Stock Market Symbols GIB.A (TSX) GIB (NYSE) MONTREAL, July 26
/PRNewswire-FirstCall/ -- CGI Group Inc. (CGI) reported third
quarter net earnings from continuing operations before
restructuring costs today of $46.4 million or 14 cents per share on
revenue of $866.5 million. This compares with $34.8 million or 10
cents per share in the previous quarter. In the quarter's results
were pre-tax restructuring costs related to specific items of $15.0
million. Including these costs, CGI net earnings were $35.9
million, or 11 cents per share compared with 14.1 million or 4
cents per share in the previous quarter. Quarterly Financial
Highlights
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In $ millions except margin and share data amounts
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Q3-2005 Q3-2006 Q2-2006 Restated(x)
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Revenue $866.5 $866.8 $936.4
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Net earnings from continuing operations before restructuring costs
related to specific items $ 46.4 $ 34.8 $ 56.6 Margin 5.4% 4.0%
6.0%
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Basic and diluted earnings per share from continuing operations
before restructuring costs related to specific items $ 0.14 $ 0.10
$ 0.13
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Restructuring costs related to specific items $ 15.0 $ 31.3 -
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Net earnings from continuing operations $ 35.9 $ 14.1 $ 56.6 Margin
4.1% 1.6% 6.0%
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Basic and diluted earnings per share from continuing operations $
0.11 $ 0.04 $ 0.13
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Weighted average number of outstanding shares 338,714,368
344,825,024 436,591,748
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Total long-term debt $ 810.7 $ 962.2 $ 258.2
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Order backlog $ 13,303 $ 13,686 $ 12,934 (x) See MD&A, page 24
for additional detail "In the third quarter we successfully
executed against our previously announced improvement plan," said
Michael E. Roach, President and Chief Executive Officer. "We
significantly improved margins and earnings per share and we were
able to maintain revenue, despite continuing currency pressures."
Third Quarter 2006 Results Revenue in the third quarter of 2006 was
lower compared with the third quarter of 2005 due to the negative
impact of currency and a decrease in revenue from the company's
largest customer, BCE. The impact of currency compared with Q3 2005
was $38.2 million while BCE spending was $40.1 million lower than
Q3 2005. On a sequential basis, the negative impact of currency was
$7.9 million. BCE revenue, sequentially, increased by $5.3 million.
Net earnings from continuing operations before restructuring costs
related to specific items in the third quarter of 2006 were $46.4
million, compared with $34.8 million in Q2 2006 and $56.6 million
in the third quarter of 2005. Net earnings from continuing
operations in the third quarter of 2006 were $35.9 million,
compared with $14.1 million in the previous quarter and $56.6
million in the third quarter of 2005. On a basic and fully diluted
earnings per share basis, before restructuring costs related to
specific items, the Company earned 14 cents per share, compared
with 10 cents per share in the previous quarter and 13 cents per
share compared with the third quarter of 2005. On a basic and fully
diluted earnings per share basis, the Company earned 11 cents per
share in the third quarter, compared with 4 cents per share in the
second quarter of 2006 and 13 cents per share compared with the
third quarter of 2005. Operationally, the third quarter of CGI's
fiscal 2006 was focused on maintaining revenue while improving
profitability as outlined in the action plan announced on March 29,
2006. Accordingly, a pre-tax charge for severance and other related
benefits, totaling $15.0 million was taken in the third quarter
bringing the total charge of the program thus far to $46.3 million.
The Company expects to incur the remaining charge of approximately
$44 million over the course of this calendar year and continues to
anticipate a one-year payback. The Company continues to generate
significant cash from operating activities, totaling $108.3 million
during its third quarter compared with $82.0 million in the second
quarter of 2006. In addition, the Company's long- term debt was
reduced from $962.2 million at the end of March 2006 to $810.7
million at the end of June, 2006. The Company ended the third
quarter with $154.5 million in cash and cash equivalents on hand
for a net long-term debt of $656.2 million. "I am pleased with the
cash generation, significant reduction in debt and overall
profitability improvements experienced in the quarter," added
Roach. "With the level of current activity in the marketplace and
the growing awareness of CGI as a global leader, we remain
confident in our ability to profitably grow our business over
time." Bookings and Renewals The Company earned several new
contracts and renewals during the quarter totaling $787 million.
Below are certain contracts awarded to CGI during its fiscal third
quarter: - More than US$100 million in AMS Advantage(R) contracts
with City of New York; Wake County, North Carolina as well as the
city and county of Honolulu, Hawaii. - $130 million, IT outsourcing
contract with Cirque du Soleil - US$45 - US$75 million, BPS
contract with Universal Insurance - $50 million, renewal with
Caisse de depot et placement du Quebec Quarterly Conference Call
Investors and the media are invited to a conference call to discuss
quarterly results this morning, July 26, 2006, at 10:00 am (ET).
Participants may access the call by dialing (866) 542-4236 or
through the Internet at http://www.cgi.com/. Supporting slides for
the call will also be available at http://www.cgi.com/. For those
unable to participate on the live call, a webcast and copy of the
slides will be archived at http://www.cgi.com/ Use of Non-GAAP
Financial Information CGI reports its financial results in
accordance with GAAP. However, management believes that certain
non-GAAP measures provide useful information to investors regarding
the Company's financial condition and results of operations as they
provide additional measures of its performance. Explanations as
well as a reconciliation of these non-GAAP measures with GAAP
financial statements are provided in the MD&A which is posted
on CGI's website at http://www.cgi.com/, and filed with SEDAR and
EDGAR. About CGI Founded in 1976, CGI Group Inc. is one of the
largest independent information technology and business process
services firms in the world. CGI and its affiliated companies
employ approximately 24,500 professionals. CGI provides end-to-end
IT and business process services to clients worldwide from offices
in Canada, the U.S., Europe, Asia Pacific as well as from centers
of excellence in Canada and the U.S., Europe and India. CGI's
annualized revenue run rate is currently $3.5 billion (US$3.1
billion) and at June 30, 2006, CGI's order backlog was $13.3
billion (US$11.9 billion). CGI's shares are listed on the TSX
(GIB.A) and the NYSE (GIB) and are included in the S&P/TSX
Composite Index as well as the S&P/TSX Capped Information
Technology and MidCap Indices. Forward-Looking Statements All
statements in this MD&A that do not directly and exclusively
relate to historical facts constitute "forward-looking statements"
within the meaning of that term in Section 27A of the United States
Securities Act of 1933, as amended, and Section 21E of the United
States Securities Exchange Act of 1934, as amended, and are
"forward-looking information" within the meaning of sections 138.3
and following of the Ontario Securities Act. These statements and
this information represent CGI Group Inc.'s ("CGI") intentions,
plans, expectations and beliefs, and are subject to risks,
uncertainties and other factors, of which many are beyond the
control of the Company. These factors could cause actual results to
differ materially from such forward-looking statements or
forward-looking information. These factors include and are not
restricted to the timing and size of new contracts, acquisitions
and other corporate developments; the ability to attract and retain
qualified members; market competition in the rapidly-evolving
information technology industry; general economic and business
conditions, foreign exchange and other risks identified in the
MD&A, in CGI's Annual Report or Form 40-F filed with the U.S.
Securities and Exchange Commission (filed on EDGAR at
http://www.sec.gov/), the Company\'s Annual Information Form filed
with the Canadian securities authorities (filed on SEDAR at
http://www.sedar.com/), as well as assumptions regarding the
foregoing. The words "believe," "estimate," "expect," "intend,"
"anticipate," "foresee," "plan," and similar expressions and
variations thereof, identify certain of such forward-looking
statements or forward- looking information, which speak only as of
the date on which they are made. In particular, statements relating
to future performance are forward-looking statements and
forward-looking information. CGI disclaims any intention or
obligation to publicly update or revise any forward-looking
statements or forward-looking information, whether as a result of
new information, future events or otherwise. Readers are cautioned
not to place undue reliance on these forward-looking statements or
on this forward-looking information. You will find more information
about the risks that could cause our actual results to
significantly differ from our current expectations in the Risks and
Uncertainties section. Consolidated Financial Statements of CGI
GROUP INC. For the three and nine months ended June 30, 2006 and
2005 CGI GROUP INC. Consolidated Statements of Earnings For the
three and nine months ended June 30 (in thousands of Canadian
dollars, except share data) (unaudited)
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Three months ended Nine months ended June 30 June 30
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2006 2005 2006 2005
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Restated Restated $ $ $ $ Revenue 866,504 936,394 2,631,803
2,781,146
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Operating expenses Costs of services, selling and administrative
746,395 802,312 2,282,948 2,389,639 Amortization(Note 6) 42,467
54,909 129,640 145,789 Restructuring costs related to specific
items(Note 7) 15,020 - 46,335 - Interest on long- term debt 13,146
5,228 29,852 19,207 Other income, net (2,193) (1,499) (5,804)
(5,646) Sale of right(Note 10) - (11,000) - (11,000) Gain on sale
and earnings from an investment in an entity subject to significant
influence - - - (4,537) Gain on sale of assets(Note 5b)) - -
(10,475) -
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814,835 849,950 2,472,496 2,533,452
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Earnings from continuing operations before income taxes 51,669
86,444 159,307 247,694 Income taxes 15,725 29,823 52,306 84,411
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Net earnings from continuing operations 35,944 56,621 107,001
163,283 Net gain (loss) from discontinued operations(Note 8) -
1,138 - (2,587)
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Net earnings 35,944 57,759 107,001 160,696
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Basic and diluted earnings per share from continuing
operations(Note 4c)) 0.11 0.13 0.29 0.37
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Basic and diluted loss per share from discontinued operations(Note
4c)) - - - (0.01)
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Basic and diluted earnings per share(Note 4c)) 0.11 0.13 0.29 0.36
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Consolidated Statements of Retained Earnings For the three and nine
months ended June 30 (in thousands of Canadian dollars) (unaudited)
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Three months ended Nine months ended June 30 June 30
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2006 2005 2006 2005
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$ $ $ $ Retained earnings, beginning of period 534,089 808,945
895,267 730,757 Net earnings 35,944 57,759 107,001 160,696 Share
repurchase costs(Note 4a)) - - (6,760) - Excess of purchase price
over carrying value of Class A subordinate shares acquired(Note
4a)) - (8,214) (425,475) (32,963)
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Retained earnings, end of period 570,033 858,490 570,033 858,490
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CGI GROUP INC. Consolidated Balance Sheets (in thousands of
Canadian dollars)
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As at As at June 30, September 30, 2006 2005 (unaudited) (audited)
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$ $ Assets Current assets Cash and cash equivalents 154,494 240,459
Accounts receivable 496,475 487,731 Work in progress 201,392
214,470 Prepaid expenses and other current assets 98,858 75,531
Future income taxes 23,146 22,118
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974,365 1,040,309 Capital assets 116,006 116,388 Contract costs
221,340 228,646 Finite-life intangibles and other long-term assets
(Note 2) 528,633 580,642 Future income taxes 38,340 46,601 Goodwill
1,738,834 1,773,370
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Total assets before funds held for clients 3,617,518 3,785,956
Funds held for clients 250,877 200,703
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3,868,395 3,986,659
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Liabilities Current liabilities Accounts payable and accrued
liabilities 357,811 378,691 Accrued compensation 134,314 107,014
Deferred revenue 156,519 127,950 Income taxes 22,868 31,955 Future
income taxes 43,866 47,163 Current portion of long-term debt 9,667
14,899
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725,045 707,672 Future income taxes 226,710 238,983 Long-term debt
(Note 3) 801,069 234,801 Accrued integration charges and other
long-term liabilities 99,365 109,810
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Total liabilities before clients' funds obligations 1,852,189
1,291,266 Clients' funds obligations 250,877 200,703
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2,103,066 1,491,969 Shareholders' equity Capital stock(Note 4a))
1,404,583 1,762,973 Contributed surplus (Note 4a) and 4b)) 78,301
67,578 Warrants (Note 4a)) - 19,655 Retained earnings 570,033
895,267 Foreign currency translation adjustment (287,588) (250,783)
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1,765,329 2,494,690
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3,868,395 3,986,659
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CGI GROUP INC. Consolidated Statements of Cash Flows For the three
and nine months ended June 30 (in thousands of Canadian dollars)
(unaudited))
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Three months ended Nine months ended June 30 June 30
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2006 2005 2006 2005
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$ $ $ $ Operating activities Net earnings from continuing
operations 35,944 56,621 107,001 163,283 Adjustments for:
Amortization(Note 6) 48,688 61,717 147,919 167,546 Non-cash portion
of restructuring costs related to specific items(Note 7) 692 - 692
- Deferred credits - (734) (781) (2,258) Future income taxes 1,956
(4,729) (11,768) 17,211 Foreign exchange loss 2,827 1,346 2,185
3,479 Stock-based compensation expense(Note 4b)) 2,347 4,748 8,641
15,454 Gain on sale and earnings from an investment in an entity
subject to significant influence - - - (4,537) Sale of right (Note
10) - (11,000) - (11,000) Gain on sale of assets - - (10,475) - Net
change in non- cash working capital items 15,855 80,534 10,291
8,759
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Cash provided by continuing operating activities 108,309 188,503
253,705 357,937
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Investing activities Business acquisitions (net of cash
acquired)(Note 5a)) (14,845) (356) (20,222) (43,607) Proceeds from
sale of assets and businesses(Note 5b)) - - 27,559 29,521 Proceeds
from sale of right - 11,000 - 11,000 Purchase of capital assets
(5,055) (5,178) (27,009) (20,128) Proceeds from disposal of capital
assets - 156 448 6,502 Contract costs (9,413) (7,523) (25,804)
(19,508) Reimbursement of contract costs upon termination of a
contract - 15,300 - 15,300 Additions to finite- life intangibles
and other long-term assets (16,862) (19,543) (52,915) (64,249)
Proceeds from sale of investment in an entity subject to
significant influence - - - 20,849 Decrease in other long-term
assets 952 3,894 3,686 10,663
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Cash used in continuing investing activities (45,223) (2,250)
(94,257) (53,657)
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Financing activities Increase in credit facilities(Note 3) - -
738,605 190,000 Repayment of credit facilities (129,449) (90,000)
(158,944) (397,578) Repayment of long- term debt (2,888) (6,251)
(10,098) (14,101) Repurchase of Class A subordinate shares
(including share purchase costs) - (26,356) (873,175) (76,004)
Issuance of shares (net of share issue costs) 25,058 1,540 57,792
2,773
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Cash used in continuing financing activities (107,279) (121,067)
(245,820) (294,910)
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Effect of foreign exchange rate changes on cash and cash
equivalents of continuing operations 697 1,169 407 1,043
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Net (decrease) increase in cash and cash equivalents of continuing
operations (43,496) 66,355 (85,965) 10,413 Net cash and cash
equivalents provided by discon- tinued operations - 2,747 - 990
Cash and cash equivalents, beginning of period 197,990 142,924
240,459 200,623
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Cash and cash equivalents, end of period 154,494 212,026 154,494
212,026
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Interest paid 6,457 731 25,154 13,164 Income taxes paid 18,193
8,948 59,935 53,075
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CGI GROUP INC. Notes to the Consolidated Financial Statements For
the three and nine months ended June 30, 2006 and 2005 (tabular
amounts only are in thousands of Canadian dollars, except share
data)(unaudited)
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1. Summary of significant accounting policies The interim
consolidated financial statements for the three and nine months
ended June 30, 2006 and 2005, are unaudited and include all
adjustments that management of CGI Group Inc. (the "Company")
considers necessary for a fair presentation of the financial
position, results of operations and cash flows. The disclosures
provided for these interim periods do not conform in all respects
to the requirements of generally accepted accounting principles
("GAAP") for the annual consolidated financial statements;
therefore, the interim consolidated financial statements should be
read in conjunction with the annual consolidated financial
statements of the Company for the year ended September 30, 2005.
These interim consolidated financial statements have been prepared
using the same accounting policies and methods of their application
as the annual consolidated financial statements for the year ended
September 30, 2005. Certain comparative figures have been
reclassified in order to conform to the current period
presentation. Restatement The Company provides a centralized
service to the Canadian property and casualty insurance industry
for the purpose of ordering abstracts of driving records from
government authorities. Following its accounting reviews performed
during the year ended September 30, 2005, the Company revised its
interpretation of the accounting treatment related to those
services. The revised interpretation required that the revenue and
applicable costs of services charged to clients, which are included
in Costs of services, selling and administrative expenses, be
presented on a net basis rather than on a gross basis as they had
been presented previously. For comparative purposes, the
reclassification amounted to $14,786,000 and $40,731,000 for the
three and nine months ended June 30, 2005, respectively. The
revised presentation is in accordance with Emerging Issue Committee
("EIC") Abstract 123, "Reporting Revenue Gross as a Principal
versus Net as an Agent", which addresses whether an enterprise
should recognize revenue based upon the gross amount billed to the
client or the net amount retained. This reclassification had no
impact on net earnings or cash flows. Change in accounting policies
The Canadian Institute of Chartered Accountants ("CICA") has issued
the following new Handbook Sections which were effective for
interim periods beginning on or after January 1, 2006: a) Handbook
Section 3831, "Non-Monetary Transactions", requires that non-
monetary transactions be recorded at fair value unless the
transaction has no commercial substance, it is an exchange of
inventory, it is non- monetary, non-reciprocal transfer to owners
or it's not reliably measurable. The adoption of this section did
not have any impact on the consolidated financials statements. b)
EIC 156, "Accounting by a Vendor for Consideration Given to a
Customer (Including a Reseller of the Vendor's Products)", provides
guidance to companies that give incentives to customers or
resellers in the form of cash, equity, free gifts, coupons and
other. The adoption of EIC 156 did not have any impact on the
consolidated financial statements since the Company already adopted
the US equivalent of EIC 156 which is EITF 01-9 "Accounting for
Consideration Given by a Vendor to a Customer" issued by the
Financial Accounting Standards Board's Emerging Issues Task Force
as at September 30, 2002. Future accounting changes The CICA has
issued the following new Handbook Sections: a) Handbook Section
3855, "Financial Instruments - Recognition and Measurement",
effective for interim periods beginning on or after October 1,
2006. The section describes the standards for recognizing and
measuring financial assets, financial liabilities and non-
financial derivatives. All financial assets, except for those
classified as held-to-maturity, and derivative financial
instruments must be measured at their fair value. All financial
liabilities must be measured at their fair value if they are
classified as held for trading purposes, if not, they are measured
at their carrying value. The Company is currently evaluating the
impact of the adoption of this new section on the consolidated
financial statements. b) Handbook Section 1530, "Comprehensive
Income", and Section 3251, "Equity", effective for interim periods
beginning on or after October 1, 2006. Comprehensive income is the
change in equity of an enterprise during a period arising from
transactions and other events and circumstances from non-owner
sources. It includes items that would normally not be included in
net income such as changes in the foreign currency translation
adjustment relating to self-sustaining foreign operations and
unrealized gains or losses on available-for-sale financial
instruments. This section describes how to report and disclose
comprehensive income and its components. Section 3251, "Equity",
replaces Section 3250, "Surplus", and establishes standards for the
presentation of equity and changes in equity as a result of the new
requirements of Section 1530, "Comprehensive Income". Upon adoption
of this section, the consolidated financial statements will include
a statement of comprehensive income. c) Handbook Section 3865,
"Hedges", effective for interim periods beginning on or after
October 1, 2006. This section describes when hedge accounting is
appropriate. Hedge accounting ensures that all gains, losses,
revenues and expenses from the derivative and the item it hedges
are recorded in the statement of earnings in the same period. The
Company is currently evaluating the impact of the adoption of this
section on the consolidated financial statements. 2. Finite-life
intangibles and other long-term assets
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As at June 30, 2006
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Accumulated Net book Cost amortization value
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$ $ $ Internal software 71,168 28,878 42,290 Business solutions
248,855 76,427 172,428 Software licenses 128,569 82,083 46,486
Customer relationships and other 380,570 134,525 246,045
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Finite-life intangibles 829,162 321,913 507,249
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Financing lease - Deferred financing fees and other 21,384
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Other long-term assets 21,384
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Total finite-life intangibles and other long-term assets 528,633
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As at September 30, 2005
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Accumulated Net book Cost amortization value
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$ $ $ Internal software 75,088 31,056 44,032 Business solutions
227,214 51,114 176,100 Software licenses 135,991 69,644 66,347
Customer relationships and other 382,111 103,819 278,292
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Finite-life intangibles 820,404 255,633 564,771
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Financing lease 1,788 Deferred financing fees and other 14,083
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Other long-term assets 15,871
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Total finite-life intangibles and other long-term assets 580,642
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3. Credit facilities The Company has available a five-year
unsecured revolving credit facility for an amount of $1,000,000,000
maturing in December 2009. This agreement comprises a Canadian
tranche with a limit of $850,000,000 and a U.S. tranche equivalent
to $150,000,000. The interest rate charged is determined by the
denomination of the amount drawn. As at June 30, 2006, an amount of
$590,000,000 has been drawn upon this facility. Also, an amount of
$28,426,639 has been committed against this facility to cover
various letters of credit issued for clients and other parties.
Financing fees of $1,000,000 were incurred during the third quarter
of 2006 and were recorded in Finite-life intangibles and other
long-term assets. In addition to the revolving credit facility, the
Company has available demand lines of credit in the amounts of
$27,000,000 and pnds stlg 2,000,000. As at June 30, 2006, no amount
has been drawn upon these facilities. The long-term debt agreements
contain covenants which require the Company to maintain certain
financial ratios. At June 30, 2006, the Company is in compliance
with the covenants of its credit facilities and other long-term
debt. On April 21, 2006, the Company obtained certain amendments to
the definition and calculations of the ratios which take into
account the impact of restructuring activities on the unsecured
revolving credit facility. In addition, on June 9, 2006, the
Company amended its agreement for the Senior US unsecured notes, as
it relates to financial ratios. 4. Capital stock, stock options and
earnings per share a) Capital stock Changes in Class A subordinate
and the Class B shares were as follows:
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Nine months ended June 30, 2006
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Class A subordinate shares Class B shares
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Carrying Carrying Number value Number value
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$ $
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Balance, beginning of period 397,448,329 1,718,105 33,772,168
44,868 Repurchased and cancelled(1) (100,846,200) (433,755) - -
Options exercised(2) 1,185,012 11,528 - - Warrants exercised(3)
7,131,236 60,981 435,991 2,856
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Balance, end of period 304,918,377 1,356,859 34,208,159 47,724
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Twelve months ended September 30, 2005
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Class A subordinate shares Class B shares
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Carrying Carrying Number value Number value
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$ $
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Balance, beginning of period 410,720,891 1,775,362 33,772,168
44,868 Repurchased and cancelled (14,078,360) (60,998) - -
Repurchased and not cancelled - (3,665) - - Options exercised
805,798 7,406 - -
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Balance, end of period 397,448,329 1,718,105 33,772,168 44,868
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(1) On January 12, 2006, the Company concluded a transaction
whereby the Company repurchased from BCE for cancellation 100
million of its Class A subordinate shares at a price of $8.5923 per
share. The excess of the purchase price over the carrying value of
Class A subordinate shares repurchased in the amount of
$425,475,000 as well as share repurchase costs in the amount of
$6,760,000, were charged to retained earnings. On January 31, 2006,
the Company announced that its Board of Directors had authorized
the renewal of the share repurchase program which enables the
Company to purchase up to 29,288,443 Class A subordinate shares for
cancellation from February 3, 2006 to February 2, 2007. No shares
have been repurchased under this renewed program. During the twelve
months ended September 30, 2005, the Company repurchased 14,896,200
Class A subordinate shares of which 846,200 Class A subordinate
shares, with a purchase value, of $7,185,000, have been paid and
cancelled in the three months ended December 31, 2005. (2) The
carrying value of Class A subordinate shares includes $3,302,000
($2,855,000 for the twelve months ended September 30, 2005) of
contributed surplus representing the value of compensation cost
associated with the options exercised and the value of exercised
options assumed in connection with acquisitions. (3) During the
second quarter in 2006, Desjardins Group exercised its warrant to
purchase 4,000,000 Class A subordinate shares of the Company at a
price of $6.55 each for an aggregate amount of $26,200,000. The
carrying value of these Class A subordinate shares includes
$14,271,000 which was previously recorded under Warrants caption.
On April 6, 2006, BCE exercised its warrants resulting in the
issuance of 3,131,236 Class A subordinate shares of the Company at
a price of $6.55 each for an aggregate amount of $20,510,000. Also,
on April 28, 2006, the Company's Class B shareholders exercised
their warrants totaling 435,991 Class B shares at a price of $6.55
each for an aggregate amount of $2,856,000. On June 13, 2006,
1,118,210 warrants of Laurentian Bank expired, resulting in a
transfer of their carrying value of $5,384,000 from the Warrants
caption to the Contributed surplus caption. b) Stock options Under
the Company's stock option plan, the Board of Directors may grant,
at its discretion, options to purchase Class A subordinate shares
to certain employees, officers, directors and consultants of the
Company and its subsidiaries. The exercise price is established by
the Board of Directors and is equal to the closing price of the
Class A subordinate shares on the Toronto Stock Exchange on the day
preceding the date of the grant. Options generally vest one year
from the date of grant conditionally upon achievement of objectives
and must be exercised within a ten-year period, except in the event
of retirement, termination of employment or death. The following
table presents the compensation expense and the weighted average
assumptions used to determine the stock-based compensation expense
recorded in Cost of services, selling and administrative expenses
using the Black-Scholes option pricing model:
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Three months ended Nine months ended June 30 June 30
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2006 2005 2006 2005
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Compensation expense($) 2,347 4,748 8,641 15,454
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Dividend yield 0.0% 0.0% 0.0% 0.0% Expected volatility 31.4% 43.4%
38.2% 45.9% Risk-free interest rate 4.3% 3.54% 3.89% 3.93% Expected
life(years) 5 5 5 5 Weighted average grant date fair values($) 2.93
3.02 3.43 3.87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table presents information concerning all outstanding
stock options granted by the Company:
-------------------------------------------------------------------------
Nine months ended Twelve months ended Number of options June 30,
2006 September 30, 2005
-------------------------------------------------------------------------
Outstanding, beginning of period 26,538,654 25,537,300 Granted
6,389,024 5,079,636 Exercised (1,185,012) (805,798) Forfeited and
expired (3,243,172) (3,272,484)
-------------------------------------------------------------------------
Outstanding, end of period 28,499,494 26,538,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------
c) Earnings per share The following table sets forth the
computation of basic and diluted earnings per share:
-------------------------------------------------------------------------
Three months ended June 30, 2006
-------------------------------------------------------------------------
Number of Net earnings shares Earnings (numerator) (denominator)
per share
-------------------------------------------------------------------------
$ $ 35,944 338,714,368 0.11
-------------------------------------------------------------------------
Dilutive options(2) 800,958 Dilutive warrants(2) 49,812
-------------------------------------------------------------------------
35,944 339,565,138 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 30, 2005
-------------------------------------------------------------------------
Net earnings shares Earnings (numerator) (denominator) per share
-------------------------------------------------------------------------
$ $ 57,759 436,591,748 0.13
-------------------------------------------------------------------------
Dilutive options(2) 812,765 Dilutive warrants(2) 728,452
-------------------------------------------------------------------------
57,759 438,132,965 0.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 30, 2006
-------------------------------------------------------------------------
Number of Net earnings shares (deno- Earnings (numerator)
minator)(1) per share
-------------------------------------------------------------------------
$ $ 107,001 371,656,027 0.29
-------------------------------------------------------------------------
Dilutive options(2) 1,565,693 Dilutive warrants(2) 1,102,064
-------------------------------------------------------------------------
107,001 374,323,784 0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 30, 2005
-------------------------------------------------------------------------
Net earnings shares Earnings (numerator) (denominator) per share
-------------------------------------------------------------------------
$ $ 160,696 441,223,152 0.36
-------------------------------------------------------------------------
Dilutive options(2) 1,090,762 Dilutive warrants(2) 1,105,297
-------------------------------------------------------------------------
160,696 443,419,211 0.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 846,200 Class A subordinate shares cancelled during the three
months ended December 31, 2005, were excluded from the calculation
of earnings per share as of the date of repurchase. (2) The
calculation of the dilutive effects excludes all anti-dilutive
options and warrants that would not be exercised because their
exercise price is higher than the average market value of a Class A
subordinate share of the Company for each of the periods shown in
the table. The number of excluded options was 24,375,869 and
18,584,096 for the three and nine months ended June 30, 2006,
respectively and 22,900,078 and 22,617,676 for the three and nine
months ended June 30, 2005, respectively. The number of excluded
warrants was nil for the three and nine months ended June 30, 2006,
respectively and 2,113,041 for the three and nine months ended June
30, 2005, respectively. 5. Investments in subsidiaries and joint
ventures a) Acquisitions For all business acquisitions, the Company
begins recording the results of operations of the acquired entities
as of their respective effective acquisition dates. On June 1st,
2006, the Company acquired all outstanding shares of Plaut
Consulting SAS ("Plaut"), a French management and technology
consulting firm for an aggregate consideration of $18,400,000 of
which $13,079,000 has already been paid. Recognized for its
expertise in implementing SAP solutions, Plaut guides its worldwide
clients through organizational and information systems
transformation projects. The amount assigned to non-deductible
goodwill is $12,678,000 and is included in the IT segment. On
February 2, 2006, the Company acquired all outstanding shares of
Pangaea Systems Inc. ("Pangaea"), an information technology
services company based in Alberta, Canada for an approximate
aggregate paid consideration of $6,700,000. Pangaea specializes in
development of internet-based solutions and related services mostly
in the public sector, as well as in the sectors of energy and
financial services. The amount assigned to non-deductible goodwill
is $6,247,000 and is included in the IT segment. b) Dispositions On
October 26, 2005, the Company disposed of its electronic switching
assets to Everlink Payment Services Inc. for cash consideration of
$27,559,000 which was received during the second quarter of fiscal
year 2006. The net assets disposed of included goodwill of
$13,172,000 and the transaction resulted in a gain of $10,475,000.
c) Modifications to purchase price allocations During the nine
months ended June 30, 2006, the Company modified the purchase price
allocation and made adjustments relating to certain business
acquisitions, resulting in a net increase of non-cash working
capital items, long-term debt and customer relationships of
$2,841,000, $463,000 and $287,000, respectively, and a net decrease
of integration charges, future income tax assets and cash of
$8,661,000, $4,465,000 and $443,000, respectively, whereas goodwill
decreased by $6,418,000. d) Balance of integration charges For AMS
and Cognicase, the components of the integration charges related to
business acquisitions included in accounts payable and accrued
liabilities as well as accrued integration charges and other
long-term liabilities are as follows:
-------------------------------------------------------------------------
Consolidation and closure of facilities Severance Total
-------------------------------------------------------------------------
$ $ $ Balance, as at October 1, 2005 57,118 5,194 62,312
Adjustments to initial provision(1) (10,188) (1,688) (11,876)
Foreign currency translation adjustment (991) 153 (838) Paid during
the nine-month period (8,199) (1,284) (9,483)
-------------------------------------------------------------------------
Balance, as at June 30, 2006(2) 37,740 2,375 40,115
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Has been recorded as a decrease of goodwill. This amount
includes the amount of goodwill decrease presented in Note 5c). (2)
Of the total balance remaining, $9,553,000 is included in accounts
payable and accrued liabilities and $30,562,000 is included in
accrued integration charges and other long-term liabilities. 6.
Amortization
-------------------------------------------------------------------------
Three months ended Nine months ended June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
$ $ $ $ Amortization of capital assets 7,573 10,342 25,512 32,678
Amortization of contract costs related to transition costs 4,055
3,427 12,044 10,689 Amortization of finite-life intangibles 30,839
31,539 91,087 92,821 Impairment of contract costs and finite-life
intangibles(Note 10) - 9,601 997 9,601
-------------------------------------------------------------------------
42,467 54,909 129,640 145,789 Amortization of contract costs
related to incentives (presented as reduction of revenue) 6,221
6,808 18,279 21,757
-------------------------------------------------------------------------
48,688 61,717 147,919 167,546
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Restructuring costs related to specific items On March 29, 2006,
the Company announced a restructuring plan impacting members
located primarily in Montreal and Toronto, of which a significant
portion is related to lower than expected BCE (a shareholder) work
volumes. Approximately 850 of the total headcount reductions were
effective as of June 30, 2006, and the remainder will be completed
by the end of the calendar year. The acceleration and expansion of
CGI's Global Delivery Model will partially offset the headcount
reductions by creating some 400 new jobs throughout its network.
Under the terms of the contract agreement signed on December 16,
2005, BCE will share in severance costs with a maximum contribution
capped at $10,000,000 for severance costs applicable to headcounts
reductions exceeding 100 positions. Total amount to be incurred as
a result of this restructuring plan will approximate $90,000,000,
of which $57,000,000 (after BCE contribution) will be for severance
and $33,000,000 for consolidation and closure of facilities. The
following table shows details of restructuring costs related to
specific items recorded in the statement of earnings during the
three and nine months ended June 30, 2006:
------------------------------------------------------------------------
For the three months ended June 30, 2006 Severance Consolidation
Total and closure of facilities
------------------------------------------------------------------------
$ $ $ IT services 11,768 4,296 16,064 BPS 226 215 441 Corporate 390
1,984 2,374
------------------------------------------------------------------------
Restructuring costs related to specific items 12,384 6,495 18,879
BCE contribution (3,859) - (3,859)
------------------------------------------------------------------------
Total restructuring costs related to specific items 8,525 6,495
15,020
------------------------------------------------------------------------
------------------------------------------------------------------------
For the nine months ended June 30, 2006
------------------------------------------------------------------------
IT services 42,812 4,296 47,108 BPS 2,193 215 2,408 Corporate 2,759
1,984 4,743
------------------------------------------------------------------------
Restructuring costs related to specific items 47,764 6,495 54,259
BCE contribution (7,924) - (7,924)
------------------------------------------------------------------------
Total restructuring costs related to specific items 39,840 6,495
46,335
------------------------------------------------------------------------
------------------------------------------------------------------------
The following table shows the components of the restructuring
provision, included in accrued compensation and in accounts payable
and accrued liabilities:
------------------------------------------------------------------------
Severance Consolidation Total and closure of facilities
------------------------------------------------------------------------
$ $ $ Balance, as at October 1, 2005 - - - IT services 31,044 -
31,044 BPS 1,967 - 1,967 Corporate 2,369 - 2,369
------------------------------------------------------------------------
Restructuring costs related to specific items 35,380 - 35,380
Payments made (4,231) - (4,231)
------------------------------------------------------------------------
Balance, as at March 31, 2006 31,149 - 31,149
------------------------------------------------------------------------
------------------------------------------------------------------------
Additional provision: IT services 11,768 4,296 16,064 BPS 226 215
441 Corporate 390 1,984 2,374
------------------------------------------------------------------------
Restructuring costs related to specific items 43,533 6,495 50,028
Payments made (34,303) (2,888) (37,191) Non-cash portion of
restruc- turing costs related to specific items - (692) (692)
------------------------------------------------------------------------
Balance, as at June 30, 2006 9,230 2,915 12,145
------------------------------------------------------------------------
------------------------------------------------------------------------
8. Discontinued operations During the year ended September 30,
2005, the Company formally adopted plans to divest from certain
activities which were not in line with the Company's strategy. The
Company disposed of the principal assets of Keyfacts Entreprises
Canada Inc. ("Keyfacts"), a wholly-owned subsidiary of the Company
as well as disposed of its US Services to Credit Unions business
unit and its CyberSuite product line. Keyfacts is a provider of
information search and retrieval services for investigative
purposes. US Services to Credit Unions is a provider of core
processing for credit unions in the United States. The following
table presents summarized financial information related to
discontinued operations:
------------------------------------------------------------------------
Three months ended June 30 Nine months ended June 30
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
$ $ $ $ Revenue - 1,542 - 17,495 Operating expenses - (130) -
11,754 Amortization - - - 610
------------------------------------------------------------------------
Earnings before income taxes - 1,672 - 5,131 Income taxes - 534 -
7,718
------------------------------------------------------------------------
Net gain (loss) from discontinued operations - 1,138 - (2,587)
------------------------------------------------------------------------
------------------------------------------------------------------------
Discontinued operations were included in the business process
services segment for the three and nine months ended June 30, 2005.
9. Segmented information The Company has two lines of business
("LOB"): IT services ("IT") and business process services ("BPS").
The focus of these LOBs is as follows: The IT services LOB provides
a full-range of IT services, including systems integration,
consulting and outsourcing, to clients worldwide. The professionals
and facilities located in India and Canada also serve the United
States and foreign-based clients as an integral part of their
off-shore and nearshore delivery model. The BPS LOB provides a full
spectrum of business process outsourcing services to its client
base. Its services include business processing for the financial
services sector, as well as other services such as payroll and
document management services. The following presents information on
the Company's operations based on its management structure:
------------------------------------------------------------------------
As at and for the three months ended June 30, 2006 IT services BPS
Corporate Total
------------------------------------------------------------------------
$ $ $ $ Revenue 764,106 102,398 - 866,504
------------------------------------------------------------------------
Earnings (loss) before interest on long- term debt, other income,
gain on sale of assets, restruc- turing costs related to specific
items, income taxes and discontinued operations(1) 85,572 13,178
(21,108) 77,642
------------------------------------------------------------------------
Total assets 2,906,859 693,983 267,553 3,868,395
------------------------------------------------------------------------
(1) Amortization included in IT services, BPS and Corporate is
$39,471,000, $6,893,000 and $2,324,000 respectively.
------------------------------------------------------------------------
As at and for the three months ended June 30, 2005 IT services BPS
Corporate Total
------------------------------------------------------------------------
$ $ $ $ Revenue (restated) 825,051 111,343 - 936,394
------------------------------------------------------------------------
Earnings (loss) before interest on long-term debt, other income,
gain on sale and earnings from an investment in an entity subject
to significant influence, income taxes and discontinued
operations(1) 92,268 20,868 (22,963) 90,173
------------------------------------------------------------------------
Total assets 3,058,621 728,334 349,445 4,136,400
------------------------------------------------------------------------
(1) Amortization included in IT services, BPS and Corporate is
$45,641,000, $13,888,000 and $2,188,000 respectively.
------------------------------------------------------------------------
As at and for the nine months ended June 30, 2006 IT services BPS
Corporate Total
------------------------------------------------------------------------
$ $ $ $ Revenue 2,314,808 316,995 - 2,631,803
------------------------------------------------------------------------
Earnings (loss) before interest on long-term debt, other income,
gain on sale of assets, restructuring costs related to specific
items, income taxes and discontinued operations(1) 241,040 38,598
(60,423) 219,215
------------------------------------------------------------------------
Total assets 2,906,859 693,983 267,553 3,868,395
------------------------------------------------------------------------
(1) Amortization included in IT services, BPS and Corporate is
$123,773,000, $17,183,000 and $6,963,000 respectively.
------------------------------------------------------------------------
As at and for the nine months ended June 30, 2005 IT services BPS
Corporate Total
------------------------------------------------------------------------
$ $ $ $ Revenue (restated) 2,447,507 333,639 - 2,781,146
------------------------------------------------------------------------
Earnings (loss) before interest on long-term debt, other income,
gain on sale and earnings from an investment in an entity subject
to significant influence, income taxes and discontinued
operations(1) 266,590 54,152 (64,024) 256,718
------------------------------------------------------------------------
Total assets 3,058,621 728,334 349,445 4,136,400
------------------------------------------------------------------------
(1) Amortization included in IT services, BPS and Corporate is
$136,215,000, $24,367,000 and $6,964,000 respectively. The
accounting policies of each segment are the same as those described
in the summary of significant accounting policies. See Note 2 of
the annual consolidated financial statements of the Company for the
year ended September 30, 2005. The figures are presented net of
intersegment sales and transfers, which are measured as if the
sales or transfers were to third parties. 10. Sale of right On June
15, 2005, the Company entered into an alliance ("arrangement") with
a financial institution. Under this arrangement, the Company has
sold to this financial institution a right to access the Company's
Canadian Credit Union ("Credit Union") clients in order to offer
them its business solutions in exchange for cash consideration of
$13,500,000. A portion of this consideration in the amount of
$2,500,000 has been recorded as deferred revenue and will be
reversed to earnings upon certain conditions being met. Additional
consideration, up to a maximum of $10,000,000, may be received by
the Company based on the number of Credit Union clients
transitioning to the financial institution's business solutions.
The Company will continue to support or provide services to the
Credit Unions with its current solutions and methodologies until
this transitioning is completed. As a result of the above
transaction, contract costs and business solutions relating to the
Credit Unions in the amount of $5,106,000 and $4,495,000,
respectively, were impaired and included in amortization expense.
11. Guarantees Contingencies From time to time, the Company is
involved in various litigation matters arising in the ordinary
course of its business. The Company has no reason to believe that
the disposition of any such current matter could reasonably be
expected to have a material adverse impact on the Company's
financial position, results of operations, or the ability to carry
on any of its business activities. Sale of assets and business
divestitures In connection with sale of assets and business
divestitures, the Company may be required to pay counterparties for
costs and losses incurred as the result of breaches in
representations and warranties, intellectual property right
infringement and litigation against counterparties. While many of
the agreements specify a maximum potential exposure of
approximately $108,500,000 in total, others do not specify a
maximum amount or limited period. It is impossible to reasonably
estimate the maximum amount that may have to be paid under such
guarantees. The amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be
determined at this time. No amount has been accrued in the
consolidated balance sheets relating to this type of
indemnification as at June 30, 2006. The Company does not expect to
incur any potential payment in connection with these guarantees
which could have a materially adverse effect on its consolidated
financial statements. U.S. Government contracts The Company is
engaged to provide services under contracts with the U.S.
Government. The contracts are subject to extensive legal and
regulatory requirements and, from time to time, agencies of the
U.S. Government investigate whether the Company's operations are
being conducted in accordance with these requirements. Generally,
the Government has the right to change the scope of, or terminate,
these projects at its convenience. The termination or a reduction
in the scope of a major government project could have a material
adverse effect on our results of operations and financial
condition. Other transactions In the normal course of business, the
Company may provide certain clients, principally governmental
entities, with bid and performance bonds. In general, the Company
would only be liable for the amount of the bid bonds if the Company
refuses to perform the project once the bid is awarded. The Company
would also be liable for the performance bonds in the event of
default in the performance of its obligations. As at June 30, 2006,
the Company provided for a total of $112,100,000 of these bonds.
The Company believes it is in compliance with its performance
obligations under all service contracts for which there is a
performance or bid bond, and the ultimate liability, if any,
incurred in connection with these guarantees would not have a
material adverse effect on the Company's consolidated results of
operations or financial condition. In addition, the Company
provides a guarantee of $5,900,000 of the residual value of a
leased property, accounted for as an operating lease, at the
expiration of the lease term. 12. Reconciliation of results
reported in accordance with Canadian GAAP to US GAAP The material
differences between Canadian and US GAAP affecting the Company's
consolidated financial statements are detailed in the table below.
The Company's most recent annual financial statements describe the
circumstances which gave rise to the material differences between
Canadian and US GAAP applicable as at September 30, 2005.
------------------------------------------------------------------------
Three months ended June 30 Nine months ended June 30
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
$ $ $ $ Reconciliation of net earnings Net earnings - Canadian GAAP
35,944 57,759 107,001 160,696 Adjustments for: Stock-based
compensation (a) - 4,748 - 15,454 Warrants 351 351 1,053 1,053
Other 477 (344) 887 (968)
------------------------------------------------------------------------
Net earnings - US GAAP 36,772 62,514 108,941 176,235
------------------------------------------------------------------------
Other comprehensive income Foreign currency translation adjustment
(41,501) 7,997 (36,805) (26,009)
------------------------------------------------------------------------
Comprehensive income (4,729) 70,511 72,136 150,226
------------------------------------------------------------------------
Basic and diluted earnings per share - US GAAP 0.11 0.14 0.29 0.40
------------------------------------------------------------------------
------------------------------------------------------------------------
As at June 30, 2006 As at September 30, 2005
------------------------------------------------------------------------
$ $ Reconciliation of shareholders' equity Shareholders' equity -
Canadian GAAP 1,765,329 2,494,690 Adjustments for: Stock-based
compensation (a) 58,411 58,411 Warrants (5,427) (6,480) Unearned
compensation (3,694) (3,694) Integration costs (6,606) (6,606)
Goodwill 28,078 28,078 Adjustment for change in accounting policy
9,715 9,715 Other (7,996) (9,463)
------------------------------------------------------------------------
Shareholders' equity - US GAAP 1,837,810 2,564,651
------------------------------------------------------------------------
(a) Stock-based compensation Under Canadian GAAP, stock-based
employee compensation was accounted for using the fair value-based
method beginning October 1, 2004, as required by CICA Handbook
Section 3870, "Stock-Based Compensation and Other Stock-Based
Payments". Under US GAAP, the Statement of Financial Accounting
Board No. 123 (revised 2004), "Share-Based Payment" is effective
for fiscal years beginning on or after June 15, 2005. The Company
adopted the modified prospective application of the recommendation
of the Statement effective October 1, 2005. The adoption of this
Statement did not have a material impact on the Company's
consolidated financial statements. DATASOURCE: CGI GROUP INC.
CONTACT: Investors: Lorne Gorber, Vice-President, Corporate
Communications and Investor Relations, (514) 841-3355; Media:
Philippe Beauregard, Director, Public Affairs, (514) 841-3218
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