Final Results

1st Mar 2006 07:00

1 March 2006LogicaCMG reports strong full year 2005 results Strong results in line with expectations with basic earnings per share of 7.4pAdjusted basic earnings per share of 7.6p, up 18.8% on the previous yearOperating profit of ‚£120.1 million- Adjusted operating profit of ‚£121.7 million, up 23.9%- Revenue growth across the Group of 10.6% of which 5.3% was organic- IT Services revenues (86% of Group total) grew by 11.1% (4.9% organically)delivering a full year operating margin of 6.8% (2004: 7.0%)- Telecoms Products# revenues (14% of Group total) increased by 7.3% deliveringa full year operating margin of 5.5% (2004: (0.7)%)- Full year book-to-bill ratio of 1.27:1 (2004: 1.13:1)- Full year cash conversion of 149% (2004: 122%)Two major strategic moves:- Acquisition of Unilog completed on 13 January 2006: now the 4th largest ITservices business in France- Acquisition of Edinfor in Iberia in April 2005: the business continued todevelop well in the second halfFinal dividend of 3.2p, giving 5.31p for the full year, up from 5.10p in 2004,when adjusted for the rights issue Commenting on the results, Dr Martin Read, Chief Executive, said: "In 2005 we achieved a significant improvement in operating profit and took twomajor strategic steps forward in shaping the future of the LogicaCMG Group. "Our IT services businesses in the United Kingdom and The Netherlands onceagain performed well, with a marked improvement in second half year operatingmargins. We have continued to develop our global delivery capability,including our facility in Bangalore, India, which now has more than 2,000employees. "Our Telecoms Products# business built on its first half year improvement withfurther revenue growth and increased margin. "Our strategic acquisitions in France and Iberia have given us a much strongerand more balanced platform for the development of the group. The Unilogtransaction in particular creates in France a third major revenue and profitgenerator for LogicaCMG and provides us with an improved platform for buildinga profitable business in Germany. "The combination of improving market conditions, increased scale and a broadergeographic footprint should enable the LogicaCMG group to make further progressin 2006." # The business previously reported as Wireless Networks will henceforth bereferred to as Telecoms Products, reflecting that many of its customers andprospects in a converging market are fixed line and cable operators, not justwireless companies. Financial HeadlinesFor the year ended 31 December 2005, LogicaCMG plc financial results under IFRSwere as follows: Basic earnings per share were 7.4p (2004: 2.9p)Adjusted basic earnings per share of 7.6p (2004: 6.4p)Book to bill ratio 1.27:1 (2004: 1.13:1)Revenue was ‚£1,834.1 million (10.6% higher than 2004)Operating profit was ‚£120.1 million compared to ‚£78.6 million in 2004Adjusted operating profit was ‚£121.7 million (23.9% higher than 2004)Group adjusted operating margin was 6.6% (up from 5.9% in 2004)- IT services adjusted operating margin at 6.8% (down from 7.0% in 2004)- Telecoms Products adjusted operating margin of 5.5% (compared to (0.7)% in2004)Profit before tax was ‚£105.6 million (2004: ‚£63.7 million)Cash generated from operations was ‚£167.0 million- Net cash inflow from trading operations was ‚£180.8 million, a cash conversionof 149% (up from 122% in 2004)Net debt at 31 December 2005 stood at ‚£96.1 million (‚£219.2 million at 1January 2005)Final dividend of 3.2p making a total for the year of 5.31p (2004: 5.10p) Notes: 1. Adjusted earnings per share is based on net profit attributable toordinary shareholders, excluding the following items:- discontinued operations- exceptional items- mark-to-market gains and losses on financial assets and financial liabilitiesdesignated at fair value through profit or loss- amortisation of those intangible assets initially recognised at fair value ina business combination- tax on those items, where applicable2. Adjusted operating profit and margin are from continuing operations and,where applicable, before exceptional items and amortisation of those intangibleassets initially recognised at fair value in a business combination. FY 05 FY 04 Growth Operating profit 120.1 78.6 52.8% Add back impact of: Exceptional items (net) 0.6 19.6 Intangible amortisation 1.0 - Adjusted operating profit 121.7 98.2 23.9% 3. Net cash inflow from trading operations is cash generated from operationsbefore project financing and cash flows from restructuring charges and otherexceptional items. Cash conversion represents net cash inflow from tradingoperations divided by adjusted operating profit.4. Earnings per share and dividends per share comparatives have been restatedto reflect the bonus element of the rights issue. For further information please contact: Carolyn Esser - media relations 020 7446 1786 (mobile: 07841 602391)Tony Richards/Frances Gibbons - investor relations 020 7446 4341 (mobile:07733 260393)Toby Mountford - Citigate Dewe Rogerson 020 7638 9571 (mobile: 07710 356611)Seb Hoyle - Citigate Dewe Rogerson 020 7638 9571 (mobile: 07799 476804) NOTE: High resolution images are available for the media to view and downloadfree of charge from www.vismedia.co.uk OVERVIEW The gradual recovery in the market for IT services continued through 2005. Thekey drivers for our customers in generating growth and value remained costcontrol, risk management and process improvement. The increased demand for IT services is causing labour markets to tighten. Theability to deploy resources on a global basis is now a key factor in fulfillingthe needs of customers. In this climate, we have been recruiting in all of ouroperations, focusing on in-demand skills and new graduates, while our nearshoreand offshore facilities continue to grow rapidly. Order intake in the first half of 2005 was exceptionally strong including ourlargest ever order, for Energias de Portugal (EDP), and a high concentration ofother outsourcing contracts. The balance in the second half was more towardsprofessional services work, to the more immediate benefit of operatingmargins. The full year book to bill ratio of 1.27:1 was significantly higherthan the previous year (1.13:1). Revenues of ‚£1,834.1 million were up 10.6% of which 5.3% was organic. Theadjusted operating margin was 6.6%, up from 5.9% last year. For the year ended31 December 2005, the profit before tax was ‚£105.6 million compared with ‚£63.7million last year. We undertook a review of property assets across the Group,crystallising embedded gains on some and providing for onerous leases onothers. The net impact of these actions was an expense of ‚£0.6 million and isseparately identified within operating profit as exceptional items. Basicearnings per share from continuing operations were 7.4p (2004: 4.1p). Adjustedbasic earnings per share were 7.6p (2004: 6.4p). IT Services revenues in reported currency grew by 11.1% over the correspondingperiod last year, and 4.9% on an organic basis, driven by the performances inthe UK and The Netherlands. Outsourcing represented 30% of IT Servicesrevenues compared to 27% in 2004. In the UK, high utilisation rates, effective use of offshore resources andlower materials revenues contributed to higher second half margins asexpected. The Netherlands had a strong second half, benefiting from higherutilisation rates and a stabilisation in the use of contractors. Our existing French business has benefited from the improving marketenvironment and completed its previously planned rationalisation. Germanyremained difficult, although revenues were stable in the second half comparedto the first half. In Iberia, the Edinfor business continued to develop wellthrough the second half. Our Telecoms Products business continued to see good demand for its messagingproducts with further significant upgrades to Internet-based working andadditional capacity for operators in developing countries. Newer technologieshave still to attain consistent, demand-driven growth, but investment byoperators is increasing around areas such as IP voicemail, content managementand delivery, and intelligent payments, allowing some revenue growth andfurther operating margin expansion in the second half. Overall staffing levels grew to 21,340 at 31 December, with the largest growthin our global delivery centres and net headcount in our key European operationsstable. STRATEGIC DEVELOPMENT Strategically we have taken two significant steps during 2005. First withEdinfor, the acquisition we completed during the first half, we won a majoroutsourcing contract against the strongest international competition. Oursecond and largest step has been the Unilog acquisition which significantlyincreases our scale and geographic balance. Unilog is one of the most consistently successful and profitable IT servicescompanies in France. It employs some 8,000 highly motivated people who havedeveloped excellent long-term relationships with their customers. Indeed, 39out of the top 40 listed French companies (CAC 40) are customers of Unilog, the40th being one of its competitors. Unilog's business in Germany, after adifficult period during the market downturn, is now growing profitably oncemore, helped by the successful integration of the Avinci business, which itacquired in 2004. The addition of Unilog, which formally joined the Group on 13 January 2006,creates in France a third major revenue and profit generator for LogicaCMG andprovides us with an improved platform for building a profitable business inGermany. At the end of the public tender period for Unilog shares, we held almost 97% ofthe shares. We also agreed with the management of Avinci in Germany that theirearn-outs would now be based on the combined performance of our operationsthere. The integration process was therefore able to get underway immediatelyin accordance with our plans. In line with our initial estimate in September2005, we have confirmed overall annualised cost-savings of ‚£19 million, with aprojected implementation cost of ‚£28 million. We also believe there is goodscope for revenue synergies as we cross-sell our respective skills and leveragecustomer relationships. Indeed, we have already made our first joint bids withUnilog to customers in France which has confirmed our view that the combinationwill be a powerful force. OUTLOOK The gradual recovery in the market for IT services continued through 2005. Itwas characterised by sustained volume increases accompanied by a growing demandfor more efficient delivery models. Following our acquisitions of Edinfor andUnilog, we enter 2006 with greater scale and a much stronger European platform. We expect market trends for IT Services in 2006 to be similar to 2005. Increasing demand and more appetite for value, efficiency and risk mitigationin our major markets will generate further organic revenue growth. TheTelecoms Products business will continue to balance some decline in the moremature technologies with growth in emerging technologies and markets. The combination of improving market conditions, increased scale and a broadergeographic footprint should enable the LogicaCMG group to make further progressin 2006, in line with current market expectations. REVIEW OF OPERATIONS * Operating profit and margin figures asterisked in the following tables arefrom continuing operations and, where applicable, before exceptional items andamortisation of those intangible assets initially recognised at fair value in abusiness combination. UNITED KINGDOM FY 05 % Growth % GrowthRevenue by market sector ‚£'m % share H2 on H1 Year-on-Year Public Sector 329.5 0.5 46.3 (4.0) Industry, Distribution & 121.2 33.0 17.0 18.0Transport Energy & Utilities 147.8 3.1 20.8 (37.0) Financial Services 64.2 16.5 9.0 5.1 Telecommunications 49.3 (20.2) 6.9 2.9 Total 712.0 4.8 100.0 (7.6) H1 05 H2 05 FY 05 FY 04 Operating Margin* 9.4% 13.3% 11.3% 11.6% The United Kingdom business grew revenues by 5% in 2005 and maintained strongoperating margins. At 11.3%*, this was down slightly from the 2004 levels asexpected and was impacted by the higher level of material revenues in the firsthalf. The strong margin improvement in the second half reflected the return tonormal levels of material revenues, good utilisation of our staff and astrengthening in professional services revenues. The UK is the most competitive market in Europe and the most advanced inoffshore maturity. The key to LogicaCMG's sustained margins has been theprogressive remixing of the skills base and the location of those skills aspart of a blended onshore, nearshore and offshore delivery model. Within theUK, overall staffing levels are stable. However, a growing proportion islocated in our delivery hub in South Wales. Recruitment locally is focused onsector specific domain knowledge and programme and change management ledconsulting skills. Meanwhile, we currently have more than 1,000 people inIndia working on UK-based business. The Public Sector was stable following several years of very high growth. Within this sector, Space & Defence had a strong second half, partly due to theramp up on the Atlas programme for the Defence Information Infrastructure. Wesecured additional sub-contract revenues from the National Health Serviceprogramme during the year and contract extensions from existing customers suchas the Crown Prosecution Service, Medical research Council and the Health &Safety Executive were an important part of the mix. Looking forward, theGovernment Shared Services strategy is creating new opportunities in bothcentral and local government. Strong growth of 33% in Industry, Distribution & Transport was driven primarilyby the transport sector where professional services increased and a number ofnew outsourcing contracts were signed, of which Transport for London was thelargest. Growth in Energy & Utilities was relatively muted with much of the businessgenerated from existing long-term contracts. The second half was impacted bylower materials revenue. The rise in prices of raw materials has impacted somebudgets at the energy providers and increased the focus on outsourcing andoffshore delivery. Our drive into the automated metering market withinnovative new solutions suffered some slippage as a result, but pilots are nowunderway and tender opportunities are in the pipeline. Financial Services continued its recovery with revenues up 17%. Demand forprofessional services improved steadily through the year, while our majoroutsourcing contract with global insurance broker, Aon, was extended further. This account, together with another major win at Legal & General, demonstrateclearly how customers are increasingly balancing the desire for cost reductionwith the need to improve service levels. Telecommunications had a much better second half despite the continuedchallenge of cost reduction targets in our major accounts. The order book atthe end of 2005 was also substantially improved. It also began to build abusiness in the media sector, including a consultancy project for the BBC. THE NETHERLANDS Revenue by market sector FY 05 % Growth % share % Growth ‚£'m Year-on-Year H2 on H1 Public Sector 111.7 15.2 27.3 8.0 Industry, Distribution & 98.7 3.0 24.1 16.4Transport Energy & Utilities 46.0 (5.2) 11.2 (18.2) Financial Services 127.9 25.4 31.2 3.0 Telecommunications 25.3 2.4 6.2 5.7 Total 409.6 11.3 100.0 4.9 H1 05 H2 05 FY 05 FY 04 Operating Margin* 6.4% 12.0% 9.3% 9.5% The Dutch business continued to grow strongly in the second half. On a fullyear basis, revenues were up 11%. As expected, the operating margin in thesecond half improved significantly with better utilisation of its own staff andthe number of contractors stabilising. Tight labour markets and growing demandfor highly skilled consultants and project managers make it difficult to bringdown the absolute number of contractors in the short term and have necessitatedinvestment in innovative recruitment programmes and master-classes. At thesame time, we are encouraging customers to move more of their standardised workto our nearshore and offshore facilities, under the close supervision of localprogramme managers. The Public sector performed well with both revenues and orders growing. Government renewal is a central theme in the Dutch economy with IT as animportant enabler. Areas of particular success in 2005 for LogicaCMG includedpublic safety and security, healthcare, internal affairs, infrastructure andspace. Large SAP-based projects at the ministries of Defence and Traffic &Transport continued to progress successfully, while we won significant softwaredevelopment projects from the Dutch Tax & Customs Authority (for cashcollection) and the Council for the Judiciary. Outsourcing is becoming a moreprevalent delivery model with shared service centres seen as a way to reduceadministrative costs. Examples here included electronic procurement and anEnterprise Content Management system, both for seven ministries. At the Centrefor Work and Income (CWI) we have implemented a SAP-based HR/Payroll system. We also leveraged our UK-based heritage to secure a number of contracts relatedto the Galileo satellite programme. Recovery in the Industry, Distribution & Transport sector gained furthermomentum, notably in the transport and logistics arena, as customers sought toaddress globalisation in their markets by reducing direct costs and achievinggreater flexibility in their staffing, including outsourcing of someprocesses. Wins at DSM and Hagemeyer in the first half were joined by a majorHR/Payroll contract with PCM Uitgevers, the third-largest newspaper andmagazine publisher in the Netherlands. This sector also benefited from itsshare of the Middle East project to design and implement a national identitycard scheme based on biometrics, for which the Netherlands is our centre ofexcellence. Energy & Utilities declined somewhat, although we are leveraging our strongpositioning with the top four energy suppliers and the market operator to applymore of our international expertise. Compliance, for instance, is a growingissue where we have a strong track record across multiple sectors. At the sametime, recognising that this sector is consolidating internationally, we havebegun to develop business with a wider range of clients. While manymultinational companies are well advanced in their plans to use offshoreresources for some application management, the volatility of the regulatoryenvironment has generally led to a relatively low appetite for offshoreservices to date across the sector as a whole. Supporting the transition tofully unbundled energy supply and retailing scheduled for 1 January 2008 willcontinue to drive the demand for operational efficiency and thereby ourservices. In Financial Services, we continue to benefit from our market leadershipposition and from a good match between our areas of expertise and currentcustomer priorities. These include risk and compliance, payments, channelmanagement (including voice and Internet integration) and test managementservices. Outsourcing, including access to offshore resource, is a growingfactor but one where banks and insurers are careful to balance the pursuit ofcost efficiencies with access to proven knowledge of specialised processes. This has enabled us to extend our business with major customers such as ABNAMRO and ING both locally and on an international basis. Telecommunications revenues improved somewhat even though the size of theavailable local market continued to contract as a result of internationalconsolidation amongst the operators and the high penetration of long termoutsourced arrangements. We are concentrating increasingly on providingspecific and innovative solutions on a project basis to maximise our return. In particular, we are well-positioned to meet the demand for converged services(voice, data and video) that exploit Internet Protocol (IP) working. We haveused nearshore resources on one contract this year and believe our blendeddelivery model will be important to maintaining our position in this verycompetitive marketplace. GERMANY FY 05 % Growth % GrowthRevenue by market sector ‚£'m % share H2 on H1 Year-on-Year Public Sector 0.4 (50.0) 0.5 (100.0) Industry, Distribution & 33.6 (14.1) 42.7 (1.2)Transport Energy & Utilities 11.7 (24.5) 14.8 (27.9) Financial Services 29.4 3.5 37.3 5.6 Telecommunications 3.7 (54.3) 4.7 64.3 Total 78.8 (14.3) 100.0 (2.0) H1 05 H2 05 FY 05 FY 04 Operating Margin* (14.6)% (15.4)% (15.0)% (16.1)% Revenues stabilised in the second half but efforts to recruit more skilledstaff were impeded to a degree by uncertainty around the Unilog transaction. Second half losses were similar to those in the first half, worse than ourexpectation. Losses are concentrated in the "industrial middle market" wheresignificant pricing pressure remains except for areas of high level industryconsulting or specialised sector skills. Improving this area is the primefocus for the Unilog integration process. Performance in outsourcing was satisfactory with important renewals andextensions won with Inbev and SWB. A new contract was signed with Altana, amajor pharmaceutical enterprise. Financial Services revenues grew 4%. The traditional strength in risk andcompliance, including the company's SAMBA product portfolio, remained a keydriver and it is now making greater headway with application management andoutsourcing. During the year, it secured its first major contract with aninternational bank to both take over part of their business process andprogressively to deploy offshore resource on the service delivery. Plannedmergers in the sector will inevitably drive greater interest in such businessmodels, so this is a valuable reference in building our credentials. FRANCE FY 05 % Growth % GrowthRevenue by market sector ‚£'m % share H2 on H1 Year-on-Year Public Sector 8.4 27.3 7.2 27.0 Industry, Distribution & 65.2 (2.5) 55.8 4.4Transport Energy & Utilities 3.7 85.0 3.2 (39.1) Financial Services 30.3 2.7 26.0 6.1 Telecommunications 9.1 2.2 7.8 (18.0) Total 116.7 2.5 100.0 2.6 H1 05 H2 05 FY 05 FY 04 Operating Margin* (6.4)% (2.0)% (4.2)% (3.4)% The improving market conditions in France coupled with completion of our ownrationalisation enabled growth to be restored in professional services, up 3%year-on-year. Strong growth in the Energy & Utilities sector was driven by a major newaccount, Dalkia, where we are implementing a mobile workforce application, andincreased business from EDF in Bordeaux. Performance in Financial Serviceswas up slightly as decline at ABN AMRO was offset by increased business withCredit Agricole. Public Sector business grew some 27% largely as a result oftwo major contracts with La Gendarmerie Nationale and Ministƒ¨re des Sport.Industry, Distribution and Transport had to compensate for an expected decreasein business from HP by consolidating positions at Auchan and Casino in theretail sector and revenues from the Eurocopter project won in 2004. Some progress has been made in raising the value-added element in the Frenchbusiness in areas such as mobile workforce and in HR/payroll outsourcing whichare projected to enjoy double-digit growth across all sectors in the yearsahead. These are valuable assets to take into the Unilog integration: but withnearly 70% of our French business still in time and materials work, the mergerwith Unilog offers by far the best route to improved utilisation andperformance for this business, as well as better job satisfaction and careerdevelopment for our people. IBERIA(EDINFOR) Revenue by market sector FY 05U H1 05U % share ‚£'m ‚£'m Public Sector 4.1 1.2 4.7 Industry, Distribution & 2.9 - 3.3Transport Energy & Utilities 72.9 16.9 82.8 Financial Services 3.7 1.3 4.2 Telecommunications 4.4 0.9 5.0 Total 88.0 20.3 100.0 H1 05U H2 05U FY 05U Operating Margin* 7.9% 7.8% 7.8% U Numbers are based on consolidation from the date of acquisition, 20 April2005. In the period since acquisition in late April, Edinfor has achieved or in somecases exceeded the targets set in our business plan. The transition phase ofthe outsource contract with EDP is progressing well and a key objective for2006 is to consolidate and develop the relationship further, includingimplementation of the Advanced Metering Infrastructure programme. Business development elsewhere has progressed well. In the broader Energy &Utilities market, Edinfor has redeveloped its UBS Utilities Customer Care &Billing system in the Oracle ERP suite following 10 years experience ofoperating systems for municipalities. We believe this to be an effectivealternative to SAP for the small-to-medium sized players. Together withLogicaCMG's unrivalled industry knowledge, it will form part of the thrust intothe Spanish market. Public Sector remains small, but with some promising opportunities,particularly around e-Identity technology. The process of acquiring Edinforenabled the company to establish contacts with senior Government officialswhich have been maintained. Financial Services is also relatively small andEdinfor is seeking to build on its evolving position at the insurer MAPFRE inSpain. The largest single contract outside of EDP during the year was won at ONI inthe Telecommunication sector where an outsourcing agreement gives access to keyinnovation programmes, as well as business processes that use the Edinforprinting and finishing competence centre. This provides an excellent referencefor growth in the sector. Evaluation continues of opportunities for enteringthe Industry, Distribution and Transport arena, concentrating initially onleveraging the company's SAP skills and track record. Staff numbers grew to 1,366 at the year end as opportunities were identified,the favourable publicity around the acquisition having created a positiverecruitment environment. OTHER MAINLAND EUROPE OPERATIONS FY 05 % Growth % GrowthRevenue by market sector ‚£'m % share H2 on H1 Year-on-Year Public Sector 2.7 (12.9) 4.5 25.0 Industry, Distribution & 6.8 (42.9) 11.3 34.5Transport Energy & Utilities 16.7 22.8 27.7 1.2 Financial Services 19.4 (17.4) 32.1 (28.3) Telecommunications 14.7 (16.9) 24.4 16.2 Total 60.3 (13.6) 100.0 (2.3) H1 05 H2 05 FY 05 FY 04 Operating Margin* (2.6)% (18.5)% (10.4)% 3.0% This region posted a significant loss in 2005 of ‚£6.3 million. While continuedlosses were expected in the Nordic & Baltics and Belgian operations, theCentral & Eastern European business suffered from a number of difficultprojects which are now substantially closed. The underlying Czech and Slovak based business performed reasonably well in amarket which is experiencing greater competition with the entry of moreoverseas players and where ownership of an increasing proportion of localassets is moving out of the countries. Public Sector business is still in theearly stages of development and revenue decline this year reflects primarilythe timing of new business given strong improvement in the order book in thesecond half. In Industry, Distribution and Transport, small initialassignments were secured with new customers such as Czech Airlines, CzechAirports, Siemens, Rexam and Pilsner Urquell, to set alongside continuingrevenues from major SAP-related projects such as the Prague Transport Companyand Lasselsberger. The company also won its first major SAP payrolloutsourcing contract with Motorpal, which is an important milestone in thedevelopment of this specialty. Revenues were stable in Energy & Utilities withnew wins at the Prague gas and electricity companies among others. FinancialServices revenues declined with the ending of a number of major projects, whileTelecommunications was broadly flat against a backdrop of disruptiveconsolidation in both sectors. In Belgium the best performances was in Energy & Utilities where the majorproject with Electrabel was extended during the year. Public Sector, FinancialServices and Telecommunications were stable. Headcount was up at the end ofthe year and we are continuing to recruit in the light of the stronger platformfor 2006 when the business is expected to be profitable. REST OF WORLD OPERATIONS FY 05 % Growth % GrowthRevenue by market sector ‚£'m % share H2 on H1 Year-on-Year Public Sector 14.5 72.6 12.7 10.1 Industry, Distribution & 14.8 (29.9) 13.0 (27.9)Transport Energy & Utilities 54.1 31.3 47.4 21.7 Financial Services 20.7 - 18.2 68.8 Telecommunications 9.9 45.6 8.7 (35.0) Total 114.0 16.1 100.0 12.7 H1 05 H2 05 FY 05 FY 04 Operating Margin* 1.3% 8.1% 4.9% 2.4% The Rest of World operations as a whole grew revenues and profits in 2005. Australia delivered very strong revenue growth and improved its margin throughgood utilisation of professional staff while benefiting from previous actionsto reduce overheads. The strongest growth was in the Public Sector driven bywork on electronic health records and document management in New South Walesand Queensland. Energy & Utilities also performed well with the IntegralEnergy outsource contract ramping up to full capacity together with a projecton retail and network separation for TXU Energy. Telecommunications grewmoderately with work on content management for Optus being of particular note. The Group's Asian operations had a good year culminating with the signing inDecember of its largest ever order with PT Natrindo Telepon Seluler (NTS), amobille telecoms operator in Indonesia. The contract, to be implemented over afour-year period, requires LogicaCMG to design, build and operate the ServicePlatform Network (SPN) as well as IT and Business Support Systems (BSS). LogicaCMG will also deliver programme management, system integration andmanaged services for the solutions. Growth in Energy & Utilities was largely driven by programmes for Shell. Financial Services was broadly stable with application management wins at Bankof Baroda, IndusInd Bank and ING Vysya Bank, and payments-related contracts atUnion Bank of India, Oriental Bank of Commerce and Bank of Baroda. In the Middle East, the project to provide a biometrics-based smart ID cardsystem for one of the nations is progressing well and more recently theopportunity has arisen to propose a similar system to another Government in theregion on which a decision is awaited. In the second half of the year, wesecured a contract from the National Bank of Iran to implement a nationalpayments infrastructure including Real Time Gross Settlement, securitiessettlement and cheque clearing. We are working with a trusted partner forlocal support and maintenance. The North American operations delivered a small profit for the year despitecontinued pricing pressure in the automotive sector. Energy & Utilitiesrevenues, the largest single component, were broadly stable. Subsequent to theyear end, we announced an agreement to acquire the operations and certainassets of Worksuite LLC, a member company of Severn Trent Plc, based inHouston, Texas. Worksuite has provided work management, scheduling and mobilecomputing solutions to the utilities industry for over 20 years and has asubstantial customer base of some 50 North American utilities. The combinationof the two companies will generate a number of exciting new solutions and theresult will be the leading integrated work and asset management solution forthe energy and utilities industry. TELECOMS PRODUCTS EMEA Asia Pacific Americas TOTAL Product area ‚£'m % ‚£'m % ‚£'m % ‚£'m % change change change change Messaging (SMS) 80.6 4.4 28.5 (18.1) 44.9 21.0 154.0 3.3 Multimedia/Internet 24.3 (4.3) 4.8 20.0 7.4 72.1 36.5 8.3 Unified Comms 8.7 11.5 3.8 8.6 6.2 87.9 18.7 28.1 Payment/Billing 24.0 43.7 15.7 (10.8) 5.8 3.6 45.5 14.0 TOTAL 137.6 8.3 52.8 (11.9) 64.3 27.8 254.7 7.3 H1 05 H2 05 FY 05 FY 04 Operating Margin* 1.0% 9.4% 5.5% (0.7)% Telecoms Products continued the improvement seen in the first half with helpfrom the normal seasonal demand for capacity upgrades ahead of Christmas andNew Year. For the year as a whole, revenues were up 7.3% and the marginimproved to 5.5%. Revenue decline in Asia Pacific largely reflects continuedreduction in Japan which mostly comprises maintenance on legacy systems. Someprice erosion in the mature products was mitigated by reductions in hardwarecosts through greater commonality of platform and the move to open sourceoperating software (LINUX). Existing customers of LogicaCMG's SMS text messaging systems continued toupgrade to the next generation offering. This both prepares them forimplementation of higher bandwidths capable of delivering a wider range ofcustomer services, and helps to reduce operating costs by enabling the use ofmore standardised Internet technology. The company has also been helping operators to get a better understanding oftheir customers' behaviour through deployment of business analysis tools. These enable proper segmentation and targeting of service offerings, as well asmore effective customer care, a major factor in reducing churn. Growth in multimedia messaging (MMS) continues to be limited and mostly drivenby machine to person traffic such as advertising. LogicaCMG is working withoperators to make person-to-person multimedia messaging an easier and moresatisfying user experience, but has recognised for some time that MMS is onlyone part of a broader requirement for systems that can deliver a variety ofcontent to users, including text, pictures, ring-tones, web pages, video, emailand instant messaging. Our uOne product portfolio is beginning to gain traction both by replacing oldvoicemail systems with ones based on Internet (IP) technology, and by providingvideomail and video portal facilities. Optimus in Portugal and Hutchison 3GAustria were notable customers in the second half of the year. This offeringis applicable to fixed line and cable companies as well as mobile operators. In November, we formally launched our Intelligent Charger product into themobile payments market as successful field trials at Vodafone Greececontinued. This product addresses a very real operator requirement which todate has proved elusive. It enables both pre and post paid payment methods onone phone with full management of credit and loyalty bonuses, and allows groupaccounts with separation of business and private usage. During the year, the company established its content and media business unitmore formally to drive forward the opportunities arising from the convergenceof fixed, mobile and broadcast media. At the same time, it has progressivelybeen moving from a business with a collection of product offerings to one witha coherent set of customer propositions. This includes a more modular andconsistent approach to product development as legacy systems are replaced, andintegration of third party offerings where appropriate. BOARD CHANGES As a result of the Unilog transaction and recognising its importance to thefuture development of the Group, we appointed two new board members in thelatter part of 2005. Gƒ©rard Philippot, the former Executive President ofUnilog, has joined the board as a non-executive director. Didier Herrmann,formerly Executive Vice President of Unilog, has also joined the LogicaCMGBoard in an executive capacity, responsible for our businesses in France,Germany and Switzerland. Unilog acquisition and related re-financing Completion of the acquisition of Unilog took place on 13 January 2006 followingthe successful public tender offer. The interest in Unilog will only beconsolidated from this date and therefore had no direct impact on 2005operational results. The Group's share of the post-tax profits of Unilog as anassociate for the period from 25 October to 31 December was ‚£2.3 million and isshown within a separate line item below operating profit. The Group's finances were restructured during the second half in light of theUnilog acquisition cost. ‚£388.7 million, net of expenses, was raised through afully underwritten 1 for 2 rights issue. The ‚£330 million revolving creditfacility due to expire in 2009 was replaced by a similar facility due to expirein 2010. In addition, a concurrent 5 year term loan of ¢â€š¬348 million wasagreed. The financing of the Unilog transaction increased the Group's net interestexpense by ‚£0.5 million in 2005. The principal constituents of this were theaccelerated amortisation of the set-up fees associated with the previousrevolving credit facility and the term loan interest cost, partially offset byinterest received on the rights issue proceeds. The rights issue resulted in the issuance of 375.5 million new ordinary sharesat a discounted price of 107 pence per share. The weighted average number ofshares used for earnings per share purposes of 898.7 million reflects the bonuselement within the rights issue. Accounting matters Following the results of the most recent triennial actuarial valuation of theCMG UK Pension Scheme, which was completed in December 2005, the deficit on thescheme as at 31 December 2004 has been revised from ‚£43.9 million to ‚£65.4million. The scheme deficit as previously reported was based on a roll-forwardof the defined benefit obligation from the formal actuarial valuation of thescheme as at 1 July 2002 using estimation techniques, as permitted under IFRS. The most recent actuarial valuation has shown that the use of estimationtechniques understated the defined benefit obligation at 31 December 2004compared to a comprehensive member-by-member assessment of the defined benefitobligation. As a consequence of the materiality of the adjustment, 2004comparative information has been amended, together with the associated deferredtax effect. The deficit on the scheme as at 31 December 2003 remainsunaffected by this revision. The balance sheet classification of the convertible bonds has changed to acurrent liability on adoption of IFRS. Under IFRS, a liability is classifiedas current when an entity does not have an unconditional right to defersettlement of a liability for at least twelve months after the balance sheet. The convertible bonds can be converted at the option of bond holders at anytime up until 5 September 2008 and therefore they have been classified as acurrent liability. The change in classification does not reflect any change inthe underlying terms of the bonds, which would still fall to be redeemed incash on 19 September 2008 if conversion into ordinary shares of the company hadnot occurred prior to this date. Cash flow and debt Cash generated from operations was ‚£167.0 million. The net cash inflow fromtrading operations was ‚£180.8 million, giving a cash conversion of 149% (2004:122%). Group net debt at 31 December 2005 was ‚£96.1 million, compared to ‚£219.2million at 1 January 2005. The reduction reflects the unutilised portion ofthe rights issue proceeds at the year end, which was used on 13 January 2006 inpayment for the Unilog shares tendered during the public offer. Followingcompletion of the Unilog acquisition, net debt was approximately ‚£330 million. Excluding the impact of the Unilog transaction and the rights issue, year endnet debt was ‚£231.0m reflecting the strong operating cash performance and theimpact of the property sale and leaseback transactions that generated ‚£8.3million of cash. DIVIDEND The interim 2005 and prior dividends have been restated to reflect the bonuselement of the rights. Accordingly, the dividends in respect of the year ended31 December 2004 of 5.8 pence per share have been restated to 5.10 pence pershare for comparative purposes. The directors have proposed a final dividend of 3.2 pence per share to be paidon 18 May 2006 to shareholders on the register at the close of business on 21April 2006. The final dividend of 3.2 pence per share together with therestated interim dividend of 2.11 pence per share brings dividends paid andproposed relating to 2005 to a total of 5.31 pence per share, representing a 4%increase over the previous year on the restated basis. Consolidated income statementFor the year ended 31 December 2005 2005 2004 Note ‚£'m ‚£'m Continuing operations: Revenue 2 1,834.1 1,658.4 Net operating costs (1,714.0) (1,579.8) Operating profit 120.1 78.6 Analysed as: Operating profit before exceptional items 2 120.7 98.2 Profit on property sale and leaseback 3 6.5 - Property reorganisation expense 3 (7.1) - Restructuring costs 3 - (17.8) Loss on disposal of business 3 - (1.8) Operating profit 2 120.1 78.6 Interest payable (24.2) (20.3) Interest receivable 7.5 5.4 Share of post-tax profits from associates 2.2 - Profit before tax 105.6 63.7 Taxation 5 (36.0) (28.8) Profit for the year from continuing operations 2 69.6 34.9 Discontinued operation: Loss from discontinued operation - (9.7) Net profit for the year 69.6 25.2 Attributable to: Equity holders of the parent 66.6 24.6 Minority interests 3.0 0.6 69.6 25.2 Earnings per share * p / share p / share - Basic 7 7.4 2.9 - Diluted 7 7.4 2.9 Earnings per share from continuing operations * - Basic 7 7.4 4.1 - Diluted 7 7.4 4.1 * Restated for the bonus element of the rights issue during 2005. Consolidated statement of recognised income and expenseFor the year ended 31 December 2005 2005 2004 ‚£'m ‚£'m Exchange differences on translation of foreign operations 6.4 (8.0) Cash flow hedges: - losses on cash flow hedges taken to equity (1.2) - - transferred to carrying amount of investment in associate 1.2 - Actuarial gains / (losses) on defined benefit plans 12.0 (18.3) Tax on items taken directly to equity (4.2) 9.4 Net income / (expense) recognised directly in equity 14.2 (16.9) Profit for the year 69.6 25.2 Total recognised income and expense for the year 83.8 8.3 Attributable to: Equity holders of the parent 81.5 7.7 Minority interests 2.3 0.6 83.8 8.3 Effects of changes in accounting policies Attributable to equity holders of the parent - increase in retained 0.8 -earnings Attributable to minority interests - - 0.8 - Consolidated balance sheet31 December 2005 2005 2004 ‚£'m ‚£'m Non-current assets Goodwill 383.4 357.3 Other intangible assets 25.3 9.1 Property, plant and equipment 102.5 76.5 Investments in associates and joint ventures 305.5 - Other investments 9.2 8.5 Retirement benefit assets 15.3 6.5 Deferred tax assets 36.0 33.3 877.2 491.2 Current assets Inventories 2.4 1.1 Trade and other receivables 649.2 567.0 Current tax assets 21.2 39.4 Cash and cash equivalents 245.3 104.9 918.1 712.4 Non-current assets classified as held for sale - 3.2 918.1 715.6 Current liabilities Convertible debt (205.0) (211.2) Other borrowings (18.5) (27.1) Trade and other payables (450.8) (365.2) Current tax liabilities (14.2) (27.9) Provisions (6.7) (13.6) (695.2) (645.0) Liabilities associated with non-current assets classified as held - (3.0)for sale (695.2) (648.0) Net current assets 222.9 67.6 Total assets less current liabilities 1,100.1 558.8 Non-current liabilities Borrowings (117.9) (66.6) Retirement benefit obligations (77.9) (79.1) Deferred tax liabilities (56.3) (45.3) Provisions (8.3) (6.2) Other non-current liabilities (1.0) (1.0) (261.4) (198.2) Net assets 838.7 360.6 Equity Share capital 114.6 75.1 Share premium account 1,084.8 707.3 Other reserves (379.3) (424.1) Total shareholders' equity 820.1 358.3 Minority interests 18.6 2.3 Total equity 838.7 360.6 Consolidated cash flow statementFor the year ended 31 December 2005 2005 2004 Note ‚£'m ‚£'m Cash flows from operating activities Net cash inflow from trading operations 180.8 119.6 Cash inflow from non-recourse financing - 5.0 Cash outflow related to property reorganisation expense (0.8) - Cash outflow related to restructuring activities (13.0) (23.7) Cash generated from operations 8 167.0 100.9 Interest paid (20.2) (16.9) Income tax paid (29.9) (26.2) Net cash inflow from operating activities 116.9 57.8 Cash flows from investing activities Interest received 3.5 2.0 Net proceeds on disposal of property, plant and equipment 10.6 3.0 Purchases of property, plant and equipment (30.2) (25.2) Expenditure on intangible assets (7.1) (5.0) Acquisition of subsidiaries (net of cash acquired) (37.2) (0.5) Acquisition of investment in an associate (266.8) - Disposal of investment in joint venture - 0.4 Disposal of business (1.1) - Net cash outflow from investing activities (328.3) (25.3) Cash flows from financing activities Proceeds from issue of new shares 391.2 1.5 Proceeds from sale of nil paid rights / treasury shares by ESOP 1.9 0.1trusts Purchase of treasury shares by ESOP trusts (1.9) - Proceeds from bank borrowings 242.8 24.4 Repayments of bank borrowings (225.6) (36.9) Repayments of finance lease principal (3.7) (3.6) Repayments of borrowings assumed in acquisitions (11.3) - Repayments of other borrowings (0.5) (1.3) Dividends paid to the company's shareholders (43.5) (41.9) Dividends paid to minority interests (0.9) (2.0) Net cash inflow / (outflow) from financing activities 348.5 (59.7) Net increase / (decrease) in cash and cash equivalents 137.1 (27.2) Cash and cash equivalents at the beginning of the year 9 106.6 134.7 Net increase / (decrease) in cash and cash equivalents 9 137.1 (27.2) Effect of foreign exchange rates 9 1.6 (0.9) Cash and cash equivalents at the end of the year 9 245.3 106.6 Accounting policies Basis of preparationThe financial information in this preliminary announcement has been extractedfrom the group's consolidated financial statements for the year ended 31December 2005. The group's consolidated financial statements have beenprepared in accordance with International Financial Reporting Standards('IFRS') adopted by the European Union at 31 December 2005, and those parts ofthe Companies Act 1985 ('the Act') that remain applicable to companiesreporting under IFRS, for the first time. The consolidated financialstatements have been prepared under the historical cost convention with theexception of certain items which are measured at fair value, as disclosed inthe accounting policies below. This preliminary announcement was approved by the Board of directors on 28February 2006. The financial information in this preliminary announcement doesnot constitute the statutory accounts of LogicaCMG plc ('the company') withinthe meaning of section 240 of the Act. The statutory accounts of the company for the year ended 31 December 2005,which include the group's consolidated financial statements for that year, wereunaudited at the date of this announcement. The auditor's report on thoseaccounts is expected to be signed following approval by the board of directorson 29 March 2006 and subsequently delivered to the Registrar of Companies afterthe Annual General Meeting on 17 May 2006. The statutory accounts for the yearended 31 December 2004 have been delivered to the Registrar of Companies. Theauditors' report on those accounts was unqualified and did not contain astatement under section 237 of the Act. On 17 May 2005, the group published an explanation of the impact of thetransition to IFRS together with restated comparative information for 2004under IFRS and reconciliations from UK generally accepted accounting principles('UK GAAP'). Certain adjustments have been made to the comparative balancesheet at 31 December 2004 since the announcement, the details of which areprovided in note 10 below. Transitional arrangementsThe accounting policies have been applied to all periods presented except forthose relating to the recognition, measurement, disclosure and presentation offinancial instruments, all matters dealt with in IAS 32 and IAS 39. The grouphas taken an exemption to apply IAS 32 and IAS 39 from 1 January 2005. Priorto this date, financial instruments have been accounted for under UK GAAP. Areconciliation of equity on adoption of IAS 32 and IAS 39 at 1 January 2005 isprovided in note 10.3. In addition, the group has taken the following optional exemptions contained inIFRS 1 in preparing the group's balance sheet on transition to IFRS at 1January 2004:Business combinations - IFRS 3 'Business Combinations' has been appliedprospectively from 1 January 2004.Cumulative translation differences - the cumulative translation differences forall operations have been set to zero at 1 January 2004 and exchange differencesarising prior to this date will not be recycled to the income statement. The group's policy for share-based payments has been applied to equityinstruments that were granted after 7 November 2002 and that had not vested onor before 31 December 2004. Adoption of new or revised standards prior to their effective dateThe group has adopted the amendments to IAS 19 'Employee Benefits' issued on 16December 2004 prior to their effective date of 1 January 2006. The amendmentspermit the group to recognise actuarial gains and losses in full through thestatement of recognised income and expense, and expands the disclosuresrequired in respect of the group's defined benefit pension schemes. The group has adopted the amendments to IAS 39 'Financial Instruments:Recognition and Measurement' issued on 16 June 2005 prior to their effectivedate of 1 January 2006. The amendments permit the group to designate afinancial instrument with one or more embedded derivatives as a financial assetor financial liability at fair value through profit or loss, with certainexceptions. The group has adopted the amendment early and has designated the2.875% 2008 convertible bonds at fair value through profit or loss with effectfrom 1 January 2005. Basis of consolidationThe consolidated financial statements include those of the company and all ofits subsidiary undertakings (together, 'the group'), and the group's share ofthe results of associates and joint ventures. Investments in associates andjoint ventures are accounted for using the equity method. Subsidiary undertakings are those entities controlled directly or indirectly bythe company. Control arises when the company has the ability to direct thefinancial and operating policies of an entity so as to obtain benefits from itsactivities. The results of subsidiaries acquired or sold are included in the consolidatedincome statement from the date of acquisition or up to the date of disposalrespectively, using the same accounting policies as those of the group. Allbusiness combinations are accounted for using the purchase method. On acquisition, the interest of any minority shareholders is stated at theminority's proportion of the fair value of the assets and liabilitiesrecognised. Subsequently, the minority interest in the consolidated balancesheet reflects the minority's proportion of changes in the net assets of thesubsidiary. A minority interest is not recognised in a subsidiary with netliabilities except to the extent that the minority has a binding obligation,and is able to make an additional investment, to cover cumulative losses. All intercompany transactions and balances are eliminated on consolidation. Non-current assets held for sale and discontinued operationsNon-current assets and disposal groups are classified as held for sale in thebalance sheet if their carrying amount will be recovered through a saletransaction rather than ongoing use but only if the sale is highly probable andis expected to complete within one year from the date of classification. Non-current assets and disposal groups held for sale are measured at the lowerof their carrying amount and fair value less costs to sell. The results of an operation that represents a separate major line of businessand either has been disposed of during the period or is classified as held forsale, are classified as discontinued operations. The post-tax profit or lossof the discontinued operation plus the post-tax gain or loss recognised on themeasurement of the assets and liabilities within the disposal group at fairvalue less costs to sell, is presented as a single amount on the face of theincome statement. Intangible assetsAll intangible assets, except goodwill, are stated at cost less accumulatedamortisation and any accumulated impairment losses. Goodwill is not amortisedand is stated at cost less any accumulated impairment losses. GoodwillGoodwill represents the excess of the cost of acquisition over the fair valueof the group's interest in the identifiable assets, liabilities and contingentliabilities acquired in a business combination. Goodwill previously writtenoff directly to reserves under UK GAAP prior to 1 July 1998 has not beenreinstated and is not recycled to the income statement on the disposal of thebusiness to which it relates. Development costsExpenditure incurred in the development of software products or enhancements,and their related intellectual property rights, is capitalised as an intangibleasset only when the future economic benefits expected to arise are deemedprobable and the costs can be reliably measured. Development costs not meetingthese criteria, and all research costs, are expensed in the income statement asincurred. Capitalised development costs are amortised on a straight line basisover their useful economic lives once the related software product orenhancement is available for use. Other intangible assetsIntangible assets purchased separately, such as software licences that do notform an integral part of related hardware, are capitalised at cost andamortised over their useful economic life. Intangible assets acquired througha business combination are initially measured at fair value and amortised overtheir useful economic lives. Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciationand any accumulated impairment losses. The cost of an item of property, plantand equipment comprises its purchase price and any costs directly attributableto bringing the asset into use. Depreciation is calculated on a straight-line basis to write down the assets totheir estimated residual value over their useful economic lives at thefollowing rates: Furniture 10 - 20% Computer equipment 25 - 33%Partitions and office equipment 10 - 20% Motor vehicles 25%Freehold property 2% Leasehold equipment and plant Life of lease The residual values and useful economic lives of property, plant and equipmentare reviewed annually. Freehold land and properties under construction are notdepreciated. Borrowing costs related to the purchase of fixed assets are notcapitalised. LeasesLeases are classified as finance leases whenever the terms of the leasetransfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognised as property, plantand equipment at an amount equal to the fair value of the leased assets or, iflower, the present value of minimum lease payments at the inception of thelease, and then depreciated over their useful economic lives. Lease paymentsare apportioned between repayment of capital and interest. The capital elementof future lease payments is included in the balance sheet as a liability. Interest is charged to the income statement so as to achieve a constant rate ofinterest on the remaining balance of the liability. Rentals payable under operating leases are charged to the income statement on astraight-line basis over the lease term. Operating lease incentives arerecognised as a reduction in the rental expense over the lease term. Impairment of assetsGoodwill is allocated to cash-generating units for the purposes of impairmenttesting. The recoverable amount of the cash-generating unit to which thegoodwill relates is tested annually for impairment or when events or changes incircumstances indicate that it might be impaired. The carrying values ofproperty, plant and equipment, investments measured using a cost basis andintangible assets other than goodwill are reviewed for impairment only whenevents indicate the carrying value may be impaired. In an impairment test, the recoverable amount of the cash-generating unit orasset is estimated to determine the extent of any impairment loss. Therecoverable amount is the higher of fair value less costs to sell and the valuein use to the group. An impairment loss is recognised to the extent that thecarrying value exceeds the recoverable amount. In determining a cash-generating unit's or asset's value in use, estimatedfuture cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value ofmoney and risks specific to the cash-generating unit or asset that have notalready been included in the estimate of future cash flows. InventoriesInventories represent computer equipment that, at the balance sheet date, hadnot yet been allocated to a specific customer contract and materials, includingwork-in-progress, used in document printing and finishing. Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and thoseoverheads that have been incurred in bringing the inventories to their presentlocation and condition. Net realisable value represents the estimated sellingprice less costs to be incurred in marketing, distribution and sale. Amounts recoverable on contractsAmounts recoverable on contracts represent revenue which has not yet beeninvoiced to customers on fixed price contracts. Such amounts are separatelydisclosed within trade and other receivables. The valuation of amountsrecoverable on contracts is adjusted to take up profit to date or foreseeablelosses in accordance with the accounting policy for profit recognition. Financial instrumentsThe following policies for financial instruments have been applied in thepreparation of the group's consolidated financial statements. For thosepolicies that have changed on adoption of IAS 32 and 39 on 1 January 2005,policies both before and after adoption are given. Cash and cash equivalentsFor the purpose of preparation of the cash flow statement, cash and cashequivalents includes cash at bank and in hand, and short-term deposits with anoriginal maturity period of three months or less. Bank overdrafts that are anintegral part of a group company's cash management are included in cash andcash equivalents where they have a legal right of set-off against positive cashbalances, otherwise bank overdrafts are classified as borrowings. Trade and other receivablesTrade and other receivables are stated at amounts receivable less any provisionfor recoverability. A trade or other receivable is derecognised from thebalance sheet when the group enters into a financing transaction whichtransfers to a third party all significant rights or other access to benefitsrelating to that asset, and all significant exposures to the risks inherent inthat asset. Non-recourse financing (1 January 2004 to 31 December 2004)For non-recourse financing arrangements that did not meet the criteria forfinancial asset derecognition, a linked presentation has been adopted wherecriteria, set out in the UK accounting standard FRS 5 'Reporting the substanceof transactions', were met. Under a linked presentation, the financing wasshown as a deduction from the gross amount of the financial asset to which itrelated either on the face of the balance sheet or, if not material to thebalance sheet, in the notes to the financial statements. Non-recourse financing (1 January 2005 onwards)A linked presentation is not permissible under IFRS standards. Financing oftrade or other receivables shown under a linked presentation prior to 1 January2005 are treated as borrowings on and after that date. Borrowings (1 January 2004 to 31 December 2004)Borrowings, including convertible debt, were recognised initially at fairvalue, net of transaction costs incurred. The finance costs of debt wereallocated to financial periods and charged to the income statement over theterm of the borrowings at a constant rate on the carrying amount. Accruedfinance costs were included in accruals rather than in the carrying amount ofthe borrowing to the extent that they were due to be paid in cash within oneyear. Conversion of debt was not anticipated and the finance cost of convertible debtwas calculated on the basis that the debt would never be converted. Thecarrying value of convertible debt is stated separately from that of otherborrowings on the face of the balance sheet. Borrowings (1 January 2005 onwards)Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated either at amortised cost or, ifdesignated as such, at fair value through profit or loss. For borrowings stated at amortised cost, any difference between the proceeds,net of transaction costs, and the redemption value is recognised in the incomestatement over the period of the borrowings using the effective interest ratemethod. The group's euro-denominated convertible bonds have been designated as afinancial liability at fair value through profit or loss. The change in thefair value of the convertible bonds that reflects the movement in the quotedmarket price of the convertible bonds is recognised in the income statement aseither interest income or expense. The change in fair value relating to themovement of the exchange rate between the euro and pounds sterling is treatedas a hedge of net investments in foreign operations (see below). Foreignexchange gains and losses on the convertible bonds are taken directly to equityto the extent that the hedge is effective. Derivative financial instruments and hedging activities (1 January 2004 to 31December 2004)The group uses forward foreign exchange contracts to reduce exposure to foreignexchange risk. The group considered these financial instruments to be hedgeswhen the following criteria were met:- the financial instruments must be related to a specific foreign currencyasset or liability that is probable and whose characteristics have beenidentified;- it must involve the same currency as the hedged item; and- it must reduce foreign currency risk on the group's operations. Gains and losses on hedges of existing assets and liabilities were included inthe carrying amount of those assets or liabilities and are recognised in theprofit and loss account. Gains and losses on qualifying hedges or firmcommitments or anticipated transactions were classified as deferred andrecognised in the profit and loss account or as adjustments in the carryingamount of the transaction when it occurred. Gains and losses on financialinstruments that did not qualify as hedges were recognised as other income orexpense. Derivative financial instruments and hedging activities (1 January 2005onwards)Derivatives are initially recognised at fair value on the date a contract isentered into and are subsequently re-measured at fair value. The fair valuesof derivatives are measured using observable market prices or, where marketprices are not available, by using discounted expected future cash flows atprevailing interest rates and exchange rates. The gain or loss onre-measurement is taken to the income statement except where the derivative ispart of a designated cash flow hedge or a designated hedge of a net investmentin a foreign operation. The effective portion of changes in the fair value of derivatives that aredesignated and qualify as a cash flow hedge of a firm commitment or forecastedtransaction are recognised directly in equity. The gain or loss relating tothe ineffective portion of a cash flow hedge is recognised immediately in theincome statement. If the cash flow hedge results in the recognition of an asset or liability,then the associated gains or losses on the derivative that had previously beenrecognised in equity are included in the measurement of the asset or liabilityat the time the asset or liability is recognised. For cash flow hedges that donot result in the recognition of an asset or a liability, amounts deferred inequity are transferred to the income statement in the same period as theunderlying transaction occurs. Where the group hedges net investments in foreign entities through currencyborrowings or derivative financial instruments, the gains or losses on thetranslation of the borrowings or change in fair value of the derivative arerecognised in equity. Gains and losses accumulated in equity are included inthe income statement when the foreign operation is disposed of. Changes in the fair value of derivative financial instruments that are notdesignated as a hedging instrument or do not qualify for hedge accounting arerecognised in the income statement as they arise. TaxationCurrent tax is recognised based on the amounts expected to be paid or recoveredunder the tax rates and laws that have been enacted or substantively enacted atthe balance sheet date. Deferred tax is provided in full on temporary differences that arise betweenthe carrying amounts of assets and liabilities for financial reporting purposesand their corresponding tax bases. Liabilities are recorded on all temporarydifferences except in respect of investments in subsidiaries and joint ventureswhere the timing of the reversal of the temporary difference is controlled bythe group and it is probable that it will not reverse in the foreseeablefuture. Deferred tax assets are recognised to the extent that it is probable thatfuture taxable profits will be available against which the asset can be offset. Deferred tax is measured on an undiscounted basis using the tax rates and lawsthat have been enacted or substantively enacted at the balance sheet date. Current and deferred tax are recognised in the income statement, except whenthe tax relates to items charged or credited directly to equity, in which casethe tax is also dealt with directly in equity. ProvisionsProvisions are recognised for restructuring costs when the group has a detailedformal plan for the restructuring that has been communicated to affectedemployees. Provisions are recognised for future committed property leasepayments when the group receives no benefit from the property throughcontinuing usage and future receipts from any sub-letting arrangements are notin excess of the group's future committed payments. Where the time value of money is material, provisions are measured at thepresent value of expenditures expected to be paid in settlement. Foreign currenciesThe presentation currency of the group is pounds sterling. Items included inthe separate financial statements of group entities are measured in thefunctional currency of each entity. Transactions denominated in foreigncurrencies are translated into the functional currency of the entity at therates prevailing at the dates of the individual transactions. Foreign currencymonetary assets and liabilities are translated at the rates prevailing at thebalance sheet date. Exchange gains and losses arising are charged or creditedto the income statement within net operating costs. The income statement and balance sheet of foreign entities are translated intopounds sterling on consolidation at the average rates for the period and therates prevailing at the balance sheet date respectively. Exchange gains andlosses arising on the translation of the group's net investment in foreignentities, and of borrowings designated as hedges of such investments, arerecognised as a separate component of shareholders' equity. On disposal of aforeign entity, the cumulative translation differences are recycled to theincome statement and recognised as part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the rates prevailing at the balance sheet date. The most important foreign currency for the group is the euro. The relevantexchange rates to pounds sterling were: 2005 2004 Average Closing Average Closing ‚£1 = ¢â€š¬ 1.46 1.46 1.47 1.41 Government grantsGrants related to assets are recognised initially as deferred income andsubsequently credited to the income statement on the same basis that therelated assets are depreciated. Grants related to income are credited to theincome statement over the periods necessary to match them with the relatedcosts which they are intended to compensate. Revenue and profit recognitionRevenue represents the fair value of consideration received or receivable fromclients for goods and services provided by the group, net of discounts, VAT andother sales-related taxes. Where the time value of money is material, revenueis recognised as the present value of the cash inflows expected to be receivedfrom the customer in settlement. Revenue from the sale of software products or hardware with no significantservice obligation is recognised 100 per cent on delivery. Revenue from thesale of software products or hardware requiring significant modification,integration or customisation is recognised using the percentage of completionmethod. The revenue and profit of contracts for the supply of professional services atpredetermined rates is recognised as and when the work is performed,irrespective of the duration of the contract. The revenue and profit of fixed price contracts is recognised on a percentageof completion basis when the outcome of a contract can be estimated reliably. A contract's outcome is usually deemed to be capable of reliable estimation atthe earlier of six months from contract commencement and the date at which 50per cent of the total estimated costs of professional services have beenincurred. If a contract outcome cannot be estimated reliably, revenues arerecognised equal to costs incurred, to the extent that costs are expected to berecovered. The stage of contract completion is usually determined by referenceto the cost of professional services incurred to date as a proportion of thetotal estimated cost of professional services. Provision is made for all foreseeable future losses. Segment reportingAt 31 December 2005, LogicaCMG is organised into two business segments: ITservices and Telecoms products. The Telecoms products business segment waspreviously referred to as the wireless networks business segment. These twobusiness segments are the group's primary reporting format for segmentinformation as they represent the dominant source and nature of the group'srisks and returns. The group's secondary reporting format is by geographicalarea. Inter-segment sales are charged at arms' length prices. Segment assets includeall intangible assets, property, plant and equipment, inventories, trade andother receivables, and cash and cash equivalents but exclude tax assets. Segment liabilities comprise mainly trade and other payables, retirementbenefit obligations and certain borrowings that can be attributed to thesegment but exclude tax liabilities and borrowings that are for generalcorporate purposes. Capital expenditure comprises additions to property, plantand equipment and intangible assets. Employee benefitsRetirement benefitsThe group operates retirement benefit plans of both a defined contribution anddefined benefit nature. Retirement benefit plans that are funded by thepayment of insurance premiums are treated as defined contribution plans unlessthe group has an obligation either to pay the benefits directly when they falldue or to pay further amounts if assets accumulated with the insurer do notcover all future employee benefits. In such circumstances, the plan is treatedas a defined benefit plan. The cost of defined contribution plans is charged to the income statement onthe basis of contributions payable by the group during the year. For defined benefit plans, the defined benefit obligation is calculatedannually by independent actuaries using the projected unit credit method. Theretirement benefit liability in the balance sheet represents the present valueof the defined benefit obligation as reduced by the fair value of plan assetsand unrecognised past service cost. A retirement benefit asset is recognisedto the extent that the group can benefit from refunds or a future reduction incontributions. Insurance policies are treated as plan assets of a defined benefit plan if theproceeds of the policy:can only be used to fund employee benefits;are not available to the group's creditors; andeither cannot be paid to the group unless the proceeds represent surplus assetsnot needed to meet all the benefit obligations or are a reimbursement forbenefit already paid by the group. Insurance policies that do not meet the above criteria are treated asnon-current investments and are held at fair value in the balance sheet. The current service cost is recognised in the income statement as an employeebenefit expense. The interest cost, resulting from the increase in the presentvalue of the defined benefit obligation over time and the expected return onplan assets, is recognised as net interest expense or income. The expectedreturn on plan assets is, for UK defined benefit pension schemes, shown net ofan expected reduction for payments to the Pension Protection Fund (the 'PPFlevy'). The difference between the actual and expected PPF levy is treated asan actuarial gain or loss. A past service cost is recognised immediately to the extent that benefits arealready vested, or is otherwise amortised on a straight-line basis over theaverage period until the benefits become vested. Actuarial gains and losses arising from experience adjustments or changes inactuarial assumptions are charged or credited in the statement of recognisedincome and expense in the period in which they arise. Share-based paymentThe cost of share-based employee compensation arrangements, whereby employeesreceive remuneration in the form of shares or share options, is recognised asan employee benefit expense in the income statement. The total expense to be apportioned over the vesting period of the benefit isdetermined by reference to the fair value at the grant date of the shares orshare options awarded and the number that are expected to vest. Theassumptions underlying the number of awards expected to vest are subsequentlyadjusted to reflect conditions prevailing at the balance sheet date. At thevesting date of an award, the cumulative expense is adjusted to take account ofthe awards that actually vest. Short-term compensated absencesA liability for short-term compensated absences, such as holiday, is recognisedfor the amount the group may be required to pay as a result of the unusedentitlement that has accumulated at the balance sheet date. Death-in-service benefitsInsured death-in-service benefits are accounted for as defined contributionarrangements. Death-in-service benefits for which the group does not haveinsurance cover are accounted for as defined benefit arrangements. Employee share ownership trustsEmployee share ownership plan (ESOP) trusts, which purchase and hold ordinaryshares of the company in connection with certain employee share schemes, areconsolidated in the group financial statements. Any consideration paid orreceived by ESOP trusts for the purchase or sale of the company's own shares isshown as a movement in shareholders' equity. DividendsDividends to the company's shareholders are recognised as a liability anddeducted from shareholders' equity in the period in which the shareholders'right to receive payment is established. Segment information The following tables show segment revenue and result for the group's primarybusiness segments, IT services and Telecoms products. 2005 Total continuing Telecoms operations IT services products ‚£'m ‚£'m ‚£'m Revenue 1,579.4 254.7 1,834.1 Segment operating profit 107.3 12.8 120.1 Analysed as: Operating profit before exceptional items 106.8 13.9 120.7 Profit on property sale and leaseback 6.5 - 6.5 Property reorganisation expense (6.0) (1.1) (7.1) Operating profit 107.3 12.8 120.1 Interest payable (24.2) Interest receivable 7.5 Share of post-tax profits from associates 2.2 Profit before tax 105.6 Taxation (36.0) Profit after tax 69.6 2004 Telecoms Total IT products continuing services operations ‚£'m ‚£'m ‚£'m Revenue 1,421.1 237.3 1,658.4 Segment operating profit / (loss) 82.0 (3.4) 78.6 Analysed as: Operating profit / (loss) before exceptional 99.8 (1.6) 98.2items Restructuring costs (17.8) - (17.8) Loss on disposal of business - (1.8) (1.8) Operating profit / (loss) 82.0 (3.4) 78.6 Interest payable (20.3) Interest receivable 5.4 Profit before tax 63.7 Taxation (28.8) Profit after tax 34.9 The share of post-tax profits from associates in the year ended 31 December2005 was attributable to the IT services business segment. The group manages the IT services business segment on a geographic basis. Additional voluntary disclosures, not required under IFRS, are provided belowfor the revenue and operating result before exceptional items of the geographicsub-divisions within the IT services business segment. Operating profit / (loss) Revenue before exceptional items 2005 2004 2005 2004 ‚£'m ‚£'m ‚£'m ‚£'m United Kingdom 712.0 679.3 80.4 79.1 Netherlands 409.6 367.9 37.9 34.9 Germany 78.8 91.9 (11.8) (14.8) France 116.7 113.9 (4.9) (3.9) Iberia * 88.0 - 5.9 - Rest of Europe 60.3 69.9 (6.3) 2.1 Rest of World 114.0 98.2 5.6 2.4 1,579.4 1,421.1 106.8 99.8 * The Iberia category represents the Edinfor business acquired in April 2005. The comparative information in the table above has been amended to includeBelgium within the Rest of Europe category. This has resulted in areclassification of revenue of ‚£28.9 million, and an operating loss of ‚£0.1million, to the Rest of Europe category from the Netherlands (formerly Benelux)category. Exceptional items The group disposed of two long leasehold office buildings in the United Kingdomin December 2005 for net proceeds of ‚£8.3 million, simultaneously entering intoan operating leaseback, generating a profit on disposal of ‚£6.5 million. TheUnited Kingdom and Telecoms products incurred an expense for vacated property,early lease terminations and related transactions costs of ‚£7.1 million forproperty reorganisation activities conducted in the second half of 2005. In 2004, the group incurred a charge of ‚£16.2 million relating to therestructuring of the business in Germany. The restructuring comprised asubstantial reduction in headcount together with other measures to reduce thecost base. In addition, a restructuring charge of ‚£1.6 million was incurred inFrance. The group disposed of its investment in the MiGWay messaging joint venture withTeledenmark on 17 December 2004. The disposal resulted in the receipt of ‚£0.4million as consideration for the transaction and a loss on disposal of ‚£1.8million. Employees Year end Average 2005 2004 2005 2004 Number Number Number Number United Kingdom 5,951 6,124 6,079 6,068 Netherlands 5,719 5,796 5,776 5,725 Germany 1,185 1,207 1,139 1,500 France 1,504 1,489 1,523 1,488 Iberia * 1,366 - 893 - Rest of Europe 877 839 854 840 Rest of World 3,132 2,459 2,658 2,121 IT services 19,734 17,914 18,922 17,742 Telecoms products 1,606 1,781 1,657 1,909 21,340 19,695 20,579 19,651 * The Iberia category represents the Edinfor business acquired in April 2005. The comparative information in the employee numbers table above has beenamended to include Belgium within the Rest of Europe category. This hasresulted in a reclassification of the average number of employees and thenumber of employees at the balance sheet date of 340 and 326 respectively tothe Rest of Europe category from the Netherlands (formerly Benelux) category. Taxation The effective tax rate on continuing operations for the year, excluding theshare of post-tax profits from associates and before exceptional items, was34.9% (2004: 34.9%) of which ‚£12.5 million (2004: ‚£23.8 million) related to theUnited Kingdom. Dividends The directors are proposing a final dividend in respect of the year ended 31December 2005 of 3.2p per share, which would reduce shareholders' funds by ‚£36.2 million. The proposed dividend is subject to approval at the AnnualGeneral Meeting on 17 May 2006 and has not been recognised as a liability inthese financial statements. The proposed final dividend has been set at a level that reflects the bonuselement of the rights issue that took place in November 2005. The totaldividend relating to the year ended 31 December 2005 is 5.31 pence per share,on a restated basis, representing 4.1% growth over the total dividends paidrelating to the previous financial year. The amounts recognised as distributions to equity holders were as follows: 2005 2004 2005 2004 p / share p / share ‚£'m ‚£'m Interim dividend, relating to 2005 / 2004 * 2.11 2.02 17.7 16.9 Final dividend, relating to 2004 / 2003 * 3.08 2.99 25.8 25.0 5.19 5.01 43.5 41.9 *Dividends per share have been restated for the bonus element of the rightsissue. Dividends payable to employee share ownership trusts are excluded from theamounts recognised as distributions in the table above. Earnings per share 2005 Weighted average Earnings number per Earnings of share shares ‚£'m million pence Earnings per share Earnings attributable to ordinary shareholders 66.6 898.7 7.4 Basic EPS 66.6 898.7 7.4 Effect of share options - 4.9 - Diluted EPS 66.6 903.6 7.4 Adjusted earnings per share Earnings attributable to ordinary shareholders 66.6 898.7 7.4 Add back: Exceptional items, net of tax 0.3 - - Mark-to-market loss on convertible bonds designated at fair value through profit or loss, net of tax 0.6 - 0.1 Amortisation of intangible assets initially recognised on acquisition, net of tax 0.7 - 0.1 Adjusted basic EPS 68.2 898.7 7.6 Effect of share options - 4.9 - Effect of convertible bonds, excluding mark-to-market 4.2 64.6 (0.1)loss, net of tax Adjusted diluted EPS 72.4 968.2 7.5 2004 Weighted average Earnings per number share Earnings of shares ‚£'m million pence Earnings per share from all operations Earnings attributable to ordinary 24.6 837.7 2.9shareholders Basic EPS 24.6 837.7 2.9 Effect of share options - 4.1 - Diluted EPS 24.6 841.8 2.9 Earnings per share from continuing operations Earnings attributable to ordinary 24.6 837.7 2.9shareholders Add back / (deduct): Loss on sale of discontinued operation 9.4 - 1.1 Pre-tax loss from discontinued operation 2.0 - 0.3 Tax relating to discontinued operation (1.7) - (0.2) Basic EPS from continuing operations 34.3 837.7 4.1 Effect of share options - 4.1 - Diluted EPS from continuing operations 34.3 841.8 4.1 Adjusted earnings per share Earnings attributable to ordinary 24.6 837.7 2.9shareholders Add back / (deduct): Loss on sale of discontinued operation 9.4 - 1.1 Pre-tax loss from discontinued operation 2.0 - 0.3 Tax relating to discontinued operation (1.7) - (0.2) Restructuring costs, net of tax 17.5 - 2.1 Loss on disposal of business 1.8 - 0.2 Adjusted basic EPS 53.6 837.7 6.4 Effect of share options - 4.1 - Adjusted diluted EPS 53.6 841.8 6.4 The basic and diluted earnings per share attributable to the discontinuedoperation for the year ended 31 December 2004 was a loss of 1.2p per share. On 19 September 2005, the group announced a rights issue to part fund theproposed acquisition of Unilog S.A. Following the approval of the requiredresolutions at the subsequent Extraordinary General Meeting, 375,495,147 newordinary shares of 10p each were issued at 107p per share on the basis of 1 newordinary share for every 2 existing ordinary shares held. The cum-rights price at the close of trading on 13 October 2005, the last dayof trading before the shares were designated ex-rights, was 168p per share. The theoretical ex-rights price for an ordinary share was approximately 147.7pper share. The weighted average number of shares has been adjusted for thebonus element within the rights issue for all periods presented. Earnings pershare for the year ended 31 December 2004 has been restated accordingly. Adjusted earnings per share, both basic and diluted, have been shown as thedirectors consider this to be helpful for a better understanding of theperformance of the group's underlying business. The earnings measure used inadjusted earnings per share excludes, whenever such items occur: the results ofdiscontinued operations; exceptional items; mark-to-market gains or losses onfinancial assets and financial liabilities designated at fair value throughprofit or loss; and amortisation of intangible assets initially recognised atfair value in a business combination. All items adjusted are net of tax whereapplicable. The weighted average number of shares excludes the shares held by employeeshare ownership plan ('ESOP') trusts, which are treated as cancelled. Theconvertible bonds were not included in the calculation of diluted earning pershare for the year ended 31 December 2004 as they were anti-dilutive, however,the convertible bonds are dilutive for the purposes of calculating adjusteddiluted earnings per share for the year ended 31 December 2005. The impact of the charge for share-based payments was to reduce adjusted basicearnings per share for the year ended 31 December 2005 by 0.7 pence per share(2004: 0.7 pence per share). Reconciliation of operating profit to cash generated from operations 2005 2004 ‚£'m ‚£'m Operating profit: Continuing operations 120.1 78.6 Discontinued operation - (2.0) 120.1 76.6 Adjustments for: Share-based payments 6.3 5.6 Depreciation of property, plant and equipment 30.4 27.6 Profit on disposal of property, plant and equipment (6.4) - Amortisation of intangible assets 5.9 5.1 Net movements in provisions (5.9) (5.2) Derivative financial instruments (2.2) - Non-cash element of expense for defined benefit plans (1.2) (1.0) 26.9 32.1 Movements in working capital: Inventories 0.1 2.0 Trade and other receivables (11.5) 0.2 Trade and other payables 31.4 (10.0) 20.0 (7.8) Cash generated from operations 167.0 100.9 Add back: cash outflow related to property reorganisation expense 0.8 - Add back: cash outflow related to restructuring activities 13.0 23.7 Less: proceeds from non-recourse financing - (5.0) Net cash inflow from trading operations 180.8 119.6 The cash flows from the discontinued operation were not material for the groupand accordingly have not been presented separately. The reconciliation ofoperating profit to cash generated from operations in the table aboverepresents the activities of both continuing and discontinued operations. Reconciliation of movements in net debt At Acquisitions Other At 1 and non-cash Exchange 31 January Cash disposals* movements differences December 2005 flows 2005 ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m Cash and cash 106.6 137.1 - - 1.6 245.3equivalents Bank overdrafts (0.4) 0.4 - - - - Finance leases (4.7) 3.7 (3.3) (0.5) - (4.8) Bank loans (108.5) (17.6) (1.6) (1.4) (2.1) (131.2) Other loans (0.9) 11.8 (11.3) - (0.4) Convertible (211.3) - - (0.9) 7.2 (205.0)bonds Net debt (219.2) 135.4 (16.2) (2.8) 6.7 (96.1) * Excludes cash and cash equivalents assumed on acquisition or disposed ofthrough sale of businesses, amounting to ‚£6.0 million and ‚£1.4 millionrespectively. The group's net debt at 31 December 2004 was ‚£198.3 million. The impact of theadoption of IAS 32 and IAS 39 was to increase group net debt by ‚£20.9 millionto ‚£219.2 million. The increase comprised a reclassification of ‚£20.8 millionfrom trade and other receivables to bank loans relating to non-recoursefinancing arrangements previously shown under a linked presentation, and anincrease in the value of convertible bonds of ‚£0.1 million to reflect theirfair value. The increase in the value of convertible bonds of ‚£0.1 million comprised areclassification of the accrual for coupon interest of ‚£1.7 million from tradeand other payables, and a reduction of ‚£1.6 million taken to equity on adoptionof IAS 32 and IAS 39 on 1 January 2005. The cash and cash equivalents balance of ‚£106.6 million at 1 January 2005 inthe table above included ‚£1.7 million of cash and cash equivalents which areshown in the consolidated balance sheet within non-current assets classified asheld for sale. Transition to IFRS On 17 May 2005, the group published an explanation of the impact of thetransition to IFRS together with restated comparative information for 2004under IFRS and reconciliations from UK GAAP. This disclosure note reproducesinformation from the group's previous announcement, amended for the followingadjustments which affect the consolidated balance sheet at 31 December 2004:- an increase of ‚£21.5 million in the retirement benefit liability associatedwith the CMG UK Pension Scheme, together with a consequential increase indeferred tax assets of ‚£6.4 million;- an increase of ‚£1.7 million in deferred tax assets relating to the release ofdeferred tax previously recognised for goodwill generated on the acquisition ofa business in Australia in 2000; and- a reclassification of the group's convertible debt, amounting to ‚£211.2million, to current liabilities from non-current liabilities. Following the results of the most recent triennial actuarial valuation of theCMG UK Pension Scheme, which was completed in December 2005, the deficit on thescheme as at 31 December 2004 has been revised from ‚£43.9 million to ‚£65.4million. The scheme deficit as previously reported was based on a roll-forwardof the defined benefit obligation from the formal actuarial valuation of thescheme as at 1 July 2002 using estimation techniques, as permitted under IFRS. The most recent actuarial valuation has shown that the use of estimationtechniques understated the defined benefit obligation at 31 December 2004compared to a comprehensive member-by-member assessment of the defined benefitobligation. As a consequence of the materiality of the adjustment, 2004comparative information has been amended. The deficit on the scheme as at 31December 2003 remains unaffected by this revision. Notes a) to i) below explain the impact that the adoption of IFRS has had oncomparative information as at and for the year ended 31 December 2004. Note j)explains the impact of the adoption of IAS 32 and IAS 39 at 1 January 2005. The narrative section is intended to support the associated numericalreconciliations contained in notes 10.1 to 10.3 below. GoodwillUnder UK GAAP, goodwill was treated in two ways. Prior to 1 July 1998,goodwill arising under the acquisition accounting method was written offdirectly to equity and recycled to the profit and loss account as part of theprofit or loss on disposal of the acquired entity. Subsequent to that date,goodwill was capitalised and amortised over its useful economic life, up to amaximum period of 20 years. The group has taken the exemption in IFRS 1 for business combinations. As aresult, the net book value of goodwill under UK GAAP at 31 December 2003 becamethe deemed cost of goodwill at the date of transition to IFRS. Under IFRS thisbalance is no longer amortised but is subject to impairment testing on anannual basis, or more frequently if there is an indication of impairment. Goodwill previously written off directly to equity is not recycled to theincome statement following a disposal of a previously acquired entity. The effect of adopting IFRS was to reverse the goodwill amortisation recognisedunder UK GAAP and to increase the carrying value of goodwill in the balancesheet at 31 December 2004. Other intangible assetsDevelopment costsUnder UK GAAP, the development costs of internally developed software productsand enhancements were expensed as incurred irrespective of the future valueexpected from the results of the development activity. IAS 38 'Intangible Assets' requires that development costs are capitalised whenthe criteria set out in the standard are met. Development costs can only becapitalised when an intangible asset will generate probable future economicbenefits and costs can be reliably measured. Once development activity on asoftware product or enhancement has finished, any capitalised costs areamortised over the useful life of the product, typically over a period of up tothree years. The effect of adopting IFRS was to capitalise development costs previouslyexpensed under UK GAAP and therefore to increase the carrying value ofintangible assets. The impact on the income statement was the net effect ofthe capitalisation of any development costs that meet the IAS 38 criteriaduring the period and the amortisation of costs capitalised in the balancesheet. Software licencesUnder UK GAAP, purchased software licences were capitalised within tangiblefixed assets as part of the computer hardware to which they related anddepreciated over their useful economic life. IAS 38 requires that computer software that is an integral part of the relatedhardware, such as an operating system, is treated as property, plant andequipment. Software that is not an integral part of the related hardware mustbe capitalised as an intangible asset and amortised over its useful economiclife. The effect of this change was to reclassify certain software licences fromproperty, plant and equipment to intangible assets in the balance sheet and toreclassify the related depreciation expense to amortisation expense in theincome statement. LeasesThe UK GAAP accounting standard on leases, SSAP 21 'Accounting for leases andhire purchase contracts', is similar to the IFRS standard, IAS 17 'Leases', interms of the classification of a lease as either an operating lease or afinance lease. Whilst both standards define a finance lease as a lease that transferssubstantially all the risks and rewards of ownership of the asset to thelessee, SSAP 21 provides a numeric test, which does not exist in IAS 17, thatwas used as persuasive evidence of whether this transfer had taken place. Aconsequence of adopting IAS 17 has been that some leases previously classifiedas operating leases under UK GAAP have been classified as finance leases underIFRS. The impact on the balance sheet at 31 December 2004 was to capitalise assetsunder finance leases within property, plant and equipment at their deemed costless accumulated depreciation. A related liability, classified as a borrowing,for future lease payments was also recognised. The impact on the incomestatement for the year ended 31 December 2004 was limited, the main consequencebeing a reduction in net operating costs and an increase in interest payable. Employee benefitsRetirement benefit schemesUnder UK GAAP, the group accounted for defined benefit and defined contributionretirement benefit schemes under SSAP 24 'Accounting for pension costs'. Additional disclosures were given under FRS 17 'Retirement Benefits'. Under SSAP 24, a regular pension cost for defined benefit schemes wasdetermined using actuarial methods and charged to the profit and loss account. Variations from the regular cost caused by, for example, retroactive changes inbenefits, changes in actuarial assumptions, and experience gains and losses,were spread over the average remaining service lives of employees. Thecumulative difference between the profit and loss account expense and employercontributions was held in the balance sheet as either a prepayment orprovision. Under IFRS, the group applies IAS 19 'Employee Benefits'. This standardfollows a balance sheet approach which is similar to that of FRS 17 wherebyscheme deficits or surpluses are recognised on the balance sheet. The incomestatement expense comprises the current service cost, the interest cost, theexpected return on any plan assets and the appropriate portion of any pastservice cost. The group has adopted early the amendment to IAS 19 in December2004 which allows actuarial gains and losses to be recognised in full in thestatement of recognised income and expense. The effect of adopting IFRS on the balance sheet at 31 December 2004 was toremove any pension prepayment or provision recognised under UK GAAP and torecognise the net deficit or surplus, when permitted, on defined benefitschemes less any unrecognised past service cost. The impact on the incomestatement for the year ended 31 December 2004 was to increase the pensionexpense in operating profit and to recognise a net charge to interest payable. HolidaypayThe group's UK GAAP accounting policy was to accrue for all payments expectedto be made to leavers within one year of the balance sheet date for holidayentitlement not used prior to leaving. IAS 19 requires that a liability isrecorded for all accrued entitlements for holiday at each balance sheet date. The impact on the group was to increase the employee benefits liability at 31December 2004 and increase the expense in the income statement for the yearended 31 December 2004. Share-based paymentsThe group operates a variety of share-based employee incentive arrangementswhich typically include the grant of rights to shares or share options. Under UK GAAP, a charge was recorded only when an award had intrinsic value onthe date of grant i.e. the market value of the company's shares on the date ofgrant exceeded the exercise price of the award. A charge was not recorded forshare options schemes as the exercise price of share options was set at theprevailing market price on the grant date. A charge was recorded for theemployee and executive equity partnership plans under which rights to shareswere granted at no cost to employees, subject to meeting performanceconditions. IFRS 2 'Share-based Payment' requires that an expense is recognised in theincome statement based on the fair value of an award on the date of grant. Theexpense is spread over the period for which services are received fromemployees, which is assumed to be the performance period of the award. Thefair value of share options is measured using an option-pricing model. TheBlack-Scholes model has been used to determine the fair value of optionsgranted under SAYE schemes. A Monte Carlo simulation model has been used forexecutive share options. IFRS 2 requires a liability to be recorded for social security costs on gainsfrom the exercise of share options. The liability is measured based on thefair value of share options outstanding at each balance sheet date. Under UKGAAP, a liability for social security was recorded only when share options hadintrinsic value. The impact of adopting IFRS was to increase the share-based payments expense inthe income statement. This is principally because an expense is now recognisedfor share option schemes where none was recognised under UK GAAP. Theliability in the balance sheet at 31 December 2004 for social security on shareoptions increased compared to UK GAAP, however, the effect on the incomestatement for the year ended 31 December 2004 was not significant. Foreign currenciesIAS 21 'The Effects of Changes in Foreign Exchange Rates' contains moreprescriptive guidance than UK GAAP on how to determine an entity's functionalcurrency, the application of which may, in some circumstances, result in adifferent outcome. As a consequence of evaluating the functional currencies ofgroup entities under IFRS, the functional currencies of some overseas brancheshave changed. The effect of the changes has been to reduce the value of amounts recoverableon contracts in the balance sheet at 31 December 2004 and to increase netoperating expenses in the income statement for the year ended 31 December 2004. TaxationDeferred tax under UK GAAP was provided on all timing differences that hadoriginated but not reversed at the balance sheet date. Timing differencesarise when gains and losses are included in tax computations in a later orearlier period from that in which they appear in the group's financialstatements. IAS 12 'Income Taxes' has a balance sheet focused approach. The standardrequires that full provision be made for all taxable temporary differencesexcept those arising on goodwill. A temporary difference is the differencebetween the carrying amount of an asset or liability in the balance sheet andits associated tax base. A temporary difference is a taxable temporarydifference if it will give rise to taxable amounts in the future when the assetor liability is settled. Deferred tax liabilities and assets are classified as non-current irrespectiveof the expected timing of the reversal of the underlying taxable temporarydifference. Current tax assets and liabilities are shown separately on theface of the balance sheet. The principal impact of adopting IFRS was to recognise deferred tax onretirement benefit scheme deficits and surpluses, adjustments to holiday payliabilities and share-based payments. DividendsUnder UK GAAP, dividends were recognised as an expense in the profit and lossaccount. An accrual was made for dividends that were proposed by directorsafter the balance sheet date but prior to the date of the signing of thefinancial statements and a corresponding expense was recognised. Distributions to equity holders are not recognised in the income statementunder IFRS, they are disclosed as a component of the movement in shareholders'equity. A liability is recorded for a final dividend when the dividend isapproved by the company's shareholders, and for an interim dividend when thedividend is paid. The impact of IFRS was to remove the accrual for the 2004final dividend in the balance sheet at 31 December 2004. BorrowingsUnder UK GAAP, the convertible bonds were presented as a non-currentliability. FRS 4 'Capital instruments' required that conversion of debt wasnot anticipated and this was reflected in the presentation as well as themeasurement of the convertible bonds. IAS 1 'Presentation of Financial Statements' requires that liabilities shouldbe classified as current when the entity does not have an unconditional rightto defer settlement of the liability for at least twelve months after thebalance sheet date. The convertible bonds are potentially exchangeable intoordinary shares of the company on any day from 1 January 2005 up to andincluding 5 September 2008. Accordingly, at 31 December 2004, the company didnot have the right to defer settlement for at least twelve months and thereforethe convertible bonds have been re-classified as a current liability underIFRS. Cash flow statementAlthough there was no effect on the underlying cash generation and expendituresof the group, there were some presentational changes on the adoption of IAS 7'Cash Flow Statements'. The cash flow statement under IFRS shows the movement in cash and cashequivalents. Cash and cash equivalents include short-term deposits with amaturity of less than three months, which were included in the management ofliquid resources category under UK GAAP. The balance sheet under IFRS at 31December 2004 included ‚£1.8 million of cash equivalents previously classifiedas a liquid deposit in the UK GAAP cash flow statement. In addition, further presentational changes were made to reflect the differentaccounting treatment of certain items under IFRS. The two principalreclassifications were for finance leases previously classified as operatingleases under UK GAAP and software product development expenditure. Under IFRS, the capital repayments of finance leases were treated as afinancing cash flow, whereas as an operating lease under UK GAAP, the leasepayments were treated as an operating cash flow. Product developmentexpenditure previously expensed and classified as an operating cash flow underUK GAAP has been classified as a cash flow from investing activities under IFRSwhen the development expenditure was capitalised as an intangible asset. Adoption of IAS 32 and 39This section describes the impact of the adoption of IAS 32 and 39 with effectfrom 1 January 2005. Non-recourse financingUnder UK GAAP, non-recourse financing arrangements that met the conditions setout in FRS 5 'Reporting the substance of transactions' were shown under alinked presentation, with the financing shown as a deduction from the grossamount of the asset to which it related. Such a presentation is notpermissible under IFRS and the financing in such arrangements has beenclassified as borrowings. The impact of adoption of IAS 32 and 39 was to increase trade and otherreceivables and borrowings by ‚£20.8 million. There was no impact on equity. Derivative financial instrumentsUnder UK GAAP, foreign currency assets and liabilities that were covered by arelated forward contract were translated at the rate of exchange specified inthat contract. Under IFRS, such assets and liabilities are translated at the rates prevailingat the balance sheet date and forward contracts, as derivative financialinstruments, are recognised in the balance sheet at fair value. Changes in thefair value of derivatives are recognised in the income statement unless coveredby a designated hedge which permits gains and losses to be deferred in equity. IFRS also requires that derivatives embedded in host contracts are separatedand accounted for as derivative financial instruments, if certain conditionsare met. The impact of adoption of IAS 32 and 39 was to recognise on the balance sheetthe fair value of all derivative financial instruments and re-translate foreigncurrency assets and liabilities at the rates prevailing on the date ofadoption. The difference between the amounts recognised under UK GAAP andIFRS, ‚£0.3 million, was taken to equity. Convertible bondsUnder UK GAAP, the convertible bonds were presented separately on the face ofthe balance sheet at par value less unamortised issue costs. Conversion of thebonds was not anticipated. The accrual for coupon interest was classifiedwithin trade and other payables. Exchange differences arising on retranslationof the convertible bonds were offset in equity against the retranslation offoreign currency net investments, to the extent permitted. Under IFRS, the group took the option to designate the convertible bonds as afinancial liability at fair value through profit or loss. The fluctuation inthe value of the convertible bonds caused by changes in the quoted market priceis recorded as interest income or expense, as appropriate. The change in fairvalue associated with the accretion of coupon interest is recognised asinterest expense. Exchange differences are taken directly to equity under adesignated net investment hedge, to the extent that the hedge is effective. The impact of adoption of IAS 32 and 39 was a reduction in the value of theconvertible bonds of ‚£1.6 million, reflecting the difference between the parvalue and quoted market price of the convertible bonds and the write off ofunamortised issue costs, together with an equal and opposite movement inequity. Reconciliation of profit for the year ended 31 December 2004 Discontinued Other IFRS UK GAAP1,3 operation2 adjustments IFRS ‚£'m ‚£'m ‚£'m ‚£'m Revenue 1,669.8 (11.4) - 1,658.4 Net operating costs (1,602.1) 13.4 8.9 (1,579.8) Operating profit 67.7 2.0 8.9 78.6 Analysed as: Operating profit before goodwill amortisation and exceptional 109.3 2.0 (13.1) 98.2items Restructuring costs (17.8) - - (17.8) Goodwill amortisation (23.8) - 23.8 - Loss on disposal of businesses n/a - (1.8) (1.8) Operating profit 67.7 2.0 8.9 78.6 Loss on disposal of business (11.2) 9.4 1.8 - Profit before interest 56.5 11.4 10.7 78.6 Interest payable (19.5) - (0.8) (20.3) Interest receivable 5.4 - - 5.4 Profit before tax 42.4 11.4 9.9 63.7 Taxation (28.0) (1.7) 0.9 (28.8) Profit after tax 14.4 9.7 10.8 34.9 Loss from discontinued operation n/a (9.7) - (9.7) Profit from continuing operations n/a - 10.8 25.2 Minority interests (0.6) - - (0.6) Net profit for the year 13.8 - 10.8 24.6 1 The UK GAAP column represents the results from both continuing anddiscontinued operations.2 The discontinued operation column shows the impact of reclassifying the lossafter tax of the discontinued operation to the line entitled 'Loss fromdiscontinued operation'.3 Boxed areas in the tables above represent amounts or sub-totals that are notapplicable under UK GAAP. Analysis of other IFRS adjustments for the year ended 31 December 2004 Goodwill Reclass- amortis- Development Lease Share- Other ification ation costs reclass- based employee of loss Foreign reversal ification payments benefits on currencies Total disposal4 ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m Revenue - - - - - - - Net operating 23.8 1.0 0.3 (5.6) (7.0) (1.8) (1.8) 8.9costs Operating 23.8 1.0 0.3 (5.6) (7.0) (1.8) (1.8) 8.9profit Analysed as: Operating profit before - 1.0 0.3 (5.6) (7.0) - (1.8) (13.1) goodwill amortisation and exceptional items - - - - - - - -Restructuring costs 23.8 - - - - - - 23.8Goodwill amortisation Loss on disposal of - - - - - (1.8) - (1.8) businesses 23.8 1.0 0.3 (5.6) (7.0) (1.8) (1.8) 8.9Operating profit Loss on - - - - - 1.8 - 1.8disposal of business Profit before 23.8 1.0 0.3 (5.6) (7.0) - (1.8) 10.7interest Interest - - (0.3) - (0.5) - - (0.8)payable Interest - - - - - - - -receivable Profit before 23.8 1.0 - (5.6) (7.5) - (1.8) 9.9tax Taxation - (0.2) - - 1.1 - - 0.9 Profit after 23.8 0.8 - (5.6) (6.4) - (1.8) 10.8tax Minority - - - - - - - -interests Net profit 23.8 0.8 - (5.6) (6.4) - (1.8) 10.8for the year 4 The reclassification of ‚£1.8m represents the reclassification of the loss ondisposal of the MiGWay joint venture from below operating profit, as requiredunder UK GAAP, to net operating costs under IFRS.Reconciliation of equity at 31 December 2004 Reclassification of held for Other IFRS UK sale operation adjustments IFRS GAAP1 ‚£'m ‚£'m ‚£'m ‚£'m Non-current assets Goodwill 333.5 - 23.8 357.3 Other intangible assets - - 9.1 9.1 Property, plant and equipment 79.0 (0.5) (2.0) 76.5 Interests in joint ventures - - - - Other investments - - 8.5 8.5 Retirement benefit assets - - 6.5 6.5 Deferred tax assets 11.2 - 22.1 33.3 423.7 (0.5) 68.0 491.2 Current assets Inventories 1.2 (0.1) - 1.1 Trade and other receivables 589.9 (5.4) (17.5) 567.0 Current tax assets 39.4 - - 39.4 Cash and cash equivalents 106.6 (1.7) - 104.9 737.1 (7.2) (17.5) 712.4 Non-current assets classified as n/a 3.2 - 3.2held for sale n/a (4.0) (17.5) 715.6 Current liabilities Convertible debt - - (211.2) (211.2) Other borrowings (25.3) - (1.8) (27.1) Trade and other payables (378.0) 3.0 9.8 (365.2) Current tax liabilities (27.9) - - (27.9) Provisions (18.1) 4.5 - (13.6) (449.3) 7.5 (203.2) (645.0) Liabilities associated with non-current assets classified as held for sale n/a (3.0) - (3.0) n/a 4.5 (203.2) (648.0) Net current assets 287.8 0.5 (220.7) 67.6 Total assets less current 711.5 - (152.7) 558.8 liabilities Non-current liabilities Convertible debt (211.2) - 211.2 - Other borrowings (64.6) - (2.0) (66.6) Retirement benefit obligations - - (79.1) (79.1) Deferred tax liabilities (41.7) - (3.6) (45.3) Provisions (6.3) - 0.1 (6.2) Other non-current liabilities - - (1.0) (1.0) (323.8) - 125.6 (198.2) Net assets 387.7 - (27.1) 360.6 Equity Share capital 75.1 - - 75.1 Share premium account 707.3 - - 707.3 Other reserves (397.1) - (27.0) (424.1) Total shareholders' equity 385.3 - (27.0) 358.3 Minority interests 2.4 - (0.1) 2.3 Total equity 387.7 - (27.1) 360.6 Boxed areas in the table above represent amounts or sub-totals that are notapplicable under UK GAAP. Analysis of IFRS adjustments at 31 December 2004 Goodwill amortis- Development Lease ation costs reclass- Employee Foreign reversal ification benefits Taxation currencies Other1 Total ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m Non-current assets Goodwill 23.8 - - - - - - 23.8 Other - 3.5 - - - - 5.6 9.1intangible assets Property, - - 3.6 - - - (5.6) (2.0)plant and equipment Interests in - - - - - - - -joint ventures Other - - - 8.5 - - - 8.5investments Retirement - - - 6.5 - - - 6.5benefit assets Deferred tax - - - - 22.1 - - 22.1assets 23.8 3.5 3.6 15.0 22.1 - - 68.0 Current assets Inventories - - - - - - - - Trade and - - - (17.0) - (0.5) - (17.5)other receivables Current tax - - - - - - - -assets Cash and cash - - - - - - - -equivalents - - - (17.0) - (0.5) - (17.5) Non-current assets classified as - - - - - - - -held for sale - - - (17.0) - (0.5) - (17.5) Current liabilities Convertible - - - - - - (211.2) (211.2)debt Other - - (1.8) - - - - (1.8)borrowings Trade and - - - (16.0) - - 25.8 9.8other payables Current tax - - - - - - - -liabilities Provisions - - - - - - - - - - (1.8) (16.0) - - (185.4) (203.2) Liabilities associated with - - - - - - - -non-current assets classified as held for sale - - (1.8) (16.0) - - (185.4) (203.2) Net current - - (1.8) (33.0) - (0.5) (185.4) (220.7)assets Total assets less current 23.8 3.5 1.8 (18.0) 22.1 (0.5) (185.4) (152.7)liabilities Non-current liabilities Convertible - - - - - - 211.2 211.2debt Other - - (2.0) - - - - (2.0)borrowings Retirement - - - (79.1) - - - (79.1)benefit obligations Deferred tax - - - - (3.6) - - (3.6)liabilities Provisions - - - 0.1 - - - 0.1 Other - - - (1.0) - - - (1.0)non-current liabilities - - (2.0) (80.0) (3.6) - 211.2 125.6 Net assets 23.8 3.5 (0.2) (98.0) 18.5 (0.5) 25.8 (27.1) Equity Share capital - - - - - - - - Share premium - - - - - - - -account Other 23.8 3.5 (0.1) (98.0) 18.5 (0.5) 25.8 (27.0)reserves Total 23.8 3.5 (0.1) (98.0) 18.5 (0.5) 25.8 (27.0)shareholders' equity Minority - - (0.1) - - - - (0.1)interests Total equity 23.8 3.5 (0.2) (98.0) 18.5 (0.5) 25.8 (27.1) 1 The other adjustments comprise: the reclassification of purchased softwarelicences with a net book value of ‚£5.6m from property, plant and equipment tointangible assets; the reversal of the accrual for the 2004 final dividend,amounting to ‚£25.8m, from trade and other payables; and the reclassification ofthe group's convertible bonds, amounting to ‚£211.2m, from non-current tocurrent liabilities. Reconciliation of equity at 1 January 2005 The following table presents a reconciliation of equity on adoption of IAS 32and IAS 39 on 1 January 2005. ‚£'m At 31 December 2004 360.6 Convertible bonds restated at fair value 1.6 Forward foreign exchange contracts (0.4) Recognition of embedded derivatives 0.1 Deferred tax on the above (0.5) At 1 January 2005 361.4 ENDLOGICACMG PLC

---

Related Shares:

LOG.L