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THOMSON REUTERS PLC /ADR/ 20-F 2006 Documents found in this filing:UNITED STATES FORM 20-F (Mark One)
Commission file number 333-08354 Reuters Group PLC (Translation of Registrant’s name into English) England The Reuters Building, South
Colonnade, Canary Wharf, London E14 5EP,
England Securities registered or to
be registered pursuant to Section 12(b) of the Act: Securities registered or to
be registered pursuant to Section 12(g) of the Act: Securities for which there
is a reporting obligation pursuant to Section 15(d) of the Act: 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.
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 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 
Contents
Definitions of company
International Financial Reporting Standards and UK GAAP The 2004 comparatives have been restated as part of the first-time adoption requirements of IFRS. As allowed by SEC rules in relation to first-time adoption of IFRS, only one year of comparatives is reported in this annual report. IFRS differs in certain respects from accounting principles generally accepted in the United States (US GAAP). The material differences between IFRS and US GAAP relevant to the Group are explained on pages 104 to 108. The accounts for the parent entity Reuters Group PLC (refer pages 112 to 117) continue to be prepared in accordance with UK GAAP. Presentational
currency
Forward-looking statements
Trademarks
First year of revenue growth (up 3%) since 2001 Recurring revenue2 of £2,242 million (up 4%) was driven by the acquisition of Moneyline Telerate (Telerate) and price increases. Usage revenue2 of £97 million (up 13%) reflected a good performance in transaction services and higher reuters.com advertising revenue. Outright revenue2 was £70 million (down 22%) with the fall principally explained by our continued withdrawal from technology consulting.
Operating profit up £13 million, trading profit1 up £8 million Trading profit of £334 million (trading margin 14%) was up £8 million over 2004. A strong revenue performance combined with continuing tight cost control was sufficient to fund our Core Plus transformation and growth investments of £41 million and a £7 million charge relating to an accounting change in the Reuters Pension Fund (RPF), to a defined benefit plan. Within trading profit, the three year Fast Forward restructuring programme delivered additional savings of £126 million, bringing the cumulative total from the programme to £360 million.
Profit for the year up £107 million Profit from discontinued operations, which is where Instinet Group is reported as the disposal of a major business line, was £253 million. This largely represents profit realised from our disposal of Instinet Group (£191 million) and profit from Instinet Group in the eleven months prior to its sale (£68 million). Profit from other asset disposals totalled £38 million, largely from further sales of our remaining stake in Tibco Software Inc. (TSI).
EPS up 6.6p to 32.6p and adjusted EPS1 up 2.0p to 13.8p Adjusted EPS was 13.8p in 2005, up 2.0p from the previous year, reflecting stronger trading profit and a reduction in the number of shares in circulation due to the share buyback programme.
Dividend of 10p per share
Net assets stand at £570 million Net funds1 were £253 million, down £73 million from the previous year. During 2005, £363 million of cash was returned to shareholders via dividend payments and as a result of the share buyback programme to return £1 billion to shareholders by July 2007.
I
am greatly encouraged by what
In my first full year as Chairman, I have had the opportunity to travel around the Reuters world, meeting many of our people and customers. I am greatly encouraged by what I have seen and heard – a business regaining its confidence, and that of its customers, and well placed to enter a new phase of growth. I am humbled by the courage and conviction shown by our people, particularly our journalists who continue to operate in areas where the threat of violence and arbitrary detention is the norm. In 2005, we mourned the deaths of Waleed Khaled, who was shot and killed in Iraq, and Rashid Khaled who died there too following a car crash in Basra. We remain intensely troubled by the difficult circumstances of journalists in war zones and continue to press for a better model of engagement between the media and the military. I am privileged to lead a world-class Board, which encompasses a broad range of backgrounds and experiences. I am a passionate believer in the power of diversity to enhance decision making. The unique outlook each Board member brings is undoubtedly the Board’s greatest asset. As a Board, we have worked hard to develop a healthy relationship with management, characterised by constructive challenge and support. Tom Glocer is an exceptional Chief Executive. The Board and management have worked together to define a coherent strategic framework. The resulting strategy for growth builds on our core strengths in content and transaction services and addresses our customers’ critical needs. We must also continue to transform our core business, by pursuing greater efficiency and simplicity in everything we do. In a world where trust is scarce, the Reuters brand, which has trust at its heart, resonates deeply. It is our challenge to grow the company to fill the space occupied by the brand. Reuters is unique in that it is governed by the Reuters Trust Principles, which commit us to act with integrity, independence and without bias. These principles are not restricted to the collection and dissemination of the news. They inform every decision we make, whether it concerns our customers, suppliers, staff or the communities in which we operate. A responsible approach to business is not optional. Without responsibility there is no sustainability. For over 150 years, Reuters has been relentless in the pursuit of truth. We have built one of the world’s great brands. Now I am confident that we are on course to enjoy a new phase of growth.
We’ve completed the ‘Fix it’ stage of
What
was the highlight for you in 2005?
Fast Forward has just completed. Did it achieve its objectives? Last July the company launched the Core Plus growth initiatives
which you said would strengthen the core business and accelerate revenue growth.
It’s
very early, but is that working
as you had hoped?
How do you think our customers are responding to those changes? First, is it coming through in revenues and in sales? The answer is yes, we’ve seen increases in these lines. Second, by how they tell Reuters they are feeling – we have a formal customer satisfaction survey that goes to about 12,000 users and that’s shown steady improvement. And finally, the thing I really like is, I just go out and spend time with customers. I walk around the trading desks, I talk to our customers, and they tell me they can see the difference at Reuters. And
what about the product offering at Reuters?
This review is taken from a video interview with Tom Glocer which can be seen at www.about.reuters.com/investors.
We’re returning cash to the market via a share buyback. Why was that
method chosen above others?
Looking to 2006, what do you see lying ahead for the company?
What are your ambitions for the Media business?
Why are electronic trading systems so important to Reuters?
How is Reuters culture changing?
The selected financial information set out below is derived from the consolidated financial statements. The selected financial data should be read in conjunction with the financial statements and related notes (pages 50 to 108), as well as the Operating and Financial Review on pages 7 to 30. The consolidated financial statements are prepared in accordance with IFRS, which differs in certain respects from US GAAP. For a summary of the material differences between IFRS and US GAAP and related information relevant to the Group, see pages 104 to 108. Consolidated income statement data
Selected financial highlights continued
Consolidated
balance sheet data
Company information We provide tools to enable traders to perform fast and accurate analysis of financial data and to manage trading risk. Our electronic trading services connect financial communities, helping them to gain access to the best prices and to trade efficiently and cost-effectively. We offer systems to help our customers manage trade processing, financial content and internal business processes more effectively throughout their organisations. Until December 2005, we owned a 62% stake in Instinet Group, a global electronic agency securities broker which operated two major businesses: Instinet, an institutional broker, and INET, an electronic marketplace. On 8 December 2005 we disposed of our entire interest when Instinet Group was acquired by the NASDAQ Stock Market Inc (NASDAQ) for cash. As a result of this transaction, we received cash proceeds of $1.1 billion (£630 million), which includes the dividend received from Instinet Group prior to disposal, less disposal costs. We intend to return the sale proceeds to shareholders as part of the two-year £1 billion share buyback programme announced in July 2005. 02 The markets we serveFinancial markets More than 90% of our revenue comes from serving the wholesale financial services industry, which includes investment and commercial banks, broker-dealers, asset and wealth managers, and commodities and energy traders. We and our customers are affected by global economic trends and by developments in the financial services markets. In this section, we provide a high-level macro-economic overview of 2005 as the backdrop to our performance during the year and to highlight the factors we have taken into account in the development of our strategy.
The global economy in 2005
recovery in 2005, growing by an estimated 2%. The Euro zone economy struggled to gain momentum in 2005, up an estimated 1.2% compared to 2% in the previous year. UK GDP growth fell to an estimated 1.9% in 2005 from 3.2% in 2004.
Financial services industry performance in 2005
Trading was a major source of profit for investment banks in 2005. Fixed income trading revenue remained strong despite increasing interest rates, and equity trading revenue continued on an upward trend as benchmark European and Asian stock indices surged. Foreign exchange (FX) trading volumes continued to grow, driven by increasing buy-side activity. Prime brokerage revenue, which includes securities lending, margin and other services provided by banks to the hedge fund industry, grew by an estimated 28% in 2005. Mergers and acquisitions (M&A) advisory also generated strong results for banks, with global M&A volume growing by 38% to reach $2.9 trillion of announced deals3. Derivatives and commodities markets continued to grow, with the notional amount outstanding of credit default swaps seeing a 48% increase in the first half of 20054.
According to the Securities
Industry Association, US securities industry employment grew by 3% in 2005, and
had recovered 59% of the jobs lost in the 2001–2003 downturn by the end
of
the year5. Headcount in the UK financial sector also grew by 3% in 2005, according to the Centre for
Economics and Business Research. However, much of this growth has been in off-trading floor areas such as compliance, and some banks are reported to have reduced their equity trading staff as they shift a greater proportion of their execution
services to direct market access and algorithmic trading.
Operating and Financial Review continued
Our challenge at Reuters is to ensure that we continue to respond to fundamental structural changes in our markets and the resulting changing requirements of our customers. By aligning our business to customer needs, we are better positioned to shift our focus towards the higher-growth areas of the financial markets.
Structural change On the regulatory front, we saw initiatives aimed at improving transparency and ensuring ‘best execution’ of client orders. In Europe, the financial services industry is preparing for the introduction of the Markets in Financial Instruments Directive (MiFID), which is due to be implemented in all EU member states in 2007. The directive increases the regulatory obligations of many market participants and is intended to harmonise regulation across the EU. In the US, the SEC adopted the Regulation National Market System (Reg NMS) in April 2005. The new regulation prompted several major changes to the US exchange landscape, with NASDAQ acquiring Instinet Group and the NYSE acquiring the Archipelago Exchange and announcing it would combine its physical trading floor and an automated platform into a hybrid market. In a response to the increased consolidation among US exchanges, a group of five banks and a hedge fund acquired 45% of the Philadelphia Stock Exchange.
New markets and alternative asset classes We saw further interest in investing in emerging markets in 2005. For example, despite structural challenges and restrictions on foreign investments, major Western banks acquired significant stakes in a number of Chinese banks. Demand for alternative asset classes such as structured financial products, property derivatives, and emission credits continued to increase in 2005. With booming property markets in many parts of the world, institutional investors increased their exposure to the property sector and property indices saw strong returns. Emission credits received much attention as an emerging alternative asset class with the launch of the EU’s Emissions Trading Scheme on 1 January 2005.
Media markets In Western media markets, broadcasters and publishers saw modest growth in advertising revenues for their traditional offerings. However, the emerging digital offerings of these providers (only approximately 5% of their total 2005 revenues came from digital platforms) experienced audience and advertising revenue growth of over 15%. In developing markets, particularly China and India, traditional and digital media platforms achieved double digit growth, according to Universal McCann. The news media industry has been in a slow transition for the past 20 years. Newspaper subscriptions continue to decline and newspaper audiences get older as younger audiences focus their attention on mobile and online services. Increased proliferation of cable news has caused a wider distribution of advertising and distribution revenues. It has also created new opportunities for audiences worldwide to obtain news. The proliferation of broadband at home has further accelerated the pace in the past three years. Online offerings have already established themselves as important media for news delivery as users prefer them to traditional media for their timeliness and their ability to go further in-depth. Technology advances are overcoming the portability advantages of printed publications and are allowing increasingly for time-shifting and television mobility.
03 Our strategy There are three stages to achieving this goal:
‘Fix it’ through Fast Forward, our three year business transformation
programme In addition, we have streamlined our portfolio over the last four years. The most significant disposal was the sale of our stake in Instinet Group, completed in 2005, which generated cash proceeds of £630 million. Customer satisfaction has been improved by recruiting and training new customer support staff and by investing in service resilience.
We use several tools, including a regular customer satisfaction survey of some 12,000 customers, to gather feedback. The survey has shown improvement year-on-year for the past three years. Consistent with our goal of making Reuters more efficient, we are on track to meet our cost savings targets. In 2005, we delivered cumulative annualised savings of £360 million, towards our goal of £440 million in 2006.
‘Strengthen it’ – continue to streamline and improve the
efficiency of our operations In July 2005, we announced four new service improvement initiatives: Rationalising our data centres from 250 to approximately 10 globally to reduce costs, simplify data distribution and help us to improve service quality; Simplifying our product development process and concentrating our development activities into fewer centres to improve product quality and reduce time to market; Streamlining our content management processes to improve the accuracy, timeliness and breadth of our data; Modernising our customer administration systems to make Reuters easier to do business with and enable us to deploy products faster to customers. We will be investing £170 million, over a four-year period, in our ‘strengthen it’ service improvement and cost efficiency initiatives. By 2010, we expect these to deliver total annualised savings of at least £150 million.
‘Grow it’ – grow our core business and pursue ‘Core
Plus’ growth opportunities in adjacent markets We are continuing to enhance our product line by introducing new versions of our flagship products, by broadening and deepening our content and by extending our distribution capability. For example, our acquisition of Telerate in 2005 brought us market benchmark content for the fixed income markets and increased our user accesses, notably in the US and Asia. As a result of this continued investment in our service offerings, we believe we can grow our business in line with the market. In addition, we have identified four ‘Core Plus’ growth opportunities which expand the market we are able to serve from £6 billion to £11 billion per annum. They also target higher growth areas, giving us the potential to deliver additional revenue growth from 2006 onwards.
Operating and Financial Review continued
We anticipate that together, these four new initiatives will generate one percentage point of revenue growth in 2006, in addition to revenue growth in the existing business which we expect to grow in line with the market. We expect additional revenue growth from new initiatives to deliver three percentage points of additional revenues in 2008.
04 Brand Reuters news and information reaches more than one billion people daily and trust in the Reuters brand remains key to our future success. Our reputation as a trusted source, neutral electronic trading platform and provider of essential enterprise-wide services for the financial sector will enable us to expand our business into new markets. In 2005, we re-launched our visual brand identity, creating a distinctive look which makes extensive use of Reuters award-winning photography. The move of our headquarters to Canary Wharf, London’s new financial district, also helped us to establish a strong brand presence among many of our largest customers. They are able to see Europe’s largest price ticker wrapped around our building, together with a giant screen displaying Reuters real time multimedia news.
05 People
Employees adapted to change Change has been a constant theme throughout 2005, as we have continued to re-balance our employee base to support our ‘strengthen it’ and ‘grow it’ strategic objectives. Our Bangalore content centre and Bangkok development centre have expanded as we renew our focus on content and strengthen our product line. Recruiting highly skilled employees in Asia has allowed us to extend the service we offer to our customers, enabling us, for example, to cover a wider range of news while containing costs and continuing to locate employees close to our customers. With 28% of employees now based in Asia, we are also well placed to support our growth strategies in the region. We are bringing in fresh markets, media, content and technology expertise, both through targeted hiring and through acquisition. During the year, we welcomed new employees to the Group through a series of acquisitions, including Telerate, Ecowin and Action Images. Reflecting our drive to recruit new talent, over 50% of our employees have joined us in the last five years.
Employee communications
Employee survey
Talent and performance management Employees’ performance is aligned to company goals through an annual performance review process that is carried out with all employees. Reviews focus both on the objectives that were set and how they were achieved, drawing on input from a range of people to ensure a rounded view of performance. The achievement of objectives is reinforced through our compensation plans.
Employee development
Employee safety
Equal opportunities and diversity Our policy is that the selection of employees, including for recruitment, training, development and promotion, should be determined solely on their skills, abilities and other requirements which are relevant to the job and in accordance with the laws in the country concerned. Our equal opportunities policy is designed, among other things, to ensure that people with disabilities, and other under-represented groups, are given the same consideration as others and enjoy the same training, development and prospects as other employees. In the UK, as well as being a member of the Employers Forum for Disability, we have made use of the services of both AbilityNet (which supplies technology for disabled users) and Employment Opportunities (a UK charity helping people with disabilities to find and retain work). We have successfully retained staff who have become disabled, as well as integrating those who are disabled when they join the company. This has been achieved by using technological solutions and re-designing the way jobs are handled, enabling individuals to contribute actively to meeting the needs of our business.
Our commitment to ethics and compliance As part of this global programme, we train our employees on key ethics and compliance areas; provide an anonymous and confidential system for staff to report concerns without the threat of retaliation; investigate and take appropriate measures when compliance issues are raised; and periodically assess the efficacy of the programme as a whole. On an individual level, ethics and compliance aspects are incorporated into our performance management system as we understand that each of us at Reuters must uphold the values and principles that have served Reuters well for so long and are at the very core of what defines Reuters as a business.
Employee profile
Remuneration
06 Corporate responsibility We steer our corporate responsibility strategy through our Corporate Responsibility Advisory Board, established in 2003, which comprises customer, supplier, investor and employee representatives. The Advisory Board considers workplace, marketplace, environment and community issues of relevance to our business and our employees and it is chaired by the General Counsel and Company Secretary, who represents it on the GMC and to the Board. For 2006, we have set ourselves the objectives of developing a code for our suppliers to adhere to when working with us; rolling out a programme of mentoring of senior managers by employees on diversity issues; raising employee participation in our Community Events Week to 15% in 45 locations; and creating a system for recording Reuters impact on the environment. Reuters is included in the Dow Jones Sustainability Index, the FTSE4Good Index, the Ethibel Sustainability Indices and the Ethibel Pioneer Investment Register. For information about our employees, see ‘People’ on page 10 to 11. For information about creditor payment terms see the Directors’ Report on page 31. For information about charitable donations, see the Directors’ Report on page 31. We also make extensive information available through our website www.about.reuters.com/csr.
07 Reuters in the community Reuters Foundation (www.foundation.reuters.com) continues to focus on areas where Reuters expertise in information gathering and communications can be put to use in ways which will benefit the communities in which we operate across the world. During the year, the Foundation offered training opportunities to journalists from all over the world, providing short courses for 391 journalists from 86 countries. Amongst the courses was a workshop in New York on HIV/AIDS reporting. In February 2006, to build on our work in this area, Reuters became a member of the Global Business Coalition on HIV/AIDS, an organisation which aims to increase the range and quality of business sector AIDS programmes in the workplace and in the community. The Reuters Institute for the Study of Journalism was launched in January 2006 (at the University of Oxford) with Reuters Foundation providing £1.75 million of funding over five years. The Institute builds on the Reuters Foundation Fellowship Programme at Green College, Oxford, and its reputation for engaging first class international journalists from across the world in serious research. It will focus on analysing the practice of journalism worldwide and examining the basis for reliable and accurate reporting in the digital age.
Operating and Financial Review continued
AlertNet (www.alertnet.org), established by Reuters Foundation in 1997, enables relief agencies and the public to share information about emergencies and associated relief efforts. In addition to carrying breaking news on emergencies, the site also helps to ensure that ‘forgotten emergencies’, those disasters long forgotten by the mainstream media, are kept in the headlines. We have seen traffic double over the past twelve months to an average 215,000 page views per day in December, as we add new content sources and as media recognition increases. The innovative Tsunami Aidwatch (www.alertnet.org/thefacts/aidtracker), set up by AlertNet to measure how much of the money pledged after the disaster was turned into actual funding for relief and reconstruction in the area, has helped position the service as an authority on humanitarian media issues. Reuters Digital Vision Program (RDVP) (www.rdvp.org) is a fellowship programme at Stanford University, California, which develops innovative applications of information and communication technologies to address the needs of under-served communities. Its projects focus on three areas: advancing financial services, knowledge & empowerment and networked health & welfare. In 2005, Reuters invested in the development of Project Market Light, a project initiated by a 2004–2005 RDVP fellow. Its goal is to help Indian farmers to price their produce more accurately, thereby enhancing their incomes, by delivering affordable, relevant and up-to-date commodities information to them by SMS over mobile phones. In response to the Asian tsunami disaster, we pledged a donation of $1 million to fund relief efforts in affected countries. To date, just over $435,000 (£235,809) has been awarded in grants to Thai and Indian charities working with victims. This figure includes a donation to the Surin Islands National Park as recognition for the support and assistance offered by Surin residents to employees from Reuters Software (Thailand) Ltd (RSTL), when they were caught on the island during the tsunami. Employees at RSTL have also volunteered their time to help restore the villagers’ livelihood. The remainder of the donation has been allocated to support house building programmes, with 64 Reuters volunteers travelling to Hikkaduwa in Sri Lanka to participate in rebuilding projects with Habitat for Humanity in 2005 and additional housebuilding team visits planned for 2006 and 2007. Building on the enthusiasm shown by employees for housebuilding projects, we are looking at offering employees further opportunities to build in areas of New Orleans affected by Hurricane Katrina, and KwaZulu Natal, South Africa, as part of a programme to provide housing to families devastated by AIDS. All employees may take one day of company time each year to engage in community activities. We focus on these activities during our annual Community Events Week programme. In 2005, 1,856 employees from 42 countries (12% of employees, 2004: 12%) participated in the scheme, undertaking a range of challenges. We encourage employees to use this opportunity to share their skills on projects ranging from hosted school visits, children’s events and fundraising to conservation work. We recognise that employees benefit from practising their professional and personal skills whilst team-building with their colleagues and providing valuable support to our communities. In addition, we operate programmes in the US and UK which match donations and fundraising efforts of our employees. Under these schemes we matched gifts of time and money amounting to £26,581 in the UK and just over $175,000 in the year. 2006 will see the launch of a similar scheme for employees across Asia. Further information on Reuters volunteering programmes can be found at www.about.reuters.com/csr.
08 Environmental impact Relocation to our new corporate headquarters in London’s Canary Wharf created an opportunity to introduce facilities which have a positive environmental impact. These include the use of fewer waste bins and plastic liners, movement sensitive lighting, default double-sided photocopying and piloting the use of recycled paper. Our entire UK property portfolio is now supplied with CCL-exempt green energy. Practices designed to reduce our environmental impact are also being rolled out in other centres in 2006. We also have a role to play in the effective communication of environmental issues. Reuters has 80 journalists providing environment news and we are expanding our coverage of environmental markets such as the carbon emissions markets. Through the Reuters Foundation, in 2005 we delivered six training workshops to over 100 non-Reuters journalists in Mexico, Germany, America, Kenya and Morocco in conjunction with funding partners.
09 Government regulation Under the provisions of the Financial Services and Markets Act 2000, Reuters Limited is regulated and authorised as a service company by the UK Financial Services Authority (FSA). Reuters Transaction Services Limited (RTSL), through which we offer Dealing 3000, equities order routing and our new suite of next generation transaction products such as RTFI, is also subject to regulation by the FSA. Since 1 April 2004 RTSL has been classified by the FSA as an Alternative Trading System (ATS). In accordance with the passporting provisions of the EU Investment Services Directive, RTSL provides its services through the European Economic Area (EEA). RTSL is also subject to regulatory approval in Singapore, Hong Kong and Australia, where it is approved by the Monetary Authority of Singapore, the Hong Kong Monetary Authority and by the Australian Securities and Investments Commission, respectively. Since late 2005 RTSL has also become subject to regulatory oversight by the Hong Kong Securities and Futures Commission. RTSL’s sister company in the United States, Reuters Transaction Services LLC (RTS LLC), is responsible for an equity order routing and indications of interest network. RTS LLC is subject to regulation by the National Association of Securities Dealers, Inc. (NASD). RTS LLC has been seeking additional approvals in the US to allow for the trading of other financial instruments such as derivatives.
In order to comply with anti-money laundering regulations and to reduce the opportunity for Reuters transactions products to be used as a conduit for money laundering operations, all our regulated subsidiaries have put in place appropriate ‘know your customer’ systems and controls. Financial review Non-GAAP measures Underlying change is calculated by excluding the impact of currency fluctuations and the results of acquisitions and disposals. Trading costs are calculated by excluding the following from operating costs from continuing operations: restructuring charges associated with Fast Forward and acquisitions, impairments and amortisation of intangibles acquired via business combinations, and fair value movements included in operating costs; and adding back foreign currency gains and other income (both of which are included in other operating income). Trading profit is calculated by excluding the following from operating profit from continuing operations: restructuring charges associated with Fast Forward and acquisitions, impairments and amortisation of intangibles acquired via business combinations, investment income, profits from disposals of subsidiaries and fair value movements. Adjusted EPS is calculated as basic EPS from continuing operations before impairments and amortisation of intangibles acquired via business combinations, investment income, fair value movements, disposal profits/losses and related tax effects. Free cash flow measures cash flows from continuing operations, other than those which are both discretionary in nature and unrelated to ongoing recurring operating activities such as the purchase of shares by the Employee Share Ownership Trusts (ESOTs), loans with associates and joint ventures and dividends paid out by Reuters. Net debt/net funds represents cash, cash equivalents and short-term investments, net of bank overdrafts and other borrowings. 10 Group performance
Revenue Recurring revenue, which represented 93% of our revenue in 2005, was £2,242 million (2004: £2,164 million). This represented an increase of 4% on an actual basis (1% underlying) compared to 2004, and was the first time underlying recurring revenue had grown since 2001. Usage revenues, 4% of our revenue in 2005, grew by 13% to £97 million (2004: £86 million). This was driven by strong performance from Reuters transaction services as well as higher advertising revenue from reuters.com.
Operating and Financial Review continued
Outright revenue, 3% of our revenue in 2005, totalled £70 million (2004: £89 million), a decline of 22% compared to 2004. This decline was mainly due to our continued withdrawal from technology consulting as part of the Fast Forward programme, a process which is nearing completion. Desktop accesses totalled 346,000 at the end of 2005, up 18,000 from the end of 2004. This increase was driven by our acquisition of Telerate. Average revenue per access (ARPA) for the fourth quarter of 2005 was up 2% to £309 compared to the same period in 2004, driven by price increases and a shift in the product mix to higher value accesses. 
Operating costs and trading costs Trading costs totalled £2,075 million in 2005 (2004: £2,013 million), up 3% on an actual basis (flat on an underlying basis), demonstrating our continued cost discipline. The differences between the underlying and actual increases are mostly related to acquisitions, principally Telerate, with the remainder due to currency movements. A change to the accounting treatment of the RPF, which is now recognised as a defined benefit plan rather than a defined contribution plan, resulted in an additional 2005 charge of £7 million. At the 2005 year end, a deficit of £223 million in the RPF was recorded on Reuters balance sheet. Further details on pension charges can be found in note 25 in the financial statements on page 84. We invested £41 million in the second half of 2005 in Core Plus transformation projects and growth initiatives. These included investment in new electronic trading products and rationalising data centres and product development units. 
The Fast Forward business transformation programme is now complete and we remain on track to achieve annualised cost savings of £440 million from the programme by the end of 2006, contributing to a total reduction from all transformation programmes of £900 million since 2001. In 2005, we delivered a further £126 million of annualised savings taking the total to £360 million under Fast Forward. These resulted largely from outsourcing our communications network to BT/Radianz in April 2005 (for more information on BT/Radianz, please refer to page 16), from further headcount reductions and from expanding our content and development facilities in Bangalore and Bangkok.
Operating profit and trading profit Trading profit was £334 million in 2005 (2004: £326 million). Trading margin was 14% (2004: 14%), after expenditure on investments in the Core Plus programme. The net effect of currency movements on trading profit was neutral with the small positive effect on revenue offset by a small negative effect in the cost base (please refer to ‘foreign exchange’ on page 22).
Profit for the year from continuing operations Net finance costs of £12 million were comparable to 2004, due to a broadly similar net debt position throughout the year, prior to completion of the Instinet Group disposal. Income from our associates and joint ventures in 2005 generated a net profit of £5 million, compared to £11 million in 2004. TSI and GL TRADE account for £5 million of this reduction as they contributed a net profit in 2004, prior to disposal. The tax charge for the year was £9 million, compared to £40 million in 2004. The reduction was mainly due to the benefit of settling prior year taxation matters. A reconciliation of the actual taxation charge to the taxation charge expected by applying the standard 30% UK rate of corporation tax to the reported profits is provided in note 6 of the financial statements on pages 61 to 62.
Profit for the year from discontinued operations
Earnings per share
Note: Refer to section 20 on page 30 for reconciliation to Group cash flows.
Note: Refer to section 20 on page 30 for reconciliation to statutory cash flow. Cash generated from continuing operations was £268 million. Free cash flow was £88 million in 2005 (2004: £208 million). The year-on-year decline was driven by increases both in capital investment and restructuring charges. Higher capital investment resulted from our move to our new London headquarters at Canary Wharf, stepped-up investment in data centres and the capitalisation of product development and software costs. 2005 cash restructuring costs were £147 million (2004: £100 million), of which £132 million represented the peak year for Fast Forward cash charges and the remainder related mainly to the integration of Telerate. Cash flow in 2004 also benefited from £49 million of proceeds from the sale of property, plant and equipment disposals which did not recur in 2005. Net funds were £253 million (2004: £326 million). The 2004 amount included £507 million of net funds at Instinet Group, reduced by £181 million of net debt in Reuters. Excluding Instinet Group, the year-on-year improvement in net debt to net funds is largely due to cash flow from operations of £268 million and net cash proceeds from disposals/acquisitions (largely Instinet Group) of £710 million. These inflows were partly offset by net purchases of assets of £182 million, dividend payments to Reuters shareholders of £140 million, and payments made as part of the share buyback programme of £223 million.
Dividends
Balance sheet
The main movements in the Group balance sheet are:
Our largest acquisition during the year was that of Telerate for £122 million, which completed in June 2005. Other smaller acquisitions included Action Images (September 2005) and EcoWin (November 2005). Disposal activity for the year included our 62% stake in Instinet Group to NASDAQ for gross proceeds of £612 million (we realised a gain on sale of £191 million), along with the dividend received from Instinet Group in July 2005 of £37 million following the sale of its Lynch, Jones & Ryan (LJR) to the Bank of New York for £96 million. The net proceeds from these transactions (including our March 2005 sale of BTC to Instinet Group) totalled approximately £630 million. Other disposals included our sale of 16 million shares in TSI for £63 million, realising a profit of £33 million, and the sale of Radianz to BT in April 2005 for £115 million cash, resulting in a loss of £4 million.
2006 Outlook Within operating profit and trading profit, we expect 2006 to benefit from the final £80 million of Fast Forward savings, taking the total to £440 million of annualised savings which we committed to in February 2003. In line with our guidance in July 2005, operating profit and trading profit in 2006 are expected to reduce by £120 million due to investments to drive Core Plus growth and transformation.
Operating and Financial Review continued
In cash flow, we expect to spend £220 million on capital investment in 2006, up from £178 million in 2005, as we continue to invest in new data centres and step up the level of product development under Core Plus, as well as continuing enhancements to our core services and infrastructure. As part of the £220 million, we expect to capitalise around £80 million of software and development expenditure. This increase will be more than offset by an expected £90 million fall in restructuring spend relating to Fast Forward and Telerate integration.
11 Divisional performance The business divisions have profit and loss responsibility. Revenues and trading profit for the two years to 31 December 2005 are analysed by business division in the following sections. We have equipped our managers to take on greater accountability for divisional performance by introducing Profitability Insight, an activity-based costing (ABC) tool which enables us to allocate and monitor costs by business division, by product, by region and by major customer (see Critical Accounting Policies on page 22). Further information on revenue by division and by geography is included in note 1 of the financial statements on pages 58 to 59. The software development teams who build and support our products and delivery platforms were integrated into the business divisions in 2005. They work closely with the product management teams and market experts responsible for identifying opportunities and defining product strategy. Shared infrastructure design is provided by an infrastructure team tasked with providing technical coherence, scale efficiencies and compliance with standards. We face competition in all the market sectors and geographical areas in which we operate. We monitor the competitive landscape actively in order to be able to respond to market developments.
Global Sales and Service Operations (GSSO) Locally, members of our sales and service teams work with customers to build relationships and to identify the correct Reuters products to meet customer needs and to feed back customer needs to the business divisions. Through regular training visits, our customer training specialists work with end-users to ensure they get full value from our products. In addition we provide product, content and technical support by telephone and email from three regional hubs, one based in each principal time zone. We also offer proactive telephone support and remote learning to help users of our premium products get the most out of their service. To increase awareness of the latest developments in our product range, we have a ‘brightspot’ travelling showcase for Reuters products, visited by over 7,000 customers in 35 cities around the world in 2005.
Content Our Data group is responsible for collecting, producing, packaging and delivering an extensive range of financial information from an array of sources such as exchanges, over-the-counter markets, research services and other contributors such as energy and fixed income data providers, as well as from our own news, research and data operations. Our coverage includes data from over 300 exchanges, more than 1.2 million bonds, 250,000 foreign exchange and money market instruments and award-winning commodities and energy content. This is further complemented by data from around 4,000 financial services contributors. In addition, our fundamentals and estimates data is recognised as a leading source of high quality financial information covering over 43,000 companies worldwide. Our acquisition of Telerate brought us additional key content for the fixed income, money, foreign exchange and over-the-counter derivatives markets. We have content operations in the UK and the US and in 2004 we opened a content operation in Bangalore, India. This now has almost 1,200 employees, most in highly skilled jobs, and continues to grow, enabling us to expand our content coverage to meet growing customer needs as well as achieving operating efficiencies.
Communications networks We have major technical centres in the Asian, European and American time zones, supported by many smaller local data centres. The data centres are linked by communications services provided principally by BT/Radianz (see above) and SAVVIS, Inc. (Savvis). The services agreements with BT/Radianz and with Savvis are important to our ability to deliver products and services to customers. Summaries of these network services agreements and the Radianz purchase and sale agreements are given on pages 123 and 125.
Our products
11.1 Sales & Trading division The Sales & Trading division is responsible for the Reuters Xtra and Reuters Trader families of products:
Reuters Xtra family is targeted at the most sophisticated end-users within the sales, trading and portfolio management functions. It includes cross-asset class, cross-geography information, advanced integrated analytics and electronic trading capabilities. We have now installed more than 100,000 accesses of our Reuters 3000 Xtra product. Our customers have access to a trading community of around 18,000 foreign exchange and money market traders globally. They can also use Reuters large equities order routing network to gain electronic access to over 200 brokers and exchanges, including their proprietary trading algorithms. Reuters Trader family is targeted at salespeople and traders who do not need the sophistication and full integration capability offered by the Reuters Xtra family of products, including those who focus on domestic and regional financial instruments. We are working to complete the migration of our customers from older products such as the 2000 and 3000 series to new Reuters Trader products, many of which are browser-based. Reuters Enterprise Connectivity family offers electronic trading and order routing tools to enable customers to connect their systems to electronic markets. It also includes Reuters Messaging to enable end-users to interact with their peers in the financial community. Our Sales & Trading information products compete with Bloomberg, Thomson Financial (a division of The Thomson Corporation), Sungard, Telekurs, IDC, and Factset, as well as stock exchanges, plus a number of smaller local and regional competitors which offer information products for the financial markets. In the electronic trading business we compete with, among others, stock exchanges, particularly in the energy and commodity markets; direct market access providers such as Lava, Liquidnet and Sonic, now owned by banks; order management system providers, which are increasingly adding information and trading capabilities; single bank portals and multi bank portals such as FX All; and other electronic execution venues such as Market Axess, Thomson TradeWeb, EBS, Bloomberg and ICAP. Financial performance
Reconciliations between the GAAP and non-GAAP measures are provided in section 20 on page 27. Revenue from Sales & Trading, 66% of our total revenue for the year, was £1,595 million (2004: £1,542 million), up 3% on an actual basis and down 1% on an underlying basis. The incorporation of Telerate revenue accounts for most of the difference between the underlying and actual results. Reuters Xtra family revenue in Sales & Trading grew by 11% compared to 2004. Reuters 3000 Xtra revenue growth of 18% in 2005 came from a mixture of new business, including the displacement of competing desktops at some of our largest customers, and the migration of customers from legacy products. Trading capabilities played an important part in the performance of the Reuters Xtra family in 2005. In particular, usage revenue from FX trading over Reuters Dealing was up 10%. As trading between banks and their customers continued to move from phone to screen, Reuters Electronic Trading added 30 new customers in 2005 and saw volumes increase six fold. Our newest transactions products, RTFI and RTFX, continued to build momentum with significant increases in active traders and trading volumes. Reuters Messaging is proving increasingly popular in the credit and fixed income communities, and now has around 60,000 regular users. In the Reuters Trader family, reductions in legacy positions continue to be the main drag on recurring revenue, although cancellations were mostly of lower value accesses. Migration to Reuters 3000 Xtra and continued growth in new Reuters Trader positions (over 8,200 now installed) ensured that overall revenue retention within Reuters remained high. Operating costs totalled £1,475 million, up 6%. Within this trading costs totalled £1,354 million, up 5% on an actual basis but flat on an underlying basis compared to 2004, with the incorporation of Telerate costs accounting for the majority of the difference. Fast Forward savings from reduced communications costs under the BT/Radianz agreement were offset by investment in our Core Plus initiatives, notably electronic trading and development and data centre restructuring, as well as service resilience. Looking forward to 2006, the major revenue drivers in Sales & Trading are expected to be new trading services; continued growth from Reuters 3000 Xtra; Telerate revenue retention; and the deployment of Reuters Trader to reduce attrition and attract new customers. There will be three sources of revenue from electronic trading: transactions-based revenues; recurring revenue from new desktop sales; and per message fees from trades processed through the Reuters Trade Notification Service. Increased Core Plus investment in electronic trading and development transformation will affect Sales & Trading profitability.
11.2 Research & Asset Management division Research & Asset Management division is responsible for the Reuters Knowledge and Reuters Wealth Manager product families: Reuters Knowledge family is targeted at the research and advisory business, including investment bankers and analysts, portfolio managers, and others focused on company and industry-specific research. Reuters Knowledge offers an integrated package of public and proprietary fundamental information about companies, plus economic data, as well as markets information, news and other content. It can be integrated with Reuters flagship real time information desktop product, Reuters 3000 Xtra. Reuters Wealth Manager family is targeted at wealth managers and retail brokers who require products that can be integrated closely into their workflow, helping users manage their clients’ portfolios better and allowing more time to concentrate on building deeper client relationships. The Reuters Wealth Manager family includes information on a wide range of managed funds provided by our Lipper subsidiary. Research & Asset Management division also receives a share of revenue from Reuters 3000 Xtra and the Reuters 2000/3000 range of products.
Operating and Financial review continued
In the Research & Asset Management arena, we compete with Thomson Financial, Factset and Standard and Poor’s, as well as smaller niche players. Our Lipper funds information business competes with Morningstar and the Micropal unit of Standard & Poor’s and a number of local domestic players. Financial performance
Reconciliations between the GAAP and non-GAAP measures are provided in section 20 on page 27. Revenue from the Research & Asset Management division, 11% of our total revenue for the year, was £268 million, up 2%. Revenue from the Reuters Xtra and Reuters Trader families included in the Research & Asset Management division grew 5% to £76 million. Our success in making Reuters Knowledge available through Reuters 3000 Xtra and Reuters Trader was the key driver of this growth. In the Reuters Knowledge family, revenue of £57 million was down 12% at actual rates but up 9% on an underlying basis, excluding disposals. Underlying growth was driven by new sales of Reuters Knowledge and feeds of fundamentals and estimates data. Reuters Knowledge accesses grew by 3,000 over the course of 2005 to 11,000. In the Reuters Wealth Manager family, revenue of £135 million was up 8% at actual rates and 1% on an underlying basis. Growth in areas such as Lipper, our fund information subsidiary, and Reuters Plus, our US retail equities product, was partly offset by a revenue decline from products such as Reuters Markets Monitor where we decided to withdraw from unprofitable business. Operating costs totalled £305 million, up 3%. Within this trading costs totalled £288 million, a 7% increase compared to 2004. This increase resulted from investment in Core Plus, particularly development transformation; investment to enhance the performance of Reuters Wealth Manager; and targeted sales campaigns to drive the growth of Reuters Knowledge and Wealth Management products. This investment was partially offset by Fast Forward savings generated by the move of certain content activities to Bangalore. Looking forward to 2006, revenue growth in Research & Asset Management is expected to be driven by three factors: sales of Reuters Knowledge, both stand-alone and embedded in Reuters 3000 Xtra; improved Lipper content; and demand for new high value content such as the new MasterCard data and EcoWin macro-economic data. This will be more than offset by investment in high value content and product functionality as part of Core Plus. 11.3 Enterprise divisionOverview The Enterprise division provides solutions to the institution (as opposed to the individual user), including datafeeds (high-speed feeds of trading data in machine-readable formats), trading room systems and risk management systems. The Enterprise division delivers data in a range of formats for use throughout our clients’ organisations. Reuters Information Management family provides the enterprise with a range of applications, tools and infrastructure components to manage financial content in real time across the customer trading environment with a high degree of scalability and resilience. Our flagship product in this product family is Reuters Market Data System (RMDS). Reuters Enterprise Information family includes real time datafeeds, which companies use to power systems such as algorithmic trading and portfolio management, and reference data often used for compliance and portfolio pricing purposes, including end-of-day and intra-day instrument prices, corporate actions, price histories and terms and conditions. Reuters Trade and Risk Management family consists of products to help manage trading positions and credit extension, make trading decisions, keep track of P&Ls and control risk. Several stock exchanges compete with our real time datafeed business by providing low-latency real time feeds of their data direct to banks and financial institutions. In addition, feedhandlers and application-programmable interface developers such as Wombat, Infodyne and Hyperfeed compete with Reuters in the market data delivery arena. Our end of day enterprise information offerings compete primarily with Bloomberg, Telekurs, and IDC. Competitors in the supply of risk products and market data systems or related components include Algorithmics, Murex, Summit Systems, Sungard Data Systems, Misys, IBM, TSI, GL TRADE and a large number of smaller firms. Financial performance
Reconciliations between the GAAP and non-GAAP measures are provided in section 20 on page 27. Revenue from the Enterprise division, 16% of our total revenue, was £393 million, up 1% for the year. This was driven by strong growth in Reuters Enterprise Information, partly offset by declines in outright revenue from Reuters Information Management. Reuters Enterprise Information, which accounts for 52% of the Enterprise division’s revenue, saw revenue rise by 11% to £203 million. Real time datafeed revenue grew 4% and Reuters DataScope revenue grew 36%, driven by increased demand for machine-readable real time and historical data to power an increasingly wide range of customer applications. Looking ahead to 2006, we expect increased customer demand for machine-readable content in standardised formats. Revenue in Reuters Information Management, 28% of divisional revenue, was down 14% to £108 million. Growth in recurring revenue from RMDS, primarily maintenance, was more than offset by a fall in outright revenue. This fall was driven by our continued withdrawal from technology consulting as part of the Fast Forward programme, the impact of moving to desktop-based solutions at smaller sites and the fact that the majority of customers have already migrated from legacy platforms onto RMDS. With the RMDS upgrade programme drawing to a successful close and a standard platform now largely in place, the focus in 2006 will shift to marketing new products such as
Reuters Wireless Delivery Service (to support trader mobility) and Reuters Tick Capture Engine (which collects trading history to support increasing regulatory requirements and complex trading analytics). We will also expand our third party developers programme to encourage development of applications on RMDS. Reuters Trade and Risk Management, 20% of divisional revenue, saw revenues rise by 1% to £82 million, helped by price increases during the year and steady growth in Asia, including significant new sales with leading banks in China. Total outright revenue in 2005 of £36 million represented a 4% decrease over 2004, partly driven by the longer sales-to-revenue cycle associated with larger client deals. After a strong fourth quarter in 2005, prospects for 2006 in Trade and Risk Management are encouraging. Operating costs totalled £325 million, down 11%. Within this, trading costs totalled £298 million, a drop of 9% compared to 2004. Fast Forward savings from scaling back dedicated technology consulting groups, following the decision to exit this business, were partially offset by investment in Core Plus growth initiatives including the 10 year Reuters Tick History database. During 2006, we will continue to market the New Enterprise Approach launched as part of Core Plus. It groups Enterprise products together to create workflow solutions for customers, and will focus initially on portfolio valuation and algorithmic trading. 11.4 Media divisionOverview The Media division focuses on creating and delivering news to the world’s newspapers, television and cable networks, radio stations and websites. It is also developing direct-to-consumer services, principally through the reuters.com family of websites. Reuters Text and Visuals products provide newspapers and magazines, news and information websites and TV channels with comprehensive, accurate and immediate text and broadcast news, video and photographic coverage. In 2005, we acquired Action Images, a specialist sports photography agency, to enable us to expand our global pictures business. Reuters Consumer products target business professionals and individual investors with fast, accurate news and financial data, enabling them to stay informed about world events, manage their financial portfolios and perform better professionally. Factiva, our 50% owned joint venture with Dow Jones, provides a broad range of global news and a deep historical archive of business information which client organisations can integrate into their business applications and intranet portals. Around 70% of Factiva’s revenue is derived from sources outside the financial services sector. Our main competitors in the supply of news to the media are Associated Press, Agence France Presse, Dow Jones and Bloomberg News. In the direct-to-consumer market, Reuters competes with a variety of local and global providers including the BBC’s websites and Yahoo! Finance. Financial performance
Reconciliations between the GAAP and non-GAAP measures are provided in section 20 on page 27. Revenue from the Media division, 7% of our total revenue, totalled £153 million, up 7% year-on-year. Agency revenues grew 6% to £133 million, driven by a good performance from TV, including the successful launch of a Middle East service, continued strength in our Pictures business and new contractual arrangements with Factiva. Consumer services revenues grew 12% to £20 million, reflecting a successful move away from syndication of news to other websites and towards promotion of direct to consumer platforms, such as reuters.com. Advertising revenues from online and signage platforms continued to grow rapidly, attracting high quality brands as diverse as Diet Coke, GE and Fidelity. In January 2006 our 24 hour TV news channel for India in collaboration with The Times of India, TIMES NOW, went live. It represents an attractive investment in its own right and a strong branding opportunity from which to launch services to India’s growing urban, affluent audience. Operating costs totalled £146 million, up 3%. Within this trading costs totalled £135 million, a 7% increase compared to 2004. Key cost drivers included expansion of news coverage to new regions and Core Plus investment in consumer services. These were partially offset by a reduction in data content costs with the move of activities to Bangalore as part of Fast Forward. In 2006, the Media division is looking forward to continued strong revenue performance. We expect opportunities to grow our video news products and expand our Pictures business on the back of our recent acquisition of Action Images sports photography. The consumer services business expects strong growth in online advertising from its US, UK and Japanese markets. Profitability will be influenced by higher levels of investment in consumer editorial and marketing teams, and in developing online, mobile and ipTV distribution capabilities. 11.5 Instinet Group
Operating and Financial Review continued
A key driver of Instinet Group’s business was average daily trading volume in the US securities markets, which increased in 2005 over 2004 levels. A significant portion of securities traded in Instinet Group’s business were NASDAQ-listed securities. Average daily trading volume in NASDAQ-listed stocks, which decreased slightly by 0.8% for the three quarters to September 2005 compared to the full year 2004. Average daily trading volume in US exchange-listed stocks has increased over the same time period by 7.1%, continuing the trend of the past five years. Overall market share for INET, the electronic marketplace, had increased slightly to 13.5% of total US market share volume by September 2005 from 13.4% in 2004. Overall market share for Instinet, the institutional broker, decreased to 2.6% of total US equity trading volume to 30 September 2005 compared to 2.7% in 2004. The volatility in market share reflected the intense competitive environment within the brokerage business, which has resulted in price reductions since 2001. In September 2001, INET reduced average prices by 11% with a new pricing schedule for US broker-dealer customers. In March 2002, INET began offering broker-dealer rebates. In October 2003, it reduced pricing for routing orders in Nasdaq-listed stocks to other trading venues through its automated smart order-routing system by 37% and introduced tiered pricing, offering lower prices to customers based on volume levels. In October 2004, INET introduced a new pricing schedule for transactions in US exchange-listed stocks. In January 2005, INET announced that it would share up to 50% of its market data revenue for certain American Stock Exchange transactions. Instinet also operated in a highly competitive environment. Traditional brokerages were also severely impacted by tighter spreads, smaller commissions, the decrease of NASDAQ market making and diminished investment banking fee revenues, which compelled them to spend more time looking for additional profit-generating opportunities. This led traditional brokerage firms to increase their focus on offering algorithmic trading, program trading and direct market access to institutional customers and resulting in their directly competing with Instinet in price and technology to provide these services to customers. As a result, customers had become more demanding and cost conscious. Instinet pricing for US equities, measured in cents per share, declined 21.0% to 30 September in 2005, and 2.6% in 2004, and pricing for non-US equities, measured as a percentage of the total consideration of the trade, declined 12.5% to 30 September 2005 and 5.4% in 2004.
Supporting financial information
Two committees (the Audit Committee and the Disclosure Committee) are involved in the risk management process, together with a programme of internal audits. Internal auditors independently review the controls in place to manage significant risks and report to the Audit Committee twice a year. The Audit Committee reviews the assurance procedures annually, including compliance controls, and reports its findings to the Board. The process and the component parts of the risk management framework are more fully described in ‘Risk Management, Internal Controls and Disclosure Controls and Procedures’ on page 37. Further information on financial risks is contained in the financial statements within note 17 on page 73 to 81. 13
Pending transactions 14
Treasury policies The key objectives of the treasury function are to ensure sufficient liquidity exists to meet funding needs and to manage the interest rate and currency risks arising from the Group’s operations and its sources of finance.
Financing
markets. We expect to be able to finance our current business plans from ongoing operations and our external facilities. Net cash flows are applied to reduce debt, placed in short-term investments with financial institutions holding strong credit ratings or used to repurchase the company’s own shares as part of an announced programme to enhance shareholder returns. The latter is subject to our intention to maintain an investment grade credit rating in the longer term. During 2005, £223 million was applied to market purchases of the company’s own shares (for information about the company’s share repurchases, see page 31). As at 31 December 2005, the Group held net funds of £253 million. Reuters is rated by the three principal rating agencies. As at 31 December 2005, our long- and short-term ratings were Fitch A/F1, Moody’s A3/P-2 and Standard and Poor’s A-/A-2. We borrow in various currencies, at both fixed and floating rates, and use derivative contracts to create the desired currency and interest rate basis. The conversion of net investments in foreign operations into the Group’s reporting currency of sterling creates translation exposure. To mitigate this effect, to the extent that the Group has core debt it will be held in currencies approximately proportionate to the currency profile of the Group’s net assets. In broad terms, using the average net funds position, a 1% increase in global interest rates would have reduced profit before tax in the year by approximately £2 million (2004: £2 million) before the impact of hedging.
Syndicated credit facility The facility is on customary terms and conditions. Drawings under the facility may be made in sterling, euros or other currencies agreed at the time and bear interest at LIBOR plus a margin, variable according to the long-term credit rating of the company. The facility cross-defaults upon default by Reuters in payment or acceleration of any other borrowings in excess of £20 million. The facility contains two financial covenants (as calculated in accordance with UK GAAP): that Reuters operating profit before interest, tax and amortisation (subject to certain adjustments) should be greater than 2.75 times net finance charges and that Reuters net borrowings should not be greater than 3.50 times Reuters operating profit before depreciation and amortisation (subject to certain adjustments). As at 31 December 2005, we complied with these covenants.
Bilateral loan facilities
Euro Commercial Paper Programme The programme is on customary terms and conditions, including a condition that the company should not be in default on any other debt or similar obligation. Issues are only made to the extent that funds can be repaid from committed financing facilities or available Group cash. The programme has no final maturity date, contains no financial covenants and there is no requirement to update the programme documentation. Debt is issued at market rates agreed between the issuer and the dealer.
Euro Medium Term Note Programme The programme is on customary terms and conditions. The programme has no final maturity date but the prospectus, containing financial information, is updated each year to allow issuance to continue. Debt is issued at market rates agreed between the issuer and the dealer. The programme documentation contains no financial covenants and notes in issue have no cross-default provision.
Short-term uncommitted facilities
Contractual financial obligations
The most significant purchase obligation entered into during the year related to BT/Radianz becoming our supplier of network services over the next eight and a half years.
Operating and Financial Review continued
Foreign exchange
Sterling costs exceeded sterling revenue due to the level of restructuring costs and UK-based marketing, development, operational and central services costs. In broad terms, using the 2005 mix of profits, the impact of an additional unilateral 1% strengthening of sterling would have been a reduction of approximately £4 million in operating profits (2004: £5 million). Exchange rate movements in 2005 had a £1 million net positive impact on operating profit.
The annual average rates for the dollar and the euro were 1.83 and 1.46 respectively (2004: 1.82 and 1.47 respectively). No unremitted profits are hedged with foreign exchange contracts as we judge it inappropriate to hedge non-cash flow translation exposure with cash-based instruments. Forward foreign exchange contracts, currency options and foreign exchange swaps are used to manage, where appropriate, the effects of transaction exposure and certain intercompany transactions which impact Group profits. Transaction exposure occurs when, as a result of trading activities, an entity receives or expends cash in a currency different to its functional currency.
15 Critical accounting policies
Adoption of International Financial Reporting Standards IFRS 1 sets out the transition rules which must be applied when IFRS is adopted for the first time. As a result, certain of the requirements and options in IFRS 1 may result in a different application of accounting policies in the 2004 restated information from that which would apply if the 2004 financial statements were prepared using full retrospective adoption of IFRS. The standard sets out certain mandatory exceptions to retrospective application and certain optional exemptions. Detailed disclosure on the mandatory exceptions applicable to the Group and the optional exemptions taken are provided within the financial statements on page 52 and pages 101 to 103. Previously the financial statements were prepared in accordance with UK GAAP. To provide an indication of the impact of IFRS from the previously reported UK GAAP, reconciliations of the net profit and equity for 2004 are shown in note 40 on pages 101 to 103.
Accounting policies involving management judgement
The impairment of property, plant and equipment, non-current assets held for sale and intangible assets (including goodwill) Note 13 of the financial statements on pages 67 to 68 outlines the key assumptions. Management has determined that no impairments are required for 2005 (2004: £18 million).
Intangible assets There is judgement involved in determining an appropriate framework to consider which expenditure requires capitalisation and which should be expensed. Amounts capitalised in 2005 for development and software total £40 million (2004: £26 million).
Defined
benefit pension plans The amounts recorded in the annual charge (service cost and interest cost offset by the expected return on assets) are sensitive to changes in these assumptions. Actuarial gains and losses are recognised fully in the Statement of Recognised Income and Expense. Note 25 on pages 84 to 87 provides further details of the annual charges (£30 million) and the net outstanding pension obligation (£310 million), quantification of the underlying assumptions and an estimate of the impact on the financial statements to changes in the most critical assumptions. Share-based
payments and long-term incentive plans (LTIP) A combination of Black Scholes and Monte Carlo simulation models has been used to calculate the fair values of awards. The use of these models requires management to make a number of assumptions including expected life of the options, expected dividends for the life of the option and historic volatility of Reuters shares. Management has considered historical data and made use of best practices in making these assumptions. The total cost of share schemes in 2005 was £30 million (2004: £22 million). For additional information concerning the long-term incentive plan (LTIP), see ‘Equity incentive plans – LTIP’ on page 41 and note 33 on page 93. Provisions The largest provisions relate to 2005 Fast Forward restructuring charges, which cover primarily severances and leasehold properties. For severance provisions, the provision is only recognised where employees have a valid expectation, or have already been told, of their redundancy. A number of leasehold properties have been identified as surplus to requirements. Although efforts are being made to sub-let this vacant space, management recognises that this may not be possible immediately. Estimates have been made to cover the cost of vacant possession, together with any shortfall arising from sub-leased rental income being lower than lease costs being borne by Reuters. A judgement has also been made in respect of the discount factor, based on a risk-free rate, which is applied to the rent shortfalls. Additionally, the Group is subject to certain legal claims and actions (refer to note 35 on page 97). Provision for specific claims or actions are only made when the outcome is considered ‘probable’ that there will be a future outflow of funds, and/or providing for any associated legal costs. The level of any provision is inevitably an area of management judgement given that the outcome of litigation is difficult to predict. Other provisions are held where the recoverability of amounts is uncertain, where the actual outcome may differ from the resulting estimates. Segment
reporting Each division is responsible for specific products’ revenues, except for the Reuters 2000/3000 range of products and Reuters 3000 Xtra. Revenues for these shared products are attributed to either the Sales & Trading division or the Research & Asset Management division, by reference to the nature of the customer taking the product. This is determined on a client-by-client basis. Where costs relate to a specific division, they are mapped directly to that division. Where costs are shared, ABC techniques are used to split these costs between divisions. The Reuters ABC tool (known as Profitability Insight) allocates shared costs to business activities, which in turn are attributed to products, and therefore divisions, using different drivers of cost. These cost drivers (e.g. the number of helpdesk calls received or the number of installed accesses) are derived from a variety of underlying source systems. Judgement has been applied in determining these cost drivers and the resulting allocation of costs. Assets and liabilities are attributed to business divisions using methodologies consistent with those applied to revenue and costs. Assets and liabilities are segmented to the extent that they relate to the operating activities of the divisions. Assets and liabilities related to financing activities, including cash balances, are not segmented. Divisional results could alter with the application of other allocation approaches and as improvements to the Profitability Insight model are made. Taxation Under IFRS and US accounting standards, in assessing which deferred tax assets to record on the balance sheet, management has made subjective judgements over the projected future profitability of certain legal entities. 16
US GAAP
Operating and Financial Review continued
17
Off-balance sheet arrangements Forward-looking statements This document contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 with respect to the Group’s financial condition, results of operations and business, and management’s strategy, plans and objectives for the Group. In particular, all statements that express forecasts, expectations and projections with respect to certain matters, including trends in results of operations, margins, growth rates, overall financial market trends, anticipated cost savings and synergies and the successful completion of restructuring programmes, strategy plans, acquisitions and disposals, are all forward-looking statements. These statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the Risk Factors discussed below. Any forward-looking statements made by the Group or on its behalf speak only as of the date they are made. The Group does not undertake to update any forward-looking statements. Reuters
may not be able to realise the anticipated benefits of the transformation initiatives
undertaken through the Fast Forward programme and the Core Plus growth strategy Unfavourable
conditions in financial markets may have a significant adverse effect on the
Group’s business Currency
fluctuations and interest rate fluctuations may have a significant impact on
the Group’s reported revenue and earnings The
Group may experience difficulties or delays in developing or responding to new
customer demands or launching new products In addition, the Group may delay or halt the launch of new products and services; its existing products and services may cease to be attractive to customers; and new products and services that the Group may develop and introduce may not achieve market acceptance. In the event any of the foregoing occurs, the Group’s financial results could be adversely affected. The
Group is dependent on third parties for the provision of certain network and
other services The
Group’s business may be adversely affected if its networks or systems experience
any significant failures or interruptions or cannot accommodate increased traffic The
Group is exposed to a decline in the valuation of companies in which it has
invested
Significant
competition or structural changes in the financial information and trading
industries could adversely affect the Group’s business The
Group may be exposed to adverse governmental action in countries where Reuters
conducts reporting activities The
Group may not be able to realise the anticipated benefits of existing or future
acquisitions or disposals The
Group may identify issues with controls over financial reporting, including
as a result of the implementation project to achieve compliance with the Sarbanes
Oxley Act, section 404 The
Group operates in an increasingly litigious environment successful, it is possible that the infringing product would be enjoined by court order and removed from the market, in addition to the legal fees that would be incurred defending such a claim. Any settlement of such a claim could also involve a significant sum. 19
Definition of key financial performance measures To supplement IFRS measures, the Group undertakes further analysis to break these measures out into their component parts, which results in the creation of certain measures which differ from the IFRS headline indicators (‘non-GAAP measures’). The rationale for this analysis is outlined below, and reconciliations of the non-GAAP measures to IFRS measures are included within the review of results. These measures are used by management to assess the performance of the business and should be seen as complementary to, rather than replacements for, reported statutory results. Underlying
results
Exclusion
of restructuring charges Under the Fast Forward programme, Reuters incurred restructuring charges relating primarily to headcount reduction and rationalisation of the Group’s property portfolio. Fast Forward is a three year programme implemented to accelerate and expand on Reuters five year business transformation plan which was launched in 2001; the programme completed in 2005, as originally envisaged (refer to page 8 for discussion of the programme). The Fast Forward programme was centrally managed, and its
Operating and Financial Review continued
performance against targets was evaluated separately from the ongoing Reuters business. Fast Forward restructuring charges are therefore excluded from certain profit and margin measures. Acquisition integration costs are one-off charges associated with transaction activity which do not recur. As described above, the charges in respect of acquisition activity are excluded to enable better like-for-like comparison between periods. Because of their time-limited and defined nature, Reuters believes that presenting these measures, both including and excluding restructuring charges, gives investors a more detailed insight into the performance of management and the business. In addition, Reuters management uses both measures to assess the performance of management and the business.
Exclusion of amortisation and impairment of intangibles acquired in a business combination, investment income, profit/(losses) from disposals, and fair value movements
Amortisation and impairment of intangibles acquired in a business combination, investment income and profit/(losses) from disposals Such charges and income may arise from corporate acquisition and disposal activity, rather than the ongoing operations of the business divisions, with a reasonable allocation being determined for segmental reporting. These are analysed and reviewed separately from ongoing operations, as this is consistent with the manner in which Reuters sets internal targets, evaluates its business units and issues guidance to the investor community. Amortisation and impairment charges in respect of software and development intangibles are included within operating costs.
Fair value movements Financial assets held at fair value through profit or loss included Reuters investment in Savvis convertible shares. This investment was sold as part of the acquisition consideration for Telerate. Fair value movements for this investment have been analysed separately from the ongoing operations of the business units during 2005. Embedded derivatives are foreign exchange contracts implicitly contained in some of Reuters revenue and purchase commitments. Changes in the fair value of embedded derivatives arise as a result of movements in foreign currency forward rates. The unpredictable nature of forward rates, the uncertainty over whether the gains or losses they anticipate will actually arise, and the volatility they bring to the income statement lead Reuters to consider that it is appropriate to analyse their effects separately from the ongoing operations of the business. This enables Reuters to undertake more meaningful period-on-period comparisons of its results, as well as to isolate and understand better the effect of future currency movements on revenue and purchase commitments. This separate analysis is also consistent with the manner in which Reuters sets its internal targets, evaluates its business divisions and issues guidance to the investor community. The impact of fair value movements on derivatives relating to treasury hedging activity is also excluded, unless there is an equivalent offset in operating results. All derivatives undertaken provide effective economic hedges, but some may not qualify for hedge accounting and in these situations the reported impact of the underlying item and the hedge may not offset. The impact of treasury derivatives is mainly due to currency or interest rate movements and, as for the other items noted above, business division operating performance is managed against targets which exclude these factors.
Tax and adjusted EPS Adjusted EPS is defined as basic EPS from continuing operations before impairments and amortisation of intangibles acquired via business combinations, fair value movements, disposal profits/losses and related tax effects.
Dividend policy
Free cash flow
Net funds/debt
20
Reconciliations of non-GAAP measures to IFRS
Reconciliation of profit before taxation from continuing activities to Reuters non-GAAP profit before taxation
Reconciliation of basic EPS to Reuters adjusted EPS
Operating and Financial Review continued
Reconciliation of actual percentage change to underlying change – Revenue by division by type
Reconciliation of actual percentage change to underlying change – Reuters revenue by division by product family
Reconciliation of divisional operating costs to trading costs
Reconciliation of divisional operating profit to trading profit
Operating and Financial Review continued
Reconciliation of cash generated from Reuters operations to Reuters free cash flow
Components of net funds
The directors submit their annual report and audited financial statements for the year ended 31 December 2005. 01
Activities 02
Share capital and dividends An interim dividend of 3.85 pence per ordinary share was paid on 31 August 2005. The directors recommend a final dividend of 6.15 pence per ordinary share, giving a total of 10 pence per ordinary share for the year (2004: 10 pence). Subject to shareholders’ approval at the Annual General Meeting (AGM) to be held on 27 April 2006, the final dividend will be paid on 4 May 2006 to members on the register holding ordinary shares at the close of business on 17 March 2006. It will be paid on 11 May 2006 to ADS holders on the register at the close of business on 17 March 2006. 03
Employees 04
Charitable contributions It is the Group’s policy not to make political contributions and none was made in 2005. 05
Creditor payment terms 06
Acquisition of own shares On 26 July 2005, Reuters announced its intention to return £1 billion to shareholders, including the proceeds of around $1 billion from the Instinet Group sale, and initiated an on-market buyback programme, which is expected to run up to July 2007. Between 26 July and 31 December 2005, 57,400,000 shares with a nominal value of £14,350,000 were repurchased at a cost of approximately £224 million. This represents 4% of called up share capital. 07
Substantial shareholdings 08
Related party transactions 09
Financial instruments 10
Post balance sheet events 11
Directors The following Board changes occurred during 2005 and early 2006: 8 February 2005 Ian Strachan stood down from the Audit Committee. 20 July 2005 Charles Sinclair stepped down as Chairman of Remuneration Committee but remained on the Committee until 6 December 2005. 19 September 2005 Ian Strachan appointed as Chairman of Remuneration Committee. 23 September 2005 Sir Deryck Maughan appointed to the Board. 6 December 2005 Charles Sinclair retired from the Board. 24 January 2006 Ian Strachan appointed to the Nominations Committee. Details of directors’ interests in the company’s shares, the remuneration of the non-executive and executive directors and information on the service contracts of the executive directors are set out on pages 39 to 48. A non-executive director is not required to hold ordinary shares in order to qualify as a director. 12
Risk management, internal controls and disclosure controls and procedures 13
Auditors By order of the Board
Rosemary Martin
The directors and senior managers of Reuters Group at 7 March 2006 are:
Directors Thomas (Tom) Glocer CEO. Previously CEO of Reuters Information (2000) and President and Senior Company Officer, Reuters America (1998–2000). Appointed CEO, Reuters Latin America in 1997 after serving in Reuters legal department from 1993. Formerly practised law in New York, Paris and Tokyo with Davis Polk & Wardwell. Member of the Corporate Council of the Whitney Museum, The Madison Council of the Library of Congress, the Leadership Champions Group (Education) of Business in the Community, The Advisory Board of the Judge Institute of Cambridge University and The Corporate Advisory Board of the Tate. Non-executive director of Instinet Group until Instinet Group was acquired in 2005 by NASDAQ. Age 46. David Grigson CFO. Joined Reuters in August 2000 from Emap PLC where he was Group Finance Director and Chairman of Emap Digital. He is a qualified chartered accountant. Formerly held senior finance roles in the UK and US at Saatchi and Saatchi PLC (1984–1989). Held a number of financial positions at Esso UK (1980–1984). Former Non-executive director of Instinet Group. Chairman of Radianz until Radianz was acquired in 2005 by BT. Age 51. Devin Wenig Executive director and President of Business Divisions. Previously President, Investment Banking & Brokerage Services (2001–2003). Joined Reuters in 1993 as corporate counsel, Reuters America and held a number of senior management positions before being appointed President, Investment Banking & Brokerage Services in January 2001. Also a Non-executive director of Nastech Pharmaceutical Company and a former Non-executive director of Instinet Group. Age 39. Lawton Fitt Non-executive director; member of the Audit Committee. Non-executive director of CIENA Corporation and Citizen Communications. Director and Trustee of Reuters Foundation. Previously a Partner and Managing Director of Goldman Sachs Group Inc. Trustee of several not-for-profit organisations including contemporary arts centres in New York and Berlin. Former Secretary (Chief Executive) of the Royal Academy of Arts. Age 52. Penelope (Penny) Hughes Non-executive director; member of the Remuneration Committee. Director of The GAP Inc., Vodafone PLC, Skandinaviska Enskilda Banken, Molton Brown Limited and a Member of the Advisory Board of Bridgepoint Capital. Former President, Coca Cola Great Britain and Ireland. Former Director of Bodyshop International PLC (1994–2000), Enodis PLC (1996–2001), SC Johnson (2002–2004), web-angel (2000–2003) and Trinity Mirror PLC (1999–2005). Age 46. Edward (Ed) Kozel Non-executive director; member of the Remuneration Committee. Chief Executive of CRIGHT. Also a Director of Yahoo. Formerly a Non-executive director of Cisco Systems Inc. (2000–2001), where he worked from 1989–2000 in a number of roles, including Chief Technology Officer and Senior Vice President for business development. Also a former Non-executive director of Tibco Software Inc. (2000–2001) and Narus Inc. (1999–2003). Prior to 1989 he worked with SRI International in California. Age 50.
Sir Deryck Maughan Non-executive director. Director of Glaxosmithkline plc, Managing Director of KKR, Chairman of KKR, Asia, Trustee of Carnegie Hall, Lincoln Center Inc. and NYU Medical Center. He serves on Advisory Councils at Stanford and Harvard Universities. Former Chairman and CEO of Citigroup International, former Vice-Chairman of the New York Stock Exchange and former Chairman and CEO of Salomon Brothers (1992–1997). Age 58. Kenneth (Ken) Olisa Non-executive director; member of the Audit Committee. Non-executive director of BioWisdom and Open Text Corporation. He is a Liveryman of the Worshipful Company of Information Technologists, a Freeman of the City of London, Chairman of homelessness charity, Thames Reach Bondway, a Governor of the Peabody Trust and a Director and Trustee of Reuters Foundation. Former Chairman (2000–2006) and CEO of Interregnum plc which he founded in 1992. Former Senior Vice President and General Manager of Wang Europe, Africa and the Middle East (1981–1992) and his career began at IBM (1974–1981). Former Director of uDate.com, Metapraxis Adaptive Inc. and Yospace Technologies Ltd and former Postal Services Commissioner. Age 54. Richard (Dick) Olver Non-executive director; Chairman of the Audit Committee; member of the Nominations Committee and Senior Independent Director. Chairman of BAe Systems PLC since July 2004. He worked for BP PLC and was Deputy Group Chief Executive (2003–2004) and CEO of BP Exploration & Production Division (1998–2002). A Fellow of the Royal Academy of Engineering. A Guardian of New Hall School. Age 59. Ian Strachan Non-executive director; Chairman of the Remuneration Committee; member of the Nominations Committee. Non-executive director of Transocean Inc., Johnson Matthey PLC, Xstrata PLC and Rolls Royce Group PLC. Former Chairman of Instinet Group, former Non-executive director of Harsco Corporation, Deputy Chairman of Invensys PLC (1999–2000) and Chief Executive Officer of BTR PLC (1996–1999). Former Deputy Chief Executive Officer (1991–1995) and Chief Financial Officer of Rio Tinto PLC (1987–1991). Also a former Non-executive director of Commercial Union PLC (1991–1995). Age 62. Charles Sinclair retired from the Board on 6 December 2005.
Senior managers Christopher Hagman Managing Director, Global Sales & Service Operations. Christopher joined Reuters in 1987, based in Sweden, and has held various senior sales and general business management positions in Sweden, the Netherlands and the UK before being appointed to his current post in April 2001. Christopher was appointed as a Member of the Executive Board of the Community of European Management Schools and Internal Companies in December 2005. Age 47. Geert Linnebank Editor-in-Chief and Global Head of Content. Geert became Editor-in-Chief in 2000 having held various editorial roles. He was appointed Chairman of Reuters Foundation in March 2004 and President and Director of Reuters Foundation Inc. in September 2005. Before joining Reuters in 1983, he was a correspondent, EC and Belgium, for AP-Dow Jones – Brussels. Age 49. Rosemary Martin General Counsel and Company Secretary. Rosemary joined Reuters in 1997 as Deputy Company Secretary and became Company Secretary in 1999. Appointed General Counsel in 2003. Rosemary has been the Director of Reuters Foundation since 2000. Former Partner at Mayer, Brown, Rowe & Maw for nine years. Non-executive director of HSBC Bank PLC. Member of Financial Services Authority Listing Authority Advisory Committee. Age 45. Susan Taylor-Martin Global Head of Corporate Strategy. Susan joined Reuters in 1993, during which time she has held a number of management roles including running the global news product group and the global equities business. Susan was appointed to her current role in 2004. Prior to joining Reuters, Susan worked in Corporate Finance, specialising in mergers and acquisitions. Age 41. Simon Walker Director of Corporate Marketing & Communications. Simon joined Reuters in 2003. Prior to joining Reuters, Simon was Communications Secretary at Buckingham Palace and Director of communications at British Airways PLC. Simon is a Trustee of the charity, UK-NZ Link Foundation and a Director of Communicor Public Relations and Awaroa Partners. Age 52. Michael Sayers resigned from the GMC on 21 September 2005 and left Reuters on 31 December 2005. Christian Verougstraete resigned from the GMC and Reuters on 2 October 2005. Alex Hungate stepped down from the GMC on 30 June 2005 to take up his role as Managing Director for Asia. Stephen Dando will be joining Reuters as Group HR Director and a member of the GMC in April 2006. Roy Lowrance has been appointed Chief Technology Officer of the Group and will join the GMC in March 2006.
01 Statement on corporate governance compliance External influences on the Group’s approach to corporate governance are:
Reuters monitors and responds to these, particularly in the UK and US which are where most of the company’s shareholders are located, continuously improving the Group’s internal governance systems. Throughout 2005, the Group has complied with the Combined Code on Corporate Governance published in July 2003, save that no individual member of the Audit Committee has been identified by the Board as having ‘recent and relevant financial experience’ (code principle C3.1) . However, in common with all the non-executive directors, the members of the Audit Committee are experienced and influential individuals, having the skills described in their biographies in ‘Directors and senior managers’ (see pages 32 and 33) and the Board considers that, collectively, the members have the attributes required to discharge properly the Committee’s responsibilities. The Group also complies with all SEC and NASDAQ governance requirements, with the exception of two provisions of the NASDAQ governance rules. The company has received waivers from NASDAQ to both exceptions on the basis that compliance with the rules would be contrary to standard UK business practice. Since 1988, Reuters has operated under a waiver of NASDAQ’s requirement that all shareholder meetings require a quorum of at least one-third of outstanding voting shares; instead, the company’s Memorandum and Articles of Association (Articles) provide, as is typical for English public companies, that a quorum shall consist of any two shareholders. In 2004 the company also received a waiver from NASDAQ’s provisions requiring shareholder approval of employee share-based incentive schemes. Reuters seeks and has received shareholder approval of its employee share-based incentive schemes to the extent required by UK regulation, including the UKLA Listing Rules.
02 Reuters Trust Principles The directors are required by the Articles to have due regard to the Trust Principles insofar as they are capable of being observed in accordance with their other duties as directors. Thus the Trust Principles are integral to the Board’s approach to the company’s business. 03 The Board Reuters has three executive directors: CEO, Tom Glocer; Chief Financial Officer (CFO), David Grigson; and President of Business Divisions, Devin Wenig. In addition to the Chairman, there are seven non-executive directors on the Board. Dick Olver, who is the senior independent non-executive director, is available to shareholders if they have concerns. No meetings with Dick Olver were requested by shareholders during 2005. The quality of the individual directors, the balance of the Board’s composition and the dynamics of the Board as a group, ensure both the Board’s effectiveness and the inability of an individual or small group to dominate the Board’s decision making. The Board has determined that each of the non-executive directors is independent in character and judgement by reason of his or her personal qualities, and that each of the non-executive directors is ‘independent’ as that term is defined in NASDAQ and SEC governance requirements. Each executive director receives a service contract on appointment (see the Remuneration report for further information) and each non-executive director receives a letter setting out the terms of the appointment. Copies of the service contracts and non-executive directors’ letters of appointment are available to shareholders from the Company Secretary on request. The non-executive directors’ appointment letters specify that the appointment is for a term of six years, subject to review after three years. Dick Olver continued to hold office beyond the initial six-year term at the request of the Board. On 1 December 2006 Dick Olver will have served on the Reuters Board for nine years. In view of this, his continuing role as a director of the company and as the senior independent non-executive director has been discussed by the Chairman with representatives of the major shareholders of the company. During the discussions the Chairman explained the value of continuing to have available to the Board Dick Olver’s skills, experience and detailed knowledge of Reuters, particularly in view of the fact that over half of the non-executive directors have less than two years’ experience on the Reuters Board. The major shareholders’ representatives support Dick Olver’s continuation as a director. The Articles provide that at each AGM any director appointed since the last AGM shall stand for election by the shareholders and one third of the directors shall retire from office by rotation and be eligible for re-election by the shareholders. However, to recognise that some shareholders prefer all the directors to stand for re-election each year, once again at the 2006 AGM each of the directors will retire from office and offer himself or herself for re-election.
Role of the Board and its committees
A schedule of matters reserved for the Board’s decision identifies those matters that the Board does not delegate to management. It includes the approval of corporate objectives, strategy and the budget, significant transactions and matters relating to share capital. During 2005 the Board focused particular attention on the development of Reuters growth strategy; the acquisition of Telerate and the disposals of Instinet Group and Radianz; brand management; succession planning; performance management and the control environment. The Board is assisted by its committees. Through the Audit Committee, it satisfies itself on the integrity of financial information and that the financial, operational and compliance controls and systems of risk management are robust. Through the Remuneration Committee, the Board determines appropriate levels of remuneration of executive directors and other senior managers. The Nominations Committee is the forum through which the Board discharges its role in nominating new directors and succession planning. These committees are described in more detail below. There is a clear division of responsibilities between the running of the Board, which is the Chairman’s responsibility, and the running of Reuters business, which is the CEO’s responsibility, with the Board having oversight. The division of responsibilities is set out in a document approved by the Board. Directors’ induction,
training and information Sir Deryck Maughan, who joined Reuters Board on 23 September 2005, received a directors’ manual which provides information about Reuters and the operation of the Board and its committees. He also received a series of induction briefings in New York and London to gain insights into the Group. Sir Deryck, like the other directors, has been supplied with Reuters products. Ongoing training for directors is available as appropriate. The Group’s legal advisers and auditors provide briefings to the directors from time to time. In 2005 the directors participated in a workshop on ethical decision-making, based on training which Reuters editorial staff receive. Guest speakers are occasionally invited to join Board dinners to discuss topics of interest with the directors and opportunities are provided for non-executive directors to meet with shareholders, customers and others involved in Reuters business. Monthly financial information is provided to the directors. Regular and ad hoc reports and presentations are prepared and circulated to the directors in advance of Board meetings, together with minutes and papers relating to the Board’s committees, to ensure the directors are supplied, in a timely fashion, with the information they need. They also have access to the Company Secretary who is responsible for advising the Board through the Chairman on all governance matters. The Company Secretary is appointed by, and can only be removed by, the Board. The directors may take independent professional advice at the company’s expense. None of the directors sought such advice during 2005 although the Remuneration Committee has appointed an independent adviser, Towers Perrin, which gave advice to the Committee.
Frequency of meetings
Board effectiveness A comprehensive Board review was undertaken in 2005 in which:
The format of the reviews was interviews with the directors and others involved in the work of the Board and its committees, the output from which was thematically analysed and discussed with the person or group being reviewed, as well as with the Chairman. Actions were agreed to address matters identified in the reviews and implementation of these actions will be monitored.
Board committees Each year, the Audit Committee reviews and, as appropriate, actively engages in the processes for financial reporting, internal control, risk assessment, audit and compliance assurance, the independence of the company’s internal and external auditors and the effectiveness of the company’s system of accounting, its internal financial controls and the internal and external audit functions.
Corporate governance and statement of directors’ responsibilities continued
Members of the committee during 2005 were Dick Olver (Chairman), Lawton Fitt, Ken Olisa and Ian Strachan (until his retirement from the committee on 8 February 2005). Each member of the committee is considered by the Board to be independent under the Combined Code and according to the SEC and NASDAQ definitions. The Board has determined that the Audit Committee does not at present include a member who is a ‘financial expert’, as defined in the Sarbanes-Oxley Act and related SEC rules because the Board considers that none of the members clearly meets all the criteria set out in the relevant definitions nor has the Board identified a member of the committee as having recent and relevant financial experience. However, the Board considers that collectively the members have the requisite skills and attributes to enable the committee properly to discharge its responsibilities. The Company Secretary is secretary to the committee. The Audit Committee’s remit, which is set out in its terms of reference, includes responsibility for:
The committee met five times in 2005 with the CEO, the CFO, other officers and the auditors attending as required. The auditors have unrestricted access to the Audit Committee and, in accordance with usual practice, met twice during the year privately with the committee, as did the Head of Internal Audit. The Chairman of the Audit Committee meets with the Head of Internal Audit and with the external auditors before each Audit Committee meeting. All members of the Audit Committee attended every committee meeting during the year. The committee reports its activities and makes recommendations to the Board. During 2005 the committee discharged the responsibilities described above. Its activities included:
The Board adopted a code of ethics for the company’s CEO and senior financial officers in 2003, in addition to the company’s general code of conduct. In 2005, the code of ethics was expanded to include personnel involved in reports and documents that the company files with government agencies and other public communications. No other material amendments to, or waivers in respect of, either code were made during 2005. Copies of the codes are available on request from the Company Secretary and can be viewed at www.about.reuters.com. The committee monitors adherence to the company’s auditor independence policy, which prohibits Group entities from engaging the auditors in activities prohibited by the SEC or the US Public Company Accounting Oversight Board. The policy was revised and approved by the Audit Committee in September 2005. The policy permits the auditors to be engaged for other services provided the engagement is specifically approved in advance by the committee or is approved by the CFO and meets the detailed criteria of specific pre-approved activities and is notified to the committee. However, any services where the expected level of fees is greater than £150,000 or the expected term is longer than one year, must be approved in advance by the committee. For details regarding fees paid to the Group’s auditors, see note 3 to the financial statements on page 60. The committee may engage, at the company’s expense, independent counsel and other advisers as it deems necessary to carry out its duties. None was engaged during the year. The Remuneration Committee has oversight of executive remuneration policy. Information concerning the Remuneration Committee is set out in the Remuneration report on page 39. The Nominations Committee makes recommendations to the Board about future appointments of non-executive directors, the Chairman and the CEO and considers recommendations from the CEO to the Board about the future appointment of executive directors. The committee gives due consideration to the Combined Code’s provisions relating to directors when making appointments to the Board.
In 2005 the composition of the committee was Niall FitzGerald, Dick Olver and Charles Sinclair. Charles Sinclair stepped down from the committee when he resigned as a director on 6 December 2005. On 24 January 2006 Ian Strachan was appointed as a member of the committee. The committee is chaired by Niall FitzGerald. The Board has determined that these directors are independent under the Combined Code and according to the NASDAQ and SEC definitions. A director may not attend or be involved in any decision concerning him or his successor. The committee has appointed an external adviser to assist it in its work in identifying potential candidates for non-executive directorships. The committee met twice in 2005 and during the year, having identified the skills, experience and attributes which are desirable for Reuters non-executive directors, the committee recommended to the Board the appointment of Sir Deryck Maughan. 04 Executive committees A Disclosure Committee, chaired by the CEO, was set up in 2002. Its members comprise the CEO, the CFO, the Global Head of Corporate Communications, the General Counsel and Company Secretary, the Head of Internal Audit, the Global Head of Finance, the Head of External Reporting, the General Counsel for the Americas and the Head of Investor Relations. The committee meets formally at least five times a year to review the Group’s trading statements and financial results and to consider the effectiveness of the Group’s disclosure controls and procedures. A sub-committee meets on an ad hoc basis to address disclosure matters arising between reporting periods. 05 Relations with shareholders An investor relations department is dedicated to facilitating communications between the company and its shareholders. It provides a regular report on investor relations as part of the routine Board report materials. The company’s AGM is used as an opportunity to communicate with private investors. The chairmen of each of the Board committees are available to answer questions at the AGM, and all directors are expected to attend the AGM. At the AGM the level of proxies lodged on each resolution and the balance for and against the resolution and the number of votes withheld are announced after the resolution has been voted on. At the 2005 AGM, voting using a poll for all resolutions was introduced to replace voting by a show of hands as the Board considers poll voting gives a better representation of shareholders’ views. The results of voting at the AGM in 2006 will be available at www.about.reuters.com.
06 Financial reporting accordance with the requirements of the SEC. Reuters has complied with both UK and US disclosure requirements in this report in order to present a true and fair view to all shareholders. In preparing the financial statements, the directors have ensured that applicable accounting standards have been followed, suitable accounting policies have been used and applied consistently, and reasonable and prudent judgements and estimates have been made where appropriate. The directors confirm that the financial statements comply with IFRS as adopted by the EU. The directors have reviewed the budget and cash flow forecasts for Reuters for the year to 31 December 2006. On the basis of this review, the directors are satisfied that the Group is a going concern and have continued to adopt the going concern basis in preparing the financial statements. 07 Risk management, internal controls and disclosure controls and procedures The Board confirms that it has a process for identifying, evaluating and managing significant risks faced by the Group. This process, which accords with the Turnbull guidance, has been in place for the full financial year and is ongoing. The control system includes:
In a group of the size, complexity and geographical diversity of Reuters it should be expected that breakdowns in established control procedures might occur. There are supporting policies and procedures for reporting and management of control breakdowns. The Board considers that the control system is appropriately designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The concept of reasonable assurance recognises that the cost of a control procedure should not exceed the expected benefits. Using a common risk management framework throughout Reuters, each of the principal business and functional units summarises the risks that could impede the achievement of its objectives. For each significant risk, line managers document an overview of the risk, how
Corporate governance and statement of directors’ responsibilities continued it is managed and any improvement actions required. A document called a ‘risk radar’ is created which sets out the main strategic and operational risks that have been identified. This document is reviewed by the GMC and the Board. At the year end, before producing the above statement on internal control in the annual report and Form 20-F, the CEO and CFO meet with members of the GMC and others to consider formally the operation and effectiveness of the company’s risk management and financial, operational and compliance internal control systems. This review includes consideration of self-assessment reports from line management and covers each of the most significant risks the company faces and how well these are controlled and managed. The CEO and the CFO report on the results of this review to the Audit Committee and to the Board. The Disclosure Committee (described on page 37) supports the process by reviewing disclosure controls and procedures. Whilst Instinet Group was part of the Group, it had its own systems of risk management and internal controls on which it reported to its shareholders. Reuters executive directors were members of the Instinet Group board, and Reuters CFO was a member of Instinet’s Audit Committee, until its disposal on 8 December 2005. The board of Factiva, which includes Reuters representatives, has responsibility for adopting processes for identifying, evaluating and managing significant risks in its business. The board of Radianz, which included Reuters representatives until its disposal on 29 April 2005, also had responsibility, while Radianz was part of the Group, for adopting such processes. In addition to the self-assessment and management review procedures, the Group monitors its internal financial control system through a programme of internal audits. Internal auditors independently review the controls in place to manage significant risks and report to the Audit Committee twice a year. The Audit Committee reviews the assurance procedures annually, including compliance controls, and reports its findings to the Board. The Group’s external auditors, PricewaterhouseCoopers LLP, have audited the financial statements and have reviewed the work of internal auditors and the internal control systems to the extent they consider necessary to support their audit report. The Audit Committee has met the internal auditors and PricewaterhouseCoopers LLP to discuss the results of their work. During 2005, Reuters management, the Audit Committee and the Group’s external auditors considered the accounting treatment of the RPF. The RPF is a hybrid pension scheme which has been in existence since 1893. It has been accounted for as a defined contribution plan, since at least 1984 when the Group went public, under both UK GAAP and US GAAP. Under the RPF’s rules, the Group is not able to access any surplus in the RPF. Although Reuters and employees make defined contributions to the fund, the RPF does not provide for contributions to be made to individual participant accounts. In 2005, management determined that the accounting for the RPF had been incorrect under US GAAP. There was no impact on the Group’s previously reported UK GAAP profit and loss account and balance sheet. As disclosed in the Group’s Form 20F/A dated 21 February 2006, amending the Group’s 2004 annual report and Form 20-F, following the change in accounting for the RPF, certain US GAAP financial information was restated. The impact of the restatement on prior year US GAAP results was to increase both reported net income before taxes and net equity in four of the five years (2000-2004). Management therefore determined that there was a material weakness in the Group’s internal control over financial reporting with respect to US GAAP accounting as at 31 December 2004. The Group has taken a range of steps to remediate this material weakness. The remedial actions aimed at strengthening controls over US GAAP, which are continuing, include:
At the end of 2005, Reuters management carried out an evaluation of the effectiveness of the design and operation of the Group’s disclosure controls and procedures. These are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, summarised and reported within specific time periods. Based on this evaluation, the CEO and the CFO concluded that, taking into account the matter noted above, the design and operation of these disclosure controls and procedures were effective as at 31 December 2005 to a reasonable assurance level (within the meaning of the US federal securities laws). With the exception of the steps noted above, no significant changes were made in the Group’s internal controls over financial reporting during the period covered by this report that materially affected, or are reasonably likely to affect materially, the Group’s internal control over financial reporting. Reuters annual report and Form 20-F for 2006 is also expected to contain an internal control report, so Reuters management have taken during 2005, and will be taking throughout 2006, steps in preparation for the Sarbanes-Oxley Act, section 404 reporting and attestation requirements that are scheduled to be met in respect of the financial year ending 31 December 2006. By order of the Board
Rosemary Martin
This report sets out Reuters executive remuneration policy, structure and details of the remuneration received by directors and senior managers for the year ended 31 December 2005. Shareholders will be invited to approve this report at the AGM on 27 April 2006.
01
Consideration
of remuneration matters – general The Remuneration Committee consists solely of non-executive directors. All members of the Remuneration Committee have been determined by the Board to be independent as defined by NASDAQ. Its current members are Ed Kozel, Penny Hughes and Ian Strachan. On 20 July 2005, Charles Sinclair resigned as Chairman of the Remuneration Committee, with Ian Strachan succeeding him. Charles Sinclair remained as a member of the Committee until his resignation from the Board on 6 December 2005. The Company Secretary is secretary to the Remuneration Committee. The Remuneration Committee met seven times in 2005. All members were present at each meeting except that Ed Kozel, Penny Hughes and Ian Strachan were each absent once. The CEO and the Chairman may attend meetings of the Remuneration Committee. Neither is present at any discussion concerning his own remuneration. During 2005, internal advice was provided by the Global Head of Human Resources, the Global Head of Performance & Reward, Tom Glocer and David Grigson. The terms of reference permit the Remuneration Committee to obtain its own external, independent advice on any matter, at the company’s expense. Towers Perrin were appointed as independent advisers to the Remuneration Committee on 20 July 2005. Towers Perrin has provided salary data to Reuters. This is routine information and independent of the advice provided to the Remuneration Committee.
02 Chairman and non-executive directors As Chairman, Niall FitzGerald receives an annual fee of £500,000. This fee is fixed until 1 October 2007. The company does not provide a pension contribution to him. Details of non-executive director appointments are contained on page 31. Niall FitzGerald and the non-executive directors have letters of engagement rather than service contracts and are not eligible to participate in executive share plans. No letter of engagement contains any provision for compensation in the event of termination outside of the periods referred to on page 34. The dates on which each non-executive director joined the Board are detailed below.
Reuters shareholders determine the remuneration paid to the non-executive directors. From 1 January 2005, this has been set at £50,000 per annum.The Board determines the additional fees payable to each non-executive director who chairs a Board committee. For 2005, these were £15,000 per annum, £10,000 per annum and £5,000 per annum for chairing the Audit, Remuneration and Nominations Committees respectively. Dick Olver, the senior independent non-executive director, receives an additional £5,000 per annum for this role. Niall FitzGerald is Chairman of the Nominations Committee and he has waived receipt of any committee chairmanship fees. In addition, non-executive directors who are resident outside Europe are eligible to receive a travel allowance of £5,000 for each Board meeting attended in the UK.
03 Executive directors In practical terms, this means that the reward structure for executive directors should attract, motivate and retain high-calibre individuals capable of successful leadership. To achieve this in a global business environment, Reuters executive remuneration must reflect the competitive practices of its principal competitors and the other multi-national businesses with which it competes for talent. Market-determined executive compensation, with a heavy emphasis on the variable remuneration elements, is the best way to ensure that Reuters has the high-performing executive directors necessary to achieve its immediate and longer-term strategic objectives. The Remuneration Committee ensures that the quantum of remuneration received by the executive directors is aligned with returns to shareholders. Reuters continues to ensure that a substantial proportion of executive reward is variable and dependent upon performance, with both corporate and personal performance affecting total executive remuneration. Basic pay represents a quarter or less of the target earnings potential. The executive directors are eligible for a cash bonus. In 2005, excluding pension contributions, the targeted composition of each executive director’s remuneration was as follows:
Executive directors are required to build and maintain a personal equity stake in the company. This personal shareholding policy
requires each executive director to accumulate a personal holding worth twice his basic salary within five years. If the policy requirements are not met, then the Remuneration Committee may recommend that it is inappropriate to grant further awards to that individual.
04 Remuneration framework
Basic salary and benefits Reuters maintains a salary structure with salary ranges based upon the mid-market of a comparator group of companies. Individual salaries are positioned at an appropriate point within the salary range. The Remuneration Committee reviews salaries and other rewards on a regular basis to ensure that the structure is maintained. Non-cash benefits are provided to executive directors and the Chairman in line with normal market practice and detailed on page 44. All executive directors receive a company car or an allowance and private healthcare benefits. Death and disability benefits are also provided to each executive director. Niall FitzGerald does not receive any death, disability or other benefits. Under the terms of Tom Glocer’s relocation agreement, Reuters provides accommodation in the UK and pays home leave expenses for him and his family. Tom Glocer’s salary has been unchanged since his appointment in 2001.
Pensions
Annual performance-related bonus were eligible for an annual cash bonus, with a maximum level of 100% of base salary for all but Tom Glocer, whose maximum level was 150% of salary. In February 2006, the Remuneration Committee considered 2005 performance, relative to the specified targets, and determined that the executive directors had earned bonuses of 72% of bonus potential. 2005 was the final year of the Fast Forward programme. During 2005, recognising the importance of revenue and cost targets during this period of significant transformation, the Remuneration Committee increased the focus on achieving the financial results associated with the Fast Forward programme. As such, 80% of the maximum bonus potential was measured against Target Trading Profit, budgeted revenue and free cash flow targets. The remainder was determined by customer satisfaction results. For 2006, the bonus will continue to focus on financial performance and customer satisfaction measures in the same proportion as in 2005. The bonus potential for Tom Glocer will remain at 150% of salary. The bonus potential for David Grigson and Devin Wenig will be 125% of salary. There is a profit threshold, based on Target Trading Profit, below which no bonuses will be paid. The Remuneration Committee reviews the business plan and establishes this threshold each year.
Equity incentive plans The executive directors participate in a discretionary stock option plan (DSOP) and a long-term incentive plan (LTIP) designed to reward longer-term performance. Details of all share incentive awards outstanding for each executive director serving during 2005 are set out on pages 46 and 47. Equity awards for executive directors are subject to the performance conditions applicable to the relevant plan. Towers Perrin provides data to the Remuneration Committee that models the expected values for equity awards. The Remuneration Committee has completed a review of remuneration arrangements, including the structure of equity plans to ensure that they remain in line with best practice and are also in alignment with the strategic business plan. This review included consultation with a number of the company’s major shareholders as well as the main representative bodies, the Association of British Industry (ABI) and the Research Recommendations and Electronic Voting Services (RREV) (a joint venture between the National Association of Pension Funds (NAPF) and Institutional Shareholder Services (ISS)). It was decided to continue to operate the LTIP and the DSOP but to increase the proportion of performance shares and to reduce the number of share options awarded, effectively rebalancing the quantum of share options and performance shares, placing more emphasis on performance shares. The Remuneration Committee also plans to maintain the overall expected value of the equity incentive plans at a comparable level to the 2005 level. These are described in more detail below. It is also the Remuneration Committee’s intention to fix, at least for 2006 and 2007, the number of shares over which options will be granted under the DSOP and the number of conditional shares which will be awarded under the LTIP. This will bring greater transparency, shareholder certainty and consistency to the equity element of remuneration. Details of the number of shares awarded under each plan are included in the relevant section below.
In 2001, the Remuneration Committee obtained shareholder approval to dis-apply ‘inner’ dilution limits. The Remuneration Committee conducts regular reviews to ensure that the dilutive impact of equity plans remains within appropriate levels. The projected dilution rate for the 2006 awards is below 1% of issued share capital. LTIP Since 1993, Reuters has operated a long-term incentive plan that seeks to encourage and reward long-term growth in shareholder value. It is Reuters practice to make an annual award of contingent share rights to executive directors and to those senior managers most able to influence corporate performance. From 2003, awards have been based on the fair market value per share using option pricing methodology. The fair market value ascribed to each share for LTIP purposes in 2005 was 43.8% of current market value. The LTIP’s performance is assessed by reference to the company’s relative total shareholder return (TSR) measured against the FTSE 100 over the performance period. As a matter of good practice, TSR performance is measured independently prior to review by the Remuneration Committee. The Remuneration Committee considers that relative TSR remains an appropriate measurement criterion for the LTIP. Whilst endorsing relative TSR as a measure, the Remuneration Committee recognises that Reuters does not fall naturally into any one of the existing FTSE industrial sectors. Accordingly, following a review, the Remuneration Committee continues to believe that the FTSE 100, rather than one individual sector or a bespoke peer group e.g. media and photography, remains the most appropriate peer group for comparison purposes. For awards made in 2006 and subsequently, this criterion will apply to determine the vesting for 50% of the initial award. The remaining proportion of the award will be determined by Reuters achievement of preset Profit Before Tax (PBT) growth achieved over the three year performance period. The performance range will be calibrated by the Remuneration Committee at the commencement of each performance period. For both the preset PBT growth element and the TSR element one third of the full award will vest for threshold performance. This is the median of the FTSE 100 for the TSR element and growth equivalent to at least 8% a year for the PBT element. For awards made in or prior to 2003 that do not vest or only partially vest after three years, the plan permits the measurement period to be extended by up to two years under a re-testing provision. Awards granted in 2000 and 2001 did not meet the performance condition required for vesting and accordingly, these awards lapsed. At the 2004 AGM and for grants from 2004, shareholders approved the removal of the re-testing provision. For 2005 awards, Reuters relative TSR ranking determines the extent to which plan awards will vest. Reuters must achieve median TSR performance for a proportion of the award to vest; full vesting only occurs for top quartile performance. Awards that do not meet at least the median performance condition on completion of the performance period will lapse. As noted above, future awards of shares subject to the TSR test will continue to vest in full for top quartile performance, with one-third of the initial award vesting for median performance, and with proportionate vesting for incremental performance between these points. Details of the awards for 2005 are set out in the table on page 46. The pre-set vesting criteria for awards which vested during 2005 or which have not yet vested are shown in the following table together with the actual ranking at 31 December 2005 (or on vesting if earlier). Awards granted prior to 2004 that vest under the plan are not released until at least five years from the date of grant.
In order to smooth the opening and closing points of measurement, the average of the daily closing prices for the immediately preceding twelve months, together with any dividends paid, is used to calculate the TSR. Shares awarded under the plan will continue to be met from existing shares held by Reuters Employee Share Ownership Trusts (ESOTs). The costs are charged to the profit and loss account over the vesting periods. For 2006, a fixed award will be granted to each executive director as noted above. These will be 500,000 shares for Tom Glocer, 200,000 shares for David Grigson and 250,000 shares for Devin Wenig. DSOP A global discretionary stock option plan was adopted by the Remuneration Committee in October 2000 and approved by shareholders in April 2001. It aims to reward growth in earnings and in the share price. With effect from 2004, to reduce the dilutive impact DSOPs have on shareholders’ interests and to allow the introduction of a plan better targeted at the general employee population, the number of participants was reduced significantly. Participation will normally be confined to executive directors and members of the GMC. Other employees may be eligible to participate in the Restricted Share Plan (see below). Specific performance conditions apply to each option grant to executive directors. For awards granted from 2001 to 2004, the Remuneration Committee could approve the re-testing of performance up to twice, in the event the performance condition was not met, by extending the performance period by up to two years with an increase of 3% in the hurdle rate of Earnings Per Share (EPS) growth as calculated under UK GAAP for each year added to the performance period. If the target rate was not met by the end of the fifth year, the options would lapse. These performance conditions were established in 2001 to retain management focus on earnings in a particularly challenging market. The performance conditions have been measured for the 2001, 2002 and 2003 grants. The performance conditions were not met for the 2001 and 2002 grants. The 2001 grant will lapse and, under the legacy re-testing provisions, the 2002 grant will be subject to a final retest against basic EPS performance for 2006. The 2003 award did meet the performance conditions and, accordingly, the 2003 DSOP award has vested. For awards granted from 2004, the re-testing provisions have been removed and new awards will not permit any extension of the measurement period. If the awards do not meet the EPS performance condition upon completion of the initial performance period they will lapse. Options granted to executive directors in 2004 and 2005 can vest only if the percentage growth in EPS exceeds the percentage growth in the retail price index by more than 9% over the three year performance period.
Remuneration report continued
The executive directors are contractually entitled to participate in the DSOP. 2005 awards are detailed in the table set out on page 40. It is the Remuneration Committee’s practice to divide participants’ annual entitlements into two awards, normally made following the announcement of preliminary annual and half-yearly results. For 2006 and 2007 awards, the Remuneration Committee has introduced a more demanding target to determine the extent to which options will be exercisable, introduced sliding scale vesting provisions and extended the period over which shares can be released from the plan. A minimum level of 6% a year growth in EPS will be required for half the options to vest; 9% a year will be required for all options to vest. For rates of growth between 6% and 9% options will vest on a proportionate basis. Furthermore, whereas all options may be exercised at present three years after grant provided that the performance test is met, executive directors will only be permitted to exercise 50% of the vested options after the initial three year period. The remaining options will only be exercisable, in two equal tranches, one and two years later. It is proposed that a fixed number of share options be established for granting to each executive director and that these are granted in equal measure over the next two years. For 2006, Tom Glocer will receive 1,250,000 options, David Grigson and Devin Wenig will each receive 500,000 options and 650,000 options, respectively. Since 2001, in addition to the requirements applicable under the plan rules, share options granted under the DSOP have been granted on terms that require recipients, who are subject to the UK national insurance regime, to pay that proportion of national insurance contributions normally attributable to the employer in addition to the proportion normally payable by the employee. The quantum of options awarded was not increased to reflect the transfer of this liability from Reuters to the recipient. At the time of its introduction, it was envisaged that the above approach would become standard market practice. However, market practice has not evolved in this way and accordingly the approach operated by Reuters is inconsistent with market norms. In light of this and other factors, including a desire to optimise the effect of incentive plans and to operate plans in a consistent manner across geographical borders, the Remuneration Committee, having taken independent advice, decided that any future share options would not be granted on the above basis and that the employer’s national insurance liability would be borne by Reuters. It was considered that such action would result in the DSOP being a more effective incentive. This approach has the additional benefit of all executive directors being treated on a more equitable basis. SAYE Plan An all-employee international savings-related share option plan is offered in which the executive directors are eligible to participate. Participants save a fixed monthly amount of up to £250 (subject to a maximum, established annually for each offer) for three years and are then able to use their savings to buy shares at a price set at a 20% discount to the market value at the start of the savings period. In line with market practice, no performance conditions are attached to options granted under this plan. For the 2005 offer, the fixed monthly savings amount was established at a maximum of £100 per month with a three year savings period. Annual Bonus Profit Sharing Plan (ABPSP) On 18 December 2003, Reuters announced its intention to introduce a new profit-sharing plan across the all-employee population. This plan was introduced to focus employees on reward for profit growth. Executive directors and members of the GMC did not participate in this plan in 2005. A decision is taken on an annual basis to operate the plan for the forthcoming year. Reuters has determined that this plan will operate for 2006. Payments under the plan were typically made in the form of shares which were normally subject to a 12 month vesting period with automatic release thereafter. To simplify the operation of the plan, payments in the future, including under the 2005 plan, will be made in cash. For 2005, participating employees will receive an award equivalent to 1% of an employee’s eligible salary. Restricted Share Plan (RSP) On 17 April 2004, at the AGM, the shareholders approved the introduction in 2004 of the RSP. Currently restricted shares will not normally be granted for long-term incentive purposes to executive directors or members of the GMC. It is intended that, other than for executive directors and GMC members, employees will be eligible to participate in this plan instead of the DSOP. This plan enables Reuters to provide market competitive remuneration, whilst reducing the dilution impact to shareholders. Other than in 2004, the year of introduction, employees would generally not be eligible to participate in the DSOP and the RSP in the same year. The RSP is normally granted with a four-year vesting period, shares vesting 25% each year. Legacy plans The following four plans are legacy plans under which Tom Glocer and Devin Wenig received awards prior to becoming executive directors. It is not intended that executive directors should receive any further awards under these plans. Performance related share plan (PRSP) This plan operated from 1995 to 2001 and targeted senior executives not participating in the LTIP. Tom Glocer and Devin Wenig hold awards granted before they became executive directors. All outstanding awards have now lapsed. The performance condition was the same as for the LTIP, although vested shares could be released three years after grant. Deferred bonus share plan (DBSP) Restricted share awards were made in 2000 as a special retention bonus to a total of around 100 senior managers, excluding the executive directors in office at that time. As a retention tool, and in line with the then market practice, they were made conditional only on remaining in employment until the shares vested. These awards vested in February 2002 and February 2003. Tom Glocer retained all of the shares that vested, meeting the statutory deductions and taxes from his own resources. Executive stock option plan (ESOP) Tom Glocer participated in an executive stock option plan operated in 1993 and 1994 prior to being appointed to the Board. Options under the plan carry no performance conditions and vested automatically on the third anniversary of grant. All options awarded to Tom Glocer under this plan have lapsed. Plan 2000 A one-off all-employee option grant was made in 1998 in order to support the retention of employees over the millennium period. In common with such all-employee plans, there is no performance condition to be satisfied. All employees, including the executive directors, were given the opportunity to apply for an option to acquire 2,000 shares at an exercise price of £5.50 per share. These options became exercisable in September 2001 and lapsed in September 2005. A small supplementary grant was made to new employees in March 1999, at an option price of £8.14 and these will normally expire in March 2006.
05 Performance graph
calculations assume the reinvestment of dividends. Performance in respect of individual awards is shown on pages 41 and 42. 
06 Subsidiary undertaking share plans
07 Service contracts Tom Glocer has a service contract, with an effective date of 23 July 2001, normally terminable by him on 90 days’ notice or, where due to the company’s fault, on 30 days’ notice. The company may terminate without cause on 30 days’ notice. In the event of termination by Tom Glocer due to the company’s fault, or by the company without cause, or in the event of a change of control, Tom Glocer’s compensation will be limited to a maximum of 12 months’ accrued benefits being annual-salary, annual bonus and pension contributions. In the event of a non-fault termination, Tom Glocer retains the benefit of any outstanding share plan awards as if his employment had not ceased. In addition, Tom Glocer and his family retain the life assurance and private healthcare benefits provided by Reuters for one year following termination. David Grigson’s and Devin Wenig’s contracts have effective dates of 21 June 2001 and 17 February 2003 respectively, and can be terminated on one year’s notice. Any termination payment will not exceed an amount equal to the sum of annual salary, bonus and 12 months’ pension contributions paid by Reuters. On a change of control of the company, all the executive directors are entitled to terminate their contracts on one month’s notice unless the acquiring party has, within three months of the change of control, agreed to adopt and uphold the Reuters Trust Principles (see page 119). Termination payments of a maximum of 12 months’ salary, annual bonus and 12 months’ pension contributions are payable to David Grigson and Devin Wenig (and to Tom Glocer as previously detailed) in such circumstances. All executive directors have contractual terms that limit the ability of an executive director to work for a defined list of competitor companies for a period of time. These provisions are in place to protect intellectual property and commercially sensitive information.
08 Policy on external appointments
Remuneration report continued 09
Directors’ remuneration for 2005
Directors’ pensions Tom Glocer participates in Reuters US pension arrangements and is entitled to a pension allowance of 25% of his base salary during 2005 and 2006. He is entitled to a lump sum death-in-service benefit whilst in service of four-times basic salary. David Grigson is a member of the Reuters Retirement Plan in the UK and is entitled to a contribution in respect of pension benefits equal to 20% of the UK earnings cap. With effect from 1 June 2005, the company introduced a salary sacrifice scheme for all pension plan members under which the company increased pension contributions by 4% in return for a reduction in the contractual base salary of the same percentage. This increased the company contribution from 20% to 24% from that date. He is entitled to a lump sum death-in-service benefit whilst in service of four-times basic salary. Devin Wenig participates in Reuters US pension arrangements and is entitled to a pension allowance of 6% of his base salary. He is entitled to a lump sum death-in-service benefit of $1 million.
The information shown complies with requirements under both the UK Listing Authority and the Directors’ Remuneration report Regulations 2002. The total amount of contributions or accruals made in 2005 to provide pension and similar benefits for the directors was £307,310 (2004: £693,315) and for the executive directors and the other senior managers as a group was £847,251 (2004: £1,622,626). These aggregate figures also include an accrual of £52,000 and £60,000 respectively for the investment returns within the US executive pension arrangements. These investment returns are calculated based on each individual’s notional fund choices made by reference to actual investment funds and the actual investment returns achieved on these funds.
Remuneration report continued Directors’ interests in long-term incentive plans5
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