Preliminary Results 2005

Capita Group PLC 23 February 2006 23 February 2006 THE CAPITA GROUP PLC Preliminary Results for the year ended 31 December 2005 A highly successful year Financial Highlights Year ended 31 December 2005 Year ended 31 December 2004 Increase Turnover £1,436m £1,282m* 12% Operating profit** £190.7m £160.5m* 19% Profit before tax** £177.2m £148.6m* 19% Earnings per share** 19.44p 16.08p* 21% Total dividend per share 7.00p 5.35p 31% Key points • Operating margins** increased to 13.3% (2004: 12.5%) • Operating cash flow up 16% to £232m (2004: £200m) • Strong growth in both public and private sectors - contracts worth £1.1bn won in last three months, including Birmingham City Council and Zurich • Eleven acquisitions totalling £88m completed in 2005; further acquisitions expected in 2006 • Total potential UK BPO market now independently valued at £94.8bn per annum * excluding discontinued operations ** before share based payment charge, intangible amortisation and impairment Rod Aldridge, Executive Chairman of The Capita Group Plc, commented: 'Capita enters 2006 with confidence. Our operations are performing consistently well, our chosen markets are active and our sales prospects are exciting. 'Moreover, the ingredients for a successful year are already in place. We believe our shareholders will be pleased by the results for 2006.' Statutory Results Year ended Year ended Increase 31 December 2005 31 December 2004 Excluding impairment charge Operating profit £178.6m £154.0m* 16.0% Profit before tax £165.1m £142.1m* 16.2% Earnings per share (basic) 18.10p 15.13p 19.6% Including impairment charge Operating profit £166.6m £154.0m* 8.2% Profit before tax £153.1m £142.1m* 7.8% Earnings per share (basic) 16.28p 15.13p 7.6% For further information: The Capita Group Plc Tel: 020 7799 1525 Rod Aldridge, Executive Chairman Paul Pindar, Chief Executive Shona Nichols, Corporate Communications Director Capita Press Office Tel: 0870 2400 488 Financial Dynamics Tel: 020 7269 7291 Andrew Lorenz/Richard Mountain Chairman's Statement Capita has enjoyed a highly successful year in 2005. We have continued to build upon our position as the UK's market leader in providing business process outsourcing (BPO) services to the public and private sectors and our successes during 2005 have positioned us strongly for 2006. Capita now prepares accounts in accordance with International Financial Reporting Standards (IFRS). Consequently, in the results below, the comparatives have been restated to reflect this change. In the year ended 31 December 2005, turnover increased by 12% to £1,436m (2004: £1,282m, excluding discontinued operations). Operating profits before the share based payment charge and before amortisation of separately identifiable intangible assets ('intangibles') and impairment rose by 19% to £190.7m (2004: £160.5m) and profits before taxation, share based payment charge, intangible amortisation and impairment increased by 19% to £177.2m (2004: £148.6m). Earnings per share before share based payment charge, intangible amortisation and impairment grew by 21% to 19.44p (2004: 16.08p excluding discontinued operations). Operating cash flow was particularly strong, rising by 16% to £232m (2004: £200m). We have increased dividends by 31% and returned a further £50m to shareholders through purchasing our own shares. In total, including the proposed final dividend, we will be returning £96m to shareholders in respect of the 2005 financial year. We are excited by the continued development of the Group and are committed to building long term, sustainable value for our stakeholders, primarily our shareholders, customers and our employees. Building value for shareholders To ensure we are building value for shareholders, we focus on a number of key measures. These are outlined below: •We have continued to enhance our operating margins, which improved materially during the year to 13.3% (2004: 12.5%). This is due to increasing volumes of work being processed through existing infrastructure, high quality operational performance across our contract base as a whole and our continued focus on seeking efficiencies in service delivery. •The strength of Capita and its business model is reflected in our excellent underlying cash flow, with £232m (2004: £200m) generated by operations in the year, representing an operating profit to cash conversion rate of 122% (2004: 125%). Our underlying free cash flow increased by 20% to £127m (2004: £106m). •We aim to contain capital expenditure at or below 4% of revenue, although there may be rare occasions when we exceed this where the financial strength of Capita can be used to a competitive advantage. In 2005, we comfortably met this objective with net capital expenditure being 3.7% (2004: 3.6%) of annual revenue. This was achieved after major investment in the Group's sophisticated IT platforms to support future growth across both our general insurance and our life and pensions businesses. •We focus on driving a steadily increasing return on capital. During 2005, the post tax return on average capital employed (including debt) has improved to 17.8% (2004: 16.5%). This compares to our weighted average cost of capital which is 8.2%. •A core plank in the creation of shareholder value is a progressive dividend policy. The Board is recommending a final dividend of 4.9p per ordinary share, making a total of 7.0p (2004: 5.35p) for the year. This represents a 31% increase on dividends paid in respect of the 2004 financial year. Over the 10 years to 31 December 2005, we have grown Capita's annual dividend at a compound rate of 31%. The final dividend will be payable on 5 May 2006 to shareholders on the register at the close of business on 7 April 2006. Our confidence in the strength and resilience of Capita's business model allows us to reduce annual dividend cover further to 2.8 times (2004: 3 times). •There may be circumstances in which market conditions allow us to add further value for shareholders through share buybacks, thus ensuring we have an efficient capital structure which will minimise our long term cost of capital. During 2005, the Group bought back 13.2m shares (representing 2% of the issued share capital) at an average price of £3.74. The Group has authority to re-purchase up to 10% of its issued share capital and we plan to seek renewal of this authority at the Annual General Meeting. •We have continued with our strategy of acquiring small, realistically priced businesses which complement or develop our service offerings. In 2005, we invested £88m (net of cash acquired) in 11 acquisitions. Further information is provided later in the statement. •We believe that the disciplines set out above collectively form an integral part of building value for our shareholders on a consistent basis over the long term. Over the 10 years to 31 December 2005, the value of the Group has increased from £160m to £2.7bn. Total shareholder return (excluding dividends) in this period has been 17 fold, equivalent to a 33% compound annual return. Our marketplace The UK BPO market continues to generate a wide range of opportunities to fuel Capita's future growth. A recent independent survey estimates that the total potential UK BPO market is valued at £94.8bn per annum, with the public sector representing 33% and the private sector 67%. The total UK BPO market is estimated to have been worth £4.4bn in revenues in 2005, with expected compound annual growth rates of approximately 12% until 2009.* The demand for business process re-engineering and service transformation continues to be driven by the public sector's need to deliver quality, cost efficient services and the private sector's requirement to remain competitive and innovative. Capita works across eight markets, being local government, central government, education, transport, health, life and pensions, insurance, and other private sector organisations (including financial services). Capita remains ranked as the number one provider of BPO services in the UK and number one outsourcing supplier in central government, local government, finance (including life and pensions and insurance) and other services (including retail/wholesale, other businesses and transport).** Creating organic growth We have two complementary approaches to creating organic growth. The first, our centrally managed Major Sales Team seeks to secure contracts typically with a value of £10m or above. These contracts are complex, integrated projects that require a wide range of the Group's skills and which generate high quality, recurring revenues. Secondly, each of our businesses employs sales teams focused upon securing growth from both existing and new customers. Across the Group, we have over 20,000 customers and our retention rate is exemplary. Organic Growth: Securing major contracts Securing major contracts is an important component of our growth. Our sales performance in 2005 was pleasing. We secured 14 major new and extended contracts with an aggregate value of £1.14bn (2004: £1.36bn). Significant new contracts won include a 10 year partnership with Harrow Council, estimated to be worth £100m, a 10 year contract with Zurich, worth £300m, and a 10 year partnership, subject to contract, with Birmingham City Council, worth £424m. 2006 has started well. Earlier this month, we announced that we had been named preferred supplier for contracts worth a total of £240m, subject to contract signature. These include a new shared services contract with South Oxfordshire and Vale of White Horse District Councils worth £20m over 7 years, a new HR outsourcing contract with the BBC worth in excess of £100m over 10 years and the re-tender of the contract to administer miners' personal liability claims on behalf of the Department of Trade and Industry, expected to be worth £120m over 3 years. We continue to enjoy a buoyant period of activity and I am pleased to report today that we have signed a further contract, worth £120m over 7 years, with DSG international plc. The contract is to extend the delivery of telephone support services which doubles the size of our business with DSGi. As a consequence of this activity, the total value of major contracts won and extended in the first 8 weeks of 2006 is £360m and we will have no material contracts (defined as having annual revenue in excess of 1% of 2005 turnover) due for renewal in 2006 and only one each in 2007 and 2008. Over the last 3 months, contracts which had been valued at a total of £1.6bn within our bid pipeline have been awarded. Of this amount, Capita has been chosen to deliver business totalling £1.1bn. Because of this surge in contract decisions, our current bid pipeline stands at £2.2bn (£3.4bn: July 2005). Replenishment of the bid pipeline is already underway and we expect the number and aggregate value of bids within it to continue to increase steadily over the next few months. The bid pipeline only includes bid situations in which Capita is shortlisted as one of 4 or fewer competitors and caps our largest bids at £500m. We have already secured strong revenue growth for 2006 and our efforts are now focused upon achieving a similar position for 2007. Organic growth: Group businesses Group businesses have performed strongly, securing many new clients and extending and broadening existing relationships across both the private and public sectors. We have enlarged our service offering in the year, investing in our business centre infrastructure and establishing additional state of the art IT platforms to service multiple clients and deliver enhanced administration and customer services. Private sector: Our penetration of the private sector market has continued in 2005, with particular success in securing business in the financial services, insurance and life and pensions sectors. Capita Insurance Services is trading strongly, building further on its position as the market leading provider of support services to the insurance market and the largest technical claims handler in the UK outsourcing market, administering £11bn of liabilities on behalf of clients. The business is the first in Europe to implement SAP Claims and SAP CRM. This SAP solution reduces the time taken to process claims across multiple clients and has the flexibility to respond well to additional volume demand. Existing and new clients, such as Norwich Union and Chester Street, will benefit from a single customer view, integrated processes and enhanced information. Capita Life & Pensions performed well in the year, securing new long term contracts and developing its core offering of end to end support for open and closed books of business. Our investment in establishing flexible, shared administration platforms is enabling us to deliver significant savings to clients and to bring their new products to market more swiftly. Clients also continue to benefit from our high standards of customer service which lead to reduced policy attrition rates. For Lincoln Life, we have reduced the attrition rate by at least 1%, equating to approximately £3m in premium income and £4m in embedded value over 12 months. Our two pensions administration operations made good progress in the year. Capita PPML, which supports specialist pensions and related investment services, has been re-launched as Capita SIP Services, in readiness for pensions simplification which comes into effect in April 2006. We have invested in administration platforms that have the capability to support multiple specialist pensions products at low cost, supporting both charge-capped products and more complex investment vehicles. Capita Hartshead has further strengthened its pre-eminent position in the UK third-party pensions administration market through securing new contracts and the acquisition of complementary businesses. Contract wins and renewals worth over £9.8m with clients including BP Oil, Baring Asset Management and Alliance & Leicester were secured in the year. We have also built up an integrated offering to support the administration requirements of independent financial advisers (IFAs) and providers, a growing new market sub-sector for Capita. Using our existing IT platforms and the specialist products and services of newly acquired Quay Software and Webline, we can offer a cost effective, integrated administration platform and more effective product distribution. Capita Registrars and Financial Services have benefited from buoyant trading conditions and the extension of their service offering in the year. Capita Registrars was appointed to half of all company flotations in 2005, including PartyGaming, the largest flotation by market value in the past 5 years. Our fund administration operation expanded rapidly, with funds under administration having increased from £1bn to £16.5bn in just 3 years. As a result of this growth, we are now listed in 12th place in the Investment Management Association (IMA) rankings for funds under administration. Public sector: Demand for our services across local and central government is healthy. We are ideally positioned to provide the strategic advice and new service infrastructures required to support current government policies and the significant service transformation needed to deliver efficient, responsive public services. We have continued to extend our capability to support local authorities through the introduction of new software products, the application of ICT and increasing utilisation of our shared services centres. Our 6 local government shared services centres have continued to expand the number of clients and services supported from each centre. For example, in 2005 our Coventry Centre supported 21 local authorities (2003: 8), collecting £15m council tax payments (2003: £8.5m) and handling 1.6m customer calls (2003:1.1m). We also renewed a number of our key local government partnerships in the year, such as our multi-service contracts with Mendip District Council and Bexley Council. Capita Strategic Education Services performed well and was re-launched in the year as Capita Strategic Children's Services, in line with the Government's strategy requiring local authorities to integrate services for children and young people. In conjunction with our education software business, we are developing new products and services to help authorities through this unprecedented service transformation and to support the delivery of on-going services. Capita Symonds has had another year of steady growth securing good quality new business, including a number of long term, high profile projects. The business has been particularly successful in penetrating the transport infrastructure and urban regeneration markets this year. In the year, we were appointed to support the Dubai Rapid Link consortium in delivering the new Dubai £1.86bn rail system with design and engineering services. Urban Vision, the joint venture between Capita Symonds, City of Salford and Morrison has been officially launched and our strategic partnership with Cumbria County Council was extended for a further 3 years to 2011. Capita Symonds is now ranked as the 5th largest multidisciplinary consultancy in the UK (7th in 2004). Capita's resourcing businesses performed much better in 2005, increasing market share across the public and private sectors, with new projects awarded by such clients as the Home Office, Department for Work and Pensions, the Metropolitan Police, the National Assembly of Wales, BAA, Fujitsu, HBOS and Argos. We have also continued our success in securing significant managed services contracts, with the award of a new contract by British Nuclear Group to manage agency supplied workers with a payroll of £150m over 3 years. Organic growth: Offshore capabilities To meet the increasing requirements to offer offshore delivery options in our major contract bid proposals and to add further value to existing clients and our own businesses, we are investing in our offshore BPO capabilities. During the year, we established a second, modern business centre in Mumbai, comprising 50,000 sq ft of space with a further 50,000 sq ft under option, bringing our total potential space in India to 120,000 sq ft, with a seat capacity of over 1,250. We now have 400 employees in Mumbai servicing five clients. Our two sites are equipped with the latest voice over internet and wireless connectivity and are now delivering eight different business processes, ranging from data input to complex fund accounting. We have achieved full BS7799 accreditation at both sites and passed all independent security audits undertaken by prospective clients. Our service delivery track record is excellent. For example, we recently transferred an existing client's extensive back office activities to the operation. We have consistently exceeded their 99.5% accuracy requirements and have met their 24 hour turnaround deadlines (previously 48 hours onshore) from the first month of live operations. We are delivering substantial savings of up to 50% of operating costs to clients currently using the offshore operation. Acquisitions We have seen a good volume of opportunities during 2005. Our focus remains firmly on small transactions, priced at a level which adds value for shareholders. During the year, we completed 11 acquisitions, investing a total of £88m (net of cash acquired). Three of these transactions had an initial purchase consideration of £10m or above: •In July, we completed the acquisition of BMI Health Services for £10m. This business has been merged with Capita's existing health solutions company which we acquired from AON in 2004. The integration of the two businesses has been completed in a highly successful manner and the combined company is now positioned as the leading and largest provider of occupational health services to the public and private sectors in the UK. We believe this market has significant potential going forward. •In September, we completed the acquisition of BDML Connect Limited from the insurance group BDML. The business was acquired for an initial cash consideration of £26m, with a deferred consideration of up to £9m, dependent on future business performance. BDML Connect delivers personalised insurance services on behalf of major affinity brands such as Norwich Union, Admiral Insurance and RAC. We are delighted by the manner in which this business has been integrated within Capita. It has performed in line with our expectations and is strongly placed for 2006. •In November, we completed the acquisition of Lonsdale Travel for an initial consideration of £10.25m. A further £0.25m may be payable, subject to achievement of certain targets. Just as we targeted and built up over the past 20 months a market leading position in supplying outsourced occupational health services, we have now identified travel administration as an area of major spend where we can add value to our clients by offering effective outsourced services. Organisations spent £14.7bn on business travel in the UK in 2004 and we estimate that some £3bn is spent across the public sector alone. The administration costs of this activity are very significant and ripe for re-engineering. Our pipeline of potential businesses to be acquired remains encouraging and we anticipate a similar volume of small transactions during 2006. Valuing our people One of the principal attributes that differentiates Capita from its competition is the proficiency, commitment and open style of our staff. The culture within Capita and its people is a key reason for our ability to deliver value for our shareholders and other stakeholders. We have a stable and consistent management team, a low turnover of senior people and an excellent spirit throughout the company. I would like to thank our staff for the vital part they play in Capita's continued success. I also welcome the 2,000 employees that have joined us since the beginning of 2005. We now employ 25,000 people in the UK, Ireland and India. Future prospects Capita enters 2006 with confidence. Our operations are performing consistently well, our chosen markets are active and our sales prospects are exciting. Moreover, the ingredients for a successful year are already in place. We believe our shareholders will be pleased by the results for 2006. Rodney M Aldridge OBE Executive Chairman 22 February 2006 Sources: *Ovum and **Harris Interactive (formally HI Europe) Reports 2005 Consolidated income statement for the year ended 31 December 2005 2005 2004 Discontinued Before Before operations, impairment, Impairment, impairment, impairment, amortisation amortisation amortisation amortisation and and and and share-based share-based share-based share-based payment payment Total payment payment Total Notes £m £m £m £m £m £m Continuing operations: Revenue 1 1,435.5 - 1,435.5 1,282.2 - 1,282.2 Cost of sales 1,054.6 - 1,054.6 955.6 - 955.6 Gross profit 380.9 - 380.9 326.6 - 326.6 Administrative 2 190.2 24.1 214.3 166.1 6.5 172.6 expenses Operating profit 1 190.7 (24.1) 166.6 160.5 (6.5) 154.0 Finance revenue 0.4 - 0.4 0.2 - 0.2 Finance costs (13.9) - (13.9) (12.1) - (12.1) Profit before tax 177.2 (24.1) 153.1 148.6 (6.5) 142.1 Income tax expense (49.1) 3.3 (45.8) (41.8) 2.4 (39.4) Profit for the year from continuing operations 128.1 (20.8) 107.3 106.8 (4.1) 102.7 Discontinued operations: Loss on discontinued operations - - - - (2.2) (2.2) Profit for the year 128.1 (20.8) 107.3 106.8 (6.3) 100.5 Attributable to: Equity holders of the 128.3 (20.8) 107.5 107.0 (6.3) 100.7 parent Minority interest (0.2) - (0.2) (0.2) - (0.2) 128.1 (20.8) 107.3 106.8 (6.3) 100.5 Earnings per share 3 - basic 19.44p (3.16)p 16.28p 16.08p (0.95)p 15.13p - diluted 19.16p (3.11)p 16.05p 15.94p (0.94)p 15.00p - basic (excluding 19.44p (3.16)p 16.28p 16.08p (0.62)p 15.46p discontinued operations) - diluted (excluding 19.16p (3.11)p 16.05p 15.94p (0.61)p 15.33p discontinued operations) Consolidated statement of recognised income and expense for the year ended 31 December 2005 2005 2004 £m £m Actuarial loss on defined benefit pension schemes (3.7) (19.7) Exchange differences on translation of foreign operations 0.2 0.1 Tax on items taken directly to equity 3.7 8.3 Net income/(expense) recognised directly in equity 0.2 (11.3) Profit for the year 107.3 100.5 Total income and expense for the period 107.5 89.2 Attributable to: Equity holders of the parent 107.7 89.4 Minority interest (0.2) (0.2) 107.5 89.2 Consolidated balance sheet at 31 December 2005 2005 2004 Notes £m £m Non-current assets Property, plant and equipment 150.1 129.1 Intangible assets 588.7 500.2 Financial assets 13.8 0.2 Trade and other receivables 5.8 6.1 Deferred taxation 25.1 32.6 783.5 668.2 Current assets Trade and other receivables 6 343.8 260.3 Total assets 1,127.3 928.5 Current liabilities Trade and other payables 6 378.0 308.9 Financial liabilities 6 49.9 33.0 Provisions 1.3 2.1 Income tax payable 32.5 28.4 461.7 372.4 Non-current liabilities Trade and other payables 1.3 3.1 Financial liabilities 221.7 145.2 Provisions 2.0 3.4 Employee benefits 43.0 44.1 268.0 195.8 Total liabilities 729.7 568.2 Net assets 397.6 360.3 Capital and reserves Issued capital 13.4 13.4 Share premium 258.1 248.1 Treasury shares (0.4) (0.2) Capital redemption reserve 0.2 0.1 Foreign currency translation 0.3 0.1 Retained earnings 125.8 98.4 Equity shareholders' funds 397.4 359.9 Minority interest 0.2 0.4 Total equity 397.6 360.3 Consolidated cash flow statement for the year ended 31 December 2005 2005 2004 Notes £m £m Cash flows from operating activities Operating profit on continuing activities before 166.6 154.0 interest and taxation Operating loss on discontinued activities - (0.3) Depreciation 31.7 27.9 Amortisation of other intangible assets (treated as 4.9 2.9 depreciation) Amortisation of intangible assets created on 4.5 1.8 acquisition Impairment of goodwill 2 12.0 - Loss on sale of available-for-sale financial assets - 0.1 Share-based payment expense 7.6 4.7 Pension charge 12.0 13.1 Pension contributions (16.6) (16.5) Loss on sale of property, plant and equipment 0.5 - Movement in provisions (2.4) 0.7 Increase in debtors (19.4) (12.5) Increase in creditors 30.8 24.1 Cash generated from operations 232.2 200.0 Exceptional additional pension contribution - (50.0) Income tax paid (38.2) (36.0) Interest paid (13.9) (11.9) Interest received 0.4 0.2 Net cash generated from operating activities 180.5 102.3 Net cash used in investing activities Purchase of property, plant and equipment (49.7) (46.2) Proceeds from sale of property, plant and equipment 0.4 3.3 Purchase of intangible fixed assets (4.0) (8.0) Acquisition of subsidiary undertakings and businesses (101.9) (56.4) Cash acquired with subsidiary undertakings 2.7 3.8 Proceeds on disposal of subsidiary undertakings - 3.1 Purchase of trade investments in insurance captives (12.0) - Proceeds on sale of available-for-sale financial assets - 4.9 (164.5) (95.5) Net cash used in financing activities Issue of ordinary share capital 9.9 5.5 Share buybacks (49.6) (27.5) Share transaction costs (0.3) (0.2) Dividends 4 (38.0) (29.6) Capital element of finance lease rental payments (0.2) (0.3) Movement on asset based securitised financing 5 1.4 - Repayment of loans notes and long term loans (7.3) (11.5) Proceeds on issue of bond 75.0 - Bond issue costs (0.1) - (9.2) (63.6) Net increase/(decrease) in cash and cash equivalents 5 6.8 (56.8) Cash and cash equivalents at the beginning of the (26.1) 30.7 period Cash and cash equivalents at 31 December (19.3) (26.1) Cash and cash equivalents comprise: Overdraft (19.3) (26.1) Total (19.3) (26.1) Notes to the Preliminary Statement 31 December 2005 1. Segmental information The Group's operations are organised and managed separately according to the nature of the services provided, with each segment representing a strategic business unit offering a different package of related services across the Group's markets. The Group accounts for sales between business units as if they were to a third party at market rates. Year ended 31 December 2005 Segment revenue Resourcing Property Commercial Corporate Integrated Professional services services services services services services Total £m £m £m £m £m £m £m Total segment revenue 187.9 200.7 271.4 245.0 400.8 267.3 1,573.1 Inter-segment revenue (13.7) (10.2) (17.7) (4.6) (27.0) (64.4) (137.6) Third party revenue 174.2 190.5 253.7 240.4 373.8 202.9 1,435.5 Segment result Result after 11.4 17.1 25.4 44.8 58.0 34.0 190.7 depreciation Share-based payment (0.9) (1.0) (1.3) (1.2) (1.9) (1.3) (7.6) Intangible amortisation - (1.7) (0.9) (0.8) (0.6) (0.5) (4.5) Impairment charge - - - - - (12.0) (12.0) 10.5 14.4 23.2 42.8 55.5 20.2 166.6 Net finance costs (13.5) Profit before tax and 153.1 minority interests Corporation taxation (45.8) Minority interests 0.2 Profit after tax and 107.5 minority interests Year ended 31 December 2004 Segment revenue Continuing Discontinued Resourcing Property Commercial Corporate Integrated Professional operations operations services services services services services services total total £m £m £m £m £m £m £m £m Total segment 179.4 162.9 261.5 201.5 344.9 247.1 1,397.3 2.9 revenue Inter-segment (17.3) - (20.3) (11.7) (6.3) (59.5) (115.1) - revenue Third party 162.1 162.9 241.2 189.8 338.6 187.6 1,282.2 2.9 revenue Segment result Result after 6.8 17.2 21.4 35.0 49.4 30.7 160.5 (0.3) depreciation Share-based (0.6) (0.6) (0.8) (0.7) (1.2) (0.8) (4.7) - payment Intangible - (1.4) - (0.2) - (0.2) (1.8) - amortisation 6.2 15.2 20.6 34.1 48.2 29.7 154.0 (0.3) Exceptional - (1.9) item Net finance costs (11.9) - Profit before tax and 142.1 (2.2) minority interests Corporation (39.4) - taxation 0.2 - Minority interests Profit after tax and 102.9 (2.2) minority interests Notes to the Preliminary Statement 31 December 2005 2. Administrative expenses Included within the middle column disclosed on the face of the consolidated income statement, against the line item administrative expenses, are the following: 2005 2004 £m £m Share-based payment charge 7.6 4.7 Amortisation of intangible assets created on acquisition 4.5 1.8 Goodwill impairment* 12.0 - 24.1 6.5 * During the year the goodwill recognised on the acquisition of the Industrial Society's workforce and training business, re-branded as Learning & Development, which was transacted in December 2001, was impaired. Over the period, the business has not performed to expectation largely due to a market decline in this type of training. 3. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted earnings per share computations: 2005 2004 £m £m Net profit attributable to ordinary equity holders of the parent from 107.5 102.9 continuing operations Loss attributable to ordinary equity holders of the parent from a - (2.2) discontinued operation Net profit attributable to ordinary equity holders of the parent 107.5 100.7 2005 2004 Number Number million million Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share 660.1 665.4 Dilutive potential ordinary shares: Employee share options 9.7 5.9 Weighted average number of ordinary shares (excluding treasury shares) adjusted for the effect of dilution 669.8 671.3 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements. To calculate earnings per share amounts for the discontinued operations, the weighted average number of ordinary shares for both basic and diluted amounts is as per the table above. The following table provides the loss figure used as the numerator: 2005 2004 £m £m Net loss attributable to ordinary equity holders of the parent from discontinued operations for basic and diluted earnings per share calculation - (2.2) Notes to the Preliminary Statement 31 December 2005 3. Earnings per share (continued) The additional earnings per share figures are calculated based on earnings attributable to ordinary equity holders of the parent before amortisation, share-based payments and impairment of £128.3m (2004: £107.0m). They are included as they provide a better understanding of the underlying trading performance of the Group. 2005 2004 P P Basic earnings per share - before amortisation, share-based payment 19.44 16.08 and impairment - after amortisation, share-based payment and impairment 16.28 15.13 Diluted earnings per share - before amortisation, share-based payment 19.16 15.94 and impairment - after amortisation, share-based payment and impairment 16.05 15.00 4. Dividends paid and proposed 2005 2004 £m £m Declared and paid during the year Ordinary shares (equity): Final for 2004 paid: 3.6p per share (2003: 2.7p per share) 24.0 18.0 Interim for 2005 paid 2.1p per share (2004: 1.75p per share) 14.0 11.6 38.0 29.6 Proposed for approval at AGM (not recognised as a liability at 31 December) Ordinary shares (equity): Final for 2005: 4.9p per share (2004: 3.6p per share) 32.0 23.8 5. Reconciliation of net cash flow to movement in net debt At 31 December 2005 Net debt Adjustments Net debt Acquisitions Cash flow Non-cash Net debt at 31 to comply at 1 in 2005 movements flow at 31 December with IAS 32 January (exc. cash) movements December 2004 and IAS 39 2005 2005 £m £m £m £m £m £m £m Overdrafts (26.1) - (26.1) - 6.8 - (19.3) Cash (26.1) - (26.1) - 6.8 - (19.3) Loan notes (27.1) - (27.1) - 4.4 - (22.7) Long-term debt - - - (2.9) 2.9 - - Bonds (124.7) 1.7 (123.0) - (74.9) (0.7) (198.6) Finance leases (0.2) - (0.2) (0.2) 0.2 - (0.2) Sub-total net debt (178.1) 1.7 (176.4) (3.1) (60.6) (0.7) (240.8) Asset based securitised finance (note 6) - - - (26.8) (1.4) - (28.2) Total (178.1) 1.7 (176.4) (29.9) (62.0) (0.7) (269.0) Notes to the Preliminary Statement 31 December 2005 5. Reconciliation of net cash flow to movement in net debt (continued) At 31 December 2004 Net debt Acquisitions Cash flow Non-cash Net debt at 1 in 2004 movements flow at 31 January (exc. cash) movements December 2004 2004 £m £m £m £m £m Cash and cash equivalents 30.7 - (30.7) - - Overdrafts - - (26.1) - (26.1) Cash 30.7 - (56.8) - (26.1) Loan notes (33.0) (0.4) 6.3 - (27.1) Long-term debt - (5.2) 5.2 - - Bonds (124.6) - - (0.1) (124.7) Finance leases (0.5) - 0.3 - (0.2) Total (127.4) (5.6) (45.0) (0.1) (178.1) 6. Balance sheet impacts The acquisition of BDML Connect Limited (BDML) included 'insurance debtors subject to a securitisation agreement'. The purpose of this arrangement is to securitise customer receivables, derived through the provision of instalment credit facilities to insurance customers of the company. The company sells said receivables, with no immediate effect on the P&L, for cash to a third party (Gresham in this case). Gresham take on the rights and responsibilities of these receivables such that the terms of this agreement dictate that Gresham has no recourse to BDML beyond 14% of the total receivable securitised. Under UK GAAP, the substance of this arrangement was disclosed as a linked presentation under the current assets section of the balance sheet without appearing in the financing section of the balance sheet. The Group's transition to IFRS has necessitated different disclosure, the impact of which is to reflect on BDML's opening balance sheet an increase in the Group's receivables of £37.1m adding £26.8m of securitised asset financing. The respective balances of this arrangement at 31 December 2005 were £37.9m to receivables and £28.2m to securitised asset financing. One of the principal activities of a subsidiary of the Group, Capita Financial Managers Limited (CFM), is to act as an authorised unit trust manager whereby funds are received on behalf of customers to be invested per instruction by CFM. The transfer of funds to purchase the units is not always done on the same business day. The Group's transition to IFRS has forced us to re-examine certain funds flow arrangements and we have reached the conclusion that this arrangement should be recorded gross on the Group's consolidated balance sheet. The impact for the 2004 closing balance sheet was to increase debtors, creditors and cash balance by £17.3m, £28.1m and £10.8m respectively. The equivalent balances on the 2005 closing balance sheet are £31.1m, £38.0m and £6.9m resulting in timing difference in cash outflow of £3.9m for the year. 7. Preliminary announcement The preliminary announcement is prepared in accordance with International Financial Reporting Standards. This differs from the basis used for the previous year's accounts and comparatives have been restated accordingly. A duly appointed and authorised committee of the Board of Directors approved the preliminary announcement on 22 February 2006. The announcement represents non-statutory accounts within the meaning of section 240 of the Companies Act 1985. The statutory annual accounts for the year ended 31 December 2005, upon which an unqualified audit opinion has been given and which did not contain a statement under section 235, 237(2) or 237(3) of the Companies Act 1985, will be sent to the Registrar of Companies. Copies of the announcement can be obtained from the Company's registered office at 71 Victoria Street, Westminster, London, SW1H 0XA. It is intended that the Annual Report & Accounts will be posted to shareholders on 22 March 2006 and will be available to members of the public at the registered office of the Company from that date. This information is provided by RNS The company news service from the London Stock Exchange

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