Interim Results

31st Aug 2005 06:00

31 August 2005LogicaCMG Reports Interim Results- Strong Growth in Earnings Per ShareNote: This is the first set of results to be issued under IFRS andcomparatives have been restated accordingly First half performance in line with expectations, featuring strong order intake and good organic growth Basic earnings per share up 63% to 3.1p from 1.9p Adjusted earnings per share on a like-for-like basis grew 33% to 2.8p from 2.1p Order book up 50%, driven by outsourcing, with closing book-to-bill ratio of 1.59:1 IT Services revenues (87% of total) grew by 11.5% (8.6% organically) Wireless Networks revenues (13% of total) increased 7% and the division achieved a major turnaround in profitability compared to the first half of last year Edinfor transaction completed in the first half - good early progress Revenue growth for the Group for the full year is expected to be circa 5% on an organic basis and circa 10% following the consolidation of Edinfor First half dividend raised to 2.4p from 2.3pCommenting on the results, Dr Martin Read, Chief Executive, said:"The long term benefits of the Logica - CMG merger in terms of scale and marketpositioning are now very much in evidence. Earnings grew 33% in the first halfand order intake was very strong, up 50% over the first half of last year. Revenues were up some 11%, driven by our largest territories, the UK and theNetherlands. Outsourcing remains a key growth area, representing 24% of grouprevenues, and was a major factor in first half order bookings."Our Wireless Networks business has returned to revenue growth and had anotherprofitable half. We expect to improve the performance further in theseasonally stronger second half. While we continue to dominate the traditionalmessaging market, we are also focusing on new opportunities as mobile and fixedoperators converge towards new broadband business models."Having got off to a good start, performance for the year is expected to show asignificant improvement over 2004 and positions LogicaCMG well as the ITindustry develops."Financial HeadlinesFor the six months ended 30 June 2005, LogicaCMG plc financial results underIFRS were as follows: Basic earnings per share was 3.1p compared to 1.9p in the first half of 2004 Adjusted basic earnings per share* of 2.8p compared with 2.1p in H1 2004 Book to bill ratio 1.59:1 (H1 2004: 1.16:1) Revenue was ‚£891.7 million (10.9% higher than H1 2004) Operating profit was ‚£40.8 million (23.3% higher than H1 2004) Group operating margin was 4.6% (up from 4.1% in H1 2004) - IT services operating margin at 5.1% (down from 5.7% in H1 2004) - Wireless Networks operating margin of 1.0% (compared to negative (5.8)% in H1 2004) Profit before tax was ‚£37.7 million (H1 2004: ‚£25.8 million) Cash generated from operations was ‚£12.5 million - Net cash inflow from trading operations was ‚£20.2 million, a cash conversion of 50% Net debt, at 30 June 2005, stood at ‚£303.0 million (‚£219.2 million at 1 January 2005) Interim dividend of 2.4p (H1 2004: 2.3p)Notes:* The adjusted earnings per share measure is based on net profit attributableto ordinary shareholders excluding the following items:discontinued operationsexceptional itemsmark-to-market gains and losses on convertible bondsamortisation of those intangible assets initially recognised in an acquisitionat fair valuetax on the items above, where applicableFor 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.ukINTERIM STATEMENT 2005 OVERVIEWMarkets for IT services continued to improve gradually in the first half of2005 and although macroeconomic indicators in Europe remain mixed, many of ourcustomers are planning to spend more on external IT services this year. Order intake was very strong in the first half, up 50% over last year as theGroup further leveraged its scale and value-based propositions. This growthwas driven primarily by outsourcing, including contracts with the UK Ministryof Defence, Energias de Portugal, Transport for London, the MetropolitanPolice, Thames Water, ING and Delta Lloyd. Group revenues grew by 11% compared to the same period last year (8% excludingEdinfor which joined the Group on 20 April). Outsourcing as a percentage ofGroup revenues grew to 24% in the period. Growth accelerated through the secondquarter during the start-up phase of several outsourcing contracts thatincluded significant materials and contractor revenues. Wireless Networksbusiness returned to revenue growth and had another profitable half. Overall,operating profit was in line with expectations and 23% ahead of last year,driving like-for-like adjusted earnings per share growth of 33% in the firsthalf.OUTLOOKThe strong order bookings produced an overall book to bill ratio of 1.59:1. With most markets still slowly improving, we continue to expect organic revenuegrowth of around 5% for the year as a whole. In addition, there will be thebenefit of a full six months' trading from Edinfor in the second half.The second half is seasonally stronger in both the IT Services and WirelessNetworks businesses, particularly from an operating margin perspective. Thisis reinforced by the introduction of International Financial ReportingStandards (IFRS) whereby provisions for holiday entitlement in the first halflargely reverse through the remainder of the year. The second half marginshould also benefit from further progress in France and Germany, and a lowerproportion of materials revenues. Higher second half revenues in WirelessNetworks will drive further margin improvement in that business. In line withour expectations, we are confident of significant progress for the remainder ofthe year.LogicaCMG has been positioned strongly to take advantage of the changesimpacting both its customers' and its own businesses. With the longer-termbenefits of the merger increasingly reflected in the Group's performance, weare focusing on growth and the future development of the Group, whilemaintaining the drive to improve profitability.BUSINESS RESULTSNote: All results are presented under IFRS with the appropriate restatedcomparativesRevenues from continuing operations of ‚£891.7 million were up 10.9% and theoperating margin was 4.6%, up from 4.1% for the same period last year. For thesix months ended 30 June 2005, the profit before tax was ‚£37.7million comparedwith ‚£25.8 million for the same period last year. Basic earnings per sharewere 3.1p (H1 2004: 1.9p). Earnings per share after adjusting for discontinuedoperations, mark-to-market gains on convertible bonds, amortisation of thoseintangible assets initially recognised in an acquisition at fair value, and taxon the items above where applicable were 2.8p (H1 2004: 2.1p). Cash generatedfrom operations was ‚£12.5 million. The net cash inflow from trading operationswas ‚£20.2 million, representing a cash conversion of 50%. Following theacquisition of our 60% stake in Edinfor in April this year, net debt at 30 June2005 was ‚£303.0 million (‚£219.2 million at 1 January 2005 after theintroduction of IFRS which impacted the opening net debt by ‚£24.7 million). The directors have declared an interim dividend for the six months of 2.4p tobe paid on 21 October 2005 to shareholders on the register at the close ofbusiness on 23 September 2005.IT Services revenues in reported currency grew by 11.5% over the correspondingperiod last year, and 8.6% on an organic basis, driven by the performances inthe UK and The Netherlands. Outsourcing represented 28% of IT Servicesrevenues compared to 27% in first half of 2004.The UK performed well with the Industry, Distribution & Transport sector inparticular showing a marked recovery from last year and the Public Sectorcontinuing its strong trend. Some pricing pressure was felt in short term,time and materials assignments, notably in the Telecoms sector. TheNetherlands continued to achieve good revenue growth with Financial Servicesperforming very strongly. Whilst the market in Germany remains difficult, we expect a significantimprovement in the operating performance compared to 2004 as the yearprogresses. Good progress is being made in Outsourcing and Financial Servicesbut the Industry, Distribution and Transport market remains very difficult,slowing the return to profitability of the business. In France, somereductions in the overhead structure were carried through as planned in thefirst half and attention was focused on targeting our pre-sales effort moreeffectively. We expect to see the benefit of these actions progressively as wecome through the second half.Overall, pricing has remained stable in the Group's key territories. Whereskills are in demand, it has been possible to pass some rate increases on tocustomers. However, the availability of lower cost delivery from offshorefacilities continues to limit the scope for broader rises. Wage increases andrecruitment strategies have been aligned with these market realities. Centraloverheads continue to be driven down wherever practical, including aprogressive shift of back office tasks to the Group's lower cost locations.Performance in Wireless Networks has been more stable with revenues up 7.0% onthe first half of last year which, with the benefit of cost reduction actionsin 2004, enabled the business to deliver a small profit of ‚£1.2 million (H12004: loss of ‚£(6.5) million). Revenues from the traditional text messaging(SMS) business are holding up better than originally expected as developingcountries install capacity to meet demand and existing customers add IP-basedfunctionality. Good first half order intake and normal seasonality increaseour confidence that revenue for the year will be slightly ahead of last yearand that in consequence profitability will be significantly improved.Overall staffing levels grew to 20,732 at 30 June, primarily as a result of theEdinfor personnel and continued expansion in Bangalore where we now have some1,500 people. The next phase of our campus development there is now underwaywhich will take our capacity to 3,000 seats, while across the Group,recruitment continues to meet the demands of growth and to accelerate skillschange in line with customer requirements.MARKET SECTOR REVIEW H1 05 % Growth % share % GrowthRevenue by sector* ‚£'m H1 05 on H1 04 H1 05 on H2 04 Wireless Networks 120.0 7.0 13.5 (4.1) Telecoms Services 56.7 (12.0) 6.3 (10.8) Telecommunications 176.7 0.1 19.8 (6.4) Public Sector 235.2 5.1 26.4 6.9 Industry, Distribution & 161.5 0.6 18.1 (2.3)Transport Energy & Utilities 174.7 47.7 19.6 19.7 Financial Services 143.6 15.0 16.1 6.9 Total Group 891.7 10.9 100.0 4.4 * From continuing operationsPublic sector revenues grew 5% over the corresponding period and 7%sequentially, with good performances in the UK, Netherlands and Australia. Theorder book and pipeline remain solid and we are leveraging the Group's trackrecord to gradually develop public sector business in our smaller territories. While growth has slowed from the very high rates of recent years, this sectorcontinues to offer significant opportunities.Revenues in Industry, Distribution and Transport were broadly flat, a markedimprovement over the significant reductions in previous years. The improvementhas come primarily from the transport and logistics areas, includingsignificant outsourcing contracts and SAP-related projects. A major smart cardproject using biometric data (iris/fingerprint recognition) for border securitystarted in the period and provides an excellent reference for large-scaleapplication of this technology.Energy & Utilities revenues improved in most countries, notably in the UK andAustralia, and with the significant contribution from Edinfor, were up 48%overall (33% organically). This performance is consistent with the strongorder taking last year. An innovative deal with a consortium of US utilitieswill result in the Group defining and developing the next generation of assetand resource management tools for the transmission and distribution market.Financial Services grew 15% driven by continued improvement in the UK andNetherlands. The business is becoming more focused on larger contracts asbanks and insurers engage with the outsourcing model and pursue greaterconsistency of platforms through their organisations. In consequence, thereare good opportunities for growth but also longer and more complex procurementcycles.Telecommunications revenues were flat, assisted by the improvement in WirelessNetworks. In telecommunications services, tough pricing negotiations with themajor operators took their toll, despite a strong performance in Asia Pacific. Following global consolidation, operators have become significantly moresophisticated in their procurement and are seeking to maximise the benefit of amore centralised approach as they battle with unprecedented competitive andtechnological pressures. Delivery of innovative projects for customers likeVodafone, T-Mobile and the Bridge Mobile Alliance in Asia has significantlyenhanced the Group's positioning in the sector and shows the benefit of a salesapproach that combines our product and systems integration heritages.UNITED KINGDOM OPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 168.1 (0.3) 45.4 5.5 Industry, Distribution & 55.6 16.8 15.0 27.8Transport Energy & Utilities 90.7 45.6 24.5 11.8 Financial Services 31.3 20.4 8.5 7.6 Telecommunications 24.3 (23.1) 6.6 (19.5) Total 370.0 10.1 100.0 7.8 H1 05 H1 04 H2 04 FY 04 Operating Margin 9.4% 10.7% 12.5% 11.6% The United Kingdom had a strong first half with 10% revenue growth and goodorder-taking driven largely by outsourcing - both new contracts and significantextensions to existing ones. As previously guided, the margin reduced somewhatfrom the highs of 2004, partly as a result of materials revenues associatedwith the start-up phase of some contracts and some rate pressure in thetelecommunications sector.The public sector continued to benefit from work related to the National HealthService programme, both as part of the central patient database project whereour component is proceeding to plan and at the University College HospitalHealth Trust where the new main hospital reached the intensive phase of its ITinfrastructure build. Success as part of the Atlas consortium in winning theDefence Information Infrastructure contract was another highlight of the periodand the initial work began to build up during the second quarter. We were alsoselected by the Metropolitan Police Authority to provide a fully-integrated,managed payroll and pensions administration service. Momentum in the localgovernment arena was maintained with wins at the London Borough of Barnet andLiverpool County Council. Major contract extensions were secured with, amongstothers, the Crown Prosecution Service, the Health & Safety Executive, Ofsted,and the European Space Agency for the Europe-wide Galileo programme.Within Industry, Distribution & Transport, the transport business movedstrongly back into growth with outsourcing contracts at Transport for London,Metronet Rail, Network Rail and Tube Lines. The commercial services businessalso saw strength in outsourcing deals from George Wimpey and the Law Society. Revenue growth in Energy & Utilities benefited additionally from materialspass-through but the underlying rate was strong following good order-taking inthe second half of 2004. Highlights included the outsourcing contract signedwith Thames Water to support their billing and income services operation withDwr Cymru Welsh Water out of LogicaCMG's new outsourcing centre in South Wales,and a contract with the Electricity Supply Board National Grid (ESBNG) inIreland. There was also strong account development at Centrica and RWE, whilequarterly support extensions at BP and Shell remained stable.Financial Services continued to benefit from the major outsource contractsigned with Aon Corporation last year, including the winning of an additionalcontract at its Combined Insurance subsidiary. Barclays, Man Investments andthe Co-operative Bank were also active accounts. Procurement processes in keyareas of our expertise such as payments and regulatory compliance, are provingto be somewhat protracted.The decline in revenues from Telecommunications continued the trend of thesecond half of 2004 with significant pricing pressure on business extensions asboth mobile and fixed operators seek to reduce customer churn. The contractwith T-Mobile to build and operate the next generation portal for the t-zonesmobile internet service is important both in terms of the Group's strategicthrust into content management and delivery and the operators' growingwillingness to enter into managed services relationships.NETHERLANDS OPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 53.7 17.2 26.9 4.9 Industry, Distribution & 45.6 (1.7) 22.8 (7.7)Transport Energy & Utilities 25.3 3.7 12.7 5.0 Financial Services 63.0 34.3 31.5 14.3 Telecommunications 12.3 (1.6) 6.1 0.8 Total 199.9 13.6 100.0 4.1 H1 05 H1 04 H2 04 FY 04 Operating Margin 6.4% 8.2% 10.6% 9.5% After a slow start, the Dutch business grew strongly with revenues up 14% overthe first half of last year. This was driven by the Financial Services andPublic sectors, including further successes in the drive to secure moreoutsourcing contracts. However, the use of contractors to meet immediatedemand has continued as we seek to accelerate recruitment of permanent staff ina relatively tight labour market. Coupled with the materials revenuesassociated with larger contracts, this has diluted the first half marginsomewhat.The Public sector continues to grow and its positioning has been strengthenedas important and complex projects continue to be rolled out at the Ministriesof Defence and Interior Affairs. We are also gaining ground in the Healthcaresector, leveraging our UK experience as the Dutch Government looks to modifyits previous market-based approach. Two more provinces are now piloting ourinnovative Mobile Traffic Services solution.Recovery in the Industry, Distribution & Transport market continues relativelyslowly, but by focusing on our key accounts, revenues have been held stable. Outsourcing wins included DSM and Hagemeyer. The Group's centre of expertisefor biometrics, located in The Netherlands, is engaged in high profile pilotsusing iris and face recognition and is generating significant requests forproposals. During the period, working together with colleagues located in theMiddle East, The Netherlands secured the Group's first major contract for anational ID card scheme. In Rotterdam, a demonstration centre has been openedfor RFID (Radio Frequency Identification) technology following a number ofsuccessful projects and solutions are being developed for machine-to-machineapplications.In Energy & Utilities effort has been focused on expanding our position withthe top four utilities and the Dutch market operator (ECH), while leveragingour downstream/retail knowledge to secure new clients. This approach wasrewarded in the first half by a large Sarbanes Oxley compliance project withone of the oil majors and a significant contract based on our GeographicalInformation Systems expertise. Several application management contracts werealso secured. As previously experienced in the UK, the main wave ofliberalisation is being followed by both consolidation and the pursuit ofincreased operational efficiency which is a key focus of the Group'spropositions.Financial Services, where the Company is the Dutch market leader, continues togrow at double digit rates. Effort to increase outsourcing revenues in thissector is gaining traction with contracts from both OHRA (part of Delta Lloyd)and ING in the first half. The framework agreement with ABN AMRO on paymentswas also extended, while at SNS Bank work is underway to develop an innovativepayment solution aimed at the Microsoft Network (MSN) community.Telecommunications revenues remained flat, but the quality of our business isbeing improved with some 50% of revenues now in projects rather than time andmaterials. Specific solutions are being sold and, where appropriate, these arebeing marketed beyond The Netherlands to tap into the trend towards globalconsolidation. These include device management, pre-paid top-up, ring backtones and Intelligent Transfer Point. For instance, a Mobile Virtual NetworkOperator hosting platform has been sold to a major Swiss operator. A major CRMimplementation, including maintenance and support, was also won from a majorDutch operator.GERMANY OPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 0.4 300.0 1.0 (42.9) Industry, Distribution & 16.9 (31.6) 42.5 17.4Transport Energy & Utilities 6.8 94.3 17.1 (43.3) Financial Services 14.3 (3.4) 35.9 5.1 Telecommunications 1.4 (56.3) 3.5 (71.4) Total 39.8 (14.0) 100.0 (12.7) H1 05 H1 04 H2 04 FY 04 Operating Margin (14.6)% (24.0)% (8.1)% (16.1)% The revenue decline in the first half after the relative stability of 2004reflected some downstream impact from last year's rationalisation and the lossof some billable people. More billable staff are being recruited to help driverevenues and the significant increase in order bookings in the latter part ofthe first half gives us confidence that the strategy is sound even thoughprogress has been slower than originally expected.Performance in Outsourcing and Financial Services was satisfactory, but theIndustry, Distribution & Transport market, which includes sectors such asautomotive, remains difficult. Order bookings in Energy & Utilities wereweighted towards the end of the period and revenues therefore dropped back fromthe second half of last year. Operating losses were virtually half of last year's, underlining the benefit ofthe restructuring.FRANCEOPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 3.7 12.1 6.4 12.1 Industry, Distribution & 31.9 19.0 55.4 (20.4)Transport Energy & Utilities 2.3 91.7 4.0 187.5 Financial Services 14.7 (3.3) 25.5 2.8 Telecommunications 5.0 13.6 8.7 11.1 Total 57.6 13.2 100.0 (8.6) H1 05 H1 04 H2 04 FY 04 Operating Margin (6.4)% (3.5)% (3.3)% (3.4)% Revenues in France were up on the same period last year, but down sequentially,broadly in line with our expectations. This reflected a lower level ofmaterials revenue than in the second half of last year and encouragingsequential growth in higher value areas. Some further rationalisation has beenundertaken to reduce the level of non-billable staff and focus sales activitiesmore effectively. The cost of these actions has been taken at the operatinglevel as previously notified, and largely accounts for the margindeterioration. The benefits of these actions will begin to come through in thesecond half.Market conditions are improving in France which will provide a better backdropfor efforts to move the business up the value chain. Significant wins duringthe period includedLa Gendarmerie Nationale (leading a consortium bid for aSAP-based HR system), Credit Agricole, ABN, MMA Insurance and energy servicescompany Dalkia. A pilot project with SNCF, the French railway operator, toimprove safety and reliability by using mobile technology to monitor trackconditions was successfully completed in June.IBERIA OPERATIONS (EDINFOR)Revenue by market sector H1 05 % share ‚£'m Public Sector 1.2 5.9 Industry, Distribution & - -Transport Energy & Utilities 16.9 83.3 Financial Services 1.3 6.4 Telecommunications 0.9 4.4 Total 20.3 100.0 H1 05 Operating Margin 7.9% Revenues for the period following acquisition (from 20 April 2005) were ‚£20.3million with an operating margin of 7.9%. Staff numbers at the end of theperiod were 1,233 (not including contractors). The acquisition of thecontrolling interest in Edinfor has been well received by the Portuguesebusiness community. In the short time since taking control of the business,progress has been good and in line with expectations.A transition and transformation programme is underway in order both to deliverthe agreed savings on the outsource contract with EDP and to give clients,including EDP, access to the extensive knowledge base and industry solutions ofLogicaCMG. Being part of an international IT services group is also enablingEdinfor to bid for more broadly-based assignments in both public and commercialsectors. The Telecommunications sector business is showing good renewals andextensions at companies such as Onitelecom and SonaeCom, while in FinancialServices we have booked orders for IT projects with Mapfre, the largestinsurance group in Spain. Relationships with key partners such as SAP andNovabase, including collaborative client development, have been deepened. Edinfor provides a range of professional and technology services, but has deepskills in a number of specific areas. LogicaCMG plans to deploy these newlyacquired skills on our client work internationally and, to facilitate this, hasdesignated three international competence centres - in SAP IS-U, GeographicalInformation Systems (GIS) and printing & finishing. Portuguese-based resourcehas already been used on a contract with Electrabel in Belgium and a jointassignment with our Dutch business has recently been won at leading energycompany NUON.OTHER MAINLAND EUROPE OPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 1.2 (33.3) 3.9 (7.7) Industry, Distribution & 2.9 (46.3) 9.5 (55.4)Transport Energy & Utilities 8.3 62.7 27.2 (2.4) Financial Services 11.3 3.7 37.1 (10.3) Telecommunications 6.8 (24.4) 22.3 (21.8) Total 30.5 (5.3) 100.0 (18.9) H1 05 H1 04 H2 04 FY 04 Operating Margin (2.6)% 3.1% 2.9% 3.0% This region includes Belgium for the first time, together with businesses inthe Nordic region, Central & Eastern Europe and Switzerland. The Czech-basedoperations continued to be profitable while Belgium and the Nordic regionposted losses in the first half. Belgium grew its revenues and order book significantly over the correspondingperiod last year, but was impacted by additional social security charges. OurCzech and Slovak businesses had a more difficult period following their strongrecovery last year as privatisation and consolidation in the telecommunicationssector caused short-term disruption. Nonetheless, they continued to leverageGroup expertise well, signing contracts with Transgas, Eurotel, Slovak Telecom,CEZ (Czech electricity producer), Shell Europe and CSOB (part of the KBC Group)where they won an SAP-based assignment against strong incumbent competition. At the end of the period, they won the contract to run a project office fornational ID cards, including biometrics, a major breakthrough in their publicsector drive. They also implemented a new payments solution for Czech insurerCeska pojistovna. The Nordic & Baltics operation remained largely focused onbusiness with existing major accounts, notably Luottokunta Bank and Vodafone. Volumes declined in the latter as a major project passed its peak andinsufficient new business was secured to maintain utilisation rates. Actionhas been taken to reduce headcount where the skills sets did not matchidentified market demand.REST OF WORLD OPERATIONSRevenue by market sector H1 05 % Growth % share % Growth ‚£'m H1 05 on H1 04 H1 05 on H2 04 Public Sector 6.9 68.3 12.9 60.5 Industry, Distribution & 8.6 (11.3) 16.0 (24.6)Transport Energy & Utilities 24.4 11.9 45.5 25.8 Financial Services 7.7 (30.6) 14.4 (19.8) Telecommunications 6.0 62.2 11.2 93.5 Total 53.6 6.3 100.0 12.1 H1 05 H1 04 H2 04 FY 04 Operating Margin 1.3% 1.8% 3.1% 2.4% Australia continued its strong performance securing significant new contractsin the Public Sector, Energy & Utilities and Telecommunications. This businesshas a high proportion of outsourcing contracts and all significant renewals andextensions were secured during the period. Major new contracts were signedwith the Queensland State for its Electronic Document and Records ManagementSystem, NSW Hunter Area Health for phase two of its electronic patients systemand Optus for implementation of a Content Management System.The Group's Asian operations leveraged their close relationship with HP tojointly win contracts at the Bank of Baroda covering Real-Time GrossSettlement, Anti Money-Laundering (AML) and Payments middleware. A further AMLsystem was won at the end of the period at IndusInd Bank in Mumbai. Theintegrated marketing of the Group's telecoms product and systems integrationcapabilities was rewarded with selection as strategic solutions partner by theBridge Mobile Alliance, as its members seek to develop and build a commonmobile service platform across the region. We also successfully migratedSmarTone in Hong Kong to a new 3G-enabled billing system based on the InfinysGeneva platform from Convergys.While overall business in the Middle East remained difficult, the largest everorder in the region was secured from a national Government to provide abiometrics-based smart ID card system. The technology is taken from the DutchCentre of Excellence which assisted with the bid process. A contract has alsobeen awarded by one of the leading banks in the region to produce a study forthe replacement of their core banking technology.The North American operations remained profitable even though their exposure tothe automotive sector is subject to strong pricing pressure. A highlight ofthe period was the consortium agreement established with four major USutilities to define and develop the next generation of asset and resourcemanagement tools. By sharing cost and expertise the group plans tosignificantly accelerate the development and delivery of the new system. Thenew set of capabilities has been named Real Time ARM (Asset and ResourceManagement). It will deliver a single integrated platform on which to manageall resources and work from the office to the field and will support furthercost reduction and efficiency in the current transmission and distributionbusinesses.WIRELESS NETWORKS EMEA AsiaPacific Americas TOTAL Product area ‚£'m % ‚£'m % ‚£'m % ‚£'m % change change change change Messaging (SMS) 37.1 2 16.2 1 21.1 12 74.4 4 Multimedia/ 9.6 (32) 3.8 192 2.6 (35) 16.0 (18)Internet Unified Comms 3.2 39 2.1 91 2.3 64 7.6 58 Payment/Billing 9.9 62 10.0 15 2.1 11 22.0 32 TOTAL 59.8 2 32.1 18 28.1 8 120.0 7 H1 05 H1 04 H2 04 FY 04 Operating 1.0% (5.8)% 3.9% (0.7)%Margin Wireless Networks' revenues were slightly ahead of last year resulting in asmall profit for the period. In its traditional market for text messaging (SMS), Wireless Networks hasbenefited both from increased market demand in developing countries such asRussia and some in South America, and from its own product developments. Thesedevelopments are targeted at protecting customers' current and futureinvestments in the Group's SMS platforms by demonstrating a migration path forthem into the world of IMS, the emerging standard for high speed, multimediacommunications over broadband networks. Wireless Networks therefore continuesto sell IP-enablement to its installed base both as a long-term cost-savingstrategy and to position operators for the introduction of 3G and broadbandservices. In addition, the launch of the Direct Messaging Router forapplication-to-person communications in the second half of last year hascreated an opportunity to achieve incremental revenues. Major SMS system andupgrade contracts during the period included Telemig (Brazil), Turkcell(Turkey), Telenor (Norway), Orascom (Algeria), Telcel (Mexico), Centennial(USA), Telefonica (South America), Optus (Australia) and Vodafone New Zealand.Market shares in the multimedia messaging (MMS) arena have remained largelyunchanged as volumes continue to slowly develop. New installations at MobileTeleSystems (Russia) - part of a broader contract to create their nextgeneration messaging platform - and Saudi Telecom were added during the periodand some small capacity upgrades were delivered to existing systems. In linewith the developing market, the Wireless Service Broker product has beenevolving by enhancing its speed and features. This is enabling WirelessNetworks to generate revenues outside of its role within MMS installations as aHigh Speed Mobile Internet gateway.Similarly, Wireless Networks has been able to refocus its Open MessagingGateway (OMG) into the emerging market for content management and delivery. AtCingular in the USA the LogicaCMG system is handling more than 4,000 messagesper second to support text voting on the American Idol show, while at SFR inFrance more than 2,000 content providers are connected to users through the OMGwith real-time content charging. This product is also an integral part of theplatform being developed for the Bridge Mobile Alliance of eight majoroperators in Asia.The interest from operators - fixed line and mobile - in content derives fromunprecedented technology convergence around broadband and internet protocol(IP) technologies. This is an opportunity and threat for operators who needboth to manage the transition and establish a business model whereby theyretain a value-added role in the distribution chain. Using its MessagingApplication Server (MAS), Wireless Networks is able to offer a low costmigration path that preserves the operators' existing investments whileproviding an enhanced user experience. Wireless Networks is delivering systems today based on its uOne productportfolio that allow video content streaming, video messaging and videomail tobe provided to customers alongside voice and data services. Building onsuccesses at H3G, Mobile One Singapore, Time Warner and SBC, contracts were wonduring the period with both Maxis and DiGi Telecommunications in Malaysia,Bright House Networks (Florida), Bulldog (UK) and, more recently, a major tierone operator in Europe. We are now seeing a steady stream of requests forproposals in this area.The mobile payments business had two major successes in the period. Amulti-million pound contract was secured at Celcom in Malaysia to deliver a newpre-paid voice and data charging system. This system will provide customerswith a single monetary balance across all transactions and services used. Field trials of our Intelligent Charger product also began with a tier oneoperator which to date are going well. This is a key strategic offering forthis part of Wireless Network's business since all operators need torationalise their payment architectures to handle concurrent pre-pay, post-payand service-specific charging. The field trial will continue through to theyear end during which time the sales campaign will be progressively stepped up.While sufficient revenue traction is not yet being seen from the newertechnologies to indicate an inflexion point, the order backlog going into thesecond half and activity levels in the pipeline do indicate that WirelessNetworks can achieve year-on-year revenue growth for the full year. Withgrowing synergy in the marketplace between our telecom products and servicesoperations, we see opportunities to extract greater value from our WirelessNetworks business going forward.CASH FLOW AND DEBTCash generated from operations was ‚£12.5 million. The net cash inflow fromtrading operations was ‚£20.2 million, giving a cash conversion of 50%. Revenuegrowth in the business resulted in a proportionate increased working capitalrequirement and there was an increase in seasonal prepayments that will unwindin the full year. Group net debt at 30 June 2005 was ‚£303.0 million, versus ‚£219.2 million as at1 January 2005, with the increase being largely attributable to theconsideration for the Edinfor acquisition and the increased working capitalrequirement outlined above.Consolidated income statement (unaudited)For the six months ended 30 June 2005 Six months Six months ended ended 30 June 30 June 2005 2004 Note ‚£'m ‚£'m Continuing operations: Revenue 2 891.7 804.1 Net operating costs (850.9) (771.0) Operating profit 2 40.8 33.1 Interest payable (8.9) (9.5) Interest receivable 5.8 2.2 Profit before tax 37.7 25.8 Taxation 4 (13.6) (9.3) Profit for the period from continuing operations 2 24.1 16.5 Discontinued operations: Loss from discontinued operations - (1.6) Net profit for the period 24.1 14.9 Attributable to: Equity holders of the parent 23.1 14.2 Minority interests 1.0 0.7 24.1 14.9 Earnings per share p / share p / share - Basic 5 3.1 1.9 - Diluted 5 2.9 1.9 Earnings per share from continuing operations - Basic 5 3.1 2.1 - Diluted 5 2.9 2.1 Consolidated statement of recognised income and expense (unaudited)For the six months ended 30 June 2005 Six months Six months ended ended 30 June 30 June 2005 2004 ‚£'m ‚£'m Exchange differences on translation of foreign operations 3.3 (7.0) Actuarial (losses) / gains on defined benefit plans (6.1) 12.6 Tax on items taken directly to equity 1.6 0.2 Net (expense) / income recognised directly in equity (1.2) 5.8 Profit for the period 24.1 14.9 Total recognised income and expense for the period 22.9 20.7 Attributable to: Equity holders of the parent 21.9 20.0 Minority interests 1.0 0.7 22.9 20.7 Note:Dividends recognised in the period amounted to ‚£25.8 million (six months ended30 June 2004: ‚£25.0 million), or 3.5p per share (six months ended 30 June 2004:3.4p per share). The interim dividend proposed but not recognised in theseinterim financial statements amounted to ‚£17.7 million (six months ended 30June 2004: ‚£16.9 million), or 2.4p per share (six months ended 30 June 2004:2.3p per share). Consolidated balance sheet (unaudited)30 June 2005 30 June 31 December 30 June 2005 2004 2004 ‚£'m ‚£'m ‚£'mNon-current assets Goodwill 376.4 357.3 351.1 Other intangible assets 17.6 9.1 7.6 Property, plant & equipment 111.4 76.5 75.5 Investments in joint ventures and associates 0.6 - 0.8 Other investments 8.4 8.5 7.8 Retirement benefit assets - 6.5 12.3 Deferred tax assets 29.8 25.2 29.8 544.2 483.1 484.9 Current assets Inventories 3.0 1.1 2.3 Trade and other receivables 668.2 567.0 598.8 Current tax assets 19.2 39.4 9.2 Cash and cash equivalents 88.5 104.9 108.4 778.9 712.4 718.7 Non-current assets classified as held for sale - 3.2 - 778.9 715.6 718.7 Current liabilities Borrowings (45.9) (27.1) (2.9) Trade and other payables (401.0) (365.2) (395.4) Current tax liabilities (14.3) (27.9) (39.1) Provisions (8.7) (13.6) (6.7) (469.9) (433.8) (444.1) Liabilities associated with non-current assets classified as held for sale - (3.0) - (469.9) (436.8) (444.1) Net current assets 309.0 278.8 274.6 Total assets less current liabilities 853.2 761.9 759.5 Non-current liabilities Convertible debt (200.8) (211.2) (199.1) Other borrowings (144.8) (66.6) (104.4) Retirement benefit obligations (58.9) (57.6) (56.0) Deferred tax liabilities (46.2) (45.3) (10.1) Provisions (9.6) (6.2) (4.4) Other non-current liabilities (1.2) (1.0) (0.8) (461.5) (387.9) (374.8) Net assets 391.7 374.0 384.7 Equity Share capital 75.1 75.1 75.0 Share premium account 707.4 707.3 706.7 Other reserves (410.4) (410.7) (400.0) Total shareholders' equity 372.1 371.7 381.7 Minority interests 19.6 2.3 3.0 Total equity 391.7 374.0 384.7 Consolidated cash flow statement (unaudited)For the six months ended 30 June 2005 Six months Six months ended ended 30 June 30 June 2005 2004 Note ‚£'m ‚£'m Cash flows from operating activities Net cash inflow from trading operations 20.2 41.3 Cash outflow related to restructuring activities (7.7) (8.9) Cash generated from operations 6 12.5 32.4 Interest paid (4.2) (5.3) Income tax paid (8.5) (8.2) Net cash (outflow) / inflow from operating activities (0.2) 18.9 Cash flows from investing activities Interest received 0.6 0.8 Proceeds on disposal of property, plant and equipment 0.6 1.6 Purchases of property, plant and equipment (11.4) (13.0) Expenditure on intangible assets (2.6) (2.5) Acquisition of subsidiaries (net of cash acquired) (35.7) (0.5) Disposal of business (1.1) - Net cash outflow from investing activities (49.6) (13.6) Cash flows from financing activities Proceeds from issue of new shares 0.1 0.8 Proceeds from disposal of own shares - 0.1 Proceeds from bank borrowings 81.7 - Repayments of bank borrowings (9.1) (0.1) Repayments of finance lease principal (1.6) (1.3) Repayments of borrowings assumed in acquisitions (11.3) - Repayments of other borrowings (0.5) (0.1) Dividends paid to the company's shareholders (25.8) (25.0) Dividends paid to minority interests (1.0) (1.3) Net cash inflow / (outflow) from financing activities 32.5 (26.9) Net decrease in cash and cash equivalents (17.3) (21.6) Cash and cash equivalents at the beginning of the period 7 106.6 134.7 Net decrease in cash and cash equivalents 7 (17.3) (21.6) Effect of foreign exchange rates 7 (0.8) (4.7) Cash and cash equivalents at the end of the period 7 88.5 108.4 Accounting policiesBasis of preparationThe accounting policies applied in these unaudited interim financial statementsare those that the group expects to apply in its annual financial statementsfor the year ended 31 December 2005, which will be prepared in accordance withInternational Financial Reporting Standards (IFRS) endorsed by the EuropeanUnion, and those parts of the Companies Act 1985 that remain applicable tocompanies reporting under IFRS.The IFRS standards that will be applicable at 31 December 2005 are not knownwith complete certainty at the time of preparation of these interim financialstatements, and as such the policies herein may be subject to amendment.The accounting policies, set out below, reflect two amendments to existingstandards not yet adopted by the European Union (EU) but which the groupexpects to be adopted by the EU before the end of 2005. The two amendmentsare: the amendment to IAS 19 'Employee Benefits', issued on 16 December 2004 bythe International Accounting Standards Board (IASB); and the amendment to IAS39 'Financial Instruments: Recognition and Measurement', issued on 16 June 2005by the IASB. The effective date of the amendment to IAS 19 is 1 January 2006,however, the group expects to apply the amendment early, as permitted by thestandard.The interim financial statements have been prepared under the historical costconvention with the exception of certain items which are measured at fairvalue, as disclosed in the accounting policies below.This interim report does not constitute statutory accounts of the group withinthe meaning of section 240 of the Companies Act 1985. Statutory accounts forthe year ended 31 December 2004, which were prepared under UK generallyaccepted accounting principles (UK GAAP), have been filed with the Registrar ofCompanies. The auditors' report on those accounts was unqualified and did notcontain a statement under section 237 of the Companies Act 1985.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 39. The group hastaken an exemption to apply IAS 32 and IAS 39 from 1 January 2005. Prior tothis date, financial instruments have been accounted for under UK GAAP. Areconciliation of equity on adoption of IAS 32 and 39 at 1 January 2005 isprovided in note 9.3.In addition, the group has taken the following optional exemptions contained inIFRS 1 'First-time Adoption of International Financial Reporting Standards' inpreparing the group's balance sheet on transition to IFRS at 1 January 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.Basis of consolidationThe consolidated financial statements include those of LogicaCMG plc (thecompany) and all of its subsidiary undertakings (together, the group), and thegroup's share of the results of joint ventures and associates. Investments injoint ventures and associates 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 are expensed in the income statement as incurred. Capitaliseddevelopment costs are amortised on a straight line basis over their usefuleconomic lives once the related software product or enhancement is availablefor 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 ofleaseThe 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.Investments in subsidiariesInvestments in subsidiaries in the company's balance sheet are held at costless any accumulated impairment losses.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 interim financial statements. For those policiesthat have changed on adoption of IAS 32 and 39 on 1 January 2005, policies bothbefore 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 euro to pounds sterling exchange rate is treated as a hedge ofnet investments in foreign operations (see below). Foreign exchange gains andlosses on the convertible bonds are taken directly to equity to the extent thatthe 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 currency assetor liability that is probable and whose characteristics have been identified;it must involve the same currency as the hedged item; andit 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 gain or losson re-measurement is taken to the income statement except where the derivativeis part of a designated cash flow hedge or a designated hedge of a netinvestment in 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 amountsof assets and liabilities for financial reporting purposesand their corresponding tax base. 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 currenciesItems included in the separate financial statements of group entities aremeasured in the functional currency of each entity. Transactions denominatedin foreign currencies are translated into the functional currency of the entityat the rates prevailing at the dates of the individual transactions. Foreigncurrency monetary assets and liabilities are translated at the rates prevailingat the balance sheet date. Exchange gains and losses arising are charged orcredited to 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: 30 June 2005 30 June 2004 Average Closing Average Closing ‚£1 = ¢â€š¬ 1.46 1.48 1.48 1.49 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.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.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 - primary basisAt 30 June 2005, LogicaCMG is organised into two business segments: IT servicesand wireless networks. These two business segments are the group's primaryreporting format for segment information. Segment revenue and result under theprimary reporting format are disclosed in the table below. Revenue Profit / (loss) after tax Six months Six months Six months Six months ended ended ended ended 30 June 2005 30 June 2004 30 June 2005 30 June 2004 ‚£'m ‚£'m ‚£'m ‚£'m IT services 771.7 691.9 39.6 39.6 Wireless networks 120.0 112.2 1.2 (6.5) 891.7 804.1 40.8 33.1 Interest payable - - (8.9) (9.5) Interest receivable - - 5.8 2.2 Taxation - - (13.6) (9.3) 891.7 804.1 24.1 16.5 The group manages the IT services business segment on a geographic basis. Additional voluntary disclosures, not required under IFRS, are provided belowfor the geographic sub-divisions within the IT services business segment. Revenue Operating profit / (loss) Six months Six months Six months Six months ended ended ended ended 30 June 2005 30 June 2004 30 June 2005 30 June 2004 ‚£'m ‚£'m ‚£'m ‚£'m United Kingdom 370.0 336.1 34.8 36.1 Netherlands 199.9 176.0 12.8 14.5 Germany 39.8 46.3 (5.8) (11.1) France 57.6 50.9 (3.7) (1.8) Iberia * 20.3 - 1.6 - Rest of Europe 30.5 32.2 (0.8) 1.0 Rest of World 53.6 50.4 0.7 0.9 771.7 691.9 39.6 39.6 * The Iberia category represents the Edinfor business acquired in the currentperiod.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 ‚£13.5 million, and an operating loss of ‚£0.2million, to the Rest of Europe category from the Netherlands (formerly Benelux)category.Employees Six months Six months ended ended 30 June 2005 30 June 2004 The average number of employees during the period was: Number Number United Kingdom 6,115 6,028 Netherlands 5,783 5,728 Germany 1,146 1,580 France 1,537 1,484 Iberia * 529 - Rest of Europe 845 845 Rest of World 2,527 1,983 IT services 18,482 17,648 Wireless networks 1,712 1,944 20,194 19,592 Six months Six months ended ended 30 June 2005 30 June 2004 The number of employees at the end of the period was: Number Number United Kingdom 6,093 5,935 Netherlands 5,787 5,675 Germany 1,025 1,539 France 1,515 1,484 Iberia * 1,233 - Rest of Europe 843 829 Rest of World 2,625 2,050 IT services 19,121 17,512 Wireless networks 1,611 1,956 20,732 19,468 * The Iberia category represents the Edinfor business acquired in the currentperiod.The comparative information in the employee numbers tables 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 352 and 342 respectively tothe Rest of Europe category from the Netherlands (formerly Benelux) category.TaxationThe tax charge for the six months ended 30 June 2005 has been based on theestimated effective tax rate for the full year of 36.0% (six months ended 30June 2004: 36.0%). The tax charge includes an overseas tax charge of ‚£7.4million (six months ended 30 June 2004: tax credit of ‚£2.7 million).Earnings per share Six months ended 30 June 2005 Weighted average Earnings Earnings number per of share shares ‚£'m million pence Earnings per share Earnings attributable to ordinary shareholders 23.1 737.0 3.1 Basic EPS 23.1 737.0 3.1 Effect of share options - 2.9 - Effect of convertible bonds, net of tax (0.4) 56.3 (0.2) Diluted EPS 22.7 796.2 2.9 Adjusted earnings per share Earnings attributable to ordinary shareholders 23.1 737.0 3.1 Less: mark-to-market gain on convertible bonds designated at fair value through profit or loss, net (2.5) - (0.3)of tax Less: amortisation of intangible assets initially recognised on acquisition, net of tax - - - Basic adjusted EPS 20.6 737.0 2.8 Effect of share options - 2.9 - Diluted adjusted EPS 20.6 739.9 2.8 For the six months ended 30 June 2005, there was no difference between earningsper share from continuing operations and earnings per share from alloperations. Six months ended 30 June 2004 Weighted average Earnings per Earnings number share of shares ‚£'m million pence Earnings per share from all operations Earnings attributable to ordinary 14.2 736.0 1.9shareholders Basic EPS 14.2 736.0 1.9 Effect of share options - 4.2 - Diluted EPS 14.2 740.2 1.9 Earnings per share from continuing operations Earnings attributable to ordinary 14.2 736.0 1.9shareholders Add back: Pre-tax loss from discontinued operations 1.6 - 0.2 Tax relating to discontinued operations - - - Basic EPS from continuing operations 15.8 736.0 2.1 Effect of share options - 4.2 - Diluted EPS from continuing operations 15.8 740.2 2.1 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 trusts, which are treated as cancelled.In the six months ended 30 June 2005, the convertible bonds were anti-dilutivefor the purposes of calculating adjusted diluted earnings per share andaccordingly were not included.The impact of the charge for share-based payments was to reduce adjusted basicearnings per share for the six months ended 30 June 2005 by 0.4 pence per share(six months ended 30 June 2004: 0.3 pence per share).For the six months ended 30 June 2004, there was no difference between earningsper share from continuing operations and adjusted earnings per share. Accordingly, adjusted earnings per share is not separately presented.Reconciliation of operating profit to cash generated from operations Six months Six months ended ended 30 June 2005 30 June 2004 ‚£'m ‚£'m Operating profit: Continuing operations 40.8 33.1 Discontinued operations - (1.6) 40.8 31.5 Adjustments for: Gain / loss on derivative financial instruments (0.8) - Share-based payments 2.9 2.5 Depreciation of property, plant and equipment 13.4 15.4 Amortisation of intangible assets 2.6 3.7 Net movements in provisions (3.8) (8.6) Non-cash element of expense for defined benefit plans 2.0 2.2 16.3 15.2 Movements in working capital: Inventories (0.3) 0.9 Trade and other receivables (46.3) (37.2) Trade and other payables 2.0 22.0 (44.6) (14.3) Cash generated from operations 12.5 32.4 Cash outflow related to restructuring activities 7.7 8.9 Net cash inflow from trading operations 20.2 41.3 The cash flows from discontinued operations are not material for the group andaccordingly 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 Other At 1 Acquisitions non-cash Exchange 30 June January Cash and movements differences 2005 2005 flows disposals* ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m Cash and cash 106.6 (17.3) - - (0.8) 88.5equivalents Bank overdrafts (0.4) 0.4 - - - - Finance leases (4.7) 1.6 (3.2) (0.3) 0.2 (6.4) Bank loans (108.5) (73.0) (1.6) (0.2) (0.6) (183.9) Other loans (0.9) 11.8 (11.3) - - (0.4) Convertible bonds (211.3) - - 0.5 10.0 (200.8) Net debt (219.2) (76.5) (16.1) - 8.8 (303.0) * Excludes cash and cash equivalents assumed on acquisition or disposed ofthrough sale of businesses, amounting to ‚£5.7 million and ‚£1.4 millionrespectively.The cash and cash equivalents balance of ‚£106.6 million at 1 January 2005included ‚£1.7 million of cash and cash equivalents which are shown in theconsolidated balance sheet within non-current assets classified as held forsale.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 / 39 on 1 January 2005.Acquisition of subsidiaryOn 20 April 2005, the group acquired 60 per cent of the issued ordinary sharecapital of Edinfor - Sistemas Informƒ¡ticos, S.A. (Edinfor) from Energias dePortugal (EDP). The Edinfor group of companies is a leading IT servicesprovider based in Portugal. Edinfor contributed revenues of ‚£20.3 million andnet profit of ‚£1.6 million for the period from 20 April 2005 to 30 June 2005.The minority interest of 40 per cent is subject to an EDP put option and aLogicaCMG call option. The EDP put option is exercisable at any time in theperiod two years from the acquisition date to four years from the acquisitiondate. The LogicaCMG call option is exercisable at any time four years afterthe acquisition date.The majority interest of 60 per cent held by the group is subject to an EDPcall option. This option is only exercisable in limited circumstances whichthe group does not expect to occur. Carrying amount pre-acquisition Provisional fair value ‚£'m ‚£'m Net assets acquired: Intangible assets 16.2 8.5 Property, plant and equipment 32.8 37.3 Investments in associates 0.6 0.6 Inventories 1.7 1.7 Trade and other receivables 36.1 35.5 Cash and cash equivalents 5.7 5.7 Trade and other payables (34.7) (27.6) Current tax payable (1.3) (1.3) Derivative financial instruments (0.4) (0.4) Borrowings (16.1) (16.1) Provisions (2.4) (2.4) Deferred tax 0.5 2.4 Other non-current liabilities - (0.1) 38.7 43.8 Minority interests (17.6) Share of net assets acquired 26.2 Goodwill 19.0 Total consideration 45.2 Total consideration comprised: Cash 37.0 Deferred consideration 6.8 Directly attributable costs 1.4 45.2 The total cash paid to EDP relating to the Edinfor transaction comprised ‚£48.3million, of which ‚£37.0 million has been attributed to the business combinationand ‚£11.3 million has been attributed to repayment of borrowings assumed onacquisition. Due to the proximity of the date of acquisition to the end of the reportingperiod, the fair value adjustments contain some provisional amounts which willbe finalised in the 2005 annual financial statements. In particular, thevalues of certain intangible assets, and deferred tax thereon, relating toacquired trade names, which are currently subsumed within goodwill, are pendingfinalisation. The goodwill recognised of ‚£19.0 million is attributable toanticipated synergies, the value of the work force and those intangible assetspending separate recognition on completion of the acquisition date fair valueexercise.Transition to IFRSOn 17 May 2005, the group published an explanation of the impact of thetransition to IFRS, restated comparative information for 2004 under IFRS andreconciliations from UK GAAP. This disclosure note reproduces information fromthe group's previous announcement where it is required to be disclosed in theseinterim financial statements under IFRS 1. In addition, a reconciliation ofequity on the adoption of IAS 32 and 39 on 1 January 2005 is also provided,together with an explanation of each adjustment.Notes a) to h) below explain the impact that the adoption of IFRS has had oncomparative information as at and for the six months ended 30 June 2004. Notei) explains the impact of the adoption of IAS 32 and 39. The narrative notesare intended to support the associated numerical reconciliations contained insections 9.1 to 9.3 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 30 June 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 balancesheets.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 sheets 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 30 June 2004 was to capitalise assets underfinance leases within property, plant and equipment at their deemed cost lessaccumulated depreciation. A related liability, classified as a borrowing, forfuture lease payments was also recognised. The impact on the income statementfor the six months ended 30 June 2004 was limited, the main consequence being areduction 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 30 June 2004 was to removeany pension prepayment or provision recognised under UK GAAP and to recognisethe net deficit or surplus, when permitted, on defined benefit schemes less anyunrecognised past service cost. The impact on the income statement for the sixmonths ended 30 June 2004 was to increase the pension expense in operatingprofit and to recognise a net charge to interest payable.Holiday payThe 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 30June 2004 and increase the expense in the income statement for the six monthsended 30 June 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 stochastic model has been used for executiveshare 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 30 June 2004 for social security on shareoptions increased compared to UK GAAP, however, the effect on the incomestatement for the six months ended 30 June 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 30 June 2004 and to increase net operatingexpenses in the income statement for the six months ended 30 June 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 2004 interim dividend inthe balance sheet at 30 June 2004.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 30June 2004 included ‚£2.4 million of cash equivalents previously classified as aliquid 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 six months ended 30 June 2004 Discontinued Other IFRS IFRS UK GAAP1,3 operations2 adjustments ‚£'m ‚£'m ‚£'m ‚£'m Revenue 809.2 (5.1) - 804.1 Net operating costs (775.0) 6.7 (2.7) (771.0) Operating profit 34.2 1.6 (2.7) 33.1 Analysed as: Operating profit before goodwill amortisation 46.1 1.6 (14.6) 33.1 Goodwill amortisation (11.9) - 11.9 - 34.2 1.6 (2.7) 33.1 Profit before interest 34.2 1.6 (2.7) 33.1 Interest payable (9.1) - (0.4) (9.5) Interest receivable 2.2 - - 2.2 Profit before tax 27.3 1.6 (3.1) 25.8 Taxation (12.9) - 3.6 (9.3) Profit after tax 14.4 1.6 0.5 16.5 Loss from discontinued operations n/a (1.6) - (1.6) Profit from continuing operations n/a - 0.5 14.9 Minority interests (0.7) - - (0.7) Net profit for the period 13.7 - 0.5 14.2 Analysis of other IFRS adjustments for the six months ended 30 June 2004 Goodwill amortis- Develop-ment Lease Share- Other ation costs reclass- based employee Foreign reversal ification payments benefits currencies Total ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m ‚£'m Revenue - - - - - - - Net 11.9 (0.8) 0.1 (2.3) (11.6) - (2.7)operating costs Operating 11.9 (0.8) 0.1 (2.3) (11.6) - (2.7)profit Analysed as: Operating profit - (0.8) 0.1 (2.3) (11.6) - (14.6)before goodwill amortisation Goodwill 11.9 - - - - - 11.9amortisation 11.9 (0.8) 0.1 (2.3) (11.6) - (2.7) Profit 11.9 (0.8) 0.1 (2.3) (11.6) - (2.7)before interest Interest - - (0.1) - (0.3) - (0.4)payable Interest - - - - - - -receivable Profit 11.9 (0.8) - (2.3) (11.9) - (3.1)before tax Taxation - 0.3 - - 3.3 - 3.6 Profit after 11.9 (0.5) - (2.3) (8.6) - 0.5tax Minority - - - - - - -interests Net profit 11.9 (0.5) - (2.3) (8.6) - 0.5for the period Notes:1 The UK GAAP column represents the results from both continuing anddiscontinued operations.2 The discontinued operations columns show the impact of reclassifying theloss after tax of discontinued operations to the line entitled 'Loss fromdiscontinued operations'.3 Boxed areas in the tables above represent amounts or sub-totals that are notapplicable under UK GAAP. Reconciliation of equity at 30 June 2004 IFRS UK GAAP adjustments IFRS ‚£'m ‚£'m ‚£'m Non-current assets Goodwill 339.3 11.8 351.1 Other intangible assets - 7.6 7.6 Property, plant & equipment 78.1 (2.6) 75.5 Interests in joint ventures 0.8 - 0.8 Other investments 0.5 7.3 7.8 Retirement benefit assets - 12.3 12.3 Deferred tax assets 14.8 15.0 29.8 433.5 51.4 484.9 Current assets Inventories 2.3 - 2.3 Trade and other receivables 613.3 (14.5) 598.8 Current tax assets 9.2 - 9.2 Cash and cash equivalents 108.4 - 108.4 733.2 (14.5) 718.7 Current liabilities Borrowings (1.1) (1.8) (2.9) Trade and other payables (393.3) (2.1) (395.4) Current tax liabilities (39.1) - (39.1) Provisions (6.7) - (6.7) (440.2) (3.9) (444.1) Net current assets 293.0 (18.4) 274.6 Total assets less current liabilities 726.5 33.0 759.5 Non-current liabilities Convertible debt (199.1) - (199.1) Other borrowings (102.4) (2.0) (104.4) Retirement benefit obligations - (56.0) (56.0) Deferred tax liabilities (5.4) (4.7) (10.1) Provisions (4.8) 0.4 (4.4) Other non-current liabilities - (0.8) (0.8) (311.7) (63.1) (374.8) Net assets 414.8 (30.1) 384.7 Equity Share capital 75.0 - 75.0 Share premium account 706.7 - 706.7 Other reserves (370.0) (30.0) (400.0) 411.7 (30.0) 381.7 Minority interests 3.1 (0.1) 3.0 Total equity 414.8 (30.1) 384.7 Analysis of IFRS adjustments at 30 June 2004 Goodwill amortis- Develop-ment 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 11.8 - - - - - - 11.8 Other - 1.5 - - - - 6.1 7.6intangible assets Property, - - 3.5 - - - (6.1) (2.6)plant & equipment Interests in - - - - - - - -joint ventures Other - - - 7.3 - - - 7.3investments Retirement - - - 12.3 - - - 12.3benefit assets Deferred tax - - - - 15.0 - - 15.0assets 11.8 1.5 3.5 19.6 15.0 - - 51.4 Current assets Inventories - - - - - - - - Trade and - - - (14.2) - (0.3) - (14.5)other receivables Current tax - - - - - - - -assets Cash and - - - - - - - -cash equivalents - - - (14.2) - (0.3) - (14.5) Current liabilities Borrowings - - (1.8) - - - - (1.8) Trade and - - - (19.0) - - 16.9 (2.1)other payables Current tax - - - - - - - -liabilities Provisions - - - - - - - - - - (1.8) (19.0) - - 16.9 (3.9) Net current - - (1.8) (33.2) - (0.3) 16.9 (18.4)assets Total assets less current 11.8 1.5 1.7 (13.6) 15.0 (0.3) 16.9 33.0 liabilities Non-current liabilities Convertible - - - - - - - -debt Other - - (2.0) - - - - (2.0)borrowings Retirement - - - (56.0) - - - (56.0)benefit obligations Deferred tax - - - - (4.7) - - (4.7)liabilities Provisions - - - 0.4 - - - 0.4 Other - - - (0.8) - - - (0.8)non-current liabilities - - (2.0) (56.4) (4.7) - - (63.1) Net assets 11.8 1.5 (0.3) (70.0) 10.3 (0.3) 16.9 (30.1) Equity Share - - - - - - - -capital Share - - - - - - - -premium account Other 11.8 1.5 (0.2) (70.0) 10.3 (0.3) 16.9 (30.0)reserves 11.8 1.5 (0.2) (70.0) 10.3 (0.3) 16.9 (30.0) Minority - - (0.1) - - - - (0.1)interests Total equity 11.8 1.5 (0.3) (70.0) 10.3 (0.3) 16.9 (30.1) Note:1 The other adjustments comprise the reclassification of purchased softwarelicences with a net book value of ‚£6.1 million from property, plant andequipment to intangible assets and the reversal of the accrual for the 2004interim dividend, amounting to ‚£16.9 million, from trade and other payables.Reconciliation of equity at 1 January 2005 ‚£'m At 31 December 2004 374.0 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 374.8 Interim reportThe interim report was approved by the board of directors on 30 August 2005 andcopies are available from LogicaCMG plc, Stephenson House, 75 Hampstead Road,London NW1 2PL and LogicaCMG, Prof. W.H. Keesomlaan 14, 1183 DJ Amstelveen,The Netherlands.ENDLOGICACMG PLC

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