    10,159.8

Net assets

   4,778.3    3,565.5    3,760.1    3,811.1    4,182.5

 

Selected Consolidated Balance Sheet Data under 2004 UK GAAP1

 

     As of 31 December
    

2003

Restated4

   2002
Restated4
   2001
     £m    £m    £m

Total assets

   10,697.5    9,646.6    9,915.8

Net assets

   3,815.8    3,433.7    3,640.9

Capital stock

   118.7    115.7    115.0

Number of shares (in millions)

   1,187.4    1,157.3    1,149.6

Notes

 

1 As permitted by the Securities and Exchange Commission, the selected financial data under IFRS is presented for two years, and the selected financial data under 2004 UK GAAP is presented for the preceding three years in a separate table for informational purposes.
2 Basic and diluted earnings per ADS have been calculated using the same method as earnings per share, multiplied by a factor of five.
3 The Group elected to adopt SFAS 123R effective in 2005 using the modified retrospective method and all presented prior periods have been adjusted accordingly.
4 2002 includes a £25.7 million impairment charge taken on the implementation of SFAS 142.
5 Restated on implementation of UITF 38 (Accounting for ESOP Trusts). The impact on 2001 was not material and therefore restatement of 2001 was not required.

 

Dividends

 

Dividends on the Company’s ordinary shares, when paid, are paid to share owners as of a record date, which is fixed after consultation between the Company and The London Stock Exchange Limited (“The London Stock Exchange”).

 

The table below sets forth the amounts of interim, final and total dividends paid on the Company’s ordinary shares in respect of each fiscal year indicated. In the United States, the Company’s ordinary shares are represented by American Depositary Shares (“ADSs”), which are evidenced by American Depositary Receipts (“ADRs”) or held in book entry form. The dividends are also shown translated into US cents per ADS using the average Bloomberg Closing Mid Point rate for pounds sterling, as shown below, for each year presented.

 

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     Pence per ordinary share

   US cents per ADS

Year ended 31 December:    Interim    Final    Total    Interim    Final    Total

2001

   1.44    3.06    4.50    10.40    22.00    32.40

2002

   1.73    3.67    5.40    13.00    27.60    40.60

2003

   2.08    4.40    6.48    17.01    35.98    52.99

2004

   2.50    5.28    7.78    22.91    48.38    71.29

2005

   3.00    6.34    9.34    27.28    57.66    84.94

 

The 2005 interim dividend was paid on 14 November 2005 to share owners on the register at 14 October 2005. The 2005 final dividend is expected to be paid on 3 July 2006 to share owners on the register at 2 June 2006. The Annual General Meeting to approve the final dividend will be on 27 June 2006 and therefore the final dividend has not been included as a liability in the Consolidated Financial Statements.

 

Exchange rates

 

Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the dollar equivalent of the pound sterling prices of the Company’s ordinary shares on The London Stock Exchange and, as a result, are likely to affect the market price of the ADSs in the United States. US dollar amounts paid to holders of ADSs also depend on the sterling/US dollar exchange rate at the time of payment. The annual average of the daily Bloomberg Closing Mid Point rate for pounds sterling expressed in US dollars for each of the five years ended 31 December 2005 was:

 

Year ended 31 December    Average

2001

   1.4401

2002

   1.5036

2003

   1.6356

2004

   1.8326

2005

   1.8189

 

The following table sets forth for each of the most recent six months, the high and low Bloomberg Closing Mid Point rates. As of 31 May 2006, the Bloomberg Closing Mid Point rate was 1.8726.

 

Month ended    High    Low

31 December 2005

   1.7762    1.7167

31 January 2006

   1.7886    1.7231

28 February 2006

   1.7800    1.7336

31 March 2006

   1.7569    1.7258

30 April 2006

   1.8210    1.7394

31 May 2006

   1.8914    1.8282

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

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D. Risk Factors

 

The Company competes for clients in a highly competitive industry, which may reduce market shares and decrease profits.

 

The communications services industry is highly competitive and fragmented. The Company’s principal competitors are other large multinational communications services companies, as well as regional and national advertising and/or marketing services firms and new media companies. In the communications services industry, service agreements with clients are generally terminable by the client upon 90 days’ notice. As such, clients may move their accounts to another agency on relatively short notice. In many cases, a WPP agency represents a client for only a portion of its advertising or marketing services needs or only in particular geographic areas, thus enabling the client to continually compare the effectiveness of the WPP agency against other agencies’ work. Many clients do not permit an agency working for them to represent competing accounts or product lines in the same market. A lesser number of companies will not permit any of the agencies owned by a communications service company to work on competing accounts or product lines in any market. These client conflict policies can and sometimes do prevent WPP’s agencies from seeking and winning new clients and assignments. If WPP’s agencies are unable to compete effectively in the markets in which they operate, WPP’s market share and profits may decrease.

 

The Company receives a significant portion of its revenues from a limited number of large clients, and the loss of these clients could adversely impact the Company’s prospects, business, financial condition and results of operations.

 

A relatively small number of clients contribute a significant percentage of the Company’s consolidated revenues. The Company’s ten largest clients accounted for approximately 23% of revenues in the year ended 31 December 2005. The Company’s clients generally are able to reduce advertising and marketing spending or cancel projects at any time for any reason. There can be no assurance that any of the Company’s clients will continue to utilise the Company’s services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, the Company’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Company’s prospects, business, financial condition and results of operations.

 

The Company may be unable to collect balances due from any client that files for bankruptcy or becomes insolvent.

 

The Company generally provides advertising and communications services to its clients in advance of its receipt of payment. The invoices for these services are typically payable within 30 to 60 days. In addition, the Company commits to media and production purchases on behalf of some of its clients. If one or more of its clients files for bankruptcy, or becomes insolvent or otherwise is unable to pay for the services the Company provides, the Company may be unable to collect balances due to it on a timely basis or at all. In addition, in that event, media and production companies may look to the Company to pay for media purchases and production work to which it committed as an agent on behalf of these clients. The damages, costs, expenses or attorneys’ fees arising from the lack of payment could have an adverse effect on the Company’s prospects, business, results of operations and financial condition. The reputation of the Company’s agencies may also be negatively affected.

 

The Company is dependent on its employees.

 

The advertising and marketing services industries are highly dependent on the talent, creative abilities and technical skills of the personnel of the service providers and the relationships their

 

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personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all service providers, is vulnerable to adverse consequences from the loss of key employees due to competition among providers of advertising and marketing services for talented personnel.

 

The Company may be subject to certain regulations that could restrict the Company’s activities.

 

From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations and rulings that directly or indirectly affect the form, content and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. For further discussion of such regulations, see the discussion in the Government regulation section under Item 4B. Though the Company does not expect any existing or proposed regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.

 

The Company may be exposed to liabilities from allegations that certain of its clients’ advertising claims may be false or misleading or that its clients’ products may be defective.

 

The Company may be, or may be joined as, a defendant in litigation brought against its clients by third parties, its clients’ competitors, governmental or regulatory authorities or consumers. These actions could involve claims alleging, among other things, that:

 

    advertising claims made with respect to the Company’s clients’ products or services are false, deceptive, misleading or offensive;

 

    the Company’s clients’ products are defective or injurious and may be harmful to others; or

 

    marketing, communications or advertising materials created for the Company’s clients infringe on the proprietary rights of third parties since client-agency contracts generally provide that the agency agrees to indemnify the client against claims for infringement of intellectual property rights.

 

The damages, costs, expenses or attorneys’ fees arising from any of these claims could have an adverse effect on the Company’s prospects, business, results of operations and financial condition to the extent that we are not adequately insured against such risks or indemnified by the Company’s clients. In any case, the reputation of the Company’s agencies may be negatively affected by such allegations.

 

The Company is exposed to the risks of doing business internationally.

 

The Company operates in 106 countries throughout the world. The Company’s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to risks regarding:

 

    currency exchange rate fluctuations;

 

    restrictions on repatriation of earnings; and

 

    changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets.

 

The occurrence of any of these events or conditions could adversely affect the Company’s ability to increase or maintain its operations in various countries.

 

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Currency exchange rate fluctuations could adversely affect the Company’s consolidated results of operations.

 

The Company’s reporting currency is the UK pound sterling. However, the Company’s significant international operations give rise to an exposure to changes in foreign exchange rates, since most of its revenues from countries other than the UK are denominated in currencies other than the UK pound sterling, including the US dollar. Changes in exchange rates cause fluctuations in the Company’s revenues when measured in UK pounds sterling.

 

The Company may have difficulty repatriating the earnings of its subsidiaries.

 

Any payment of dividends, distributions, loans or advances to the Company by its subsidiaries could be subject to restrictions on, or taxation of, dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which the Company’s subsidiaries operate. If the Company is unable to repatriate the earnings of its subsidiaries it could have an adverse impact on the Company’s ability to redeploy earnings in other jurisdictions where they could be used more profitably.

 

The Company is subject to recessionary economic cycles.

 

The Company’s business is affected by recessionary economic cycles. Recessionary economic cycles may adversely affect the businesses of the Company’s clients, which can have the effect of reducing the amount of services they purchase for the Company’s agencies and thus can materially adversely affect the Company’s consolidated results of operations.

 

The Company may be unsuccessful in evaluating material risks involved in completed and future acquisitions.

 

The Company regularly reviews potential acquisitions of businesses that are complementary to its businesses. As part of the review the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite the Company’s efforts, it may be unsuccessful in ascertaining or evaluating all such risks. As a result, it might not realise the intended advantages of any given acquisition. If the Company fails to realise the expected benefits from one or more acquisitions, the Company’s business, results of operations and financial condition could be adversely affected.

 

The Company may be unsuccessful in integrating any acquired operations with its existing businesses.

 

The Company may experience difficulties in integrating operations acquired from other companies. These difficulties include the diversion of management’s attention from other business concerns and the potential loss of key employees of the acquired operations. Acquisitions also frequently involve significant costs related to integrating information technology, accounting and management services, rationalising personnel levels and implementing internal controls. If the Company experiences difficulties in integrating one or more acquisitions, the Company’s business, results of operations and financial condition could be adversely affected.

 

Goodwill and other acquired intangible assets recorded on the Company’s balance sheet with respect to acquired companies may become impaired.

 

The Company has a significant amount of goodwill and other acquired intangible assets recorded on its balance sheet with respect to acquired companies. The Company annually tests the carrying

 

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value of goodwill for impairment. The estimates and assumptions about results of operations and cash flows made in connection with impairment testing could differ from future actual results of operations and cash flows. In addition, future events could cause the Company to conclude that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations.

 

The Company may use ordinary shares, incur indebtedness, expend cash or use any combination of ordinary shares, indebtedness and cash for all or part of the consideration to be paid in future acquisitions that would result in additional goodwill being recorded on the Company’s balance sheet.

 

ITEM 4. INFORMATION ON THE COMPANY

 

The Company operates through a number of established global, multinational and national advertising and marketing services companies that are organised into four business segments. Our largest segment is Advertising and Media investment management where we operate the well-known advertising networks Ogilvy & Mather Worldwide, JWT, Y&R, Grey Worldwide and Bates Asia, and the newly formed Voluntarily United Group of Creative Agencies, as well as media investment management companies such as MediaCom, Mediaedge:cia, and MindShare. Our other segments are Information, insight and consultancy (where our operations are conducted through the Kantar Group), Public relations and public affairs (where we operate through well-known companies such as Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton, Ogilvy Public Relations Worldwide and GCI) and Branding & identity, Healthcare and Specialist communications (where our operations are conducted by B to D Group, Enterprise IG, Fitch, CommonHealth, Wunderman, Sudler & Hennessey, OgilvyOne Worldwide, Ogilvy Healthworld, 141 Worldwide and other companies).

 

The Company’s ordinary shares are admitted to the Official List of the UK Listing Authority and trade on The London Stock Exchange and American Depositary Shares (which are evidenced by ADRs or held in book entry form) representing deposited ordinary shares are quoted on the NASDAQ National Market (“NASDAQ”). At 31 May 2006 the Company had a market capitalisation of £8.2 billion.

 

The Company’s executive office is located at 27 Farm Street, London W1J 5RJ, England, Tel: (44) 20-7408-2204 and its registered office is located at Pennypot Industrial Estate, Hythe, Kent CT21 6PE, England.

 

A. History and Development of the Company

 

WPP 2005 Limited (formerly WPP Group plc) was incorporated and registered in England and Wales in 1971 and is a public limited company under the Companies Act 1985, and until 1985 operated as a manufacturer and distributor of wire and plastic products. In 1985, new investors acquired a significant interest in WPP and changed the strategic direction of the Company from being a wire and plastics manufacturer and distributor to being a multinational communications services organisation. Since then, the Company has grown both organically and by the acquisition of companies, most significantly the acquisitions of JWT Group, Inc. in 1987, The Ogilvy Group, Inc. in 1989, Young & Rubicam Inc. (“Young & Rubicam” or “Young & Rubicam Brands”, as the group is now known) in 2000, Tempus Group plc (“Tempus”) in 2001, Cordiant Communications Group plc (“Cordiant”) in 2003 and Grey Global Group, Inc. (“Grey”) in March 2005.

 

On or about October 25, 2005, the company originally named WPP Group plc and now known as WPP 2005 Limited (“Old WPP”), completed a reorganisation of its capital and corporate structure through a scheme of arrangement pursuant to Section 425 of the Companies Act of 1985 (the “Companies Act”), resulting in the formation of the Company as the new parent company of Old WPP. On October 26, 2005, the Company effected a reduction of capital, reducing the nominal value of each

 

9


of its ordinary shares by 465p from 475p to 10p. This reduction of capital created distributable reserves of £5,843,422,695. Pursuant to Rule 12g-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company succeeded to Old WPP’s registration and periodic reporting obligations under the Exchange Act. On completion of the reorganisation, each shareholder of Old WPP received an ordinary share of the Company in place of every Old WPP ordinary share held prior to the reorganisation. Citibank, N.A., Depositary for the ADSs representing Old WPP ordinary shares, canceled Old WPP ADSs held in book entry form and issued ADSs representing ordinary shares of the Company to the holders. Holders of certificated ADSs, or ADRs, of Old WPP were entitled to receive Company ADSs upon surrender of the Old WPP ADRs to the Depositary. Each Old WPP ADS represented five ordinary shares of Old WPP and each Company ADS represents five ordinary shares of the Company.

 

On 4 October 2000, the Company finalised its acquisition of Young & Rubicam. The value of the consideration, which was satisfied entirely by the issue of new WPP ordinary shares or WPP ADSs, was £3.0 billion. The consideration was calculated by reference to the opening WPP share price on 4 October 2000, which was £7.99. The merger with Young & Rubicam brought together two organisations sharing a common approach to the integration of advertising and marketing services for clients. Management believes that the companies complement one another in providing alternative operating brands in common business areas while adding the market research expertise of the Group to the Young & Rubicam businesses. The Young & Rubicam companies and other Group companies continue to share a large number of major clients, such as Ford . Within the enlarged Group client conflicts can be managed more effectively through separate operating brands so that clients can be assured of confidentiality. In addition, the merger strengthened the Group geographically, particularly in North America and Continental Europe.

 

On 6 November 2001, the Company finalised its acquisition of Tempus. The consideration was satisfied principally by £369 million in cash. Prior to the acquisition, the Group owned a 22% interest in the ordinary share capital of Tempus. Subsequent to the acquisition, The Media Edge and CIA, Tempus’ core brand, merged operations to create Mediaedge:cia. Mediaedge:cia’s geographically balanced network enables it to develop, manage and implement national, regional and global communications and media solutions for the benefit of its clients.

 

The acquisition of Cordiant was completed on 1 August 2003. WPP issued £11.3 million in new WPP shares as consideration for Cordiant and its shareholders, entering into a scheme of arrangement under Section 425 of the Companies Act. The Group also paid £265.5 million for the debt of Cordiant. £62.1 million of the debt was repaid prior to the acquisition date. Since the acquisition, Cordiant and its subsidiaries have been assimilated into the Group’s global communications and media network, although shortly after the acquisition the Group separately sold Cordiant’s interest in Zenith Optimedia Group Limited to Publicis for £75 million. Cordiant gave the Company reinforced relationships with a number of major multinational clients, strong agencies in Europe, Bates Asia (an Asian-based entity with local and multinational clients), a number of ex-Zenith media planning and buying operations, effective healthcare and retail-rooted branding and identity operations, and a number of specialist public relations and event management capabilities.

 

On 7 March 2005, the Company completed the acquisition of Grey in consideration for the issue of 78 million new WPP ordinary shares and $720 million in cash. Grey has been consolidated into the results of WPP from that date. Grey brings a number of strategic assets and strong people – a planning and account handling advertising agency, a media investment management capability, a public relations capability, a healthcare capability and a direct, sales promotion, interactive and internet capability. Geographic strengths include the US and Europe (including Eastern Europe) in particular, with interesting bases in Asia Pacific, Latin America, Africa and the Middle East, which are being developed further, organically and by acquisition. From a client perspective there are also significant opportunities to build on existing common client opportunities, and explore new relationships.

 

10


The Company spent £719.9 million and £224.5 million for acquisitions and investments in 2005 and 2004, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of property, plant and equipment was £160.5 million and £89.7 million, respectively, and cash spent on share repurchases and cancellations was £152.3 million and £88.7 million, respectively.

 

B. Business Overview

 

In 2005, revenues increased by 25.0% to £5.4 billion as compared to 2004. On a like-for-like basis, under which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year results, adjusted to include the results of acquisitions for the commensurate period in the prior year, revenues were up by 5.5%. Reported profit before interest and tax increased in 2005 by 36.0% to £686.7 million, including the effects of £46.0 million and £40.6 million of goodwill impairment charges taken on subsidiaries in 2005 and 2004, respectively. Profit before tax in 2005 was up 36.4% to £592.0 million as compared to 2004 and diluted earnings per share increased by 26.9% to 29.7p.

 

The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from over 2,000 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare, and Specialist communications (including direct, promotion and relationship marketing).

 

Approximately 48% of the Company’s reported revenues in 2005 were from Advertising and Media investment management, with the remaining 52% of its revenues being derived from the business segments of Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare and Specialist communications. Over the past several years, the pattern of revenue growth varied by communications services sector and brand.

 

The following table shows, for the last two fiscal years, reported revenue attributable to each business segment in which the Company operates.

 

Revenue    2005   

% of

Total in

2005

   2004   

% of

Total in

2004

     (£m)         (£m)     

Advertising and Media investment management

   2,606.4    48.5    1,985.3    46.1

  
  
  
  

Information, insight and consultancy

   810.4    15.1    744.8    17.3

  
  
  
  

Public relations and public affairs

   534.4    9.9    445.2    10.4

  
  
  
  

Branding and identity, Healthcare and Specialist communications

   1,422.5    26.5    1,124.2    26.2

  
  
  
  

TOTAL

   5,373.7    100.0    4,299.5    100.0

  
  
  
  

 

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The pattern of revenue growth also differed regionally. The following table shows, for the last two fiscal years, reported revenue attributable to each geographic area in which the Company operates and demonstrates the Company’s regional diversity.

 

Revenue    2005   

% of

Total in

2005

   2004   

% of

Total in

2004

     (£m)         (£m)     

North America

   2,106.9    39.2    1,651.9    38.5

  
  
  
  

United Kingdom

   808.1    15.0    728.5    16.9

  
  
  
  

Continental Europe

   1,410.3    26.3    1,134.8    26.4

  
  
  
  

Asia Pacific, Latin America, Africa and Middle East

   1,048.4    19.5    784.3    18.2

  
  
  
  

TOTAL

   5,373.7    100.0    4,299.5    100.0

  
  
  
  

 

The Company’s principal activities within each of its business segments are described below.

 

Advertising and Media investment management

 

Advertising

 

The principal functions of an advertising agency are the planning and creation of marketing and branding campaigns and the design and production of advertisements for all types of media such as television, cable, the internet, radio, magazines, newspapers and outdoor locations such as billboards.

 

The Company’s advertising agencies include Ogilvy & Mather Worldwide, JWT, Y&R, Grey Worldwide, the Voluntarily United Group of Creative Agencies and Bates Asia. The Company also owns interests in Asatsu-DK (20.9%); GIIR, Inc (28.2%); Singleton, Ogilvy & Mather in Australia (33.3%) and DYR Tokyo (49.0%).

 

Ogilvy & Mather Worldwide. Ogilvy & Mather is a full-service multinational advertising agency. Ogilvy & Mather was formed in 1948 and is headquartered in New York. Its strategy includes an integrated service offering known as 360 Degree Brand Stewardship®, a business platform that enables Ogilvy & Mather to integrate its growing range of disciplines which now include 141, Ogilvy’s brand activation company, Ogilvy PR and Ogilvy Healthworld. Ogilvy has also brought digital and direct media back into their operations in 2005 as Neo@Ogilvy.

 

JWT. JWT, one of the world’s first advertising agencies, was founded in 1864 and is a full service multinational advertising agency headquartered in New York. JWT’s relationships with a number of its major clients have been in existence for many years, exhibiting, management believes, an ability to adapt to meet the clients’ and market’s new demands.

 

Y&R. Y&R, a full-service multinational advertising agency network headquartered in New York, was formed in 1923 and is now part of a collaborative, multidisciplinary model under Young & Rubicam Brands. Y&R’s clients also benefit from Y&R’s continued investments in its proprietary brand management tool, BrandAsset ® Valuator.

 

Grey Worldwide. Grey commenced operations in 1917 and was incorporated in 1925 as Grey Advertising Inc. Grey has offices in approximately 90 countries and was acquired by WPP in March 2005.

 

The Voluntarily United Group of Creative Agencies. In the fall of 2005, WPP’s Red Cell network was split in two parts, with nine of the former Red Cell offices forming the Voluntarily United Group of

 

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Creative Agencies. The group now includes Senora Rushmore United, Madrid; Berlin Cameron United, New York; Cole & Weber United, Seattle; WM United, Buenos Aires; United London; 1861 United, Milan; LDV United, Antwerp; BTS United, Oslo; and Les Ouvriers du Paradis United, Paris.

 

Bates Asia. Bates is an Asia-focused advertising network. In 2005, Bates Asia launched a network-wide initiative to improve the creative product and recognition of the Bates brand. In addition, 141 Worldwide, a marketing services division of Bates Asia, received strong support from Ogilvy to redefine and re-launch a new focused positioning and consistent offering across Asia.

 

Media investment management

 

GroupM is WPP’s consolidated media investment management operation, serving as the parent company to agencies including MediaCom, Mediaedge:cia and MindShare. As such, GroupM has capabilities in business science, consumer insight, communications and media planning, implementation, interactions, content development, and sports and entertainment marketing. The primary purpose of GroupM is to maximise the performance of WPP’s media agencies, operating not only as their parent company, but as collaborator on performance-enhancing activities, such as trading, finance, tool development and other business-critical capabilities, in order to leverage the combination of GroupM’s scale and talent resources.

 

Mediacom. Mediacom was transitioned into GroupM following the Grey acquisition in March 2005, and, as a part of the WPP family was able for the first time in its history to work together with sister media agencies, beginning to develop synergies in a number of relevant professional areas.

 

Mediaedge:cia. Mediaedge:cia was formed following the Group’s acquisition of Tempus in 2001 with the merger of its core brand CIA with The MediaEdge. In addition to its media planning and implementation capability, Mediaedge:cia has established and is growing its operations in interaction (digital, direct & search), entertainment marketing, sports, sponsorship and event marketing, cause-related marketing, content development, ROI and consumer insights, and is now developing a retail marketing practice.

 

MindShare. MindShare was originally formed from the merger of the media departments of JWT and Ogilvy & Mather. MindShare has recently made significant investments in developing strategic resources, especially in the areas of communications planning, content, insights, digital and return on investment (ROI), with its ambition moving from being marketing partners for their clients to being their business partners.

 

Information, insight and consultancy

 

To help optimise its worldwide research offering to clients, the Company’s separate global research and strategic marketing consultancy businesses, which are described below, are managed on a centralised basis under the umbrella of the Kantar Group. The principal interests comprising the Kantar Group are:

 

Research International. RI, a large custom research company, specialises in a wide range of business sectors and areas of marketplace information including strategic market studies, brand positioning and equity research, customer satisfaction surveys, product development, international research and advanced modeling.

 

Millward Brown. MB is one of the world’s leading companies in advertising research, including pre-testing, tracking and sales modeling, and offers a full range of services to help clients market their brands more effectively.

 

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IMRB International. IMRB is a leading market research business in India.

 

KMR Group. KMR focuses on media planning databases and new product development projects. KMR has the following principal subsidiaries and investments:

 

AGBNielsen Media Research. AGBNielsen, a joint venture formed with VNU, is a leading provider of television audience measurement systems worldwide.

 

BMRB International. BMRB is one of Europe’s largest and fastest growing full-service market research agencies. BMRB offers innovative research solutions through its network and partnerships with agencies worldwide.

 

IBOPE Media Information (the Company holds 31% of the total share capital). IBOPE is one of Latin America’s leading media research businesses, which services national and multinational clients throughout the region in measurement and analysis of television ratings and advertising expenditures.

 

Lightspeed Research. Lightspeed provides online consumer panel access for tracking and ad hoc studies. Lightspeed also offers online proprietary panel products and solutions for such specialty consumer panels as healthcare, financial services, expectant and new mothers, automotive and family.

 

Public relations and public affairs

 

Public relations and public affairs companies advise clients who are seeking to communicate with consumers, governments and/or the business and financial communities. Public relations and public affairs activities include national and international corporate, financial and marketing communications, crisis management, public affairs and government lobbying. The Company’s largest businesses in this area are Burson-Marsteller, Hill & Knowlton, Ogilvy Public Relations Worldwide, Cohn & Wolfe and GCI Group.

 

Burson-Marsteller. Burson, founded in 1953 and part of Young & Rubicam Brands, specialises in corporate and marketing communications, business-to-business services, crisis management, employee relations and government relations. In 2005, Mark Penn, founding partner of WPP agency Penn, Schoen & Berland (PSB), was named Burson’s new CEO. PSB is now a Burson agency.

 

Hill & Knowlton. H&K, founded in 1927, is a worldwide public relations and public affairs firm headquartered in New York. H&K provides national and multinational clients with a wide range of communications services including corporate and financial public relations, marketing communications, internal communication, change management, crisis communications and public affairs counseling. The Hill & Knowlton network also includes the businesses of Blanc & Otus, H&K’s stand-alone technology company, and Wexler & Walker Public Policy Associates.

 

Ogilvy Public Relations Worldwide. OPR is a leading public relations and public affairs firm based in New York with practice areas in marketing, health and medical, corporate public affairs and technology and social marketing. The firm has offices in key financial, governmental and media centres as well as relationships with affiliates worldwide. In 2005, OPR acquired iPR, a Hong Kong financial communications firm, and The Federalist Group, a Washington DC-based public affairs firm that specialises in government relations.

 

Cohn & Wolfe. C&W, a Young & Rubicam Brands company, is an international public relations agency established in 1970. It offers marketing-related public relations for its clients and provides its clients with business results and marketing communications solutions.

 

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GCI Group. GCI Group, Grey’s global public relations firm and part of Grey Global Group has expertise in five practices: healthcare, corporate, consumer marketing, technology and media relations. Since it’s acquisition in March 2005, GCI expanded its consumer and technology practices, as well as its global reach, by consolidating its service offering with Cohn & Wolfe.

 

Others. The Group includes a number of other companies specialising in public relations and public affairs, including BKSH, Buchanan Communications, Clarion Communications, Finsbury, Quinn Gillespie, Robinson Lerer & Montgomery (a Young & Rubicam Brands company), Timmons and Company and Chime Communications (21.8%).

 

Branding and identity, Healthcare and Specialist communications

 

The Company’s activities in this business area include branding and identity; healthcare communications; direct, promotional and interactive marketing; and other specialist communications services including custom media, demographic and sector marketing, sports marketing, and media and film production services.

 

Branding and identity

 

B to D Group. This branding and design entity, formed in 2005, consists of Landor Associates (a Young & Rubicam Brands Company), Enterprise IG, VBAT, Addison Corporate Marketing, Lambie-Nairn, The Partners (a Young & Rubicam Brands Company) and Walker Group. The mission of the B to D Group is to maximise and leverage the strengths of each individual company in order to offer clients and prospects the most complete and compelling branding and design solutions. As part of the Group, the companies have access to new clients and untapped markets, as well as resources such as advanced knowledge sharing systems and financial tools. Employee exchange further enables the companies to share top-level strategic thinking, creativity and cultural knowledge.

 

Fitch. Fitch is a leading brand and design consultancy, operating across the three main geographical areas (Europe, the United States, and Asia Pacific) for multinational clients and for those regional clients standing to benefit from a globally informed interdisciplinary approach. Through trends forecasting, strategy, and design, Fitch creates content and design solutions for its clients. Rodney Fitch, who founded the agency in 1972, rejoined in 2004 as Chairman and CEO of Fitch.

 

Healthcare and communications

 

The Company has extensive expertise in healthcare communications, including CommonHealth, Sudler & Hennessey (a Young & Rubicam Brands Company), Ogilvy Healthworld (part of the Ogilvy & Mather Worldwide network) and Grey Healthcare Group (part of Grey Global Group).

 

Specialist communications

 

Direct, promotional and interactive marketing

 

The Company has a number of operating businesses in this category, including:

 

    A. Eicoff & Co specialises in targeted cable and broadcast television advertising.

 

    Bridge Worldwide, acquired in 2005, brings strong capabilities in the interactive and relationship marketing space.

 

    Einson Freeman is a US-based brand promotion integrated marketing agency.

 

    EWA specialises in data and relationship management services.

 

15


    G2, part of Grey Global Group, unifies all of the specialised marketing communications services grouped under Grey Synchronized Partners. The companies within this global business unit will be rebranded: G2 Branding & Design (formerly G2); G2 Interactive (formerly Grey Interactive); G2 Direct & Digital (formerly Grey Direct) and G2 Promotional Marketing (formerly J. Brown Agency) and comprise a global network across 42 countries.

 

    Headcount Worldwide Field Marketing offers field marketing and brand development services, supported by strong customer relationship skills.

 

    KnowledgeBase Marketing, a Young & Rubicam Brands company, is a single source provider of integrated information-based marketing solutions to businesses in targeted high-growth industries. KBM delivers its integrated business solutions services by creating consolidated databases, and then designing, implementing and evaluating database marketing programs for clients. KBM’s capabilities include data warehousing, data mining, information services and data analysis.

 

    Mando Brand Assurance is a UK-based global promotional risk management company, underwriting marketing activity for major international brands.

 

    OgilvyOne Worldwide, part of the Ogilvy & Mather Worldwide network, is a direct marketing group, offering online marketing consulting and also traditional direct marketing communications such as direct response advertising techniques.

 

    RMG Connect is a global operation which consolidates all of JWT’s customer relationship marketing offerings.

 

    VML, headquartered in Kansas City and part of Young & Rubicam Brands, specialises in full service integrated on-line and traditional advertising.

 

    Wunderman, part of Young & Rubicam Brands, is an integrated marketing solutions company that delivers customer relationship management services to its clients. Wunderman combines strategic consulting, data-driven and creative marketing services, the Internet, and the latest information technologies to drive and measure business results for its clients.

 

    141 Worldwide, part of the Ogilvy & Mather Worldwide network, is a global marketing services network whose offers include direct marketing, customer relationship management, promotional marketing, interactive solutions, sports and entertainment marketing, field marketing, public relations and media broadcast public relations.

 

    Warwicks is a design and publishing company, specialising in the design and production of sales, promotion, public relations and service literature for a diverse range of companies.

 

Custom media

 

    Forward is a custom media business which specialises in direct customer communications programmes.

 

    Spafax specialises in the aviation sector. In early 2006, WPP acquired DMX Inflight, strengthening Spafax’s integrated in flight entertainment offering and giving them greater presence in the US market.

 

Demographic and sector marketing

 

Branding and identity

 

    BDG McColl, Edinburgh–based architects and interior designers, specialise in the design of commercial buildings and interiors.

 

16


    BDGworkfutures is an international design consultancy focusing on strategy and design for working environments, working with corporate clients and within the Government sector.

 

Corporate/B2B

 

    Ogilvy Primary Contact is a leading UK-based provider of business-to-business, financial and corporate advertising.

 

Demographic marketing

 

    The Bravo Group, Kang & Lee, WINGLATINO and MosaicaMD (formed with the 2005 merger of Mendoza Dillon and Mosaica) create multi-cultural marketing and communications programs targeted to the fast-growing US Hispanic and Asian communities. Their multi-disciplinary services include advertising, promotion and event marketing, public relations, research and direct marketing. The Bravo Group and Kang & Lee are part of Young & Rubicam Brands. WINGLATINO is part of Grey Global Group.

 

Event/face-to-face marketing

 

    MJM is a full-service communications company for live events, meetings, exhibits, trade shows, brand theater and training, serving clients around the world.

 

Foodservice marketing

 

    The Food Group specialises in targeted food advertising, marketing, and culinary and technology solutions.

 

Youth marketing

 

    The Geppetto Group assists clients in communicating their products and services to the youth market (children and teens) and implementing creative branding solutions.

 

Real estate marketing

 

    Pace is one of the largest specialists in the real estate communications market in the United States, offering comprehensive services in the marketing of both commercial and residential property to developers, builders and real estate agents.

 

Technology marketing

 

    Banner Corporation is a European marketing communications firm specialising in the technology sector. Banner is part of Young & Rubicam Brands.

 

Sports marketing

 

    Global Sportnet is a German-based sports marketing agency specialising in the marketing of exclusive and worldwide broadcasting and marketing rights to European soccer matches and the sponsorship consultancy of blue-chip clients across various sports. They also launched the Performance joint venture with MindShare to create a dedicated sports and entertainment sponsorship consultancy.

 

    PRISM Group, on a global basis, offers sports marketing and consultancy, event management, public relations and communication design.

 

17


    PSM is a London-based sports and entertainment marketing consultancy.

 

Media & production services

 

    Metro Group provides a diverse range of technical and creative services, including multimedia, film, video and asset archiving, equipment sales and post-production systems to clients in the UK.

 

    The Farm Group, headquartered in the UK, is a film and video production services company.

 

Manufacturing

 

The original business of the Company remains as the manufacturing division, which operates through subsidiaries of Wire and Plastic Products Limited. The division produces a wide range of products for commercial, industrial and retail applications.

 

WPP Group plc

 

WPP, the parent company, develops the professional and financial strategy of the Group, promotes operating efficiencies, coordinates cross referrals of clients among the Group companies and monitors the financial performance of its operating companies. The principal activity of the Group is the provision of communications services worldwide. WPP acts only as the parent company and does not trade. The parent company complements the operating companies in three distinct ways:

 

    First, the parent company relieves them of much administrative work. Financial matters (such as planning, budgeting, reporting, control, treasury, tax, mergers, acquisitions, investor relations, legal affairs and internal audit) are co-ordinated centrally.

 

    Secondly, the parent company encourages and enables operating companies of different disciplines to work together, both for the benefit of clients and for the job satisfaction of our people. The parent company also plays an across-the-Group role in the following functions: the management of talent, including recruitment and training; in property management; and in procurement, information technology and knowledge sharing.

 

    And, finally, WPP itself can function as the 21st century equivalent of the full-service agency. For some clients, predominantly those with a vast geographical spread and a need for marketing services ranging from advertising through design and website construction to research and internal communications, WPP can act as a portal to provide a single point of contact and accountability.

 

The parent company operates with a limited group of approximately 250 people at the centre in London, New York, Hong Kong and Sao Paolo.

 

WPP Strategy

 

The Group has three strategic priorities:

 

    First in the short term, having weathered the internet bust successfully, to build on the solid base we have established;

 

    Second, in the medium term, to build upon the successful base we have established with the acquisition of Young & Rubicam Brands and Grey. At Grey, the new management structure is now in place and whatever integration targeted, now completed. At Young & Rubicam Brands, our plans are also largely completed, the one remaining task being to complete the management structure at the Y&R advertising agency, where momentum has picked up recently;

 

18


    Third, in the long term or over the next five to ten years, to increase the combined geographic share of revenues of Asia Pacific, Latin America, Africa and the Middle East, and Central and Eastern Europe, from around 20% to one-third; to increase the share of revenues of marketing services from around 52% to two-thirds; and to increase the share of more measurable marketing services – such as Information, insight & consultancy, and direct, interactive and internet – from around one-third of our revenues to 50%.

 

Clients

 

Through the Group’s companies and associates, WPP offers a comprehensive and, when appropriate, integrated range of communications services to national, multinational and global clients. The Company serves over 390 clients in three or more disciplines. More than 270 clients in four disciplines; these clients account for around 60% of Group revenues. The Group also works with nearly 220 clients in six or more countries. All together, the Company now serves more than 300 of the Fortune Global 500, over one-half of the NASDAQ 100 and over 30 of the Fortune e-50. The Company’s ten largest clients in 2005, measured by revenues, were Altria, American Express, BAT, Ford, GlaxoSmithKline, IBM, Microsoft, Proctor & Gamble, Pfizer and Unilever. Together, these clients accounted for approximately 23% of the Company’s revenues in 2005. No client of the Company represented more than 6% of the Company’s aggregate revenues in 2005. The Group companies have maintained long-standing relationships with many of its clients, with an average length of relationship for the top 10 clients of approximately 50 years.

 

Acquisitions

 

Total initial cash consideration spent on acquisitions and investments, less cash and cash equivalents acquired, was £416.3 million in 2005. In addition to the Grey acquisition, WPP or its operating companies acquired, made an investment in or increased its existing equity stake in a number of companies in 2005, identified below:

 

Name


  

Country


Advertising and Media investment management

    

Kinetic Worldwide

   UK

Tarantula

   UK

Direct.com

   USA

Gallagher Group

   USA

Malone Advertising

   USA

Studiocom.com

   USA

The Weinstein Company

   USA

Santo Buenos Aires

   Argentina

Tsubcero1

   Argentina

The Communications Group1

   Australia

Young & Rubicam Group1

   Australia

G2 Chile1

   Chile

Halbye Kaag JWT1

   Denmark

J Walter Thompson Finland1

   Finland

Dentsu, Young & Rubicam1

   Hong Kong

Insight Brand Consulting

   Hong Kong

Newsun Communication

   Hong Kong

Bandero Barone Scarpelli1

   Italy

FullSix1

   Italy

 

19


Ad Venture Worldwide1

   Korea

O&M Comunicacion1

   Mexico

Grey Communications Group BV1

   Netherlands

LDV Red Cell BV1

   Netherlands

Young & Rubicam Holdings1

   New Zealand

Dentsu, Young & Rubicam-Alcantra1

   Philippines

Propaganda

   Russia

Video International Group

   Russia

Essence Communications1

   Singapore

Young & Rubicam RSA Holdings1

   South Africa

BAT Media

   Spain

Focus Media1

   Spain

Mets Global Media1

   Spain

Senora Rushmore

   Spain

Despatch

   Uruguay

Information, insight and consultancy

    

Retail Marketing Services

   UK

ASI/Kantar Research

   USA

DynamicLogic

   USA

eRewards1

   USA

m.Metrics

   USA

Oracle Market Research

   China

RI China1

   China

Media Research, Inc.

   Korea

Colmar & Brunton1

   New Zealand

Pentor Communications

   Poland

Spring Brands

   Singapore

Public relations and public affairs

    

Chime Communications1

   UK

Federalist Group

   USA

Hill and Knowlton Argentina1

   Argentina

Impact Employee Communications

   Australia

Gulf Hill & Knowlton1

   Bahrain

IPR Asia Holdings

   China

ABC Public Relations

   Denmark

Branding & Identity, Healthcare and Specialist communications

Current Medical Directions

   USA

Fortelligent

   USA

K&L Field Marketing

   USA

Syzygy

   Germany

Notes

 

1 Increased stake

 

20


In the first quarter of 2006, the Group made acquisitions or increased equity interests, none of which are material individually or in the aggregate, in advertising and media investment management in the United Kingdom, United States, Israel, Brazil, South Africa, China, Singapore and Germany; in public relations and public affairs in India; and in direct, internet and interactive in the United States.

 

Government Regulation

 

From time to time, governments, government agencies and industry self-regulatory bodies in the United States, European Union and other countries in which the Company operates have adopted statutes, regulations, and rulings which directly or indirectly affect the form, content, and scheduling of advertising, public relations and public affairs, and market research, or otherwise affect the activities of the Company and its clients. Some of the foregoing relate to privacy and data protection and general considerations such as truthfulness, substantiation and interpretation of claims made, comparative advertising, relative responsibilities of clients and advertising, public relations and public affairs firms, and registration of public relations and public affairs firms’ representation of foreign governments.

 

In addition, there is an increasing tendency towards consideration and adoption of specific rules, prohibitions, and media restrictions, and labeling, disclosure and warning requirements, with respect to advertising for certain products, such as over-the-counter drugs and pharmaceuticals, cigarettes, food and certain alcoholic beverages, and to certain groups, such as children.

 

Proposals have been made for the adoption of additional laws and regulations that could further restrict the activities of advertising, public relations and public affairs, and market research firms and their clients. Though the Company does not expect any existing or proposed regulations to materially adversely impact the Company’s business, the Company is unable to estimate the effect on its future operations of the application of existing statutes or regulations or the extent or nature of future regulatory action.

 

Litigation

 

WPP and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The Company does not anticipate that the outcome of these proceedings and claims will have a material adverse effect on the Group’s financial position or on the results of its operations.

 

21


C. Organizational Structure

 

The Company’s business comprises the provision of communications services on a national, multinational and global basis. It operates from over 2,000 offices in 106 countries. The Company organises its businesses in the following areas: Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare, and Specialist communications (including direct, promotion and relationship marketing). A listing of the Group brands operating within these business segments as at May 2006 is set forth below.

 

Advertising


  

Media investment management


ADK1

   Group M:

Bates Asia

   MAXUS

BrandBuzz4

   MediaCom

Dentsu Y&R1, 2, 4

   Mediaedge:cia

Diamond Oglivy

   MindShare

Grey Worldwide7

   Outrider5

LG Ad1

    

JWT

   Other media agencies

Marsteller Advertising4

   Kinetic Worldwide2

Ogilvy & Mather Worldwide

   KR Media3

Red Cell

    

Soho Square

    

The Voluntarily United Group of Creative Agencies

    

Y&R4

    

 

Information, insight & consultancy


  

Public relations & public affairs


The Kantar Group:

   BKSH4

Added Value

   Blanc & Otus

BPRI

   Buchanan Communications

Cannondale Associates

   Burson-Marsteller4

Center Partners

   Chime Communications PLC1

Everystone

   Clarion Communications

Focalyst2

   Cohn & Wolfe4

Fusion 5

   Finsbury

Glendinning

   GCI Group7

Henley Centre HeadlightVision

   Hill & Knowlton

IMRB International

   Ogilvy Public Relations Worldwide

KMR Group

   Penn, Schoen & Berland4

    –AGBNielsen Media Research2

   Quinn Gillespie

    –BMRB International

   Robinson Lerer & Montgomery4

    –IBOPE Media Information1

   Timmons and Company

    –Marktest1

   Wexler & Walker Public Policy Associates

    –Mediafax

    

Lightspeed Research

    

MVI

    

Mattson Jack Group

    

Millward Brown

    

Research International

    

RMS Instore

    

Ziment Group

    

Other marketing consultancies:

    

ohal

    

 

22


Branding & identity


  

Direct, digital, promotion &
relationship marketing


  

Specialist communications


Addison Corporate Marketing6

BDGMcColl

BDGworkfutures

Coley Porter Bell

Dovetail

Enterprise IG6

Fitch

Lambie-Nairn6

Landor Associates4, 6

The Partners4, 6

VBAT6

Walker Group6

Warwicks

  

A. Eicoff & Co

Bridge Worldwide

Brierley & Partners1

Dialogue Marketing

Digit

Einson Freeman

EWA

FullSIX3

Good Technology4, 5

Grass Roots1

G27

    -G2 Branding & Design

    -G2 Interactive

    -G2 Direct & Digital

    -G2 Promotional Marketing

Headcount Worldwide Field Marketing

High Co1

KnowledgeBase Marketing4

Mando Brand Assurance

Maxx Marketing

OgilvyOne Worldwide

RMG Connect

RTC Relationship Marketing4

syzygy1

VML4

Wunderman4

141 Worldwide

  

Corporate/B2B

Brouillard

Ogilvy Primary Contact

Custom media

Forward

Spafax

Demographic marketing

The Bravo Group4

Kang & Lee4

MosaicaMD

UniWorld1

WINGLATINO7

Employer branding/recruitment

JWT Specialized Communications

Event/face-to-face marketing

MJM

PCI Fitch

The Event Union

    -MJM

    -Pro Deo

    -facts + fiction

Foodservice marketing

The Food Group

Sports marketing

Global Sportnet

Performance SportEnt

PSM

PRISM Group

Entertainment marketing

Alliance7

Youth marketing

The Geppetto Group

G Whiz6

Real estate marketing

Pace

Technology marketing

Banner Corporation4

Media and production services

Clockwork Capital1

The Farm Group

MEDIAPRO Group1

Metro Group

     
     
     
     
     
     
     
     
     
     
     
     
       
       
       
       
       
       

Healthcare communications


     

CommonHealth

     

Feinstein Kean Healthcare

     

Grey Healthcare Group7

     

Ogilvy Healthworld

     

Sudler & Hennessey4

     
       
       
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
           
         

WPP knowledge communities


          The Channel
          The Store

Notes

 

1 Associate
2 Joint venture
3 Minority investment
4 A Young & Rubicam Brands Company
5 A Mediaedge:cia company
6 A member of B to D Group
7 A Grey Global Group Company

 

23


D. Property, Plant and Equipment

 

The majority of the Company’s properties are leased, although certain properties which are used mainly for office space are owned in the United States (including the 370,000 net square foot Young & Rubicam headquarters office building located at 285 Madison Avenue in New York, New York) and in Latin America (principally in Argentina, Brazil, Chile, Mexico and Peru), and manufacturing facilities are owned in the United Kingdom. Principal leased properties include office space at the following locations:

 

Location    Use   Approximate
square footage

Worldwide Plaza, New York, NY

   Ogilvy & Mather, 141, OPR   634,300

466 Lexington Avenue, New York, NY

   JWT   456,100

777 Third Avenue, New York, NY

   Grey Global Group   438,300

230 Park Ave South, New York, NY

  

Burson-Marsteller,

Landor, Sudler & Hennessey

  233,400

498 Seventh Avenue, New York, NY

   MindShare   204,200

500 Woodward Avenue, Detroit, MI

   JWT, MindShare   183,300

Darmstadter Landstrasse, Frankfurt, Germany

   Ogilvy & Mather   150,500

114 Fifth Avenue, New York, NY

   Grey Global Group   132,800

825 Seventh Avenue, New York, NY

   Mediaedge:cia   129,600

303 Second Street, San Francisco, CA

   Y&R Advertising, Wunderman, Hill & Knowlton, Blanc & Otus, Mindshare, Mediaedge:cia, Burson Marsteller, Grey Global Group, Bravo, Fitch, JWT   128,100

350 North Orleans, Chicago, IL

   Ogilvy & Mather, 141, MindShare, OPR   126,600

233 North Michigan Avenue, Chicago, IL

  

Y&R Advertising, Wunderman,

Burson-Marsteller, Mediaedge:cia, Landor

  122,100

989 Changle Road, Shanghai, China

   Ogilvy, JWT, Group M, Hill & Knowlton   120,900

222 Merchandise Mart Plaza, Chicago, IL

   JWT, Hill & Knowlton, Research International   111,700

10 Cabot Square, Canary Wharf, London, UK

   Ogilvy & Mather   104,200

58 Jinbao Street, Beijing, China

   Ogilvy, Group M   101,300

27-8 Chamwon-dong Seocho-ku, Seoul, South Korea

   Diamond Ad Ltd.   100,300

Greater London House, London, UK

   Y&R Advertising, Wunderman   91,000

 

The Company considers its properties, owned or leased, to be in good condition and generally suitable and adequate for the purposes for which they are used. See also Item 5—Operating and Financial Review and Prospects. As of 31 December 2005, the fixed asset value (cost less depreciation) representing properties, both owned and leased, as reflected in the Company’s consolidated financial statements was approximately £249.8 million.

 

The task of improving property utilisation continues to be a priority for the Group, with a portfolio of approximately 18 million square feet worldwide. In December 2002, establishment cost as a percentage of revenue was 8.4%, with a goal of reducing this ratio to 7.0% in the medium term. At the

 

24


end of 2004 the establishment cost to revenue ratio reduced to 7.6% and by December 2005 this ratio improved further to 7.2%, driven by better utilisation and higher revenues. There should be further opportunities to improve utilisation in the future, as we integrate 3.2 million square feet of property within Grey into the portfolio.

 

See note 3 to the Consolidated Financial Statements for a schedule by years of future minimum rental payments to be made and future sublease rental payments to be received, as of 31 December 2005, under non-cancelable operating leases of the Company.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

25


ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Introduction

 

The Company’s reporting currency is the UK pound sterling. However, the Company’s significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or “functional”) currencies of its main operating units. The majority of the Group’s debt is therefore denominated in US dollars and euros, as these are the predominant currencies of revenues.

 

To neutralise foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency (current and prior year local currency results translated into US dollars at a budget, or “constant”, foreign exchange rate).

 

See Item 11 of this report for Quantitative and Qualitative Disclosures about Market Risk.

 

A. Operating Results

 

Overview

 

The Company is one of the world’s largest communications services groups. It operates through a number of established national, multinational and global advertising and marketing services companies. The Company offers services in four reporting segments:

 

    Advertising and Media investment management,

 

    Information, insight and consultancy,

 

    Public relations and public affairs, and

 

    Branding and identity, Healthcare and Specialist communications.

 

In 2005, 48% of the Company’s consolidated revenues were derived from Advertising and media investment management, with the remaining 52% of its revenues being derived from the marketing services segments.

 

The Group has established the following financial and strategic objectives:

 

    To continue to raise operating margins (based on profit before interest, taxation, goodwill impairment, amortisation of acquired intangibles and investment gains and write-downs) to the levels of the best performing competition. This performance measure is used by management to assess the performance of the business. Our operating margin measured on this basis increased a full margin point to a record 14.0% in 2005 from 13.0% in 2004, ahead of the revised target set in August 2005 of 13.7%. The adoption of IFRS reduced our operating margin by 1.0 margin point. Therefore our previously stated long term goal of 20% under UK GAAP is 19% under IFRS. Achieving this is tough, but not out of the question.

 

    To continue to increase flexibility in the cost structure by increasing our percentage of variable staff costs. Management believes this will afford the Company greater flexibility in the event revenue growth weakens. Peak flexibility historically was in 2000, at 6.6% of revenues in variable staff costs. Now at 7.6% in 2005 and 7.8% in 2004, the Group has seen new peaks in flexibility.

 

26


    To improve total share owner return by maximising the return on investment on the Company’s free cash flow across the alternatives of capital expenditure, mergers and acquisitions, and dividends or share buy-backs.

 

    To continue to enhance the contribution of the parent company, beyond that of a financial holding company, to add value both to its clients and its people.

 

    To place greater emphasis on revenue growth through our practice development activities, aimed at helping us position our portfolio in the faster-growing functional and geographic areas.

 

    To improve further the quality of our creative output by increasing training and development programs, by recruiting external talent, by celebrating and rewarding outstanding creative success both tangibly and intangibly, by acquiring strong creative companies, and by encouraging, monitoring and promoting our companies’ achievements in winning creative awards.

 

The following discussion is based on the Company’s audited Consolidated Financial Statements beginning on page F-1 of this report. The Group’s 2005 consolidated financial statements have been prepared under IFRS (International Financial Reporting Standards, incorporating International Accounting Standards), which were adopted with effect from 1 January 2004, with the exception of IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IAS 32 ‘Financial Instruments: Disclosure and Presentation’. Due to continued amendments to IAS 39 the Group decided not to implement this standard for statutory reporting from 1 January 2004, and, consequently, took advantage of the option in IFRS 1 ‘First-time adoption of International Financial Reporting Standards’ to implement IAS 39, together with IAS 32, from 1 January 2005 without restating its 2004 income statement and balance sheet. The consolidated financial statements have also been prepared in accordance with IFRSs adopted for use in the European Union. IFRS differ in certain significant respects from US GAAP. See pages F-41 to F-61 of the Consolidated Financial Statements, which contain a discussion and reconciliation of the principal differences between IFRS and US GAAP relevant to the Company.

 

The Group’s financial performance in the year more than mirrored the continuing steady strength in economic conditions across the globe, with even the weakest region, Western Continental Europe, picking up in the second half.

 

2005, expected to be the softest year of the quadrennial 2005-2008 cycle, was surprisingly strong. With no special political or sporting events to speak of, 2005 reflected the steady growth seen throughout the world, with three geographical speeds – fastest in Asia Pacific, Latin America, Africa, the Middle East and Eastern Europe; a steady speed in the US; and slower speed in Western Europe.

 

2005 also marked continued client focus on top-line growth, as corporate profitability, margins and liquidity continued to improve significantly. Corporate profitability remains at historically high levels on both sides of the Atlantic. This resulted in unprecedented levels of new business activity, which have continued into 2006.

 

Network television price inflation and declining audiences, fragmentation of traditional media and rapid development of new technologies continued to drive experimentation by our clients in new media and non-traditional alternatives. 1998 was really the first year when WPP’s marketing services activities represented over 50% of Group revenue. In 2004 these activities represented almost 54% of Group revenue. In 2005 they represented 52%, as media investment management was again the fastest-growing part of our business, following major success in winning media planning and buying consolidations, and the first-time inclusion of Grey Worldwide and MediaCom. In addition, in 2005, our narrowly defined internet-related revenue was almost $500 million or over 5% of our worldwide reported revenue. This is in line with 4-5% for online media’s share of total advertising spend in the US

 

27


and approximately 4% share worldwide. The new media continue to build their share of client spending.

 

Segment performance

 

As discussed earlier, management reviews the Group’s businesses in constant currency to better illustrate the underlying trends from one year to the next. To supplement the reportable currency segment information presented in note 2 to the Consolidated Financial Statements, the table below gives details of revenue growth by region and business segment both in reported and constant currency.

 

    

Reported

Revenue

growth %+/(-)

  

Constant Currency

Revenue

growth %+/(-)

     2005    2004    2005    2004

North America

   +27.5    -1.6    +25.9    +9.7

  
  
  
  

United Kingdom

   +10.9    +9.6    +10.9    +9.6

  
  
  
  

Continental Europe

   +24.3    +5.1    +23.0    +7.6

  
  
  
  

Asia Pacific, Latin America, Africa & Middle East

   +33.7    +14.8    +27.4    +23.7

Total Group

   +25.0    +4.7    +22.9    +11.4

  
  
  
  
    

Reported

Revenue

growth %+/(-)

  

Constant Currency

Revenue

growth %+/(-)

     2005    2004    2005    2004

Advertising & Media investment management

   +31.2    +3.9    +28.6    +10.8

  
  
  
  

Information, insight & consultancy

   +8.8    +5.9    +7.3    +11.5

  
  
  
  

Public relations & public affairs

   +20.0    -1.3    +18.7    +6.5

  
  
  
  

Branding & identity, Healthcare & Specialist communications

   +26.5    +8.1    +24.7    +14.6

  
  
  
  

Total Group

   +25.0    +4.7    +22.9    +11.4

  
  
  
  

 

Performance of the Group’s businesses is reviewed by management based on profit before interest, taxation, goodwill impairment, amortisation of acquired intangibles and investment gains and write-downs. A table showing these amounts by segment for each of the two years ended 31 December 2005 is presented in note 2 to the Consolidated Financial Statements. Related performance margins by region and business segment are shown below.

 

     2005    2004

North America

   16.6%    15.2%

  
  

United Kingdom

   10.5%    10.4%

  
  

Continental Europe

   12.5%    11.3%

  
  

Asia Pacific, Latin America, Africa & Middle East

   13.7%    13.4%

  
  

Advertising & Media investment management

   15.5%    14.9%

  
  

Information, insight & consultancy

   10.3%    8.9%

  
  

Public relations & public affairs

   14.1%    13.1%

  
  

Branding and identity, Healthcare & Specialist communications

   13.6%    12.5%

  
  

 

28


Further, management reviews the Group’s businesses on a like-for-like basis, in which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year results, adjusted to include the results of acquisitions for the commensurate period in the prior year. Supplemental references to like-for-like revenues are made where management believes these are meaningful to the discussion of the underlying trend of the business. Management believes that discussing like-for-like revenues provides a better understanding of the Company’s revenue performance and trends because it allows for more meaningful comparisons of current period revenue to that of prior periods.

 

The Group’s total like-for-like growth was 5.5%. Advertising and media investment management like-for-like growth was over 4%. Information, insight and consultancy like-for-like revenues were up over 6%. Public relations and public affairs continued its recovery with like-for-like revenue growth well over 7%. In Branding and identity, Healthcare and Specialist communications like-for-like revenues rose by over 6%, with the Group’s healthcare and direct, internet and interactive businesses showing particularly strong revenue growth.

 

Geographically, all regions showed double-digit revenue growth in 2005 on a constant currency basis. The US continues to grow, with like-for-like growth of almost 6%, up slightly on the first half. Latin America remains the fastest-growing region, as it was in 2004. Asia Pacific remains strong across the region, with China and India leading the way, with like-for-like growth rates of 23% and almost 15% respectively, an acceleration of the growth seen in the first half. Western Continental Europe, although relatively more difficult, improved slightly in the second half. The UK was softer in the latter part of the year, reflecting weakness in the economy. As seen in the first half, rates of growth in Europe continue to be two-paced, with Western Continental Europe remaining softer and Central and Eastern Europe, Russia and the CIS countries, in particular, more buoyant.

 

2005 compared with 2004

 

Revenues—Reported revenues were up 25% in 2005 to £5,373.7 million from £4,299.5 million in 2004. On a constant currency basis, revenue was up almost 23%, with all regions showing revenue growth, as detailed in the table above. The post-acquisition contribution of Grey to the Group’s 2005 revenue was £695.0 million, and the contribution of other acquisitions completed during the year in the aggregate was £62.4 million. The contribution of aggregate acquisitions completed in 2004 to revenue in that year was £63.6 million. On a like-for-like basis revenues were up 5.5%, up 6% in the first half of 2005 and 5% in the second half. Sequential quarters in 2005 were up 5.7%, 6.2%, 4.8% and 5.2%.

 

Operating costs—Reported operating costs including direct costs (but excluding goodwill impairment, amortisation of acquired intangibles and investment gains and write-downs) rose in 2005 by over 23%, and by over 21% in constant currency (over 4% on a like-for-like basis) from the previous year.

 

Staff costs excluding incentives in 2005 were up over 26%. Charges for incentive payments (including the cost of share-based compensation) totaled £227.6 million in 2005 (£189.5 million in 2004), an increase of over 20%, which represents more than 24% (compared with 26.3% in 2004) of operating profit before bonuses, taxes and income from associates. Before incentive payments, operating margins increased 0.9 margin points in 2005 to 18.3% from 17.4% in 2004. The reported staff cost to gross margin ratio remained flat in 2005 at 62.1%.

 

Part of the Group’s strategy is to continue to increase variable staff costs (freelance, consultants and incentive payments, including share option charges) as a proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues. There was a slight deterioration in variable staff costs as a proportion of total staff costs in 2005. This ratio decreased to 12.8% in 2005 (including 1.0 percentage

 

29


points attributable to share-based compensation) from 13.2% in 2004 and variable staff costs as a proportion of revenues decreased to 7.6% from a peak of 7.8% in 2004.

 

Establishment costs fell as a proportion of revenues from 7.6% in 2004 to 7.2% in 2005, driven by better property utilisation and higher revenues.

 

Impairment charges of £46.0 million and £40.6 million were recorded in the years ended 31 December 2005 and 2004, respectively. The impairment charges relate to certain under-performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill. In addition, goodwill write-downs in relation to the utilisation of pre-acquisition tax losses of £1.1 million and £12.6 million were taken in 2005 and 2004, respectively. These write-downs were due to the better than expected performance of certain acquisitions in the year, which enabled the utilisation of pre-acquisition tax attributes that previously could not be recognised at the time of acquisition due to insufficient evidence that they were recoverable.

 

Operating profit—Reported operating profit was up over 37% to £652.8 million in 2005 from £475.5 million in 2004. Reported operating margins increased from 11.1% to 12.1%. Reported operating income, including income from associates, was £686.7 million in 2005, up 36% from £505.0 million in 2004. Reported operating margins, including income from associates, were 12.8% and 11.7% in 2005 and 2004, respectively. Margins were negatively impacted by 1.3% in 2005 and 1.2% in 2004 due to goodwill impairment and amortisation of acquired intangibles taken on subsidiaries in each year. In addition, margins were positively impacted by 0.1% in 2005, and negatively impacted by 0.1% in 2004 by the net impact of investment write-downs partially offset by profits on disposal of equity investments. Therefore, operating margins, including income from associates, increased to 14.0% in 2005 from 13.0% in 2004 before goodwill impairment, acquired intangibles amortisation and investment gains and write-downs. For 2005, the post-acquisition contribution of Grey to the Group’s 2005 operating profit was £68.6 million, and the contribution of other acquisitions completed during the year was £6.0 million in the aggregate. For 2004, acquisitions completed during the year contributed operating income in that year of £12.9 million in the aggregate.

 

The Group has released £10.1 million in 2005 to operating profit relating to excess provisions established in respect of acquisitions completed prior to 2004. At the same time, the Group includes within operating costs charges for one-off costs, severance and restructuring charges, including those resulting from integrating acquisitions. In 2004, £14.0 million of excess provisions were released in respect of acquisitions completed prior to 2003.

 

Finance income/costs—Finance income (including expected return on pension scheme assets recorded under IAS 19 ‘Employee Benefits’ of £24.2 million in 2005 and £21.3 million in 2004) increased to £87.6 million in 2005 from £77.7 million in 2004. Finance costs (including interest on pension scheme liabilities recorded under IAS 19 of £32.0 million in 2005 and £30.8 million in 2004) increased to £182.3 million in 2005 from £148.3 million in 2004, largely reflecting additional charges under IFRS of £22.7 million relating to the change in accounting for the Group’s convertible bonds (£13.8 million), and the revaluation of financial instruments (£8.9 million) following the adoption of IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ on 1 January 2005. There are no similar charges in 2004 since prior year comparatives have not been restated, as permitted by IFRS 1. The remaining increase reflects higher interest rates, offset by the impact of improved liquidity as a result of a reduction in working capital. As a result of the above, net interest payable and similar charges was £94.7 million in 2005, up from £70.6 million in 2004, an increase of £24.1 million.

 

30


Taxes—The Company’s tax rate on reported profits in 2005 was 32.8% compared to 31.1% in 2004. This increase reflects the continuing positive impact of the Group’s tax planning initiatives, more than offset by the impact of Grey, which had a tax rate on acquisition in excess of 45%.

 

Net income—Net income attributable to equity holders of the parent was £363.9 million in 2005 against £273.0 million in 2004. The increase was driven by improved operations and the contribution of Grey and other acquisitions completed during the year, partially offset by charges arising from the adoption of IAS 32 and IAS 39.

 

Results of Operations Under US GAAP

 

The Company’s Consolidated Financial Statements included elsewhere herein have been prepared in accordance with IFRS, which differ in certain significant respects from US GAAP.

 

For the year ended 31 December 2005, net income under US GAAP was £251.4 million compared with net income of £126.4 million in 2004. See pages F-42 to F-61 of the Consolidated Financial Statements for a discussion and reconciliation of the principal differences between US GAAP and IFRS that affect the Group’s financial statements. The resulting aggregate impact of US GAAP adjustments was to reduce net income by £112.5 million and £146.6 million in 2005 and 2004, respectively.

 

The impact of US GAAP adjustments on net income decreased in 2005 by £34.1 million as compared to 2004. This variance is driven principally by a £16.6 million decrease in contingent consideration deemed as compensation and the implementation of IAS 32 and IAS 39 under IFRS as of 1 January 2005, which gave rise to (i) the elimination of the adjustment for incremental expense recorded in respect of derecognition of liabilities (£16.1 million in 2004) and (ii) the reversal of £12.7 million of finance costs related to the classification of convertible debt under IFRS into both liability and equity elements, which is accounted for entirely as a liability under US GAAP, partially offset by an increase in the adjustment to record incremental pension expense under US GAAP of £6.4 million.

 

B. Liquidity and Capital Resources

 

General—The primary sources of funds for the Group are cash generated from operations and funds available under its credit facility. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. For a breakdown of the Company’s sources and uses of cash see the “Consolidated Cash Flow Statements” included as part of the Company’s Consolidated Financial Statements in Item 18 of this Report.

 

The Company spent £719.9 million and £224.5 million for acquisitions and investments in 2005 and 2004, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £171.3 million and £95.6 million, respectively, and cash spent on share repurchases and cancellations was £152.3 million and £88.7 million, respectively.

 

As we expect that necessary capital expenditure will remain equal to or less than the depreciation charge in the long-term, the Company has concentrated on examining potential acquisitions and on returning excess capital to share owners in the form of dividends or share buy-backs. In 2005, 25.4 million ordinary shares (of which 21.3 million were cancelled), or 2% of our share capital, were repurchased at a total cost of £152 million and average price of £5.99 per share.

 

The Company has decided to increase the final dividend by 20% to 6.34p per share, taking the full year dividend to 9.34p per share for 2005. In addition, as the return on capital criteria for investing in

 

31


cash acquisitions have been raised, particularly in the United States, the Company will continue to commit to repurchasing up to 2% of its share base in the open market at an approximate cost of £150 million, when market conditions are appropriate. Such annual rolling share repurchases are believed to have a more significant impact in improving share owner value than sporadic buy-backs.

 

The Group’s liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate primarily to the Group’s turnover, or billings. Billings comprises the gross amounts billed to clients in respect of commission-based income together with the total of other fees earned. In 2005, billings were £26.674 billion, or 5.0 times the revenue of the Group. The inflows and outflows associated with the media buying activity therefore represent significant cash flow within each month of the year and are forecast and re-forecast on a regular basis throughout the year by the Group’s treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Group’s bankers and other sources.

 

Liquidity risk management—The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in excess of peak net borrowing levels and debt maturities are closely monitored. Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group’s major operations.

 

USA bonds—During 2005, the Group repaid $200 million of 6.625% bonds due 2005. The Group has in issue $100 million of 6.875% bonds due 2008 and $650 million of 5.875% bonds due 2014.

 

Grey debt—In March 2005, subsequent to its acquisition by the Group, Grey Global Group Inc repaid $75 million of 7.41% Senior Notes due 2009 and $50 million of 8.17% Senior Notes due 2007 together with accrued interest of $4 million and make-whole payments of $10.85 million.

 

Eurobond—At 31 December 2005, the Group has in issue 650 million of 6.0% bonds due 2008. During 2004, the Group had repaid 350 million of 5.125% bonds.

 

Revolving credit facilities—During 2005, the Group replaced its existing $750 million Revolving Credit Facility with a new $1.6 billion seven-year Revolving Credit Facility due August 2012. The Group’s syndicated borrowings drawn down, in US dollars and pounds sterling, averaged $405.3 million at an average interest rate of 4.11% inclusive of margin. The Group had available undrawn and committed facilities of £931 million at 31 December 2005 (2004: £391 million)

 

Borrowings under the Revolving Credit Facility and certain other debt instruments are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreements. The Group is currently in compliance with both covenants.

 

Interest on the Company’s borrowings, other than the bonds, is payable at a margin of between 0.125% and 0.275% over relevant London Interbank Offered Rate (“LIBOR”).

 

Convertible bonds— In October 2000, with the purchase of Young & Rubicam Inc, the Group acquired $287.5 million of 3% convertible bonds which were redeemed on their due date, 15 January 2005.

 

In April 2002, the Group issued £450 million of 2% convertible bonds due April 2007. At the option of the holder, the bonds are convertible at any time into 41,860,465 WPP ordinary shares at an initial price of £10.75. As the bonds are redeemable at a premium of 5.35% over par, the conversion price

 

32


increases during the life of the bonds to £11.33 per share into the same number of shares as above. The effective interest rate on the liability component is 7.2%.

 

In March 2005, with the purchase of Grey Global Group Inc, the Group acquired $150 million of 5% convertible debentures due 2033. Each debenture holder has the right to require Grey and WPP (as co-obligor) to repurchase as of each of 28 October 2008, 2010 and 2013 all or a portion of the holder’s then outstanding debentures at par ($1,000 per debenture) plus the amount of accrued and unpaid interest. WPP has the unrestricted right to call the bond at par from 2013. Each $1,000 of principal amount is initially convertible into 11.820362 WPP ADSs and $499.31 of cash and is convertible at the option of the holder at any time. The effective interest rate on the liability component is 4.5%.

 

Working capital facilities—The Group had a working capital facility in which certain trade receivables were assigned as security against the advance of cash. For further details on working capital facilities refer to Item 5E below.

 

We believe that cash provided by operations and funds available under our credit facility will be sufficient to meet the Group’s anticipated cash requirements based upon our current forecast funding requirement and our ability to access capital and bank markets to refinance maturing debt.

 

Following approval by share owners at an Extraordinary General Meeting on 26 September 2005, and after obtaining Court approval, the Group’s corporate structure was changed in October 2005. This primarily involved the introduction of a new parent undertaking in the UK. This reorganisation resulted in the creation of more than £5 billion of additional distributable reserves, which the Board considers necessary to cater for likely requirements for dividends and share repurchases in the medium to long term.

 

C. Research and Development, Patents and Licenses

 

Not applicable.

 

D. Trend Information

 

The world economy continued to grow in 2005, after the recovery in 2003 and 2004, driven by activity in the United States, Asia Pacific, Latin America, the Middle East, Russia and the CIS countries. As a result, the Company has performed at record levels. While like-for-like revenues have grown beyond market expectations, like-for-like average headcount has grown less.

 

Following this productivity improvement, the Group’s margins at both the pre-and post- incentive levels have improved significantly. In addition, given improved levels of operating profit and margin, incentive pools and variable staff costs are now at record levels. This will improve operational gearing and flexibility in 2006 and beyond.

 

The Company’s budgets for 2006 have been prepared by management on a prudent basis, largely excluding new business, particularly in advertising and media investment management. They predict improvements in like-for-like revenues in the range of 4%, with balanced growth in the first and second half of the year. They also indicate marketing services revenues growing faster than advertising and media investment management.

 

The Group’s revenues for the first three months of 2006 were £1,375.8 million, increasing by over 23% over the first quarter of 2005. Constant currency revenues were up 18%. The impact of currency in the first quarter of 2006 accounted for just over 5% of the Group’s revenue growth. On a like-for-like

 

33


basis, excluding acquisitions and currency fluctuations, revenues were up almost 5%. Net debt at 31 March 2006 was £1,216 million, compared to £1,261 million at 31 March 2005 (at constant exchange rates). Average net debt in the first quarter of 2006 was £1,043 million compared to £828 million in the corresponding period in 2005, at 2006 exchange rates. In the 12 months to 31 March 2006, the Group’s free cash flow was £745 million. Over the same period, the Group’s expenditure on capital, acquisitions, share repurchases and dividends was £783 million.

 

E. Off-Balance Sheet Arrangements

 

The Group had a working capital facility in which certain trade receivables were assigned as security against the advance of cash. This security was represented by the assignment of a pool of trade receivables to a bankruptcy-remote subsidiary of the Group, with further assignment to the providers of this working capital facility. The financing provided against this pool took into account the risks that may have been attached to the individual receivables and the expected collection period. The facility was repaid and cancelled on 31 August 2005.

 

On termination of the working capital facilities, the Group was not obliged to support any credit-related losses arising from the assigned debts against which cash has been advanced. The transaction documents stipulate that, in the event of default in payment by a debtor, the providers of the facility may only seek repayment of cash advanced from the remainder of the pool of debts in which they hold an interest and that recourse from the Group is not available.

 

F. Tabular Disclosure of Contractual Obligations

 

The following summarises the Company’s estimated contractual obligations at 31 December 2005, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods. Certain obligations presented below held by one subsidiary of the Company may be guaranteed by another subsidiary in the ordinary course of business.

 

          Payments due in
(£m)    Total    2006    2007    2008    2009    2010   

Beyond

2010

Contractual obligations:

                                  

Long-term debt1

                                  

  
  
  
  
  
  
  

Eurobond

   463.6    —      —      463.6    —      —      —  

  
  
  
  
  
  
  

Sterling convertible bond

   446.2    —      446.2    —      —      —      —  

  
  
  
  
  
  
  

USA bonds

   464.3    —      —      58.2    —      —      406.1

  
  
  
  
  
  
  

Grey convertible bond

   87.3    —      —      —      —      —      87.3

  
  
  
  
  
  
  

Other

   22.2    22.2    —      —      —      —      —  

  
  
  
  
  
  
  

Subtotal

   1,483.6    22.2    446.2    521.8    —      —      493.4

  
  
  
  
  
  
  

Interest payable

   377.4    82.9    51.3    36.3    22.4    22.4    162.1

  
  
  
  
  
  
  

Operating leases

   1,239.8    231.8    202.2    176.4    156.5    112.9    360.0

  
  
  
  
  
  
  

Capital commitments

   36.9    36.9    —      —      —      —      —  

  
  
  
  
  
  
  

Investment commitments

   7.5    5.6    —      1.9    —      —      —  

  
  
  
  
  
  
  

Estimated obligations under acquisition earnouts

   220.0    81.3    71.9    14.7    20.3    31.8    —  

  
  
  
  
  
  
  

Total

   3,365.2    460.7    771.6    751.1    199.2    167.1    1,015.5

  
  
  
  
  
  
  

Notes

 

1 In addition to long-term debt, the Company had short-term overdrafts at 31 December 2005 of £435.6 million.

 

34


The Company expects to make annual contributions to its funded defined benefit schemes, as determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. Our advisors indicate that further average cash contributions of approximately £11-£12 million per annum would be necessary to fully fund all funded pension schemes over the remaining expected funding period.

 

Cash Flows

 

As at 31 December 2005, the Group’s net debt was £804 million, up £249 million from £555 million in 2004. Net debt averaged £1,212 million in 2005, up £129 million against £1,083 million in 2004 (up £132 million at 2005 exchange rates).

 

Cash flow strengthened as a result of improved working capital management and cash flow from operations. In 2005, operating profit before goodwill impairment, amortisation of acquired intangible assets and charges for non-cash-based incentive plans was £794 million, capital expenditure £171 million, depreciation £122 million, tax paid £136 million, interest and similar charges paid £60 million and other net cash inflows of £16 million. Free cash flow available for debt repayment, acquisitions, share buybacks and dividends was therefore £565 million. This free cash flow was absorbed by £508 million in net acquisition payments and investments, share repurchases and cancellations of £152 million and dividends of £100 million. This resulted in a net outflow of £195 million. The objective introduced in 2003 of covering outgoings by free cash flow was achieved, excluding the net cash element of the acquisition of Grey.

 

The Group bases its internal cash flow objectives on free cash flow. Free cash flow is a non-GAAP financial measure. Management believes free cash flow is meaningful to investors because it is the measure of our funds available for acquisition-related payments, dividends to shareowners, share repurchases and debt repayment. The purpose of presenting free cash flow is to indicate the ongoing cash generation within the control of the Group after taking account of the necessary cash expenditures of maintaining the capital and operating structure of the Group (in the form of payments of interest, corporate taxation and capital expenditure). Net working capital movements are excluded from this measure since these are principally associated with our media buying activities on behalf of clients and are not necessarily within the control of the Group. This computation may not be comparable to that of similarly titled measures presented by other companies.

 

35


A tabular reconciliation of free cash flow is shown below.

 

    

2005

£m

    2004
£m
 

Net cash inflow from operating activities

   837.5     556.4  

  

 

Plus:

            

Issue of shares

   20.3     17.9  

  

 

Proceeds on disposal of property, plant and equipment

   6.7     9.3  

  

 

Profits on disposal of equity interests

   4.3     3.0  

  

 

Less:

            

Movements in working capital and provisions

   (107.6 )   4.8  

  

 

Loss on sale of property, plant and equipment

   (1.1 )   (1.9 )

  

 

Amounts written off investments

   —       (5.0 )

  

 

Purchases of property, plant and equipment

   (160.5 )   (89.7 )

  

 

Purchase of other intangible assets (including capitalised computer software)

   (10.8 )   (5.9 )

  

 

Dividends paid to minority shareholders in subsidiary undertakings

   (24.0 )   (22.5 )

  

 

Free cash flow

   564.8     466.4  

  

 

 

Because of the seasonal swings in our working capital generally, and those resulting from our media buying activities on behalf of our clients in particular, together with the fact that we choose for commercial reasons to locate the debt of the Group in particular countries and leave cash resources in others, though our cash resources could be used to repay the debt concerned, management believes that net debt, also a non-GAAP financial measure, is an appropriate and meaningful measure of the debt levels within the Group. We similarly believe average net debt to be a more accurate reflection of the amount of debt the Group has supporting its activities through the year.

 

The following table is an analysis of net debt.

 

     2005     2004  
     £m     £m  

Debt financing

   (1,919.2 )   (1,916.4 )

  

 

Cash and short-term deposits

   1,115.2     1,616.0  

  

 

     (804.0 )   (300.4 )

  

 

IAS 32 and IAS 39 adjustment at 1 January 2005

   —       (254.3 )

  

 

Net debt

   (804.0 )   (554.7 )

  

 

 

For additional details of the IAS 32 and IAS 39 adjustment at 1 January 2005 see note 13 to the Consolidated Financial Statements.

 

Capital Structure

 

At 31 December 2005, the Company’s capital base was comprised of 1,252,899,372 ordinary shares of 10 pence each.

 

36


Property Costs

 

The task of improving property utilisation continues to be a priority for the Group with a portfolio of approximately 18 million square feet worldwide. There should be further opportunities to improve utilisation in the future, as we integrate 3.2 million square feet of property within Grey into the portfolio.

 

Inflation

 

As in 2004, in management’s opinion the effect of inflation has not had a material impact on the Company’s results for the year or financial position as at 31 December 2005.

 

Use of Estimates

 

The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Critical Accounting Policies

 

The Company’s financial statements have been prepared in accordance with IFRS and reconciled to US GAAP. A summary of the Group’s principal accounting policies are described in the first section of notes to the Consolidated Financial Statements, entitled “Accounting Policies” with discussion of IFRS to US GAAP differences in Item 18. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgments and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our consolidated financial statements and notes thereto.

 

Goodwill and other intangibles

 

The Company has a significant amount of goodwill and other intangible assets. In accordance with the guidance provided by SFAS 142 ‘Goodwill and Other Intangible Assets’ under US GAAP and IAS 36 ‘Impairment of Assets’, under IFRS, the Company annually tests the carrying value of goodwill and other indefinite lived intangible assets for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The estimates and assumptions about results of operations and cash flows that we make in connection with impairment testing, as described in more detail below, could differ materially from future actual results of operations and cash flows. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted to the recoverable amount if required.

 

The 2005 impairment review was initially undertaken as at 30 June 2005 and then updated as at 31 December 2005. The review assessed whether the carrying value of goodwill was supported by the net present value of future cashflows derived from assets using a projection period of up to five years for each cash-generating unit. After the projection period, steady or declining growth has been assumed at rates not exceeding long-term average growth rates for the industry for each cash-generating unit. Except as noted below, an annual growth rate of 3.0% and a pre-tax discount rate of 11.9% have been assumed. Projections for Young & Rubicam assume an annual growth rate of 4.4%. The projections also include assumptions about payments for cash taxes and cash flows have

 

37


therefore been discounted using the Group’s weighted average cost of capital of 7.8%. An impairment charge is required for both goodwill and other indefinite lived intangible assets when the carrying amount exceeds the recoverable amount. Impairment charges of £46.0 million and £40.6 million were recorded in the years ended 31 December 2005 and 2004, respectively. The impairment charges relate to certain under-performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill.

 

Future anticipated payments to vendors in respect of earnouts are based on the directors’ best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors’ estimates. A summary of earnout related obligations included in creditors is shown in note 22 to the Consolidated Financial Statements. WPP has also entered into agreements that allow the Group’s equity partners to require the Group to purchase the minority interest. These agreements are treated as derivatives over equity instruments and are recorded in the balance sheet at fair value and the valuation is remeasured at year end. Under IFRS, fair value is based on the present value of expected cash outflows. Actual performance may differ from the assumptions used resulting in amounts ultimately paid out with respect to these earnout and option agreements at more or less than the recorded liabilities.

 

Revenue recognition

 

Advertising and media investment management arrangements may include incentive-based revenue. Incentive-based revenue typically comprises both quantitative and qualitative elements; on the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received/receivable.

 

In applying the proportional performance method of revenue recognition for both market research and other long-term contracts, management is required to make significant judgments, estimates and assumptions. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. Costs incurred as a proportion of expected total costs is used as an initial proportional performance measure. The indicative proportional performance measure is always subsequently validated against other more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measure takes precedence since these are output measures.

 

Since project costs can vary from initial estimates, the reliance on total project cost estimate represents an uncertainty inherent in the revenue recognition process. Individual project budgets are reviewed regularly with project leaders to ensure that cost estimates are based upon up to date and as accurate information as possible, and take into account any relevant historic performance experience. Also, the majority of contracted services subject to proportional performance method revenue recognition are in relation to short term projects, averaging approximately 3 months. Due to this close and frequent monitoring of budgeted costs and the preponderance of short term projects, the impact of variances between actual and budgeted project costs has historically been minimal. The Company’s combined bad debt and work in process write-offs in the business segments where the proportional performance method of revenue recognition is applied was less than 1% of revenues in each of the two

 

38


years ended December 31, 2005. The Company does not believe that the effect of these uncertainties, taken as a whole, will significantly impact their results of operations in the future.

 

Pension costs

 

Pension costs are accounted for in accordance with IAS 19, “Employee Benefits” under IFRS and under US GAAP are determined in accordance with the requirements of SFAS 87, “Employers’ Accounting for Pensions”. Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have been updated by the local independent qualified actuaries to 31 December 2005.

 

The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an ageing membership population. In accordance with IAS 19, the actuarial calculations have been carried out using the projected unit method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.

 

The Group’s pension deficit was £231.4 million as at 31 December 2005, compared to £202.3 million as at 31 December 2004. The pension deficit increase is due to increases in North America and Continental Europe. These increases are principally due to newly acquired unfunded plans (through the acquisition of Grey) and the reclassification of various existing unfunded arrangements from defined contribution to defined benefit provision following a reassessment of the terms of these arrangements in 2005. Also, in the UK, the discount rate decreased from 5.3% to 4.7% due to the lower yields available on high-quality UK corporate debt.

 

Most of the Group’s pension scheme assets are held by its schemes in the United Kingdom and North America. In the United Kingdom, the forecasted weighted average return on assets decreased from 5.7% as at 31 December 2004 to 5.2% as at 31 December 2005, and in North America, the forecasted weighted average return decreased from 6.9% to 6.7%, principally due to decreases in expected rates of return on corporate bonds.

 

Management reviews the expected long-term rates of return on an annual basis and revises them as appropriate. Regarding mortality assumptions, in the UK, mortality rates are calculated using the PA92 table, the main UK mortality table, projected to 2020 for current active and deferred vested members, and to 2005 for current pensioners. In the US, mortality rates are principally calculated using the RP 2000 table, commonly used in the US, projected for 10 years to build in an allowance for future improvements in life expectancy. Also, we periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries, which generate probability- adjusted expected future returns on those assets. These studies also project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories.

 

Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. Our advisors indicate that further average cash contributions of approximately £11-12 million per year would be necessary to fully fund all funded pension schemes over their remaining expected funding period.

 

Deferred taxes

 

We record deferred tax assets and liabilities using substantially enacted tax rates for the effect of timing differences between book and tax bases of assets and liabilities. Currently we have deferred tax

 

39


assets resulting from operating loss carryforwards and deductible temporary differences, all of which could reduce taxable income in the future. Based on available evidence, both positive and negative, we determine whether it is probable that all or a portion of the deferred tax assets will be realised. The main factors that we consider include:

 

    future earnings potential determined through the use of internal forecasts;

 

    cumulative losses in recent years;

 

    history of loss carryforwards and other tax assets expiring;

 

    the carryforward period associated with the deferred tax assets; and

 

    the nature of the income that can be used to realise the deferred tax asset.

 

If it is our belief that it is probable that some portion of these assets will not be realised, no asset is recognised. Gross unrecognised assets under IFRS were £2,698.5 million in 2005.

 

If market conditions improve and future results of operations exceed our current expectations, our existing recognised deferred tax assets may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realisable. As a result, we may need to reverse all or a portion of the deferred tax assets, which may have a significant effect on our results of operations and financial condition.

 

New US GAAP Accounting Pronouncements

 

The Group has considered the following recent US GAAP accounting pronouncements covering topics that may be applicable to our operations for their potential impact on its results of operations and financial position:

 

(i) Adopted in the current year:

 

SFAS 123R

 

In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognised in the financial statements at fair value. SFAS 123R is effective for the Group from 1 January 2006, but earlier adoption is encouraged. The Group has elected to adopt SFAS 123R in 2005 using the modified retrospective method.

 

Under the modified retrospective method, from the effective date, compensation cost is recognised based on the requirements of SFAS 123R for all new share-based awards and based on the requirements of SFAS 123 for all awards granted prior to the effective date of SFAS 123R that remain unvested on the effective date. The impact on the 2004 US GAAP financial statements was to reduce net income by £22.9 million.

 

The FASB issued several FASB Staff Positions (FSPs) during 2005 and 2006 covering topics relating to SFAS 123R. These topics include:

 

    the classification of freestanding instruments (FSP SFAS 123R-1);

 

    the clarification of definition of grant date (FSP SFAS 123R-2);

 

    the transition election related to the tax effects of share-based awards (FSP SFAS 123R-3);

 

    the treatment of a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control (FSP SFAS 123R-4).

 

40


The application of these FSPs did not have a material impact on the Group’s consolidated results of operations or financial position.

 

EITF 05-6

 

In June 2005 the Emerging Issues Task Force (EITF) reached a consensus on Issue 05-6, Determining the Amortisation Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (EITF 05-6). EITF 05-6 requires leasehold improvements acquired in a business combination to be amortised over the shorter of the useful life of the assets or a term that includes required lease periods and renewals deemed to be reasonably assured at the date of acquisition. Additionally, the Issue requires improvements placed in service significantly after and not contemplated at or near the beginning of the lease term to be amortised over the shorter of the useful life of the assets or a term that includes required lease periods and renewals deemed to be reasonably assured at the date the leasehold improvements are purchased. The adoption of EITF 05-6 has not had a material impact on the consolidated results of operations or financial position.

 

(ii) To be adopted in future periods:

 

SFAS 153

 

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets. SFAS 153 amends APB Opinion 29 replacing the exception from having to apply the fair value accounting provisions of APB 29 for non-monetary exchanges of similar productive assets with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is effective for the first reporting period beginning after 15 June 2005. We do not believe that the adoption of SFAS 153 will have a material impact on the Group’s consolidated results of operations or financial position.

 

SFAS 154

 

In May 2005, SFAS 154, Accounting Changes and Error Corrections – replacement of APB Opinion No. 20 and FASB Statement No. 3, was issued. SFAS 154 changes the accounting for and reporting of a change in accounting principle by requiring retrospective application to prior periods’ financial statements of changes in accounting principle unless impracticable, SFAS 154 is effective for accounting changes made in fiscal years beginning after 15 December 2005. We do not believe that the adoption of SFAS 154 will impact the Group’s historical consolidated results of operations or financial position; rather the impact depends upon future changes to accounting principles.

 

EITF 04-5

 

In June 2005, the EITF reached a consensus on Issue 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5), regarding how to evaluate whether a partnership should be consolidated by one of its partners. The scope of this Issue is limited to limited partnerships or similar entities (such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership) that are not variable interest entities under FASB Interpretation 46(R). The EITF concluded that a general partner or a group of general partners of a limited partnership is presumed to control the limited partnership, unless either the limited partners have the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or the limited partners have substantive participating rights. The guidance in the Issue is effective after 29 June 2005 for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified. For general partners in all

 

41


other pre-existing limited partnerships, the guidance in the Issue is effective no later than the beginning of the first reporting period in fiscal years beginning after 15 December 2005. We do not believe that the adoption of EITF 04-5 will have a material impact on the Group’s financial statements.

 

FSP SFAS 115-1/124-1

 

In November 2005, the FASB issued FSP SFAS 115-1/124-1, the Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance in this FSP addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealised losses that have not been recognised as other-than-temporary impairment. The guidance in FSP SFAS 115-1/124-1 shall be applied to reporting periods beginning after 15 December 2005. The Group does not expect the adoption of FSP SFAS 115-1/124-1 to have a material impact on its consolidated results of operations or financial position.

 

New IFRS Accounting Pronouncements

 

Adoption of IFRS

 

From 1 January 2005, the Group was required to prepare its consolidated financial statements in accordance with IFRS. WPP’s date of transition to IFRS is 1 January 2004.

 

IFRS 1 (First-time Adoption of International Financial Reporting Standards) allows a number of exemptions from the full requirements of IFRS for those companies adopting IFRS for the first time. WPP has taken advantage of certain of these exemptions as follows:

 

Financial instruments – The Group has taken advantage of the exemption available under IFRS 1 not to apply IAS 39 (Financial Instruments: Recognition and Measurement) and IAS 32 (Financial Instruments: Disclosure and Presentation) in respect of the year ended 31 December 2004. UK GAAP has continued to be applied in accounting for financial instruments in this period. The Group has adopted IAS 39 and IAS 32 with effect from 1 January 2005 and consequently restated the balance sheet at that date in accordance with the requirements of these standards, which generally means a recognition of financial instruments at fair value.

 

Business Combinations – The Group has elected not to apply IFRS 3 (Business combinations) retrospectively to business combinations that completed prior to 1 January 2004. However, the Group took the option to apply IAS 21 (The effects of changes in foreign exchange rates) retrospectively to fair value adjustments and goodwill arising in all business combinations that occurred before the date of transition to IFRS.

 

Share-based payments – IFRS 2 (Share-based payments) applies to all share-based payments granted since 7 November 2002, but the Group has elected for full retrospective restatement as this better represents the ongoing charge to the income statement.

 

The impact that the adoption of IFRS would have had on the Group’s 2004 results is shown on pages F-36 to F-41.

 

42


The following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

 

IAS 21 Amendment – Net investment in a Foreign Operation

 

IAS 39 Amendment – Cash flow hedges of Forecast Intragroup Transactions

 

IAS 39 Amendment – Fair value option

 

IAS 39 and IFRS 4 Amendment – Financial Guarantee Contracts

 

IFRS 6 Exploration for and Evaluation of Mineral Resources

 

IFRS 7 Financial instruments: Disclosures

 

IFRIC 4 Determining whether an Arrangement contains a Lease

 

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

 

IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

 

IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies

 

IFRIC 8 Scope of IFRS 2

 

IFRIC 9 Reassessment of Embedded Derivatives.

 

The Group does not consider that these Standards and Interpretations will have a significant impact on the financial statements of the Group except for additional disclosures on capital and financial instruments when the relevant standards come into effect for periods commencing on or after 1 January 2007.

 

43


ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The directors and executive officers of the Company as of 11 May 2006 are as follows:

 

Philip Lader, age 60: Non-executive chairman. Philip Lader was appointed chairman in 2001. The US Ambassador to the Court of St James’s from 1997 to 2001, he previously served in several senior executive roles in the US Government, including as a Member of the President’s Cabinet and as White House Deputy Chief of Staff. Before entering government service, he was executive vice president of the company managing the late Sir James Goldsmith’s US holdings and president of both a prominent American real estate company and universities in the US and Australia. A lawyer, he is also a Senior Advisor to Morgan Stanley, a director of RAND, Marathon Oil and AES Corporations, a member of the Council of Lloyd’s (Insurance Market), a trustee of the British Museum and a member of the Council on Foreign Relations.

 

Sir Martin Sorrell, age 61: Chief executive. Sir Martin Sorrell joined WPP in 1986 as a director, becoming Group chief executive in the same year.

 

Paul Richardson, age 48: Finance director. Paul Richardson became Group finance director of WPP in 1996 after four years with the Company as director of treasury. He is responsible for the Group’s worldwide functions in finance, information technology, procurement and property. He is also the country manager for Italy. Previously he spent six years with the central financial team of Hanson PLC. He is a chartered accountant and member of the Association of Corporate Treasurers. He is a non-executive director of Chime Communications PLC and STW Communications Group Limited in Australia, both of which are companies associated with the Group.

 

Howard Paster, age 61: Director. Howard Paster was appointed a director in January 2003. He was previously chairman and chief executive officer of Hill & Knowlton, Inc. He joined the WPP parent company in August 2002, overseeing WPP’s portfolio of public relations and public affairs businesses. Prior to joining Hill & Knowlton Inc., he served as assistant to President Clinton and director of the White House Office of Legislative Affairs. He is a member of the board of trustees of Tuskegee University, president of the Little League Foundation and a member of the Council on Foreign Relations.

 

Mark Read, age 39: Strategy director. Mark Read was appointed a director in March 2005. He has been WPP’s director of strategy since 2002. He worked at WPP between 1989 and 1995 in both parent company and operating company roles. Prior to rejoining WPP in 2002, he was a principal at the consultancy firm of Booz-Allen & Hamilton and founded and developed the company WebRewards in the UK.

 

Colin Day, age 50: Non-executive director. Colin Day was appointed a non-executive director in July 2005. He is group finance director of Reckitt Benckiser plc, having been appointed to its board in September 2000. Prior to joining Reckitt Benckiser he was group finance director of Aegis Group plc and previously held a number of senior finance positions with ABB Group plc and De La Rue Group plc. He is a non-executive director of Imperial Tobacco plc and, until 30 September 2005, of easyJet plc.

 

Esther Dyson, age 54: Non-executive director. Esther Dyson was appointed a director in 1999. In 2004 she sold her 21-year-old company, EDventure Holdings, to CNET Networks, the US-based interactive media company. She remains editor of her newsletter, Release 1.0, and continues to host the annual PC Forum conference under CNET’s ownership. She is an acknowledged luminary in the information technology industry, and has been highly influential for the past 20 years on the basis of her insight into the evolving online/information technology market worldwide, including the emerging IT

 

44


markets of Central and Eastern Europe and Asia. An angel investor as well as an analyst/observer, she recently participated in the sale of Flickr to Yahoo!. She sits on the boards of other IT start-ups including EVDB, Meetup.com, NewspaperDirect (Canada), CV-Online (Hungary) and Yandex (Russia). She sat on the consumer advisory board of Orbitz until its sale to Cendant. She is also active in public affairs and was founding chairman of ICANN, the domain name policy agency, from 1998 to 2000.

 

Orit Gadiesh, age 55: Non-executive director. Orit Gadiesh was appointed a director in April 2004. She is chairman of Bain & Company, Inc. and a world-renowned expert on management and corporate strategy. She holds an MBA from Harvard Business School and was a Baker Scholar. She is a board member of the Harvard Business School Visiting Committee, the Dean’s Advisory Board at Kellogg School in the US and the Haute Ecole Commerciale in France. She is a member of the Foundation Board for the World Economic Forum, and on the Board of Directors of The Peres Institute for Peace. She is a member of the Council on Foreign Relations, a trustee for Eisenhower Fellowships, a committee member of the Metropolitan Museum of Art, New York, and a vice chairman for The Kennedy Center.

 

David H. Komansky, age 67: Non-executive director. David Komansky was appointed a director in January 2003. He was chairman of the Board of Merrill Lynch & Co, Inc, serving until his retirement on 28 April 2003. He served as chief executive officer from 1996 to 2002, having begun his career at Merrill Lynch in 1968. Among many professional affiliations, he serves as a director of Black Rock, Inc. and as a member of the International Advisory Board of the British American Business Council. Active in many civic and charitable organisations, he serves on the Board of the New York Presbyterian Hospital.

 

Christopher Mackenzie, age 51: Non-executive director. Christopher Mackenzie was appointed a director in 2000. He is chief executive of Equilibrium, a London-based investor group. He is also a board member of the Abdul Latif Jameel Group, the Borets Group, Minerva plc and Champagne Jacquesson et Fils S.A. He served as the chief executive of financial service groups including Brunswick Capital in Russia, Trizec Properties in the US and GE Capital Europe.

 

Stanley (Bud) Morten, age 62: Non-executive director. Bud Morten was appointed a director in 1991. He is a consultant and private investor. He is currently the Independent Consultant to Citigroup/Smith Barney with responsibility for its independent research requirements. Previously he was the chief operating officer of Punk, Ziegel & Co, a New York investment banking firm with a focus on the healthcare and technology industries. Before that he was the managing director of the equity division of Wertheim Schroder & Co, Inc., in New York. He is a former non-executive director of Register.com, which was sold to a private equity firm in November 2005 and is no longer a public company. He is also a non-executive director of The Motley Fool, Inc., which is a private company.

 

Koichiro Naganuma, age 61: Non-executive director. Koichiro Naganuma was appointed a director in February 2004. He is president and group chief operating officer of Asatsu-DK, also known as ADK. Joining the agency in 1981, he began his career with the account service of global clients in the agency. His mandate thereafter expanded to the total operation of the group. He replaced ADK Chairman Masao Inagaki on the Board who retired upon the appointment of Mr Naganuma. ADK is Japan’s third largest advertising and communications company, and ninth largest in the world. WPP took a 20% interest in ADK in 1998.

 

Lubna Olayan, age 50: Non-executive director. Lubna Olayan was appointed a director in March 2005. Lubna Olayan has been the deputy chairman and chief executive officer of the Olayan Financing Company (OFC), a subsidiary of The Olayan Group, and the holding entity for the Olayan Group’s operations in the Kingdom of Saudi Arabia and the Middle East, since October 1986. OFC operates or actively participates in more than 40 companies, often in partnership with leading multinationals. OFC

 

45


is also one of the largest investors in the Saudi and regional stock markets. In December 2004, she was elected to the Board of Saudi Hollandi Bank, a publicly listed company in Saudi Arabia. She also served on the board of Chelsfield Plc., the UK property developer, from 1996 through 2004. Ms Olayan is a member of the International Business Council of the World Economic Forum and the International Advisory Board of the Council on Foreign Relations, which she joined in November and December of 2005 respectively. Ms Olayan joined the Board of Directors of INSEAD in January of 2006, and has been a member of the International Council of INSEAD since March 1997.

 

John Quelch, age 54: Non-executive director. John Quelch was appointed a director in 1988. He is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School. Between 1998 and 2001 he was Dean of the London Business School. He also serves as chairman of the Massachusetts Port Authority. Professor Quelch’s writings focus on global business practice in emerging as well as developed markets, international marketing and the role of the multinational corporation and the nation state. He is a non-executive director of Inverness Medical Innovations, Inc. and Pepsi Bottling Group Inc. He served previously on the boards of Blue Circle Industries plc, easyJet plc, Pentland Group plc and Reebok International Limited.

 

Jeffrey A. Rosen, age 58: Non-executive director. Jeffrey Rosen was appointed a director in December 2004. He is a deputy chairman and managing director of Lazard. Previously, he was a managing director of Wasserstein Perella & Co., Inc. since its inception in 1988, and chairman of Wasserstein Perella International. He has over 30 years’ experience in international investment banking and corporate finance. He is a member of the Council on Foreign Relations and is President of the Board of Trustees of the International Center of Photography in New York.

 

Paul Spencer, age 56: Non-executive director. Paul Spencer was appointed a director in April 2004. He is a financier with 20 years’ experience in the financial management of a number of blue chip companies, including British Leyland PLC, Rolls-Royce PLC, Hanson PLC and Royal & Sun Alliance PLC. He served as UK chief executive of Royal & Sun Alliance PLC between 1999 and 2002. He is the chairman of State Street Managed Pension Funds Ltd. He is also chairman of the Association of Corporate Treasurers’ Advisory Board, NS&I (National Savings), the UK government-owned retail savings institution, and Sovereign Reversions Group plc. He is also a non-executive director of CMC Group plc, Resolution Life Group plc and Nipponkoa Insurance (Europe) Ltd. Paul is a governor of Motability, a UK charity for the disabled.

 

Beth Axelrod served as a director during the year, resigning on 24 March 2005.

 

The board of directors has determined that all of the non-executive directors are independent under NASDAQ Marketplace Rule 4200.

 

Terms of Directors and Executive Officers

 

As result of a scheme of arrangement, described in more detail in Item 14, all of the directors of the Company who were not appointed as directors on the incorporation of the new parent company which is now called WPP Group plc are required to submit themselves for election at the Annual General Meeting. Only Sir Martin Sorrell, Paul Richardson and Mark Read were appointed at the incorporation of the Company as a consequence of which all the remaining directors (other than Howard Paster who is not seeking election) need to be considered for election at the Annual General Meeting.

 

As a matter of policy the Company requires all directors to submit themselves for re-election by share owners at least every three years or every year in the case of those directors who held office for more than nine years or who are 70 years of age or over.

 

46


B. Compensation

 

Review of compensation

 

During 2005, the Compensation committee undertook a thorough review of the Group’s current compensation and incentive strategy. The review included extensive internal consultation, an examination of our competitors’ current practices and consideration of financial, tax, accounting and legal issues and current best practice guidelines.

 

From this review it was apparent that:

 

    The ongoing use of stock options had become a major source of executive dissatisfaction, was not cost-effective (i.e. the cost to WPP of providing options far outweighed the perceived value delivered to the participant) and furthermore the use of options was becoming less common in the industry.

 

    The dynamic nature of our businesses meant that the three-year performance measures used in our operating company long term incentive plans (‘LTIPs’) were both volatile and complex. This in turn resulted in the plans not being fully understood and providing little motivational or retentive effect.

 

    In the limited cases they were being used, restricted stock awards were much better understood and provided a good retention mechanism.

 

    The ‘poaching’ of our people by competitors was becoming an area of considerable concern across most of our businesses and this was often accompanied by senior executive frustration with the lack of appropriate means of compensation to retain our best people.

 

    The Renewed Leadership Equity Acquisition Plan (‘Renewed LEAP’) continues to be an effective plan for certain senior executives.

 

The committee therefore decided to make a number of significant changes to the way in which compensation is to be delivered while at the same time staying true to the principles of compensation described throughout Item 6. In summary this entailed:

 

    Single-year performance awards (Performance Share Awards/PSAs), delivered as restricted stock awards and vesting a further two years after the end of the one-year performance period, replaced awards previously made under the operating company LTIPs.

 

    Similarly at the parent company, the use of Executive Share Awards (‘ESAs’) replaced awards previously made under the Performance Share Plan (‘PSP’). Again, these awards will vest two years after the end of the one-year performance period.

 

    A significantly reduced use of stock options from the WPP Executive Stock Option Plan. Awards of stock options under this plan have not been made to executive directors since 1995. Below this level, options will now only be used under this plan (as opposed to the WWOP referred to elsewhere in Item 6) in special circumstances, for example as a recruitment incentive.

 

    Future awards of stock made on an annual basis to the WPP Leaders, Partners and High Potential Groups will all be in the form of restricted stock which vest three years after grant.

 

47


Executive remuneration

 

The key elements of short- and long-term remuneration are summarised in the following table:

 

   

Objective


 

Participation


 

Performance
period


 

Conditions


Annual                

Base salary1

  To maintain package competitiveness at all levels within the Group.   All employees.   N/A   Not applicable. But salary levels are determined taking a number of relevant factors into account, including individual and business unit performance, level of experience, scope of responsibility and the competitiveness of total remuneration.
Cash bonus   To incentivise delivery of value at all levels within the Group.   Approximately 10% of employees are eligible to receive a performance bonus.   1 year   Achievement of challenging performance goals (financial and non-financial) at the individual and business unit level.
Performance
share awards2
  To incentivise delivery of value and to align with interests of share owners.   Key operating company executives.   1 year   Achievement of challenging performance goals (financial and non-financial) at operating company level. Further two-year retention period.
Executive
share awards2
  To incentivise delivery of value and to align with interests of share owners.   Parent company executives and executive directors.   1 year   Achievement of individual annual bonus objectives. Further two-year retention period.
Long-Term                
WWOP3   To develop a stronger ownership culture.   Employees with two years’ employment. Not offered to those participating in other share programs or to executive directors.   3 years   None.

 

48


   

Objective


 

Participation


 

Performance
period


 

Conditions


Renewed
LEAP
  To incentivise long-term performance of certain senior executives against the TSR of key comparators and maximise alignment with share owner interests through a high level of personal financial commitment.   Participation offered only to those key executives (currently less than 20 people) whose contributions transcend their day-to-day role, including executive directors.   5 years   Relative TSR performance against a group of key communication services comparator companies, subject to a fairness review by the Compensation committee.
Restricted
Stock Plan
  To encourage a share ownership culture and long-term retention as well as supporting recruitment.   Directors and senior executives of the operating companies and senior executives of the parent company.   Typically 3 year retention period.   None.
Executive
Stock Option
Plan
  To provide a tool to promote retention and recruitment.   Occasional use only to deal with special situations.   3 years   Conditions are determined at the time of grant of the award.

Notes

 

  This table does not include details of previous plans, such as operating company LTIPs and PSP which are no longer used for regular grants of new awards.
1 Base salary is the only pensionable element of remuneration.
2 Awards are granted under the Restricted Stock Plan.
3 Since its first adoption in 1997, grants have been made annually under this plan and as at 4 May 2006 options under this plan had been granted to over 53,000 employees for approximately 26.6 million ordinary shares of the Company.

 

As indicated above, the principal elements of WPP executive remuneration were fully reviewed in 2005 and currently comprise the following:

 

    Base salaries (fixed);

 

    Annual incentives (variable); and

 

    Long-term incentives (variable).

 

Pension contributions, life assurance, health and disability, and other benefits are also provided.

 

49


Base salary

 

The Compensation committee believes that base salary is only one element of compensation and therefore should only be reviewed in the context of the total compensation being provided to an executive.

 

During 2005 the base salary of Mark Read was increased to £225,000 as part of the overall review of his compensation arrangements when he was appointed to the Board. No other change was made to the base salary of any other executive directors.

 

Annual cash bonus

 

The annual cash bonus is paid under plans established for each operating company and for executives, including executive directors, of the parent company. Challenging performance goals are established and these must be achieved before any bonus becomes payable.

 

Each executive’s annual incentive opportunity is defined at a ‘target’ level for the full achievement of objectives. Higher awards may be paid for outstanding performance in excess of target.

 

The target level for Group executive directors (other than the Group chief executive and Group finance director) is currently no more than 50% of base salary and the maximum is currently 75%. In the case of the Group finance director, the target level is 80% of base salary and 120% at maximum. The target level for the Group chief executive is 100% of base salary and the maximum is 200%.

 

In the case of the Group chief executive and other parent company directors, the annual cash bonus is based on Group and individual performance:

 

    one-third is based on Group financial results. This goal is common for all executive directors including the Group chief executive;

 

    one-third is based on individual strategic objectives determined prospectively by the committee at the commencement of each year. In the case of the Group chief executive this related to the relative financial performance of WPP against its peer group. (For 2005 WPP ranked first in the peer group for operating profit growth, EPS growth and margin improvement.); and

 

    one-third is based on the achievement by the individual director of critical business objectives assessed by the committee at the end of each year. For 2005 in the case of the Group chief executive these included (amongst others) strengthening the geographic position of Group companies in both developed and fast-growing markets, ensuring orderly and effective succession of leadership for a number of specific key operating company and parent company roles, developing collaboration amongst the business leaders and encouraging cross-selling between Group companies, including client co-ordination initiatives.

 

In assessing the individual performance of each executive director in 2005, taking into account the performance referred to above, the committee determined that the appropriate bonus for each was as follows:

 

Sir Martin Sorrell

  190% of salary

Paul Richardson

  108% of salary

Howard Paster

  68% of salary

Mark Read

  73% of salary

 

50


Share awards

 

Following the policy review undertaken in 2005, the operating company LTIPs were replaced by PSAs. This has considerably simplified the measurement of performance while at the same time increasing retention by ensuring a greater percentage of the bonus pool is paid in shares.

 

At the parent company the comparable change meant that no further awards were granted under the PSP and instead ESAs are used to reward executive directors for performance over a single year. Performance under these awards is against the same measures currently used to determine the annual bonus payment, but in this case delivered entirely in the form of shares with a further two-year retention period.

 

These awards are not pensionable and will be satisfied out of one of the Company’s ESOPs and not out of a new issue of WPP or treasury shares.

 

Renewed Leadership Equity Acquisition Plan (‘Renewed LEAP’)

 

Renewed LEAP was approved by share owners in April 2004. As with Original LEAP the purposes of Renewed LEAP are to:

 

    reward superior performance relative to WPP’s peer companies;

 

    align the interests of executive directors and other key executives with those of share owners through significant personal investment and ownership of stock; and

 

    ensure competitive total rewards.

 

Under Renewed LEAP, participants have to commit WPP shares (‘investment shares’) in order to have the opportunity to earn additional WPP shares (‘matching shares’). For each participant’s first LEAP award, at least one-third of these investment shares have to be purchased in the market. The number of matching shares which a participant can receive at the end of the investment and performance period depends on the performance (based on TSR) of the Company measured over five financial years (four years in the case of awards made in 2004). Total Shareholder Return (‘TSR’) represents the change in share price, together with the value of reinvested dividends, over the performance period.

 

It is expected that all matching shares to which participants may become entitled will be provided from one of the Company’s ESOPs.

 

The Compensation committee believes that TSR relative to a group of key comparator companies is the most appropriate measure for determining performance-based rewards for Group executive directors, as it most closely aligns reward with the delivery of share owner value. However, the Compensation committee also acknowledges that TSR may not always reflect the true performance of the Company and in exceptional circumstances it therefore may need to perform a ‘fairness review’ to vary the number of matching shares that will vest if it determines that, during a performance period, there have been exceptional circumstances. Factors that the Committee will consider in its fairness review of any awards will include various measures of the Group’s financial performance, such as growth in revenues and in earnings per share.

 

51


For the 2005 awards the vesting schedule is as follows:

 

Rank compared to peer group*   Number of matching shares

1

  5

2

  5

3

  4.5

4

  3.5

5

  2.5

6

  1.5

Below median

  0**

 

  * For actual performance between these positions the match is calculated on a pro rata basis.
  ** For participants for whom 2005 is the first year in LEAP, performance below median results in a half share match.

 

As at the year end WPP’s TSR growth was below median for both the 2004 and 2005 performance periods. The comparator companies for the awards made in 2005 were:

 

Omnicom

  Aegis

Interpublic

  Taylor Nelson Sofres

Publicis

  Dentsu

Havas

  Arbitron

Ipsos

  VNU

Gfk

   

 

On a change of control, matching shares under Renewed LEAP can be received based on the Company’s performance to that date.

 

Awards are made on an annual basis, taking into account prevailing market and competitive conditions. Under Renewed LEAP, Sir Martin Sorrell committed investment shares having a value of $10 million, namely 1,032,416 shares, for the award made for 2004. In 2005 Sir Martin committed investment shares having a value of $2 million, namely 203,394 shares.

 

Retirement benefits.

 

All pension coverage for the Company’s executive directors is currently on a defined contribution basis and only base salary is pensionable under any Company retirement plan. Details of pension contributions for the period under review in respect of executive directors are set out elsewhere in Item 6.

 

The form and level of Company sponsored retirement programs varies depending on historical practices and local market considerations. The level of retirement benefits is regularly considered when reviewing total executive remuneration levels.

 

Directors’ remuneration and interests

 

The following information on directors’ remuneration and interests is presented in accordance with UK reporting requirements.

 

52


Non-executive directors

 

The shareholdings of non-executive directors are set out in Item 6E. Non-executive directors do not participate in the Company’s pension plans, share option or other incentive plans, but may receive a part of their fees in ordinary shares of the Company. The Board considers that the non-executive directors’ remuneration conforms with the requirements of the Combined Code.

 

The fees payable to non-executive directors represent compensation in connection with Board and Board committee meetings, and where appropriate for devoting additional time and expertise for the benefit of the Group in a wider capacity.

 

Directors’ remuneration

 

For the fiscal year ended 31 December 2005 the aggregate compensation paid by WPP and its subsidiaries to all directors and officers of WPP as a group for services in all capacities was £8,096,893. Such compensation was primarily paid by WPP and its subsidiaries in the form of salaries, performance-related bonuses and a deferred share award. The sum of £676,270 was set aside and paid in the last fiscal year to provide pension benefits for directors and officers of WPP.

 

The compensation of all executive directors is determined by the Compensation committee which is comprised wholly of non-executive directors whom the Company considers to be independent. The Compensation committee is advised by independent remuneration consultants as well as by Group executives, particularly the Group chief executive (who was not present at any meeting when matters relating to his own compensation or contracts were decided), the chief talent officer, the Director of compensation and benefits and the Group general counsel. During the year, the committee received material assistance from Towers Perrin. Significant advice was also received from Hammonds solicitors on a number of legal and governance issues surrounding compensation and benefits which arose during the course of the year. Hammonds provide legal advice on a range of matters to the Group.

 

During 2005, no advice was required in relation to the remuneration of the chairman of the Company and the non-executive directors. Had it been required it would have been provided by Towers Perrin to the Board and not to the committee.

 

Remuneration of the directors who were directors during the year ended 31 December 2005 is set out in the table below. All amounts shown constitute the total amounts which the respective director received during 2005 and for the annual bonus in respect of 2005 but received in 2006. No compensation payments for loss of office have been made during 2005 to any individuals who have been directors of the Company.

 

53


                       

Total annual

remuneration

 

Pension

contributions

    Location  

Salary

and
fees

 

Other

benefits1

 

Short-term

incentive plans

(annual bonus)2

 

Value

of ESA8

 

2005

Total

 

2004

Total

 

2005

Total

 

2004

Total

        £000   £000   £000   £000   £000   £000   £000   £000
Chairman                                    

P Lader3

  USA   216   —     —         216   213   —     —  

Executive directors

                                   

Sir Martin Sorrell1,3,4

  UK   859   25   1,596   798   3,27810   2,419   343   321

E L Axelrod3,6

  USA   115   9   —     —     124   615   145   22

H Paster3

  USA   385   35   261   354   1,03510   584   19   8

M Read6

  UK   169   1   163   218   551   —     17   —  

P W G Richardson1,3,5

  USA   463   91   486   450   1,49010   814   90   90

Non-executive directors

                                   

C Day6

  UK   22   —     —         22   —     —     —  

E Dyson3

  USA   51   —     —         51   50   —     —  

O Gadiesh3

  USA   51   —     —         51   33   —     —  

D Komansky3

  USA   51   —     —         51   50   —     —  

C Mackenzie

  UK   54   —     —         54   56   —     —  

S W Morten3

  USA   65   —     —         65   66   —     —  

K Naganuma9

  Japan   —     —     —         —     —     —     —  

L Olayan6

  KSA   40   —     —         40   —     —     —  

J A Quelch3,7

  USA   93   46   —         139   114   —     —  

J Rosen3,6

  USA   54   —     —         54   —     —     —  

P Spencer

  UK   60   —     —         60   37   —     —  

Total remuneration

      2,748   207   2,506   1,820   7,281   5,051   614   441

Notes

 

1 Other benefits comprise healthcare, life assurance and allowances for cars, housing and club memberships.
2 Amounts paid in 2006 in respect of bonus entitlements for 2005.
3 All amounts payable in US dollars have been converted into pounds sterling at $1.8189 to £1. The amounts paid to Sir Martin Sorrell and Paul Richardson were paid part in US dollars and part in pounds sterling. This can give rise to small fluctuations year on year.
4 The amount of salary and fees comprise the aggregate of salary/fees paid under the UK Agreement and the salary paid under the US Agreement.
5 Neither Paul Richardson nor the Company received any payment from Chime Communications PLC or STW Communications Group Limited in respect of his non-executive directorships in those companies.
6 Jeffrey Rosen was appointed to the Board in January 2005, Lubna Olayan was appointed to the Board in March 2005, Mark Read was appointed to the Board in April 2005, and Colin Day was appointed to the Board in July 2005. Beth Axelrod retired from the Board in March 2005.
7 In addition to fees paid to John Quelch in 2005 as a non-executive director of the Company additional fees were received by him of £46,000.
8 Shares vesting under these awards are deferred for two years.
9 Mr Naganuma received no remuneration from the Company given his executive position with Asatsu DK.
10 The total for 2005 includes the value of the ESA. There was no comparable award in 2004 because historically awards have been made under the Performance Share Plan which is not a short-term incentive plan.

 

54


Other long-term incentive plan awards

 

Long-term incentive plan awards granted to directors comprise the PSP and Renewed LEAP. The operation of the PSP and Renewed LEAP are described elsewhere in Item 6.

 

Performance Share Plan awards to directors up to and including 31 December 20051

 

   

Grant

date

 

Share

price on

grant
date (p)

 

At

01.01.05

(no. of
shares)

 

Granted

(lapsed)

2005

(no. of
shares)

   

Performance

period ends

 

Vested

06.03.05

(no. of
shares)

 

Share

price on

vesting/

deferral
date (p)

 

At

31.12.05

(no. of
shares)

 

Value

received

from vested

awards (£)

 

Percentage

of
maximum

vesting

potential
(%)

E L Axelrod2

  02.09.02
18.09.02
30.04.043, 4
30.04.04
  473.0
421.0
556.0
556.0
  9,601
52,645
62,190
67,535
  (4,742
(52,645
(62,190
(67,535
)
)
)
)
  31.12.03
31.12.04
31.12.05
31.12.06
  4,859
—  
—  
—  
  623   —  
—  
—  
—  
  30,272   50
Nil
—  
—  
                   
                   
                   

 
 
 
 

 
 
 
 
 
 

H Paster

  30.04.043, 4
30.04.04
  556.0
556.0
  79,150
85,955
  —  
—  
 
 
  31.12.05
31.12.06
  —  
—  
      79,150
85,955
      —  
—  
                   

 
 
 
 

 
 
 
 
 
 

M Read

  18.09.02
30.04.04
  421.0
556.0
  4,462
6,646
  (4,462
—  
)
 
  31.12.04
31.12.06
  —  
—  
      —  
6,646
      Nil
—  
                   

 
 
 
 

 
 
 
 
 
 

P W G Richardson

  29.02.00
28.02.01
18.09.02
30.04.043, 4
30.04.04
  1,221.5
812.0
421.0
556.0
556.0
  6,328
8,571
44,617
67,912
92,025
  1495
545
(44,617
—  
—  
 
 
)
 
 
  31.12.02
31.12.03
31.12.04
31.12.05
31.12.06
  6,477
4,339
—  
—  
—  
  623
623
  —  
4,286
—  
67,912
92,025
  40,352
27,032
  69
50
Nil
—  
—  
                   
                   
                   
                   

 
 
 
 

 
 
 
 
 
 

Sir Martin Sorrell5

  22.09.99
29.02.00
28.02.01
18.09.02
30.04.043, 4
30.04.04
  568.5
1,221.5
812.0
421.0
556.0
556.0
  186,247
94,500
44,306
115,319
142,615
171,779
  —  
—  
—  
(115,319
—  
—  
 
 
 
)
 
 
  31.12.01
31.12.02
31.12.03
31.12.04
31.12.05
31.12.06
  186,247
94,500
33,229
—  
—  
—  
  7607
474.57
548.57
—  
—  
—  
  —  
—  
11,077
—  
142,615
171,779
  1,415,4778
448,4038
182,2618
  85
69
50
Nil
—  
—  
                   
                   
                   
                   
                   

 
 
 
 

 
 
 
 
 
 

Notes

 

1 Performance conditions: The performance condition relates WPP’s TSR compared to the TSR results for a comparator group of communications services companies. No vesting takes place if the WPP TSR is below the median TSR result for the comparator group and full vesting occurs if WPP TSR is at least equal to the second highest result within the comparator group. Between these levels, awards vest on a sliding scale according to TSR performance.

 

  No awards were made under the PSP in the year ended 31 December 2005. Details of the comparator groups which apply in respect of different awards are as follows (for companies which subsequently delisted, the date of delisting is shown in brackets). Details of the treatment of delisted companies for the purposes of TSR calculation are set out in the notes to the table on Renewed LEAP below.

(i) For 2003 and 2004 awards: Aegis Communications Group, Arbitron, Dentsu, Digitas, Grey Global Group (delisted March 2005), Gfk, Havas Advertising, Ipsos, Omnicom, Publicis, Taylor Nelson Sofres, Interpublic and VNU.

(ii) For 2002 awards: Aegis Communications Group, Cordiant Communications (delisted July 2003), Grey Global Group (delisted March 2005), Havas Advertising, Omnicom, Publicis, Taylor Nelson Sofres and Interpublic.

(iii) For 2001 awards, in addition to those listed at (ii): True North Communications (delisted June 2002).

(iv) For 2000 awards, in addition to those listed at (ii) and (iii): AC Nielsen (delisted February 2001), Saatchi & Saatchi (delisted September 2000) and Young & Rubicam (delisted October 2000).

2 Beth Axelrod, who resigned in March 2005, had vested rights under the Performance Share Plan, all of which lapsed upon her ceasing to be an employee of the Group except the 4,859 shares from the 2001-2003 PSP which had already vested and were sold.
3 Following the calculation of TSR for WPP and the comparator group, the awards with the performance period ending 31 December 2005 have since lapsed.
4 On 30 April 2004, awards were made to Beth Axelrod, Howard Paster, Paul Richardson and Sir Martin Sorrell in respect of period 2003-2005.
5 These shares represent dividends received in respect of restricted stock where the performance conditions have been satisfied, and the dividends have been reinvested in the acquisition of further ordinary shares or ADRs.
6 Sir Martin Sorrell deferred the vesting of 93,123 shares due to vest in 2002, 93,812 shares due to vest in 2003 and 92,340 shares due to vest in 2004, which would otherwise have been due to him under PSP. These awards together with 34,701 shares which vested in March 2005 were exercised on 23 March 2005.
7 The rules required that the value of the award was determined by reference to the value on the deferral date.
8 The value received from vested awards does not include amounts paid in respect of dividends accrued on awards that Sir Martin Sorrell deferred in 2002, 2003 and 2004.

 

55


Renewed Leadership Equity Acquisition Plan

 

Name   

Grant/

award

date

  

Share

units

(ADRs/

Ords)1

   At median level of performance    At maximum level of performance
        

Number of

matching

units at

01.01.052

  

Granted/

(lapsed)

units

   

Number of

matching

units at

31.12.05

  

Number of

matching

units at

01.01.052

  

Granted/

(lapsed)

units

   

Number of

matching

units at

31.12.05

E L Axelrod3

   28.10.04    ADRs    7,423    (7,423 )   —      24,744    (24,744 )   —  

H Paster

   28.10.04    ADRs    7,423          7,423    24,744          24,744
     15.12.05    ADRs         9,141     9,141         30,470     30,470

M Read

   15.12.05    Ords         15,255     15,255         50,850     50,850

P W G Richardson

   28.10.04    Ords    37,168          37,168    123,892          123,892
     15.12.05    Ords         122,037     122,037         406,790     406,790

Sir Martin Sorrell

   28.10.04    Ords    1,238,899          1,238,899    4,129,664          4,129,664
     15.12.05    Ords         305,091     305,091         1,016,970     1,016,970

Notes

 

1 One ADR is the equivalent of five Ordinary Shares.
2 All awards shown in the above table, are dependent on WPP’s TSR performance against a comparator group over the relevant performance period and maintenance of a participant’s holding of Investment Shares and continued employment throughout the Investment Period. The comparator group for the award made in 2004 comprises of Aegis, Arbitron, Dentsu, Digitas, Gfk, Grey Advertising, Havas Advertising, Interpublic, Ipsos, Omnicom Group, Publicis, Taylor Nelson Sofres and VNU. The comparator group for the award made in 2005 remained the same with the exception of the removal of Digitas and Grey Advertising. Where a company delists during the performance period, the committee deem this to be a disposal and the proceeds are treated as being reinvested in the stock of the remaining companies.
3 The award to Beth Axelrod lapsed on her resignation on 24 March 2005.

 

Group chief executive—Sir Martin Sorrell

 

Sir Martin Sorrell’s services to the Group outside the US have previously been provided under an agreement with JMS Financial Services Limited (JMS). With effect from 1 April 2005 this was replaced by an executive service contract entered into directly between Sir Martin and the Company. He is also directly employed by WPP Group USA, Inc. for his activities in the US. Taken together, the current agreement in relation to his services to the Group outside the US (‘the UK Agreement’) and to his services to the Group in the US (‘the US Agreement’) provide for the following remuneration, including incentive awards, all of which is disclosed elsewhere in Item 6:

 

    annual salary of £859,000*;

 

    annual pension contributions of £343,000;

 

    short-term incentive (annual bonus) of 100% of annual salary at target and up to 200% at maximum;

 

    the Executive Stock Award; and

 

    the Leadership Equity Acquisition Plan as renewed.

 

* Year-on-year may fluctuate due to exchange rate variances.

 

56


Earned Awards exercised by Sir Martin Sorrell in 2004 and 2005

 

The table set out below was included in last year’s report of the committee and proved helpful for share owners in understanding the vesting/exercise of various incentive plans awarded to Sir Martin Sorrell since 1993 and which have been deferred over a number of years.

 

The table has therefore been included again this year:

 

Plan    Year(s) of grant    Date of
vesting/
exercise
   No. of
shares/
phantom
shares

Capital Investment Plan1

   1994    01.09.04    1,054,442

Notional Share Award Plan

   1994    01.09.04    1,754,520

Original LEAP2

   1999    22.09.04    3,221,442

Phantom Options3

   1993, 1994    23.03.05    2,148,581

Performance Share Plan4

   1999, 2000, 2001    16.03.05    313,976

Notes

 

1 In addition, 987,742 shares vested but have not yet been exercised and a further 2,649,208 shares were deferred until 1 October 2008.
2 The number of shares under Original LEAP includes those attributable to JMS.
3 JMS exercised the Phantom Options on 23 March 2005 and used the proceeds to subscribe for 1,907,468 shares.
4 At 31 December 2005, Sir Martin Sorrell remained interested in the right to 11,077 shares under the Performance Share Plan award made on 28 February 2001.

 

Compensation of executive officers

 

The information contained in the following three tables sets out the compensation details for the Group chief executive and each of the other four most highly compensated executive officers in the Group as at 31 December 2005 (the “executive officers”). The information is in addition to the disclosure required under UK legislation and regulations. As used in this section, the “executive officers” are deemed to include executive directors of the Company and executives who served as the chief executive officer of one of the Group’s major operating companies.

 

This information covers compensation for services rendered in all capacities and paid in the financial year ended 31 December 2005 and in the previous two financial years. Incentive compensation paid in 2006 for performance in 2005 and previous years is not included in these tables. The bonus payments referred to below are payments made in 2005, 2004 and 2003 under the short-term incentive awards for performance in 2004, 2003 and 2002 respectively.

 

57


Summary Compensation Table1

 

               Long-term compensation    
          Annual compensation    Awards    Payouts    
     Year    Salary    Bonus2  

Other annual

compensation3

  

Share

option SARs

and phantom4

ADR no.

  

LTIP

Payments5

 

All other

compensation6

          $000    $000   $000         $000   $000

Sir Martin Sorrell9 – Group chief executive

   2005    1,562    2,827   45    —      5,69910   625
     2004    1,539    2,309   46    —      30,640   603
     2003    1,374    —     40    —      —     1,733

S Lazarus – Chairman/Chief executive officer Ogilvy & Mather Worldwide

   2005    850    9518   55    —      675   648
     2004    850    7577   37    65,501    9,599   648
     2003    850    9067   36    63,805    502   648

A Fudge – Chairman/Chief executive officer Young & Rubicam

   2005    800    596   28    —      —     9
     2004    800    —     27    15,748    —     5
     2003    800    —     25    16,874    —     3

P W G Richardson – Group finance director

   2005    841    509   165    —      123   164
     2004    800    454   177    —      2,952   165
     2003    731    164   159    —      251   120

I Gotlieb – Chairman/Chief executive officer GroupM

   2005    750    684   16    —      2,789   38
     2004    750    613   16    14,763    971   38
     2003    750    536   16    15,819    506   38

Notes

 

1 Amounts paid in sterling have been converted into US dollars using the following annual average exchange rates; 2005: $1.8189/£; 2004: $1.8326/£; and 2003: $1.6356/£. This can give rise to small fluctuations year on year.
2 Represents short-term incentive awards paid during calendar years 2005, 2004 and 2003 in respect of the prior year’s incentive plans.
3 Includes the value of company cars, club memberships, executive health and other benefits, supplemental executive life insurance.
4 As used in this report, the term ‘phantom ADRs/shares’ (as used in the UK) and the term ‘free-standing SARs’ (as used in the US) are interchangeable.
5 Includes value of payments made under the PSP and LTIP in stock and cash. For the year 2004, these figures also include the value of matching shares vesting under Original LEAP. In the case of Sir Martin Sorrell $30,640k; Shelly Lazarus $9,026k; and Paul Richardson $2,730k.
6 Includes accruals during each calendar year under consideration, under defined contribution retirement and defined benefit retirement arrangements.
7 Includes a guaranteed bonus of $150k.
8 Includes a guaranteed bonus of $250k.
9 This includes the value of 178,036 shares which represented Sir Martin Sorrell’s bonus for 2002 and which he received in the form of restricted stock, in respect of which the restricted period ended on 27 May 2005.
10 This includes the value received from revised awards paid in respect of dividends accrued on Sir Martin Sorrell’s PSP awards deferred in 2002, 2003 and 2004.

 

58


Stock option, SAR and phantom stock exercises in last financial year and final year-end share option, SAR and phantom stock values

 

    

Ordinary Share

Equivalents

acquired

upon exercise

  

Market

Value at

exercise
date

($)

  

Ordinary

Share

Equivalent

Vested Shares

 

Ordinary

Share

Equivalent

Unvested

Shares

 

Value of

Vested

Shares

12/30/05

($)

  

Value of

Unvested

Shares

12/30/051

($)

Sir Martin Sorrell

   2,148,581    22,073,123    987,7422   2,649,2083   8,640,948    23,175,756

S Lazarus

   —      —      91,440   1,493,025   137,617    3,668,671

A Fudge

   —      —      0   243,065   0    425,125

P W G Richardson

   —      —      —     —     —      —  

I Gotlieb

   —      —      484,130   378,810   728,616    1,091,233

Notes

 

1 The value is calculated by subtracting the exercise price from the fair market value of the Company’s ordinary shares on 30 December 2005, namely 629p, or the value of WPP’s ADRs, namely $54, and using an exchange rate of $1.7187/£1.
2 Comprising an option over 987,742 ordinary shares following partial deferral of the award under the Capital Investment Plan on 1 September 2004.
3 Deferred stock arising out of the deferral of the award under the Capital Investment Plan on 1 September 2004.

 

Long-term incentive plan grants in relation to 2005

 

              Estimated future payouts
     Plan   Performance    Threshold
Units
  

Target

Units2

  

Maximum

Units

Sir Martin Sorrell

   Renewed LEAP1   2005-2009       61,019    203,395

S Lazarus

   Renewed LEAP   2005-2009       24,375    81,250

A Fudge

   Renewed LEAP   2005-2009       18,281    60,935

P W G Richardson

   Renewed LEAP1   2005-2009       24,408    81,360

I Gotlieb

   Renewed LEAP   2005-2009       9,141    30,470

Notes

 

1 Actual awards were made over ordinary shares but are shown here as ADRs for ease of comparison.
2 Target units calculated on the basis of 1.5 matching shares for each investment share committed to Renewed LEAP and maximum units of 5 matching shares for each investment share.

 

ADR/share price at year end and during the year

 

    

30 December

2005*

  

12 month

high

  

12 month

low

ADR

   $ 54.00    $ 60.05    $ 47.34

Ordinary

     629.0p      630.5p      534.5p
* December 31st was a Saturday.

 

C. Board Practices

 

Information regarding the expiration of the current term of each director and the period during which such director has served is set forth in Item 6A.

 

Compensation committee

 

During the year, the Compensation committee comprised the following who took decisions in respect of the year: Bud Morten (chairman of the committee), Philip Lader and Christopher Mackenzie.

 

59


Esther Dyson was appointed a member of the committee on 4 May 2006 and Jeffrey Rosen will replace Bud Morten as chairman of the committee following the Annual General Meeting.

 

During 2005 the Compensation committee held nine formal meetings and also had many informal discussions. Compensation committee meetings are frequently attended, in whole or in part by the Group chief executive, the chief talent officer, the director of compensation and benefits, the Company Secretary and the Group general counsel.

 

Scope of Compensation committee

 

Under its terms of reference the committee is responsible for:

 

    Reviewing and approving the remuneration and terms of employment (including any termination arrangements) of executive directors and senior executives of the Company and of directors and senior executives of the operating companies.

 

    Reviewing the incentive policy and compensation plans.

 

    Monitoring the vesting of awards under all incentive plans including the Renewed Leadership Equity Acquisition Plan (Renewed LEAP).

 

    Reviewing systems implemented throughout the Group to deal with matters such as employee harassment and discrimination.

 

    Appointing and reviewing the performance of external advisors to the committee and to the company in relation to executive remuneration and human resource activities.

 

No current member of the committee has any personal financial interest (other than as a share owner) in the matters to be decided by the committee, potential conflicts of interest arising from cross-directorships or day-to-day involvement in running the Group’s businesses. The terms of reference for the Compensation committee are available on the Company’s website (www.wppinvestor.com) and will be on display as set out in the Notice of Annual General Meeting. These terms of reference are regularly reviewed.

 

The Compensation committee regularly consults with Group executives, particularly the Group chief executive, the chief talent officer, the Director of compensation and benefits and the Group general counsel. During the year, the committee received material assistance from Towers Perrin. Significant advice was also received from Hammonds solicitors on a number of legal and governance issues surrounding compensation and benefits which arose during the course of the year. Hammonds provide legal advice on a range of matters to the Group. See further discussion in the Directors’ remuneration section of Item 6.

 

During 2005, no advice was required in relation to the remuneration of the chairman of the Company and the non-executive directors. Had it been required it would have been provided by Towers Perrin to the Board and not to the committee.

 

Advice is received by the committee on issues including the following:

 

    analysis of competitive compensation practices and determination of competitive positioning;

 

    base salary levels;

 

    annual and long-term incentive plans and awards;

 

    policy relating to WPP share ownership;

 

    pensions and executive benefits;

 

60


    service contract terms for executives;

 

    changes in accounting, taxation, legal and regulatory practices;

 

    governance issues relating to compensation and the role of the committee; and

 

    policies for preventing to employee harassment and discrimination.

 

During the year the most significant issues addressed by the committee were:

 

    A thorough review of all executive compensation plans, their effectiveness and relevance to the Group’s business needs.

 

    Changes to the incentive packages for the chief financial officer and the director of strategy.

 

    A review of the contractual arrangements for the Group chief executive and monitoring the vesting of awards under a number of his incentive plans.

 

    Effecting the transfer of existing incentive arrangements to the new parent holding company following the Group’s reorganisation.

 

    Renewing the WPP Executive Stock Option Plan and the WPP Worldwide Ownership Plan.

 

Principles of remuneration

 

At its heart all executive compensation at WPP is governed by three guiding principles:

 

    competitiveness;

 

    performance; and

 

    alignment to share owner interests.

 

Competitiveness

 

Compensation packages for Group executives are reviewed on a regular basis (on average every 24 months). When reviewing an executive’s package the committee usually consults with the Group chief executive, the Group chief talent officer and the chief executive officer of the appropriate operating company.

 

In making its assessments, the committee considers individual and business unit performance, level of experience and scope of responsibility. It also takes into account the overall value of the package, including both fixed and variable elements, and focuses on the ‘on-target’ level of remuneration. The competitiveness of this total package is then reviewed in relation to the most appropriate benchmarks.

 

For example, for the Group chief executive three separate benchmarks for remuneration opportunities are used:

 

    the most senior executive position in the Company’s two closest comparators, Omnicom and Interpublic Group;

 

    the CEO position in companies of comparable size and complexity in the UK; and

 

    the CEO position in public companies of comparable size and complexity in the US.

 

The same approach is taken for the other senior executives, including executive directors. The Compensation committee considers data from the latest industry surveys covering the senior positions

 

61


in WPP’s operating companies. WPP participates in the leading global surveys of executive remuneration in the advertising, market research, healthcare, public relations and public affairs sectors. In addition, for heads of operating companies the committee considers public disclosures for similar positions in listed companies of comparable size and complexity in the relevant sector.

 

Performance

 

All remuneration packages for senior executives, including executive directors, have a significant element which is variable and dependent on performance. The performance targets set in respect of variable compensation are both specific and challenging as is apparent in the fact that little or no short-term bonus was paid in 2001 and 2002 and both the 2002-2004 and the 2003-2005 Performance Share Plan awards failed to pay out.

 

Alignment to share owner interests

 

WPP is committed to aligning executive performance and reward with share owner interests. This is achieved by providing significant opportunities for executives to acquire WPP stock, by using performance measures that are linked to the creation of share owner value and by operating share ownership goals for the most senior executives.

 

Many of our incentive plans pay out wholly or partially in WPP stock. Approximately half of the compensation package of the executive directors was delivered in shares last year.

 

The Compensation committee believes that Total Shareholder Return (TSR) relative to a group of key comparators continues to be the most appropriate measure for determining long-term performance-based rewards for Group executive directors, as it most closely aligns reward with the delivery of share owner value. For this reason TSR is the sole measure of performance used for Renewed LEAP.

 

WPP has encouraged share ownership for its most senior executives, including executive directors, for many years. For executive directors this is achieved through participation in Renewed LEAP. Other WPP Leaders (approximately 200 people) are expected to own at least 40,000 WPP ordinary shares.

 

Clearly there is also a need to ensure that share owner value is not diminished through the issue of new shares to satisfy incentive awards. The dilution, as at 4 May 2006, was well below the 10% level recommended by the ABI. It is intended that Renewed LEAP awards, the Performance Share Awards, the Executive Share Awards and Restricted Stock Plan awards will all be satisfied with purchased shares held in the ESOPs.

 

IFRS transition

 

From 1 January 2005, the Company has been required to account under International Financial Reporting Standards (IFRS). It is commonly acknowledged that this may lead to greater volatility in earnings. The committee is aware that these changes may affect the evaluation of performance under those WPP long-term incentive plans which use earnings-based performance measures. The committee, in consultation with the Audit committee, has resolved to take these matters into account when evaluating performance under the relevant long-term incentive plans. Details of the expensing of share-based incentives under IFRS 2 are given in note 25 to the Consolidated Financial Statements.

 

Policy on directors’ service contracts, notice periods and termination payments

 

The Compensation committee regularly considers the Company’s policy on the duration of directors’ service contracts, the length of notice periods in executive directors’ service contracts and provisions for payment (if any) on termination of such contracts.

 

62


None of the contracts of parent company executive directors contain liquidated damages provisions. There were no payments in 2005 in respect of termination of employment of any executive director.

 

The notice periods for directors are as follows:

 

Executive Director


  

Contract/effective date


  

Unexpired term/Notice period


Sir Martin Sorrell

   1 April 2005    “At will”

Howard Paster

   1 January 2002    6 months

Paul Richardson

   1 January 2005    12 months

Mark Read

   9 September 2002    6 months

 

Non-executive director*


 

Contract date


Philip Lader

  26 February 2001

Colin Day

  25 July 2005

Esther Dyson

  29 June 1999

Orit Gadiesh

  28 April 2004

David Komansky

  28 January 2003

Bud Morten

  2 December 1991

Lubna Olayan

  18 March 2005

John Quelch

  10 July 1991

Koichiro Naganuma

  23 January 2004

Christopher Mackenzie

  14 March 2000

Jeffrey Rosen

  20 December 2004

Paul Spencer

  28 April 2004

* The notice period applicable to all non-executive directors is two months.

 

Audit committee

 

As of 31 December 2005, the Audit committee comprised Paul Spencer, Bud Morten and Jeffrey Rosen who joined the committee on 29 April 2005. Esther Dyson was appointed to the Audit committee in May 2006.

 

Meetings of the Audit committee, of which there were eight during 2005, were also attended, in whole or in part, by the auditors, the chairman of the Company, the Group finance director, the director of internal audit, the Company Secretary and a representative of the legal department.

 

This year the work of the committee included:

 

    monitoring the integrity of the Company’s financial statements and reviewing significant financial reporting judgements;

 

    reviewing and reporting on the key elements of risk management as they affect the Group’s global operations;

 

    reviewing internal financial control and internal audit activities;

 

    the review and appointment of the external auditors and approval of their remuneration and terms of engagement;

 

    monitoring the external auditors’ independence, objectivity and effectiveness, taking into account relevant global professional and regulatory requirements;

 

63


    the approval and monitoring of the policy for the engagement of the external auditors in relation to the supply of permissible non-audit services (including taxation), taking into account relevant ethical and regulatory requirements. WPP’s policy regarding non-audit services that may be provided by the Group’s auditors, Deloitte & Touche (now Deloitte & Touche LLP), prohibits certain categories of work in line with relevant guidance on independence, such as the Sarbanes-Oxley Act. Other categories of work may be provided by the auditors if it is appropriate for them to do so. The provision of such services and associated fees are pre-approved by the Audit committee, although some specified categories of work may be delegated to the director of internal audit for pre-approval. All fees are summarised periodically for the committee in order to assess the aggregate value of non-audit fees against audit fees. The value of fees for 2005 is shown in note 3 to the Consolidated Financial Statements;

 

    monitoring accounting and legal reporting requirements, including all relevant regulations of the UK Listing Authority, the U.S. Securities and Exchange Commission, and NASDAQ with which the Company must comply;

 

    in conjunction with Howard Paster, the director responsible for corporate responsibility (CR) in 2005, ensuring systems are in place to monitor social, environmental and ethical issues which may affect the Group (other than issues which fall within the remit of the Compensation committee); and

 

    maintaining established procedures for the receipt and treatment of concerns regarding accounting, audit and internal audit matters, including confidential and anonymous submissions by employees of concerns relating to those issues.

 

During the year, particular attention has been given to the impact of new accounting standards, ensuring compliance with the Combined Code, monitoring progress towards full compliance with the Sarbanes-Oxley Act (particularly section 404 of that Act) and ensuring that the Company complies with the NASDAQ rules to the extent that they apply to the Company.

 

The terms of reference for the Audit committee are available on the Company’s website (www.wppinvestor.com) and will be on display as set out in the Notice of Annual General Meeting.

 

Auditors

 

In 2002, the Group appointed Deloitte & Touche as auditors to the Company following a thorough review of services offered by a number of the leading international accountancy firms.

 

NASDAQ Marketplace Rules and Home Country Practices

 

In general, under NASDAQ Marketplace Rule 4350, foreign private issuers such as WPP are permitted to follow home country corporate governance practices instead of certain provisions of Rule 4350 without having to seek individual exemptions from NASDAQ. A foreign private issuer that elects to follow a home country practice instead of any such provisions of Rule 4350 must submit in advance to NASDAQ a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. The Company’s independent United Kingdom counsel has certified to NASDAQ that the Company’s corporate governance practices are not prohibited by the laws of England and Wales.

 

The requirements of Rule 4350 and the corporate governance practices that the Company follows in lieu thereof are described below:

 

   

Rule 4350(f) requires that the quorum for any meeting of stockholders must not be less than 33 1/3% of the outstanding shares of a company’s common voting stock. The Company’s

 

64


 

Articles of Association provide that the necessary quorum for a general share owner meeting is a minimum of two persons entitled to vote on the business to be transacted, each being a share owner or a proxy for a share owner or a duly authorized representative of a corporate share owner.

 

    Rule 4350(i) requires that issuers obtain stockholder approval before a stock option or purchase plan is established or materially amended or other equity compensation arrangement is made pursuant to which stock may be acquired by officers, directors, employees or consultants of the issuer, subject to certain exceptions. The Company seeks share owner approval for the adoption or amendment of stock plans or stock purchase plans only as required by the Articles of Association of the Company, the Listing Rules of the UK Listing Authority (“the Listing Rules”) and the laws of England and Wales. Subject to the exceptions permitted in the Listing Rules, this involves seeking share owner approval to any such plan that falls into either of the following categories (as defined in the Listing Rules):

 

  (a) an employees’ share scheme if the scheme involves or may involve the issue of new shares or the transfer of treasury shares; and

 

  (b) a long-term incentive scheme in which one or more directors of the Company is eligible to participate and to material amendments of that scheme to the extent required by the scheme’s rules. In this context, it should be noted that the provisions of the rules relating to whether amendments to the scheme rules must be approved by share owners must themselves be drafted to ensure compliance with the Listing Rules.

 

D. Employees

 

The assets of communications services businesses are primarily its employees, and the Company is highly dependent on the talent, creative abilities and technical skills of its personnel and the relationships its personnel have with clients. The Company believes that its operating companies have established reputations in the industry that attract talented personnel. However, the Company, like all communications services businesses, is vulnerable to adverse consequences from the loss of key employees due to the competition among these businesses for talented personnel. On 31 December 2005 the Group had 74,631 employees located in approximately 2,000 offices in 106 countries compared with 59,932 employees on 31 December 2004. As at 31 March 2006, the Group had approximately 76,000 employees. Including employees of associated undertakings, this figure is approximately 94,000. The average number of employees in 2005 was 70,936 compared with 57,788 in 2004. Their geographical distribution was as follows:

 

     2005    2004

North America

   21,261    17,271

  
  

United Kingdom

   8,007    7,069

  
  

Continental Europe

   18,644    14,793

  
  

Asia Pacific, Latin America, Africa and Middle East

   23,024    18,655

  
  
     70,936    57,788

  
  

Their operating sector distribution was as follows:

         

Advertising and Media investment management

   38,084    29,419

  
  

Information, insight and consultancy

   10,089    9,482

  
  

Public relations and public affairs

   5,901    5,136

  
  

Branding and identity, Healthcare and Specialist communications

   16,862    13,751

  
  
     70,936    57,788

  
  

 

65


E. Share Ownership

 

Directors’ Interests

 

Ordinary Shares

 

Directors’ interests in the Company’s share capital, all of which were beneficial, were as follows:

 

   

At 1 Jan

2005 or

appointment

date

 

Shares
acquired

through
long-term

incentive plan

awards in
20052

   

Movement

during

2005

inc.
shares

purchased

in 20053

   

At 31 Dec

2005

or earlier

retirement
or

resignation

 

Shares
acquired

through
long-term

incentive plan

awards in
20062

   

Other

movements

since

31 Dec
2005

   

At 4 May

2006

or earlier

retirement
or

resignation

    Vested   (sold)         Vested   (sold)      

E L Axelrod3,4

  75,720   4,859   (4,859 )   –       75,720   –     –       –       75,720

 
 
 

 

 
 
 

 

 

C Day4

  3,240   –     –       2,000     5,240   –     –       –       5,240

 
 
 

 

 
 
 

 

 

E Dyson

  35,000   –     –       –       35,000   –     –       –       35,000

 
 
 

 

 
 
 

 

 

O Gadiesh

  –     –     –       –       –     –     –       –       –  

 
 
 

 

 
 
 

 

 

D Komansky

  10,000   –     –       –       10,000   –     –       –       10,000

 
 
 

 

 
 
 

 

 

P Lader

  11,950   –     –       –       11,950   –     –       –       11,950

 
 
 

 

 
 
 

 

 

C Mackenzie

  10,000   –     –       20,000     30,000   –     –       –       30,000

 
 
 

 

 
 
 

 

 

S W Morten

  20,000   –     –       –       20,000   –     –       –       20,000

 
 
 

 

 
 
 

 

 

K Naganuma6

  –     –     –       –       –     –     –       –       –  

 
 
 

 

 
 
 

 

 

L Olayan4

  –     –     –       –       –     –     –       –       –  

 
 
 

 

 
 
 

 

 

H Paster3,5,7,8

  502,736   –     –       (84,732 )   418,004   –     –       (171,367 )   246,367

 
 
 

 

 
 
 

 

 

J A Quelch

  12,000   –     –       –       12,000   –     –       –       12,000

 
 
 

 

 
 
 

 

 

M Read3,4,5

  3,000   –     –       –       3,000   –     –       –       3,000

 
 
 

 

 
 
 

 

 

P W G Richardson3,5,7,8

  455,000   10,816   (4,816 )   (234,824 )   226,176   4,402   (4,402 )   (38,000 )   188,176

 
 
 

 

 
 
 

 

 

J Rosen4

  –     –     –       –       –     –     –       –       –  

 
 
 

 

 
 
 

 

 

P Spencer

  –     –     –       10,000     10,000   –     –       –       10,000

 
 
 

 

 
 
 

 

 

Sir Martin Sorrell3,5,7,9

  17,265,707   34,701   (34,701 )   (3,632,679 )   13,633,028   11,373   –       –       13,644,401

 
 
 

 

 
 
 

 

 

Notes

 

1 Save as disclosed above and elsewhere in Item 6, no director had any interest in any contract of significance with the Group during the year.
2 Further details of long-term incentive plans are given elsewhere in Item 6.
3 Each executive director has a technical interest as an employee and potential beneficiary in shares in the Company held under the ESOPs. At 31 December 2005, the Company’s ESOPs held in total 53,297,356 shares in the Company (2004: 51,657,256 shares). On 24 March 2005, JMS sold 4,115,961 shares to the WPP Group plc UK ESOP (UKESOP) at a price of 617.5p per share and on the same day Sir Martin Sorrell acquired from the UKESOP 2,999,003 shares also at the price of 617.5p per share.
4 Jeffrey Rosen was appointed to the Board in January 2005, Lubna Olayan was appointed to the Board in March 2005, Mark Read was appointed to the Board in April 2005 and Colin Day was appointed to the Board in July 2005. Beth Axelrod retired from the Board in March 2005.
5 The above interests do not include the unvested interests of the executive directors in the Performance Share Plan or Restricted Stock Plan.
6 K Naganuma is a director of Asatsu-DK, which at 4 May 2006 was interested in 31,295,646 shares representing 2.5% of the issued share capital of the Company.
7 In respect of Sir Martin Sorrell, Howard Paster, Paul Richardson and Mark Read the above interests include investment shares committed to the 2004 and 2005 awards under Renewed LEAP, but do not include matching shares.
8 Paul Richardson sold 234,824 shares at a price of 614p per share on 23 March 2005. Howard Paster sold 78,032 shares at a price of 623p per share on 8 March 2005 and further gifted 6,700 shares to two US based charities on 6 September 2005.

 

66


9 In the case of Sir Martin Sorrell (through JMS) interests included 1,571,190 and 577,391 phantom options granted in 1993 and 1994 respectively, which were exercised on 23 March 2005, details of which are set out elsewhere in Item 6. Also included for Sir Martin Sorrell are 4,691,392 shares in respect of the Capital Investment Plan part of which vested in September 2004 and in respect of which 987,742 shares are vested but have not yet been exercised and Sir Martin Sorrell deferred a further 2,649,208 shares until 1 October 2008. Sir Martin Sorrell also exercised rights over 313,976 shares under the Performance Share Plan in March 2005 and sold 1,920,000 on 19 December 2005 at a price of 627.5p per share. In addition, the restricted period on the 178,036 shares which represented Sir Martin’s bonus for 2002, and which he received in the form of restricted stock, ended on 27 May 2005.

 

Option and Phantom Option Awards held by executive directors in the year ended 31 December 2005

 

   

Grant/

Award

Date

 

Exercise

price

   

At 1 Jan

2005

(no. of

shares)

 

Granted

(lapsed)

2005

(no. of

shares)

 

Exercised

2005

(no. of

shares)

 

Share
price

on
exercise

   

Value on

exercise

(£)

 

At 30
Dec

2005

(no. of

shares)

 

Share/

ADR

price

30
Dec

20051

   

Percent-

age of

maximum

vesting

potential

   

Exercised

2006

(no. of

shares)

 

Share

price on

exercise

   

Vaue on

exercise

(£)

Sir Martin Sorrell2   Apr 1993     52.50 p   1,571,190   –     1,571,190   617.50 p   8,877,224   –       629 p   100 %       –       –  
    Apr 1994     115.00 p   577,391   –     577,391   617.50 p   2,901,390   –       629 p   100 %       –       –  

H Paster3

  Sep 1995     154.00 p   78,032   –     78,032   623.00 p   365,970   –       629 p   100 %       –       –  
    Jun 1996     214.00 p   10,688   –     –               10,688     629 p   100 %   10,688   671 p   48,844
    Sep 1997     283.50 p   83,499   –     –               83,499     629 p   100 %   83,499   671 p   323,559
    Sep 1998     293.00 p   77,180   –     –               77,180     629 p   100 %   77,180   677 p   296,372
    Sep 1999   $ 46.47501     11,834   –     –               11,834   $ 54     100 %       –       –  
    Sep 2000   $ 63.26251     8,694   –     –               8,694   $ 54     100 %       –       –  
    Sep 2001   $ 35.38001     16,959   –     –               16,959   $ 54     100 %       –       –  
    Sep 2002   $ 33.20001     18,072   –     –               18,072   $ 54     100 %       –       –  

M Read3

  Nov 2003     559.50 p   10,615   –     –               10,615     629 p   100 %       –       –  
    Oct 2004     553.50 p   9,879   –     –               9,879     629 p   100 %       –        

Notes

 

1 Share price 12 month high/low: 630.5p/534.5p; $60.05/$47.34. Where $ is used in the above table, the awards to the relevant director are in respect of American Depositary Receipts (ADRs).
2 The two awards shown in respect of Sir Martin Sorrell, relate to phantom option awards made to JMS in 1993 and 1994. The award made in 1993 was in respect of 2,196,190 phantom options. JMS exercised 625,000 of the 1993 phantom options in 1997, leaving 1,571,190 unexercised. The phantom option awards have vested in full. The exercise of the phantom option awards took place on 23 March 2005; under an agreement dated 14 May 2001, the sum received was used by JMS to subscribe for 1,907,468 shares in aggregate.
3 All option awards were granted prior to becoming an Executive Director.

 

Restricted Stock Awards

 

During 2005 Mark Read held the following Restricted Stock Awards, all of which were granted prior to his appointment as an executive director:

 

Grant date    No. of shares
awarded
   Vesting date

1 Jun 2004

   5,515    1 Jun 2006

6 Mar 2005

   19,262    6 Mar 2008

10 Mar 2005

   4,816    10 Mar 2007

 

67


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

Control of registrant

 

As of the dates shown below, the Company is aware of the following interests of 3% or more in the issued ordinary share capital of the Company:

 

     Months Ending 31 May
           2006          2005          2004

Legal & General

   4.2 %   51,683,257    3.3 %   42,132,978    3.4 %   40,592,450

WPP ESOP

   4.1 %   50,597,811    4.0 %   50,432,167    4.8 %   57,205,865

Legg Mason

   4.0 %   49,737,600    4.1 %   52,282,669    3.8 %   45,513,831

Barclays

   3.1 %   38,850,782    3.0 %   38,115,057    *     *

AIM Management

   3.1 %   38,148,881    *     *    *     *
* Less than 3% interests in the issued ordinary share capital of the Company.

 

The disclosed interests of all of the above refer to the respective combined holdings of those entities and to interests associated with them. The Company has not been notified of any other holdings of ordinary share capital of 3% or more. None of these shareholders has voting rights that are different from those of the holders of the Company’s ordinary shares generally. As far as WPP is aware, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government, or by any other natural or legal persons severally or jointly.

 

The number of outstanding ordinary shares at 31 December 2005 was 1,252,899,372, which includes the underlying ordinary shares represented by 24,317,649 ADSs. 242 share owners of record of WPP ordinary shares were US residents at 31 December 2005.

 

The geographic distribution of our share ownership as of 31 December 2005 is presented below:

 

UK

   41 %

US

   43 %

Asia Pacific, Latin America, Africa & Middle East and Continental Europe

   16 %

Total

   100 %

 

B. Related Party Transactions

 

None.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

68


ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

See Item 18.

 

Outstanding legal proceedings

 

The Company has claims against others and there are claims against the Company in a variety of matters arising from the conduct of its business. In the opinion of the management of the Company, the ultimate liability, if any, that is likely to result from these matters would not have a material effect on the Company’s financial position, or on the results of operations.

 

Dividend distribution policy

 

The Group continues to increase dividends. The profit before tax for the year was £592.0 million (2004: £434.4 million). The directors of the Company recommended a final dividend of 6.34p (2004: 5.28p) per share to be paid on 3 July 2006 to share owners on the register at 2 June 2006 which, together with the interim ordinary dividend of 3.00p (2004: 2.50p) per share paid on 14 November 2005, makes a total of 9.34p for the year (2004: 7.78p), an increase of 20%.

 

ADR holders are eligible for all stock dividends or other entitlements accruing on the underlying WPP Group plc shares and receive all cash dividends in US dollars. These are normally paid twice a year. Dividend cheques are mailed directly to the ADR holder on the payment date if ADRs are registered with WPP’s US depositary, Citibank N.A. Dividends on ADRs that are registered with brokers are sent to the brokers, who forward them to ADR holders.

 

B. Significant changes

 

None.

 

69


ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing Details

 

Share price history

 

The Company’s ordinary shares have been traded on The London Stock Exchange since 1971.

 

The following table sets forth, for the periods indicated, the reported high and low middle-market quotations for the Company’s ordinary shares on The London Stock Exchange, based on its Daily Official List.

 

    

£ per

Ordinary Share

     High    Low

2001

   8.89    4.60

  
  

2002

   8.11    3.91

  
  

2003

   5.96    3.20

  
  

2004

         

First Quarter

   6.43    5.31

  
  

Second Quarter

   5.88    5.29

  
  

Third Quarter

   5.58    4.70

  
  

Fourth Quarter

   5.90    4.98

  
  

2005

         

First Quarter

   6.26    5.50

  
  

Second Quarter

   6.23    5.60

  
  

Third Quarter

   6.08    5.61

  
  

December

   6.31    5.70

  
  

Fourth Quarter

   6.31    5.35

  
  

2006

         

January

   6.45    6.18

  
  

February

   6.72    6.19

  
  

March

   6.99    6.74

  
  

First Quarter

   6.99    6.18

  
  

April

   7.07    6.72

  
  

May

   6.94    6.43

  
  

 

70


The ordinary shares have traded in the United States since 29 December 1987 in the form of ADSs, which are evidenced by ADRs or held in book entry form. The Depositary for the ADSs is Citibank, N.A. in New York. The following table sets forth, for the periods indicated, the reported high and low sales prices of the ADSs as reported by NASDAQ.

 

     US dollars per ADS
     High    Low

2001

   65.31    34.50

2002

   58.50    30.16

2003

   49.93    26.74

2004

         

First Quarter

   59.50    48.64

Second Quarter

   53.53    46.86

Third Quarter

   50.94    42.39

Fourth Quarter

   56.50    45.02

2005

         

First Quarter

   60.05    51.27

Second Quarter

   58.52    51.05

Third Quarter

   54.07    50.05

December

   55.30    49.58

Fourth Quarter

   55.30    47.34

2006

         

January

   56.85    55.37

February

   58.46    53.72

March

   60.88    58.65

First Quarter

   60.88    53.72

April

   62.73    58.57

May

   64.71    60.39

 

The Depositary held 121,588,243 ordinary shares as at 31 December 2005, approximately 9.71% of the outstanding ordinary shares, backing 24,317,649 outstanding ADSs.

 

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

See the discussion under “Share Price History” in Item 9.A.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

71


ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

WPP is a public limited company incorporated under the name “WPP Group plc” in England and Wales with registered number 05537577.

 

The following summarises certain provisions of our memorandum and articles of association and applicable English law. This summary is qualified in its entirety by reference to the UK Companies Act 1985 and our memorandum and articles of association. A copy of our articles of association in the form adopted on 16 August 2005 is filed as an exhibit to this annual report on Form 20-F.

 

Objects and Purposes

 

Clause 4 of the Company’s memorandum of association provides that the Company’s principal objects are to carry on the business or businesses of media advertising, market research, public relations, sales promotion and specialist communications and to develop concepts for advertising, marketing, research, sales promotion and similar operations. The Company’s memorandum grants it a range of corporate capabilities to effect these objects.

 

Directors

 

Interested Transactions. Subject to any restrictions under the Companies Act 1985, and provided the director has disclosed the nature and extent of the interest to the board, the director may:

 

    have any kind of interest in a contract with or involving the company or another company in which WPP has an interest;

 

    have any kind of interest in a company in which WPP has an interest;

 

    hold a position, other than auditor, for WPP or another company in which WPP has an interest on terms and conditions decided by the board; and

 

either alone, or through a firm with which the director is associated, do paid professional work other than as an auditor for WPP or another company in which WPP has an interest on terms and conditions decided by the board.

 

When a director knows that he or she is in any way interested in a contract with WPP he or she must disclose the nature of that interest at a meeting of the directors. A general notice given to the board that a director has an interest of the kind stated in the notice in a contract involving a person identified in the notice is treated as a standing disclosure that the director has that interest.

 

Subject to the provisions of our articles of association, a director shall not vote (or be counted in the quorum at the meeting) on a resolution about a contract in which the director, or a person who is connected with the director, to his knowledge has a material interest. The director can vote, however, if the interest is only an interest in WPP’s shares, debentures or other securities. In addition, a director can vote and be counted in the quorum on a resolution in which the director has a material interest, provided the material interest arises only because the resolution relates to:

 

    the giving of a guarantee, security or indemnity in respect of money lent or obligations incurred by the director or that other person at the request of, or for the benefit of, WPP or any of its subsidiary undertakings;

 

72


    the giving of a guarantee, security or indemnity in respect of a debt or obligation of WPP or any of its subsidiary undertakings to that other person, if the director has taken responsibility for all or any part of that debt or obligation by giving a guarantee, security or indemnity;

 

    the offer by WPP or any of its subsidiary undertakings of any shares, debentures or other securities for subscription or purchase if the director takes part because the director is a holder of shares, debentures or other securities, or if the director takes part in the underwriting or sub-underwriting of the offer;

 

    a contract involving any other company if the director, and any person connected with the director, has any kind of interest in that company. This does not apply if the director owns 1% or more of that company;

 

    a contract regarding an arrangement for the benefit of employees of WPP or any of its subsidiary undertakings which only give the director benefits which are also generally given to the employees to whom the arrangement relates; or

 

    a contract relating to the purchase of any insurance for the benefit of persons including directors.

 

A director shall not vote or be counted in a quorum on a resolution relating to his own appointment (including fixing or varying its terms) or the termination of his own appointment, as the holder of any office or place of profit with WPP or a company in which WPP is interested.

 

Subject to any restrictions under the Companies Act 1985 and our articles of association, the board may exercise or arrange the exercise of the voting rights attached to any shares in another company held by WPP and may exercise voting rights which they have as directors of that company in any way they decide. This includes voting in favor of a resolution appointment any of them as directors or officers of that company and determining their remuneration.

 

Remuneration. The directors (other than any director who for the time being holds an executive office of employment with WPP or a subsidiary of WPP) shall be paid out of the funds of WPP by way of remuneration for their services as directors such fees not exceeding in aggregate £1,000,000 per annum or such larger sum as WPP may, by ordinary resolution, determine. Such remuneration shall be divided among the directors in such proportion and manner as the board may decide. The board may also make arrangements for such proportion of the fees payable to any director to be provided in the form of fully paid ordinary shares in the capital of WPP in accordance with the provisions of the articles of association.

 

The board may also repay to a director all expenses properly incurred in attending and returning from general meetings, board meetings or board committee meetings, or expenses arising in any other way in connection with WPP. A director may also be paid out of the funds of WPP all expenses incurred by him in obtaining professional advice in connection with the affairs of WPP or the discharge of his duties as a director.

 

The board may grant special remuneration to a director who performs any special or extra services which the board considers extends beyond the ordinary duties of a director. Such special remuneration may be paid by way of lump sum, salary, commission, profit sharing or otherwise as decided by the board and may be paid in addition to any other remuneration payable.

 

The board may decide whether to provide pensions, annual payments or other allowances or benefits to any person, including those who are or who were directors, their relations or dependants, or anyone connected to them. The board may also decide to contribute to a scheme, pension or fund or to pay premiums to a third party for these purposes.

 

73


Appointment. Directors may be appointed by the share owners by ordinary resolution or by the board of directors. A director appointed by the board holds office only until the next annual general meeting but shall be eligible for reappointment. Unless otherwise determined by ordinary resolution, the number of directors shall not be less than six in number. There is no requirement of share ownership for a director’s qualification.

 

Retirement and Age Limit. At each annual general meeting, any director then in office who has been appointed by the board since the previous annual general meeting, or any director who at the date of the notice convening the annual general meeting has held office for more than 3 years since he was appointed or last reappointed by WPP in general meeting, shall retire from office but shall be eligible for reappointment. There is no age limit for directors.

 

Borrowing Powers. The board may exercise all the powers of WPP to borrow money, mortgage or charge all or part of its undertaking, property and assets (present and future) and uncalled capital and to issue debentures and other securities and give security either outright or as collateral security for any debt, liability or obligation of WPP or of any third party.

 

The board shall restrict the borrowings of WPP and exercise all voting and other rights or powers of control exercisable by WPP in relation to its subsidiary undertakings so as to secure that the aggregate amount of all borrowings at any time is not more than two and a half times adjusted capital and reserves. This affects subsidiary undertakings only to the extent the board can do this by exercising these rights or powers of control. This limit can be exceeded if the consent of the share owners has been given in advance by passing an ordinary resolution. The limit does not include the borrowings owing by one group company to another group company.

 

Indemnity of Directors. Subject to any restrictions under the Companies Act 1985, every director or other officer (excluding an auditor) of WPP may be indemnified out of the assets of WPP against all liabilities incurred by him in the actual or purported execution or discharge of his duties, or the exercise or purported exercise of his powers or otherwise in relation to or in connection with his duties, powers or office. This indemnity shall not apply to any liability to the extent that it is recovered from any other person.

 

Ordinary Shares

 

Each of the issued WPP ordinary shares is fully paid and not subject to any further calls or assessments by WPP. There are no conversion rights, redemption provisions or sinking fund provisions relating to any WPP ordinary shares. The WPP ordinary shares are issued in registered form.

 

WPP may, subject to the Statutes and the articles of association, issue share warrants with respect to fully paid shares. It may also, with the approval of share owners in general meeting, convert all or any of its paid up shares into stock and re-convert stock into paid up shares of any denomination.

 

Voting Rights and General Meetings. At a general meeting an ordinary resolution or any other question (other than a special or extraordinary resolution) put to a vote shall be decided by a show of hands unless a poll is duly demanded. A poll may be demanded by:

 

    the chairman of the meeting;

 

    at least five share owners present in person or by proxy, and who are entitled to vote on the resolution;

 

    any share owner(s) present in person or by proxy, who represent in the aggregate at least 10% of the voting rights of all share owners entitled to vote on the resolution; or

 

74


    any share owner(s) present in person or by proxy, who hold shares providing a right to vote on the resolution on which the aggregate sum paid up on such shares is equal to not less than 10% of the total sum paid up on all the shares providing that right.

 

All special resolutions and extraordinary resolutions shall be decided on a poll.

 

Subject to disenfranchisement in the event of (i) non-payment of any call or other sum due and payable in respect of any shares or (ii) any non-compliance with any statutory notice requiring disclosure of the beneficial ownership of any shares, and subject to any special rights or restrictions as to voting for the time being attached to any shares on a show of hands, every holder of WPP ordinary shares who (being an individual) is present in person or (being a corporation) is present by a duly authorised representative at a general meeting of WPP will have one vote and every person present who has been appointed as a proxy shall have one vote, and on a poll, every holder of WPP ordinary shares who is present in person or by proxy will have one vote per share. In addition, any proxy who has been appointed by the ADS Depositary shall have such number of votes as equals the number of shares in relation to which such proxy has been appointed.

 

In the case of joint holders, the vote of the person whose name stands first in the register of members and who tenders a vote is accepted to the exclusion of any votes tendered by any other joint holders.

 

The necessary quorum for a general share owner meeting is a minimum of two persons entitled to vote on the business to be transacted, each being a share owner or a proxy for a share owner or a duly authorised representative of a corporate share owner.

 

An annual general meeting and an extraordinary general meeting called for the passing of a special resolution or a resolution of which special notice is required by the Statutes or a resolution appointing any person (other than a retiring director) as a director shall be called by not less than twenty one clear days’ notice. All other extraordinary general meetings shall be called by not less than 14 clear days’ notice. Only those share owners entered in the register of members 48 hours prior to the date of the meeting are entitled to vote at that meeting and the number of shares then registered in their respective names shall determine the number of votes such share owner is entitled to cast at that meeting.

 

Dividends. WPP may, by ordinary resolution, declare a dividend to be paid to the share owners according to their respective rights and interests in profits, and may fix the time for payment of such dividend. No dividend may be declared in excess of the amount recommended by the directors. The directors may from time to time declare and pay to the share owners of WPP such interim dividends as appear to the directors to be justified by the profits of WPP available for distribution. There are no fixed dates on which entitlement to dividends arises on WPP ordinary shares.

 

The share owners may pass, on the recommendation of the directors, an ordinary resolution to direct all or any part of a dividend to be paid by distributing specific assets, in particular paid up shares or debentures of any other company.

 

The articles also permit a scrip dividend scheme under which share owners may be given the opportunity to elect to receive fully paid WPP ordinary shares instead of cash, or a combination of shares and cash, with respect to future dividends.

 

If a share owner owes any money to WPP relating in any way to shares, the board may deduct any of this money from any dividend on any shares held by the share owner, or from other money payable by WPP in respect of the shares. Money deducted in this way may be used to pay the amount owed to WPP.

 

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Unclaimed dividends and other money payable in respect of a share can be invested or otherwise used by directors for the benefit of WPP until they are claimed. A dividend or other money remaining unclaimed twelve years after it first became due for payment will be forfeited and cease to remain owing by WPP.

 

Return of capital. In the event of a winding-up or other return of capital of WPP, the assets of WPP available for distribution among the share owners will be divided, subject to the rights attached to any other shares issued on any special terms and conditions, between the holders of WPP ordinary shares according to the respective amounts of nominal (par) value paid up on those shares and in accordance with the provisions of the Companies Act 1985. The liquidator may, if authorised by an extraordinary resolution of share owners and subject to the Companies Act 1985, divide and distribute among the share owners, the whole or any part of the non-cash assets of WPP in such manner as he may determine.

 

The liquidator may also, with the same authority, transfer any assets to trustees upon any trusts for the benefit of share owners as the liquidator decides. No past or present share owner can be compelled to accept any shares or other property which could subject him or her to a liability.

 

Alteration of Share Capital. WPP may from time to time by ordinary resolution of our share owners:

 

    increase its share capital by the amount, to be divided into shares of the amounts, that the resolution prescribes;

 

    consolidate and divide all or any of its share capital into shares of a larger amount than the existing shares;

 

    cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of the share capital by the amount of the shares cancelled; and

 

    subject to the Statutes, subdivide any of its shares into shares of a smaller amount than that fixed by the memorandum of association, provided that the proportion between the amount paid and the amount, if any, unpaid on each reduced share must be the same as on the share from which the reduced share is derived, and the resolution may determine that any of the shares resulting from the sub-division may have any preference or advantage or have qualified or deferred rights or be subject to any restrictions.

 

Subject to the Statutes, WPP may purchase or enter into a contract to purchase any of its own shares of any class (including any redeemable shares, if we should decide to issue any) provided that the approval of either more than 50% (in the case of open market purchases) or 75% (in the case of private purchases) of attending share owners present in person or by proxy at a general meeting of share owners is given. However, shares may only be repurchased out of distributable profits or the proceeds of a fresh issue of shares made for that purpose, and, if a premium is paid it must be paid out of distributable profits.

 

WPP may, by special resolution, reduce its share capital or any capital redemption reserve, share premium account or other nondistributable reserve, subject in each case to confirmation by the English Courts.

 

Transfer of Shares

 

Unless the articles of association specify otherwise, a share owner may transfer some or all of his or her shares to another person in any manner which is permitted by the Statutes and is approved by the board. Transfers of uncertificated shares must be carried out using the relevant system. The

 

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instrument of transfer for certificated shares must be signed by or on behalf of the transferor and except in the case of a fully paid share, by or on behalf of the transferee and must be delivered to the registered office or any other place the directors decide.

 

The directors may refuse to register a transfer:

 

    if it is of shares which are not fully paid;

 

    if it is of shares on which WPP has a lien;