7th Mar 2005 07:02
Management Consulting Group PLC07 March 2005 FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Management Consulting Group PLC ("MCG" or "the Group"), the internationalmanagement consultancy group, today announces its results for the year ended 31December 2004. Key points • Turnover up 35% to £119.2 million (2003: £88.6 million)• Underlying turnover growth of 44% at constant exchange rates• Operating profit before goodwill amortisation of £12.3 million (2003: £0.2 million)• Operating profit after goodwill amortisation of £8.5 million (2003: loss of £3.8 million)• Proudfoot Consulting performing well - turnover up 19% to £81.4 million (2003: £68.2 million); underlying revenue increase was 26% at constant exchange rates• Parson Consulting showed significant growth with turnover up 85% at £37.8 million (2003: £20.4 million); underlying revenue increase was over 100% at constant exchange rates• Headline earnings per share of 5.0 pence (2003: loss of 0.5 pence)• Basic earnings per share of 3.0 pence (2003: loss of 2.7 pence)• Dividend up 34% to 0.67 pence per share (2003: 0.5 pence per share)• Turnover since the year end in line with last year. Year to date order book up 10% Rolf Stomberg, Chairman:"2004 has delivered the best results for our shareholders in a decade and I amdelighted that we are recommending a 34% increase in the dividend." Kevin Parry, Chief Executive:"During 2004 our trading improved significantly, with Parson Consulting doublingin size and Proudfoot Consulting performing strongly. In 2005, our existingorders and prospects, together with the expanded service offering, will positionus well to deliver further growth." For further information please contact: Management Consulting Group PLCKevin Parry Chief Executive 020 7710 5000Mark Currie Finance Director 020 7710 5000 The Maitland ConsultancySuzanne Bartch 020 7379 5151 (mobile) 07769 710335Michelle Jeffery 020 7379 5151 (mobile) 07989 977837 An analyst briefing will be held at the offices of Management Consulting GroupPLC on the 6th floor of Fleet Place House, 2 Fleet Place, Holborn Viaduct,London, EC4M 7RF on Monday 7 March 2005 at 9.30am. Notes to Editors Management Consulting Group PLC comprises two consulting businesses: ProudfootConsulting and Parson Consulting. Proudfoot Consulting helps clients to achieve significantly increasedprofitability through the implementation of operational improvements leading toincreased sales, lower operating and overhead costs, greater output and lowercapital expenditure. Its clients include BP, National Australia Bank, NewmontMining, Nissan, PSA Peugeot-Citroen and Societe Generale. Parson Consulting specialises in financial management consultancy. It is free ofauditing conflicts and provides Sarbanes-Oxley compliant services. It has fourservice lines: governance and risk management, operational financial management,strategic financial management and transaction support. Its clients includeAvis, Citigroup, Ford, General Mills, Kingfisher, Shell and Warner Bros. MANAGEMENT STATEMENT Overview 2004 2003 2002 2001 2000 £m £m £m £m £mTurnover- Continuing operations 119.2 88.6 107.3 72.1 31.7- Discontinued operations - - - - 6.2 ------- ------- ------- ------- ------- 119.2 88.6 107.3 72.1 37.9 ------- ------- ------- ------- -------Operating profit/(loss) from continuingoperations before goodwillamortisation 12.3 0.2 7.6 1.7 (9.5) ------- ------- ------- ------- -------Headline earnings/(loss)per share* (pence) 5.0 (0.5) 4.7 1.4 (7.3) ------- ------- ------- ------- -------Dividend 0.67p 0.50p 0.50p - - ------- ------- ------- ------- -------* adjusted for effect of capital issue in May 2002 Trading in 2004 improved markedly over the prior year with both businessesperforming well. In particular, the performance of Parson Consulting improvedsignificantly as a result of continuing investment, the completion of itsrestructuring, a broadening of its client base, new service offerings andincreased client spending resulting from US regulatory changes. Turnover was up 35% in Sterling terms. Underlying growth was even strongerbecause the US dollar, in which the majority of our revenues are billed,weakened relative to Sterling. At 2004 constant exchange rates, the underlyinggrowth was 44%. The operating profit before goodwill amortisation increased by £12.1 million to£12.3 million (2003: £0.2 million), demonstrating the significant operationalgearing in both the Proudfoot Consulting and Parson Consulting businesses.Exchange rate movements had only a small impact on operating profit because welargely match the currency of our costs with the currency of our sales. Headline earnings per share were 5.0 pence (2003: loss of 0.5 pence), thehighest level for 10 years. In the light of the profitability of the Group and the trading prospects, thedirectors are recommending a 34% increase in the final dividend to 0.67 penceper share. GROUP CONSULTANCIESThe Group comprises two consultancies: Proudfoot Consulting and ParsonConsulting. Proudfoot Consulting helps clients to achieve significantly increasedprofitability through the implementation of operational improvements leading toincreased sales, lower operating and overhead costs, greater output and lowercapital expenditure. Proudfoot Consulting's appeal is to operationally focusedsenior managers intent on executing strategy and achieving stretching goals. Parson Consulting specialises in financial management consultancy. It is free ofauditing conflicts and provides Sarbanes-Oxley compliant services. It has fourservice lines: governance and risk management, operational financial management,strategic financial management and transaction support. Parson Consulting'sappeal is to Chief Financial Officers intent on achieving the highest standardsof financial management. Year ended Year ended 31 Dec 2004 31 Dec 2003 --------- --------- £'000 £'000 --------- ---------RevenueProudfoot Consulting 81,437 68,238Parson Consulting 37,811 20,411 --------- --------- 119,248 88,649 ---------- ---------Operating profit/(loss) before goodwillamortisationProudfoot Consulting 10,063 4,519Parson Consulting 2,278 (4,310) --------- --------- 12,341 209 ---------- ---------- The operating profit before goodwill amortisation of Proudfoot Consulting was£10.1 million, an increase of £5.5 million relative to the prior year and thatof Parson Consulting was £2.3 million, an increase of £6.6 million. PROUDFOOT CONSULTINGProudfoot Consulting's turnover was £81.4 million, an increase of 19% over 2003and 26% in constant currency terms. This represents 68% (2003: 77%) of Groupturnover. Turnover in the dominant markets of North America and Europe grew strongly;North America by 26% and Europe by 24%. The North American business rebounded strongly in 2004 after a difficult 2003.Significant engagements were undertaken to increase output for natural resourceclients which are benefiting from high commodity prices. In thetelecommunication and financial sectors there was a particular emphasis onengagements to improve customer service and productivity. These latter twosectors increased their spending on consulting after several years of cut backs. The European business was influenced more by the improving general economicconditions than by particular industry sectors. Earlier in the year the demandfor services increased in the UK, Spain and Portugal and latterly this extendedto France and Germany. Whilst this is encouraging, it may be premature toconclude that there will be a sustained increase in demand for consultingservices in Europe. South African businesses are very aware of their need to favour black empoweredsuppliers. Accordingly we concluded transactions with two groups of previouslydisadvantaged individuals (PDIs) which resulted in the formation of ProudfootConsulting Africa (Proprietary) Limited, a company with 51% ownership by PDIs.This business model takes account of the specific circumstances in South Africaand will significantly increase our credentials for winning work in thateconomy. We are delighted to be the first international consultancy to bemajority black owned. In Asia Pacific we have established an office in China which will allow us toserve more readily that growing market place. The operating profit before goodwill amortisation for the Proudfoot Consultingbusiness was £10.1 million (2003: £4.5 million). After adding back depreciation,the EBITDA margin was 13% (2003: 8%) compared with our unchanged target of asustainable 15% margin. PARSON CONSULTINGAt the end of the year, we had owned Parson Consulting for some two and a halfyears. During 2004 we made significant progress not only by selling theSarbanes-Oxley related services that we had developed in 2003 but also from theintroduction of other service offerings. Parson Consulting's turnover increased by 85% compared with 2003 to £37.8million. In constant currency the growth was over 100%. The operating profitbefore goodwill amortisation was £2.3 million compared with a loss of £4.3million in 2003. After adding back depreciation, the EBITDA margin was 7%. Weare aiming to achieve a sustainable 15% EBITDA margin, the same as our aim forProudfoot Consulting. We have significantly expanded our US client base on the back of the regulatoryrequirements. To ensure that we are not over-reliant on Sarbanes-Oxley relatedwork, we have developed a range of new services that we started to offer in theautumn and which have been well received. This is part of a continuing programmeof service developments to meet the increasing demands that are being placed onfinance functions and back offices in large businesses. As expected, Sarbanes-Oxley work peaked in the fourth quarter of 2004. This workwas mainly assisting larger US clients to comply for the first time with therequirements of Section 404 of the Sarbanes-Oxley Act. Corporate governance andrisk related work will continue to be an important service in the future. Workon initial compliance with Sarbanes-Oxley is continuing in 2005 because smallerUS companies and foreign registrants have a later deadline for compliance. Further, clients will need assistance with the continuing compliance obligationsand will wish to use dedicated software for this purpose. Accordingly, we haveentered into a partnership agreement with Certus, a company that has developedspecialised compliance software. This allows us to be at the leading edge offuture work in this area. The turn-around of Parson Consulting has now been completed in line with ouroriginal timetable after lagging by some months in the earlier part of 2003. Keyelements of the turn-around have been investment in senior people, investment inservice offerings, process improvements installed by Proudfoot Consulting, fullyvaluing our services and developing the capability to undertake larger and morecomplex engagements. We are continuing to invest further in people, servicelines, training and geographies. Following the success of the London office which was opened at the tail end of2003, we are opening two additional offices in the United States as well asoffices in Paris and Sydney. The latter two will be based in our existingProudfoot Consulting offices in those cities which will reduce the additionalreal estate and other infrastructure costs of the start-ups. EarningsThe net finance expense was less than £0.1 million, little changed from 2003.Interest income was offset by the discount unwind associated with the closed USretirement benefit plans. The tax charge was £3.0 million (2003: £1.1 million) giving an effective taxrate on pre-tax profits before goodwill amortisation of 24%. The tax chargebenefits from the utilisation of brought forward tax losses, particularly in theUnited States, but the Group suffers from minimum tax charges in certainjurisdictions and has taxable income in others. The basic earnings per share were 3.0 pence (2003: loss of 2.7 pence). Theheadline earnings per share, which adds back goodwill amortisation to the basicearnings per share, were 5.0 pence (2003: loss of 0.5 pence). Balance sheetGoodwill amounts to £62.3 million (2003: £69.2 million). Goodwill has reduceddue to the annual amortisation, the weakness of the US dollar relative toSterling and the write-back of deferred consideration that did not becomepayable in connection with acquisitions. The cash balance increased by £4.8 million to £14.5 million at 31 December 2004(31 December 2003: £9.7 million). The increase in cash is attributable totrading profits, offset by the payment of deferred consideration, contributionsto the closed US defined benefit pension plan, tax and dividends. The balance sheet liability in respect of the closed US retirement benefit plansreduced by £1.8 million to £11.4 million as a result of funding during the year,foreign exchange movements and an improvement in the value of assets, offset inpart by the effect of the actuary adopting more conservative actuarialassumptions. DividendThe board is delighted to recommend a final dividend of 0.67 pence per share(2003: 0.5 pence per share) which will be payable on 25 May 2005 to shareholderson the register on 29 April 2005. International Financial Reporting StandardsThe Group will be reporting its results in accordance with InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union from 1January 2005. Note 12 presents and explains the expected consolidated results of the Groupconverted from UK Generally Accepted Accounting Principles (UK GAAP) to an IFRSbasis for the year ended 31 December 2004, and includes the restated openingbalance sheet at 1 January 2004, which is the transition date for the Group'sadoption of IFRS. The transition to IFRS results in an increase in both operating profit andprofit before tax for the year ended 31 December 2004 of £3.9 million comparedto UK GAAP. This is due to the removal of goodwill amortisation (£3.8 million)and deferral of long-term employee benefits (£0.5 million), offset in part by anew charge for employee share options in 2004 of £0.4 million. Equity shareholders' funds at 31 December 2004 increase by £5.5 million underIFRS compared to UK GAAP. This reflects the adjustments noted above which, aftertax, increase the retained profit for the year by £4.3 million, and the reversalof the proposed year end dividend of £1.2 million which is recorded whendeclared under IFRS. Basic earnings per share are 2.1 pence higher under IFRS at 5.1 pence per share. PeopleDuring the course of the year we have recruited many employees to the Group. Weare grateful for the contribution that all employees have made and we arepleased by the part that they have all played in the continued development ofProudfoot Consulting and Parson Consulting. As previously announced, Stephen Purse has resigned as a director with effectfrom 7 March 2005 to become the finance director of Clifford Chance LLP. GarethJones, who has completed his three year term as a non-executive director, willnot be standing for re-election at the forthcoming Annual General Meeting. Weare grateful for their important contributions to the development of the Groupand wish them well for the future. Also as previously announced, Mark Curriejoined the board on 1 March 2005 and succeeds Stephen Purse as the financedirector. He will offer himself for re-election at the forthcoming AnnualGeneral Meeting. In addition, Alan Barber is offering himself for election as a non-executivedirector at the forthcoming Annual General Meeting. He was a partner in KPMG LLPfor 25 years until he retired last year. He provided audit and other services tomany of KPMG's largest clients. He has not previously been involved in providingservices to Management Consulting Group PLC. He is currently a non-executivedirector of Teather and Greenwood Holdings plc, lastminute.com plc and theAnimal Health Institute. It is intended that he will succeed Gareth Jones asChairman of the Audit Committee. ProspectsGroup revenue in the first two months of 2005 has matched the level of the firsttwo months of last year. We are continuing to invest in both ProudfootConsulting and Parson Consulting to deliver growth in 2005 and the effect ofthis is already visible in the cumulative order book of both ProudfootConsulting and Parson Consulting, which is some 10% up since the beginning ofthe year. The board expects that in 2005, Parson Consulting will contribute an increasedproportion of the Group's turnover, resulting in a broader mix of revenue thanpreviously. Parson Consulting's revenue in the first two months of 2005 is inline with the run rate for the second half of 2004, even though the second halfof last year represented the peak of the work associated with our clients'Sarbanes-Oxley initial compliance. This has been achieved as a result of stepstaken last year to broaden the service offerings provided by Parson Consulting,which have been well received due to clients' continuing investment in financefunctions. The board is pleased with the 2004 results of both Proudfoot Consulting andParson Consulting and we anticipate further progress in the current calendaryear. Dr Rolf StombergChairman Kevin ParryChief Executive GROUP PROFIT AND LOSS ACCOUNT year ended 31 December 2004 2003 note £'000 £'000 --------- ---------Turnover 2 119,248 88,649Cost of sales (60,270) (45,137) --------- ---------Gross profit 58,978 43,512Selling costs (30,362) (28,303) --------- ---------Administrative expensesExcluding goodwill amortisation (16,275) (15,000)Goodwill amortisation (3,792) (4,029) --------- ---------Total administrative expenses (20,067) (19,029) Operating profit/(loss): --------- ---------Before goodwill amortisation 12,341 209After goodwill amortisation 8,549 (3,820) --------- ---------Total operating profit/(loss) 2,8 8,549 (3,820)Finance costs 3 (34) (46) --------- ---------Profit/(Loss) on ordinary activities before taxation 2 8,515 (3,866)Tax on profit/(loss) on ordinary activities (2,995) (1,062) --------- ---------Profit/(Loss) on ordinary activities after taxation 5,520 (4,928)Equity dividends 4 (1,221) (944) --------- ---------Retained profit/(loss) for the financial year 4,299 (5,872) --------- --------- Earnings/(Loss) per share - pence 7Basic 2.98 (2.68)Diluted 2.96 (2.68)Headline 5.03 (0.49) --------- --------- There is no material difference between the results reported on the historicalcost basis and those disclosed in the profit and loss account.Turnover and operating results in both the current and prior years relate tocontinuing operations. GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES year ended 31 December 2004 2003 note £'000 £'000 -------- --------Profit/(Loss) for the financial year 5,520 (4,928)Actuarial (loss)/gain relating to retirement benefitschemes 10 (1,696) 285Currency translation differences on foreign currencynet investments (1,745) 250 -------- --------Total recognised gains and losses relating to the year 2,079 (4,393) -------- -------- GROUP RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS year ended 31 December 2004 2003 £'000 £'000 --------- --------Profit/(Loss) for the financial year 5,520 (4,928)Other recognised gains and losses during the year (3,441) 535 --------- -------- 2,079 (4,393)Equity dividends (1,221) (944)Issue of share capitalDeferred consideration for acquisitions 27 1,281Share option schemes 48 - Movement in reserve for shares to be issued (1,981) (7,261) --------- --------Net decrease in shareholders' funds (1,048) (11,317)Opening shareholders' funds 44,708 56,025 --------- --------Closing shareholders' funds 43,660 44,708 --------- -------- GROUP BALANCE SHEET as at 31 December 2004 2003 note £'000 £'000 £'000 £'000 ------- ------- ------- -------Fixed assetsIntangible assets 62,317 69,206Tangible assets 1,789 1,649 ------- -------Total fixed assets 64,106 70,855 Current assetsDebtors 12,575 7,910Cash at bank and in hand and deposits 14,510 9,738 ------- ------- 27,085 17,648Creditors: amounts falling duewithin one year (30,718) (24,015) ------- -------Net current liabilities (3,633) (6,367) ------- -------Total assets less current liabilities 60,473 64,488Creditors: amounts falling dueafter more than one year (2,545) (3,387) Provisions for liabilities and charges (2,885) (3,180) ------- -------Net assets excluding retirementbenefits liability 55,043 57,921Retirement benefits liability 10 (11,383) (13,213) ------- --------Net assets including retirementbenefits liability 43,660 44,708 ------- -------Capital and reservesCalled up share capital 47,256 47,198Share premium account 38,026 38,009Shares to be issued 185 2,166Own shares held by employee share trust (970) (970)Other reserves (1,336) 409Profit and loss account (39,501) (42,104) ------- -------Shareholders' funds - equity 43,660 44,708 ------- ------- GROUP CASH FLOW STATEMENT as at 31 December 2004 2003 note £'000 £'000 £'000 £'000 ------- ------- ------- -------Net cash inflow/(outflow) fromoperating activities 8 12,048 (4,957)Returns on investments andservicing of financeInterest received 206 247 ------- -------Net cash inflow from returns oninvestments and servicing of finance 206 247 Taxation (3,806) (553) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (1,438) (594)Proceeds from sale of tangiblefixed assets 117 205 ------- -------Net cash outflow from capitalexpenditure and financialinvestment (1,321) (389) Acquisitions and disposalsPayments to acquire subsidiaryundertakings (1,074) (5,189) ------- -------Net cash outflow from acquisitionsand disposals (1,074) (5,189) Equity dividends paid (925) (911) ------- -------Cash inflow / (outflow) before use of liquid resourcesand financing 5,128 (11,752)FinancingNet proceeds from issue ofordinary shares 48 - ------- -------Net cash inflow from financing 48 - ------- -------Increase/(Decrease) in cash in theyear 9 5,176 (11,752) ------- ------- NOTES 1.Accounting policiesThe financial information, with the exception of note 12, has been prepared onthe basis of the accounting policies set out in the Annual Report and Accountsfor the year ended 31 December 2003. Note 12 shows the impact of InternationalFinancial Reporting Standards (IFRS) on the results for the year and restatesthe balance sheets under IFRS at the transition date of 1 January 2004 and at 31December 2004. 2. Segmental information(a) Turnover The analysis of turnover by geographical origin is as follows: 2004 2003Continuing operations £'000 £'000 --------- ---------North America 77,656 54,457Europe 33,670 24,650Africa 3,791 4,698Asia Pacific 4,131 4,844 --------- --------- 119,248 88,649 --------- --------- There is no material difference between turnover by geographical origin andturnover by geographical destination. (b) Profit/(Loss) on ordinary activities before taxation The analysis of the profit/(loss) by geographical region is as follows: 2004 2003Continuing operations £'000 £'000 --------- ---------North America 11,558 2,736Europe (2,161) (6,899)Africa (728) 25Asia Pacific (120) 318 --------- ---------Total operating profit/(loss) 8,549 (3,820)Finance costs (34) (46) --------- ---------Group profit/(loss) on ordinary activities beforetaxation 8,515 (3,866) --------- --------- Management consultancy is the Group's sole business segment. 3.Finance costs 2004 2003 £'000 £'000 -------- --------Interest receivable and similar income 421 859Interest payable and similar charges (183) (180)Other finance charges (272) (725) -------- -------- (34) (46) -------- -------- 4. Equity dividends proposed 2004 2003Equity shares £'000 £'000 -------- --------Proposed final dividend of 0.67p (2003: 0.5p) 1,221 944 -------- -------- The directors recommend the payment of a final dividend of 0.67 pence to be paidon 25 May 2005 to ordinary shareholders on the register on 29 April 2005. Thedividend is not payable on shares held in the employee share trust, which haswaived its entitlement to dividends. The amount of the 2004 dividend waived was£0.03 million (2003: £0.02 million). 5. Earnings before interest, tax, depreciation and amortisation 2004 2003 £'000 £'000 -------- --------Operating profit/(loss) 8,549 (3,820)Depreciation 1,164 1,223Amortisation of goodwill 3,792 4,029 -------- --------EBITDA 13,505 1,432 -------- -------- 6. Staff numbers and costs The average number of persons employed by the Group (including directors) duringthe year, analysed by category, was as follows: 2004 2003 -------- --------Sales and marketing 181 178Consultants 454 420Support staff 122 121 -------- -------- 757 719 -------- -------- The aggregate payroll costs of these persons were as follows: 2004 2003 £'000 £'000 -------- --------Wages and salaries 58,231 50,332Social security costs 6,346 5,752Other pension costs 800 828 -------- -------- 65,377 56,912 -------- -------- 7. Earnings per share The basic earnings per share are calculated by dividing the profit after tax bythe weighted average number of Ordinary Shares in issue during the year afterdeducting 3,879,584 shares held by the Group in an employee share trust. For diluted earnings per share, the weighted average number of Ordinary Sharesin issue is adjusted to assume conversion of all potentially dilutive OrdinaryShares. The Group's dilutive instruments are share options granted to employeeswhere the exercise price is less than the average market price during the year.Dilution is not recognised where continuing operations are loss making. The average market price of Ordinary Shares for the year ended 31 December 2004was 41.3 pence (31 December 2003: 36.9 pence). Headline earnings per share has been calculated in accordance with thedefinition in the Institute of Investment Management Research ('IIMR') Statementof Practice No. 1, 'The Definition of IIMR Headline Earnings'. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below: 2004 2003 Weighted Weighted Earnings average Earnings average per share number of per share number of amount Earnings shares amount Earnings shares (£'000) (million) (pence) (£'000) (million) (pence) -------- -------- -------- -------- -------- --------Basic EPSProfit/(Loss)attributable toshareholders 5,520 185.0 2.98 (4,928) 183.7 (2.68) Effect ofdilutivesecuritiesOptions - 1.8 (0.02) - - - -------- -------- -------- -------- -------- --------Fully dilutedEPS 5,520 186.8 2.96 (4,928) 183.7 (2.68) -------- -------- -------- -------- -------- --------Basic EPS 5,520 185.0 2.98 (4,928) 183.7 (2.68)Goodwillamortisation 3,792 - 2.05 4,029 - 2.19 -------- -------- -------- -------- -------- --------Headline EPS 9,312 185.0 5.03 (899) 183.7 (0.49) -------- -------- -------- -------- -------- -------- 8. Reconciliation of operating profit/(loss) to net cash flow from operating activities 2004 2003 £'000 £'000 -------- --------Operating profit/(loss) 8,549 (3,820)Depreciation 1,164 1,223Amortisation of goodwill 3,792 4,029Management long-term incentive plan (757) (1,919)Adjustment for pension funding (2,911) (3,029)(Increase)/Decrease in debtors (4,053) 534Increase/(Decrease) in creditors 6,374 (2,043)(Decrease)/Increase in provisions (110) 68 -------- --------Net cash inflow/(outflow) from operating activities 12,048 (4,957) -------- -------- 9. Analysis of net funds Net funds at Cash flow Exchange Net funds at 1 Jan 2004 movement 31 Dec 2004 £'000 £'000 £'000 £'000 --------- --------- --------- ---------Cash at bank 9,738 5,176 (404) 14,510 --------- --------- --------- --------- 10. Retirement benefits The retirement benefits liability relates to the closed US defined benefitspensions scheme and to the closed US post-retirement medical benefits plan. Entitlement to additional benefit accruals under the US defined benefits pensionscheme ceased on 31 December 2001. The US post-retirement medical benefits plan relates to certain former employeeswho retired prior to 30 June 1995 and to a small number of current and formeremployees who were employed at that date. 2004 2003 £'000 £'000 -------- --------Retirement benefits liability at start of year (13,213) (17,290)Pension contributions 2,790 1,315Payment of medical benefits 122 140Service costs (1) 1,574Net finance expense (272) (725)Actuarial (loss)/gain (1,696) 285Foreign exchange translation 887 1,488 -------- --------Retirement benefits liability at end of year (11,383) (13,213) -------- -------- 11. Statutory accounts The above financial information does not constitute statutory accounts asdefined in Section 240 of the Companies Act 1985. The financial information hasbeen extracted without material adjustment from the consolidated financialstatements of Management Consulting Group PLC, which have been audited. Theauditors have made a report under Section 235 of the Companies Act 1985 inrespect of the statutory consolidated accounts for the years ended 31 December2004 and 31 December 2003. Their reports were unqualified within the meaning ofSection 262(1) of the Companies Act 1985 and did not contain a statement underSection 237(2) or (3) of that Act. Statutory accounts for the financial year ended 31 December 2003 have beendelivered to the Registrar of Companies pursuant to Section 242 of the Actwhereas those for 2004 will be delivered following the Annual General Meeting. 12. Restatement of financial information under IFRS IFRS will apply for the first time in the Group's Annual Report for the yearending 31 December 2005. Consequently, the Group's financial results for the sixmonths ending 30 June 2005 will be prepared under IFRS. This note presents and explains the consolidated results of the Group convertedfrom UK Generally Accepted Accounting Principles (UK GAAP) to an IFRS basis forthe year ended 31 December 2004. It summarises on an IFRS basis: • the consolidated income statement for the year ended 31 December 2004;• the consolidated opening balance sheet at 1 January 2004, which is the transition date for the Group's adoption of IFRS;• the consolidated balance sheet at 31 December 2004; and• the consolidated cash flow statement for the year ended 31 December 2004. The standards giving rise to changes to the Group's consolidated results ontransition from UK GAAP to IFRS, and their financial impact, are as follows: IFRS 2 Share-based Payment Under IFRS 2, the Group recognises a charge for the fair value of outstandingshare options granted to employees after 7 November 2002. The charge has beencalculated using the stochastic option pricing model and the resulting cost hasbeen charged to the income statement over the relevant option vesting periods,adjusted to reflect actual and expected levels of vesting. There was no chargeto the profit and loss account in 2004 under UK GAAP in relation to shareoptions granted to employees. The impact of IFRS 2 is a reduction in retainedearnings as at 1 January 2004 of £0.2 million and a charge of £0.4 million forthe year ended 31 December 2004. A deferred tax asset of £0.2 million isrecognised in relation to the share option scheme. IFRS 3 Business Combinations Under IFRS, goodwill is no longer amortised but held at carrying value in thebalance sheet and tested annually for impairment (with a specific requirement tobe tested at the date of transition) and when there are indications ofimpairment. The goodwill amortisation under UK GAAP of £3.8 million chargedduring the year has been reversed under IFRS. All goodwill has been tested forimpairment for the year ended 31 December 2004 and at the transition date inaccordance with IFRS, and no adjustment was deemed necessary. Under the transitional rules of IFRS 1, the Group has taken advantage of theoption not to apply IFRS 3 retrospectively to business combinations that tookplace before the date of transition. As a result, goodwill arising from pastbusiness combinations is recorded initially in the opening balance sheet at theamortised carrying value under UK GAAP on that date. IAS 10 Events after the Balance Sheet Date IAS 10 requires that dividends are recognised in the period in which they aredeclared. This is different to UK GAAP where the proposed dividend is recognisedin the profit and loss account. The proposed final dividend for 2003 of £0.9million has been reversed out of the opening balance sheet and recorded as theamount paid in the year ended 31 December 2004. Similarly, the proposed finaldividend for 2004 of £1.2 million has been reversed from the income statement. IAS 19 Other Long-term Benefits Deferred employee bonuses awarded in respect of the year ended 31 December 2004but not payable in cash and shares until 31 December 2007, are accounted forunder IAS 19 as deferred long-term benefits, and will be expensed to the incomestatement over the subsequent three year deferral period under IFRS. Under UKGAAP they are charged in full to the profit and loss account in 2004. Thisresults in a credit to the 2004 income statement of £0.5 million, included in"Other adjustments", and a corresponding reduction in liabilities at 31 December2004. Deferred tax of £0.2 million is provided under IFRS in respect of thedeferred employee bonuses. IAS 38 Intangible Assets IAS 38 requires computer software costs, including development costs, to beclassified as intangible assets. Capitalised software of £0.4 million isreclassified at 31 December 2004 as intangible assets, which continues to beamortised over three years or the life of the software contract if shorter. Theopening balance sheet under IFRS includes a similar reclassification of £0.4million. IAS 21 The Effects of Changes in Foreign Exchange Under IFRS, translation differences arising from the date of transition to IFRSthat are permitted to be taken to reserves must be tracked in a separate foreignexchange reserve. Foreign exchange taken to reserves relating to translation offoreign equity investments must be recycled to the income statement on disposalof the investment. The Group has elected to take the exemption, permitted under the transitionalrules, of not applying IAS 21 retrospectively; this has allowed the Group toreset to zero its historic foreign exchange reserve at 1 January 2004 of £12.3million by means of a reclassification to retained earnings. The gain or loss onany subsequent disposal of a foreign subsidiary will be adjusted only by thoseaccumulated translation adjustments arising after 1 January 2004. (a) Income statement for the year ended 31 December 2004 Previously IFRS 2 IFRS 3 IAS 10 Other Restated reported share Business Dividends under IFRS under based combin- UK GAAP payments ations £'000 £'000 £'000 £'000 £'000 £'000 ------- ------- ------- ------- ------- -------Revenue 119,248 - - - - 119,248Cost of sales (60,270) (144) - - - (60,414) ------- ------- ------- ------- ------- -------Gross profit 58,978 (144) - - - 58,834 - - -Distributioncosts (30,362) (86) - - - (30,448)Goodwillamortisation (3,792) - 3,792 - - -Administrativeexpensesexcludinggoodwillamortisation (16,275) (209) - - 534 (15,950) ------- ------- ------- ------- ------- -------Operatingprofit 8,549 (439) 3,792 - 534 12,436 Finance (34) - - - - (34)costs ------- ------ ------- ------- ------- -------Profit beforetax 8,515 (439) 3,792 - 534 12,402Tax (2,995) 160 - - (190) (3,025) ------- ------- ------- ------- ------- -------Profit aftertax 5,520 (279) 3,792 - 344 9,377Dividends (1,221) - - 296 - (925) ------- ------- ------- ------- ------- -------Profit for theyear 4,299 (279) 3,792 296 344 8,452 ------- ------- ------- ------- ------- -------Earnings pershare - basic 2.98p 5.07pEarnings pershare - diluted 2.96p 5.02p ------- ------- (b) Balance sheet as at 1 January 2004 (date of transition) Previously IFRS2 IAS 10 IAS 38 IAS 21 Restated reported share Dividends Intangible Foreign under under based assets exchange IFRS UK GAAP payments reserve £'000 £'000 £'000 £'000 £'000 £'000 ------- ------- -------- ------- ------- -------Non-currentassetsGoodwill 69,206 - - - - 69,206Otherintangibleassets - - - 390 - 390 Property,plant andequipment 1,649 - - (390) - 1,259 ------- ------- -------- ------- ------- -------Totalnon-currentassets 70,855 - - - - 70,855 ------- ------- -------- ------- ------- -------CurrentassetsTrade andotherreceivables 7,910 - - - - 7,910Cash and cashequivalents 9,738 - - - - 9,738 ------- ------- -------- ------- ------- -------Total currentassets 17,648 - - - - 17,648 ------- ------- -------- ------- ------- -------Total assets 88,503 - - - - 88,503 ------- ------- -------- ------- ------- ------- CurrentliabilitiesTrade andother (19,084) - - - - (19,084)payablesDividend toshareholders (944) - 944 - - -Current taxliability (3,987) - - - - (3,987) ------- ------- -------- ------- ------- -------Total currentliabilities (24,015) - 944 - - (23,071) ------- ------- -------- ------- ------- -------Total assetsless currentliabilities 64,488 - 944 - - 65,432 ------- ------- -------- ------- ------- -------Non-currentliabilitiesRetirementbenefitsobligation (13,213) - - - - (13,213)Non-currenttaxliabilities (2,359) - - - - (2,359)Deferred taxliabilities (1,296) - - - - (1,296)Long-termprovisions (1,884) - - - - (1,884)Othernon-currentpayables (1,028) - - - - (1,028) ------- ------- -------- ------- ------- -------Totalnon-currentliabilities (19,780) - - - - (19,780) ------- ------- -------- ------- ------- -------Total assetsless totalliabilities 44,708 - 944 - - 45,652 ------- ------- -------- ------- ------- ------- EquityShare capital 47,198 - - - - 47,198Share premiumaccount 38,009 - - - - 38,009Shares to beissued 2,166 - - - - 2,166Sharecompensationreserve - 177 - - - 177Own shares (970) - - - - (970)Hedging andtranslationreserves (12,338) - - - 12,338 -Other reserves 12,747 - - - - 12,747Retainedearnings (42,104) (177) 944 - (12,338) (53,675) ------- ------- -------- ------- ------- -------Total 44,708 - 944 - - 45,652equity ------- ------- -------- ------- ------- ------- (c) Balance sheet as at 31 December 2004 Previously IFRS 2 IFRS 3 IAS 10 reported Share Business Dividends under based Combinations UK GAAP payments £'000 £'000 £'000 £'000 ---------- -------- -------- --------Non-current assetsGoodwill 62,317 - 3,792 -Other intangible assets - - - -Property, plantand equipment 1,789 - - - ---------- -------- -------- --------Totalnon-currentassets 64,106 - 3,792 - ---------- -------- -------- --------Current assetsTrade and otherreceivables 12,575 160 - -Cash and cashequivalents 14,510 - - - ---------- -------- -------- --------Total currentassets 27,085 160 - - ---------- -------- -------- --------Total assets 91,191 160 3,792 - ---------- -------- -------- --------Current liabilitiesTrade and otherpayables (24,756) - - -Dividend toshareholders (1,240) - - 1,240Current taxliability (4,722) - - - ---------- -------- -------- --------Total currentliabilities (30,718) - - 1,240 ---------- -------- -------- --------Total assetsless currentliabilities 60,473 160 3,792 1,240 ---------- -------- -------- --------Non-current liabilitiesRetirementbenefitsobligation (11,383) - - -Non-current taxliabilities (1,859) - - -Deferred taxliabilities (1,111) - - -Long-termprovisions (1,774) - - -Othernon-currentpayables (686) - - - ---------- -------- -------- --------Totalnon-currentliabilities (16,813) - - - ---------- -------- -------- --------Total assetsless totalliabilities 43,660 160 3,792 1,240 ---------- -------- -------- --------EquityShare capital 47,256 - - -Share premiumaccount 38,026 - - -Shares to beissued 185 - - -Sharecompensationreserve - 616 - -Own shares (970) - - -Hedging andtranslationreserves (14,083) - - -Other reserves 12,747 - - -Retainedearnings (39,501) (456) 3,792 1,240 ---------- -------- -------- --------Total equity 43,660 160 3,792 1,240 ---------- -------- -------- -------- IAS 38 IAS 21 Other Restated Intangible Foreign Under Assets Exchange IFRS Reserve £'000 £'000 £'000 £'000 ---------- -------- -------- --------Non-current assetsGoodwill - - - 66,109Other intangibleassets 392 - - 392Property, plant andequipment (392) - - 1,397 ---------- -------- -------- --------Total non-currentRelated Shares:
MMC.L