Final Results

22nd Mar 2006 07:01

F&C Asset Management PLC22 March 2006 To: London Stock ExchangeAttention: RNSFrom: F&C Asset Management plc (the "Company")Date: Embargoed until 7am on 22 March 2006 Annual Results for the twelve months to 31 December 2005 (unaudited) The annual results for 2005 are the first full year financial statements of theF&C Asset Management plc Group ("F&C") to be prepared under InternationalFinancial Reporting Standards ("IFRS"). The comparative results for the year to31 December 2004 have been restated under IFRS. Key Highlights - Underlying earnings per share before amortisation and impairment of intangibles, restructuring costs and the cost of the Re-Investment plan increased by 24.6% to 15.9p - Final dividend of 7.0p giving an unchanged total of 11.0p for the year. - Operating margin before amortisation and impairment of intangibles, restructuring costs and the cost of the Re-Investment plan increased from 34.0% to 44.1%. - Assets under management at 31 December 2005 were £131.0bn. - Integration of the merged businesses now substantially complete. - Annualised synergies of £33 million achieved and we will see the full benefits in 2006. Enquiries: Alain Grisay, Chief Executive / Jason Hollands, Head of Communication -Telephone: 0207 506 1168 Financial Summary 2005 2004 Restated** Assets under management £131.0bn £124.8bnNet revenues (before investment income attributable to policyholders) £267.2m £151.9mLoss before tax £(106.3)m £(4.4)mUnderlying profit before tax* £107.8m £41.0mGroup operating profit* £117.7m £51.7m Operating margin*(1) 44.1% 34.0%Loss per share (16.4p) (1.6p)Underlying earnings per share* 15.9p 12.8p Interim dividend 4.00p 4.00pFinal dividend 7.00p 7.00p Total dividends per ordinary share 11.00p 11.00p * before amortisation and impairment of intangibles, restructuring costs andthe cost of the Re-Investment Plan. ** as restated for the implementation of IFRS. (1) being Group operating profit expressed as a percentage of net revenuesbefore investment income attributable to policyholders. Chairman's Statement Company Overview The year 2004 was dominated by the negotiation and conclusion of the mergerbetween ISIS Asset Management plc and F&C Group (Holdings) Limited. 2005naturally centred on the integration of the two firms to form one. In this, wewere successful. The result is a more diversified, balanced, efficient, andprofitable platform. In his comments which follow, our new Chief Executive,Alain Grisay, gives a detailed recap of the year just passed together withmanagement's priorities for the future. Allow me to highlight here two keydevelopments and one overriding priority for our Company. The single largest success in 2005 was the completion of the integration effort.This will reduce annualised costs by some £33 million. The single largestsetback was the announced loss of Resolution Life assets. This will reduceannualised revenues by some £27 million. The positive impact of cost synergieshas been partially registered in 2005. The negative impact of asset shifts byResolution Life will predominantly bite in 2006. Management's principal focus during the second half of the year was thestrengthening of the quality and execution of our product offering. This remainsa priority. Much action has been taken. There are encouraging signs. We willlook for validation of these efforts in the form of positive flows and top linegrowth. Improved returns for our clients must underpin improved returns for ourshareholders. Results and Dividend The group is reporting a loss per share of 16.4 pence. This reflects a numberof non-cash and non-recurring items including amortisation and impairment ofintangibles, restructuring costs and the cost of the Re-Investment plan. TheBoard believes a more appropriate measure to be underlying earnings per sharewhich rose to 15.9 pence, an increase of 24.6 per cent on the comparative numberfor 2004. In line with our stated dividend policy the Board is recommending an unchangedfinal dividend of 7.0 pence per ordinary share payable on 19 May 2006 toshareholders on the register on 7 April 2006. Board Developments During 2005, the Board re-visited and re-affirmed the group's pan-Europeanproposition as articulated to investors at the time of the 2004 merger. TheBoard's principal focus however, was very much on the key first step in thatstrategy - the successful execution of the merger itself. I would like to thankthe Directors for the dedication shown and results achieved. In September, we announced the prospective retirement of Howard Carter andappointment of Alain Grisay to succeed him as Chief Executive. The transitionhas gone smoothly. Alain took up his formal responsibilities on the 1 January2006, and Howard will, as planned, step down from the Board at the upcomingAnnual General Meeting. We would like to thank Howard for his many years ofservice. Without his efforts, the Company would certainly not be in itsstrengthened position today. We sincerely wish him the very best in the yearsahead. Meanwhile, this January, it was announced that our Chief Financial Officer, IanPaterson Brown, would be standing down by mutual agreement. Ian has been withthe Company in its various incarnations for no less than 24 years. He has playeda key role in the Company's expansion. He was of course central to the merger in2004 and a key contributor to the identification and realisation of the costsynergies that flowed from the subsequent integration. Ian will retire from theBoard at the Annual General Meeting. We thank him for his tireless efforts andwish him all the very best. Industry Developments In last year's communique, I highlighted a trend towards industry consolidation.That trend accelerated in 2005 and promises to continue in the years ahead. Thesearch for critical mass, economies of scale, acceptance of open architecture(which facilitates separation of production and distribution), and finally there-examination by owners of what is core and what is not, are factorscontributing to sector activity. Two recent transactions are worth noting. BothCitigroup and Merrill Lynch have exchanged their very considerable assetmanagement businesses for shares in a more focused, stand alone asset managementcompetitor. The view seems to be that a dedicated asset management company is amore successful model. This is of course, our model. Summary and Conclusion If 2004 was the year of the transaction, 2005 was the year of integration, theresult of which is a better balanced Company. Not withstanding the immediateearnings challenges, we believe the Company to be well positioned to takeadvantage of the expanding opportunities for asset management in thepan-European marketplace. On behalf of the Board, allow me to thank our employees and clients whosededication and support have made these strides possible. Robert JenkinsChairman20 March 2006 Chief Executive's Report This is the first Annual Report covering a full year of trading by the enlargedCompany formed by the merger of F&C Group (Holdings) Limited and ISIS AssetManagement plc in October 2004. It is also my first report as Chief Executive,having succeeded Howard Carter on 1 January. As a result of the merger andsubsequent integration, F&C is now one of the largest asset managers in Europewith £131 billion (at 31 December 2005) of assets under management, anachievement of which my predecessor can rightly be proud. Whilst 2004 was dominated by the transaction, 2005 was focused on integratingthe two companies. I am pleased to report that: • We have successfully completed a large and complex integration in just 15 months, possibly a record for the asset management industry. • We have achieved £33 million of annualised cost synergies, the full benefits of which will be seen in the 2006 numbers. • The above synergies are achieved through the removal of duplication in functions, the consolidation of premises, product rationalisation and the adoption of a single brand. • The only outstanding integration activity relates to certain IT projects which will run for another 18 months. During 2005 we were advised by Resolution Life of its decision to internalisethe management of its assets following its own merger with the Britannic Group.Whilst the loss of some £20 billion in assets in Q1 2006 was of courseunfortunate, it was by no means related to F&C's performance or service levels. While the integration is now firmly behind us and we have moved to a business asusual environment there remains a number of business risks which I highlightlater in my report. To ensure strategic focus, provide greater accountabilityand enhance our control environment we have implemented a number of changes toour management governance structure. We have streamlined our decision making process by setting up an ExecutiveCommittee and a Management Committee in lieu of some six existing managementlevels. We have also replaced the function of Chief Investment Officer by that of a Head ofInvestments to recognise the business management approach required by a largeroperation. Asset management being a service industry, we have articulated our businessphilosophy as seeking to excel in everything our clients expect. To this end wehave launched an initiative, "Performance First", across the business which: • Defines top quartile performance standards for every area of activity: investment management, marketing and client servicing, operations and all the support functions; • Sets clear and measurable departmental and individual goals; and • Incentivises individuals to achieve their goals. This will be achieved through proposed amendments to the Company's Long Term Remuneration Plans, details of which will be contained in the Annual Report and Accounts. These initiatives, combined with a strengthening of some of our human capital,reinforce a common business culture across the Group and give us a focusedplatform for growth. Business Overview & Strategy The key characteristics of F&C's business are: • We are a pure asset manager: Our only activity is asset management. • We are focused on the UK and Continental Europe: Headquartered in London, F&C has offices in seven countries (UK, Netherlands, Portugal, Ireland, Germany, France and the US) and is focused on growth in Europe. • We are an active manager and an active investor: Our investment process utilises proprietary research to add value for our clients. Our investment style is both active and pragmatic; we are not bound by labels such as "value" or " growth". As shareholder representatives we also actively engage with the companies in which we invest with the goal of enhancing and protecting long term shareholder value. • We are a diversified business by client type, asset mix and geography (see tables below) which provides us with a robust business model across market cycles. • Our distribution model is based on intermediaries and strategic partnerships. o In the UK institutional market we sell principally through investment consultants, who now advise the overwhelming majority of pension funds on the selection of investment managers. o In the UK retail market we distribute primarily through financial advisers. Our approach is to develop long-term relationships based on providing business solutions. o Across Europe we have developed wholesale and sub-advisory relationships with local partners where we benefit from long-term contracts and leverage local presence. These include Friends Provident (UK), Eureko (The Netherlands), Millennium BCP (Portugal), Friends First (Ireland) MAAF Assurances and Imperio (France). We are a "multi-boutique" company which leverages on scale: We benefit from ourscale in terms of research, infrastructure, distribution and access to themarket. In terms of our investment model though we are a "multi-boutique". Ourinvestment professionals work in small teams on specific products to foster anentrepreneurial culture of ownership and accountability for performance. Theseteams include property, fund of private equity funds, single strategy hedgefunds and fund of hedge funds. Alongside the mainstream asset classes we are amulti-specialist with significant strength in niche areas such as Governance andSocially Responsible Investment (GSRI), Emerging Market Debt, Liability DrivenInvestment (LDI), Global Tactical Asset Allocation (GTAA) and Multimanager Fundof Funds. Our Strategy Our strategy is grounded in our belief in a virtuous circle: deliveringexcellent performance will be validated by organic growth which will, in turn,translate into earnings growth and stock price performance. Going forward, ourthree strategic priorities are therefore: 1. A focus on investment performance Our performance is already strong in a number of areas. Where there is room forimprovement we have taken, and will continue to take, action: • We have reorganised the investment management division, replacing the traditional Chief Investment Officer function as custodian of the House Market View with the new role of Head of Investments; a role which focuses on the broader approach to business management required to deliver consistent performance. This gives us a more widely based front office senior leadership team where the heads of each asset class now have a more focused responsibility and accountability for investment decisions. We believe this is an appropriate model for an investment division with over 180 professionals. • Where appropriate, we have and will continue to selectively upgrade the quality of our investment teams. Last October we recruited a team of highly regarded UK equity fund managers. We have already attracted institutional and retail assets on the back of this move. 2. Organic growth Our priority is to grow organically. We will take an opportunistic attitudetowards further acquisitions. We will consider transactions that would enable usto either leverage our platform or to secure new distribution channels. 3. We are targeting new business in higher margin areas Following the successful integration of F&C with ISIS, we have one of the mostefficient platforms in the asset management industry with an operating margin of44.1% in 2005. While we recognise that maintaining this operating margin willbe a challenge, our aim is to leverage this platform and improve our businessmix by targeting new business in higher margin areas: - We continue to strengthen F&C's retail brand through advertising and by deepening our relationships with financial advisers, our primary distribution channel for retail products in the UK. - Our network of offices and presence in local markets mean we are well placed to increase funds under management from the more profitable continental European markets. - We are investing in developing our higher margin products including Liability Driven Investment, alternatives and specialist institutional mandates yielding performance fees such as emerging market debt, high yield, high alpha equities, hedge funds, and Private Equity Fund of Funds. We have been successful in attracting some outstanding managers to lead these efforts. - Our "multi-boutique" approach allows us to offer a broad range of products to our clients, and positions us to maximise our share of their assets under management in response to shifts in their portfolios. Assets Under Management The table below provides a breakdown of assets under management at 31 December2005 by client category, asset class and geographic source. Assets Under Management by Client Category 31 December 31 December* 2005 (%) 2004 £bn £bn Insurance Funds 79.2 60.5 77.4Institutional Funds 34.6 26.4 32.4Investment Trusts 6.9 5.2 5.3Open Ended Products (Third Party) 2.7 2.1 2.5SICAV's 0.5 0.4 0.5Sub-Advisory 7.1 5.4 6.2Total Retail 17.2 13.1 14.5Venture Capital Trusts/ Limited Partnerships - - 0.5 Total 131.0 100.0 124.8 * as restated to be consistent with 2005. Insurance clients represent 60 per cent of our assets under management but thisis spread across a number of clients with whom we have long term contracts.These include Friends Provident, Eureko, Achmea, RSA, Friends First andMillennium BCP. The level of insurance client assets has reduced during thefirst quarter of 2006 to about 53 per cent of total assets under managementfollowing Resolution's final transfer of assets to its in-house asset managementoperation. Assets Under Management by Asset Class 31 December 31 December 2005 (%) 2004 £bn £bn Fixed Interest 72.8 55.6 72.6UK Equities 19.4 14.8 16.8Overseas Equities 25.8 19.7 23.1Property 6.5 5.0 6.0Other Alternative Investments 1.2 0.9 0.9Liquidity 5.3 4.0 4.9Private Equity - - 0.5 Total 131.0 100.0 124.8 Fixed interest assets represent some 56 per cent of our total assets undermanagement. Within this asset class F&C has developed a strong track recordmanaging a large book of corporate credit for both institutional and retailclients. We have also developed expertise in specialist higher margin products,particularly in emerging market debt and high yield bonds. Whilst alternative investments represent a relatively small portion of ouroverall assets under management, the fee rates are higher than average. This isan area we have been growing rapidly. Assets Under Management by Geographic Source 31 December 31 December 2005 (%) 2004 £bn £bn United Kingdom 77.7 59.3 74.8The Netherlands 32.1 24.5 30.4Portugal 13.5 10.3 12.7Ireland 2.9 2.2 2.8Germany 1.9 1.5 1.7France 1.2 0.9 0.7Other 1.7 1.3 1.7 Total 131.0 100.0 124.8 Review of 2005 & Prospects Investment Performance Performance was mixed over the year with major areas of strength but also someweakness. Some 54 per cent of our retail funds delivered above averageperformance in their respective IMA sectors* during 2005, compared to 60 percent over the last three years and just 38 per cent over five years. Credit was an area of particular strength with the F&C Long Dated Corporate BondFund finishing the year ranked first out of fifty-two funds and the F&CCorporate Bond Fund ranked second out of seventy-two funds in their respectivesectors over three years, according to the CAPS pooled pension fund survey1. We also outperformed over the year in high yield, emerging debt, ContinentalEuropean equities, US smaller companies, UK smaller companies, Japan and Asiaex-Japan. Balanced portfolios benefited from positive asset allocationdecisions. Our ethical funds were relatively disadvantaged against the wider market in 2005by their natural under-weight exposure to oils and financials, but theycontinued to deliver good absolute returns and were performance leaders againstother competitor ethical products. We underperformed in emerging equities, UK equities and Euro government bonds.-------------------------------------------------------------------------------- * Excludes funds with target returns. 1 Russell Mellon CAPS Pooled Pension Fund Update to 31 December 2005. The F&CMPF Corporate Bond Fund sits in the UK Bonds - Standard Sector. The F&C MPF LongDated Corporate Bond Fund sits in the UK Bonds - Long Term sector. Calculationbasis: offer to offer, income reinvested at offer, net of fees. Operations As outlined in our last Annual Report, our intention had been to outsource toMellon certain operational functions related to the former ISIS business. Thiswould have involved the transfer of some of our staff. After a year of duediligence and contractual negotiations we took the decision in November toterminate our discussions with Mellon, as we were not satisfied that to proceedwould have been in the best interests of all our stakeholders. Our existing platform for client administration of the former ISIS book ofbusiness is efficient and there has been no disruption to clients as a result ofour decision to disengage from this project. We have considerable experience inusing a multi-provider approach as we currently use some five providers foroutsourcing services . We are now enhancing our flexibility by building a datawarehouse to consolidate data from various providers. A separate client and fund administration outsourcing project with ABN AMROMellon Global Services in The Netherlands did proceed successfully in December.This resulted in 22 of F&C Netherlands staff transferring to ABN AMRO Mellon'sAmsterdam office. F&C Netherlands is now able to focus entirely on clientservicing and asset management. Fund flows for the year to 31 December 2005 Client Category Inflows Outflows Net £m £m £m Insurance Funds N/A N/A (6,577)Institutional Funds 4,523 (5,482) (959)Open Ended Products (Third Party) 367 (211) 156Investment Trusts 1,144 (690) 454SICAV's 517 (530) (13)Sub Advisory 2,511 (1,711) 800 N/A N/A (6,139) As the table above illustrates, during 2005 we experienced net outflows of £6.1billion assets under management. Some £5.2 billion of these related to oneinsurance client, Resolution plc. Additional net outflows were experienced frominstitutional clients. In contrast there were net inflows from higher marginretail client categories such as sub-advisory relationships, open-ended fundsand investment trusts. Further commentary is provided below. Insurance The successful integration of the two previous businesses was over-shadowed bythe termination of our contract to manage assets for Resolution plc, the majornegative event for us during 2005. This was particularly disappointing as it wasnot related to investment performance or any other reasons within our control. • During 2005 outflows from Resolution plc represented £5.2 billion, a significant proportion of the total £6.6 billion net outflows from insurance clients. • The remaining £19.9 billion of Resolution plc assets have been withdrawn during Q1 2006. • F&C will receive £27 million in compensation for the termination of this contract. • Going forward, F&C has little exposure to closed life books and natural run-offs will be small. We see further opportunities in the insurance sector given F&C's expertise inthis area. In particular: • We have developed a dedicated Assets and Liability Management (ALM) capability to provide solutions to meet the specific needs of insurance clients. • With some of our insurance clients, F&C has a contractual right to manage additional assets acquired through corporate activity. For example, following the merger of Achmea and Levob in 2005, assets were transferred to F&C. Similarly, the merger between Achmea and Interpolis in 2005 will create new opportunities for F&C. • Insurance clients are increasingly interested in allocating some assets to alternatives such as hedge funds and private equity, where we have developed expertise and where margins are higher than traditional asset classes. Institutional During 2005, despite inflows of some £4.5 billion we experienced net outflows ofabout £1 billion. Asset losses were related broadly to three factors: • An industry trend away from balanced to specialist management. This was a factor primarily impacting our business in The Netherlands; • A switch by some clients away from equities and bonds to other asset classes; and • Some instances of disappointing investment performance, particularly in emerging equities. In the UK the main contributor to new business has come through the FriendsProvident Defined Contribution and investment products (£1.2 billion of newassets). In general, sales activity has been focused on the investmentconsultants, with over 150 research meetings taking place during the year.Whilst the majority have been with the largest consulting firms (Watsons,Mercers, Hewitts, Hymans Robertson and Psolve,) we have extended our coverage toencompass over 50 other firms nationwide. We have concentrated on presenting fornew business those areas of investment expertise where we believe we havecompetitive advantage including composite UK bonds, high alpha UK equities, UKproperty and other more specialist areas such as fund of private equity funds,fund of hedge funds and ALM management. In addition, the F&C Managed PensionFund continues to provide smaller schemes with the opportunity to invest in adiversified manner across a choice of 25 specialist investment vehicles. In The Netherlands we have seen opportunities created by policy and regulatorydevelopments in two areas where we have strong specialist expertise: • There is growing interest in Governance & Socially Responsible Investment where we operate our market leading reoTM (responsible engagement overlay) service. Achmea has recently applied reoTM to €1.5 billion of its assets under management. • The second area is ALM and LDI. The adoption of market consistent valuations for both the assets and liabilitiesof pension funds has highlighted the valuations' sensitivity to interest ratemovements where pension funds are invested in more asset classes than justbonds. This mismatch causes the so called "duration gap" where the value ofassets can change at a different pace to the value of liabilities. In order tobenefit from the long term value creation of different asset classes pensionfunds need to actively manage their risks. In The Netherlands, from January 2007 Dutch pension funds will be subject to thenew Financieel Toetsingskader (nFTK) regulation which will require them tostructure their investments to lock in their ability to cover their liabilities. F&C, as a leading manager of insurance portfolios, has a strong technicalexpertise in liability modelling and LDI. To provide a solution to our pensionfund clients and leveraging on our experience, we have recently launched aseries of LDI pooled funds which have already attracted over €500 million ofDutch client assets. These structures allow clients to commit only part of theirassets to cover the risk of interest rates movements on their liabilities whilstretaining the flexibility to seek higher returns in other asset classes. In Portugal we continue to manage institutional assets for Millennium BCP-Fortisand have been working with them on their new asset allocation strategy. Onedisappointment was an outflow of around £1.4 billion as a result of Caixa'sdecision to manage in-house the assets of Imperio Bonanca. F&C will becompensated for this loss under its long-term arrangement with BCP. In Ireland attention has been directed on property where our performance hasbeen very strong. We have also been focusing on widening the marketing of ourGovernance and Socially Responsible Investment (GSRI) capabilities ahead of thelaunch of a Charities Managed Fund in 2006. In Germany during 2005, institutional investors have continued to redefine thevalue chain between investment managers, custodians and Master KAGs and thegrowing market share of the Master KAGs underlines this trend. In this context,F&C has built on its reputation as a specialist provider of investment solutionsin the areas of bonds, convertibles and, more recently, single strategy hedgefunds. In France we continued to develop our relationship with MAAF Assurance. Salesand marketing activity has centred around a planned second tranche of FOSCA (aclosed-ended property investment vehicle focused on the French office market).The first tranche was launched with their property subsidiary MAAF REIM in 2004.Our relationship with Imperio Assurances continues to be robust and assets havegrown significantly. UK Retail Industry sales in 2005 started slowly, but picked up from May on the back ofstrong growth in equity markets. All major equity markets posted positivereturns during 2005 with the FTSE All Share Index generating a 22 per cent totalreturn. Statistics from the Investment Management Association (IMA) indicate that,whilst net retail sales in 2005 were some 73 per cent higher than 2004, thisimprovement was not reflected in sales of Individual Savings Accounts (ISAs).Net ISA sales actually ended 2005 some 10 per cent lower than 2004 and were attheir lowest level since 1999. As Howard Carter indicated in his Report lastyear, we are concerned that ISA sales have been impacted by the decision of theGovernment to abolish tax credits on ISA dividends. This is a factor which theGovernment should consider when it conducts its review of the future of ISAslater this year. Industry wide, equity funds represented 39 per cent of net retail sales comparedto 32 per cent from bond funds. Investors showed a strong preference for equityincome funds and other yield based investments. Demand for property basedinvestments remained high. Our own net retail sales were up 21 per cent in 2005. We are pleased with thisprogress so soon after a major merger. In particular: • We completed a fund rationalisation programme during the first half of the year and consolidated the fund accounting, trustee and third-party administration. • The two legacy ranges of investment trust wrapper products such as PEPs, ISAs and regular savings schemes were migrated into one product suite by December 2005. • The company consistently advertised throughout the year to build the F&C brand in the IFA market place. Key product highlights during 2005 were: • The Stewardship Income Fund, an ethical equity income fund, was our best-selling OEIC which received widespread recognition and media attention for its excellent long term performance compared to other equity income funds. • In July we sought to capitalise further on the success of the Stewardship Income management team by appointing them to run the F&C UK Growth & Income Fund, a previously poorly performing product. The fund has now moved in to the top quartile of the IMA Equity Income Sector and has more than doubled in size on the back of new inflows and strong performance. • Our multi-manager range of funds accounted for 25 per cent of our UK retail fund sales. This is a fast growing area, receiving support from intermediaries seeking to outsource client portfolio management to professional fund of funds teams. In particular, we saw the greatest level of support for the F&C Multi-Manager Distribution Fund which has grown to over £150 million in just two years. • Corporate bond funds represented 17 per cent of our retail sales, a slowdown on 2004 as advisers turned their attention towards equity funds. Performance has remained strong throughout the year and the lead manager on these funds now carries a coveted AAA- rating from Citywire, the highest possible rating. • The Venture Capital Trust (VCT) market saw significant growth in 2005 on the back of favourable tax changes introduced in the 2004 Budget. Currently subscriptions to VCT new issues attract 40 per cent income tax relief. F&C is the largest distributor of VCT products, marketing trusts managed by ISIS EP LLP (under the Baronsmead brand). F&C saw an increase in gross VCT sales of 40 per cent in 2005. It was an eventful year for the investment trust industry with arbitrageursactive in the market and plenty of corporate activity. As a market leader in theinvestment trust sector we were not immune from these trends. Developmentsinvolving investment trust clients included: • The launch of the F&C Commercial Property Trust Limited in March. With gross assets of £965 million invested in high quality UK commercial property, principally sourced from Friends Provident, this is the largest listed commercial property trust to date. Over £250 million of new funds were raised as part of this initiative. • The acquisition of a private equity fund of funds team from Martin Currie Investment Management. The deal was accompanied by the mandate for the Martin Currie Capital Return Trust plc which has now been renamed F&C Private Equity Trust plc, following its merger with Discovery Trust plc. The team have expanded our investment capabilities and improved our ability to grow our exposure to alternative assets in a scaleable way. • The merger of the F&C Income Growth Investment Trust plc with F&C Capital and Income Investment Trust plc; • The outsourcing of certain US and Japanese assets by Foreign & Colonial Investment Trust plc; • A reconstruction and tender offer by F&C Global Smaller Companies plc; • The introduction of discount control mechanisms by Foreign & Colonial Investment Trust plc, European Assets Trust N.V. and F&C Global Smaller Companies plc. • The loss of the mandate to manage F&C Pacific Investment Trust plc and the recent announcement by Latin American Investment Trust plc that it intends to withdraw its funds. F&C has long been recognised as a market leader in the provision of investmenttrust savings wrappers and an important development during the year was thelaunch of the F&C Child Trust Fund. This provides access to a range of F&Cmanaged investment trusts through the Government's recently introduced savingsscheme for new born children. The group's leading position as an investment trust product provider has onceagain been validated in the market place with numerous awards including "Investment Trust Company of the Year" (Financial Adviser); "Best InvestmentTrust Provider" (Shares Magazine); "Best Investment Trust ISA Provider"(Personal Finance); "Best Investment Trust Group" (Professional Adviser). A further positive achievement for our retail business was winning the FinancialAdviser Five Star Service Award. This was particularly pleasing, as F&C was theonly asset manager to win this award which is based on voting by financialadvisers. European Wholesale Our strategy for accessing the retail market outside of the UK is primarily,although not exclusively, as a wholesaler working with local distributors. Thischannel was one of the most successful for F&C during 2005. The three key retailmarkets for F&C in Continental Europe are Portugal (where we providesub-advisory services to Millennium BCP Funds de Investimento (MFI), the mutualfunds of Millennium BCP), The Netherlands (where we sub-advise mutual funds forAchmea, the largest Dutch insurance group) and Germany (where we market SICAVfunds). Retail assets under management arising from these relationships were€10.7 billion at year end, a rise of 27 per cent across the year and ahead ofour forecasts. A summary of key developments in these markets includes the following: • In Portugal we saw net sales of €829 million. Our partner Millennium-BCP has retained its position as the number one provider of mutual funds in Portugal with a 21 per cent market share. We are continuing to work with MFI to review and enhance their product range. • In The Netherlands net sales were €475 million which included the transfer of €218 million assets resulting from Achmea's merger with Levob. • In Germany net sales were €115 million with the focus being F&C HVB-Stiftungfonds, a low risk product co-branded with HypoVereinsbank and managed by F&C Alternatives which is designed to provide predictable returns, as well as three SICAV funds: F&C European High Yield, F&C Emerging Market Bond and F&C US Smaller Companies. Working with our institutional business we have negotiated an exclusive share class on the F&C Emerging Market Bond Fund for Commerzbank. We have increased our visibility in the German market place through seminars, roadshows and conferences. F&C Alternative Investments Interest in alternative assets continues to grow across our client bank. The F&C Alternative Investments team currently manages three single strategyhedge funds; F&C Amethyst (an equity volatility trading fund), F&C Sapphire (aquantitative asset allocation fund) and F&C Citrine (a European equity long/short fund). In addition to these three funds, the team also manage a number of retail fundswhich leverage our derivatives expertise, including F&C Higher Income Plan, F&CBLUE and F&C HVB-Stiftungsfonds, all of them with an absolute return bias. Despite the challenging environment for the hedge fund industry in 2005, it wasa successful year for F&C Alternative Investments: • Assets under management increased 33 per cent to £1.2 billion • F&C Amethyst won the prestigious EuroHedge Award as the best Mixed Arbitrage & Multi-Strategy fund. • F&C Amethyst closed for new business having successfully raised €470 million. • F&C Citrine launched its first major fund raising in September 2005. F&C Partners LLP F&C Partners is a fund of hedge funds boutique, founded in late 2004, which ismajority owned and controlled by F&C. The team currently manages two products; aBalanced Alpha Fund and a Select Alpha Fund. Both portfolios delivered positiveabsolute returns and assets under management at year end were £295 million. ISIS Equity Partners LLP As reported last summer, assets managed by F&C's private equity subsidiary, ISISEquity Partners, were transferred to a new Limited Liability Partnership (ISISEP LLP) in which F&C has a small minority interest. As such these assets are nolonger included in F&C's quarterly reporting of AUM. However, we continue toenjoy a profit share as an investor in ISIS EP LLP. Two C-share issues on Venture Capital Trusts managed by ISIS EP LLP and marketedby F&C were fully subscribed during the year, securing ISIS EP LLP with thelargest market shares of new VCT fund raising. Business Risks In addition to the "normal risks" facing the business relating to market,clients, personnel and regulation, the Company faces a number of short-termoperational challenges. These operational challenges, principally created bythe loss of the Resolution Life contracts and the decision to withdraw from theUK outsourcing negotiations with Mellon, are being managed and prioritisedthrough the Company's risk management activities. We have also taken action toaddress investment performance but the loss of key mandates as a result ofhistoric investment underperformance remains a business risk and a key area ofmanagement focus as we seek to embed "Performance First" across the business. Financial Review 2005 was not only the year of integration and cost synergies, it also saw listedcompanies adopt International Financial Reporting Standards ("IFRS") for thefirst time. Recognising that the accounts represent the first full twelve monthsof the enlarged group and the benefit of certain cost synergies, the figures for2005 are not readily comparable with those for 2004. Results - Consolidated Income Statement Under IFRS the results of our Managed Pension Fund business are consolidated ona line by line basis rather than being included as a single line item "otheroperating income", as previously reported under UK GAAP. The effect of this isto inflate both revenues and operating costs attributable to policyholders'underlying assets. The other major factors impacting the Income Statement are the Re-InvestmentPlan expense of £22.2 million which relates to the share scheme established atthe time of the merger to lock-in and incentivise senior staff. This wascommented on in last year's Annual Report and Accounts and further informationwill be included within the Remuneration Report. Historically we have been required to amortise goodwill. However, with theintroduction of IFRS it is necessary to separately recognise the fair value ofintangible assets and to amortise those assets over their estimated usefullives. These intangible assets represent the value of underlying managementcontracts acquired. Intangible Assets - Management Contracts Carrying Additions Impairment Amortisation Foreign Carrying Value Amortisation Value at in Year in in Year Exchange at Period 1 January Year Movements 31 December 2005 in Year 2005 £m £m £m £m £m Years F&C AcquisitionInvestment Trusts 118 - (56) (6) - 56 20Insurance 124 - - (12) (4) 108 10Institutional 182 - (55) (18) (3) 106 10Retail/Other 87 - - (9) (1) 77 10 511 - (111) (45) (8) 347 RSA AcquisitionInsurance 38 - - (5) - 33 10Retail/Other 41 - - (6) - 35 10 79 - - (11) - 68 Other - 1 - - - 1 20 Total 590 1 (111) (56) (8) 416 The remaining carrying value of intangible assets needs to be reviewed ifindicators of their potential impairment exist. If there has been an impairmentthen the intangible asset is written down to its recoverable value. This is atopic I will return to under the review of the balance sheet but bothamortisation and impairment of intangible assets are added back in calculatingunderlying earnings, one of the mechanisms the Board uses for measuring theprogress of the business. Results Previously, under UK GAAP, we have shown Earnings Per Share ("EPS") on a "clean"basis being EPS before restructuring costs, amortisation of goodwill and thecost of the Re-Investment Plan. Under IFRS the Board continues to believe thatit is appropriate to give some measure of the underlying earnings of thebusiness and hence while the basic loss per share was 16.4 pence for the year,the underlying earnings per share was 15.9 pence (2004: 12.8 pence). Furthercomment is provided on underlying earnings below. Net Revenues Net revenues for the year, excluding investment income attributable topolicyholders, were £267 million (2004: £152 million). Investment management fees in the year were £277.4 million. While new businessof £9.1 billion was added during the year and markets rose adding approximately£12.8 billion to our assets under management, we also incurred significantbusiness outflows which, while impacting 2005, will have a more significanteffect on 2006 revenues. As previously discussed, the loss of Resolution assets through corporateactivity was the major factor impacting our outflows. Resolution outflows in2005 were approximately £5.2 billion and a further £19.9 billion has beenwithdrawn in Q1 2006. We have agreed a termination payment with Resolution inrespect of this business amounting to £27 million which will be received inApril 2006. Some of the other institutional business losses, such as certainemerging equities mandates, were at a higher revenue margin than our average at31 December 2004 (21 basis points). When taken together with the disposal of ourprivate equity business, we expect our recurring revenue margin for 2006 to be20 basis points. While this short term set-back is disappointing, our focusremains generating net new business in higher margin areas. While we lost some mandates due to disappointing investment performance it ispleasing to note that we also earned £13 million of performance fees during theperiod. Operating Expenses Operating expenses excluding the Re-Investment Plan costs, amortisation andimpairment of intangible assets, restructuring costs and net operating costs oninvestment and insurance contracts were £151 million (2004: £101 million) whichrepresent the ongoing costs of running the business. Some 60 per cent of theseare staff related costs. Management of headcount is therefore a fundamentaldiscipline. Headcount 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2005 2004 2003 2003 2003 Actual Actual Actual Actual Total F&C ISIS United Kingdom 616 700 311 521 832Overseas 121 140 146 - 146 Total 737 840 457 521 978 (Figures for 2004 and 2005 do not include temporary staff or vacancies.) Since the year-end we have further reduced our headcount, recognising that allareas of the integration, apart from some of the technology aspects, are nowconcluded. As previously highlighted, technology integration is always the lastpart to be completed but to gain the full operational synergies it is essentialthat this is concluded. While we continue to pay attention to our operating margin, it is only one ofthe measures we use to assess our business efficiency and progress. As indicatedearlier, organic growth measured by assets under management, net new businessand revenue margin will be amongst the real measures of our success goingforward. Integration Expenditure and Synergies The table below shows the integration expenditure incurred since the merger. Itis pleasing to report that in all areas of our business, apart from certain ITsystems, integration is essentially concluded. Based on our budget for 2006 thefull benefit of synergies resulting from these restructuring costs are expectedto be delivered ahead of our timetable and, as such, we should see benefitsslightly in excess of the forecast £33 million in the results for the year to 31December 2006. 2005 2004 Total £000 £000 £000 Redundancy and other related staff costs 6,330 8,975 15,305Premises costs 2,514 4,730 7,244Information Technology and related costs 6,081 640 6,721Re-branding, retail administration and client servicing 2,335 364 2,699Consultancy and other costs supporting the restructuring process 5,145 1,635 6,780Property, plant and equipment write-downs - 1,988 1,988 Restructuring costs 22,405 18,332 40,737 Long Term Remuneration Plans - Share Schemes While we included the cost of share schemes in last year's accounts, the numbersare not directly comparable for two reasons: Firstly, the basis used under IFRS for the share schemes, includingRe-Investment Plan and the matching shares, requires the fair value of theawards to be spread over the period until employees become entitled to theshares. As such, the table below shows the cost for 2005. Details of themechanics of the plans will be contained in the Remuneration Report. Secondly, the Long Term Remuneration Plan was only introduced towards the end of2004 and therefore the expense in 2004 only represents a portion of the year.Going forward it is our intention to make annual grants and it is anticipatedthat a grant of some 5 million shares will be made after the Annual GeneralMeeting in May 2006. The table below shows the number of outstanding shareawards at 31 December 2005 and the cost in the year. Share Schemes Outstanding share awards at 31 Dec 2005 Cost in respect of 2005 (Number 000s) (£000) Re-Investment Plan:- Investment Shares 4,626 14,369- Matching Shares 9,534 7,793 22,162 Recurring Arrangements:- Long-term Remuneration Plan 5,954 3,466- Other Share Schemes 8,776 1,973 5,439 Underlying Earnings The Board believes that it is necessary to look at a number of factors todetermine the progress of the business. Underlying earnings is one of thosemetrics and to assist clarity the table below shows how this is determined. Reconciliation of Underlying Earnings per Share 31 December 2005 Basic P Loss per Ordinary Share (16.4) Amortisation of intangibles, net of tax 8.3Cost of the Re-Investment Plan, net of tax 3.8Restructuring costs, net of tax- Reorganisation post acquisition of F&CGH Group 3.4- Operations outsourcing 0.3Impairment of intangibles, net of tax 16.5 Earnings per ordinary share before amortisation and impairment of intangibles, restructuring costs and the cost of the Re-Investment Plan* 15.9 * Defined as 'underlying earnings per share'. Dividend We have in previous Annual Reports set out our dividend policy and it isappropriate to do so here. With the introduction of IFRS the wording changes bynecessity, however, the underlying principles and the future intentions areunchanged. Our dividend policy is: • To maintain and, if appropriate, grow the dividend. • To target over the medium term 1.5 times dividend cover based on " underlying earnings". • To review dividend cover in light of future business and regulatory requirements and distributable reserves. Given the business outflows during 2005 and the loss of the Resolution businessin early 2006 it would be imprudent to increase the dividend at present, albeitit remains an objective. The Board has therefore proposed an unchanged finaldividend of 7.0 pence per ordinary share for the year which will be payable on19 May 2006 to shareholders on the register on 7 April 2006. This dividend, whentaken with the interim dividend of 4.0 pence per Ordinary Share, results in anunchanged total dividend of 11p per share for the year to 31 December 2005.Under IFRS this final dividend of 7.0 pence per Ordinary Share is not recognisedin the accounts until it is approved by shareholders and, as such, no liabilityfor it is included within the 2005 accounts. Foreign Currency During the year we earned about 25 per cent of our revenues in Euros. Afterrecognising Euro costs, the net impact is that less than 16 per cent of our "netrevenues" being exposed to exchange rate fluctuations. The Board has decidedthat it will not seek to hedge our exposure to short-term fluctuations incurrency and in particular the Euro/Sterling exchange rate. We will, however,seek to repatriate surplus overseas currency into Sterling. Surplus currencybalances are defined as being that level of cash which exceeds our regulatorycapital requirements in the respective countries plus the necessary workingcapital to finance short term expenditure requirements and other businessinitiatives. As part of our debt refinancing exercise, outlined below, we will be exploringall of the options available, including the possibility of refinancing ourSterling borrowings with a Euro-based loan. If we proceed down this route itwill provide a hedge for both our Euro denominated net revenues and that part ofour intangible assets which fall to be treated as Euro denominated under IFRS.We are still at an early stage in the discussion process with our advisers and,as such, the above outlines only one option. We will keep shareholders updated,reporting further at the half-year. Regulatory Capital F&C continues to operate under a waiver from the FSA requirements ofconsolidated supervision. While we remain confident that the status quo willcontinue, we cannot foresee what future changes in regulation will bring,particularly as they are typically driven from Europe and are not directly underthe FSA's control. We await the finalisation of the revised regulations oncapital adequacy scheduled for later this year. We will continue to monitordevelopments and consider the options open to us, as addressed under the headingof Debt Refinancing. Goodwill and Intangible Assets The face of the balance sheet shows: Goodwill Management Other Total Contracts £m £m £m £m At 31 December 2004 578.0 589.8 0.5 1,168.3Amortisation for year - (55.8) (0.4) (56.2)Impairment - (111.5) - (111.5)Other - (6.4) 1.5 (4.9) At 31 December 2005 578.0 416.1 1.6 995.7 Under IFRS, when an acquisition is made there is a requirement to separatelyrecognise the fair value attributed to intangible assets, which in this case aremanagement contracts. The excess of consideration over the fair value of netassets acquired represents the business value and infrastructure and isrecognised as goodwill. Management contracts acquired are separated by nature of client, e.g. insurance,investment trust, and are amortised over their expected useful lifes. We arerequired to review the carrying value of these contracts where any indicator ofpotential impairment arises, e.g. higher than anticipated fund losses. Suchmandate losses may have the effect of creating an impairment charge regardlessof the level of new business that has been achieved. A good example of this isinvestment trusts where we have generated net new business during the year, butthe loss of investment trust mandates purchased as part of the 2004 businesscombination at a rate higher than originally estimated means we need torecognise an impairment charge of some £56m. The nature of investmentmanagement businesses is that mandates will always be won and lost, sometimes,as in the case of Resolution, for reasons outwith the business's control.While this clearly depicts a short term loss of business, it does not signal orsignify a long term loss of business value - a factor that is driven by stockmarkets, net new business, revenue margin and other factors. The level of fund losses during 2005 and anticipated losses in respect of bothinstitutional and investment trust clients and resultant impact on futurerevenue was significant enough to be considered a potential indicator ofimpairment in respect of the related intangible assets. A full impairmentreview of these assets was therefore undertaken. This review determined the recoverable amount of the intangible assets inrespect of investment trust and institutional fund management contracts waslower than their carrying value and has therefore resulted in impairment chargesof £56.1m and £55.4m respectively. These calculations have been based ondifferent risk discount rates using the Group's weighted average cost of capitalof 8.9% allowing for the nature of the contracts and the estimated life as shownabove. The recoverable amount assumes an estimated loss rate of 5% and 14% perannum respectively. We are required to conduct an annual impairment review of the carrying value ofgoodwill although there is no annual amortisation charge. Our reviewdemonstrated that there was no impairment and hence no requirement to write downgoodwill as at 31 December 2005. Cash Resources While we have debt on our balance sheet and have incurred restructuring costs of£24.6 million during the year, fund management businesses are cash generativeand require minimal working capital other than that required to maintaincompliance with regulatory capital requirements. With cash of £118.0 million onour balance sheet at 31 December 2005, current assets less current liabilities(excluding the £180 million of debt which we intend to refinance later thisyear) of £105.2 million and projected future profitability, we remain satisfiedwith our current position and will continue to manage both cash resources andthe balance sheet for the benefit of shareholders. Pension Fund Deficits While we have seen a strong rise in equity markets over the last 12 months whichhas resulted in an increase in the pension funds assets this has more than beennegated by the strengthening in the mortality assumption and the reduction inthe discount rate, both of which have significantly increased the quantum of ourdefined benefit pension liabilities as at 31 December 2005. At the year-end theaggregate pension fund deficit had increased to £33.6 million, net of deferredtax. The Board has established a committee of non-executive Directors to review ourfinal salary pension funds and consider matters such as the level of the deficitand future funding strategies, the feasibility of combining the ISIS and F&Cschemes and the management of the proposed PPF levy. These are also matters thatthe trustees of the pension schemes are considering. Debt Refinancing As highlighted in last year's Annual Report the £180 million of debt drawn downfrom our parent company, Friends Provident, to acquire RSA's investmentmanagement business in 2002, falls to be repaid in November 2006. We are at an advanced stage of formally appointing advisers to assist us withrefinancing our debt requirements. In addition to the £180 million, we have £34million of subordinated debt and a £50 million revolving facility of which £5million is drawn. As part of our refinancing exercise we are considering rollingall of this together and consolidating our debt requirements through either apublic or private placement. We are also addressing the rating agencyconsiderations, regulatory capital requirements, accounting and tax issues and,as covered under foreign currency, the business needs going forward. While theloan does not require to be refinanced until the end of 2006 we believe it isimportant to move matters forward at this time to create flexibility and timefor proper consideration of all these matters. If we were to seek to issue some form of tier 1 or tier 2 capital this wouldhave a positive impact on our regulatory capital position without necessarilymaterially changing the structure of our balance sheet. With the potential forfuture changes in the capital adequacy requirements this is an avenue that iscurrently being considered as it could materially strengthen our regulatorycapital position. Conclusion The integration was successful and swiftly completed with no consequences to ourclient franchise directly related to the deal. The loss of the Resolution Life contracts was unfortunate but has validated therationale to create a business with significant scale and diversification ofrevenues by asset class, business type and in particular client mandate. Throughout this period F&C employees have shown tremendous commitment and Iwould like to pay tribute to their hard work and professionalism. Looking ahead, I am confident that over the medium term we will achieve ourstated objective of excelling in everything we do. Alain L. GrisayChief Executive20 March 2006 Consolidated Income Statement 2005 2004 (as restated) £000 £000RevenuesInvestment management fees 277,356 154,507Investment income attributable to policyholders 28,918 28,047Other income 691 3,249Total revenues 306,965 185,803 Fee and commission expenses (10,895) (5,837) Net revenues 296,070 179,966 Operating expensesGains/(losses) on financial instruments carried at fair value through profit and loss (26,408) (24,373)Dealing costs on investment contract assets (1,226) (2,526)Net operating costs: investment and insurance contracts (27,634) (26,899)Operating expenses (149,769) (100,616)Re-Investment Plan costs (22,162) (5,428)Impairment of intangible assets - management contracts (111,500) -Amortisation of intangible assets - management contracts (55,801) (20,762)Loss on foreign exchange (926) (751)Total operating expenses before restructuring costs (367,792) (154,456) Operating (loss)/profit before restructuring costs (71,722) 25,510 Restructuring costs:- Reorganisation costs post acquisition of F&CGH Group (22,405) (18,332)- Operations outsourcing (2,235) (932) Operating (loss)/profit after restructuring costs (96,362) 6,246 Finance revenue 15,570 4,641Finance costs (19,495) (14,983)Investment impairment (5,026) -Loss on disposal of subsidiary (672) -Share of loss of associates (339) (318) Loss before tax (106,324) (4,414) Tax - Policyholders (118) (445)Tax - Shareholders 29,169 1,318Tax credit 29,051 873 Loss for the year (77,273) (3,541) Attributable to:Equity holders of the parent (77,273) (3,541)Minority interests - - Loss for the year (77,273) (3,541) Memo - dividends proposed 33,381 32,914 - dividends paid 51,817 16,480 Basic loss per share (16.36)p (1.60)p Consolidated Balance Sheet As at As at 31 Dec 2005 31 Dec 2004 (as restated) £000 £000Assets Non-current assetsProperty, plant and equipment 11,242 10,912Intangible assets: - Goodwill 577,946 577,946 - Management contracts 416,141 589,823 - Other intangible assets 1,641 506 995,728 1,168,275Other financial investments 3,397 4,195Loan receivables 2,500 -Investment in associates 335 4,767Deferred acquisition costs 8,342 7,808Deferred tax assets 34,083 30,223 Total non-current assets 1,055,627 1,226,180 Current assetsFinancial investments 982,943 813,595Insurance and other assets 2,617 2,352Stock of units and shares 676 556Trade and other receivables 92,858 63,071Deferred acquisition costs 3,018 2,566Cash and cash equivalents - policyholders 28,152 47,145Cash and cash equivalents - shareholders 118,045 133,939 146,197 181,084 Total current assets 1,228,309 1,063,224Total assets 2,283,936 2,289,404 Liabilities Non-current liabilitiesInterest bearing loans and borrowings 34,800 214,800Trade and other payables - 3Provisions 12,960 10,322Pension deficit 48,032 17,707Deferred income 14,351 10,752Deferred tax liabilities 125,295 177,963Total non- current liabilities 235,438 431,547 Current liabilitiesInvestment contract liabilities 1,006,928 862,308Insurance contract liabilities 2,617 2,352Interest bearing loans and borrowings 185,000 5,000Trade and other payables 58,724 61,274Provisions 6,463 2,534Employee benefits 29,954 35,331Deferred income 3,679 4,999Current tax payable 9,713 6,401Total current liabilities 1,303,078 980,199 Total liabilities 1,538,516 1,411,746 Equity attributable to equity holders of the parent Share capital 484 482Share premium account 30,730 28,956Merger reserve 606,146 749,754Other reserves 52,179 108,401Retained earnings 56,379 (9,935)Total equity attributable to equity holders of the parent 745,918 877,658Minority interest (498) -Total equity 745,420 877,658 Total liabilities and equity 2,283,936 2,289,404 Consolidated Statement of Recognised Income andExpense 2005 2004 (as restated) £000 £000 Loss for the year (77,273) (3,541) Exchange movements on translation of foreign operations (4,246) 4,846 Actuarial loss on defined benefit pension schemes (30,734) (2,909) (Loss)/gain on financial investments (227) 661 Tax on items taken directly to equity 8,597 1,155 Share of associate costs charged directly to equity - (98) Net income recognised directly in equity (26,610) 3,655 Total recognised income and expense for the year (103,883) 114 Attributable to:Equity holders of the parent (103,883) 114Minority interest - - (103,883) 114 Condensed Consolidated Cash Flow Statement 2005 2004 (as restated) £000 £000 Cash generated from operations 44,364 34,581Income tax paid (14,359) (6,608) Net cash inflow from operating activities 30,005 27,973 Cash flows from investing activities Proceeds from sale of property, plant and equipment 94 -Acquisition of property, plant and equipment (3,701) (4,066)Payment to increase investment in associate (485) (5,101)Rebate of consideration on RSAI acquisition - 3,893Purchase of intangibles - management contracts (1,249) -Purchase of intangibles - software (989) -Return of capital from investments 132 -Proceeds from disposal of subsidiaries 10 -Cash transferred on disposal of subsidiary (824) -Payments to acquire investments (35) -Loan to associate (ISIS EP LLP) (2,500) -Expenses of acquisition (624) (11,998)Net cash acquired with subsidiary undertakings - 132,791Investment income from investing activities 9,344 1,678 Net cash (outflow)/inflow from investing activities (827) 117,197 Cash flows from financing activities Proceeds from issue of share capital 1,776 822Drawdown of revolving credit facility from FP Group - 5,000Repayment of revolving credit facility from FP Group - (15,000)Proceeds from long-term borrowings - 25,000Interest paid on loans (13,498) (11,299)Other interest paid (392) (879)Equity dividends paid (51,817) (16,480)Preference dividends paid (47) (23)Purchase of own shares (87) (1,165) Net cash outflow from financing activities (64,065) (14,024) Net (decrease)/increase in cash and cash equivalents (34,887) 131,146 Cash and cash equivalents at 1 January 181,084 49,938 Cash and cash equivalents at 31 December 146,197 181,084 Cash and cash equivalentsShareholders 118,045 133,939Policyholders 28,152 47,145 146,197 181,084 Accounting Policies Basis of preparation These are an extract from the first full consolidated financial statements ofF&C Asset Management plc and its subsidiaries (the Group) which have beenprepared in accordance with International Financial Reporting Standards (IFRS).The consolidated financial statements are presented in pounds Sterling, roundedto the nearest thousand, except where otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared inaccordance with IFRS, as adopted by the European Union (EU) as they apply tofinancial statements of the Group for the year ended 31 December 2005, and thoseparts of the Companies Act 1985 applicable to companies reporting under IFRS. First-Time Adoption The Group has adopted early the Fair Value Option in IAS 39 FinancialInstruments: Recognition and Measurement issued by the International AccountingStandards Board in June 2005. The Fair Value Option allows for any financialinstrument to be classified upon initial recognition at fair value through theincome statement. This enables the liabilities of the Group's unit linkedinsurance business to match the underlying policyholders' assets which are heldto meet these obligations. Previously recognised financial assets and financial liabilities can only bedesignated at fair value through the income statement, if they were alreadydesignated as such, before 1 September 2005, under the old fair value rules andsubsequently still qualify under the new fair value rules. The Fair ValueOption only applies to newly recognised financial assets and liabilities goingforward. Comparative information must also be restated from the transition dateto comply with the new fair value rules. The Group has opted for the Fair ValueOption to prevent the mismatch for unit linked assets and liabilities, inrespect of F&C Managed Pension Funds Ltd, the Group's insurance subsidiary,being measured on a different basis and because financial instruments aremanaged individually or together on a fair value basis. In line with IFRS 1 'First-time Adoption of the International ReportingStandards', an opening IFRS balance sheet has been prepared as at 1 January2004, the date of the Group's transition to IFRS. To the extent that the IFRSaccounting policies differ from those applied under UK GAAP any adjustments tobalances reported under UK GAAP have been taken to retained earnings or otherequity reserves. An explanation of the effect of the transition to IFRS on the reported financialposition and financial performance of the Group was provided in the Group'sInterim Accounts for 2005. This included reconciliations of equity and profitor loss for comparative figures previously reported under UK GAAP to thoserevised figures reported under IFRS. Copies of these Interim Accounts areavailable on the Company website (www.fandc.com) or on request. The Group has applied its accounting policies under IFRS retrospectively as atthe date of transition, subject to the following exemptions, as permitted byIFRS 1: • Past business combinations have been restated to comply with IFRS 3 'Business Combinations' with effect from 1 July 2002. • Cumulative foreign exchange differences are deemed to be zero at the date of transition to IFRS. • IFRS 2: Share-based payments has not been applied to any equity instruments that were granted before 7 November 2002. • Items of property, plant and equipment are carried at the carrying value that was applied under UK GAAP at 1 January 2004. • All actuarial gains and losses in respect of defined benefit pension arrangements have been recognised in full at the date of transition to IFRS. Accounting estimates assumptions and judgements The preparation of the financial statements necessitates the use of estimates,assumptions and judgements. These estimates and assumptions affect the reportedamounts of assets, liabilities and contingent liabilities at the balance sheetdate as well as affecting the reported income and expenses for the year. Although the estimates are based on management's best knowledge and judgement ofinformation and financial data, the actual outcome may differ from theseestimates, possibly significantly, in future periods when subject to changes. Summary of significant accounting policies The accounting policies set out below have been applied consistently throughoutthe Group for the purposes of the consolidated financial statements. They havealso been applied in preparing an opening IFRS balance sheet at 1 January 2004for the purposes of the transition to IFRS and in preparing the consolidatedIncome Statement for the year ended 31 December 2004 and for the Balance Sheeton that date, except as permitted by the transitional requirements of IFRS 1 'First-time Adoption of International Financial Reporting Standards'. The Group has identified accounting policies that are most significant to itsbusiness operations and the understanding of its results. (a) Consolidation (i) Subsidiaries Subsidiaries are all entities over which the Group has the power, directlyor indirectly, to govern the financial and operating policies so as to obtainbenefits from its activities. All subsidiaries follow accounting policiesconsistent with those of the Group and have coterminous reporting periods. The consolidated financial statements incorporate the assets, liabilities,results and cash flows of the company and its subsidiaries. The results ofsubsidiaries acquired or sold during the period are included in the consolidatedresults from the date of acquisition or up to the date of disposal. Intra-groupbalances and any unrealised gains and losses or income and expenses arising fromintra-group transactions are eliminated in preparing the consolidated financialstatements. The financial information of subsidiaries used in preparing theconsolidated financial statements is prepared using consistent accountingpolicies. Minority interests represent the portion of profit or loss and net assets insubsidiaries not held by the Group and are presented separately in the incomestatement and within equity in the consolidated balance sheet, separately fromparent shareholders' equity. (ii) Associates Associates are all entities over which the Group has significant influence butnot control, over the financial and operating policies. Investments inassociates are accounted for under the equity method of accounting and areinitially recognised at cost. The Group's investment in associates includesgoodwill (net of any impairment loss) identified on acquisition. Under the equity method, an investment is included as the cost of the investmentplus the Group's share of post-acquisition net assets after deducting anydistributions received and any impairment loss. Goodwill relating to anassociate is included in the carrying amount of the investment and is notamortised. The Group's share of post-tax profits or losses is presented as asingle line item in the consolidated income statement. The Group alsorecognises directly in equity its share of post acquisition gains and losseswhich the associate has recognised directly in equity, which are presented inthe Statement of Recognised Income and Expense. The Group's associates follow accounting policies consistent with those of theGroup and have coterminous reporting periods. (iii) Business Combinations A business combination is the bringing together of separate entities orbusinesses into one reporting entity. The result is that one entity, theacquirer, obtains control of one or more entities or businesses. The cost of an acquisition is measured as the fair value of the assets given,equity instruments issued and liabilities incurred or assumed at the date ofexchange, plus costs directly attributable to the acquisition. Identifiableassets acquired and liabilities and contingent liabilities assumed in a businesscombination are measured initially at their fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the Group'sshare of the identifiable net assets acquired is recorded as goodwill. (b) Foreign currencies The consolidated financial statements are presented in pounds Sterling, theCompany's functional and presentation currency. Each entity in the Groupdetermines its own functional currency and items included in the financialstatements of each entity are measured in that functional currency. (i) Foreign Currency Transactions Transactions in foreign currencies are translated to the functional currency atthe exchange rate ruling at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies at the Balance Sheet date aretranslated at the exchange rate ruling at the Balance Sheet date, and anyexchange differences arising are taken to the Income Statement. Non-monetary assets and liabilities measured at historical cost in a foreigncurrency are translated using the exchange rate at the date of transaction andare not subsequently restated. Non-monetary assets and liabilities stated atfair value in a foreign currency are translated at the exchange rate at the datethe fair value was determined. When fair value movements in assets andliabilities are reflected in the Income Statement, the corresponding exchangemovements are also recognised in the Income Statement. Conversely, when fairvalue movements in assets and liabilities are reflected directly in equity, thecorresponding exchange movements are also recognised directly in equity. (ii) Foreign Operations The functional currency of foreign operations is predominantly the Euro. The assets and liabilities of foreign operations are translated to Sterling atforeign exchange rates ruling at the Balance Sheet date. The revenues andexpenses of foreign operations are translated to Sterling at foreign exchangerates approximating the rates ruling at the dates of the transactions. Foreignexchange differences arising on translation of foreign operations, includingrelated intangible assets, into Sterling are recognised directly in the Group'sForeign Currency Translation Reserve (FCTR), which is a separate equity reserveand reported in the Statement of Recognised Income and Expense (SORIE). Theseexchange differences are recognised as income or expenses in the period in whichthe foreign operations are disposed of. (c) Revenue Recognition Asset management fees, investment advisory fees and other revenue generated fromthe Group's investment management activities are recognised in the IncomeStatement over the period for which these investment management services areprovided. Initial fees received in advance are taken to the Balance Sheet and amortisedover the period of the asset management service. The group enters into standardcontractual terms for all investors. Therefore, the period of provision ofasset management services is estimated based upon the Group's experience of theaverage holding periods of investors. The average holding period is assessed onan annual basis. The Group has entitlement to earn performance fees from a number of clientswhere the actual fund performance of clients' assets exceed defined benchmarksby an agreed level of outperformance in a set time period. Most of the Group'sperformance fee arrangements are assessed on a calendar year basis. Performancefees are recognised in the Balance Sheet when the quantum of the fee can beestimated reliably, which is usually towards the end of the performance period. (d) Leases All Group leases are operating leases, being leases where the lessor retainssubstantially all the risks and rewards of ownership of the leased asset.Rentals paid under operating leases are charged to the Income Statement on astraight-line basis over the lease term. Lease incentives are recognised by theGroup as a reduction in the rental expense, allocated on a straight-line basisover the lease term. Note (r) discusses the recognition of onerous provisions onproperty leases when the leased space has ceased to be occupied by the Group. (e) Fee and commission expenses Fee and commission expenses comprise two main elements, namely costs associatedwith gaining new asset management contracts, and subsequent commission paid toagents. The costs associated with the gaining of contracts are deferred andamortised over the estimated term of the contracts (in line with the treatmentof the associated initial fees received), while the subsequent commission paidto agents is expensed as the services are provided. (f) Finance revenue Finance revenue comprises interest, dividends, expected return on pension assetsand gains on sale of investments held at amortised cost. Dividend income isrecognised when the right to receive payment is established. Interest income isrecognised in the Income Statement on an effective interest rate basis as itaccrues. (g) Finance costs Finance costs comprise interest payable on borrowing, interest on pensionliabilities and dividends on Preference Shares. Borrowing costs are recognisedin the Income Statement on an effective interest basis. (h) Income taxes The income tax expense/credit disclosed on the face of the Income Statementrepresents the aggregate of current tax and the movement in deferred tax. Income tax is recognised in the Income Statement for the period, except to theextent that it is attributable to a gain or loss that is recognised directly inequity. In such cases the gain or loss shown in equity is stated separatelyfrom the attributable income tax. Current tax is the expected tax payable to the taxation authorities on thetaxable profit for the period, using tax rates enacted or substantively enactedat the Balance Sheet date, and includes any adjustment to tax payable in respectof previous years. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amount of assets and liabilities in the financialstatements and the corresponding tax basis used in the computation of taxableprofit, accounted for using the balance sheet liability method. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised, based on tax ratesand laws enacted or substantively enacted at the Balance Sheet date. Deferred tax liabilities are generally recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised, except: • where the deferred tax asset or liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither the accounting nor taxable profit or loss; or • in respect of taxable or deductible temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. A deferred tax asset is recognised for the carry forward of unused tax losses tothe extent that it is probable that future taxable profits will be availableagainst which the unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the asset to berecovered. (i) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Expenditure on property, plant and equipment is capitalised on initialrecognition. Subsequent expenditure is only capitalised when it is probablethat there will be future economic benefits associated with the expenditure canbe measured reliably. All other expenditure is recognised in the IncomeStatement as an expense as incurred. Property, plant and equipment is depreciated so as to write off the cost ofassets, using the straight-line method, over their estimated useful lives, asfollows: Leasehold improvements - over 10 yearsMotor vehicles - over 3 yearsOffice furniture & equipment - over 3-5 yearsComputer equipment - over 3 years Depreciation is recognised as an expense in the Income Statement. The carrying value of assets and their useful lives are reviewed at eachreporting date. If an indication of impairment exists, the assets are writtendown to their recoverable amount and the impairment is charged to the IncomeStatement in the period in which it arises. An item of property and equipment is derecognised upon disposal or when nofurther future economic benefits are expected from its use. Any gain or lossarising on derecognition of the asset (calculated as the difference between thenet disposal proceeds and the carrying value of the asset) is included in theIncome Statement in the year the asset is derecognised. (j) Intangible assets (i) Goodwill Goodwill arising from a business combination is initially measured at cost,being the excess of the cost of the business combination over the Group'sinterest in the net fair value of the identifiable assets and liabilities andcontingent liabilities. Following initial recognition, goodwill is measured atcost less any accumulated impairment losses. If the cost of the acquisition isless than the fair value of the net assets, the difference is recogniseddirectly in the income statement. Business combinations arising after 1 July2002 are accounted for under IFRS 3 ' Business Combinations' using the purchasemethod. Where the initial amount of goodwill can only be determined on aprovisional basis at the end of the financial reporting period, adjustments aremade to the amount of goodwill up to 12 months from the date of acquisition. Other adjustments to the amount of goodwill are made for amounts that arecontingent on future events and on the realisation of potential benefits of theacquiree's tax loss carry forwards and other deferred tax assets that did notsatisfy the criteria for separate recognition on acquisition. Goodwill is tested annually for impairment or more frequently if events orchanges in circumstances indicate that the carrying value may be impaired. Goodwill was tested for impairment at 1 January 2004 (the date of transition toIFRS) and annually thereafter. (ii) Investment Management Contracts Intangible assets acquired separately are measured on initial recognition atcost. The cost of intangible assets acquired in a business combination is fairvalue as at the date of acquisition. Following initial recognition, intangibleassets are carried at cost less accumulated amortisation and any accumulatedimpairment losses. The useful lives of management contracts are finite and are amortised on astraight line basis over their estimated average contract term, depending on thenature of the contract, with amortisation being charged to the Income Statement. The amortisation period is reviewed at each financial year-end. The estimateduseful lives have been assessed as follows: Investment trusts 20 years Insurance 10 years Institutional 10 years Retail 10 years (iii) Other Intangible Assets The cost of intangible assets acquired in a business combination is fair valueas at the date of acquisition. Following initial recognition, intangible assetsare carried at cost less accumulated amortisation and any accumulated impairmentlosses. Separately purchased intangible assets have a finite life and are shownat cost less accumulated amortisation and impairment losses. Amortisation ischarged to the Income Statement in equal annual instalments, based on the usefuleconomic life of the intangible assets concerned as follows: Software - 3 yearsLicences - over the contractual term (3-5 years) Subsequent expenditure on capitalised intangible assets is expensed as incurred. (k) Impairment The Group assesses at each reporting date whether there is an indication that anasset may be impaired. If any such indication exists, or when annual impairmenttesting for an asset is required, the Group makes an estimate of the asset'srecoverable amount. An asset's recoverable amount is the higher of an asset's orcash-generating unit's fair value less costs to sell and its value in use, andis determined for an individual asset, unless the asset does not generate cashinflows that are largely independent of those from other assets or groups ofassets. Where the carrying amount of an asset exceeds its recoverable amount,the asset is considered impaired and is written down to its recoverable amount. Any impairment arising is recognised in the Income Statement. In assessing valuein use, the estimated future cash flows are discounted to their present valueusing a pre-tax discount rate that reflects current market assessments of thetime value of money and the risks specific to the asset. Where goodwill forms part of a cash-generating unit and part of the operationwithin that unit is disposed of, the goodwill associated with the operationdisposed of is included in the carrying amount of the operation when determiningthe gain or loss on disposal of the operation. Goodwill disposed of in thiscircumstance is measured based on the relative values of the operation disposedof and the portion of the cash-generating unit retained. Except for any goodwill impairments which cannot be reversed, an assessment ismade at each reporting date as to whether there is any indication thatpreviously recognised impairment losses may no longer exist or may havedecreased. If such indication exists, the recoverable amount is estimated. Apreviously recognised impairment loss is reversed only if there has been achange in the estimates used to determine the asset's recoverable amount sincethe last impairment loss was recognised. If that is the case the carrying amountof the asset is increased to its recoverable amount. That increased amountcannot exceed the carrying amount that would have been determined, net ofdepreciation or amortisation, had no impairment loss been recognised for theasset in prior years. Such reversal is recognised in the Income Statement. Aftersuch a reversal, the amortisation or depreciation charge is adjusted in futureperiods to allocate the asset's revised carrying amount, less any residualvalue, on a systematic basis over its remaining useful life. (l) Financial instruments When financial instruments are recognised initially they are measured at fairvalue plus, in the case of investments not at fair value through incomestatement, directly attributable transaction costs. They are classified into the categories described below: Financial investments at fair value through profit or loss include investmentsthat are held for trading purposes or that have been specifically designated as'at fair value through profit or loss'. They are measured on initial recognitionat fair value and carried in the Balance Sheet at fair value. Subsequent toinitial recognition, movements in fair value are taken to the income statementin the period in which they arise. The following assets and liabilities areclassified as Financial investments at fair value through profit or loss: Current assets: • Financial investments • Stock of units and shares Current liabilities: • Investment contract liabilities Available for sale financial assets are also carried at fair value in theBalance Sheet. Where the fair value of unquoted investments cannot be reliablydetermined they have been carried at cost. Movements in fair value, other thanimpairment losses and foreign exchange movements on monetary assets, are takento the fair value reserve in equity until derecognition of the asset, at whichtime the cumulative amount in this reserve is recognised in the IncomeStatement. The following assets are classified as Available for sale: Non-current assets • Other financial investments The fair value of instruments that are actively traded in organised financialmarkets is determined by reference to quoted market bid prices at the close ofbusiness on the balance sheet date. For investments where there is no activemarket, fair value is determined using valuation techniques. Such techniquesinclude using recent arm's length market transactions; reference to the currentmarket value of another instrument, which is substantially the same; discountedcash flow analysis and option pricing models. Loans and receivables are recognised at amortised cost using the effectiveinterest rate method. The following assets and liabilities are classified asLoans and receivables: Current assets: • Trade and other receivables Non-current liabilities: • Interest bearing loans and borrowings • Other creditors Current liabilities: • Interest bearing loans and borrowings • Trade and other payables The Group has adopted "trade date" accounting. Accordingly, financialinvestments are recognised on the date the Group commits to the purchase of theinvestments, and are de-recognised on the date it commits to their sale. (m) Cash and cash equivalents Cash and cash equivalents comprise cash balances, deposits held at call withbanks and other short term highly liquid investments in money market instrumentswith original maturity dates of three months or less. (n) Investment contracts The Group sells unit-linked pension investment contracts through its insurancesubsidiary, F&C Managed Pension Funds Limited ('MPF'). These unit-linkedcontracts involve both the transfer of a financial instrument and the provisionof investment management services. The financial instrument component isclassified as a financial liability at fair value through the income statement. The financial liability is measured based on the carrying value of the assetsand liabilities that are held to back the contract, adjusted to take account ofthe effect on the liabilities of discounting for the time value of tax paymentson assets sold in the fund. The investment management fees earned from thesecontracts are accounted for as described in the revenue recognition accountingpolicy. Unit-linked policyholder assets held by MPF and related policyholder liabilitiesare carried at fair value, with changes in fair value taken to profit or loss. Amounts received from and paid to investors under these contracts are accountedfor as deposits received or paid and therefore not recorded in the IncomeStatement. At the Balance Sheet date the value of these contracts is stated atan amount equal to the fair value of the net assets held to match thecontractual obligations. (o) Insurance contract liabilities Insurance contract liabilities are measured in accordance with actuarialprinciples and guidance. Any change in the value of the liability is taken tothe Income Statement. Where these liabilities are reinsured, the element ofthe risk reinsured is valued on the same basis as the related liability and isincluded as an asset in the Balance Sheet. Changes in the value of the asset aretaken to the Income Statement. Amounts recoverable under reinsurance contractsare assessed for impairment at each Balance Sheet date. (p) Employee benefits (i) Short-term employee benefits Short-term employee benefits are recognised as an undiscounted expense andliability when the employee has rendered services during an accounting period. Short-term compensated absences are recognised in the case of accumulatingcompensated absences, when the employees render service that increases theirentitlement to future compensated absences or, in the case of non-accumulatingcompensated absences, when the absences occur. (ii) Profit-sharing and bonus payments These are recognised when there is a present legal or constructive obligation tomake such payments as a result of past events and a reliable estimate of theobligation can be made. (iii) Pension obligations Defined Benefit Schemes - The Group operates a number of defined benefit pension arrangements. These schemes provide benefits based on final pensionable salary. The assets ofthe funded schemes are held in separate trustee administered funds. The pension liability recognised in the balance sheet is the present obligationof the employer, which is the estimated present value of future benefits thatemployees have earned in return for their services in the current and prioryears, less the value of the plan assets in the schemes. The discounted rate ofthe employees' benefits is the appropriate AA corporate bond yield at thebalance sheet date. A qualified actuary performs the calculation annually usingthe projected unit credit method. The pension costs of the schemes in theIncome Statement are analysed into: • Current service cost, which is the actuarially calculated present value of the benefits earned by the active employees in each period. • Past service costs, relating to employee service in prior periods arising as a result of the introduction of, or improvement to, retirement benefits in the current period, are recognised in the income statement on a straight-line basis over the period in which the increase in benefits vest. • Settlements or curtailments are recognised in the income statement to the extent that they are not allowed for in the actuarial assumptions. Losses on settlements or curtailments are measured at the date on which the employer becomes demonstrably committed to the transaction. Gains on settlements or curtailments are measured at the date on which all parties, whose consent is required, are irrevocably committed. • The expected return on pension assets is recognised within 'Finance Income' and the interest on scheme liabilities is recognised in 'Finance Costs'. The actuarial gains and losses, which arise from any new valuation and fromupdating the previous actuarial valuation to reflect conditions at the balancesheet date, are taken in full to the Statement of Recognised Income and Expensefor the period. The adjustment is shown net of deferred taxation. Where the Group is unable to identify its share of assets and liabilities inmulti-employer defined benefit schemes, the Group accounts for these in the sameway as for defined contribution schemes. Defined Contribution Schemes - Contributions made to these schemes are chargedto the Income Statement as they become payable in accordance with the rules ofthe scheme. (iv) Other long-term employee benefits Other long-term employee benefits are recognised at the discounted present valueof the obligation at the Balance Sheet date. The benefit is determined usingactuarial techniques to estimate the amount of benefit employees have earned fortheir services at the Balance Sheet date. (v) Termination benefits Termination benefits are recognised as a liability and an expense when the Groupis committed to the termination of employment before the normal retirement date.A commitment to such termination benefits arises when the Group has initiateddetailed plans which cannot realistically be withdrawn. (q) Share-based payments The Group operates a number of share scheme arrangements which require to be accounted for as share based payments. All grants of shares, share options or other share-based instruments that aregranted after 7 November 2002 have been recognised as an expense. The fairvalues of share-based payment awards are measured using a valuation modelapplicable to the terms of the awards (Black Scholes, Binomial or Monte Carlosimulation). The fair value is measured by an external valuer at the date theaward is granted and the expense is spread over the period during which theemployees become unconditionally entitled to exercise the awards, known as thevesting period. The cumulative expense recognised in the Income Statement isequal to the estimated fair value of the award multiplied by the number ofawards expected to vest. Vesting of awards typically depends upon meetingdefined performance criteria such as continued company service requirements,earnings per share ('EPS') targets and/or share price return targets. Vesting of employee share awards depends upon meeting "market" and/or "non-market related" performance conditions. The type of vesting criteria affectsthe calculation of the expense charged to the Income Statement and subsequentadjustments, as follows: i) Non-market based conditions are performance criteria not directly linkedto company share price targets, such as EPS targets and/or company servicerequirements. The probability of meeting "non-market based" conditions isincorporated into the expense charge via the estimate of the number of awardsexpected to vest. The total cumulative expense is ultimately "trued-up" or"trued-down" to reflect the actual number of awards which vest. Therefore, ifno awards vest, no cumulative expense charge is ultimately recognised. ii) Market based conditions are performance criteria linked to company shareprice targets. The probability of meeting "market based conditions" isincorporated into the calculation of the fair value of the award. Should themarket-based performance condition not ultimately be met, no "true up/down"adjustment is made to reflect this. Therefore, an expense charge is made whethermarket-based awards ultimately vest or not. IFRS 2 'Share-based Payments' makes a distinction between awards settled inequity and those settled in cash. Equity settled awards are charged to theIncome Statement with a corresponding credit to equity. Cash settled awards arecharged to the Income Statement with a corresponding credit to liabilities. Theestimated fair value of cash settled awards are re-measured at each reportingdate until the payments are ultimately settled. Awards to employees treated as "good leavers" vest immediately and the remainingfull expense of the awards is charged to the Income Statement immediately. Goodleavers include retirees and involuntary redundancies. The dilutive effective of outstanding options is reflected as additional sharedilution in the computation of earnings per share. (r) Provisions A provision is recognised in the Balance Sheet when the Group has a legal orconstructive obligation as a result of a past event, and it is probable that anoutflow of economic benefits will be required to settle the obligation. If theeffect is material, provisions are determined by discounting the expected futurecash flows at a pre-tax rate that reflects current market assessments of thetime value of money and, where appropriate, the risks specific to the liability. No provision is established where a reliable estimate of the obligation cannotbe made. Where the Group expects some or all of a provision to be reimbursed thereimbursement is recognised as a separate asset but only when the reimbursementis virtually certain. Where the Group has obligations under property leases and where the space hasceased to be used for the purposes of the business, full provision is made forfuture net outstanding liabilities under such leases after taking into accountthe effect of any expected sub-letting arrangements. (s) Share capital Preference Share capital - The Group's issued Preference Share capital isclassified as a liability. It is carried at amortised cost in the BalanceSheet. Preference dividends are recognised in the Income Statement as interestexpense as they accrue. Ordinary Share capital - When Ordinary Shares are repurchased, the amounts ofconsideration paid, including directly attributable costs, are recognised inequity and are classified as treasury shares. Dividends on ordinary shares arerecognised on the date of payment, or if subject to approval, the date approvedby the shareholders. (t) Accounting for ESOP Trusts The Group has two Employee Share Ownership Plan (ESOP) Trusts that own shares inthe Company to enable it to satisfy certain future exercises of share-basedawards. The ESOPs are consolidated into the Group's results, with these sharespresented as treasury shares and deducted from equity. 1. Income Taxes a) Analysis of tax credit in the year 2005 2004 (as restated) £000 £000Consolidated income statement Current income taxUK 10,817 5,802Overseas 10,249 1,298Adjustments in respect of previous years (1,640) 312 Deferred income taxRelating to origination and reversal of temporary differences (49,810) (7,861)Adjustments in respect of previous years 1,333 - Transfers from unrecognised tax assets - (424) Income tax credit reported in the consolidated income statement (29,051) (873) Consolidated statement of changes in equityDeferred and current income tax related to items charged/(credited)directly to equityShare based payments 672 (479)(Loss)/gain on financial investments (68) 198Actuarial loss on defined benefit pension schemes (9,201) (874) (8,597) (1,155) b) Factors affecting the tax credit for the year A reconciliation between the actual tax credit and the product of accounting loss multiplied by the Group'sdomestic tax rate for the years ended 31 December 2005 and 2004 is as follows: 2005 2004 £000 £000 Accounting loss before income tax (106,324) (4,414) At the Group's statutory income tax rate of 30.0% (2004: 30.0%) (31,897) (1,324) Adjustments in respect of previous years (307) 312Disallowed expenses 1,917 971Non-taxable income (265) (55)Deferred tax asset not previously recognised - (714)Overseas tax 634 (63)Utilisation of unrecognised losses (1,309) -Share based payments 2,176 - Income tax credit reported in the consolidated income statement (29,051) (873) 2. Earnings per Share Basic earnings per share amounts are calculated by dividing net profit for theperiod attributable to ordinary equity holders of the parent by the weightedaverage number of Ordinary Shares outstanding during the year. In the opinion of the Directors the profit before amortisation and impairment ofintangibles, restructuring costs and the cost of the Re-Investment Plan moreaccurately reflects the underlying earnings performance of the Group for eachyear. Reconciliation of Earnings per Share 31 December 31 December 2005 2004 (as restated) Basic Basic p p Loss per Ordinary Share (16.36) (1.60) Amortisation of intangibles, net of tax 8.27 6.56Cost of the Re-Investment Plan, net of tax 3.82 1.71Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH Group 3.32 5.80- Operations outsourcing 0.33 0.29Impairment of intangibles, net of tax 16.52 - 15.90 12.76 Earnings per ordinary share before amortisation and impairment ofintangibles, restructuring costs and the cost of the Re-Investment Plan* * Defined as 'underlying earnings per share' The following reflects the income and share capital data used in the basicearnings per share computations: Income Year ended Year ended 31 December 2004 31 December 2005 (as restated) £000 £000 Loss attributable to ordinary equity holders (77,273) (3,541) of the parent for basic earnings per share Amortisation of intangibles, net of tax 39,061 14,533Cost of the Re-Investment Plan, net of tax 18,025 3,799Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH Group 15,684 12,832- Operations outsourcing 1,564 652Impairment of intangibles, net of tax 78,050 - Profit attributable to ordinary equity holders of the parent before amortisation and impairment ofintangibles, restructuring costs and the cost ofthe Re-Investment Plan 75,111 28,275 Share capital 31 December 2005 31 December 2004 No. No. Weighted average number of Ordinary Shares (excluding treasury shares) for basic earningsper share 472,408,007 221,546,388 3. Goodwill and Other Intangible Assets Purchased Management software and Goodwill contracts licences Total £000 £000 £000 £000Cost:At 1 January 2004 (as restated) 254,031 104,300 4,643 362,974Intangibles arising on 323,915 516,940 65 840,920acquisition of F&CGH GroupExternal additions - - 271 271Exchange gains - 4,990 - 4,990 At 31 December 2004 (as restated) 577,946 626,230 4,979 1,209,155 External additions - 1,249 1,555 2,804Disposals - - (2,359) (2,359)Exchange losses - (7,630) (91) (7,721) At 31 December 2005 577,946 619,849 4,084 1,201,879 Amortisation and impairment:At 1 January 2004 (as restated) - 15,645 4,041 19,686Amortisation for the year - 20,762 432 21,194Impairment losses - - - -At 31 December 2004 (as restated) - 36,407 4,473 40,880 Exchange losses - - (91) (91)Amortisation for the year - 55,801 420 56,221Disposals - - (2,359) (2,359)Impairment losses - 111,500 - 111,500 At 31 December 2005 - 203,708 2,443 206,151 Net book values:At 31 December 2003 (as restated) 254,031 88,655 602 343,288At 31 December 2004 (as restated) 577,946 589,823 506 1,168,275 At 31 December 2005 577,946 416,141 1,641 995,728 Intangible assets with finite lives During 2005, due to indifferent investment performance in some areas of thebusiness as well as other clients withdrawing funds for strategic reasonsfollowing changes in their own corporate structure, the business experienced alevel of fund outflows which was higher than anticipated and led to net newbusiness targets not being met. This level of lost business has had a notableimpact on revenues and was significant enough to be considered an indicator ofpotential impairment of certain intangible assets, namely the related investmentmanagement contracts. In accordance with IAS 36, a full impairment review of these assets wasundertaken. The review resulted in impairments being recognised in respect ofmanagement contracts as follows: 2005 2004 £000 £000 F&C investment trust contracts 56,100 - F&C institutional contracts 55,400 - Total impairment recognised in the Income Statement 111,500 - The above contracts relate to the investment trust management contracts andinstitutional fund management contracts acquired as a result of the creation ofF&C Asset Management plc following the business combination of ISIS AssetManagement plc and F&C Group (Holdings) Limited on 11 October 2004, afterrestating the accounts to comply with International Financial ReportingStandards. The recoverable amounts of the assets have been determined based on value in usecalculations using cash flow projections based on the latest annual financialbudget approved by the board. The discount rate applied to the cash flow projections is 9.4% for investmenttrust contracts, 9.4% for institutional contracts with no fixed term, and 8.4%for fixed term institutional contracts. These rates reflect the varying risksand uncertainties inherent in the underlying revenues, using the group'sweighted average cost of capital of 8.9%, calculated as at 31 December 2005, asa benchmark. Revenues in the projections have been grown at 6% per annum in respect of theGroup's long-term view of market growth, which is consistent with thatexperienced over the longer term across the markets in which the managed assetsare invested. The revenue projections also incorporate an estimated loss rateof 5% per annum compounded over the projected period in respect of investmenttrusts, and 14% per annum for institutional contracts with no fixed term. Costs for the first year of the projections are driven by the budgeted groupmargin for 2006 of 40%. Thereafter costs are driven by the overall businessprojected margins, consistent with combined anticipated future inflation andsalary increases of 3.5%, with the margin capped at 45% as a measure ofprudence, based on historical performance. Impairment has been determined by comparing the results of the value in usecalculations in respect of the remaining contracts at the year-end to thecarrying value (cost less aggregate amortisation) of the assets at 31 December2005, with any deficits arising constituting impairment to be recognised for theyear. There were no indicators of potential impairment of intangible assets withfinite lives in respect of the comparative period, and as such, no impairmentreview was performed for 2004. 4. Defined Benefit Pension Schemes The following tables summarise the aggregate defined benefit pension deficit of the Group and the key assumptions which drive the quantified deficit: 31 December 31 December 2005 2004 (as restated) £million £million Defined benefit pension obligations (164.1) (114.5)Plan assets 116.1 96.8 Gross pension deficit (48.0) (17.7) Expected long-term rates of return on plan assets: As at As at 31 December 31 December 2005 2004 Equities 7.00% 7.00%Gilts 5.00% 5.00%Corporate Bonds 4.70% 5.30%Cash 4.00% 4.00% Key assumptions used to determine benefit obligations: At 31 December At 31 December 2005 2004 Discount rate 4.25% - 4.70% 5.25% - 5.30%Rate of salary increase 2.75% - 4.00% 2.75% - 4.00%Rate of inflation increase 1.75% - 2.75% 1.75% - 2.75% Mortality assumptions The mortality rates were revised as part of the 31 March 2005 actuarialvaluation for the ISIS Asset Management plc Pension Fund. The Directors believethat the revised mortality assumptions more accurately reflect the liabilitiesof the schemes and have adopted the same assumptions for both UK defined benefitschemes. The UK pension schemes have changed their mortality assumptions to the mediumcohort basis for 2005. The mortality assumptions have been projected forward,to take account of future improvements in mortality, using a 'typical' year ofbirth of 1965 for all future pensioners and 1935 for all current pensioners,rather than on an individual basis. For 2004 PM/FA92 tables were used for mortality assumptions with no projectionforward for future improvements in mortality and rated down by 3 years forfuture pensioners. The cost of strengthening the mortality in 2005 was approximately £18,000,000. The mortality assumptions used for both the main UK defined benefit schemes at 31 December are: 31 December 31 December 2005 2004Mortality table for males retiring in the future PMA92B1965MC -1 PMA92base - 3Mortality table for females retiring in the future PFA92B1965MC -1 PFA92base -3Mortality table for current male pensioners PMA92B1935MC -1 PMA92baseMortality table for current female pensioners PFA92B1935MC -1 PFA92base To demonstrate what these mortality assumptions mean, the expected age at death of a member retiring atage 60 is: Impact of mortality assumptions 31 December 2005 31 December 2004 Expected age at death for a male retiring in the future at age 60 88 84Expected age at death for a female retiring in the future at age 60 91 87Expected age at death for a current male pensioner aged 60 86 81Expected age at death for a current female pensioner aged 60 89 84 5. Acquisition of Subsidiaries F&C Asset Management plc (previously ISIS Asset Management plc) acquired and gained control of F&CGroup (Holdings) Limited and its subsidiaries ('F&CGH Group') on 11 October 2004. The businesscombination has been accounted for as an acquisition. Effect of acquisition As at 31 December 2004, the Directors considered the fair values of the net assets as at theacquisition date to be provisional, until the F&CGH Group Completion Accounts review process hasbeen finalised. The values adopted as fair values of the net assets of the acquired companies atthe date of acquisition reflected the best estimates available to the Directors at the time ofpreparation of the accounts for the year ended 31 December 2004. The effect of changes to the initial estimates of the fair values of the net assets acquired is asfollows: Provisional fair value to the Group at acquisition Adjustments as Additional Final fair value to as at a result of fair value The Group at 31 December 2004 adopting IFRS adjustments acquisition £000 £000 £000 £000 Non-current assets Property, plant and equipment 3,611 (65) - 3,546Intangible assets:- Management contracts - 516,940 - 516,940- Other intangible assets - 65 - 65Financial investments 1,424 - 467 1,891Deferred acquisition costs - 818 - 818Deferred tax assets 18,193 2,246 - 20,439 Current assetsStock of units and shares 19 - - 19Trade and other receivables 56,536 - (3,027) 53,509Current tax recoverable - - 1,000 1,000Cash and cash equivalents - shareholders 132,791 - - 132,791 Non-current liabilitiesInterest bearing loans and borrowings (9,000) - - (9,000)Pension deficit (4,992) (2,193) - (7,185)Deferred income (3,631) - - (3,631)Provisions (2,231) - (3,661) (5,892)Deferred tax liabilities - (155,082) - (155,082) Current liabilitiesTrade and other payables (111,880) 30 (8,140) (119,990)Deferred revenue - (1,149) - (1,149) Net assets acquired 80,840 361,610 (13,361) 429,089 Goodwill arising 685,434 (361,610) 91 323,915 Consideration 766,274 - (13,270) 753,004 Discharged by:Initial consideration - fair value of shares 736,862issuedEstimated further consideration payable 2,942Expenses of acquisition (of which £578,000 is accrued) 13,200 753,004 The "provisional fair value to the Group at acquisition, as at 31 December 2004"reflects the provisional net asset values disclosed in the Group's 2004 annualreport and accounts. The requirement to restate the Group's results for 2004 necessitated adjustmentsto the previously reported net assets acquired, in order to reflect these underIFRS. The explanation of these adjustments formed part of the 2004 full yearreconciliations included with our Interim results for 2005. Following the review of the Completion Accounts and subsequent agreement withEureko B.V. regarding adjustments to the purchase consideration, the followingspecific adjustments have been made to reflect the fair value of assets acquiredon acquisition: a) Financial investments have been increased to reflect the fair value of the acquired group's interest in private equity investments. b) Trade and other receivables have been reduced to their estimated realisable values at completion. c) Provisions have been increased to reflect the Directors' assessment of provisions in respect of onerous property contracts and the cost of providing benefits to employees on long-term sickness leave. d) Trade and other payables have been increased to reflect additional obligations of the acquired entities which are considered to exist at 11 October 2004, but which were not fully reflected in the Completion Accounts. e) Adjustments have been made to reflect the tax effect of the non-tax fair value adjustments, together with an additional provision in respect of tax obligations in existence as at 11 October 2004, as a result of the submission of prior period tax computations. f) The additional consideration recognised at 31 December 2004 has been reduced by £13,270,000 to reflect the reduction in the expected total consideration payable for the F&CGH Group. Accordingly, the consideration liability of £16,212,000 disclosed and accrued in the 2004 annual report and accounts has been reduced to £2,942,000. In accordance with IFRS 3, the 2004 comparatives have been restated for theeffect of the above adjustments. 6. Contingencies Contingent Liabilities: (a) Shareholding in F&C Group Management Limited (formerly Primrose Street Holdings Limited) In December 2000, when Eureko agreed to acquire 90 per cent. of the issued sharecapital of F&C Group (Holdings) Limited from Hypo Vereins-Bank, approximately 73per cent. of the ordinary issued shares of F&C Group Management Limited, asubsidiary company, were held in the form of two bearer share warrants whichcould not be located prior to the completion of the sale (the ''old ShareWarrants''). Since a bearer share warrant issued by a company entitles the bearer to theshares specified in the share warrant, there is a risk that a third partyholding the old Share Warrants may claim that it is entitled to the specifiedshares in F&C Group Management Limited. If a third party were successful inestablishing a claim in relation to the old Share Warrants, F&C Group (Holdings)Limited could be liable to indemnify F&C Group Management Limited under theoriginal indemnity arrangements, which could, as set out below, have a materialadverse effect on the F&C Asset Management Group's business, results ofoperations and/or financial condition. Although there is a possibility that a third party may seek to establish that itis entitled to the shares specified in the old Share Warrants, the Directorshave been informed that Eureko has been advised that the prospect of a thirdparty succeeding in such a claim is remote. Under the terms of the Sale and Purchase Agreement (in respect of the Merger),Eureko Holdings has given a specific indemnity (guaranteed by Eureko) to F&CAsset Management plc in respect of losses arising in relation to the lost sharewarrants to bearer in F&C Group Management Limited (including in respect of theindemnity granted by F&C Group (Holdings) Limited to F&C Group ManagementLimited) which is capped at approximately £432 million. (b) European Court Case - VAT on investment trust management fees In a current European Court case, a UK investment trust is seeking to establishthat management services to UK investment trusts should be a VAT exempt supply,rather than a taxable supply in accordance with current UK VAT law. If this casewere successful, a number of group companies, in common with other relevant fundmanagers in the UK, would face claims from those investment trusts to which theyhave supplied services for repayment of the VAT they have charged to them. TheAITC (a party to the above litigation) has indicated that it believes claimsdating back as far as 1990 may be lodged with fund managers by investmenttrusts. Companies in the F&C group can submit repayment claims to HM Revenue andCustoms, but only dating back as far as 2001, being the maximum time periodpermitted. The Group has begun to receive protective claims from a number of itsinvestment trust clients and has lodged protective claims with HM Revenue andCustoms. At present, the Directors are not able to judge the likelihood that theVAT court case will be successful, nor are they able to quantify the claims thatmay be received or the extent to which such claims could be mitigated andtherefore, are not able to quantify the potential liability. Contingent Assets: During 2005 Banco Comercial Portugues S.A., (BCP) a Group client, withdrewapproximately €2 billion of assets which were managed by the Group under theterms of long-term agreements. The Group are currently negotiating with BCP toobtain compensation for which it is contractually entitled. As settlementnegotiations are at an early stage, the Group has not yet received the finalvaluations from the external advisers who have been appointed to support F&C andtherefore the potential asset cannot be quantified. 7. Consolidated Reconciliation of Equity 2005 2004 (as restated) £000 £000 Total equity attributable to equity holders of the parent at 1 January 877,658 151,285 Loss after tax for the period (77,273) (3,541) Ordinary dividends paid (51,817) (16,480) Share-based payments 21,822 6,220 Goodwill written back on disposal of subsidiary 449 - Exchange movements on translation of foreign operations (4,246) 4,846 Net actuarial loss on defined benefit pension schemes (21,533) (2,035) Net (loss)/gain on financial investments (159) 463 Tax on items taken directly to equity (672) 479 Share capital allotted on exercise of options 1,776 822 Share capital allotted and issued as acquisition consideration for F &CGH Group - 736,862 Share capital allotted on issue of shares to Abacus Employee Benefit Trust - 25,351 Movement on own shares in respect of shares issued to Abacus Employee Benefit Trust - (25,351) Purchase of ESOP shares (87) (1,165) Share of associate costs charged directly to equity - (98) Total equity attributable to equity holders of the parent at 31 December 745,918 877,658 8. Subsequent Events Expected Loss of F&C Latin American Investment Trust On 10 March 2006 an announcement was made by one of the Group's investment trustclients, F&C Latin American Trust PLC (the 'Trust'), that following theresignation of the Trust's nominated manager from the Group, the Trust Boarddecided to appoint a new manager, further details of which have still to beannounced. While the exact timing of the termination of the management contract isuncertain, it is expected to be imminent, however, all management andadministrative fees will continue to be received by the Group up to 8 May 2006,the date of the Trust's Annual General Meeting and continuation vote. Annualised revenues from this Trust are approximately £3.1million. The expected loss of this business constitutes an indicator of potentialimpairment in the related intangible asset which was recognised as part of theF&C acquisition, and as such, an impairment review of the investment trustmanagement contracts will be undertaken in 2006. This review will re-assess thecarrying value of the relevant assets, including their estimated remainingeconomic life, and determine whether any further impairment will arise. Withdrawal of Resolution plc funds As previously communicated to shareholders, the Group were advised during 2005that Resolution Life had initiated plans to internalise the management of theirassets. The Group subsequently reached agreement with Resolution thatcompensation of £27 million would be received following the withdrawal of thefunds, representing a rebate of consideration paid for these contracts as partof the original acquisition. Since 31 December 2005, Resolution have withdrawnthe majority of the £19.9 billion funds remaining as at 31 December 2005 and, assuch, have triggered the payment of the £27 million compensation, which will bereceived by the Group in April 2006. The total annualised revenue on all Resolution funds lost, including the £5.2billion of funds lost during 2005, amounts to some £27 million. As these contracts are recognised as intangible assets, the agreed compensationwas assumed receivable in the calculations to assess whether the assets had beenimpaired. No impairment arose in respect of these contracts. 9. Other Information The financial information set out above for the years ended 31 December 2005 and31 December 2004 has been extracted from the unaudited and audited financialstatements respectively for those years. The information does not constitutestatutory accounts in terms of the Companies Act 1985. The financial statementsfor 2004 received an unqualified audit opinion. The report and accounts for theyear ended 31 December 2004 have been filed with the Registrar of Companies. Thereport and accounts for the year ended 31 December 2005 will be filed within thestatutory period, following the Annual General Meeting. Copies of the 2005 Annual Report and Accounts will be posted to shareholders andwill be available for inspection at the registered office of the company at 80George Street, Edinburgh EH2 3BU. This announcement and the information contained herein are not for publicationor distribution in and shall not constitute or form any part of any offer orinvitation to subscribe for, underwrite or otherwise acquire, or anysolicitation of any offer to purchase or subscribe for, securities including inthe United States, Canada, Australia, Japan or any other jurisdiction where suchactivity is unlawful. This announcement and the information contained herein do not constitute anoffer of securities for sale in the United States of America. Neither thisannouncement nor any copy of it may be taken or distributed into the UnitedStates of America or distributed or published, directly or indirectly, in theUnited States of America. Any failure to comply with this restriction mayconstitute a violation of US securities law. The securities referred to hereinhave not been and will not be registered under the US Securities Act of 1993, asamended (the "Securities Act") and may not be offered or sold in the UnitedStates unless they are registered under the Securities Act or pursuant to anavailable exemption therefrom. No public offering of securities is being madein the United States. This information is provided by RNS The company news service from the London Stock Exchange

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