SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of December 2002
Commission File Number 1-14858
CGI Group Inc.
(Translation of Registrant's Name Into English)
1130 Sherbrooke Street West
5th Floor
Montreal, Quebec
Canada H3A 2M8
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F ___ Form 40-F _X_
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K if submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ___ No _X_
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___.
Enclosure: Management's Discussion and Analysis of Financial Position and
Results of Operations and Management's and Auditors's Reports for year end
September 30, 2002 and Auditor's Consent.
This Form 6-K shall be deemed incorporated by reference in the Registrant's
Registration Statement on Form S-8, Reg. Nos. 333-13350, 333-66044 and
333-74932.
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Roadmap
This management's discussion and analysis of financial position and results of
operations ("MD&A") should be read in conjunction with the Consolidated
Financial Statements of the Company's fiscal years 2002, 2001 and 2000 and the
notes beginning on page 42 of this annual report. The Company's accounting
policies are in accordance with Canadian generally accepted accounting
principles ("GAAP") of the Canadian Institute of Chartered Accountants ("CICA").
These differ in some respects from GAAP in the United States ("US GAAP"). The
fiscal 2002, 2001 and 2000 results are reconciled to US GAAP in Note 16 to the
Consolidated Financial Statements. All dollar amounts are in Canadian dollars
unless otherwise indicated.
Corporate overview
Headquartered in Montreal, CGI's operations are organized along geographic lines
with three strategic business units: Canada and Europe, US and Asia Pacific and
Business Process Services, along with Corporate Services. CGI provides
end-to-end information technology ("IT") services in six economic sectors:
financial services, telecommunications, manufacturing/retail/distribution,
governments, utilities and services, as well as healthcare. Some 72% of the
Company's business is in the management of IT and business functions
(outsourcing), and 28% in systems integration and consulting ("SI&C").
CGI and its affiliated companies employ 14,600 people serving some 3,000 clients
from more than 60 offices located around the world. The Company provides
end-to-end IT services and business solutions to its clients, including IT
facilities management through a network of state-of-the-art data centers in
Canada (Montreal, Toronto and Regina), in the US (Phoenix) and in the UK
(Basingstoke). CGI also has applications maintenance and development centers in
India (Mumbai and Bangalore).
Business acquisitions
In fiscal 2002, CGI completed the acquisition of five niche companies (through
the purchase of all shares, except in two cases where the assets were acquired)
and invested to create a joint venture with Canada Post Corporation ("Canada
Post").
On April 2, 2002, CGI acquired Albany-based Rapid Application Developers Inc.
("RAD"), one of the region's largest software development firms. At the time of
the acquisition, RAD had 36 employees serving government clients and generated
US$4.2 million in revenue annually. The price paid was approximately $6.5
million (US$4.0 million).
On May 3, 2002, CGI signed a shareholders' agreement which finalized the terms
and conditions of a new jointly-owned IT services company, Innovapost Inc.
("Innovapost"), with Canada Post as the majority owner (51%) and CGI owning 49%.
Innovapost will provide all IT services to Canada Post, its affiliated
companies, and potentially to other postal organizations worldwide. Innovapost
began generating revenue in July 2002 and expects to achieve total revenue of
approximately $200 million in its first year, approximately $400 million by year
three and approximately $3.5 billion over 10 years. This contract added
approximately $1.75 billion to CGI's backlog over a 10-year period.
On June 3, 2002, CGI closed the acquisition of Netplex Systems Inc.'s Retail
Division ("Netplex"), which served over 240 retail customers including Macy's,
Toys "R" Us and Value City, with retail solutions that focus on warehouse
management, store system integration and distribution. Forty professionals
located in the state of Oklahoma joined CGI. CGI paid a cash consideration of
approximately $6.9 million (US$4.4 million) for the acquisition.
On June 3, 2002, CGI completed the acquisition of electronic solutions provider
Myriap Inc. ("Myriap"), for a cash consideration of approximately $3.3 million,
which provided CGI with deeper knowledge in the transactional Web space. Some 60
professionals located in Montreal and Toronto joined CGI.
On June 12, 2002, CGI closed the acquisition of Stewart & Stewart Consulting
Inc. ("Stewart & Stewart"), with annual revenue of approximately $4 million. The
Edmonton-based company added geographic information systems and resource-based
systems knowledge with its 35 professionals supplying services primarily to the
Alberta government, under an existing outsourcing contract. CGI paid a cash
consideration of approximately $3.3 million for Stewart & Stewart.
On July 9, 2002, CGI completed the acquisition of privately held IMPLETECH
International Inc. ("Impletech") with annual revenue valued at $5 million.
Impletech offered SI&C services within the manufacturing sector with a focus on
enterprise resource planning (ERP) implementation. Twenty professionals, located
mostly in Toronto, joined CGI. Impletech served over 100 clients in the
automotive, food and beverage, pharmaceutical and industrial/electronic sectors.
CGI paid approximately $1.4 million for Impletech.
1 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Large contracts
On October 1, 2001, Fireman's Fund Insurance Company ("Fireman's Fund"), a
subsidiary of Allianz AG of Munich, and CGI finalized a 10-year IT outsourcing
agreement valued at US$380 million. As part of the agreement, CGI provides
Fireman's Fund with IT support services to some 80 locations across the United
States. Also, CGI took over the client's Phoenix-based, 40,000 square foot,
state-of-the-art data center. On October 2, 2002, Fireman's Fund Interstate
Insurance Group, a division of Fireman's Fund, and CGI announced the signing of
a nine-year outsourcing contract valued at US$13 million for the provision of
infrastructure services. This contract is an addition to the outsourcing
agreement signed on October 1, 2001.
Other significant developments
On December 20, 2001, CGI successfully closed its public offering of Class A
subordinate shares in Canada announced on December 3, 2001. CGI sold 11,110,000
Class A subordinate shares of the Company at a price of $11.25 per share, for
net proceeds of $119.5 million, to a syndicate of investment dealers. The net
proceeds of the offering were added to CGI's general funds and used to finance
its development activities, including the funding of large outsourcing contracts
and acquisitions, and for other general corporate purposes.
Also, in the second quarter of fiscal 2002, the Company sold two of its
subsidiaries located in Japan and Australia, for a cash consideration of
approximately $10.4 million with no resulting gain.
In May 2002, the Company signed a memorandum of understanding for a 10-year
outsourcing agreement valued at $80 million with IT services provider League
Data Limited ("League Data"). CGI plans to manage League Data's banking
environment and build a new browser-based front-end solution. Shareholders of
League Data approved the entering into contract negotiations with the Company,
which are still in process.
In June 2002, Satish Sanan retired from his position as Vice-Chairman, Executive
Vice-President, US Business Engineering, and Board Director.
In October 2002, Charles Sirois, Chairman and Chief Executive Officer of
Telesystem Ltd, resigned from CGI's Board. Mr. Sirois had served as a member of
the Board since 1998.
Performance overview
Fiscal 2002 marked the 26th consecutive year of revenue growth for CGI. Revenue
grew to $2,169.6 million, up from $1,560.4 million in fiscal 2001 and $1,423.1
million in fiscal 2000. Earnings before depreciation and amortization of fixed
assets and amortization of contract costs and other long-term assets were $309.2
million, compared with $219.3 million in fiscal 2001 and $168.2 million in
fiscal 2000. Net earnings amounted to $135.8 million ($0.36 basic and diluted
earnings per share), against earnings before amortization of goodwill ("cash net
earnings") of $89.9 million ($0.30 basic and diluted cash earnings per share)
and net earnings of $62.8 million ($0.21 basic and diluted earnings per share)
in fiscal 2001 and to cash net earnings of $73.5 million ($0.27 basic and
diluted cash earnings per share) and net earnings of $55.7 million ($0.21 basic
and $0.20 diluted earnings per share) in fiscal 2000. The net margin (i.e. net
earnings over revenue) was 6.3%, compared with 4.0% in 2001 and 3.9% in 2000.
The balance sheet remained strong as at September 30, 2002, with $104.2 million
in cash and cash equivalents, $1.78 billion of shareholders' equity and $8.5
million in long-term debt, solely related to capital leases.
Preparation of Consolidated Financial Statements
In an ongoing review of new or more precise interpretation of various accounting
pronouncements and to maintain its conservative accounting practices, CGI made
modifications or revisions to its financial statements and accompanying notes.
As a result of these modifications or revisions, there was no impact on the net
earnings or cash provided by operating activities of the Company. Following are
the most significant reclassifications:
a) Amortization of incentives related to outsourcing contracts
During the year ended September 30, 2002, the Company modified the presentation
of the amortization related to incentives granted on outsourcing contracts based
on EITF 01-9, Accounting for consideration given by a vendor to a customer, by
the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF").
The amortization of incentives is now presented as a reduction of revenue as
opposed to being shown as amortization of contract costs and other long-term
assets. Furthermore, the Company also reclassified discounts granted on an
existing outsourcing contract which was previously presented in the costs of
services, selling and administrative expenses. For comparative purposes, revenue
for the years ended September 30, 2001 and 2000 were reduced by $20,924,000 and
$12,928,000 respectively, amortization of contract costs and other long-term
assets were reduced by $10,274,000 and $3,478,000
2 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
respectively, and costs of services, selling and administrative expenses were
reduced by $10,650,000 and $9,450,000 respectively (see Note 5 to the
Consolidated Financial Statements).
b) Foreign currency translation adjustment
During the quarter ended December 31, 2001, the Company revised the calculation
of the foreign currency translation adjustment in order to use the current rate
as opposed to the historical rate upon translation of the goodwill related to
its self-sustaining foreign subsidiaries. This adjustment results in an increase
of $21,197,000 of the foreign currency translation adjustment and goodwill as at
September 30, 2001.
c) Accounts receivable and deferred revenue
During the year ended September 30, 2002, the Company's management changed the
presentation related to accounts receivable and deferred revenue for the
month-end advance billing on outsourcing contracts. Accordingly, accounts
receivable and deferred revenue were both reduced by $34,511,000 as at September
30, 2001
d) Goodwill and integration liability
During the quarter ended June 30, 2002, the Company reviewed its interpretation
of the accounting treatment for integration costs accrued for in connection with
business acquisitions; accordingly, the integration liability originally accrued
for in 2001 in connection with the acquisition of IMRglobal Corp. ("IMRglobal")
was reduced by $20,810,000. As a result, goodwill and future income tax assets
recorded in connection with the acquisition also decreased by $17,027,000 and
$3,783,000, respectively.
Comparison of operating results for the years ended September 30, 2002, and
September 30, 2001
Revenue
YEAR ENDED PERCENTAGE YEAR ENDED
SEPTEMBER 30, CHANGE VS SEPTEMBER 30,
2002 2001 2001
(in '000 of Canadian dollars) $ % $
Revenue 2,169,613 39.0 1,560,391
Revenue for fiscal 2002 increased 39.0% to $2.17 billion, from $1.56 billion in
the previous year. Year-over-year organic growth of 9.9% was driven by a
combination of new client wins, notably with Fireman's Fund in the US and Canada
Post in Canada, as well as contract renewals and add-on projects from existing
clients. External revenue growth was 29.1% and was primarily attributable to the
full 12-month contribution of the IMRglobal acquisition, completed in July 2001.
2002 revenue mix
In fiscal 2002, the revenue mix by contract type, geographic market and targeted
vertical was as shown below.
Long-term outsourcing contracts represented 72% of the Company's total revenue,
including 15% from business process services, while project oriented systems
integration and consulting ("SI&C") work represented 28%. Geographically,
clients in Canada represented 73%; clients in the US represented 20%; and all
other regions, 7%. Year-over-year, a notable change in the mix by client
geography is in the increasing proportion of revenue coming from outside Canada.
In fiscal 2001, clients in Canada represented 77%; US represented 17% and all
other regions, 6%.
Another noteworthy year-over-year change is the revenue distribution by targeted
vertical. Revenue from clients in the financial services sector remained strong,
representing 41% of revenue; while telecommunications represented 25%;
manufacturing, retail and distribution (MRD), 15%; governments, 15%; utilities
and services, 3%; and healthcare, 1%. Over fiscal 2002, CGI has grown its
presence in the financial services, government, and utilities and services
verticals but the telecommunications revenue, while consistent in absolute
dollars, has declined as a percentage of total revenue from 33% in fiscal 2001,
to 25% in 2002.
Throughout fiscal 2002, demand for outsourcing services remained strong across
all of the Company's key geographic markets, namely Canada, the US and Europe.
However, demand for SI&C services was weaker in the US and in France, and the
Company does not expect the demand for these services to increase significantly
before 2004. Please see discussion of revenue, which follows in the section
entitled Segmented information of this MD&A.
3 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Targeted Verticals (%) Contract Types (%) Geographic Markets (%)
a. Financial services 41% a. Management of IT and business a. Canada 73%
b. Telecommunications 25% functions (outsourcing) 72% b. US 20%
c. Manufacturing, retail and b. Systems integration and c. International 7%
distribution 15% consulting 28%
d. Governments 15%
e. Utilities and services 3%
f. Healthcare 1%
Operating expenses
YEAR ENDED PERCENTAGE YEAR ENDED
SEPTEMBER 30, CHANGE VS SEPTEMBER 30,
2002 2001 2001
(in '000 of Canadian dollars) $ % $
Total operating expenses 1,860,463 38.7 1,341,045
The costs of services, selling and administrative expenses totaled $1,842.9
million in fiscal 2002, or 84.9% of revenue, compared with $1,328.5 million, or
85.1% of revenue in fiscal 2001. Research expenses amounted to $17.6 million in
fiscal 2002 compared to $12.6 million in 2001. During fiscal 2002, the Company
continued to invest in the $50.0 million Strategic Investment Program announced
in fiscal 2000. The purpose of this program is to support client oriented
initiatives, development of the Company's proprietary solutions and
implementation of new technologies. The Company's efforts are aimed at assisting
its clients in meeting their growing and diversified needs.
Total operating expenses, including expenses associated with research, were
$1,860.5 million or 85.8% of revenue, a slight improvement from 85.9% in fiscal
2001.
Earnings before depreciation and amortization of fixed assets, amortization of
contract costs and other long-term assets, interest and income taxes ("EBITDA")1
EBITDA in fiscal 2002 increased 40.9% to $309.2 million, compared with $219.3
million in the previous year. The EBITDA margin improved to 14.2%, compared with
14.1% in the previous year. The improvement was driven by synergies from
additional outsourcing contracts, tight expense controls applied across the
Company, as well as contribution from acquisitions made during the year.
Depreciation and amortization
In fiscal 2002, CGI reported depreciation and amortization of fixed assets of
$37.8 million, compared with $32.5 million in the prior year. The increase
between fiscal 2002 and fiscal 2001 is reflective of a greater level of fixed
asset acquisitions made through either purchases or business acquisitions.
Amortization of contract costs and other long-term assets was $39.2 million in
fiscal 2002, an increase compared to $23.2 million in fiscal 2001, as a result
of increased contract costs associated with the delivery of large outsourcing
contracts with the Confederation des caisses populaires et d'economie Desjardins
du Quebec ("Desjardins"), Laurentian Bank of Canada ("Laurentian Bank"),
Fireman's Fund and Canada Post, the purchase of two enterprise license
agreements in the second half of the fiscal year 2002, and to a lesser extent,
the closing of five niche acquisitions (see further detailed discussions in the
"Review of balance sheets" section of this MD&A).
Earnings before interest, income taxes and amortization of goodwill ("EBIT")
EBIT increased to $232.6 million in fiscal 2002, compared to $162.1 million in
fiscal 2001. The EBIT margin (i.e. EBIT over revenue) was 10.7% in fiscal 2002,
compared to 10.4% in the previous year.
Interest
Interest on long-term debt decreased to $2.4 million from $4.2 million in fiscal
2001, as a result of a decrease in the average debt and capital leases held
during the year. In fiscal 2002, interest expense was related mainly to the
Libor advance debt of US$20 million. In fiscal 2001, such expense stemmed mainly
from a loan contracted in the course of a large outsourcing contract and an
acquisition.
--------------
1 EBITDA represents earnings before depreciation and amortization, interest and
income taxes. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and incur debt. EBITDA should not
be considered by an investor as an alternative to operating income or net
earnings, as an indicator of operating performance or of cash flows or as a
measure of liquidity. Because EBITDA is not a measurement determined in
accordance with Canadian GAAP, EBITDA as presented may not be comparable to
similarly titled measures of other companies.
4 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Income taxes
The effective income tax rate in fiscal 2002 was down to 41.6% compared with
44.5% in fiscal 2001. The decrease in CGI's tax rate compared with last year
reflects a reduction in the significance of the tax losses incurred by the
Company's foreign subsidiaries, compared with the earnings before income taxes,
as well as a 2.0% reduction in the Canadian combined federal and provincial
statutory tax rates.
Amortization of goodwill, net of income taxes
Effective October 1, 2001, CGI stopped recording goodwill amortization based on
the new CICA Handbook recommendations, discussed in the section "Critical
Accounting Policies" further in this MD&A. As such, current net earnings and
earnings before amortization of goodwill ("cash net earnings") for periods
before October 1, 2001, are equivalent. For purposes of clarity and ease of
comparison, CGI compares net earnings to cash net earnings figures in
year-over-year comparisons.
Net earnings
Net earnings in fiscal 2002 increased 51.0% to $135.8 million, or 6.3% of
revenue, against comparable cash net earnings of $89.9 million or 5.8% of
revenue and net earnings of $62.8 million or 4.0%, in the previous fiscal year.
Basic and diluted earnings per share of $0.36 in fiscal 2002 were up from basic
and diluted cash earnings per share of $0.30 and from basic and diluted earnings
per share of $0.21 reported in fiscal 2001. This increase in earnings per share
takes into account a 26.0% year-over-year increase in the weighted average
number of shares outstanding. The weighted average number of shares outstanding
increased year-over-year primarily as a result of the issuance of shares as part
of the acquisition of IMRglobal in late July 2001. The increase in net earnings
and higher earnings per share year-over-year reflects, in part, the fact that
the Company no longer records goodwill amortization.
Pro forma net earnings
Under the Stock option plan, had compensation cost been determined using the
fair value method at the day of grant for awards granted since October 1, 2001,
the Company's pro forma net earnings, basic and diluted earning per share would
have been $131.7 million, $0.35 and $0.35 respectively, for the 12-month period
ended September 30, 2002.
Segmented information
CGI has three strategic business units ("SBU"): Canada and Europe, US and Asia
Pacific, and Business Process Services ("BPS"), along with Corporate Services.
CGI evaluates each SBU's performance and reports segmented information according
to this structure (see Note 12 to the Consolidated Financial Statements). The
highlights for each segment in fiscal 2002 are detailed below:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
(in '000 of Canadian dollars) $ $
Revenue
Canada and Europe 1,823,995 1,345,538
US and Asia Pacific 309,683 178,566
BPS93,461 74,735
Intersegment elimination (57,526) (38,448)
------------------------------------------------------------------------
Total revenue 2,169,613 1,560,391
------------------------------------------------------------------------
Earnings before interest, income taxes,
entity subject to significant influence
and amortization of goodwill
Canada and Europe 283,409 203,678
US and Asia Pacific (4,784) (18,636)
BPS 17,295 14,193
Corporate expenses and programs (63,775) (35,611)
------------------------------------------------------------------------
Total earnings before interest,
income taxes, entity subject
to significant influence and
amortization of goodwill 232,145 163,624
------------------------------------------------------------------------
In fiscal 2002, revenue from the Canada and Europe SBU was $1,824.0 million, up
35.6% over revenue of $1,345.5 million posted in fiscal 2001. Revenue from the
US and Asia Pacific SBU was $309.7 million, up 73.4% over revenue of $178.6
million in fiscal 2001. Revenue reported by the BPS SBU was $93.5 million, up
25.2% from $74.7 million in the previous fiscal year.
5 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
EBIT for the Canada and Europe SBU was $283.4 million in fiscal 2002, up 39.1%
year-over-year. In the US and Asia Pacific SBU, there was a loss before
interest, income taxes and amortization of goodwill of $4.8 million, an
improvement of 74.2% over last year when the loss was $18.6 million. The BPS SBU
reported EBIT of $17.3 million, up 21.8% from the $14.2 million reported last
year.
Canada was a major contributor to CGI's growth throughout fiscal 2002. CGI's
position as a leading end-to-end IT services provider in this market, coupled
with numerous strong client relationships and high customer satisfaction
ratings, fueled strong growth. Revenue was driven by a combination of IT and
business process outsourcing and SI&C contracts wins, renewals and add-on
projects. Growth in revenue, without a corresponding increase in overhead,
resulted in good margin contribution. New contract wins in the government
vertical were strong throughout the year and provided good growth as well.
In Europe, the improvement in results was driven largely by growth in the UK,
especially SI&C contract wins. As expected, France was softer, partly because of
what is referred to as the Euro hangover--a phenomenon not unlike the slowdown
in spending after Year 2000. Planned improvements in France should result in a
gradual positive effect year over year.
The US and Asia Pacific operation's growth in revenue was primarily the result
of including a full year of activities from the US operations of IMRglobal that
had been acquired on July 27, 2001 and for which only two months of revenue was
included in the results of 2001. The EBIT improved significantly from a loss of
$18.6 million to a loss of $4.8 million for the current year. The significant
driver for the improvement was the integration of the existing operations of the
Company with the activities of the recent US acquisitions, primarily IMRglobal.
As well, several outsourcing contracts were initiated in the US during the year,
leveraging the Company's near-shore and offshore delivery model which takes
advantage of the lower cost delivery services in Canada and India.
Overall, US operations improved as a result of a greater push towards a global
operational model and adherence to CGI's standard management ratios. During the
year, the integration of US operations was completed under a global operations
structure headed by Michael Roach, Chief Operating Officer, which presents
additional opportunities for synergies.
In the US outsourcing space, CGI continued to better position itself to propose
and win large IT and business process outsourcing contracts. CGI's current
outsourcing contracts with US clients have been growing and today represent 56%
of the business generated in the US. CGI's long-term objective is to generate
75% of its US business from outsourcing. CGI believes it has made progress in
building a presence and brand as an outsourcer in the US market place, and in
leveraging synergies with Canadian and global operations. The Company's strength
and advantage are in the midtier or middle market where contracts range between
$50 million and $200 million per year, a segment where interest in outsourcing
is growing.
CGI was affected negatively by the continued softness in the US market and the
weak demand for SI&C services. The Company does not expect the SI&C business in
the US to return with any degree of strength before fiscal 2004, but does expect
that its US operations will see a gradual improvement in margins.
In fiscal 2002, the BPS SBU delivered a solid performance, realizing renewals
with its overall roster of clients. Among fiscal 2002 achievements for the BPS
SBU was the successful implementation of the first phase of a document
management services contract with Arbella Insurance in the third quarter, as
well as the signing in the fourth quarter of a 10-year, US$36 million business
process outsourcing contract with US-based GrafTech International Ltd. (formerly
UCAR International Inc.), an existing IT outsourcing client of CGI. The
Company's credentials as a provider of business process services continue to
grow and its BPS offering continues to be well received by its client base,
especially in the insurance sector.
Comparison of operating results for the years ended September 30, 2001, and
September 30, 2000
Revenue
YEAR ENDED PERCENTAGE YEAR ENDED
SEPTEMBER 30, CHANGE VS SEPTEMBER 30,
2001 2000 2000
(in '000 of Canadian dollars) $ % $
Revenue 1,560,391 9.6 1,423,080
In fiscal 2001, revenue increased marginally by 9.6% to $1,560.4 million, from
$1,423.1 million in fiscal 2000, as a result of numerous acquisitions completed
during the year. In fiscal 2001, long-term outsourcing contracts represented
6 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
69% of total revenue and systems integration and consulting contracts were 31%
of total revenue.
In fiscal 2001, CGI implemented a dynamic acquisition strategy aimed at
acquiring both niche and large IT companies. As a result of this, the Company
acquired nine companies and took an equity position in four such entities, which
together contributed $216.5 million in incremental revenue. Also, in fiscal
2001, CGI signed several large IT outsourcing contracts, which contributed
significantly to its revenue growth. Among the most important contributors,
CGI's operating results benefited from a five-month contribution related to the
contract with Desjardins, as well as a three and a half month contribution
related to its agreement with Laurentian Bank. In addition, the Company
benefited from contracts with Allianz (effective February 7, 2001) and Sun Life
(effective January 4, 2001).
In fiscal 2000, the Company benefited from a 12-month contribution of its
contract with Bell Mobility, as well as from its DRT Systems International and
DRT Systems International L.P. (jointly, "DRT") acquisition, effective July 1,
1999. These revenue gains were partially offset by Bell Canada's reduction in IT
budgets, compounded by an industry-wide slowdown in IT spending related to the
Year 2000 phenomenon.
Operating expenses
YEAR ENDED PERCENTAGE YEAR ENDED
SEPTEMBER 30, CHANGE VS SEPTEMBER 30,
2001 2000 2000
(in '000 of Canadian dollars) $ % $
Total operating expenses 1,341,045 6.9 1,254,861
The costs of services, selling and administrative expenses totaled $1,328.5
million in fiscal 2001, or 85.1% of revenue, compared with $1,244.9 million, or
87.5% of revenue in fiscal 2000. This reduction in the operating expenses to
revenue ratio in fiscal 2001 was achieved by lower overhead costs in the US and
Europe units resulting from the improvements in the utilization of CGI's IT
members, synergies from the integration of the business acquisitions and
outsourcing contracts, the revenue contribution of IMRglobal and other acquired
companies. Also, the Company's participation in the Quebec government's
refundable tax credits on salaries program which the Company benefits from, as a
result of its future relocation to E-Commerce Place in Montreal, contributed to
decrease the ratio. Total operating expenses, including expenses associated with
research, were $1,341.0 million or 85.9% of revenue, an improvement from 88.2%
in fiscal 2000.
Earnings before depreciation and amortization of fixed assets, amortization of
contract costs and other long-term assets, interest and income taxes ("EBITDA")
EBITDA in fiscal 2001 increased 30.4% to $219.3 million, compared with $168.2
million in fiscal 2000. In fiscal 2001, the EBITDA margin improved to 14.1%,
compared with 11.8% in the previous year.
Depreciation and amortization
In fiscal 2001, CGI reported depreciation and amortization of fixed assets
totaling $32.5 million, compared with $26.4 million the year before. The
increase in fiscal 2001 was the result of the acquisition of fixed assets
related to the Desjardins contract, as well as other asset purchases acquired
through the acquisition of nine companies, and the four joint ventures in which
CGI acquired interests. In fiscal 2000, depreciation and amortization of fixed
assets was lower, partly as a result of the fact that only two acquisitions were
made.
In fiscal 2001, amortization of contract costs and other long-term assets
totaled $23.2 million, compared with $18.5 million in fiscal 2000. The amounts
of amortization of contract costs and other long-term assets against the revenue
were of $10.3 million and $3.5 million for 2001 and 2000, respectively.
Amortization of contract costs and other long-term assets increased as a result
of costs incurred for the delivery of large outsourcing contracts with
Desjardins, Laurentian Bank and Sun Life, among others. The year-over-year
increase in the amortization of this charge is also reflective of integration
costs incurred on these new outsourcing contracts, as well as the value assigned
to the client contracts of acquired businesses.
Earnings before interest, income taxes and amortization of goodwill ("EBIT")
EBIT was $163.6 million in fiscal 2001, up 32.7% over fiscal 2000 EBIT of $123.3
million. The EBIT margin improved to 10.5% in fiscal 2001, compared with 8.7% in
fiscal 2000.
Interest
Interest on long-term debt increased to $4.2 million from $3.6 million in fiscal
2000. In fiscal 2001, interest expense was related mainly to a loan contracted
in the course of a large outsourcing contract and an acquisition. In fiscal
2000, such expense stemmed mainly from a full year of outstanding long-term debt
relating to the acquisition of DRT.
7 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Income taxes
The effective income tax rate before amortization of goodwill was 44.5% in
fiscal 2001, compared with 40.5% in fiscal 2000, despite a 2.0% decrease in the
combined federal and provincial statutory rates. In fiscal 2001, the Company
recorded additional valuation allowances relating to the tax benefit on losses
incurred in the US and certain international operations.
Net earnings
Net earnings in fiscal 2001 increased 12.8% to $62.8 million ($0.21 basic and
diluted earnings per share) compared with $55.7 million ($0.21 basic and $0.20
diluted earnings per share) in the previous fiscal year. In fiscal 2001, the net
margin (i.e. net earnings over revenue) improved to 4.0%, compared with 3.9% in
fiscal 2000.
Review of balance sheets--fiscal year-ends 2002 and 2001
A discussion follows on line items of the balance sheet for which there were
significant variances over last year.
Assets at the end of fiscal 2002 were $2,300.9 million, compared with $2,028.7
million at the end of fiscal 2001, representing an increase of 13.4%. Most asset
items increased over the previous fiscal year, the major one being contract
costs and other long-term assets, as well as cash and cash equivalents.
In fiscal 2002, accounts receivable were higher than the previous year by $9.0
million primarily due to an increase in the refundable tax credits on salaries
related to E-Commerce Place for $5.9 million that are included in the accounts
receivable balance. This tax credit receivable balance was excluded from the
calculation of the Company's collection period for accounts receivable and work
in progress. Days of sales outstanding ("DSO") at the end of fiscal 2002 were 50
days, compared with 67 days at the end of the last fiscal year. The DSO
calculation subtracts the deferred revenue from the accounts receivable and work
in progress balances. The year-over-year decrease in DSO is a reflection of the
IMRglobal acquisition that was made late in fiscal 2001 for which its revenue
stream was accounted over a period of only two months in 2001. Excluding the
impact of the IMRglobal acquisition, DSO for CGI at the end of fiscal 2001 would
have been 57 days.
The year-over-year increase of $14.1 million in work in progress is primarily a
result of unbilled revenue as at September 30, 2002, for work performed on
certain outsourcing contracts but not yet billed as per contract specifications.
Fixed assets increased by $22.0 million despite a depreciation and amortization
charge of $37.8 million during fiscal 2002. The main components of this increase
were an investment for the development of a new software designed for CGI's
internal use along with the capitalization of the installation costs for the new
offices located at E-Commerce Place in Montreal. The balance of the increase in
fixed assets was a result of purchases made during the normal course of
business.
Contract costs and other long-term assets were up by $161.3 million compared
with last September 30, 2001. This increase is largely reflective of outsourcing
contracts signed with Fireman's Fund and with Canada Post. The 10-year contract
signed with Fireman's Fund on October 1, 2001, added $56.0 million to contract
costs, as an incentive granted to the client. In the Canada Post contract, the
amounts booked to contract costs comprised, firstly, an amount of $26.0 million
for CGI's investment in its share of the joint venture Innovapost, and secondly,
an additional $26.0 million which CGI paid to Canada Post as an incentive for
the creation of the joint venture and the signing of a 10-year outsourcing
contract. Additionally, in the last quarter of fiscal 2002, an incentive of
$15.7 million was paid pursuant to an outsourcing agreement with a Canada Post
subsidiary, and was recorded with contract costs and other long-term assets.
Also in the increase of contract costs and other long-term assets are two
five-year license agreements for certain software that will be used in the
delivery of services to the Company's outsourcing clients ($32.3 million). Other
items were also added to the contract costs in fiscal 2002 during the normal
course of business, including costs for the development of software or software
acquired to provide long-term outsourcing services to clients; future income tax
adjustments related to the Company's contracts with Fireman's Fund and with
Innovapost ($25.1 million); and the value of various contracts acquired through
acquisitions. These additions to contract costs and other long-term assets were
offset by a total amortization charge of $62.8 million during the year. The
amortization of the incentives included in the contract costs against revenue
for 2002 represented $23.6 million.
Total short and long-term future income tax assets decreased by $5.8 million
over last year, largely as a result of the reduction of the integration
provision balance (described in Note 9 to the Consolidated Financial
Statements), and due to the differences between the carrying and the tax values
of the fixed assets.
8 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Goodwill was up by $14.9 million at the end of fiscal 2002. Goodwill denominated
in US dollars, UK pounds and Euros are translated using the year-end currency
exchange rate. The exchange rate variances between the Canadian dollar and these
other currencies resulted in a $2.6 million increase in the goodwill between
September 30, 2001, and September 30, 2002. Adjustments were made to certain
goodwill balances relating to acquisitions made during the 2001 fiscal year (see
Note 9 to the Consolidated Financial Statements). In addition, an $8.0 million
decrease in goodwill resulted from the sale of the Japanese and Australian
operations. Finally, $23.0 million of goodwill was recorded as a result of
acquisitions made during the year.
Total liabilities of the Company were $521.3 million. The most significant
variances were within the long-term future income tax liability, and the
accounts payable and accrued liabilities.
Accounts payable and accrued liabilities decreased by $33.6 million compared to
September 30, 2001, largely as a result of the usage of the acquisition and
integration liabilities of companies acquired in 2001, the most significant
being IMRglobal which decreased during the last 12 months by $18.3 million.
Also, accounts payable and accrued liabilities as at September 30, 2001,
included IMRglobal accounts payable, which were assumed as part of the
acquisition on July 27, 2001, and paid subsequent to the end of the year.
Deferred revenue was up by 20.5% at the end of fiscal 2002. This reflects
payments from several clients in advance of the work being performed.
For fiscal 2002, income taxes payable were up $6.1 million over last year
receivable balance of $979,000, as a result of an increase in the profitability
of CGI's Canadian operations compared to fiscal 2001.
The short and long-term portions of the future income tax liabilities were up
$55.3 million of which $29.6 million resulted from contract costs and other
long-term assets capitalized in the year. Another $18.4 million was recorded as
a result of the difference between the tax and carrying values of contract costs
and other long-term assets. Finally, another $4.8 million was credited in
respect to the tax credits on salaries that had been accrued at year-end.
Deferred credits and other long-term liabilities decreased by $9.7 million in
fiscal 2002 as a result of the following factors. First, incentives granted to
Desjardins and Laurentian Bank in fiscal 2001 were used during fiscal 2002.
Also, additions to deferred credits for new incentives granted, in the form of
rebates, as part of the Fireman's Fund outsourcing contract for $23.7 million in
the first quarter of 2002, and the discount granted to a Canada Post subsidiary
for $15.7 million in the last quarter of 2002, increased the balance but were
offset by the portion used by these clients, totaling $6.8 million in fiscal
2002. The remaining variance in this account is related to the change in the US
currency rate that affected the US dollar portion of the deferred credits.
Shareholders' equity increased by $276.5 million between September 30, 2001 and
September 30, 2002.
A portion of the increase comes from the net earnings of $135.8 million recorded
during fiscal 2002. The capital stock balance increased as well between the two
dates, resulting from the public issuance of 11,110,000 shares on December 20,
2001, for net proceeds of $119.5 million, which was discussed earlier in the
"Other significant developments" section.
Foreign currency translation adjustment increased by $10.5 million in the year
reflecting the currency exchange rate differences for CGI's self-sustaining
foreign subsidiaries. The Canadian currency rate vis-a-vis the US dollar
increased to 1.5810 at September 30, 2002, from 1.5712 at September 30, 2001.
The UK pound increased from 2.3105 at September 30, 2001, to 2.4705 at September
30, 2002, and the Euro increased from 1.4497 at September 30, 2001, to 1.5494 at
September 30, 2002.
Analysis of financial condition and cash flows
Cash and cash equivalents on September 30, 2002 were up by $58.2 million or
126.5% over September 30, 2001. As at September 30, 2000, this balance
represented $49.3 million. The drivers of the September 30, 2002, increase
compared to September 30, 2001, and the decrease between September 30, 2001, and
September 30, 2000, are explained below.
9 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2000
(in '000 of Canadian dollars) $ $ $
Cash provided by
operating activities 177,447 174,002 67,550
Cash provided by (used for)
financing activities 92,894 (15,821) (11,176)
Cash used for investing
activities (215,603) (157,751) (50,331)
Foreign exchange gain (loss)
on cash held in foreign
currencies of self-sustaining
subsidiaries 3,475 (3,763) 1,069
-----------------------------------------------------------------------------------------
Net change in cash
and cash equivalents 58,213 (3,333) 7,112
-----------------------------------------------------------------------------------------
Cash provided by operating activities in fiscal 2002 was similar to the previous
year. The Company's net earnings for the year increased by 116.3%, despite
higher depreciation and amortization of fixed assets and amortization of
contract costs and other long-term assets, but this was offset by higher usage
by the outsourcing clients of their rebates by $35.6 million during the period.
The net change in non-cash working capital items amount was lower by $40.0
million compared with the 12-month period ended September 30, 2001. The main
reasons are the reduction of the integration provision liability provisioned for
the IMRglobal acquisition and an increase of work in progress. The use of cash
was offset, however, by the increase in the level of prepayments received from
outsourcing clients, by an increase of the payable income taxes provision and by
an improvement in the DSO by 20 days during the year. The cash provided by
operating activities between fiscal 2001 and fiscal 2000 increased by $106.5
million. The change came from the increase by 12.8% in net earnings, along with
increases in the depreciation and amortization of fixed assets, in the
amortization of contract costs and other long-term assets, in the future income
tax balances, and in the variance from the changes in non-cash working capital
items. The change in non-cash working capital items was due to an increase in
work in progress, which resulted from the increased business volumes, business
acquisitions and major outsourcing contracts signed in fiscal 2001. Accounts
payable and accrued liabilities increased in the normal course of business.
In fiscal 2000, the net change in non-cash working capital items reflected
mainly a decrease in accounts payable and accrued liabilities related to the
decrease in the operating expenses year over year.
In fiscal 2002, cash provided by financing activities was $92.9 million,
compared with $15.8 million used for financing activities in the prior year.
This year-over-year increase of $108.7 million reflects two significant events.
On December 20, 2001, the Company issued 11,110,000 Class A subordinate shares
at $11.25 per share for net proceeds of $119.5 million. Offsetting in part the
cash raised in this offering was the repayment of a US$20 million Libor debt
advance in the fourth quarter of fiscal 2002 and payments on capital leases held
by the Company. The exercise of stock options during the year also contributed
to the increase in cash provided by financing activities. In 2001, the $65.0
million debt repayment was related to the reimbursement of outstanding long-term
debt of companies acquired during 2001 (mostly Star Data Systems Inc. and
IMRglobal). Offsetting this draw down of the cash balance in fiscal 2001 was an
amount of $54.2 million of net proceeds from the issuance of 6.4 million shares.
This resulted primarily from the exercise of preemptive rights by two majority
shareholders of the Company, pursuant to the IMRglobal acquisition.
Cash used for investing activities was up $57.9 million in fiscal 2002
reflecting investments made during the year as part of large outsourcing
contracts signed (mostly Fireman's Fund and Canada Post), including an amount
used for the start-up of the joint venture Innovapost, the acquisition of five
niche companies and the purchase of fixed assets (mostly the installation costs
for the fit-up of the E-Commerce Place in Montreal and the development costs of
software that will be used internally). More information on cash used for
purchase of fixed assets and contract costs and other long-term assets is
discussed in the earlier section, "Review of balance sheets." Cash used for
investing activities was offset by proceeds of $10.4 million received in the
sale of the Company's Japanese and Australian operations. Additionally, the
Company disbursed $20.1 million for five business acquisitions in fiscal 2002,
as compared to $141.0 million for 10 business acquisitions along with four joint
venture investments in fiscal 2001. The cash used for investing activities in
fiscal 2001 totaled $157.8 million up from $50.3 million in fiscal 2000.
Business acquisitions had increased to $86.4 million in 2001, up from $18.4
million in fiscal 2000, reflecting the 10 business acquisitions the Company had
made, along with four joint venture investments, compared to two business
acquisitions in fiscal 2000. The increase in the cash used for contract costs
and other long-term assets in fiscal 2001 was a result of the costs incurred as
part of the outsourcing contracts signed in fiscal 2001, including those with
Desjardins, Laurentian Bank, Sun Life and GrafTech International Ltd.
10 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Liquidity and other financial resources
AVAILABLE AT OUTSTANDING AT AVAILABLE AT OUTSTANDING AT
TOTAL SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
COMMITMENT 2002 2002 2001 2001
(in '000 of Canadian dollars) $ $ $ $ $
Unsecured revolving credit facility 225,000 222,796 2,204 199,050 25,950
Lines of credit (Bank of Montreal) 25,000 23,342 1,658 23,350 1,650
Lines of credit (BC Central Credit Union) 500 500 - 500 -
Other (Sept. 30, 2002) 2,471 2,471 - - -
(Sept. 30, 2001) 3,250 - - 2,350 900
CGI maintains a strong balance sheet and cash position, which together with bank
lines are sufficient to support the Company's growth strategy and represent a
competitive strength when proposing on outsourcing contracts. If these resources
need to be augmented due to the financing requirements related to new large
outsourcing contracts or large acquisitions, significant additional cash
requirements would likely be financed by the issuance of debt and/or equity
securities. At September 30, 2002, cash and cash equivalents were $104.2 million
and the total credit facility available amounted to $249.1 million, compared
with $225.3 million at the same time in 2001. As a Libor advance of US$20
million was reimbursed during the last quarter of the fiscal year 2002, the
financing available under both the unsecured revolving credit facility and
available lines of credit with the Bank of Montreal were increased in comparison
to September 30, 2001.
The bank credit facility contains certain covenants, which require the Company
to maintain certain financial ratios. As at September 30, 2002, and September
30, 2001, the Company met these ratios.
Under a new credit facility closed subsequent to year-end, the Company has
access to a $150 million revolving credit facility for the operating activity
needs and working capital purposes and to a $265 million three-year term
revolving credit facility for financing of acquisitions and outsourcing
contracts. The Company has also access to a $25 million uncommitted operating
facility for cash management purposes. The $150 million revolving credit
facility, at the option of the lenders, can be renewed on an annual basis for an
additional year or have, at the initiative of the Company, the balance
outstanding on this credit facility locked into a two-year term loan.
Commitments
TOTAL MINIMAL LEASE
COMMITMENT TYPES PAYMENTS DUE UNTIL 2007
(in '000 of canadian dollars) $
Operating leases
Rental of office space 742,466
Computer equipment 93,511
Long-term service agreements 57,110
CGI is committed under the term of operating leases with various expiration
dates, primarily for rental of premises, computer equipment used in outsourcing
contracts and long-term service agreements in the aggregate amount of $893.1
million. Of this total amount, rental of office space represents $742.5 million;
computer equipment represents $93.5 million and long-term service agreements,
$57.1 million. The increase in the property leases compared to commitments as of
September 30, 2001, reflects CGI having entered into a 20-year lease with
E-Commerce Place in Montreal. This commitment represents $472.1 million. As part
of its relocation to E-Commerce Place, CGI has been receiving provincial tax
credits on salaries since May 11, 2000, which are deducted from the costs of
services, selling and administrative expenses since then. The Company will be
receiving these tax credits, representing up to $12,500 per year for each
eligible employee relocated to E-Commerce Place, until fiscal 2010 inclusively.
Further details can be found in Note 3 to the Consolidated Financial Statements.
Computer equipment leases are related to hardware leased from manufacturers or
financial institutions in the course of business activities. As part of the
outsourcing agreements in particular, clients agree to take back the computer
equipment in the case of early contract termination.
Critical accounting policies
Revenue recognition
The Company provides two broad ranges of services: outsourcing services
(management of IT and business functions) and IT consulting services (systems
integration and consulting). The Company's revenue is principally derived from
outsourcing services.
11 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Revenue from outsourcing contracts is based on the services performed or
information processed during the period in accordance with contract terms and
the agreed-upon billing rates applied to the consumed service metrics. In some
cases, the Company bills customers prior to performing the service, resulting in
deferred revenue which is presented as a current liability in the Consolidated
Financial Statements. Reimbursements, including those relating to travel and
other out-of-pocket expenses, and other similar third party costs, such as the
cost of hardware and software resales, are included in revenue and the
corresponding expense is included in costs of services.
For time and materials and level of effort types of contracts, revenue is
recognized as the services are provided. For cost-based contracts, revenue is
recorded as reimbursable costs are incurred. These types of contracts are
generally entered into with customers in the context of IT consulting services.
Revenue on fixed-price contracts is recognized on the basis of the estimated
percentage-of-completion of services rendered that reflects the extent of work
accomplished. This type of contract is generally entered into for systems
integration services. Management estimates the percentage-of-completion by
reference to measures of performance that are reasonably determinable and are
directly related to the activities critical to completion of the contract.
Management measures performance principally based on the labor hours spent on
the contract over the total estimated labor hours for the contract. The Company
uses this method of revenue recognition as projected contract revenue and costs
may reasonably be estimated based on the Company's business practices, methods
and historical experience. This method requires estimates of costs and profits
over the entire term of the contract. Management regularly reviews underlying
estimates of project profitability; revisions to estimates are reflected in the
statement of earnings in the period in which the facts that give rise to the
revision become known. Provisions for estimated losses, if any, are recognized
in the period in which the loss is determined. Contract losses are measured as
the amount by which the estimated costs of the contract exceed the estimated
total revenue from the contract.
Occasionally, the Company sells software licenses. Revenue from the sale of
software licenses is recognized when the product is delivered, no significant
vendor obligations remain and the collection of the agreed-upon fee is probable.
Where license agreements include multiple elements, revenue from sale of
licenses is recognized on the same basis, provided the services do not include
significant customization to the base product. In these cases, revenue is
recognized over the period of delivery. Revenue from software maintenance and
support agreements is recognized on a straight-line basis over the term of the
related agreements.
Contract costs and other long-term assets
Contract costs and other long-term assets include principally contract costs,
cost of software acquired and developed and software license acquisition costs.
Contract costs are incurred in the course of two to 10-year IT management
contracts. These assets are recorded at cost and amortized using the
straight-line method over the term of the respective contracts. Contract costs
principally comprise the following:
a) Incentives granted to clients upon signature of long-term outsourcing
contracts. Occasionally, incentives may be granted either in the form of
cash payments, issuance of equity instruments, or rebates granted primarily
over a transition period as negotiated in the contract. In the case of an
incentive in the form of an issuance of equity instruments, cost is measured
at the estimated fair value of the equity instruments issued. For incentives
in the form of rebates, cost is measured at the value of the financial
commitment granted and a corresponding deferred credit is recorded. As
services are provided to the customer, the deferred credit is reversed in
the statement of earnings and recognized as revenue. Amortization of the
incentives is presented as a reduction of revenue;
b) Estimated fair value of long-term outsourcing contracts and/or customer
lists acquired through business acquisitions; the estimated fair value is
determined as part of the purchase price allocation process in the context
of business acquisitions; and,
c) Transition costs incurred during the transition period on long-term
outsourcing contracts.
Costs of software acquired and developed include software specifically designed
or acquired to provide long-term outsourcing contracts to clients or groups of
clients. Costs of software developed are capitalized only after technological
feasibility is established. Software acquired and developed is recorded at cost
and amortized on a straight-line basis over its estimated useful life.
12 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Costs of software licenses include licenses acquired for the purpose of certain
long-term outsourcing contracts. Software licenses are recorded at cost and are
amortized on a straight-line basis over their respective contract terms,
estimated useful lives or based on consumption.
Goodwill
Goodwill represents the excess of the purchase price over the fair values of the
net assets of entities acquired at the respective dates of acquisition. On
October 1, 2001, the Company adopted prospectively the new recommendations of
the CICA Handbook Sections 1581, Business Combinations, and 3062, Goodwill and
Other Intangible Assets. Accordingly, the Company discontinued the amortization
of goodwill as of October 1, 2001. Prior to October 1, 2001, goodwill was
amortized on a straight-line basis over its expected useful life of 20 years.
For business combinations occurring after June 30, 2001, the Company did not
amortize the resulting goodwill, consistent with transition recommendations of
Section 1581.
Goodwill is tested annually, or more frequently if impairment indicators arise,
for impairment in relation to the fair value of each reporting unit to which
goodwill applies and the value of other assets in that reporting unit. An
impairment charge is recorded for any goodwill that is considered impaired.
During the second quarter ended March 31, 2002, the Company completed the
transitional impairment test and concluded that no goodwill impairment charge
needed to be recorded. The Company intends to perform its annual review of
goodwill as of September 30 of each year. Based on the impairment test performed
as of September 30, 2002, the Company concluded that no goodwill impairment
charge was required.
Deferred credits
Deferred credits principally comprise the unused portion of rebates granted by
the Company to customers under the terms of certain long-term outsourcing
contracts (see Contract costs and other long-term assets described above).
Stock option plan
The Company has a stock option compensation plan, which is described in Note 7
to the Consolidated Financial Statements. No compensation expense is recognized
for this plan when stock options are granted to employees and directors. Any
consideration paid by employees and directors on exercise of stock options is
credited to share capital.
On April 1, 2002, the Company early adopted the recommendations of CICA Handbook
Section 3870, Stock-Based Compensation and Other Stock-Based Payments. This
section establishes standards for the recognition, measurement and disclosure of
stock-based compensation made in exchange for goods and services and requires
the use of the fair value method to account for awards to non-employees and
direct awards of stock to employees and encourages, but does not require, the
use of the fair value method to account for stock-based compensation costs
arising from awards to employees. The section also requires pro forma
disclosures relating to net earnings and earnings per share figures as if the
fair value method of accounting had been used. The Company has chosen not to use
the fair value method to account for stock-based compensation costs arising from
awards to employees. The pro forma disclosure is presented in Note 7 to the
Consolidated Financial Statements.
Risks and uncertainties
While management is positive about the Company's long-term prospects, the
following risks and uncertainties should be considered when evaluating CGI's
potential:
The competition for contracts--CGI has a disciplined approach to management of
all aspects of its business, with an increasing proportion of its operations
codified under ISO 9001 certified processes and in corporate manuals. These
processes were developed to help CGI ensure that its employees deliver services
consistently according to the Company's high standards and they are based on
strong values underlying its client-focused culture. These processes contribute
to CGI's high contract win rate and renewal rate. Additionally, the Company has
developed a deep strategic understanding of the six economic sectors it targets,
and this helps enhance its competitive position. CGI's critical mass and
end-to-end IT services have qualified it to make proposals on large IT and
business process outsourcing contracts across North America and in Europe.
The long sales cycle for major outsourcing contracts--The average sales cycle
for large outsourcing contracts typically ranges from six to 18 months, with
some extending to 24 months.
Foreign currency risk--The increased international business volume could expose
CGI to greater foreign currency exchange risks, which could adversely impact its
operating results. CGI has in place a strategy to protect itself from currency
fluctuations, to the extent possible, against foreign currency exposure.
13 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
Business mix variations--Following the merger with US-based IMRglobal in July
2001, the greater proportion of SI&C services in CGI's business mix, versus
outsourcing, may result in greater quarterly revenue variations. However, CGI's
efforts in the US market place are aimed at developing its capability to deliver
an end-to-end IT outsourcing offering. As a result of this transition, CGI
expects to increase the proportion of its outsourcing business, thus ensuring
greater revenue visibility and predictability.
The availability and cost of qualified IT professionals--The high growth of the
IT industry results in strong demand for qualified individuals. Over the years,
CGI has been able to successfully staff for its needs thanks to its solid
culture, strong values and emphasis on career development, as well as
performance-driven remuneration. In addition, CGI has implemented a
comprehensive program aimed at attracting and retaining qualified and dedicated
professionals and today, the Company is a preferred employer in the IT services
industry. CGI also secures access to additional qualified professionals through
outsourcing contracts and business acquisitions.
The ability to successfully integrate business acquisitions and the operations
of IT outsourcing clients--The integration of acquired operations has become a
core competency for CGI, which has acquired a significant number of companies
over the past 15 years. The Company's disciplined approach to management,
largely based on its ISO 9001 certified management frameworks, has been an
important factor in the successful integration of human resources of acquired
companies and the IT operations of outsourcing clients. As at the end of fiscal
2002, the vast majority of CGI's operations had received ISO 9001 certification.
The ability to continue developing and expanding service offerings to address
emerging business demand and technology trends--CGI remains at the forefront of
developments in the IT services industry, thus ensuring that it can meet the
evolving needs of its clients. The Company achieves the aforementioned through:
its specialization in six targeted economic sectors; its non-exclusive
commercial alliances with hardware and software vendors and strategic alliances
with major partners; its development of proprietary IT solutions to meet the
needs of clients; regular training and sharing of professional expertise across
its network of offices; and business acquisitions that provide specific
knowledge or added geographic coverage.
Material developments regarding major commercial clients resulting from such
causes as changes in financial condition, mergers or business acquisitions--With
the exception of BCE Inc., its subsidiaries and affiliates, no one company or
group of related companies represents more than 10% of CGI's total revenue. See
Note 13 to the Consolidated Financial Statements.
Potential liability if contracts are not successfully carried out--CGI has a
strong record of successfully meeting or exceeding client needs. The Company
takes a professional approach to business, and its contracts are written to
clearly identify the scope of its responsibilities and to minimize risks.
Credit risk concentration with respect to trade receivables is limited due to
the Company's large client base--The Company generates a significant portion of
its revenue from a shareholder's subsidiaries and affiliates, namely BCE Inc.
Management does not believe that the Company is subject to any significant
credit risk. The Company operates internationally and is exposed to market risks
from changes in foreign currency rates. Other than the use of financial products
to deliver on its hedging strategy, the Company does not trade derivative
financial instruments.
Outlook
CGI expects to be able to deliver continued growth in fiscal 2003. The Company's
strategy will continue to be based on a balanced mix of its four pillars of
growth, namely organic growth through smaller contracts and projects, organic
growth through large outsourcing contract wins, acquisitions and equity
investments at the business unit level and large acquisitions.
CGI will continue to leverage its flexible outsourcing delivery model in order
to secure IT and business process outsourcing contracts. CGI's solid balance
sheet and liquidity position represent strength when bidding on acquisitions and
large outsourcing contracts. CGI is active in reviewing potential acquisition
candidates to increase its critical mass in the US and Europe, particularly the
UK. The Company believes that there are many acquisition opportunities
available, but remains committed to its financial, operational and cultural
criteria, and will not sacrifice these for short term or potential gain.
Based on information known today about current market conditions and demand, and
the adjustment made to comply with the EITF 01-9 of the Financial Accounting
Standards Board, the Company has provided the following guidance for the fiscal
year ending September 30, 2003. This guidance is before the effect of potential
large outsourcing contracts or large acquisitions, contributing more than $100
million per year in annual revenue. Base revenue for the
14 CGI GROUP INC. 2002
management's discussion and analysis
of financial position and results of operations
Fiscal year ended September 30, 2002
year is expected to be between $2.4 billion and $2.6 billion, representing
between 11% and 20% growth over fiscal 2002 results. Net earnings per share
should be in the range of $0.43 to $0.47.
Margin improvement remains among CGI's most important financial objectives.
Improvements during coming quarters will be driven by further synergies from
large outsourcing contracts, ongoing integration of acquisitions and a gradual
reduction in selling, general and administration expenses.
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. These statements represent CGI Group Inc.'s 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.
These factors include and are not restricted to the timing and size of
contracts, acquisitions and other corporate developments; the ability to attract
and retain qualified employees; 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 Group Inc.'s
Annual Report or Form 40-F filed with the U.S. Securities and Exchange
Commission, the Company's Annual Information Form filed with the Canadian
securities authorities, 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, which speak only as of the date on which they are
made. In particular, statements relating to future growth are forward-looking
statements. CGI disclaims any intention or obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Readers are cautioned not to place undue reliance on
these forward-looking statements.
15 CGI GROUP INC. 2002
management's and auditors' reports
Management's Report
The management of the Company is responsible for the preparation and
integrity of the financial statements contained in the Annual Report. These
statements have been prepared in accordance with accounting principles generally
accepted in Canada and necessarily include some amounts that are based on
management's best estimates and judgment. Management considers that the
statements present fairly the financial position of the Company, the results of
its operations and its cash flows.
To fulfill its responsibility, management developed and continues to
maintain systems of internal accounting controls and establishes policies and
procedures to ensure the reliability of financial information and to safeguard
assets. The internal control systems and financial records are subject to
reviews by external auditors during the examination of the financial statements.
The Audit Committee of the Board of Directors meets regularly with the
external auditors and with management to approve the scope of audit work and
assess reports on audit work performed. The financial statements have been
reviewed and approved by the Board of Directors on the recommendation of the
Audit Committee.
[Signed] [Signed]
Serge Godin Andre Imbeau
Chairman and Chief Executive Officer Executive Vice-President and
Chief Financial Officer
November 4, 2002
Auditors' Report
To the Shareholders of CGI Group Inc.
We have audited the consolidated balance sheets of CGI Group Inc. as at
September 30, 2002 and 2001 and the consolidated statements of earnings,
retained earnings and cash flows for each of the years in the three-year period
ended September 30, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at September 30,
2002 and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended September 30, 2002 in accordance with
Canadian generally accepted accounting principles.
[Signed]
Samson Belair Deloitte & Touche
Montreal, Quebec
November 4, 2002
CGI GROUP INC. 2002 1
financial statements
Consolidated Statements of Earnings Years ended September 30--(in thousands of Canadian dollars,
except per share amounts)
2002 2001 2000
$ $ $
Revenue 2,169,613 1,560,391 1,423,080
----------------------------------------------------------------------------------------------------------------------
Operating expenses
Costs of services, selling and administrative expenses 1,842,854 1,328,460 1,244,901
Research 17,609 12,585 9,960
----------------------------------------------------------------------------------------------------------------------
1,860,463 1,341,045 1,254,861
----------------------------------------------------------------------------------------------------------------------
Earnings before the under-noted: 309,150 219,346 168,219
----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization of fixed assets 37,781 32,536 26,387
Amortization of contract costs and other long-term assets (Note 5) 39,224 23,186 18,513
----------------------------------------------------------------------------------------------------------------------
77,005 55,722 44,900
----------------------------------------------------------------------------------------------------------------------
Earnings before the following items: 232,145 163,624 123,319
----------------------------------------------------------------------------------------------------------------------
Interest
Long-term debt 2,411 4,206 3,624
Other (2,833) (2,664) (3,768)
----------------------------------------------------------------------------------------------------------------------
(422) 1,542 (144)
----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, entity subject to
significant influence and amortization of goodwill 232,567 162,082 123,463
Income taxes (Note 8) 96,768 72,165 49,985
----------------------------------------------------------------------------------------------------------------------
Earnings before entity subject to significant influence
and amortization of goodwill 135,799 89,917 73,478
Entity subject to significant influence - 7 64
----------------------------------------------------------------------------------------------------------------------
Earnings before amortization of goodwill 135,799 89,924 73,542
Amortization of goodwill, net of income taxes (Note 2) - 27,135 17,876
----------------------------------------------------------------------------------------------------------------------
Net earnings 135,799 62,789 55,666
----------------------------------------------------------------------------------------------------------------------
Weighted average number of outstanding Class A
subordinate shares and Class B shares 377,349,472 299,500,350 270,442,354
----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share before amortization of goodwill 0.36 0.30 0.27
----------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.36 0.21 0.21
----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 0.36 0.21 0.20
----------------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements.
Consolidated Statements of Retained Earnings Years ended September 30--(in thousands of Canadian dollars)
2002 2001 2000
$ $ $
Retained earnings, beginning of year, as previously reported 245,945 183,156 139,080
Adjustment for change in accounting policy (Note 2) - - (11,590)
----------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of year, as restated 245,945 183,156 127,490
Net earnings 135,799 62,789 55,666
Share issue costs, net of income taxes (Note 7) (3,800) - -
----------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year 377,944 245,945 183,156
----------------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements.
CGI GROUP INC. 2002 2
financial statements
Consolidated Balance Sheets As at September 30--(in thousands of Canadian dollars)
2002 2001
$ $
(Restated, Note 2)
Assets
Current assets
Cash and cash equivalents 104,221 46,008
Accounts receivable (Note 3) 295,191 286,156
Income taxes - 979
Work in progress 98,904 84,838
Prepaid expenses and other current assets 48,373 48,931
Future income taxes (Note 8) 12,567 17,998
----------------------------------------------------------------------------------------------------------------------
559,256 484,910
Fixed assets (Note 4) 145,381 123,391
Contract costs and other long-term assets (Note 5) 433,742 272,403
Future income taxes (Note 8) 28,661 29,002
Goodwill 1,133,852 1,118,963
----------------------------------------------------------------------------------------------------------------------
2,300,892 2,028,669
----------------------------------------------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 261,509 295,092
Deferred revenue 61,027 50,652
Income taxes 5,128 -
Future income taxes (Note 8) 26,301 21,013
Current portion of long-term debt (Note 6) 4,172 7,528
----------------------------------------------------------------------------------------------------------------------
358,137 374,285
Future income taxes (Note 8) 93,696 43,705
Long-term debt (Note 6) 4,328 32,752
Deferred credits and other long-term liabilities 65,116 74,813
----------------------------------------------------------------------------------------------------------------------
521,277 525,555
----------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Capital stock (Note 7) 1,332,621 1,198,096
Contributed surplus 3,652 211
Warrants and stock options (Note 7) 31,132 35,101
Retained earnings 377,944 245,945
Foreign currency translation adjustment 34,266 23,761
----------------------------------------------------------------------------------------------------------------------
1,779,615 1,503,114
----------------------------------------------------------------------------------------------------------------------
2,300,892 2,028,669
----------------------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements.
Approved by the Board
[Signed] [Signed]
Serge Godin Andre Imbeau
Director Director
CGI GROUP INC. 2002 3
financial statements
Consolidated Statements of Cash Flows Years ended September 30--(in thousands of Canadian dollars)
2002 2001 2000
$ $ $
Operating activities
Net earnings 135,799 62,789 55,666
Adjustments for:
Depreciation and amortization of fixed assets 37,781 32,536 26,387
Loss on disposal of fixed assets - - 1,454
Amortization of contract costs and other long-term assets 62,783 33,460 21,991
Amortization of goodwill - 28,586 19,153
Deferred credits and other long-term liabilities (50,021) (14,442) -
Future income taxes 35,602 32,589 2,214
Foreign exchange loss (gain) 1,240 4,213 (497)
Entity subject to significant influence - (7) (64)
Net change in non-cash working capital items (Note 11) (45,737) (5,722) (58,754)
----------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 177,447 174,002 67,550
----------------------------------------------------------------------------------------------------------------------
Financing activities
Net variation of credit facility (25,000) (5,000) (16,200)
Decrease of other long-term debt (8,342) (65,027) (5,907)
Issuance of shares (Note 7) 131,736 54,206 10,931
Share issue costs (Note 7) (5,500) - -
----------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 92,894 (15,821) (11,176)
----------------------------------------------------------------------------------------------------------------------
Investing activities
Business acquisitions (net of cash) (Note 9) (19,866) (86,393) (18,395)
Investment in a joint venture (Note 9) (26,000) - -
Investment in an entity subject to significant influence - - (514)
Purchase of fixed assets (57,199) (23,993) (18,090)
Proceeds from sale of subsidiaries (Note 9) 10,365 - -
Proceeds from sale of fixed assets - 1,270 845
Contract costs and other long-term assets (122,903) (48,635) (14,177)
----------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (215,603) (157,751) (50,331)
----------------------------------------------------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held
in foreign currencies of self-sustaining subsidiaries 3,475 (3,763) 1,069
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 58,213 (3,333) 7,112
Cash and cash equivalents at beginning of year 46,008 49,341 42,229
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 104,221 46,008 49,341
----------------------------------------------------------------------------------------------------------------------
Supplementary cash flow information (Note 11).
See Notes to the Consolidated Financial Statements.
CGI GROUP INC. 2002 4
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Note 1. Description of business
CGI Group Inc. (the "Company" or "CGI"), directly or through its subsidiaries,
provides a full range of information technology ("IT") services including
management of IT and business functions, systems integration and consulting. The
Company's primary focus is large-scale systems integration and outsourcing
contracts for both private and public sector organizations.
Note 2. Summary of significant accounting policies
The Consolidated Financial Statements are prepared in accordance with Canadian
generally accepted accounting principles ("GAAP"), which differ in certain
material respects with US GAAP. Significant differences relevant to the Company
are presented in Note 16. Certain comparative figures have been reclassified in
order to conform to the presentation adopted in 2002.
Use of estimates
The preparation of the Consolidated Financial Statements in conformity with
Canadian GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of revenue and expenses during the reporting period.
Because of the use of estimates inherent in the financial reporting process,
actual results could differ from those estimates.
Principles of consolidation
The financial statements of entities controlled by the Company are consolidated;
entities jointly controlled by the Company, referred to as joint ventures, are
accounted for using the proportionate consolidation method; the associated
company, which the Company had the ability to significantly influence, was
accounted for using the equity method.
Revenue recognition
The Company provides two broad ranges of services: outsourcing services
(management of IT and business functions) and IT consulting services (systems
integration and consulting). The Company's revenue is principally derived from
outsourcing services.
Revenue from outsourcing contracts is based on the services performed or
information processed during the period in accordance with contract terms and
the agreed-upon billing rates applied to the consumed service metrics. In some
cases, the Company bills customers prior to performing the service, resulting in
deferred revenue which is presented as a current liability in the Consolidated
Financial Statements. Reimbursements, including those relating to travel and
other out-of-pocket expenses, and other similar third party costs, such as the
cost of hardware and software resales, are included in revenue and the
corresponding expense is included in costs of services.
For time and materials and level of effort types of contracts, revenue is
recognized as the services are provided. For cost-based contracts, revenue is
recorded as reimbursable costs are incurred. These types of contracts are
generally entered into with customers in the context of IT consulting services.
Revenue on fixed-price contracts is recognized on the basis of the estimated
percentage-of-completion of services rendered that reflects the extent of work
accomplished. This type of contract is generally entered into for systems
integration services. Management estimates the percentage-of-completion by
reference to measures of performance that are reasonably determinable and are
directly related to the activities critical to completion of the contract.
Management measures performance principally based on the labour hours spent on
the contract over the total estimated labour hours for the contract. The Company
uses this method of revenue recognition as projected contract revenue and costs
may reasonably be estimated based on the Company's business practices, methods
and historical experience. This method requires estimates of costs and profits
over the entire term of the contract. Management regularly reviews underlying
estimates of project profitability; revisions to estimates are reflected in the
statement of earnings in the period in which the facts that give rise to the
revision become known. Provisions for estimated losses, if any, are recognized
in the period in which the loss is determined. Contract losses are measured as
the amount by which the estimated costs of the contract exceed the estimated
total revenue from the contract.
Occasionally, the Company sells software licenses. Revenue from the sale of
software licenses is recognized when the product is delivered, no significant
vendor obligations remain and the collection of the agreed-upon fee is probable.
Where license agreements include multiple elements, revenue from sale of
licenses is recognized on the same basis, provided the services do not include
significant customization to the base product. In these cases, revenue is
recognized over the period of delivery. Revenue from software maintenance and
support agreements is recognized on a straight-line basis over the term of the
related agreements.
Cash and cash equivalents
Cash and cash equivalents consist primarily of unrestricted cash and short-term
investments having an initial maturity of three months or less.
Depreciation and amortization
Fixed assets are recorded at cost and are depreciated and amortized over their
estimated useful lives, using principally the
CGI GROUP INC. 2002 5
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
straight-line method. The annual depreciation and amortization periods by fixed
asset category are as follows:
Buildings 10 to 40 years
Leasehold improvements Term of lease plus first renewal option
Furniture and fixtures 3 to 10 years
Computer equipment 3 to 5 years
Software 1 to 5 years
Contract costs and other long-term assets
Contract costs and other long-term assets include principally contract costs,
cost of software acquired and developed and software license costs.
Contract costs are incurred in the course of two to 10-year IT management
contracts. These assets are recorded at cost and amortized using the
straight-line method over the term of the respective contracts. Contract costs
principally comprise the following:
a) Incentives granted to clients upon signature of long-term outsourcing
contracts. Occasionally, incentives can be granted either in the form of
cash payments, issuance of equity instruments, or rebates granted
principally over a transition period as negotiated in the contract. In
the case of an incentive in the form of an issuance of equity
instruments, cost is measured at the estimated fair value of the equity
instruments issued. For incentives in the form of rebates, cost is
measured at the value of the financial commitment granted and a
corresponding deferred credit is recorded. As services are provided to
the customer, the deferred credit is reversed in the statement of
earnings and recognized as revenue. Amortization of the incentives is
presented as a reduction of revenue;
b) Estimated fair value of long-term outsourcing contracts and/or customer
lists acquired through business acquisitions; the estimated fair value is
determined as part of the purchase price allocation process in the
context of business acquisitions; and,
c) Transition costs incurred during transition period on long-term
outsourcing contracts.
Costs of software acquired and developed include software specifically
designed or acquired to provide long-term outsourcing contracts to clients or
groups of clients. Costs of software developed are capitalized only after
technological feasibility is established. Software acquired and developed is
recorded at cost and amortized on a straight-line basis over its estimated
useful life.
Costs of software licenses include licenses acquired for purposes of certain
long-term outsourcing contracts. Software licenses are recorded at cost and are
amortized on a straight-line basis over their respective contract terms,
estimated useful lives or based on consumption.
Goodwill
Goodwill represents the excess of the purchase price over the fair values of the
net assets of entities acquired at the respective dates of acquisition. On
October 1, 2001, the Company adopted prospectively the new recommendations of
the Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 1581,
Business Combinations, and 3062, Goodwill and Other Intangible Assets.
Accordingly, the Company discontinued the amortization of goodwill as of October
1, 2001. Prior to October 1, 2001, goodwill was amortized on a straight-line
basis over its expected useful life of 20 years. For business combinations
occurring after June 30, 2001, the Company did not amortize the resulting
goodwill, consistent with transition recommendations of Section 1581.
Goodwill is tested annually, or more frequently if impairment indicators
arise, for impairment in relation to the fair value of each reporting unit to
which goodwill applies and the value of other assets in that reporting unit. An
impairment charge is recorded for any goodwill that is considered impaired.
During the second quarter ended March 31, 2002, the Company completed the
transitional impairment test and concluded that no goodwill impairment charge
needed to be recorded. The Company intends to perform its annual review of
goodwill as of September 30 of each year. Based on the impairment test performed
as of September 30, 2002, the Company concluded that no goodwill impairment
charge was required.
Impairment of long-lived assets other than goodwill and intangible assets with
indefinite lives The Company evaluates the carrying value of its long-lived
assets other than goodwill and intangible assets with indefinite lives on an
ongoing basis. In order to determine whether an impairment exists, management
considers the undiscounted cash flows estimated to be generated by those assets
as well as other indicators. Any permanent impairment in the carrying value of
assets is charged against earnings in the period an impairment is determined.
The Company does not have intangible assets with indefinite lives.
Deferred credits
Deferred credits principally comprise the unused portion of rebates granted by
the Company to customers under the terms of certain long-term outsourcing
contracts (see "Contract costs and other long-term assets" described above).
CGI GROUP INC. 2002 6
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Stock option plan
The Company has a stock option compensation plan, which is described in Note 7.
No compensation expense is recognized for this plan when stock options are
granted to employees and directors. Any consideration paid by employees and
directors on exercise of stock options is credited to share capital.
On April 1, 2002, the Company early adopted the recommendations of CICA
Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments.
This Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation made in exchange for goods and services
and requires the use of the fair value method to account for awards to
non-employees and direct awards of stock to employees and encourages, but does
not require, the use of the fair value method to account for stock-based
compensation costs arising from awards to employees. The Section also requires
pro forma disclosures relating to net earnings and earnings per share figures as
if the fair value method of accounting had been used. The Company has chosen not
to use the fair value method to account for stock-based compensation costs
arising from awards to employees. The pro forma disclosure is presented in Note
7.
Research
Research expenses are charged to earnings in the year they are incurred, net of
related investment tax credits.
Income taxes
On October 1, 1999, the Company adopted the recommendations of CICA Handbook
Section 3465, Income taxes, which replaced the deferral method with the
liability method of tax allocation. The Company applied the recommendations
retroactively without restating prior years.
Future income taxes relate to the expected future tax consequences of
differences between the carrying amount of balance sheet items and their
corresponding tax values. Future tax assets are recognized only to the extent
that, in the opinion of management, it is more likely than not that the future
income tax assets will be realized. Future income tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment or substantive enactment.
The change had the following cumulative effect on the October 1, 1999
accounts:
INCREASE DECREASE
$ $
Retained earnings 11,590
Goodwill 16,869
Current future income tax assets 9,060
Long-term future income tax assets 4,722
Current future income tax liabilities 15
Long-term future income tax liabilities 8,488
Translation of foreign currencies
Revenue and expenses denominated in foreign currencies are recorded at the rate
of exchange prevailing at the transaction date. Assets and liabilities
denominated in foreign currencies are translated at exchange rates prevailing at
the balance sheet dates. Unrealized translation gains and losses are reflected
in net earnings.
Self-sustaining subsidiaries and joint ventures whose economic activities
are largely independent of the parent company are accounted for using the
current-rate method. Under this method, assets and liabilities of subsidiaries
denominated in a foreign currency are translated into Canadian dollars at
exchange rates in effect at the balance sheet dates. Revenue and expenses are
translated at average exchange rates prevailing during the period. Resulting
unrealized gains or losses are accumulated and reported as foreign currency
translation adjustments in shareholders' equity. As a result of differences in
the translation of the financial statements of foreign subsidiaries and joint
ventures, the foreign currency translation adjustment increased by $10,505,000
and $21,634,000 in 2002 and 2001, respectively. These increases resulted
principally from translating US dollars denominated goodwill.
The accounts of foreign subsidiaries, which are financially or operationally
dependent on the parent company, are accounted for using the temporal method.
Under this method, monetary assets and liabilities are translated at the
exchange rates in effect at the balance sheet dates and non-monetary assets and
liabilities are translated at historical exchange rates. Revenue and expenses
are translated at average rates for the period. Translation exchange gains or
losses of such subsidiaries are reflected in net earnings.
Prior to October 1, 2001, the Company used the current-rate method to
account for all its subsidiaries and joint ventures except for its Japanese,
Australian, South American and United Kingdom ("UK") subsidiaries which were
translated using the temporal method. On October 1, 2001, the Company
reclassified, for foreign currency translation purposes, its subsidiary located
in the UK from integrated to self-sustaining operations as a result of changes
in its economic and operating facts and circumstances. During 2001, the UK
subsidiary signed large contracts allowing it to generate cash flows
independently. Prior to 2001, the UK subsidiary generated minimal local cash
flows from operations. In addition, as a result of the acquisition of IMRglobal
Corp. ("IMRglobal" or "IMR"), completed in July 2001 (see Note 9), CGI acquired
a second subsidiary in the UK. This contributed to additional, more significant
revenue streams for the UK operations. As a result of this reclassification,
applied on a prospective basis, the foreign currency translation component of
shareholders' equity increased by approximately $1,400,000.
CGI GROUP INC. 2002 7
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Preparation of Consolidated Financial Statements
a) Amortization of incentives related to outsourcing contracts
During the year ended September 30, 2002, the Company modified the
presentation of the amortization related to incentives granted on
outsourcing contracts based on EITF 01-9, Accounting for consideration given
by a vendor to a customer, by the Financial Accounting Standards Board's
Emerging Issues Task Force ("EITF"). The amortization of incentives is now
presented as a reduction of revenue as opposed to being shown as
amortization of contract costs and other long-term assets. Furthermore, the
Company also reclassified discounts granted on an existing outsourcing
contract which was previously presented in the costs of services, selling
and administrative expenses. For comparative purposes, revenue for the years
ended September 30, 2001 and 2000 were reduced by $20,924,000 and
$12,928,000 respectively, amortization of contract costs and other long-term
assets were reduced by $10,274,000 and $3,478,000 respectively and costs of
services, selling and administrative expenses were reduced by $10,650,000
and $9,450,000 respectively.
b) Foreign currency translation adjustment
During the quarter ended December 31, 2001, the Company revised the
calculation of the foreign currency translation adjustment in order to use
the current rate as opposed to the historical rate upon translation of the
goodwill related to its self-sustaining foreign subsidiaries. This
adjustment resulted in an increase of $21,197,000 of the foreign currency
translation adjustment and goodwill as at September 30, 2001.
c) Accounts receivable and deferred revenue
During the year ended September 30, 2002, the Company's management changed
the presentation related to accounts receivable and deferred revenue for the
month-end advance billing on outsourcing contracts. Accordingly, accounts
receivable and deferred revenue were both reduced by $34,511,000 as at
September 30, 2001.
d) Goodwill and integration liability
During the quarter ended June 30, 2002, the Company reviewed its
interpretation of the accounting treatment for integration costs accrued for
in connection with business acquisitions; accordingly, the integration
liability originally accrued for in 2001 in connection with the acquisition
of IMR was reduced by $20,810,000. As a result, goodwill and future income
tax assets recorded in connection with the acquisition also decreased by
$17,027,000 and $3,783,000, respectively.
Note 3. Accounts receivable
2002 2001
$ $
Trade 229,583 223,158
Other (1) 65,608 62,998
----------------------------------------------------- -------------- -----------
295,191 286,156
----------------------------------------------------- -------------- -----------
(1) Other accounts receivable include refundable tax credits on salaries,
calculated at the rate of 25% on salaries paid in Quebec, to a maximum of
$10,000 per year per eligible employee. This tax credit was increased during
the year to 35% of salaries paid to a maximum of $12,500, retroactive to
January 1, 2001. The Company became eligible to receive these tax credits
starting May 11, 2000, upon its commitment to relocate to the E-Commerce
Place. Other accounts receivable, as at September 30, 2002 and 2001, include
refundable tax credits on salaries of approximately $38,446,000 and
$32,513,000 respectively. Of these amounts, $43,184,000, $24,763,000 and
$7,750,000 were recorded as a reduction of salary expense comprised in costs
of services, selling and administrative expenses in the consolidated
statements of earnings for 2002, 2001 and 2000, respectively. The amount
credited to expenses for 2002 includes a retroactive adjustment of
$4,414,000 for fiscal 2001 in order to reflect the increase in tax credit
rate from 25% to 35%.
These refundable tax credits on salaries carry certain conditions. The
Company must be defined as an eligible company meaning that it will relocate
to the E-Commerce Place. In addition, the Company must, every year, obtain
an eligibility certificate from the ministere des Finances confirming that
the Company operates "eligible activities" in a proportion of at least 75%
as well as an eligibility certificate for employees working for the Company
during the year. Should the Company fail to relocate to the E-Commerce Place
or fail to meet other significant obligations required under the current tax
credits on salaries program, any tax credits received would have to be
refunded to the Quebec government. Any refund made by the Company would be
charged to earnings in the corresponding period. No future liability has
been recorded related to any reimbursement clause as of September 30, 2002.
CGI GROUP INC. 2002 8
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Note 4. Fixed assets
2002
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
Land 4,102 - 4,102
Buildings 24,724 761 23,963
Leasehold improvements 45,766 14,186 31,580
Furniture and fixtures 40,157 22,131 18,026
Computer equipment 120,854 94,986 25,868
Software 57,393 15,551 41,842
----------------------------------------------------------------------------------------------------------------------
292,996 147,615 145,381
----------------------------------------------------------------------------------------------------------------------
2001
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
Land 4,191 - 4,191
Buildings 23,397 167 23,230
Leasehold improvements 30,572 6,033 24,539
Furniture and fixtures 30,411 12,884 17,527
Computer equipment 112,276 70,140 42,136
Software 24,496 12,728 11,768
----------------------------------------------------------------------------------------------------------------------
225,343 101,952 123,391
----------------------------------------------------------------------------------------------------------------------
Fixed assets include assets acquired under capital leases totaling $9,434,000
($11,368,000 in 2001), net of accumulated depreciation and amortization of
$22,209,000 ($27,301,000 in 2001).
Note 5. Contract costs and other long-term assets
2002
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
Contract costs 379,985 56,091 323,894
Software acquired and developed 83,018 23,313 59,705
Software licenses and other 105,573 55,430 50,143
----------------------------------------------------------------------------------------------------------------------
568,576 134,834 433,742
----------------------------------------------------------------------------------------------------------------------
2001
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
Contract costs 219,816 24,780 195,036
Software acquired and developed 49,380 10,409 38,971
Software licenses and other 76,081 37,685 38,396
----------------------------------------------------------------------------------------------------------------------
345,277 72,874 272,403
----------------------------------------------------------------------------------------------------------------------
Contract costs and other long-term assets amortization expense comprises the
following for the years ended September 30:
2002 2001 2000
$ $ $
Contract costs 31,312 12,943 6,539
Software acquired and developed 12,911 4,879 1,858
Software licenses and other 18,560 15,638 13,594
----------------------------------------------------------------------------------------------------------------------
62,783 33,460 21,991
----------------------------------------------------------------------------------------------------------------------
CGI GROUP INC. 2002 9
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Amortization expense of contract costs and other long-term assets is presented
as follows in the consolidated statements of earnings for the years ended
September 30 (see Note 2):
2002 2001 2000
$ $ $
Reduction of revenue 23,559 10,274 3,478
Amortization of contract costs and other long-term assets 39,224 23,186 18,513
----------------------------------------------------------------------------------------------------------------------
62,783 33,460 21,991
----------------------------------------------------------------------------------------------------------------------
Note 6. Long-term debt
2002 2001
$ $
Unsecured revolving credit facility, repaid during the year (1) - 25,000
Obligations under capital leases, bearing interest at various
interest rates varying from 4.9% to 12.25% and repayable in
blended monthly instalments maturing at various dates until 2006 8,500 14,901
Other secured and unsecured loans, repaid during the year - 379
----------------------------------------------------------------------------------------------------------------------
8,500 40,280
Current portion 4,172 7,528
----------------------------------------------------------------------------------------------------------------------
4,328 32,752
----------------------------------------------------------------------------------------------------------------------
(1) An amount of $225,000,000 is available under the terms of this unsecured
revolving credit facility. In addition to this revolving credit facility,
the Company also has available lines of credit totaling $27,971,000. Under
both of these facilities, an amount totaling approximately $3,862,000 as at
September 30, 2002, has been drawn to cover various letters of credit issued
for contracts with major outsourcing and systems integration clients. The
credit facility contains certain covenants which require the Company to
maintain certain financial ratios.
Minimum capital lease payments are as follows:
PAYMENT INTEREST PRINCIPAL
$ $ $
2003 4,707 535 4,172
2004 3,709 234 3,475
2005 848 55 793
2006 73 13 60
2007 - - -
----------------------------------------------------------------------------------------------------------------------
Total minimum capital lease payments 9,337 837 8,500
----------------------------------------------------------------------------------------------------------------------
Note 7. Capital stock, stock options and warrants
a) Capital stock
Authorized, an unlimited number without par value:
- First preferred shares, carrying one vote per share, ranking prior to
second preferred shares, Class A subordinate shares and Class B shares
with respect to the payment of dividends;
- Second preferred shares, non-voting, ranking prior to Class A subordinate
shares and Class B shares with respect to the payment of dividends;
- Class A subordinate shares, carrying one vote per share, participating
equally with Class B shares with respect to the payment of dividends and
convertible into Class B shares under certain conditions in the event of
certain takeover bids on Class B shares;
- Class B shares, carrying 10 votes per share, participating equally with
Class A subordinate shares with respect to the payment of dividends,
convertible at any time at the option of the holder into Class A
subordinate shares.
CGI GROUP INC. 2002 10
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
For 2002, 2001 and 2000, and after giving retroactive effect to the subdivision
of the Company's shares that occurred on January 7, 2000, the Class A
subordinate shares and the Class B shares changed as follows:
CLASS A SUBORDINATE SHARES CLASS B SHARES
CARRYING CARRYING
NUMBER VALUE NUMBER VALUE
$ $
Balance at September 30, 1999 233,887,974 423,616 34,773,652 148
Issued for cash 287,914 4,003 - -
Issued as consideration for business acquisitions (Note 9) 5,626,369 57,112 - -
Options exercised 953,410 5,914 72,874 1,014
-----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 240,755,667 490,645 34,846,526 1,162
Issued for cash - - 5,953,248 53,043
Issued as consideration for business acquisitions (Note 9) 85,835,178 651,010 - -
Options exercised 441,872 2,236 - -
-----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 327,032,717 1,143,891 40,799,774 54,205
Issued for cash (1) 11,110,000 124,988 - -
Issued as consideration for business acquisitions (Note 9 )210,739 2,261 - -
Options exercised 1,546,801 7,276 - -
-----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 339,900,257 1,278,416 40,799,774 54,205
-----------------------------------------------------------------------------------------------------------------------------
(1) On December 20, 2001, the Company issued 11,110,000 Class A subordinate
shares to the public for cash proceeds of $124,988,000 before share issue
costs of $3,800,000 (net of income tax recoveries of $1,700,000).
b) Stock options
Under a Stock option compensation plan for certain employees and directors of
the Company and its subsidiaries, the Board of Directors may grant, at its
discretion, options to purchase company stock to certain employees and directors
of the Company and its subsidiaries. The exercise price is established by the
Board of Directors but may not be lower than the average closing price for Class
A shares over the five business days preceding the date of the grant. Options
generally vest one to three years from the date of grant and must be exercised
within a 10-year period, except in the event of retirement, termination of
employment or death. Options for 35,749,234 Class A subordinate shares have been
reserved for issuance under the Stock option plan.
Had compensation cost been determined using the fair value method at the day
of grant for awards granted since October 1, 2001, under this Stock option plan,
the Company's pro forma net earnings, basic and diluted earnings per share for
the year ended September 30, 2002, would have been $131,669,000, $0.35 and
$0.35, respectively. These pro forma amounts include a compensation cost based
on a weighted-average grant date fair value of $4.27 per stock option for
1,096,101 stock options (net of cancellation) granted during the year ended
September 30, 2002, as calculated using the Black-Scholes option pricing model
with the following assumptions: risk-free interest rate of 4.6%, dividend yield
of 0.0%, expected volatility of 48.7% and expected life of five years. As
permitted by CICA Handbook Section 3870, the pro forma disclosure omits the
effect of awards granted before October 1, 2001.
In connection with a business acquisition completed in fiscal 2001 (see Note
9) where outstanding stock options of the acquiree became options to acquire CGI
Class A subordinate shares, the Company recorded 3,357,962 vested options out of
a total of 8,424,502 options outstanding as a purchase consideration of
$16,519,000 representing the estimated fair value of the outstanding vested
stock options of the acquiree at the date of acquisition.
c) Warrants
In connection with the signing of a strategic outsourcing contract and of a
business acquisition (see Note 9), the Company granted warrants entitling the
holders to subscribe to up to 5,118,210 Class A subordinate shares. The exercise
prices were determined using the average closing price for Class A subordinate
shares at a date and for a number of days around the respective transaction
dates. The warrants vest upon signature of the contract, or date of business
acquisition, and have an exercise period of five years. As at September 30, 2002
and 2001, there were 5,118,210 warrants issued and outstanding, 4,000,000 of
which are exercisable at a price of $6.55 per share and expire April 30, 2006,
and the remaining 1,118,210 are exercisable at a price of $8.78 per share
expiring June 13, 2006. The fair values of the warrants, totaling $19,655,000,
were estimated at their respective grant dates using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 4.9%,
dividend yield of 0.0%, expected volatility of 57.7% and expected life of five
years.
In addition to the warrants to purchase up to 5,118,210 Class A subordinate
shares referred to above and issued in connection with the signing of a
strategic outsourcing contract and of a business acquisition (the "Initial
Warrants"), CGI issued to the Majority Shareholders and BCE warrants (the
"Pre-emptive Rights Warrants") to subscribe in the aggregate up to 3,865,014
Class A subordinate shares and 697,044 Class B shares pursuant to their
pre-emptive rights contained in the articles of incorporation of CGI, with
substantially similar terms and conditions as those of the Initial Warrants. The
Pre-emptive Rights Warrants may be exercised by BCE and the Majority
Shareholders only to the extent that the holders of the Initial Warrants
exercise such Initial Warrants.
Furthermore, subject to regulatory approval, the Company has undertaken in
favor of a holder of Initial Warrants to purchase up to 4,000,000 Class A
subordinate shares to issue promptly after April 30, 2006 (the "Expiration
Date") replacing warrants (the "Extended Warrants") to purchase Class A
subordinate shares equal to the number of Class A subordinate shares not
purchased by such holder under terms of the Initial Warrants on the Expiration
Date. The Extended Warrants will have substantially similar
CGI GROUP INC. 2002 11
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
terms and conditions as those of the Initial Warrants, except for the exercise
price which will be based upon the closing price of the Class A subordinate
shares on the Toronto Stock Exchange ("TSX") on the date preceding the issuance
of the Extended Warrants.
d) The following table presents the number of all shares, stock options and
warrants outstanding as at September 30:
2002 2001
Class A subordinate shares 339,900,257 327,032,717
Class B shares 40,799,774 40,799,774
----------------------------------------------------------------------------------------------------------------------
Total capital stock 380,700,031 367,832,491
Number of stock options (Class A subordinate shares) -Accounted for 2,333,231 3,139,943
Number of stock options (Class A subordinate shares) -Not accounted for 18,481,589 21,083,909
Number of warrants (Class A subordinate shares) -Accounted for 5,118,210 5,118,210
Number of warrants (Class A subordinate shares and Class B shares) -Not accounted for 4,562,058 4,562,058
----------------------------------------------------------------------------------------------------------------------
Number of shares reflecting the potential exercise of stock options and warrants 411,195,119 401,736,611
----------------------------------------------------------------------------------------------------------------------
e) The following table presents information concerning stock options and
warrants accounted for the years ended September 30:
2002 2001
STOCK OPTIONS WARRANTS STOCK OPTIONS WARRANTS
CARRYING CARRYING CARRYING CARRYING
NUMBER VALUE NUMBER VALUE NUMBER VALUE NUMBER VALUE
$ $ $ $
Balance, beginning of year 3,139,943 15,446 5,118,210 19,655 - - - -
Granted as consideration for
business acquisitions (Note 9) - - - - 3,357,962 16,519 5,118,210 19,655
Exercised (107,318) (528) - - (218,019) (1,073) - -
Forfeited and expired (1) (699,394) (3,441) - - - - - -
-----------------------------------------------------------------------------------------------------------------------------
Balance, end of year 2,333,231 11,477 5,118,210 19,655 3,139,943 15,446 5,118,210 19,655
-----------------------------------------------------------------------------------------------------------------------------
(1) During the year ended September 30, 2002, the Company cancelled options for
an amount of $3,441,000 which has been reclassified to contributed surplus.
f) Additional information on stock options
The following table presents information concerning all outstanding stock
options granted to certain employees and directors by the Company for the years
ended September 30:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF OPTIONS(1) PER SHARE OF OPTIONS(1) PER SHARE OF OPTIONS(1) PER SHARE
$ $ $
Outstanding, beginning of year 24,223,852 10.69 6,413,181 11.46 4,996,414 8.23
Granted 1,206,925 8.91 10,643,930 8.89 2,565,594 15.93
Granted as consideration for business
acquisition (Note 9) - - 8,424,502 12.27 - -
Exercised (1,546,801) 4.27 (441,872) 2.63 (1,026,284) 6.75
Forfeited and expired (3,069,156) 12.55 (815,889) 13.90 (122,543) 13.21
-----------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 20,814,820 10.79 24,223,852 10.69 6,413,181 11.46
-----------------------------------------------------------------------------------------------------------------------------
(1) Include stock options that are accounted for as indicated in the table above.
CGI GROUP INC. 2002 12
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
The following table summarizes information about outstanding stock options
granted to certain employees and directors of the Company at September 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ $ $
0.05 to 4.40 998,378 7 2.79 534,777 2.47
5.14 to 5.94 993,173 1 5.70 973,918 5.71
6.03 to 8.99 8,966,226 9 8.45 7,330,755 8.52
9.03 to 13.61 5,416,530 7 10.63 4,232,456 10.64
14.00 to 17.44 2,768,014 7 15.82 2,159,288 15.74
18.01 to 23.94 1,322,044 5 20.48 1,019,473 20.23
24.51 to 36.79 350,455 6 33.97 309,800 34.85
----------------------------------------------------------------------------------------------------------------------
20,814,820 7 10.79 16,560,467 10.86
----------------------------------------------------------------------------------------------------------------------
g) Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share for the years ended September 30:
2002 2001 2000
NUMBER NUMBER NUMBER
NET EARNINGS OF SHARES EARNINGS NET EARNINGS OF SHARES EARNINGS NET EARNINGS OF SHARES EARNINGS
(NUMERATOR) DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE
$ $ $ $ $ $
Net earnings 135,799 377,349,472 0.36 62,789 299,500,350 0.21 55,666 270,442,354 0.21
Dilutive options - 2,083,498 - - 1,287,291 - - 2,317,858 -
Dilutive warrants - 2,137,885 - - 319,545 - - - -
------------------------------------------------------------------------------------------------------------------------------
Net earnings after
assumed conversions 135,799 381,570,855 0.36 62,789 301,107,186 0.21 55,666 272,760,212 0.20
------------------------------------------------------------------------------------------------------------------------------
Note 8. Income taxes
As described in Note 2, the Company adopted the recommendations of CICA Handbook
Section 3465, Income Taxes, effective October 1, 1999, as a cumulative
adjustment to retained earnings. The income tax provision is as follows for the
years ended September 30:
2002 2001 2000
$ $ $
Current 61,166 38,125 46,494
Future (1) 35,602 34,040 3,491
----------------------------------------------------------------------------------------------------------------------
96,768 72,165 49,985
----------------------------------------------------------------------------------------------------------------------
(1) Includes $1,451,000 in 2001, and $1,277,000 in 2000, of future income taxes
related to goodwill amortization.
The Company's effective income tax rate differs from the combined Canadian
statutory tax rate for the following reasons for the years ended September 30:
2002 2001 2000
% % %
Combined federal and provincial tax rates 36.6 38.6 40.6
Non-deductible items 0.7 8.6 7.3
Valuation allowance relating to tax benefits on losses 4.4 7.8 -
Other (0.1) (2.0) (1.1)
----------------------------------------------------------------------------------------------------------------------
Effective income tax rate after goodwill amortization 41.6 53.0 46.8
Goodwill amortization - (8.5) (6.3)
----------------------------------------------------------------------------------------------------------------------
Effective income tax rate before goodwill amortization 41.6 44.5 40.5
----------------------------------------------------------------------------------------------------------------------
CGI GROUP INC. 2002 13
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Future income taxes are as follows at September 30:
2002 2001
$ $
(Restated)
Future income tax assets:
Provision for integration costs 5,160 22,310
Tax benefits on losses carried forward 127,609 97,415
Accrued compensation 5,969 7,107
Allowance for doubtful accounts 1,421 3,507
Other 1,888 3,742
----------------------------------------------------------------------------------------------------------------------
142,047 134,081
----------------------------------------------------------------------------------------------------------------------
Future income tax liabilities:
Fixed assets, contract costs and other long-term assets 88,387 28,597
Work in progress 6,490 6,716
Goodwill 5,309 5,467
Refundable tax credits on salaries 13,832 8,997
Other 5,979 8,202
----------------------------------------------------------------------------------------------------------------------
119,997 57,979
----------------------------------------------------------------------------------------------------------------------
Valuation allowance 100,819 93,820
----------------------------------------------------------------------------------------------------------------------
Future income taxes, net (78,769) (17,718)
----------------------------------------------------------------------------------------------------------------------
Future income taxes are classified as follows:
Current future income tax assets 12,567 17,998
Long-term future income tax assets 28,661 29,002
Current future income tax liabilities (26,301) (21,013)
Long-term future income tax liabilities (93,696) (43,705)
----------------------------------------------------------------------------------------------------------------------
Future income tax liabilities, net (78,769) (17,718)
----------------------------------------------------------------------------------------------------------------------
Certain of the Company's subsidiaries have losses carried forward
aggregating approximately $369,000,000, of which approximately $325,000,000
(US$206,000,000) originates from the Company's US subsidiaries, available to
reduce future taxable income and expiring at various dates to 2022. The benefit
of these losses has been reflected in the Consolidated Financial Statements to
the extent that it was considered to be more likely than not that the related
future income tax assets would be realized.
Foreign earnings of certain of CGI's subsidiaries would be taxed only upon
their repatriation to Canada. The Company has not recognized a future tax
liability for these retained earnings as management does not expect them to be
repatriated. On remittance, certain countries impose withholding taxes that,
subject to certain limitations, are then available for use as tax credits
against a federal or provincial income tax liability, if any. Determination of
the amount of unrecognized federal and provincial future income tax liability
for these retained earnings or foreign tax withholding is not practicable
because of the complexities associated with its hypothetical calculation.
Note 9. Investments in subsidiaries and joint ventures
For all business acquisitions, the Company began recording the results of
operations of the acquired entities as of their respective effective acquisition
dates.
During fiscal 2002, the Company completed five acquisitions of IT consulting
firms for considerations ranging between $2,100,000 and $7,000,000, for an
aggregate consideration of $24,988,000, including acquisition costs of
approximately $503,000 and the issuance of 210,739 Class A subordinate shares at
a price of $10.73 per share. The Company acquired all of the outstanding shares
of the businesses, except in two cases where assets were acquired.
CGI GROUP INC. 2002 14
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
The acquisitions were accounted for using the purchase method and the total
initial purchase price allocation is as follows:
2002
$
Non-cash working capital items (2,686)
Future income taxes 933
Fixed assets 1,271
Contract costs and other long-term assets 2,166
Goodwill (1) 23,049
-------------------------------------------------------------------------------
24,733
Cash position at acquisition 255
-------------------------------------------------------------------------------
Net assets acquired 24,988
-------------------------------------------------------------------------------
Consideration
Cash (including acquisition costs) 20,121
Balance of purchase price 2,606
Issuance of 210,739 Class A subordinate shares (2) 2,261
-------------------------------------------------------------------------------
24,988
-------------------------------------------------------------------------------
(1) Includes $9,292,000 of goodwill deductible for tax purposes. Of the total
goodwill amount, $10,986,000 is included in the US and Asia Pacific segment
and the remaining $12,063,000 is included in the Canada and Europe segment.
(2) The per share value of the shares issued as consideration for one of the
business acquisitions was determined using the average closing share price
on the TSX over a reasonable period before and after the date the terms of
the business combination were agreed to and announced.
In May 2002, the Company acquired, for a cash consideration of $26,000,000,
a 49% interest in a newly created joint venture, Innovapost Inc. ("Innovapost").
The Company also paid, through Innovapost, an incentive of $26,000,000 to Canada
Post Corporation, its partner in the joint venture, for the signing of a 10-year
outsourcing contract. The aggregate consideration paid of $52,000,000 was
accounted for as contract costs and other long-term assets in accordance with
its substance and will be amortized over the term of the contract.
During the year, the Company sold its Australian and Japanese operations for
an aggregate cash consideration of $10,365,000 with no resulting gain.
As described below, during 2002, the Company finalized the purchase price
allocation for both the IMR and the Desjardins acquisitions completed during
2001.
The schedule below reflects the payments made and the remaining balance of
accrued acquisition and integration costs related to IMR.
RESTATED PAID DURING
BALANCE AS AT THE YEAR ENDED BALANCE AS AT
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001(1) 2002 2002
$ $ $
Professional fees 2,834 2,796 38
Consolidation and closure of facilities 12,446 4,745 7,701
Severance 11,700 10,468 1,232
Other 1,655 325 1,330
----------------------------------------------------------------------------------------------------------------------
28,635 18,334 10,301
----------------------------------------------------------------------------------------------------------------------
(1) Restated as described in Note 2.
During 2001, the Company made the following acquisitions:
C.U. Processing Inc. ("CUP")--On October 4, 2000, the Company acquired all the
outstanding shares of CUP, a Detroit-based provider of information management
systems primarily to US credit unions;
AGTI Consulting Services Inc. ("AGTI")--On November 27, 2000, the Company
acquired 49% of all outstanding shares of AGTI, a Montreal-based IT consulting
firm. The Company accounts for its 49% interest in AGTI using the proportionate
consolidation method;
Star Data Systems Inc. ("Star Data")--On January 9, 2001, the Company acquired
all the outstanding common shares of Star Data on the basis of 0.737 Class A
subordinate shares of the Company for each Star Data common share; therefore,
the Company issued 13,546,327 Class A subordinate shares at a price of $7.59 per
share for a total consideration of $102,820,000 before acquisition costs of
approximately $2,150,000. The price per share of $7.59 was determined using the
trading price on the TSX of the CGI Class A subordinate shares over a reasonable
period before and after the closing date of the acquisition. Star Data is a
Canadian-based provider of IT services and solutions to the financial services
industry;
CGI GROUP INC. 2002 15
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Assets and liabilities of Confederation des caisses populaires et d'economie
Desjardins du Quebec used in data and micro-computing of Mouvement des caisses
Desjardins ("Desjardins") operations--On May 1, 2001, the Company acquired the
assets, certain intellectual property rights and assumed certain liabilities of
Desjardins which it used in data and micro-computing. In addition, approximately
450 Desjardins employees were transferred to the Company. The total
consideration paid for this acquisition was $72,216,000, before acquisition
costs of approximately $120,000, comprises cash of $57,945,000 and the issuance
of 4,000,000 warrants at fair value in the amount of $14,271,000 (see Note 7).
The warrants are presented as a component of shareholders' equity with a
corresponding amount included in contract costs and other long-term assets, in
accordance with their substance;
IMRglobal--On July 27, 2001, the Company merged with IMRglobal, a US-based
leading global provider of end-to-end IT solutions, acquiring all the
outstanding common stock of IMRglobal on the basis of 1.5974 Class A subordinate
shares of the Company for each share of IMRglobal common stock; therefore, the
Company issued 70,753,841 Class A subordinate shares at a price of $7.58 per
share for a consideration of $536,314,000 before acquisition costs of
approximately $17,347,000. The price per share of $7.58 was determined using the
average trading price on the TSX of the CGI Class A subordinate shares over a
reasonable period before and after the date that the terms of the business
combination were agreed to and announced. In addition, each outstanding
IMRglobal stock option as of that date became a 1.5974 stock option to acquire a
Class A subordinate share of the Company; therefore, the Company effectively
issued 8,424,502 stock options having a weighted-average exercise price per
share of $12.27 and having a weighted-average fair value of $5.37 per option.
Consistent with Canadian GAAP at the time, $16,519,000 representing the total
fair value of 3,357,562 outstanding vested stock options having a weighted
average fair value of $4.92 per option, was recorded as purchase consideration.
The remaining $28,720,000 representing the total fair value of 5,066,940
outstanding unvested stock options having a weighted-average fair value of $5.67
per option was not recorded as purchase consideration (see Note 7).
The purchase price included integration and acquisition costs totaling
$47,190,000 incurred by the Company for professional fees and costs to exit and
consolidate certain IMR activities.
The components of the accrued costs included in the purchase price were as
follows:
RESTATED RESTATED RESTATED BALANCE
ACQUISITION AND PAID AS AT REMAINING AS AT
INTEGRATION SEPTEMBER 30, SEPTEMBER 30,
LIABILITIES(1) 2001(1) 2001(1)
$ $ $
Professional fees 17,347 14,513 2,834
Consolidation and closure of facilities 14,000 1,554 12,446
Severance 12,000 300 11,700
Other 3,843 2,188 1,655
----------------------------------------------------------------------------------------------------------------------
47,190 18,555 28,635
----------------------------------------------------------------------------------------------------------------------
(1) Restated as described in Note 2.
At various dates throughout fiscal 2001, the Company completed the
acquisition of all outstanding shares of six other companies, entered into two
joint venture agreements and increased its interest in an equity investee for an
aggregate consideration of $32,705,000. The sum of the purchase price
allocations to the net assets acquired is presented in the "Other" column in the
table below. A total of 1,535,010 Class A subordinate shares having a
weighted-average value per share of $7.74 were issued in connection with these
acquisitions. The per share value of the shares issued as consideration was
determined using the average closing share price on the TSX of the CGI Class A
subordinate shares over a reasonable period before and after the closing date of
the business combinations. In addition, the Company began using the
proportionate consolidation method to account for its investment in the equity
investee as of January 12, 2001.
CGI GROUP INC. 2002 16
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
These fiscal 2001 acquisitions were accounted for using the purchase method, as
follows:
NET ASSETS ACQUIRED IMR(2) STARDATA DESJARDINS(3) AGTI CUP OTHER TOTAL
$ $ $ $ $ $ $
Non-cash working capital items (45,695) (18,391) 24,245 2,216 (12,061) (471) (50,157)
Fixed assets 42,095 21,211 3,612 448 3,296 2,135 72,797
Contract costs and other
long-term assets 29,923 9,203 111,986 - 447 11 151,570
Future income taxes 1,102 15,716 (7,744) 10 4,228 1,139 14,451
Goodwill (1) 560,520 73,060 7,744 14,602 41,601 27,588 725,115
Long-term debt (53,988) (10,799) - - (812) (1,759) (67,358)
Deferred credits and other
long-term liabilities (7,609) - (67,627) - - - (75,236)
----------------------------------------------------------------------------------------------------------------------
526,348 90,000 72,216 17,276 36,699 28,643 771,182
Cash position at acquisition 26,485 12,820 - 7,639 1,837 4,062 52,843
----------------------------------------------------------------------------------------------------------------------
552,833 102,820 72,216 24,915 38,536 32,705 824,025
----------------------------------------------------------------------------------------------------------------------
Consideration
Cash - - 57,945 24,915 38,536 19,561 140,957
Issuance of 85,835,178 Class A
subordinate shares 536,314 102,820 - - - 11,876 651,010
Fair value of 3,357,562 vested
stock options (Notes 2 and 7) 16,519 - - - - - 16,519
4,000,000 warrants at fair
value (Note 7) - - 14,271 - - - 14,271
Equity value of investment
at acquisition date - - - - - 1,268 1,268
----------------------------------------------------------------------------------------------------------------------
552,833 102,820 72,216 24,915 38,536 32,705 824,025
----------------------------------------------------------------------------------------------------------------------
(1) Includes $55,413,000 of goodwill deductible for tax purposes. Of the total
goodwill amount, $534,415,000 is included in the US and Asia Pacific segment
and the remaining $190,700,000 is included in the Canada and Europe segment.
(2) During 2002, the Company finalized the purchase price allocation of IMR; as
a result, contract costs and other long-term assets were increased by
$7,577,000 and non-cash working capital items, goodwill and future income
taxes were decreased by $3,947,000, $978,000 and $2,652,000, respectively.
Total acquisition and integration costs were also adjusted (decrease of
$20,810,000) to reflect the Company's reviewed interpretation of the
accounting treatment for integration liabilities to be incurred in
connection with business acquisitions (see discussion above). These
adjustments are all reflected in the table above.
(3) During the third fiscal quarter of 2002, the Company finalized the purchase
price allocation resulting in decreases in goodwill, integration
liabilities, and future income tax assets of $1,805,000, $2,864,000 and
$1,059,000 respectively. These adjustments are all reflected in the above
table.
During 2001, the Company modified the initial purchase price allocation of APG
Solutions & Technologies Inc. ("APG"), acquired in 2000, following the
conclusion of pending arbitration at the acquisition date, which resulted in a
reduction of the consideration paid and the corresponding value of net assets
acquired of approximately $1,721,000.
During 2000, the Company made the following acquisitions:
MCM Technology Inc. ("MCM")--On October 26, 1999, the Company acquired all the
outstanding shares of MCM, an information technology consulting firm serving
clients mainly in the healthcare and telecommunications industries; therefore,
the Company issued 462,062 Class A subordinate shares at a price of $13.90 per
share for a total consideration of $6,425,000 before acquisition costs of
approximately $100,000. The price per share of $13.90 was determined using the
trading price on the TSX of the CGI Class A subordinate shares over a reasonable
period before and after the closing date of the acquisition.
APG--On September 1, 2000, the Company acquired all the outstanding shares of
APG, an information technology consulting firm specializing in the
implementation of enterprise resource planning solutions, system evolution,
electronic commerce and knowledge management; therefore, the Company issued
5,164,307 Class A subordinate shares at a price of $9.81 per share for a total
consideration of $50,687,000 before acquisition cost of approximately
$1,300,000. The price per share of $9.81 was determined using the trading price
on the TSX of the CGI Class A subordinate shares over a reasonable period before
and after the closing date of the acquisition.
CGI GROUP INC. 2002 17
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
These fiscal 2000 acquisitions, including the fiscal 2001 modification relating
to APG described above, were accounted for using the purchase method, as
follows:
NET ASSETS ACQUIRED MCM APG TOTAL
$ $ $
Non-cash working capital items (1,208) (8,336) (9,544)
Fixed assets 872 2,089 2,961
Contract costs and other long-term assets - 64 64
Future income taxes 363 9,678 10,041
Goodwill 8,925 63,749 72,674
Long-term debt (635) (1,775) (2,410)
----------------------------------------------------------------------------------------------------------------------
8,317 65,469 73,786
Cash position at acquisition 1,008 (7,162) (6,154)
----------------------------------------------------------------------------------------------------------------------
9,325 58,307 67,632
----------------------------------------------------------------------------------------------------------------------
Consideration
Cash 2,900 7,620 10,520
Issuance of 5,626,369 Class A subordinate shares (Note 7) 6,425 50,687 57,112
----------------------------------------------------------------------------------------------------------------------
9,325 58,307 67,632
----------------------------------------------------------------------------------------------------------------------
Note 10. Joint ventures: supplementary information
The Company's proportionate share of its joint venture investees' operations
included in the Consolidated Financial Statements is as follows:
AS AT AND FOR THE YEARS ENDED SEPTEMBER 30
2002 2001
$ $
Balance Sheets
Current assets 34,252 18,370
Non-current assets 29,431 21,967
Current liabilities 15,547 4,275
Non-current liabilities 3,580 45
Statements of earnings
Revenue 79,456 35,057
Expenses 77,226 34,339
----------------------------------------------------------------------------------------------------------------------
Net earnings 2,230 718
----------------------------------------------------------------------------------------------------------------------
Statements of cash flows Cash provided by (used for):
Operating activities 10,552 1,572
Financing activities 3,868 -
Investing activities (2,573) (2,220)
Note 11. Supplementary cash flow information
i) Net change in non-cash working capital items is as follows for the years
ended September 30:
2002 2001 2000
$ $ $
Accounts receivable (617) 725 17,206
Income taxes 6,502 (559) (13,647)
Work in progress (17,673) (12,277) 31,725
Prepaid expenses and other current assets (1,361) (556) (5,486)
Accounts payable and accrued liabilities (43,199) 2,073 (92,027)
Deferred revenue 10,611 4,872 3,475
----------------------------------------------------------------------------------------------------------------------
(45,737) (5,722) (58,754)
----------------------------------------------------------------------------------------------------------------------
CGI GROUP INC. 2002 18
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
ii) Non-cash operating, investing and financing activities are as follows for
the years ended September 30:
2002 2001 2000
$ $ $
Operating activities
Deferred credits and other long-term liabilities 15,728 14,000 -
Future income taxes 12,347 3,029 -
----------------------------------------------------------------------------------------------------------------------
28,075 17,029 -
----------------------------------------------------------------------------------------------------------------------
Investing activities
Shares issued for business acquisitions 2,261 681,800 57,112
Purchase of assets under capital leases - - 2,882
Contract costs and other long-term assets 28,075 22,413 -
----------------------------------------------------------------------------------------------------------------------
30,336 704,213 59,994
----------------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of shares 2,261 651,010 57,112
Issuance of warrants and stock options - 36,174 -
Increase in obligations under capital leases - - 2,882
----------------------------------------------------------------------------------------------------------------------
2,261 687,184 59,994
----------------------------------------------------------------------------------------------------------------------
iii) Interest paid and income taxes paid are as follows for the years ended
September 30:
2002 2001 2000
$ $ $
Interest paid 2,172 4,592 3,754
Income taxes paid 51,923 41,615 67,154
Note 12. Segmented information
Effective October 1, 2001, the Company changed its organizational structure. The
Company has three strategic business units ("SBU") as follows: Canada and
Europe, US and Asia Pacific, and Business Process Services ("BPS"). As of that
date, the Company began to evaluate each SBU's performance under this structure
and began reporting segmented information on that basis. Comparative segmented
information has been restated to reflect the fiscal 2002 segmentation basis.
The Company evaluates each SBU's performance primarily based on its revenue,
revenue less operating expenses as well as based on its net contribution (the
latter being defined as earnings before interest, income taxes and amortization
of goodwill) by its Management Committee that is chaired by the Chief Executive
Officer.
The Canada and Europe segment and the US and Asia Pacific segment offer
end-to-end IT services including management of IT and business functions,
systems integration and consulting services. The BPS segment provides services
in the management of business functions. These segments serve clients in the
following sectors: financial services, telecommunications, manufacturing, retail
and distribution, governments, utilities and services and healthcare. The
corporate segment comprises management of cash and cash equivalents and general
corporate activities such as strategy and market development, coordination of
large projects and capital investment decisions. Costs which have not been
allocated to the other segments are included in this segment as they represent
common costs and general head office expenses; the allocation of these costs to
the other segments would not assist in the evaluation of the respective
segments' contributon.
2002
CANADA AND US AND INTERSEGMENT
EUROPE ASIA PACIFIC BPS CORPORATE ELIMINATION TOTAL
$ $ $ $ $ $
Revenue (1) 1,823,995 309,683 93,461 - (57,526) 2,169,613
Operating expenses 1,481,129 303,530 71,927 61,403 (57,526) 1,860,463
-----------------------------------------------------------------------------------------------------------------------
Earnings before the undernoted: 342,866 6,153 21,534 (61,403) - 309,150
Depreciation and amortization 59,457 10,937 4,239 2,372 - 77,005
-----------------------------------------------------------------------------------------------------------------------
Earnings before interest and income taxes 283,409 (4,784) 17,295 (63,775) - 232,145
-----------------------------------------------------------------------------------------------------------------------
Total assets 1,363,889 645,224 118,142 173,637 - 2,300,892
-----------------------------------------------------------------------------------------------------------------------
(1) Revenue of approximately $50,833,000 and $30,199,000 generated from clients
located in the United States were presented under the Canada and Europe
segment for the years 2002 and 2001 respectively.
CGI GROUP INC. 2002 19
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
2001
CANADA US AND INTERSEGMENT
AND EUROPE ASIA PACIFIC BPS CORPORATE ELIMINATION TOTAL
$ $ $ $ $ $
Revenue 1,345,538 178,566 74,735 - (38,448) 1,560,391
Operating expenses 1,092,343 195,076 57,669 34,405 (38,448) 1,341,045
----------------------------------------------------------------------------------------------------------------------
Earnings before the undernoted: 253,195 (16,510) 17,066 (34,405) - 219,346
Depreciation and amortization 49,517 2,126 2,873 1,206 - 55,722
----------------------------------------------------------------------------------------------------------------------
Earnings before interest, income taxes,
entity subject to significant influence
and amortization of goodwill 203,678 (18,636) 14,193 (35,611) - 163,624
----------------------------------------------------------------------------------------------------------------------
Total assets (1) 1,222,107 643,475 96,871 66,216 - 2,028,669
----------------------------------------------------------------------------------------------------------------------
2000
CANADA US AND INTERSEGMENT
AND EUROPE ASIA PACIFIC BPS CORPORATE ELIMINATION TOTAL
$ $ $ $ $ $
Revenue 1,275,471 158,449 75,840 - (86,680) 1,423,080
Operating expenses 1,085,071 164,204 57,534 34,732 (86,680) 1,254,861
----------------------------------------------------------------------------------------------------------------------
Earnings before the undernoted: 190,400 (5,755) 18,306 (34,732) - 168,219
Depreciation and amortization 37,671 2,793 3,136 1,300 - 44,900
----------------------------------------------------------------------------------------------------------------------
Earnings before interest, income taxes,
entity subject to significant influence
and amortization of goodwill 152,729 (8,548) 15,170 (36,032) - 123,319
----------------------------------------------------------------------------------------------------------------------
Total assets 677,952 141,698 80,643 28,262 - 928,555
----------------------------------------------------------------------------------------------------------------------
Revenue by service line:
2002 2001 2000
$ $ $
Management of IT and business functions (outsourcing) 1,562,121 1,070,183 878,798
Systems integration and consulting 607,492 490,208 544,282
----------------------------------------------------------------------------------------------------------------------
Total 2,169,613 1,560,391 1,423,080
----------------------------------------------------------------------------------------------------------------------
The Canada and Europe segment comprises revenue from contracts with a
shareholder, its subsidiaries and its affiliated companies (see Note 13).
CONTRACT COSTS AND
FIXED ASSETS OTHER LONG-TERM ASSETS GOODWILL
2002 2001 2002 2001 2002 2001(1)
$ $ $ $ $ $
Canada and Europe 59,727 63,132 367,712 233,597 579,369 582,788
US and Asia Pacific 42,112 43,632 25,005 27,263 507,406 490,805
BPS 16,912 8,923 10,461 9,324 47,077 45,370
Corporate 26,630 7,704 30,564 2,219 - -
----------------------------------------------------------------------------------------------------------------------
145,381 123,391 433,742 272,403 1,133,852 1,118,963
----------------------------------------------------------------------------------------------------------------------
(1) Restated as described in Note 2.
Note 13. Related party transactions
In the normal course of business, the Company is party to contracts with certain
of BCE Inc.'s ("BCE," a shareholder) subsidiaries and affiliated companies,
pursuant to which the Company is its preferred IT supplier. BCE exercises
significant influence over the Company's operating, financing and investing
activities through its 31.53% (32.63% in 2001) ownership interest in CGI and
through the significant business volume originating from BCE together with its
subsidiaries and affiliates. Transactions and resulting balances, which were
measured at exchange amounts, are presented below:
2002 2001 2000
$ $ $
Revenue 502,645 437,591 560,077
Purchase of services 82,978 78,495 114,062
Accounts receivable 18,756 37,549 53,235
Accounts payable 7,850 4,828 12,645
Work in progress 126 16,389 12,072
Deferred revenue 853 24,010 11,998
Contract costs and other long-term assets 26,257 22,750 25,711
CGI GROUP INC. 2002 20
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
In the normal course of business, the Company is also party to contracts
with Innovapost, a joint venture, pursuant to which the Company is its preferred
IT supplier. CGI exercises significant influence over the Innovapost's
operating, financing and investing activities through its 49% ownership
interest. Transactions and resulting balances, which were measured at exchange
amounts, are presented below:
2002
$
Revenue 8,778
Accounts receivable 8,721
Work in progress 3,606
Contract costs and other long-term assets 23,747
Deferred credits 10,624
Note 14. Commitments and contingencies
At September 30, 2002, the Company is committed under the terms of operating
leases with various expiration dates, primarily for rental of premises and
computer equipment used in outsourcing contracts, in the aggregate amount of
approximately $835,977,000. Minimum lease payments due in each of the next five
years are as follows:
$
2003 104,742
2004 96,225
2005 78,670
2006 61,644
2007 49,230
The Company concluded six long-term service agreements representing a total
commitment of $57,110,000. Minimum payments under these agreements due in each
of the next five years are as follows:
$
2003 29,713
2004 14,515
2005 8,068
2006 4,245
2007 569
Note 15. Financial instruments
Risk management
The Company periodically uses various derivative instruments to manage its
foreign currency position. The derivative instruments entered into by CGI
comprise principally forward contracts. The Company does not hold or issue
financial instruments for trading purposes.
Fair value
At September 30, 2002 and 2001, the estimated fair values of cash and cash
equivalents, accounts receivable, work in progress and accounts payable and
accrued liabilities approximate their respective carrying values.
The estimated fair values of long-term debt and obligations under capital
leases are not significantly different from their respective carrying values at
September 30, 2002 and 2001.
Credit risk
Credit risk concentration with respect to trade receivables is limited due to
the Company's large client base. Furthermore, as described in Note 13, the
Company generates a significant portion of its revenue from a shareholder's
subsidiaries and affiliates. Management does not believe that the Company is
subject to any significant credit risk.
Currency risk
The Company operates internationally and is exposed to market risks from changes
in foreign currency rates. As at September 30, 2002 and 2001, there were no
outstanding forward contracts. Realized and unrealized foreign exchange gains
and losses in relation to forward contracts for each of the years in the
three-year period ended September 30, 2002, were not significant.
CGI GROUP INC. 2002 21
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
Note 16. 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 as follows:
Reconciliation of net earnings:
2002 2001 2000
$ $ $
Net earnings - Canadian GAAP 135,799 62,789 55,666
Adjustments for:
Capitalized software costs (i) (2,771) - -
Warrants (ii) 910 (11,605) -
Unearned compensation (iii) (1,450) (150) -
Integration costs (iv) - (4,842) (1,764)
Goodwill (v) - (500) (500)
Foreign currency translation (vi) - 523 462
----------------------------------------------------------------------------------------------------------------------
Net earnings - US GAAP 132,488 46,215 53,864
----------------------------------------------------------------------------------------------------------------------
Basic and diluted EPS - US GAAP 0.35 0.15 0.20
----------------------------------------------------------------------------------------------------------------------
Reconciliation of shareholders' equity:
2002 2001 2000
$ $ $
(Restated, Note 2)
Shareholders' equity - Canadian GAAP 1,779,615 1,503,114 677,301
Adjustments for:
Capitalized software costs (i) (2,771) - -
Warrants (ii) (10,695) (11,605) -
Unearned compensation (iii) (3,694) (3,694) -
Integration costs (iv) (6,606) (6,606) (1,764)
Goodwill (v) 28,078 27,578 (642)
Foreign currency translation (vi) 581 581 1,659
Adjustment for change in accounting policy (vii) 9,134 9,134 9,134
----------------------------------------------------------------------------------------------------------------------
Shareholders' equity - US GAAP 1,793,642 1,518,502 685,688
----------------------------------------------------------------------------------------------------------------------
(i) Capitalized software costs
Under Canadian GAAP, certain overhead costs were capitalized. Under US GAAP,
these overhead costs are expensed as incurred. The adjustment represents the
charge to consolidated net earnings, net of amortization already recorded for
Canadian GAAP purposes and net of income taxes.
(ii) Warrants
Under Canadian GAAP, the fair value of warrants issued in connection with
long-term outsourcing contracts is recorded as contract costs and amortized on a
straight-line basis over the initial contract term. Under US GAAP, the fair
value of equity instruments issued was subtracted from the initial proceeds
received in determining revenue. The 2001 adjustment represents the subtraction
to revenue, net of contract costs amortization recorded for Canadian GAAP
purposes and net of income taxes. The 2002 adjustment reflects the reversal of
contract cost amortization, net of income taxes, which is included as a
reduction to Canadian GAAP consolidated net earnings.
(iii) Unearned compensation
Under Canadian GAAP, unvested stock options granted as a result of a business
combination are not recorded. The adjustment reflects the intrinsic value of
unvested stock options (see (v) below) that would have been recorded as a
separate component of shareholders' equity for US GAAP purposes, relating to the
IMR acquisition described in Note 9. This unearned compensation is amortized
over approximately three years, being the estimated remaining future vesting
(service) period.
(iv) Integration costs
Under Canadian GAAP, prior to January 1, 2001, certain restructuring costs
relating to the purchaser may be recognized in the purchase price allocation
when accounting for business combinations, subject to certain conditions. Under
US GAAP, only costs relating directly to the acquired business may be considered
in the purchase price allocation. The adjustment represents the charge to
consolidated net earnings, net of goodwill amortization in 2001 and 2000,
recorded for Canadian GAAP purposes and net of income taxes.
CGI GROUP INC. 2002 22
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
(v) Goodwill
As described in (vii) below, goodwill recorded by the Company would be greater
for US GAAP purposes than for Canadian GAAP purposes. The 2001 and 2000
adjustments reflect the additional goodwill amortization expense for US GAAP
purposes. Consistent with both Canadian and US GAAP, the Company discontinued
the amortization of goodwill effective October 1, 2001.
The goodwill adjustment to shareholders' equity results principally from the
difference in the value assigned to stock options issued to IMR employees. Under
Canadian GAAP, the fair value of outstanding vested stock options is recorded as
part of the purchase allocation (see Notes 2 and 7), whereas under US GAAP, the
fair value of both vested and unvested outstanding stock options granted as a
result of the business acquisition is recorded. See (iii) above for a further
discussion relating to this item.
During the year ended September 30, 2002, the Company revised the
calculation of the goodwill component adjustment under US GAAP. As a result, the
goodwill component adjustment to Canadian shareholders' equity increased to
$28,078,000 as at September 30, 2002, from $27,578,000 as at September 30, 2001.
(vi) Foreign currency translation
Under Canadian GAAP, the financial statements of the Company's foreign
subsidiaries, which are considered integrated operations, have been translated
using the temporal method. Under this method, monetary assets and liabilities
are translated at the exchange rates in effect at the balance sheet dates and
non-monetary assets and liabilities are translated at historical exchange rates.
Revenue and expenses are translated at average rates for the period. Translation
exchange gains or losses of such subsidiaries are reflected in net earnings.
Under US GAAP, Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation, requires companies to translate
functional-currency financial statements into reporting currency using the
current exchange rate method whereby the rates in effect on the balance sheet
dates for assets and liabilities and the weighted average rate for statement of
earnings elements are used. Any translation adjustments, resulting from the
process of translating the financial statements of foreign subsidiaries into
Canadian dollars, are excluded from the determination of net earnings and are
reported as a separate component in shareholders' equity.
(vii) Income taxes and adjustment for change in accounting policy
On October 1, 1999, the Company adopted the recommendations of CICA Handbook
Section 3465, Income taxes (see Note 2). The recommendations of Section 3465 are
similar to the provisions of SFAS No. 109, Accounting for Income Taxes, issued
by the Financial Accounting Standards Board ("FASB"). Upon the implementation of
Section 3465, the Company recorded an adjustment to reflect the difference
between the assigned value and the tax basis of assets acquired in a purchase
business combination, which resulted in future income tax liabilities; the
Company recorded this amount through a reduction of retained earnings as part of
the cumulative adjustment. Under US GAAP, this amount would have been reflected
as additional goodwill.
Prior to the issuance of Section 3465, under Canadian GAAP, accounting for
income taxes was similar to the provisions of the US Accounting Principles Board
No. 11. Under US GAAP, the Company would have followed the provisions of SFAS
No. 109.
(viii) Comprehensive income
Cumulative other comprehensive income is comprised solely of foreign currency
translation adjustments which result from the process of translating the
financial statements of foreign subsidiaries (see (vi) above). As at September
30, 2002, 2001 and 2000, cumulative other comprehensive income amounts to
$34,266,000, $24,526,000 and $2,889,000, respectively.
The following table represents comprehensive income in accordance with SFAS
No. 130, Reporting Comprehensive Income:
2002 2001(1) 2000
$ $ $
(Restated)
Net earnings - US GAAP 134,094 46,215 53,864
Other comprehensive income:
Foreign currency translation adjustment, net of income taxes 10,505 22,034 1,762
----------------------------------------------------------------------------------------------------------------------
Comprehensive income 144,599 68,249 55,626
----------------------------------------------------------------------------------------------------------------------
(1) Restated as described in Note 2.
(ix) Proportionate consolidation
The proportionate consolidation method is used to account for interests in joint
ventures. Under US GAAP, entities in which the Company owns a majority of the
share capital would be fully consolidated and those which are less than
majority-owned but over which the Company exercises significant influence, would
be accounted for using the equity method. This would result in reclassifications
in the consolidated balance sheets and statements of earnings as at September
30, 2002 and 2001, and for each of the years in the three-year period ended
September 30, 2002. However, the differences in the case of majority-owned joint
ventures were not considered material and have consequently not been presented
(see Note 10). In accordance with practices prescribed by the U.S. Securities
and Exchange Commission, the Company has elected, for the purpose of this
reconciliation, to account for interests in joint ventures using the
proportionate consolidation method.
CGI GROUP INC. 2002 23
notes to the consolidated financial statements
Years ended September 30, 2002, 2001 and 2000
(tabular amounts only are in thousands of Canadian dollars except share data)
(x) Earnings before amortization of goodwill
In Canada, the Accounting Standards Board approved an addendum to CICA Handbook
Section 1580, Business Combinations, subsequently superceded by Section 1581,
Business Combinations, that permitted goodwill amortization expense to be
presented net-of-tax on a separate line in the consolidated statements of
earnings. This presentation was not permitted under US GAAP. Under US GAAP, for
the years ended September 30, 2001 and 2000, $29,086,000 and $19,653,000 (as
adjusted for US GAAP purposes) of amortization of goodwill would have been
included in operating expenses, respectively.
(xi) Depreciation and amortization
Under US GAAP, depreciation and amortization amounts would be included in
operating expenses.
(xii) Consolidated statements of cash flows
The Company's consolidated statements of cash flows for each of the years in the
three-year period ended September 30, 2002, were prepared in accordance with
CICA Handbook Section 1540, Cash Flow Statements, the provisions of which are
substantially similar to those of SFAS No. 95, Statement of Cash Flows.
CGI GROUP INC. 2002 24
Samson Belair/Deloitte & Touche, S.E.N.C.
Assurance and Advisory Services
1 Place Ville-Marie
Suite 3000
Montreal QC H3B 4T9
Canada
Tel.: (514) 393-7115
Fax: (514) 390-4113
www.deloitte.ca
Independent Auditors' Consent
We hereby consent to the incorporation by reference in CGI Group Inc.'s
Registration Statements on Form S-8 (Reg. Nos. 333-13350, 333-66044 and
333-74932) of our audit report dated November 4, 2002, which is included in CGI
Group Inc.'s Form 6-K.
(signed)
Samson Belair/Deloitte & Touche
Chartered Accountants
Montreal, Quebec
December 5, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CGI GROUP INC.
(Registrant)
Date: December 5, 2002 By /s/ Paule Dore
Name: Paule Dore
Title: Executive Vice-President
and Chief Corporate Officer
and Secretary