7th Aug 2006 07:01
F&C Asset Management PLC07 August 2006 To: London Stock ExchangeAttention: RNSFrom: F&C Asset Management plc (the "Company")Date: Embargoed until 7am on 7 August 2006 Interim Results for the six months to 30 June 2006 (unaudited) Financial and Business Highlights The F&C Asset Management plc Group ("F&C") has today announced its interimfinancial results for the six months to 30 June 2006. Financial Highlights • Underlying earnings per share of 7.4 pence. • Operating margin of 41.0 per cent, despite the loss of Resolution plc funds. • Average fee rate increased to 22 basis points for 1H 2006 from 21 basis points in 2005. • £44.8 million non-cash impairment charge arising from the further loss of institutional and investment trust management contracts and a reduction in the expected lives of remaining contracts. • Interim dividend of 4.0 pence maintained. Business Highlights • Assets under management of £107 billion as at 30 June 2006. • Strong underlying net new business inflows in UK Retail and European Wholesale. • Building blocks are in place to support enhanced performance. Enquiries: Jason Hollands, Head of Group Communications - Telephone: 020 7506 1168 Chief Executive's Report The first half of 2006 saw good progress in implementing the strategy outlined afew months ago in our 2005 Annual Report and Financial Statements. The focus onperformance, clear accountability and the upgrading of resources where necessaryreceived particular attention. Despite the withdrawal of £20.1 billion of funds by Resolution plc during Q1,the first six months generated investment management fees of £130.7 million, ona par with the same period in 2005. These management fees do, however, includesome revenues which will not recur in future periods, as detailed below. Having achieved our target of £33 million of annualised cost synergies stemmingfrom the merger, further synergies and savings have been reinvested in thebusiness. These, along with a strict cost discipline, have allowed the Group tofinance new initiatives and to make senior hires while reporting lower coststhan the second half of last year. Underlying Earnings Per Share (EPS) for the period to 30 June are 7.4 pence. TheBoard continues to regard 'underlying earnings' as the most appropriate measureof performance. However, the loss of certain investment trust and institutionalmandates, which were recognised as intangible assets at the time of the merger,together with a reassessment of the lives of the remaining contracts have led toa £44.8 million impairment charge. After this charge, further restructuringcosts, the amortisation of intangible assets and the cost of the Re-Investmentplan the basic loss per share was 4.4 pence. Both investment performance and new business flows were stronger in the firstquarter than in the second when sharp falls in global equity markets andincreased market volatility affected results. Despite this, our UK retail fundsales in particular continued to be resilient through May and June,demonstrating momentum in this part of our business. Overall, we are encouraged by progress year-to-date and notwithstanding thedisappointment of certain investment trust and institutional outflows, webelieve that the key building blocks have now been put in place to deliverimproved investment performance over time, the prerequisite for generatingorganic growth. Assets Under Management and Business Flows Assets under management decreased from £131 billion at 31 December 2005 to £107billion at 30 June 2006, principally reflecting the withdrawal of £20.1 billionof assets by Resolution plc as well as a number of smaller mandate losses. Excluding insurance flows, the total net outflow for the first half amounted to£3.9 billion of which £3.5 billion occurred during the first quarter. Grossinflows during 1H 2006 were £3.4 billion. In the UK retail market we generated net inflows of £165 million during the halfyear, representing a 158 per cent. year-on-year increase. A particular successhas been the new F&C UK Opportunities Fund which has received encouragingsupport from multi-managers and discretionary intermediaries. Our European wholesale business also enjoyed a strong first quarter butredemptions were high in the second quarter, particularly in Portugal whereinvestors tend to be more risk averse. Whilst there was a small net outflow of£24 million in our sub-advisory business during the half year, the underlyingstrength of the business was masked by a £182 million outflow in Q1 as a resultof the closure of the Friends Provident GPI SICAV range. In the investment trust area we recorded a £495 million net outflow, principallyas a result of the merger of the F&C Emerging Markets Investment Trust with acompetitor and the loss of the F&C Latin American Investment Trust following thedeparture of the lead manager. The latter loss was particularly disappointinggiven the strong long term performance of the Trust. We remain committed torebuilding our emerging equities franchise and have subsequently strengthenedthis area through focused recruitment. In Q2 a longstanding Dutch pension client, Vervoer, for whom we have managed abalanced mandate, conducted a review of its operating model. Vervoer havesubsequently appointed a fiduciary manager with responsibility for assetallocation, risk budgeting and underlying manager selection for specialistmandates. As a result, and despite our out-performance both at the overallmandate level and in most of the sub-portfolios, we have been notified of thewithdrawal of all equity assets currently managed by F&C. This will amount to anoutflow of approximately £1.5 billion in assets, which we expect to happen inQ3. We have also been notified by the Electricity Supply Pension Scheme of thetermination of our contract to manage their £1 billion property portfolio, witheffect from Q3. Financial Results Revenues As previously reported, most of the assets that we managed for Resolution plcwere transferred back to Resolution during Q1 following its merger withBritannic Group plc. Despite the loss of £20.1 billion of Resolution-relatedfunds during Q1 2006, investment management fees for the six months to 30 Juneof £130.7 million were on a par with the £131.1 million management fees earnedduring the same period in 2005. 1H 2006 revenues benefited from £2.7 million ofrevenue from Resolution and approximately £3.8 million in fees from the Vervoerequity portfolios and the Electricity Supply Pension Scheme property mandate,however, these revenues will not recur in 2H 2006, due to the imminenttermination of these mandates. The average fee rate has risen from 21 basis points in the year ended 31December 2005 to 22 basis points for the first half of 2006. Expenses The expenses in our income statement include a number of recurring andnon-recurring items, the significant elements of which are set out below: 1H 2006 2H 2005 1H 2005 £m £m £mUnderlying operating costs 75.0 78.2 72.5Amortisation of intangible assets 22.3 27.9 27.9'Recurring expenditure' 97.3 106.1 100.4 Restructuring costs 6.9 10.8 13.8Re-Investment Plan costs 6.3 9.3 12.9Impairment of intangible assets 44.8 111.5 -'Non-recurring expenditure' 58.0 131.6 26.7 The underlying operating costs of the Group for the six months to 30 June 2006amount to £75.0 million. These are some £3.2 million less than the comparablecosts for 2H 2005 and demonstrate the achievement of the anticipated costsynergy benefits arising from the merger, despite further investment during 1H2006 to support a number of new revenue enhancing initiatives. The restructuring costs incurred during 1H 2006 include the final tranche ofstaff related expenditure associated with the merger, the costs of furtherintegration of our information technology (IT) infrastructure and the cost ofproviding for onerous lease obligations in respect of vacant premises. Whilefurther IT restructuring costs will be incurred in 2H 2006 the cumulativerestructuring expenditure associated with the merger will not exceed thepreviously stated target of £50 million. As previously highlighted, the Re-Investment Plan represents the one-offshare-based payment arrangements which are linked to the crystallised incentivesthat employees agreed to rollover at the time of the merger. The level ofassociated costs will continue to fall, in line with the underlying three yearterm of the arrangements. Amortisation and Impairment of Intangible Assets The Group's balance sheet includes the net book value of management contractsacquired through business combinations. While these contracts have beenamortised over their expected useful lives, for which a charge of £22.3 millionhas been recognised in 1H 2006, there is a requirement to test the carryingvalue of these assets where any indicator of potential impairment exists. Theloss of both investment trust and institutional mandates during 1H 2006(including Vervoer and ESPS) required a further impairment review to beperformed. The resultant impairment charge of £44.8 million has been recognisedat the end of the period and comprises £22.2 million in respect of investmenttrusts and £22.6 million on institutional contracts. There are two key factors which have determined the quantum of the impairmentcharge recognised; firstly, the higher than anticipated mandate losses duringthe period; and secondly, the directors determined it appropriate to reduce theanticipated remaining lives of these contracts to 6 years for institutionalcontracts and 10 years for investment trusts, as a result of these higher thananticipated losses. Further details of the impairment testing are provided in note 5 of theaccompanying interim financial statements. Underlying Earnings and Operating Margin While the face of the income statement shows a loss after tax of £21.0 millionfor the period and a resultant basic loss per share of 4.4 pence, your Boardcontinues to regard 'underlying earnings' as the most appropriate measure of therecurring performance of the Group. This measure of performance excludes theamortisation of intangible assets and the non-recurring items highlighted above,an analysis of which is provided in note 3 to the financial statements. The underlying earnings per share (EPS) for the six months to 30 June amount to7.4 pence, compared with 15.9 pence for the year to 2005 and 7.9 pence for thefirst half of 2005. The Group continues to display a strong underlying operating margin incomparison to our peers, achieving 41.0 per cent. for the six months to 30 June.The margin has fallen from 44.1 per cent for 2005, although this is primarily asa result of the loss of revenue from Resolution. During the period, we received £27 million cash compensation from Resolution plcin relation to the early termination of its contract. However, as the value ofthe related intangible asset for which this compensation was received alsoamounted to £27 million, no gain or loss has arisen and hence there is no impacton the Group income statement. Debt Refinancing While the Group continues to have a healthy cash position (shareholders cash ofsome £136 million as at 30 June 2006), it remains the Board's intention torefinance the £180 million debt facility, which falls due for payment to ourparent company, Friends Provident, in November 2006. The Group is seeking torefinance this debt with debt that will qualify as regulatory capital. In orderto maintain maximum flexibility, the Board has, in the meantime, agreed withFriends Provident that the current facility can be rolled over, if consideredappropriate. Pension Deficit Since 31 December 2005, the Group's pension deficit has reduced from £48 millionto £35 million. While this benefit is pleasing to note, it has largely beendriven by the increase in corporate bond yields since the year-end. Dividend The Board has today declared an interim dividend of 4.0 pence per share, whichwill be payable on 20 October 2006, to shareholders on the register as at 22September 2006. Business Developments As outlined in our 2005 Annual Report and Financial Statements, we have astraightforward view that asset management is a service industry and thereforeour business philosophy is to seek to excel in everything that our clientsexpect from us. At the start of the year we launched Performance First, aninitiative to drive top quartile performance throughout every part of thebusiness through the definition of clear objectives and lines ofresponsibilities. Investment performance is of course pivotal to the success of our business andwe have continued to implement changes, where necessary, to improve it. Mergersynergies have allowed us to finance the upgrading of resources while reducingour overall costs. During 1H 2006 we hired 12 senior investment professionals aswell as significantly upgrading our marketing teams in both the UK and TheNetherlands. Specific action was taken to address two areas of performance weakness; emergingequities and Euro government bonds. In particular, we appointed a new Head ofEmerging Equities and have undertaken focused recruitment in this area in orderto rebuild our long term track record. F&C has a major presence in fixed income with a strong record in credit, highyield and emerging debt, but our Euro government bond performance in London haslagged the benchmark. To address this we have consolidated our entire Eurogovernment bond investment proposition in Amsterdam where the team servicing ourDutch insurance clients has a stronger record of delivering to clientexpectations. An additional benefit of this move is that it will enhance ourability to deliver Euro government / corporate aggregate product as our Euro /global credit team is already based in Amsterdam. However, investment performance alone is no guarantee of client retention. Whilewe believe the industry-wide shift from balanced to specialist mandates islargely played out in the UK, the rise of fiduciary management in TheNetherlands is a risk factor, as demonstrated by the recent decision by Vervoer.As at 30 June balanced pension mandates (excluding insurance) represented 14.1%of revenues. To address these industry developments we have further developed our "multi-boutique" investment framework and are focusing on higher marginspecialist areas for net new business, such as private equity funds, high alphaequities, emerging debt and high yield bonds. We have also been strengtheningand developing key overlays for institutional clients in areas such as GlobalTactical Asset Allocation and Liability Driven Investment (LDI). Building on theexperience of our Dutch LDI pooled funds we are developing similar products witha view to launching into the UK and Irish market places in 2H 2006. Finally, a key development during the half year has been the recruitment ofDavid Logan as Chief Financial Officer. David joined the Group and was appointedto the Board as an Executive Director on 31 July. Prior to this he was a Partnerin the Insurance and Investment Management Division at Deloitte. Summary Despite turbulent markets, good progress has been made in both our UK retail andEuropean wholesale businesses which are in growth mode. However, institutionaland investment trust net outflows will put pressure on short term revenues whilewe develop new product initiatives in these areas. Strong investment performanceis without doubt essential in order to grow organically. While the necessarybuilding blocks for improving performance are now largely in place, we willcontinue to invest where necessary to ensure your Company is well positioned tobenefit from the considerable growth opportunities we see in the European assetmanagement industry. Alain GrisayChief Executive4 August 2006 F&C Asset Management plcCondensed Consolidated Income Statement 6 months 6 months ended Year ended ended 30 June 2005 31 December Notes 30 June 2006 (as restated)* 2005 £000 £000 £000 RevenuesInvestment management fees 130,738 131,062 277,356Investment income attributable to policyholders 20,099 13,354 28,918Other income 298 366 691Total revenues 151,135 144,782 306,965 Fee and commission expenses (5,026) (4,609) (10,895) Net revenues 146,109 140,173 296,070 Operating expensesNet operating costs: investment and insurance contracts (19,380) (12,656) (27,634)attributable to policyholdersOperating expenses (75,012) (72,534) (150,695)Re-Investment Plan costs (6,298) (12,864) (22,162)Impairment of intangible assets - management contracts (44,815) - (111,500)Amortisation of intangible assets - management (22,286) (27,874) (55,801)contractsTotal operating expenses before restructuring costs (167,791) (125,928) (367,792) Operating (loss)/profit before restructuring costs (21,682) 14,245 (71,722) Restructuring costs:- Reorganisation costs post acquisition of F&CGH Group 1(a) (6,927) (13,339) (22,405)- Operations outsourcing 1(b) - (423) (2,235) Operating (loss)/profit after restructuring costs (28,609) 483 (96,362) Finance revenue 9,299 6,793 15,570Finance costs (10,391) (9,466) (19,495)Share of profit/(loss) of associates 545 (360) (339)Impairment in associates and other financial - - (5,026)investmentsLoss on disposal of subsidiaries - (275) (672) Loss before tax (29,156) (2,825) (106,324) Tax - Policyholders (865) (353) (118)Tax - Shareholders 8,974 2,456 29,169Tax income 2 8,109 2,103 29,051 Loss for the period (21,047) (722) (77,273) Attributable to:Equity holders of the parent (21,047) (722) (77,273)Minority interests - - - Loss for the period (21,047) (722) (77,273) Memo - dividends proposed 4 19,181 18,854 33,381 - dividends paid 4 33,472 32,952 51,817 Basic loss per share 3 (4.40)p (0.15)p (16.36)p Diluted loss per share 3 (4.30)p (0.15)p (15.77)p * The restatement is presentational only and is explained within the AccountingPolicies. F&C Asset Management plcConsolidated Balance Sheet As at 30 June As at 2005 As at 30 June (as 31 December Notes 2006 restated) 2005 £000 £000 £000Assets Non-current assetsProperty, plant and equipment 10,646 11,231 11,242Intangible assets: - Goodwill 5 569,846 577,946 577,946 - Management contracts 5 321,887 551,158 416,141 - Other intangible assets 5 1,421 484 1,641 5 893,154 1,129,588 995,728Other financial investments 3,991 3,293 3,397Loan to associate 2,500 2,500 2,500Investment in associates 560 4,857 335Deferred acquisition costs 8,097 8,122 8,342Deferred tax assets 32,680 33,239 34,083 Total non-current assets 951,628 1,192,830 1,055,627 Current assetsFinancial investments 1,108,614 877,913 982,943Reinsurance assets 2,372 2,371 2,617Stock of units and shares 746 635 676Trade and other receivables 110,552 116,217 92,858Deferred acquisition costs 3,399 2,788 3,018Cash and cash equivalents:- Shareholders 136,232 68,741 118,045- Policyholders 52,136 37,804 28,152 188,368 106,545 146,197 Total current assets 1,414,051 1,106,469 1,228,309Total assets 2,365,679 2,299,299 2,283,936 Liabilities Non-current liabilitiesInterest bearing loans and borrowings 34,800 214,800 34,800Provisions 12,116 11,284 12,960Pension deficit 6 35,035 24,884 48,032Deferred income 14,288 11,657 14,351Deferred tax liabilities 97,539 165,838 125,295Total non- current liabilities 193,778 428,463 235,438 Current liabilitiesInvestment contract liabilities 1,144,231 917,690 1,006,928Insurance contract liabilities 2,372 2,371 2,617Interest bearing loans and borrowings 185,000 5,000 185,000Trade and other payables 88,359 69,161 58,724Provisions 7,675 1,776 6,463Employee benefits 17,814 17,758 29,954Deferred income 3,990 4,999 3,679Current tax payable 14,489 9,764 9,713Total current liabilities 1,463,930 1,028,519 1,303,078 Total liabilities 1,657,708 1,456,982 1,538,516 Equity attributable to equity holders of the parent Share capital 7 485 483 484Share premium account 32,414 29,997 30,730Merger reserve 550,884 719,797 606,146Other reserves 18,718 63,792 52,179Retained earnings 106,320 28,598 56,379Total equity attributable to equity holders of the parent 708,821 842,667 745,918Minority interests (850) (350) (498)Total equity 8 707,971 842,317 745,420 Total liabilities and equity 2,365,679 2,299,299 2,283,936 The financial statements were approved by the board of Directors and authorisedfor issue on 4 August 2006. F&C Asset Management plcConsolidated Statement of Recognised Income and Expense 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December (as restated) 2005 £000 £000 £000 Loss for the period (21,047) (722) (77,273) Foreign exchange movements on translation of foreign (439) (11,083) (4,246)operations Actuarial gain/(loss) on defined benefit pension 12,229 (6,910) (30,734)schemes Gain/(loss) on available for sale financial investments 642 (871) 893 Fair value gains transferred to the Income Statement - - (1,120) Tax (expense)/ income on items taken directly to equity (3,870) 2,334 8,597 Goodwill written back on disposal of subsidiary - - 449 Net income/(expense) recognised directly in equity 8,562 (16,530) (26,161) Total recognised income and expense for the period (12,485) (17,252) (103,434) Attributable to:Equity holders of the parent (12,485) (17,252) (103,434)Minority interests - - - (12,485) (17,252) (103,434) F&C Asset Management plcCondensed Consolidated Cash Flow Statement Note 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Cash inflows/(outflows) from operating activities 57,854 (27,416) 44,364Income tax paid (7,631) (6,204) (14,359) Net cash inflow/(outflow) from operating activities 50,223 (33,620) 30,005 Cash flows from investing activities Proceeds from sale of property, plant and equipment - 35 94Acquisition of property, plant and equipment (785) (2,346) (3,701)Payment to increase investment in associate - (509) (485)Purchase of intangibles - management contracts - - (1,249)Purchase of intangibles - software (547) - (989)Return of capital from investments 83 - 132Proceeds from disposal of subsidiaries - 10 10Cash transferred on disposal of subsidiary - (812) (824)Receipt of compensation for loss of Resolution plc 5 27,000 - -fundsExpenses of F&CGH Group acquisition (199) (583) (624)Loan to associate - (2,500) (2,500)Payments to acquire investments (1,202) (14) (35)Investment income from investing activities 5,813 3,909 9,344 Net cash inflow/(outflow) from investing activities 30,163 (2,810) (827) Cash flows from financing activities Proceeds from issue of share capital 1,684 1,042 1,776Interest paid on loans (6,474) (6,089) (13,498)Other interest paid (70) (44) (392)Equity dividends paid (33,472) (32,952) (51,817)Interest paid on preference shares (27) (20) (47)Purchase of own shares (241) (46) (87)Receipt from realisation of own shares 385 - - Net cash outflow from financing activities (38,215) (38,109) (64,065) Net increase/(decrease) in cash and cash 42,171 (74,539) (34,887)equivalents Cash and cash equivalents at 1 January 146,197 181,084 181,084 Cash and cash equivalents at 30 June (31 December) 188,368 106,545 146,197 Cash and cash equivalentsShareholders 136,232 68,741 118,045Policyholders 52,136 37,804 28,152 188,368 106,545 146,197 Accounting Policies Basis of preparation and accounting policies The interim condensed consolidated financial statements for the six months ended 30 June 2006 have been prepared inaccordance with accounting policies that the Directors anticipate will be applied in the annual financial statements for2006. The interim condensed consolidated financial statements do not include all the information and disclosures required inthe annual report and financial statements, and should be read in conjunction with the Group's annual report andfinancial statements as at 31 December 2005. The accounting policies adopted in the preparation of the interim condensed consolidated financial statements areconsistent with those followed in the preparation of the Group's annual report and financial statements for the yearended 31 December 2005. However, the Directors have reassessed the estimated useful lives of certain intangible assets(management contracts). Full details are provided in note 5. The 2005 annual report and financial statements areavailable on our website (www.fandc.com) or from our registered office. Certain figures reported in the 2005 interim financial statements have been reclassified within these interim financialstatements, for consistency with the presentation applied in the financial statements for the year ended 31 December2005, being the Group's first set of audited annual results prepared in accordance with International FinancialReporting Standards. These changes are presentational in nature and do not change the previously reported financialresults for the six months to 30 June 2005 nor the aggregate assets and liabilities as at that date. Notes to the Interim Financial Statements 1. Restructuring costs (a) Integration, rationalisation and reorganisation of the business after acquisition of F&C Group (Holdings) Limited The Directors consider it appropriate to disclose separately the following integration, reorganisation and restructuring costs relating to continuing operations due to the fundamental impact the acquisition had on the management and operational structure of the enlarged Group: 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Termination and other related employee benefits 3,760 4,926 6,330Premises costs 846 1,117 2,514Information technology and related costs 1,903 2,305 6,081Re-branding, administration and client servicing 282 1,956 2,335Consultancy and other costs supporting the restructuring 136 3,035 5,145process Restructuring costs 6,927 13,339 22,405Tax income in respect of restructuring costs (2,078) (4,002) (6,721)Net effect of restructuring costs 4,849 9,337 15,684 (b) Operations outsourcing The Directors consider that the following restructuring costs associated with the operations outsourcing project should be separately disclosed: 6 months ended 6 months ended Year ended 30 June 2006 30 June 31 December 2005 2005 £000 £000 £000 Information technology and related costs - - 366Consultancy and other costs supporting the restructuring process - 423 1,869 Operations outsourcing costs - 423 2,235Tax income in respect of operations outsourcing costs - (127) (671)Net effect of operations outsourcing costs - 296 1,564 2. Income taxes The major components of tax (income)/expense for each period are: Condensed Consolidated Income Statement 6 months ended 6 months ended Year ended 30 June 2006 30 June 2000 31 December 2005 £000 £000 £000 Current income tax: Current income tax expense 12,184 11,189 21,066 Adjustments in respect of previous periods 1,738 (943) (1,640) Deferred income tax: Relating to origination and reversal of temporary (20,330) (12,349) (49,810) differences Adjustments in respect of previous periods (1,701) - 1,333 Income tax income reported in the Condensed Consolidated Income Statement (8,109) (2,103) (29,051) Consolidated Statement of Changes inEquity 6 months ended 6 months ended Year ended 30 June 2006 30 June 2000 31 December 2005 £000 £000 £000 (as restated) Deferred and current income tax related to items charged or credited directly to equity 3,870 (2,334) (8,597) Effective rate of tax The tax income for the six month period ended 30 June 2006 has been determined by using aneffective annual tax rate for each tax jurisdiction and applying that rate to the pre-tax income of thatjurisdiction. The combined effective tax rate on all jurisdictions, together with the net prior yearadjustment of £37,000, brings the total tax income to £8,109,000 for the period to 30 June 2006. 3. Earnings per share Basic earnings per share amounts are calculated by dividing net profit/(loss)for the period attributable to ordinary equity holders of the parent by theweighted average number of Ordinary Shares outstanding during the period. Diluted earnings per share amounts are calculated by dividing the net profit/(loss) attributable to ordinary equity holders of the parent by the weightedaverage number of Ordinary Shares outstanding during the period plus theweighted average number of Ordinary Shares that would be issued on theconversion of all the dilutive potential Ordinary Shares into Ordinary Shares. In the opinion of the Directors the profit before amortisation and impairment ofintangibles, restructuring costs and cost of the Re-Investment Plan moreaccurately reflects the underlying earnings performance of the Group for eachperiod. Reconciliation of earnings per share 6 months 6 months 6 months 6 months Year Year ended ended ended ended ended ended 31 December 30 June 30 June 30 June 30 June 31 December 2006 2006 2005 2005 2005 2005 Basic Diluted Basic Diluted Basic Diluted p p p p p p Loss per Ordinary Share (4.40) (4.30) (0.15) (0.15) (16.36) (15.77) Amortisation of intangibles, net of tax 3.26 4.15 8.27Cost of the Re-Investment Plan, net of tax 0.92 1.91 3.82Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH 1.01 1.98 3.32Group- Operations outsourcing - 0.06 0.33Impairment of intangibles, net of tax 6.57 - 16.52Underlying earnings per share* 7.36 7.95 15.90 * Defined as earnings per Ordinary Share before amortisation and impairment of intangibles, restructuring costs and the cost of the Re-Investment Plan The following reflects the income and share capital data used in the basic and diluted earnings per share calculations: Income 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Loss attributable to ordinary equity holders (21,047) (722) (77,273) of the parent for basic loss per share Amortisation of intangibles, net of tax 15,600 19,512 39,061Cost of the Re-Investment Plan, net of tax 4,409 9,005 18,025Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH 4,849 9,337 15,684Group- Operations outsourcing - 296 1,564Impairment of intangibles, net of tax 31,371 - 78,050 Underlying profit attributable to ordinary 35,182 37,428 75,111equity holders of the parent* *Defined as profit before amortisation and impairment of intangibles, restructuring costs and the cost of the Re-Investment Plan. Share capital 30 June 2006 30 June 2005 31 December 2005 No. No. No. Weighted average number of Ordinary Shares 477,830,981 470,946,021 472,408,007(excluding treasury shares) for basic loss pershare Dilutive potential weighted average number of 489,899,726 490,204,677 489,973,244Ordinary Shares 4. Ordinary dividends 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Declared and paid during the period Equity dividends on Ordinary Shares: - Final dividend for 2005: 7.0p (2004: 7.0p) 33,472 32,952 32,952 - Interim dividend for 2005: 4.0p - - 18,865 33,472 32,952 51,817 Proposed dividends, not recognised as a liability Equity dividends on Ordinary Shares: - Final dividend for 2005: 7.0p - - 33,381 - Interim dividend for 2006: 4.0p (2005: 4.0p) 19,181 18,854 - 19,181 18,854 33,381 The proposed interim dividend for 2006 is based on 4.0p per shareand 479,536,023 Ordinary Shares being eligible for dividends as at 30 June 2006. This dividend was approved by the Board on 4 August 2006. No liability forthis dividend exists as at 30 June 2006. 5. Goodwill and other intangible assets Management Goodwill contracts Other Total intangible assets - software and licences £000 £000 £000 £000Cost: At 30 June 2005 577,946 615,439 5,146 1,198,531 Additions - 501 1,388 1,889Disposals - - (2,359) (2,359)Foreign exchange gains / (losses) - 3,909 (91) 3,818 At 31 December 2005 577,946 619,849 4,084 1,201,879 Additions - - 54 54Disposals (8,100) (43,200) - (51,300)Foreign exchange gains / (losses) - 6 (147) At 30 June 2006 569,846 576,496 4,144 1,150,486 Amortisation and impairment:At 30 June 2005 - 64,281 4,662 68,943Disposals - - (2,359) (2,359)Foreign exchange gains / (losses) - - (91) (91)Impairment losses - 111,500 - 111,500Amortisation charge for period - 27,927 231 28,158 At 31 December 2005 - 203,708 2,443 206,151 Amortisation charge for period - 22,286 274 22,560Impairment losses - 44,815 - 44,815Disposals - (16,200) - (16,200)Foreign exchange gains / (losses) - - 6 6 At 30 June 2006 - 254,609 2,723 257,332 Net book values: At 30 June 2005 577,946 551,158 484 1,129,588At 31 December 2005 577,946 416,141 1,641 995,728At 30 June 2006 569,846 321,887 1,421 893,154 Goodwill arose on business combinations and relates to the business as a wholefollowing the fundamental integration, rationalisation and reorganisations whichtook place after each acquisition. Management contracts predominantly relate to contracts arising from businesscombinations, following the restatement of goodwill on transition to IFRS. As indicated in the 2005 annual report and financial statements, Resolution plcwithdrew the majority of its assets in the first quarter of 2006. The agreedcompensation of £27,000,000 received from Resolution during the period has beenrecognised as proceeds in respect of the deemed disposal of intangible assets.The cost, with respect to the original valuation, of the assets disposed of was£43,200,000 and the related cumulative amortisation amounted to £16,200,000.Therefore the carrying value of the disposed asset equalled the proceedsreceived giving rise to neither a gain nor a loss. The £8,100,000 disposal ofgoodwill in the period is in respect of the remaining deferred tax relating tothe £27,000,000 carrying value of the intangible assets disposed of. Impairment testing of intangible assets with finite lives During the first half of 2006 the business experienced a level of fund outflowswhich was higher than anticipated. This level of lost business will have asignificant impact on revenues and was enough to be considered an indicator ofpotential impairment of certain intangible assets, namely the related investmentmanagement contracts. In accordance with IAS 36 'Impairment of Assets', a full impairment review ofthese assets was undertaken. The review resulted in impairment losses beingrecognised in respect of management contracts as follows: 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 F&C Investment Trust contracts 22,194 - 56,100 F&C Institutional contracts 22,621 - 55,400 Total impairment recognised in the CondensedConsolidated Income Statement 44,815 - 111,500 The cumulative impairment of management contracts at 30 June 2006 amounts to£156,315,000 (31 December 2005: £111,500,000). The above contracts relate to the investment trust management contracts andinstitutional fund management contracts acquired as a result of the businesscombination of the ISIS and F&CGH Groups on 11 October 2004. The recoverable amounts of the assets have been determined based on value in usecalculations using cash flow projections based on the latest annual financialbudget approved by the Board. The discount rate applied to the cash flow projections is 10.1% (2005: 9.4%) forinvestment trust contracts, 10.1% (2005: 9.4%) for institutional contracts withno fixed term, and 9.1% (2005: 8.4%) for fixed term institutional contracts.These rates reflect the varying risks and uncertainties inherent in the revenuesfrom the underlying assets, using the Group's weighted average cost of capitalof 9.6%, calculated as at 30 June 2006, (31 December 2005: 8.9%), as abenchmark. The revenue projections assume growth of 6% (2005: 6%) per annum, in line withthe Group's long-term view of market growth, and consistent with thatexperienced over the last 15 years across the markets in which the managedassets are invested. The projections are derived using the estimated usefullives of the underlying contracts and assume a constant loss of revenues overthe projection periods. Operating costs for the first year of the projections are driven by the budgetedGroup profit margin for 2006. Thereafter, costs have been grown at a minimumrate of 3.5% (2005: 3.5%) per annum, to accord with estimated future inflationand salary increases, with the margin capped at 45% (2005: 45%). Impairment has been determined by comparing the results of the value in usecalculations in respect of the remaining contracts at the period-end to thecarrying value (cost less aggregate amortisation and prior impairment) of theassets at 30 June 2006, with any deficits arising constituting impairment to berecognised for the period. Having continued to lose contracts at a rate which was higher than originallyanticipated, the Group reconsidered the average expected lives of the relatedassets. Following this reappraisal, the Directors have revised their estimateof the remaining useful lives of the affected management contracts which, witheffect from 1 July 2006, are consistent with the above loss rates and are nowassessed as follows: Investment trusts - 10 years Institutional (non-fixed term) - 6 years The original estimate of their useful lives on acquisition of the assets inOctober 2004 was 20 years for investment trusts and 10 years for non-fixed terminstitutional contracts. (The estimated useful lives of all other categories ofmanagement contracts remain unchanged.) This represents a change in accounting estimate from that used up to 30 June2006, and will accelerate the amortisation of the remaining value of the assetsfrom July 2006. The effect of this change will be an increased amortisationcharge of £1,686,000 in the second half of 2006, and an increased charge of£3,346,000 per annum in future periods until such time as the assets becomefully amortised. 6. Pension deficit The deficit on defined benefit pension obligations is summarised as follows: 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Fair value of plan assets 117,053 103,828 116,097Benefit obligation (152,088) (128,712) (164,129) Deficit in the schemes (35,035) (24,884) (48,032) The Income Statement charge for defined benefit pension obligations issummarised as follows: 6 months ended 6 months ended Year ended 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Current service cost 1,558 1,784 2,905Past service cost - - 514Expected return on plan assets (3,698) (3,165) (6,332)Interest cost of benefit obligation 3,800 3,033 6,080 Total charge to Income Statement 1,660 1,652 3,167 7. Share capital The Group recorded the following amounts within shareholders' equity as a result of the issue of Ordinary Shares: 30 June 2006 30 June 2005 31 December 2005 £000 £000 £000 Issued Ordinary Shares of 0.1p each 485 483 484 The number of Ordinary Shares in issue was as follows: 30 June 2006 30 June 2005 31 December 2005 No. No. No. Allotted, issued and fully paid OrdinaryShares of 0.1p each 484,646,094 482,906,002 483,434,237 Ordinary Shares held as Treasury shares 5,365,016 11,555,046 6,564,104 Ordinary Shares available in the market 479,281,078 471,350,956 476,870,133 8. Consolidated reconciliation of equity 6 months 6 months Year ended ended ended 31 December 30 June 2006 30 June 2005 2005 £000 (as restated) £000 Total equity attributable to equity holders of the parent at 1 January 745,420 877,658 877,658 Items reported in the Consolidated Statement of Recognised Income andExpense (12,485) (17,252) (103,434) Dividends paid (33,472) (32,952) (51,817) Share-based payment charges 7,514 14,218 21,822 Share capital allotted on exercise of options 1,684 1,042 1,776 Purchase of own shares (509) (47) (87) Settlement proceeds received on exercise of options 171 - - Partners' capital injected - - 2 Partners' drawings in advance of profits (352) (350) (500) Total equity attributable to equity holders of the parent at 30 June (31December) 707,971 842,317 745,420 9. Contingencies Contingent liabilities: (a) Shareholding in F&C Group Management Limited (formerly Primrose Street Holdings Limited) In December 2000, when Eureko agreed to acquire 90% of the issued share capital of F&C Group(Holdings) Limited from Hypo Vereins-Bank, approximately 73% of the ordinary issued shares of F&C Group ManagementLimited, a subsidiary company, were held in the form of two bearer share warrants which could not be located prior tothe completion of the sale (the ''old Share Warrants''). Since a bearer share warrant issued by a company entitles the bearer to the shares specifiedin the share warrant, there is a risk that a third party holding the old Share Warrants may claim that it is entitled tothe specified shares in F&C Group Management Limited. If a third party were successful in establishing a claim inrelation to the old Share Warrants, F&C Group (Holdings) Limited could be liable to indemnify F&C Group ManagementLimited under the original indemnity arrangements, which could, as set out below, have a material adverse effect on theF&C Asset Management Group's business, results of operations and/or financial condition. Under the terms of the Sale and Purchase Agreement in respect of the Merger, Eureko Holdingshas given a specific indemnity (guaranteed by Eureko) to F&C Asset Management plc in respect of losses arising inrelation to the old Share Warrants in F&C Group Management Limited (including in respect of the indemnity granted by F&CGroup (Holdings) Limited to F&C Group Management Limited) which is capped at approximately £432 million. While there is a possibility that a third party may seek to establish that it is entitled tothe shares specified in the old Share Warrants, the Directors have been informed that Eureko was advised at the time ofthe Merger that the prospect of a third party succeeding in such a claim is remote. (b) European court case - VAT on investment trust management fees In a current European court case, a UK investment trust is seeking to establish thatmanagement services to UK investment trusts should be a VAT exempt supply, rather than a taxable supply in accordancewith current UK VAT law. If this case were successful, a number of companies in the Group, in common with otherrelevant fund managers in the UK, would face claims from those investment trusts to which they have supplied servicesfor repayment of the VAT they have charged to them. The Association of Investment Trust Companies (a party to the abovelitigation) has indicated that it believes claims dating back as far as 1990 may be lodged with fund managers byinvestment trusts. Companies in the Group can submit repayment claims to HM Revenue and Customs, but only dating back asfar as 2001, being the maximum time period permitted. The Group has received protective claims from a number of itsinvestment trust clients and has lodged protective claims with HM Revenue and Customs. At present, the Directors are notable to judge the likelihood that the VAT court case will be successful, nor are they able to quantify the claims thatmay be received or the extent to which such claims could be mitigated and therefore, are not able to quantify thepotential liability. Contingent assets: (a) Compensation for withdrawal of funds During 2005 Banco Commercial Portugues S.A. (BCP), a Group client, withdrew approximately €2 billion ofassets which were managed by the Group under the terms of long-term agreements. The Group is currently negotiating withBCP to attain value for shareholders, in line with the principles of the contractual agreement. (b) European court case - Management services to authorised unit trusts and OEICs Following a recent European court case ("the Abbey National case"), it has been ruled that certain servicesprovided for the management of authorised unit trusts and Open Ended Investment Companies should be exempt from VAT. Asa result of certain outsourced arrangements, the Group anticipates that certain services provided by suppliers willbecome exempt and the Group may recover VAT erroneously paid in respect of previous periods, much of which will havebeen treated as irrecoverable VAT from the Group's perspective. HM Revenue and Customs have set 1 October 2006 as thedate from which changes arising from this court case should be implemented. It is too early to establish the potentialquantum of output VAT which may be recovered by the Group, as it is linked to the extent of protective claims submittedby our suppliers and the provision of ongoing services from these outsourced providers. Assets under management and fund flows The tables below disclose assets under management at 30 June 2006 and fund flowsfor the six months to 30 June 2006. 1. Assets under management 30 June 2006 31 March 2006 31 December 2005 £bn £bn £bn Insurance Funds 58.4 61.3 79.2 Institutional Funds 31.6 32.9 34.6 Investment Trusts 6.5 7.0 6.9Open Ended Products - Third Party 2.9 3.0 2.7SICAVs 0.5 0.5 0.5Sub-Advisory 7.1 7.3 7.1 Total Retail 17.0 17.8 17.2 Total 107.0 112.0 131.0 30 June 2006 31 March 2006 31 December 2005 •bn •bn •bn Insurance Funds 84.4 87.8 115.2 Institutional Funds 45.8 47.2 50.4 Investment Trusts 9.5 10.1 10.0Open Ended Products - Third Party 4.1 4.2 3.9SICAVs 0.8 0.8 0.8Sub-Advisory 10.2 10.5 10.4 Total Retail 24.6 25.6 25.1 Total 154.8 160.6 190.7 2. Assets under management by asset class 30 June 2006 31 March 2006 31 December 2005 £bn £bn £bn Fixed Interest 55.1 57.2 72.8 Equities 40.0 43.3 45.2 Property 5.2 5.1 6.5 Other Alternative Investments 1.2 1.3 1.2 Liquidity 5.5 5.1 5.3 Total 107.0 112.0 131.0 30 June 2006 31 March 2006 31 December 2005 •bn •bn •bn Fixed Interest 79.8 82.0 106.0 Equities 57.9 62.0 65.8 Property 7.5 7.3 9.4 Other Alternative Investments 1.7 1.8 1.8 Liquidity 7.9 7.5 7.7 Total 154.8 160.6 190.7 3(a) Fund flows for the year to date 30 June 2006 Client category Inflows Outflows Net £m £m £mInsurance Funds - Resolution N/A N/A (20,121)Insurance Funds - Other N/A N/A (748)Institutional 1,353 (4,914) (3,561)Investment Trusts 94 (589) (495)Open Ended Products - Third Party 260 (95) 165SICAVs 236 (182) 54Sub Advisory 1,447 (1,471) (24)Total Retail 2,037 (2,337) (300) N/A N/A (24,730) 3(b) Fund flows for the quarter to 31 March 2006 Client category Inflows Outflows Net £m £m £mInsurance Funds - Resolution N/A N/A (20,121)Insurance Funds - Other N/A N/A 368Institutional 781 (4,184) (3,403)Investment Trusts 85 (298) (213)Open Ended Products - Third Party 119 (43) 76SICAVs 171 (110) 61Sub Advisory 776 (793) (17)Total Retail 1,151 (1,244) (93) N/A N/A (23,249) 3(c) Fund flows for the quarter to 30 June 2006 Client category Inflows Outflows Net £m £m £mInsurance Funds - Resolution N/A N/A 0Insurance Funds - Other N/A N/A (1,116)Institutional 572 (730) (158)Investment Trusts 9 (291) (282)Open Ended Products - Third Party 141 (52) 89SICAVs 65 (72) (7)Sub Advisory 671 (678) (7)Total Retail 886 (1,093) (207) N/A N/A (1,481) Notes: 1) The insurance fund outflows for Resolution of £20.1 billion occurredduring 1Q06. The F&C Group received £27 million of compensation from Resolutionin respect of all fund withdrawals. The remaining assets of £723 millionincluded in the insurance assets above, are expected to be transferred toResolution in 3Q06. 2) The underlying sub advisory net inflows in 1H 2006 amount to £158million after adjusting for the £182 million outflow as a result of the closureof Friends Provident GPI SICAV range. The £182 million was retained formanagement within the F&C Group and is included with the net insurance flows. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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