SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_______________________________
FORM
40-F
(Check
one)
¨
Registration statement pursuant to Section 12 of the Securities Exchange Act
of
1934
or
þ
Annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934
For
the
fiscal year ended September 30, 2006
Commission
file number 1-14858
GROUPE
CGI INC./CGI GROUP INC.
(Exact
name of Registrant as Specified in Its Charter)
CGI
Group
Inc.
(Translation
of Registrant’s Name Into English)
Québec,
Canada
(Province
or Other Jurisdiction of Incorporation or Organization)
7374
(Primary
Standard Industrial Classification Code Number)
[Not
Applicable]
(I.R.S.
Employer Identification Number)
1130
Sherbrooke Street West
7th
Floor
Montréal,
Québec
Canada
H3A 2M8
(514)
841-3200
(Address
and Telephone Number of Registrant’s Principal Executive
Offices)
CGI
Technologies and Solutions Inc.
4050
Legato Road
Fairfax,
VA 22033
(703)
267-8679
(Name,
Address and Telephone Number of Agent For Service in the United
States)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
|
Title
Of Each Class
|
Name
Of Each Exchange On Which Registered
|
|
Class
A Subordinate Voting Shares
|
New
York Stock Exchange
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
None
(Title
of
Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
For
annual reports, indicate by check mark the information filed with this
form:
þ
Annual
Information Form þ
Audited
Annual Financial Statements
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report:
297,484,885 Class A Subordinate Shares, 34,208,159 Class B Shares
Indicate
by check mark whether the registrant by filing 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 (the “Exchange Act”).
If “Yes” is marked, indicate the file number assigned to the registrant in
connection with such rule. Yes____ 82-____ No
X
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past
90
days. Yes
X No____
Undertaking
Registrant
undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly,
when
requested to do so by the Commission staff, information relating to: the
securities registered pursuant to Form 40-F; the securities in relation to
which
the obligation to file an annual report on Form 40-F arises; or transactions
in
said securities.
Controls
and Procedures
The
Registrant has established a system of controls and other procedures designed
to
ensure that information required to be disclosed in its periodic reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms. These disclosure controls and procedures
have been evaluated under the direction of the Registrant’s Chief Executive
Officer and Chief Financial Officer as of the end of the Registrant’s most
recently completed fiscal year on September 30, 2006. Based on such evaluations,
the Chief Executive Officer and Chief Financial Officer have concluded that
the
disclosure controls and procedures are effective. No change was made in the
Registrant’s internal controls over financial reporting during the fiscal year
ended September 30, 2006 that has materially affected, or is reasonably
likely to materially affect, the Registrant’s internal control over financial
reporting. No significant changes were made in the Registrant’s internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Audit
Committee
The
Audit
and Risk Management Committee of the Board of Directors is composed entirely
of
unrelated directors who meet the independence and experience requirements of
the
New York Stock Exchange, the Toronto Stock Exchange, the U.S. Securities and
Exchange Commission rules and Multi-Lateral Instrument 52-110 adopted by the
Canadian Securities Administrators which took effect on March 30,
2004.
The
Audit
and Risk Management Committee is composed of Mrs. Eileen Mercier, Chair of
the
committee, and Messrs. Robert Chevrier, C. Wesley M. Scott and Gerald T. Squire.
The
Registrant’s Board of Directors has determined that the following members of the
Audit and Risk Management Committee of the Board of Directors are “audit
committee financial experts” within the meaning of paragraph (8) of General
Instruction B to Form 40-F:
|
-
|
Robert
Chevrier,
|
|
|
-
|
Eileen
A. Mercier and
|
|
|
-
|
C.
Wesley M. Scott
|
Principal
Accountant Fees and Services
In
order
to satisfy itself as to the independence of the external auditors, the Audit
and
Risk Management Committee has adopted an auditor independence policy which
covers (a) the services that may and may not be performed by the external
auditors, (b) the governance procedures to be followed prior to retaining
services from the external auditors, and (c) the responsibilities of the
key participants. The following is a summary of the material provisions of
the
policy.
Performance
of Services
Services
are either acceptable services or prohibited services.
The
acceptable services are (a) audit and review of financial statements, (b)
prospectus work, (c) audit of pension plans, (d) special audits on control
procedures, (e) tax planning services on mergers and acquisitions activities,
(f) due diligence relating to mergers and acquisitions, (g) tax services related
to transfer pricing, (h) sales tax planning, (i) research and interpretation
related to taxation, (j) research
-2-
relating
to accounting issues, (k) proposals and related services for financial
structures and large tax planning projects, (l) preparation of tax returns
and
(m) all other services that are not prohibited services.
The
prohibited services are (a) bookkeeping services, (b) design and implementation
of financial information systems, (c) appraisal or valuation services or
fairness opinions, (d) actuarial services, (e) internal audit services, (f)
management functions, (g) human resources functions, (h) broker-dealer services,
(i) legal services, (j) services based on contingency fees and (k) expert
services.
Governance
Procedures
The
following control procedures are applicable when considering whether to retain
the external auditors’ services:
For
all
services falling within the permitted services category, whether they are audit
or non-audit services, a request for approval must be submitted to the Audit
and
Risk Management Committee through the Executive Vice-President and Chief
Financial Officer prior to engaging the auditors to perform the
services.
In
the
interests of efficiency, certain permitted services are pre-approved quarterly
by the Audit and Risk Management Committee and thereafter only require approval
by the Executive Vice-President and Chief Financial Officer as
follows:
|
·
|
The
Audit and Risk Management Committee can pre-approve envelopes for
certain
services to pre-determined dollar limits on a quarterly
basis;
|
|
|
·
|
Once
pre-approved by the Audit and Risk Management Committee, the Executive
Vice-President and Chief Financial Officer may approve the services
prior
to the engagement;
|
|
|
·
|
For
services not captured within the pre-approved envelopes and for costs
in
excess of the pre-approved amounts, separate requests for approval
must be
submitted to the Audit and Risk Management Committee;
|
|
|
·
|
At
each meeting of the Audit and Risk Management Committee a consolidated
summary of all fees by service type is presented including a break
down of
fees incurred within each of the pre-approved
envelopes.
|
Fees
Paid to External Auditors
During
the years ended September 30, 2006 and September 30, 2005, the Registrant
paid the following fees to its external auditors:
|
Service
retained
|
Fees
paid
|
|
|
2006
|
2005
|
|
|
Audit
services
|
$4,255,723
|
$2,948,591
|
|
Audit
related services(a)
|
$1,885,899
|
$1,575,009
|
|
Tax
fees(b)
|
$1,607,561
|
$4,187,281
|
|
All
other fees
|
Nil
|
Nil
|
(a)
the
audit related fees paid to the external auditors for the years ended September
30, 2006 and September 30, 2005 were in relation to special audits on control
procedures, due diligence relating to mergers and acquisitions and research
relating to accounting issues.
(b)
the
tax fees paid to the external auditors for the years ended September 30, 2006
and September 30, 2005 were in relation to tax planning services on mergers
and
acquisitions and major reorganization activities, research and interpretation
related to taxation, support activities related to tax audit and preparation
of
personal tax returns.
-3-
Code
of Ethics
In
addition to its Code
of Ethics and Business Conduct that
applies to all the Registrant’s employees, officers and directors, the
Registrant has adopted an Executive
Code of Conduct that
applies specifically to the Registrant’s principal executive officer, principal
financial officer, principal accounting officer or controller, or other persons
performing similar functions (collectively, the "Officers"). The Executive
Code Conduct
is
designed to deter wrongdoing and to promote:
|
-
|
Honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships;
|
|
|
-
|
Full,
fair, accurate, timely, and understandable disclosure in reports
and
documents that the Registrant files with, or submits to, the Securities
and Exchange Commission and in other public communications made by
the
Registrant;
|
|
|
-
|
Compliance
with applicable governmental laws, rules and
regulations;
|
|
|
-
|
The
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the code; and
|
|
|
-
|
Accountability
for adherence to the code.
|
The
Registrant’s Executive
Code of Conduct and
of
its Code
of Ethics and Business Conduct have
been
posted on the Registrant’s website at http://www.cgi.com.
The
Registrant has not amended its Executive
Code of Conduct in
any
substantive respect since its adoption, nor have any waivers been granted in
respect of any of its provisions.
Off-balance
sheet arrangements
The
Registrant does not enter into off-balance sheet financing as a matter of
practice except for the use of operating leases for office space, computer
equipment and vehicles, none of which are off-balance sheet arrangements within
the meaning of paragraph (11) of General Instruction B to Form 40-F. In
accordance with Canadian GAAP, neither the lease liability nor the underlying
asset is carried on the balance sheet as the terms of the leases do not meet
the
threshold for capitalization.
As
disclosed in Note 24 to the Registrant’s Consolidated Financial Statements, in
the normal course of business, the Registrant enters into agreements that may
provide for indemnification and guarantees to counterparties in transactions
such as consulting and outsourcing services, business divestitures, lease
agreements and financial obligations. These indemnification undertakings and
guarantees may require the Company to compensate counterparties for costs and
losses incurred as a result of various events, including breaches of
representations and warranties, intellectual property right infringement, claims
that may arise while providing services or as a result of litigation that may
be
suffered by counterparties. The nature of most indemnification undertakings
prevent the Registrant from making a reasonable estimate of the maximum
potential amount the Registrant could be required to pay counterparties, as
the
agreements do not specify a maximum amount and the amounts are dependent upon
the outcome of future contingent events, the nature and likelihood of which
cannot be determined at this time. The Registrant does not expect that any
sum
it may have to pay in connection with these guarantees will have a materially
adverse effect on its Consolidated Financial Statements.
-4-
Tabular
Presentation of Contractual Obligations
As
of
September 30, 2006, the Registrant’s known contractual obligations were as
follows:
|
Contractual
Obligations
(in
‘000 of Canadian dollars)
|
Payment
due by period
|
||||
|
Total
|
Less
than
1
year
|
2nd
and 3rd
years
|
4th
and 5th
years
|
After
5
years
|
|
|
Long-Term
Debt Obligations
|
812,478
|
7,626
|
98,351
|
684,231
|
22,270
|
|
Capital
(Finance) Lease Obligations
|
781
|
616
|
165
|
-
|
-
|
|
Operating
Lease Obligations(1)
|
1,194,802
|
217,644
|
299,246
|
186,971
|
490,941
|
|
Purchase
Obligations(1)
|
209,652
|
72,213
|
81,482
|
46,511
|
9,446
|
|
Total
|
2,217,713
|
298,099
|
479,244
|
917,713
|
522,657
|
(1) Included
in these obligations: $60.1 million of ofӿce space leases and $6.7 million of
long-term service agreements which are accounted for within accounts payable
and
accrued liabilities, accrued integration charges and other long-term liabilities
and long-term debt.
Information
to be Filed on This Form
The
following materials are filed as a part of this Annual Report:
|
1.
|
Annual
Information Form for the fiscal year ended September 30, 2006
|
|
2.
|
Audited
Annual Financial Statements for the fiscal year ended September 30,
2006
|
|
3.
|
Management’s
Discussion and Analysis of Financial Position and Results of
Operations
|
The
following documents are filed as exhibits to this Annual Report:
|
23.1
|
Consent
of Deloitte & Touche LLP
|
|
99.1
|
Certification
of the Registrant’s Chief Executive Officer required pursuant to Rule
13a-14(a).
|
|
99.2
|
Certification
of the Registrant’s Chief Financial Officer required pursuant to Rule
13a-14(a).
|
|
99.3
|
Certification
of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
99.4
|
Certification
of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
-5-
ANNUAL
INFORMATION FORM
For
the
fiscal year ended
September 30,
2006
December
12, 2006
TABLE
OF
CONTENTS
|
CORPORATE
GOVERNANCE
|
1
|
|
Board
and Standing Committee Charters and Codes of Ethics
|
1
|
|
Audit
Committee Information
|
1
|
|
INCORPORATION
AND DESCRIPTION OF CAPITAL STOCK
|
1
|
|
Corporate
Structure
|
1
|
|
Subsidiaries
|
1
|
|
Capital
Structure
|
2
|
|
Stock
Splits
|
2
|
|
Market
for Securities, Trading Price and Volume
|
2
|
|
GENERAL
DEVELOPMENT AND DESCRIPTION OF THE BUSINESS
|
3
|
|
Mission
and Profile
|
3
|
|
CGI's
Business Approach
|
3
|
|
Related
Party Transactions
|
3
|
|
Commercial
Alliances
|
4
|
|
DESCRIPTION
OF CGI'S BUSINESS
|
7
|
|
Business
Structure
|
7
|
|
Principal
Offices
|
8
|
|
Main
Services Offered by CGI
|
8
|
|
Research
|
8
|
|
Human
and Material Resources
|
9
|
|
Client
Base
|
9
|
|
The
North American Information Technology Services Industry
|
9
|
|
Industry
Trends and Outlook
|
9
|
|
CGI's
Growth and Positioning Strategy
|
10
|
|
Quality
Processes
|
11
|
|
RISK
FACTORS
|
11
|
|
DIRECTORS
AND OFFICERS
|
12
|
|
Directors
|
12
|
|
Officers
|
12
|
|
Ownership
of Securities on the Part of Directors and Officers
|
14
|
|
INTEREST
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
|
14
|
|
TRANSFER
AGENT AND REGISTRAR
|
14
|
|
MATERIAL
CONTRACTS
|
14
|
|
ADDITIONAL
INFORMATION
|
14
|
|
APPENDIX
A
|
16
|
|
Fundamental
Texts
|
16
|
This
Annual
Information Form is
dated
December 12, 2006 and, unless specifically stated otherwise, all information
disclosed in this form is provided as at September 30, 2006, the end of
CGI’s
most recently completed fiscal year. All dollar amounts herein are in Canadian
dollars, unless otherwise stated.
CORPORATE
GOVERNANCE
Board
and Standing Committee Charters and Codes of Ethics
CGI’s
Code of Ethics and Business Conduct, its Executive Code of Conduct, the
charter
of the Board of Directors and the charters of the standing committees of
the
Board of Directors, including the charter of the Audit and Risk Management
Committee, are set out in CGI’s Fundamental
Texts
which
are annexed as Appendix A to this Annual Information Form.
Audit
Committee Information
The
Company incorporates by reference the disclosure contained under the heading
“Expertise and financial and operational literacy” on page 34 and the
disclosure under the heading “Report of the Audit and Risk Management Committee”
on page 40 and following of CGI’s Management
Proxy Circular dated
December 12, 2006 which was filed with the Canadian securities regulatory
authorities and which is available at www.sedar.com and on CGI’s web site at
www.cgi.com. A copy of the Management
Proxy Circular will
be
provided promptly to shareholders upon request.
INCORPORATION
AND DESCRIPTION OF CAPITAL STOCK
Corporate
Structure
CGI Group Inc.
(the
“Company” or “CGI”) was incorporated on September 29, 1981 under, and is
governed by, the provisions of Part IA of the Companies
Act
(Quebec).
The
Company continued the activities of Conseillers
en gestion et informatique C.G.I. inc.,
which
was originally founded in 1976. The executive and registered office of
the
Company is situated at 1130 Sherbrooke Street West, 7th floor, Montreal,
Quebec,
Canada, H3A 2M8. CGI became a public company on December 17, 1986, upon
completing an initial public offering of 800,000 Class A subordinate voting
shares.
Subsidiaries
The
following is a list of the subsidiaries of CGI having (i) total assets
representing more than 10% of the consolidated assets of CGI as at
September 30, 2006, or (ii) sales and operating revenues representing
more than 10% of the consolidated sales and operating revenues of CGI for
the
year ended September 30, 2006.
|
Name
|
Laws
of
Incorporation
|
Percentage
of
Ownership
|
|
CGI
Information Systems and Management Consultants Inc.
|
Canada
|
100%
|
|
Conseillers
en gestion et informatique C.G.I. inc.
|
Québec
|
100%
|
|
CGI
Technologies and Solutions Inc.
(previously
named CGI-AMS Inc.)
|
Delaware
|
100%
|
-1-
Capital
Structure
The
Company’s authorized share capital consists of an unlimited number of First
Preferred Shares (“First Preferred Shares”), issuable in series, an unlimited
number of Second Preferred Shares (“Second Preferred Shares”), issuable in
series, an unlimited number of Class A subordinate shares (“Class A
subordinate voting shares”) and an unlimited number of Class B shares
(multiple voting) (“Class B shares”), all without par value, of which, as
of December 12, 2006, 296,240,025 Class A subordinate voting shares,
34,208,159 Class B shares
were issued and outstanding and none of the First Preferred Shares or
Second
Preferred Shares were issued and outstanding. As of December 12, 2006,
46.4% and 53.6% of the aggregate voting rights were attached to the outstanding
Class A subordinate voting shares and Class B shares
respectively.
The
Company incorporates by reference the disclosure contained under the headings
“Class A Subordinate Voting Shares and Class B Shares”, on page 3
and “First Preferred Shares” and “Second Preferred Shares” on page 5 of
CGI’s Management
Proxy Circular
dated
December 12, 2006 which was filed with the Canadian securities regulatory
authorities and which is available at www.sedar.com and on CGI’s web site at
www.cgi.com. A copy of the Management
Proxy Circular
will be
provided promptly to shareholders upon request.
Stock
Splits
As
of
December 12, 2006, the Company had proceeded with four subdivisions of its
issued and outstanding Class A subordinate voting shares as
follows:
|
·
|
August
12, 1997 on a two for one basis;
|
|
|
·
|
December
15, 1997 on a two for one basis;
|
|
|
·
|
May
21, 1998 on a two for one basis; and
|
|
|
·
|
January
7, 2000 on a two for one basis.
|
Market
for Securities, Trading Price and Volume
CGI’s
Class A subordinate voting shares are listed for trading on the
Toronto
Stock Exchange under
the
symbol GIB. A and on the New
York Stock Exchange,
under
the symbol GIB. A total of 290,744,071 Class A subordinate voting shares
were traded on the Toronto
Stock Exchange during
the year ended September 30, 2006 as follows:
|
Month
|
High(a)
($)
|
Low(a)
($)
|
Volume
|
|
October
2005
|
8.90
|
8.20
|
9,989,782
|
|
November
2005
|
8.73
|
8.36
|
15,600,220
|
|
December
2005
|
9.36
|
8.32
|
28,171,631
|
|
January
2006
|
9.94
|
8.79
|
33,480,809
|
|
February
2006
|
9.49
|
8.29
|
23,389,933
|
|
March
2006
|
8.95
|
7.50
|
31,898,807
|
|
April
2006
|
8.55
|
7.72
|
37,949,780
|
|
May
2006
|
8.28
|
7.24
|
26,210,597
|
|
June
2006
|
7.39
|
6.70
|
15,209,235
|
|
July
2006
|
7.16
|
6.50
|
16,703,446
|
|
August
2006
|
7.33
|
6.50
|
18,646,579
|
|
September
2006
|
7.49
|
6.92
|
33,493,252
|
|
(a)
|
The
high and low prices reflect the highest and lowest prices at
which a board
lot trade was executed in a trading session during the
month.
|
-2-
Normal
Course Issuer Bid and Share Repurchases
On
January 31, 2006, CGI announced that it was renewing its normal course
issuer
bid to repurchase up to 10% of the public float of its issued and outstanding
Class A subordinate voting shares. In addition to the share repurchases
carried out under the normal course issuer bid, on January 12, 2006,
the Company
repurchased for cancellation from BCE Inc. (“BCE”) 100 million of its
Class A subordinate voting shares. See “Significant developments of the
most recent three fiscal years - Fiscal Year ended September 30, 2006 -
Significant Developments” below.
GENERAL
DEVELOPMENT AND DESCRIPTION OF THE BUSINESS
Mission
and Profile
CGI’s
vision is to be a world-class information technology (“IT”) and business process
outsourcing (“BPO”) leader helping our clients win and grow. The mission of CGI
is to help its clients with professional services of outstanding quality,
competence and objectivity, delivering the best solutions to fully satisfy
client objectives in IT, business processes and management. In all we do,
we
foster a culture of partnership, intrapreneurship and integrity, building
a
world-class IT and BPO company.
At
CGI we
have always understood, and we have always valued, the link between sound,
ethical business practices and the creation of shareholder value. We believe
in
balancing the interests of our key stakeholders: our clients, our members
and
our shareholders in order to be recognized by our clients as their partner
of
choice, for the depth of our experience in their industry sectors; to be
recognized by our members and industry peers as the best employer in the
industry; and by our shareholders as a well-managed company providing superior
returns.
When
our
employees (whom we call our members) know that their contribution is valued
and
when their work environment is both challenging and rewarding, they deliver
services to our clients that are consistently timely and of the highest
quality.
Our clients reap the considerable benefits of our members’ exceptional
performance, and they in turn reward us with the trust and loyalty that
help us
to build the long-term partnerships on which CGI is built.
These
fundamental business principles that underlie all of the Company’s business
activities are contained in a collection of documents and policies that
collectively are called CGI’s Fundamental
Texts which
contain the charter of the Company’s Board of Directors and those of its
standing committees, reflect applicable corporate governance regulations
and
guidelines and take into account evolving best practices in Canada and
the US.
These documents are to be read in the context of CGI’s Mission,
Vision, Dream and Values
which
are explained in the preamble to the Fundamental
Texts.
The
Fundamental
Texts are
annexed below as Appendix A and are posted on the Company’s web site at
www.cgi.com.
CGI
now
ranks among the largest independent IT and business process services firms
in
North America. CGI helps its clients in the private and public sectors
meet
their strategic goals by providing them with an end-to-end offering of
high-level IT services and business solutions from offices located around
the
world. CGI’s unique mix of services is comprised of management of IT and
business functions, systems development and integration, and consulting.
CGI’s
Business Approach
As
of
December 12, 2006, CGI focused on serving markets in five sectors. Over
time the Company has been able to develop close, long term relationships
with
its clients and to become their IT partner of choice. CGI professionals
have a
thorough understanding of their clients’ business needs.
CGI
chooses to focus on industries that make a strategic use of IT to enhance
their
competitive position. CGI therefore provides end-to-end IT services in
the
following five economic sectors: financial services, manufacturing, retail
and
distribution, governments and healthcare, as well as telecommunications
and
utilities.
-3-
Related
Party Transactions
BCE
Inc. and Bell
Canada
In
December 2005 CGI entered into agreements with BCE pursuant to which
it
repurchased 100 million of its Class A subordinate voting shares and
extended the outsourcing agreement with the BCE group of companies (See
“Significant developments of the most recent three fiscal years - Fiscal
Year
ended September 30, 2006 - Significant Developments” below). Previously, in July
of 2004 CGI, Bell
Canada and
Connexim
Inc.,
a
subsidiary
of Bell
Canada,
entered
into an agreement pursuant to which the Company’s network services are
outsourced to Connexim
Inc.
The
outsourcing agreement provides the Company with economies of scale as
well as
best practices in network management. While Bell
Canada
and
Connexim
Inc.
were
affiliates of BCE and therefore related parties when the agreement was
entered
into, following the repurchase of Class A subordinate voting shares from
BCE, they are no longer related parties.
Innovapost
Inc.
In
the
normal course of business, CGI is also party to contracts with Innovapost,
a
joint venture, pursuant to which CGI is its preferred IT supplier. CGI
exercises
significant influence over Innovapost’s operating, financing and investing
activities through its 49% ownership interest.
Lease
of an Aircraft
In
December 2005, the Company leased a private aircraft for use on company
business
pursuant to a transaction in which Serge Godin, CGI’s Founder and Executive
Chairman of the Board, had an indirect interest. See “Interest of Management and
Others in Material Transactions” below.
Commercial
Alliances
CGI
currently has commercial alliance agreements with various business partners.
These non-exclusive commercial agreements with hardware and software providers
allow the Company to provide its clients with best of breed technology,
often on
the best commercial terms available. The following is a chronological list
of
CGI’s primary commercial alliances:
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·
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in
1996, CGI entered into a procurement relationship with IBM
Canada;
|
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|
in
1998, CGI signed commercial agreements with ERP program developers
SAP,
PeopleSoft
and
Oracle;
|
|
·
|
in
September 1999, CGI entered into a non-exclusive alliance with
Microsoft
that led to Partner Agreements;
|
|
·
|
in
October 1999, CGI signed a non-exclusive direct commercial systems
integrator agreement with Sun
Microsystems;
|
|
·
|
in
December 2000, CGI signed a non-exclusive systems integration
agreement
with Siebel;
and
|
|
·
|
in
July 2002, CGI signed a non-exclusive systems integration agreement
with
BEA
Systems.
|
Significant
developments of the most recent three fiscal years
Fiscal
Year ended September 30, 2006
Significant
Developments
In
fiscal
2006 CGI signed approximately $4.0 billion in new contracts, extensions
and
renewals. The most significant transaction was a contract extension worth
$1.1
billion in value over a term of ten years in which CGI extended the outsourcing
agreement with the BCE group of companies on January 12, 2006, providing
the
Company with an important source of recurring revenues. The remaining new
contracts, extensions and renewals span the Company’s targeted vertical markets.
Overall, while fiscal 2006 was not without its successes, it was, nonetheless,
a
year marked by two over-arching challenges. First, lower than expected
revenue
and work volumes from our largest client, BCE, which impacted our revenue
by
-4-
$114.7
million in fiscal 2006. Second, the strengthening Canadian dollar had a
negative
impact of $106.4 million on our fiscal 2006 revenue compared with fiscal
2005.
Program
to Strengthen CGI’s Competitive Position
On
March
29, 2006 CGI announced that it was taking measures to reduce its overall
cost
structure and to accelerate the expansion of its Global
Delivery Model.
The
measures were partly in response to the lower than expected revenue from
BCE. In
line with this plan, approximately 1,000 positions were eliminated during
fiscal
2006, primarily located in Montreal and Toronto, of which half were related
to
BCE. The remaining headcount
reduction stemmed from other adjustments to CGI’s cost base and included
reductions in global and corporate functions. CGI’s strategic intent to increase
the scale of CGI’s Global
Delivery Model
created
new positions in our centres of excellence in Atlantic Canada, southwest
Virginia, and India which partially offset the headcount reductions.
This
exercise allowed the Company to further reduce its overhead and increase
the
overall utilization rate of its workforce. A pre-tax provision of $67.3
million
was taken in fiscal 2006, comprised of $51.5 million for severance and
$15.8
million for consolidation and closure of facilities. The remaining estimated
provision of $22.7 million will be taken over the remainder of calendar
2006.
The Company continues to expect a one-year payback.
Adjustments
to Senior Management
Serge
Godin, previously Chairman of the Board and Chief Executive Officer (“CEO”) took
the position of Executive Chairman of CGI in January, 2006, and the Board
appointed Michael E. Roach, previously President and Chief Operating Officer,
as
President and Chief Executive Officer of CGI, reporting to the Executive
Chairman.
In
July
of 2006, André Imbeau, previously Executive Vice-President and Chief Financial
Officer (“CFO”), was appointed Executive Vice-Chairman of CGI. In September of
2006, Mr. Imbeau was also appointed Corporate Secretary. In his new role,
Mr.
Imbeau works closely with Serge Godin and focuses on strategic initiatives
leading to value creation, such as major transactions and financing as
well as
key client relationships. Concurrently, David Anderson, previously CGI’s Senior
Vice-President and Corporate Controller was appointed to the role of Executive
Vice-President and Chief Financial Officer. In this capacity, Mr. Anderson
also
joined the CGI Executive Committee, which consists of Serge Godin, André Imbeau,
and Michael E. Roach.
BCE
Share Buyback and Normal Course Issuer Bid
On
December 16, 2005, the Company reached an agreement with BCE to purchase
for
cancellation 100 million of its Class A subordinate voting shares held
by BCE at
a price of $8.59 per share. The transaction was completed on January 12,
2006
and the shares were cancelled. The purchase price was equal to the
volume-weighted average price of the Class A subordinate voting shares
on the
Toronto Stock Exchange for the 20 trading days preceding December 16, 2005.
Subsequent to the repurchase of shares, the shareholders agreement with
BCE was
terminated, and its representation on the CGI Board of Directors was
relinquished. As at September 30, 2006, BCE’s share ownership represented
approximately 2% of CGI’s issued and outstanding Class A subordinate voting
shares and Class B shares, compared to 30% at the end of fiscal 2005. CGI
financed the acquisition price of $859.2 million plus associated costs
of $6.8
million through cash on hand and the utilization of its credit facilities.
Following this transaction, through an agreement with a bank syndicate,
the
Company’s current bank facilities were increased by $200 million to stand at $1
billion. The agreement is currently comprised of a Canadian tranche with
a limit
of $850 million and a U.S. tranche equivalent to $150 million.
On
January 31, 2006, the Company’s Board of Directors authorized the renewal of its
Normal
Course Issuer Bid
and the
purchase of up to 10% of the public float of the Company’s Class A subordinate
voting shares during the ensuing year and the Toronto Stock Exchange
subsequently approved the Company’s request for approval. The Normal
Course Issuer Bid
enables
CGI to purchase on the open market through the Toronto Stock Exchange up
to
29,288,443 Class A subordinate voting shares for cancellation. The Class
A
subordinate voting shares may be purchased under the Issuer Bid commencing
February 3, 2006 and ending no later than February 2, 2007, or on such
earlier
date when
-5-
the
Company completes its purchases or elects to terminate the bid. As of December
12, 2006, the Company had purchased 9,041,200 Class A subordinate
voting shares under the Issuer Bid for an average market price plus commission
of $7.1736, representing an aggregate consideration of $64.7 million.
Exercise
of Share Purchase Warrants
On
March
22, 2006, La Fédération des caisses Desjardins du Québec (“Desjardins”)
exercised a warrant for 4,000,000 Class A subordinate voting shares at
a price
of $6.55 each. This warrant was originally issued by CGI in connection
with a
10-year outsourcing agreement signed with Desjardins in 2001. On April
6,
2006, BCE
exercised warrants for 3,021,096 Class A subordinate voting shares and
110,140
Class B shares at a price of $6.55 each. Similarly, on April 28, 2006,
the Class
B shareholders of CGI exercised warrants for 435,991 Class B shares at
a price
of $6.55 each. The warrants exercised by BCE and the Class B shareholders
had
been issued to them pursuant to their pre-emptive rights at the time
of the
issuance of the Desjardins warrants. On June 13, 2006, 1,118,210 warrants
held by another third party, which had not been exercised, expired. No
further
warrants are outstanding as of December 12, 2006.
Fiscal
Year ended September 30, 2005
Significant
Acquisitions
On
December 1, 2004, the Company purchased for $47,196,000 the remaining
outstanding shares of AGTI Services Conseils Inc. (“AGTI”) a Montreal-based
information technology consulting enterprise specializing in business and
IT
consulting, project and change management and productivity improvement.
The
Company previously held 49% of the outstanding shares of AGTI.
Other
Significant Developments
On
February 1, 2005 the Board of Directors authorized the purchase of up to
10% of
the public float of the Company’s Class A subordinate voting shares through a
Normal Course Issuer Bid (the “Issuer Bid”). The Issuer Bid enabled the Company
to purchase on the open market through the facilities of the Toronto
Stock Exchange
up to
27,834,417 Class A subordinate voting shares for cancellation. As at January
28,
2005, there were 410,902,202 Class A subordinate voting shares of the Company
outstanding of which approximately 68% were widely held. The Company was
authorized to purchase Class A subordinate voting shares under the Issuer
Bid
commencing on February 3, 2005 and was authorized to continue to do so
until
February 2, 2006. As of December 16, 2005, the Company had purchased
14,896,200 Class A subordinate voting shares under the Issuer Bid for an
average
market price plus commission of $7.82, representing an aggregate consideration
of $116.4 million.
On
December 20, 2004 CGI announced that it had concluded a five-year unsecured
revolving credit facility, which replaced its previous syndicated bank
facilities. The new credit facilities of an aggregate amount of $800 million
were comprised of a US tranche worth the equivalent of $300 million and
a
Canadian tranche worth $500 million. The credit facilities were concluded
with a
banking syndicate in which the National
Bank of Canada acted
as
administrative agent and lead arranger; JPMorgan
Chase Bank and
Caisse
centrale Desjardins acted
as
syndication agents and lead arrangers; The Toronto
Dominion Bank,
Bank
of America,
KeyBank
and
Caisse
de dépôt et placement du Québec acted
as
documentation agents; ABN
AMRO,
Bank
of Montreal,
Canadian
Imperial Bank of Commerce,
the
Royal
Bank of Canada,
United
Overseas Bank and
Société
Générale acted
as
managing agents and Citibank
acted
as
a participant.
-6-
Fiscal
Year ended September 30, 2004
Significant
Acquisitions
In
fiscal 2004 CGI acquired American Management Systems, Incorporated
(“AMS”),
a premier business and IT consulting firm to the government, healthcare,
financial services and communications industries. CGI acquired AMS’ business
with associated revenue of more than $900 million for a net cash consideration
of $584 million.
Other
Significant Developments
On
October 21, 2003, Nexxlink
Technologies Inc. (“Nexxlink”)
purchased various non-core CGI assets generating approximately $40 million
in
annual revenue for a price of $21 million payable to CGI in cash, a convertible
note and shares of Nexxlink. This transaction provided CGI initially
with a 32%
equity interest in Nexxlink. On December 9, 2004, Bell
Canada announced
that it was making an offer to acquire all of the outstanding shares
of Nexxlink
at a price of $6.05 per share for an equity value of approximately $67
million.
CGI agreed with Bell
Canada to
support Bell
Canada’s
offer
and therefore tendered the Nexxlink shares that it or
its
wholly-owned subsidiaries owned in response to Bell
Canada’s
bid.
The bid closed successfully on January 25, 2005 with the result that
the Company
disposed on that date of all of its interest in Nexxlink.
On
January 30, 2004, we announced that CGI had completed a US$192 million
private
debt placement financing with US institutional investors. The private placement
was comprised of three tranches of guaranteed senior unsecured notes, with
a
weighted average maturity of 6.4 years and a weighted average fixed coupon
of
4.97%. The proceeds were used to reimburse the drawn-down portion of the
Company’s existing credit facilities, as well as for general corporate
purposes.
On
March
19, 2004, we completed (i) a firm underwritten private placement in Canada
and
the US of approximately 33.1 million subscription receipts at a price of
$8.00
per subscription receipt for gross proceeds of $264.6 million and (ii)
a private
placement of approximately 8.3 million subscription receipts with BCE
at
a
price of $8.00 per subscription receipt for proceeds of approximately $66.1
million, on the same terms and conditions as the firm underwritten private
placement offering. The private placements were undertaken in connection
with
the acquisition of AMS. On May 3, 2004, upon the satisfaction of certain
conditions related to the acquisition of AMS, each subscription receipt
was
automatically exchanged for one Class A subordinate voting share without
payment
of additional consideration.
DESCRIPTION
OF CGI’S BUSINESS
Business
Structure
CGI’s
business operations are structured in two key lines of business (“LOB”): The IT
Services LOB and the Business Process Services (“BPS”) LOB. CGI’s remaining
business activities are in the nature of corporate services that are carried
on
primarily by CGI’s head office staff.
Corporate
services - Head Office
(Montreal)
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Administrative
and financial functions
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Communications
and investor relations
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Corporate
and strategic development
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·
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Corporate
affairs
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Human
resources
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Internal
Audit
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Legal
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Marketing
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Mergers
& Acquisitions
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Planning
and corporate development
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-7-
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Quality
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Research
& Development
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Professional
development programs
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Support
to large outsourcing projects
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Knowledge
management
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Project
performance
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IT
Services LOB
The
IT
services LOB provides a full-range of IT services, including systems
integration, consulting and outsourcing to clients worldwide. The professionals
and facilities in India and Canada also serve the United States and
foreign-based clients as an integral part of our off-shore and nearshore
delivery model.
BPS
LOB
The
BPS
LOB provides a full spectrum of business process outsourcing services
to its
client base. Its services include business processing for the financial
services
sector, as well as payroll services and document management
services.
Principal Offices
CGI
is
one of the largest information technology and business process services
firms.
CGI and its affiliated companies employ approximately 24,500 professionals.
CGI
provides end-to-end IT and business process services to clients worldwide
from
offices in Canada, the United States of America (“US”), Europe, Asia Pacific as
well as from centers of excellence in North America, Europe and India.
Its main
locations are listed on the inside back cover of volume 1 of CGI’s
Annual
Report for
fiscal 2006 entitled We’re
in your community
which
information is incorporated by reference. The 2006 Annual
Report was
filed
with the Canadian securities regulatory authorities and is available at
www.sedar.com and on CGI’s web site at www.cgi.com. A copy of volumes 1
and 2 of the 2006 Annual
Report will
be
provided promptly to shareholders upon request.
Main
Services Offered by CGI
CGI
provides the full range of IT services including the management of IT and
business processes on an outsourced basis, as well as systems integration
and
consulting. The Company’s primary focus is large scale systems integration and
outsourcing contracts. CGI provides the consulting, implementation and
operations services that companies need to turn their corporate strategy
into
reality.
Outsourced
Management of IT and Business Processes
Outsourcing
is one of the fastest growing segments of the IT industry. CGI has been
active
in outsourcing since 1986, which makes it a pioneer in this segment. Through
a
series of acquisitions completed since 1996, including the acquisition
on July
1, 1998 of Bell
Sygma and
Bell
Sygma International,
the
Company is now the largest independent provider of IT and BPO services
in
Canada, and continues to strengthen its position in the US outsourcing
market.
Outsourcing
contracts are signed for periods ranging from five to ten years and are
generally renewable. They are paid for according to a formula of monthly
payments.
As
part
of outsourcing contracts, clients delegate entire or partial responsibility
for
their IT operations or a business process in order to achieve significant
savings and access the best IT, while retaining control over strategic
functions. These contracts provide revenue visibility and support performance
stability.
Services
provided as part of an outsourcing contract may include facilities management
(data centres, call centres, network and desktop services), application
maintenance and support, development and integration of new projects and
applications, as well as BPS including functions such as document management
and
payroll services or insurance policy administration.
-8-
Consulting
and Systems Integration
When
providing consulting services, CGI acts as a trusted advisor to its clients,
offering a full range of IT and management consulting services, including
IT
strategic planning, business process engineering and systems architecture.
In
addition to their technical expertise, CGI professionals understand the
business
issues in a particular industry or sector.
In
terms
of systems integration, CGI provides implementation services covering
the full
scope of today’s enterprise IT environment, integrating different technologies
to create IT systems that respond to clients’ strategic needs. In addition to
its expertise at working with leading technologies and software applications,
CGI provides customized application development services leveraging its
ISO and
SEI CMM certified methodologies and the option of economies from offshore
development.
Research
Information
technologies are abundant, complex and rapidly changing. In this context,
CGI’s
success depends on its ability to remain at the forefront of its field,
as well
as to adapt its service approach to suit each client’s specific needs. This
situation requires the ongoing development of cutting edge expertise,
tools and
methodology.
The
combined gross research and development spending incurred in 2006 was $68.6
million compared with $78.2 million in 2005 and $64.5 million in 2004.
The
decrease in research and development spending in 2006 is mainly related
to the
acceleration of CGI’s Global
Delivery Model
which
allows the Company to carry out its research and development at a lower
cost.
Human
and Material Resources
As
of
December 12, 2006, CGI had approximately 24,500 employees. In order to
encourage
the high degree of commitment necessary to ensure the quality and continuity
of
client service, CGI has had an employee share purchase plan in place for
several
years. From the beginning, the Company has had a profit sharing program
which,
from 1990 onwards, has been based on the performance of its business units.
These measures, together with the Company’s ongoing training programs, are based
on the concepts of intrapreneurship and total quality that form the core
of
CGI’s corporate culture.
As
for
facilities, the vast majority of CGI’s offices are located in rented premises.
As of September 30, 2006, the net value of CGI’s capital assets was $120
million. Capital leases related to these fixed assets amounted to $2.6
million.
Client
Base
CGI
works
with large and medium sized businesses in the private and public sectors
worldwide. The Company’s clientele is well balanced in terms of quality,
quantity, stability and diversity. The BCE group of companies’ (including
Bell
Canada)
domestic operations accounted for 11.9% of CGI’s revenue in fiscal 2006,
compared with 14.3% of CGI’s revenue in fiscal 2005 and 16.4% of CGI’s revenue
in fiscal 2004. With the exception of BCE,
none
of CGI’s clients accounted for more than 10% of its business.
The
North American IT Services Industry
Size,
Structure and Recent Developments
Looking
ahead, we expect that market demand for systems integration and consulting
services will increase, in line with improving economic conditions. With
respect
to information technology and business process services outsourcing, we
believe
that the potential remains enormous. CGI has from time to time commissioned
a
study from International
Data Corp. (“IDC”)
which provides CGI with insight as to spending on information technology
and
business process services in Canada, the United States and Western
Europe.
-9-
According
to IDC’s research, the potential business opportunity for information technology
outsourcing was estimated to be US$682 billion in the US, US$476 billion
in
Western Europe and US$60 billion in Canada. For business process services,
the
opportunity is even greater, amounting to US$1.4 trillion in the US,
US$480
billion in Europe, and US$80 billion in Canada. These numbers exclude
the value
of services already outsourced and indicate a large untapped potential
market.
Another
study CGI commissioned by IDC surveyed
Fortune 2000 business line executives and
identified a trend to full information technology outsourcing. 13% of
companies
surveyed have plans to outsource all their information technology operations
within the next three years. CGI therefore believes that the Canadian
IT
services market offers significant growth opportunities. In the US market,
where
the size of the market is about 11 times larger, the opportunities for CGI
are many times greater.
Industry
Trends and Outlook
Our
industry continues to evolve rapidly. In the early to mid 1990s, 75%
of the
industry’s revenue came from per diem services, i.e. from specialized assistance
within specific projects. Such services did not require a large or complex
organization nor did they allow for much differentiation between firms,
which
resulted in fierce competition.
Today,
a
large IT firm’s revenues are generated by systems integration or outsourcing
projects aimed at comprehensive business solutions. Both public and private
sector organizations are looking for new ways to provide better services
at
lower cost. For organizations, the emergence of internet applications and
web
based business models have shortened implementation time for solutions
while
increasing pressure to retain scarce professional resources. Their need
to
concentrate on core competencies and to increase flexibility explains why
companies increasingly turn to externally sourced professionals for the
development and management of some of their specialized functions, including
information systems. They are demanding proven technological solutions
implemented rapidly at a lower total cost of ownership and
operation.
Prospective
clients continue to place significant emphasis on cost reductions and are
therefore inclined to consider outsourcing part or all of their IT services.
These factors help to explain the growing popularity of global outsourcing
services.
CGI’s
Growth and Positioning Strategy
CGI
has
major competitive advantages to address the current demand for services
and the
potential market for global outsourcing services. The Company benefits
from a
strong financial position and offers the full range of IT services.
CGI’s
independence from hardware manufacturers is also a differentiating factor,
allowing the Company to focus on developing the best solution for our client’s
needs.
CGI
benefits from a highly flexible delivery model. U.S. clients are served
using a
mix of domestic (U.S.), Canadian and Indian-based service centres. This
flexible
service offering provides clients with high quality services on very competitive
terms, while protecting CGI’s margins.
CGI’s
client base represents all of the main economic sectors. In order to develop
services adapted to the specific needs of each market, the Company’s
professionals are grouped according to targeted client segments, which
provide
the Company with a deeper understanding of the trends specific to each
industry,
as well as a better understanding of the clients’ competitive and technological
challenges. This market expertise is a key factor in a company’s ability to
develop comprehensive business solutions.
With
the
addition of the operations acquired when CGI purchased AMS in May of 2004
(see
“Fiscal Year ended September 30, 2004 - Significant Acquitions” above), our
presence in the US market today is roughly at the same stage we had reached
several years ago in Canada. With this platform in the U.S., CGI is replicating
the same formula for success it used in Canada, emphasizing a metro market
proximity model, end-to-end IT services, and positioning itself for large
outsourcing contracts.
-10-
CGI
utilizes a strategy founded on four pillars of growth that combines organic
growth and acquisitions.
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The
first growth pillar, focused on organic growth, is comprised
of
outsourcing, systems integration and consulting (“SI&C”) contract
wins, renewals and extensions, at the regional level of our
operations.
CGI is growing its sales funnel of contract proposals across
all of the
Company’s geographic markets.
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The
second pillar of growth the pursuit of new large outsourcing
contracts.
These contracts can use a blend of onshore, nearshore or offshore
expertise to leverage our full, end-to-end global delivery
capabilities.
Given the Company’s growth rate over the last several years, CGI has the
greater critical mass required to bid on large, complex opportunities
in
North America and in Europe.
|
The
third
and fourth pillars of our growth strategy focus on acquisitions of smaller
firms
or niche players and of large companies, respectively. In North America,
we will
continue to be an IT domain consolidator of both small and large IT services
companies.
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Small
acquisitions: We identify niche company acquisitions through
our strategic
mapping program that systematically searches for companies
that could
strengthen our geographic presence, vertical market
knowledge or increase the richness of our service offerings.
Currently, we
are focused on acquisitions in our targeted verticals and metro
markets in
the US, as well as on expanding our BPO capabilities.
|
|
·
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Large
acquisitions: Through large acquisitions, we are seeking targets
in Europe
and the US that will increase our geographical presence and critical
mass
in order to further qualify us for larger outsourcing deals.
|
Quality
Processes
CGI’s
ISO
9001 certified management frameworks ensure that its clients’ objectives are
clearly defined, that projects are properly scoped and that the necessary
resources are applied to meet objectives. These processes ensure that clients’
requirements drive CGI’s solutions. Clients are constantly kept informed; their
degree of satisfaction is constantly measured and part of the incentive
remuneration of CGI managers is linked to the results.
In
1993,
the Company began working towards obtaining ISO 9001 certification for
its
Project Management Framework. CGI’s Quebec City office was granted ISO 9001
certification in June 1994, which allowed CGI to become North America’s first
organization in the IT consulting field to receive ISO 9001 certification
for
the way in which it managed projects. Since 1995 CGI has expanded the ISO
9001
certification throughout its Canadian, US and international offices as
well as
its corporate headquarters. Over the past several years, in the context
of CGI’s
high growth rate, its ISO certified quality system has been a key ingredient
in
spreading its culture, in part because it helps to integrate new members
successfully.
As
clients grow and IT projects become increasingly complex, CGI strives to
further
refine its quality processes while allowing them to branch out across all
its
activities. CGI’s enhanced quality system referred to as the Client
Partnership Management Framework (“CPMF”)
is simpler and provides the Company’s business units with greater autonomy in a
context of decentralized activities. One of CGI’s key focus areas remains the
successful management of client relationships, leading to long-term
partnerships. Following its merger with IMRglobal
in
July
2001, CGI gained applications development centres in Mumbai and Bangalore
which
have now achieved SEI CMMi Level 5 quality certification.
CGI
strives to ensure that clients benefit from a seamless offering of consistently
high quality. Regardless of which CGI business unit they deal with, clients
know
that CGI will provide the same quality services, while delivering projects
on
time and on budget by a margin that far exceeds industry standards.
CGI
also
obtained ISO 9001 certification for the application of its Member
Partnership Management Framework in
its
operations, and most recently, in 2004, similarly obtained ISO 9001
certification for its
-11-
Shareholder
Partnership Management Framework (“SPMF”).
The SPMF structures the processes and information flows between CGI and
its
shareholders as well as with the investment community.
CGI
now
holds ISO quality certification for the management of its partnerships
with each
of its three major stakeholder groups, namely customers, members and
shareholders.
RISK
FACTORS
The
Company incorporates by reference the disclosure contained in the section
entitled “Risks and Uncertainties” describing the risk factors to which the
Company’s business is exposed, which is contained in its Management’s
Discussion and Analysis for
the
year ended September 30, 2006 on pages 4 to 24 of volume 2 of CGI’s
2006
Annual Report entitled
Our
numbers which
was
filed with the Canadian securities regulatory authorities and which is
available
at www.sedar.com and on CGI’s web site at www.cgi.com. A copy of the
Management’s
Discussion and Analysis will
be
provided promptly to shareholders upon request.
DIRECTORS
AND OFFICERS
Directors
The
Company incorporates by reference the disclosure under the heading “Nominees for
Election as Directors” relating to the Company’s directors contained on pages 8
to 14 of CGI’s Management
Proxy Circular
dated
December 12, 2006 which was filed with the Canadian securities regulatory
authorities and which is available at www.sedar.com and on CGI’s web site at
www.cgi.com. A copy of the Management
Proxy Circular
will be
provided promptly to shareholders upon request.
Officers
The
following table states the names of CGI’s Senior Officers, their place of
residence and their principal occupation:
|
Name
and place of residence
|
Principal
occupation
|
|
Serge
Godin
Westmount,
Quebec
Canada
|
Founder
and Executive Chairman of the Board
|
|
R.
David Anderson
Haliburton,
Ontario
Canada
|
Executive
Vice-President and Chief Financial Officer
|
|
François
Boulanger
Longueuil,
Québec
Canada
|
Vice-President
and Corporate Controller
|
|
André
J. Bourque
Outremont,
Quebec
Canada
|
Executive
Vice-President and Chief Legal Officer
|
|
Michael
Denham
Montreal,
Quebec
Canada
|
President,
Business Process Services (BPS)
|
|
André
Imbeau
Beloeil,
Quebec
Canada
|
Founder,
Executive Vice-Chairman of the Board and Corporate
Secretary
|
|
Donna
Morea
Falls
Church, Virginia
USA
|
President
US Operations and India
|
|
Luc
Pinard
St-Lambert,
Quebec
Canada
|
Executive
Vice-President and Chief Technology Officer
|
|
Michael
E. Roach
Outremont,
Quebec
Canada
|
President
and Chief Executive Officer
|
|
Daniel
Rocheleau
Longueuil,
Quebec
Canada
|
Executive
Vice-President and
Chief
Business Engineering Officer
|
-12-
|
Jacques
Roy
Bourcherville,
Quebec
Canada
|
Senior
Vice-President, Finance and Treasury
|
|
Joseph
Saliba
London
England
|
President
Europe and Australia
|
|
Claude
Séguin
Montreal,
Quebec
Canada
|
Senior
Vice-President Finance and Strategic
Investments
|
All
of
the above-mentioned persons have held the position set out opposite their
names,
or other executive or equivalent management functions in the Company or
its
subsidiaries during the last five years, except Donna Morea who prior to
May 3,
2004 served as Executive
Vice-President - Public Sector Group of
American Management Systems, Incorporated (“AMS”) and in other equivalent
executive positions at AMS prior to its acquisition by CGI on May 3, 2004;
and
Michael Denham, who prior to August 2005 was with Bombardier Inc. where
he spent
four years as Senior Vice-President, Strategy reporting to the CEO. Prior
to
that position, Mr. Denham was a partner with McKinsey and Company, where
he held
key leadership roles and worked extensively in the United States and
Europe.
Ownership
of Securities on the Part of Directors and Officers
The
Company incorporates by reference the disclosure under the heading “Principal
holders of Class A subordinate voting shares and Class B shares” on page 5
of CGI’s Management
Proxy Circular dated
December 12, 2006 which was filed with the Canadian securities regulatory
authorities and which is available at www.sedar.com and on CGI’s web site at
www.cgi.com. A copy of the Management
Proxy Circular
will be
provided promptly to shareholders upon request.
INTEREST
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
The
charter of the Audit and Risk Management Committee requires that the committee
review all related party transactions.
In
January of 2006 CGI entered into agreements with BCE pursuant to which
it
repurchased 100 million of its Class A subordinate voting shares and extended
the outsourcing agreement with the BCE group of companies (See “Significant
developments of the most recent three fiscal years - Fiscal Year ended
September
30, 2006 - Significant Developments” above). In addition to the review carried
out by the Audit and Risk Management Committee, a special committee of
the Board
of Directors composed of independent directors reviewed the transaction.
The
special committee received independent advice as well as a fairness opinion
in
support of its recommendation to the Board of Directors in favour of the
transaction.
In
accordance with its mandate, the Audit and Risk Management Committee also
reviewed and recommended the approval of a transaction in which the Company
leased a private aircraft for use on Company business from a leasing company
which had acquired it from a limited partnership of which Serge Godin,
CGI’s
Founder
and Executive Chairman
of the Board,
was the
sole limited partner. Following approval by the Board of Directors on
September 26, 2005, a financial lease was entered into on
December 5, 2005.
-13-
TRANSFER
AGENT AND REGISTRAR
The
Company's transfer agent for the Company's Class A subordinate voting
shares and Class B shares is Computershare Trust Company of Canada whose
head office is situated in Toronto (Ontario). Share transfer service
is
available at Computershare's Montreal (Quebec) and Toronto (Ontario)
offices as
well as at the principal office of Computershare Trust Company, Inc.
in Denver
(Colorado), and New York (New York).
MATERIAL
CONTRACTS
The
only
contract the Company entered into during the year ended on September
30, 2006
that was material to the Company was the agreement pursuant to which
CGI
repurchased 100 million of its Class A subordinate voting shares from, and
extended its commercial agreements with, BCE. See “Significant developments of
the most recent three fiscal years - Fiscal Year ended September 30,
2006 -
Significant Developments” above.
ADDITIONAL
INFORMATION
The
Company will provide to any person, upon request to the corporate secretary
of
the Company, (i) a copy of the Annual
Information Form of
the
Company, together with one copy of any document, or the pertinent pages
of any
document incorporated by reference in the Annual
Information Form,
(ii) a copy of the comparative financial statements of the Company for the
year ended September 30, 2006 together with the accompanying report of the
auditor and one copy of any subsequent interim financial statements,
(iii) a copy of the Management
Proxy Circular dated
December 12, 2006 and (iv) a copy of volumes 1 and 2 of the
2006
Annual Report of
the
Company.
Additional
information including directors’ and officers’ remuneration and indebtedness,
securities authorized for issuance under equity compensation plans and
principal
holders of the Company’s shares is included in the Management
Proxy Circular dated
December 12, 2006.
Additional
financial information in relation to the last fiscal year ended
September 30, 2006, is presented in the audited financial statements
(pages 25 to 59) and under the title Management’s
Discussion and Analysis (pages 4
to 24), in volume 2 of the 2006
Annual Report entitled
Our
numbers.
The
documents mentioned above are available on www.sedar.com and on the Company’s
web site at www.cgi.com as well as at the Company’s head office:
1130
Sherbrooke Street West
7th
Floor
Montreal,
Quebec
H3A
2M8
Telephone:
(514) 841-3200
Fax:
(514) 841-3299
-14-
APPENDIX
A
CGI
GROUP INC.
FUNDAMENTAL
TEXTS
The
following documents form part of CGI’s Fundamental
Texts
and may
be found on the pages of Appendix A indicated:
|
Mission,
Vision, Dream and Values
|
2
|
|
CGI
Management Foundation
|
12
|
|
Charter
of the Board of Directors
|
18
|
|
Charter
of the Corporate Governance Committee
|
27
|
|
Charter
of the Human Resources Committee
|
33
|
|
Charter
of the Audit and Risk Management Committee
|
38
|
|
Code
of Ethics and Business Conduct
|
49
|
|
Executive
Code of Conduct
|
67
|
|
Guidelines
on Timely Disclosure of Material
|
|
|
Information
and Transactions in Securities of
|
|
|
CGI
Group Inc. by Insiders
|
69
|
-15-
Fundamental
Texts
of
CGI Group Inc.
©
CGI Group Inc.
December
2006
CGI
proprietary
Presentation
This
set
of documents presents the fundamental texts that define CGI and its management
approach. The fundamental texts address not only members of the board of
directors, CGI's executive team and the company's shareholders, but also
all CGI
members as well as anyone who wishes to consult them. Their main objective
is to
provide a better understanding of the most essential aspects of the company.
It
is our hope that this understanding will generate a shared vision of what
constitutes CGI and of the community of thought that is essential to the
company's success. The document will also provide all CGI members with an
understanding that will allow them to participate fully in the life of the
company and to better represent CGI.
THE
FUNDAMENTAL TEXTS INCLUDE:
|
1.
Dream, Mission, Vision and Values
|
2
|
|
|
2.
CGI Management Foundation
|
12
|
|
|
3.
Documents and Policies Pertaining to Corporate Governance
|
17
|
|
|
3.1
Charter of the Board of Directors
|
18
|
|
|
3.2
Charter of the Corporate Governance Committee
|
27
|
|
|
3.3
Charter of the Human Resources Committee
|
33
|
|
|
3.4
Charter of the Audit and Risk Management Committee
|
38
|
|
|
4
Codes of Ethics
|
48
|
|
|
4.1
Code of Ethics and Business Conduct for members, officers and
directors of
CGI
|
49
|
|
|
4.2
Executive Code of Conduct
|
49
|
|
|
4.3
Guidelines on Timely Disclosure of Material Information and Transactions
in Securities of CGI by Insiders
|
69
|
|
|
Appendix
|
95
|
1
1.
Dream,
Mission, Vision and Values
2
Dream,
Mission, Vision and Values
This
document constitutes Chapter 1 of the Fundamental Texts of CGI Group Inc.
It
begins with the mission statement of the company and is followed by the vision,
the dream and the values of CGI. By "dream," we essentially mean the intent
or
initial desire that led to the creation of our company and continues to drive
its operation and growth. It also extends to the main principles and governing
ideas that define the company's philosophy in its important cultural and
organic
aspects. This presentation of CGI's dream and values is therefore intended
to
impart in a succinct manner the company's character, essence, dynamism, values
and culture, and the creative impulse that culminated in its creation and
of
which it is an extension.
3
|
A.
|
THE
CGI DREAM
|
A
number
of governing ideas inspired the creation of CGI and continue to drive its
development. These ideas constitute what we call the CGI "dream." It is a
dream
based on a set of values to which we are profoundly attached.
The
dream
has allowed us to assemble, all around the world, a team of extraordinary
men
and women who share it and are building a company that reflects their
aspirations - who are, in fact, building their "own" company. Over the years,
our team has built a clientele we are extremely proud of and whom we are
dedicated to serving with the utmost skill.
This
dream has its roots in the original and simple idea that first motivated
CGI's
founders when they created the company:
"To
create an environment in which we enjoy working together and, as owners,
contribute to building a company we can be proud of."
From
this
very basic idea grew an entire business philosophy.
It
goes
without saying that creating this type of environment is particularly
challenging in consulting companies such as ours. Personnel generally work
at
client locations, making it difficult to develop a sense of belonging through
a
shared workplace. There is the risk of certain people being "forgotten" when
they spend long periods at a client site, and this risk is amplified when
these
individuals have few CGI colleagues working on the same engagement.
|
B.
|
THE
CGI MISSION AND VISION
|
The
mission of CGI is to help our clients with professional services of outstanding
quality, competence and objectivity, delivering the best solutions to fully
satisfy client objectives in information technology, business processes and
management.
In
all we
do, we foster a culture of partnership, intrapreneurship, teamwork and
integrity, building a world class IT and business process services
company.
With
this
mission statement, we are endeavouring to describe not only the company's
purpose, but also our ambition and values. In doing so, we hope, in a few
words,
to advance an overall understanding of these essential aspects of
CGI.
Our
vision is to be a world class IT and business process services leader helping
our clients win and grow.
4
The
following section will foster a more thorough comprehension of the dream
associated with this mission and the values referred to in the mission
statement.
C. THE
CGI CULTURE AND VALUES
To
succeed in creating a highly favourable environment within such a context,
CGI
has fostered a corporate culture rooted in participation in the company and
focused on each of its members. Developing a corporate culture, despite members
often working at a distance, began with explicitly defining and then sharing
common values. Our fundamental belief is that a company with an inspiring
dream,
unparalleled integrity, a caring, humane management philosophy and solid
values
is better able to attract and respond to the profound aspirations of remarkably
high-calibre, competent people. These people in turn will seek out a select
clientele, one aware of the company's values, and will deliver high-quality
services at a competitive price, while meeting the company's profitability
objectives. The growth and profitability generated as a result will allow
CGI to
offer its shareholders a superior and sustained return on their investment.
To
support our dream and to create such an environment, we have adhered to a
number
of principles or governing ideas:
|
1.
|
Sharing
the same values
|
|
2.
|
Embracing
the objectives of our clients
|
|
3.
|
Adopting
a caring, humane approach towards our
members
|
|
4.
|
Focusing
on synergy and the strength of
teamwork
|
|
5.
|
Participating
in the development of our company as its owner-shareholders, and
sharing
in its wealth
|
|
6.
|
Promoting
robust, healthy and sustainable growth to the benefit of all
stakeholders
|
|
7.
|
Implementing
a management model aligned with our dream and
values
|
|
1.
|
SHARING
THE SAME VALUES
|
Sharing
the same values allows us to enjoy considerable autonomy and swiftness of
action
without compromising our cohesiveness. It also allows us to mobilize teams
more
rapidly and bring together the most experienced individuals from across the
company, who are able to quickly work as one to address a given challenge.
And,
of course, these values also guide our decisions and actions.
PARTNERSHIP
AND QUALITY
5
For
us,
partnership and quality are both a philosophy and a way of life. We develop
and
follow the best management practices and we entrench these approaches into
client relationships and service delivery frameworks in order to foster long
term and strong partnerships with our clients. We listen to our clients and
we
are committed to their total satisfaction in everything we do.
OBJECTIVITY
AND INTEGRITY
We
exercise the highest degree of independent thinking in selecting the products,
services and solutions we recommend to clients. In doing so, we adhere to
the
highest values of quality, objectivity and integrity. Consequently, strict
rules
of business and professional conduct are applied. We do not accept any
remuneration from suppliers.
INTRAPRENEURSHIP
AND SHARING
Our
success is based on the competence, commitment and enthusiasm of our members.
Therefore, we promote a climate of innovation and initiative where we are
empowered with a sense of ownership in supporting clients, thus ensuring
the
firm’s profitable growth. Through teamwork, sharing our know-how and expertise,
we bring the best of CGI to our clients. As members, we share in the value
we
create through equity ownership and profit participation.
RESPECT
As
a
global company, we recognize the richness that diversity brings to the company
and welcome this diversity while embracing the overall CGI culture. In all
we
do, we are respectful of our fellow members, clients, business partners and
competitors.
FINANCIAL
STRENGTH
We
strive
to deliver strong, consistent financial performance which sustains long term
growth and rewards our members and shareholders. Financial strength enables
us
to continuously invest and improve services and business solutions to the
benefit of our clients. To this end, we manage our business to generate industry
superior returns.
CORPORATE
SOCIAL RESPONSIBILITY
Our
business model is designed to ensure that we are close to our clients and
communities. We embrace our social responsibilities and contribute to the
continuous development of the communities in which we live and
work.
|
2.
|
EMBRACING
THE OBJECTIVES OF OUR
CLIENTS
|
6
At
CGI,
we believe that accomplishing outstanding work provides one with a strong
sense
of fulfilment. Our high-quality work allows us to forge rewarding relationships
with our colleagues and clients and to experience the pleasure of our own
creativity when we find an ideal solution to address our clients' needs.
To
this
end, we strongly encourage our members to develop a listening attitude to
ensure
that an understanding of the client's particular situation and needs takes
priority in all that we do. For this reason, we foster a culture of
independence, objectivity and integrity. We want our clients to know that
we
understand their objectives and are committed to finding the solution that
is
right for them. Our flexibility in establishing customized business
relationships demonstrates our keen interest in our clients' objectives,
cultural environment and values.
This
in-depth understanding of our clients' objectives is one of the keys to our
success and is as present in our short-term engagements as it is in our
outsourcing contracts extending over multiple years.
However,
embracing the objectives of our clients goes far beyond simply understanding
them. It demands, for example, that we sincerely commit to offering the very
best of ourselves in order to demonstrate to clients that we support them
as
completely as if we were their own employees. It is essential that they
"experience our commitment."
|
3.
|
ADOPTING
A CARING, HUMANE APPROACH TOWARDS OUR
MEMBERS
|
Although
the demands of our industry are considerable, CGI has always believed that
this
in no way conflicts with the very humane and caring approach we take in all
of
the relationships we foster. And while our human resources policies and Member
Partnership Management Framework embody this concern and commitment, for
CGI,
this is also an issue of maturity and genuine leadership. It is a question
of
the quality of "being." To foster this attitude of caring and sensitivity
towards others, CGI has led by example. Since the inception of the company,
this
approach has been transmitted, most notably through the example set by our
founders as well as by teamwork and the CGI Leadership Institute, and is
today
an integral component of CGI's spirit and culture.
|
4.
|
FOCUSING
ON SYNERGY AND THE STRENGTH OF
TEAMWORK
|
CGI
favours the accomplishment of work through synergy, which refers to the pooling
of our members' skills, experience and creative abilities in all aspects
of
corporate life. Whether deciding on the direction to take in a service proposal
or determining the best solution for a client, we incorporate synergy into
everything we do.
Normally,
a synergy group will hold meetings at key milestones throughout the entire
lifespan of a given engagement. The group not only includes
7
subject
matter experts, but also less experienced members, who gain knowledge from
their
colleagues and are therefore able to more rapidly hone their own expertise.
The
objective is always to find appropriate and proven solutions for our clients.
This practice is entrenched in our Quality System, which has earned ISO 9001
certification.
The
practice of synergy underscores an outstanding cultural trait: at CGI, we
believe that we are stronger and that everyone benefits when we work as a
team.
Our clients receive services of higher quality, and our members constantly
learn
from one another through concrete achievements.
|
5.
|
PARTICIPATING
IN THE DEVELOPMENT OF OUR COMPANY AS ITS
OWNER-SHAREHOLDERS
|
It
is
important that our members consider CGI as "their" company and that they
participate in its growth and development. Involvement in professional groups
that help maintain CGI's leadership position is just one of the many such
forms
of participation.
However,
for this involvement in the company to be complete and rewarding, we feel
it
necessary that all CGI members be able to also share in the benefits generated
by their activities. For this reason, since its founding, CGI has offered
all of
its members the opportunity to be shareholders and owners of their company.
To
this end, CGI has implemented a Share Purchase Plan, through which it pays
half
the cost of shares up to a certain amount. Members also qualify for a portion
of
the company's annual profits when objectives are met (Profit Participation
Plan). This capital sharing opportunity has existed since CGI was established.
It
is an approach that incorporates many advantages:
FOR
OUR CLIENTS
Because
of this approach, CGI has very few freelance or contract employees. This
helps
assure our clients that the experience we acquire through working with them
is
more likely to remain in the company. Moreover, the people they deal with
at CGI
are also owners of the company and are therefore completely committed to
producing high-quality, dependable work in order to strengthen the client
relationship.
FOR
OUR SHAREHOLDERS
Our
external shareholders can rest assured that, as fellow owners, all of CGI's
members have their mutual interests at heart, i.e. a desire to see the company
grow and the drive to execute each contract in a way that will yield the
targeted profit margin. This also impacts business development, for, as
shareholders, our members strive to promote the company's growth, but will
not
sacrifice profitability by submitting counter-
8
productive
bids. And finally, shareholders are also assured that all of our members
will
manage the company's costs as if they were their own.
FOR
OUR MEMBERS
As
members and shareholders, we feel above all that the growth in value, which
we
are contributing to, does provide us with a lucrative return over the long
term.
It is indeed more stimulating to work for a company that values the sharing
of
wealth. This also guarantees greater transparency in the management of the
company. Because we must communicate our financial results to everyone, all
of
CGI's managers are more accountable to the people they lead and are more
likely
to involve them in the decision process. We believe that our approach to
corporate ownership fosters greater overall dynamism and cohesiveness of
action.
This also allows us to attract and retain individuals with a genuine desire
to
build and develop the company.
|
6.
|
PROMOTING
ROBUST, HEALTHY AND SUSTAINED GROWTH TO THE BENEFIT OF ALL
STAKEHOLDERS
|
Robust,
healthy and sustained growth is vital to the company's success. Much of our
clientele consists of large companies with operations extending over many
countries. We are committed to serving these clients well, often through
long-term relationships that require us to deploy professionals in sufficient
numbers where clients operate. The growth of our clients' business requires
that
we grow with them. Also, as a result of our success, an increasing number
of
clients call upon us to provide them with services. Robust growth is therefore
intrinsic to the nature of the business we are in.
Growth
is
not only a vital component of our activities and essential to our clients,
it
also benefits our members. It provides them with an opportunity to embark
upon
new and stimulating challenges and develop their own potential. And growth,
when
financially healthy and profitable, clearly benefits all of our shareholders
(including our member shareholders) through the value it generates.
To
maintain healthy and sustained growth, it is important that the companies
or
groups that join our ranks be welcomed and well integrated into our operations.
In order to succeed in its growth strategy, CGI has developed its integration
capability into a core competency. This capacity to integrate is based on
three
main axes. The first axis is aimed primarily at welcoming newcomers, answering
their legitimate questions, confirming their new conditions of employment
and,
above all, allowing them to discover CGI by sharing its dream and values.
The
second axis is directed towards establishing the various synergy goals linked
to
an acquisition or an outsourcing deal. This encourages all parties to understand
that this combination of strengths offers new, stimulating opportunities.
The
third axis is aimed at assuring the organizational
9
transition
and a rapid transfer to the CGI Management Foundation, especially with regards
to the Quality System.
It
follows that there ought to be an equilibrium of interests among all of the
company's core stakeholders: clients, members and shareholders.
It
is of
course also essential that, as it grows, our company continues to act as
a
responsible corporate citizen by respecting and supporting the communities
in
which it operates and by respecting the environment.
The
following are a few concrete examples of how this balanced approach promotes
the
healthy and sustained growth of CGI:
|
w
|
We
must ensure, at every step of our growth, that we preserve the
quality of
the services we offer to our current and future
clients.
|
|
w
|
We
must also ensure that our members are adequately prepared to
face the new
challenges we offer them and that they have the resources needed
to
accomplish their work.
|
|
w
|
Growth
must not come at the expense of the communities where we do business,
or
of the environment in general. In fact, we are committed to participating
in the development of these communities and the protection of the
environment.
|
|
w
|
We
strive to ensure that our growth and development efforts provide
short-term benefits without negatively impacting our long-term
performance. We believe this also to be in the best interests of
our
shareholders.
|
When
the
above conditions are met, robust, healthy, balanced and sustainable growth
will
follow.
|
7.
|
IMPLEMENTING
A MANAGEMENT MODEL ALIGNED WITH OUR DREAM AND
VALUES
|
CGI's
dream is being fulfilled every day through the constant efforts of our members
who share and believe in this dream. It is also achieved through a disciplined
management approach that is based on the company's
10
objectives
to produce high quality work for its clients, promote the development of
its
members and provide high value to its shareholders.
11
2.
CGI
Management Foundation
12
CGI
Management Foundation
INTRODUCTION
In
the
above diagram, we have assembled the key elements that define and guide the
management of CGI. For this reason, these elements have been called the CGI
Management "Foundation." They reflect our collective experience and have
been
developed to make our actions as efficient as possible. This efficiency must
first and foremost respect a number of principles, which are themselves
integrated into the CGI Management Foundation and deserve to be emphasized:
|
1)
|
the
primacy of the dream, the mission, the vision and the values of
the
company;
|
|
2)
|
the
equilibrium between the legitimate interests of our clients, members
and
shareholders;
|
|
3)
|
the
balance between the need to assure cohesiveness and rigour in the
management of the company and the commitment to promote autonomy,
initiative and entrepreneurship.
|
The
CGI
Management Foundation intends to guide rather than prescribe.
Thus,
it
offers a certain amount of freedom in order to remain focused on our essential
goal: to provide high-quality services truly adapted to our clients' needs.
13
We
will
now examine the individual elements of the Foundation.
DREAM,
MISSION, VISION, VALUES, QUALITY POLICIES, STRATEGIC DIRECTIONS AND
PLANS
The
first
section of the diagram aims at ensuring that all decisions are well aligned
on
the dream, mission, vision and values of the company. These are described
in the
first section of this document.
The
next
component is our Quality Policy. It has earned ISO 9001 certification, which
requires that CGI demonstrate every year to external evaluators that its
Quality
Policy is applied across all of its operations.
The
final
component of this uppermost section focuses on Strategic Directions and Plans.
These are established on an annual and triennial basis according to a rigorous
process that includes extensive participation from within the company as
well as
from our clients and our shareholders. The emphasis placed on involving all
business units and corporate services in the planning process helps ensure
that
the objectives established and methods selected are shared by all to the
fullest
extent possible and that they generate enthusiastic commitment in their
implementation.
GOVERNANCE
POLICIES AND FRAMEWORKS, HUMAN RESOURCES POLICIES, FINANCIAL POLICIES AND
ORGANIZATIONAL MODEL
The
first
component of the second section refers to the company's governance policies
and
frameworks. These policies and frameworks are comprised of the following
documents:
|
1)
|
The
Charters of the Board of Director and its
committees;
|
|
2)
|
the
Codes of Ethics, to which members, officers and directors of the
company
must adhere;
|
|
3)
|
the
Operations Management Framework, which outlines the delegation
framework
with respect to decision making (e.g. who may authorize and sign
a million
dollar proposal; who may authorize promotion to a vice-president's
position).
|
The
second component involves human resources policies. All new members of the
CGI
team are asked to read You and CGI, which outlines all of the company's human
resources policies, from compensation and training to career
development.
14
The
third
component focuses on financial policies. It covers how we determine our
profitability objectives, target ratios (e.g. profit margins, maximum percentage
allotted to certain expenses), how and when our financial results are prepared,
the rules governing disclosure of results, etc. These policies and rules
are
outlined in a document under the responsibility of the Chief Financial Officer,
and the most pertinent elements are communicated to all of our
members.
Finally,
the organizational model favoured by CGI is one that provides considerable
autonomy to our business units. This model consists of creating business
units
in major cities in the regions that we serve. We also put a high priority
on
establishing solid business relationships within these regions, particularly
with the decision makers from the companies operating in these cities. Each
of
these "metropolitan" business units is structured according to the key economic
sectors served by CGI (finance, telecommunications, etc.). The implementation
of
a service offering for clients which have operations in multiple regions
or
countries is achieved through collaboration among business units, which,
in the
case of large contracts and particularly those involving outsourcing, can
result
in entire business units being dedicated to our major clients or to groups
of
clients who share the same needs. Consulting services and centres of expertise
throughout CGI ensure that knowledge, strategies and leading-edge solutions
are
shared within the entire company.
BUSINESS
UNIT PROCESSES AND PARTNERSHIP MANAGEMENT FRAMEWORKS
The
Business Unit Processes explain how the Client Partnership Management Framework
and the Member Partnership Management Framework are applied locally in each
business unit. They also describe how business development activities and
other
initiatives crucial to the smooth operation of each business unit should
be
managed.
The
activities at the core of the operational management of CGI are aligned onto
three management frameworks: the Client Partnership Management Framework,
the
Member Partnership Management Framework and the Shareholder Partnership
Management Framework. These frameworks are the cornerstones of a continuous
improvement process that is supported by the documentation and the systematic,
audited application of our best
15
practices.
The process is also constantly fuelled by client, member and shareholder
evaluations of our activities and performance.
The
first
is the Client Partnership Management Framework. CGI's leadership position
in its
industry is contingent upon its ability to deliver services of the highest
quality to its clients at competitive prices and within the established time
frames. The Client Partnership Management Framework is the basis of how we
manage our relationships with our clients. For each of type of mandates
(outsourcing, projects, and consulting services), this framework guides our
teams in the achievement of all phases of their work, from the proposal to
its
completion of the mandate. It is based not only on our best practices, but
also
relies on the industry's best standards and practices. A rigorous, regular
program to evaluate the satisfaction of our clients allows us to measure
our
progress and continuously improve our practices. This evaluation is conducted
on
a face-to-face basis with the client, who must sign the evaluation. Each
year,
CGI establishes improvement objectives based on the results obtained the
previous year.
The
Member Partnership Management Framework guides all of our managers through
the
communications and dialogue activities they have with their teams. This cycle
begins with welcoming activities and is followed by informal meetings, team
meetings at various levels, career planning and performance reviews. We measure
the satisfaction of our members annually through a survey conducted by an
outside firm. Members can also use the survey to communicate their observations
and suggestions to the head of their business unit or the CGI executive team.
The results are published, and commitments are made by the leaders of both
the
business units and the company itself to address the comments submitted and
make
needed improvements.
The
Shareholder Partnership Management Framework describes our information and
relationship program with our investors beyond the prescribed activities
associated with corporate governance, transparency and the disclosure of
results.
The
final
section refers to the way we measure our results. First and foremost, we
systematically measure the satisfaction levels of active clients regularly.
We
also measure member satisfaction annually, and we are currently developing
a
shareholder satisfaction measurement tool.
16
3.
Documents
and Policies Pertaining to Corporate Governance
17
Documents
and Policies Pertaining to Corporate Governance
3.1
Charter of the Board of Directors
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Charter. This Charter should
therefore be read in conjunction with Chapter 1.
|
1.
|
INTERPRETATION
|
"Accounting
or Related Financial Experience" means the ability to analyse and interpret
a
full set of financial statements, including the notes attached thereto, in
accordance with Canadian generally accepted accounting principles.
"Financially
Literate" means the ability to read and understand a balance sheet, an income
statement, a cash-flow statement and the notes attached thereto.
"Independent
Director" means a director who meets the independence criteria set out in
section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by
the
Canadian Securities Administrators and as amended and in effect as of June
30,
2005, which is reproduced in Appendix A.
|
2.
|
OBJECTIVES
|
CGI’s
shareholders are the first and most important element in the Company’s
governance structures and processes. At each annual general meeting, the
Company’s shareholders elect the members of the Company’s Board of Directors and
give them a mandate to manage and oversee the management of the Company’s
affairs for the coming year.
In
the
normal course of operations, certain corporate actions which may be material
to
CGI are initiated from time to time by the Company’s senior management and, at
the appropriate time, are submitted to CGI’s Board of Directors for
consideration and approval. When appropriate, such matters are also submitted
for consideration and approval by CGI’s shareholders. All such approvals are
sought in accordance with the charters of the Board of Directors and standing
committees, CGI’s corporate governance practices and applicable corporate and
securities legislation.
18
The
overall stewardship of the Company is the responsibility of the Board of
Directors. In accomplishing the mandate it receives from the Company’s
shareholders, the Board of Directors may delegate certain of its authority
and
responsibilities to committees and management and reserve certain powers
to
itself. Nonetheless, it will retain full effective control over the
Company.
|
3.
|
COMPOSITION
|
|
3.1
|
The
majority of the Board of Directors shall be comprised of Independent
Directors. The application of the definition of Independent Director
to
the circumstances of each individual director is the responsibility
of the
Board of Directors which will disclose on an annual basis whether
it is
constituted with the appropriate number of directors which are
Independent
Directors and the basis for its analysis. The Board of Directors
will also
disclose which directors are Independent Directors or not and provide
a
description of the business, family, direct and indirect shareholding
or
other relationship between each director and the
Company.
|
|
3.2
|
The
Company expects and requires directors to be and remain free of
conflictual interests or relationships and to refrain from acting
in ways
which are actually or potentially harmful, conflictual or detrimental
to
the Company's best interests. Each director shall comply with the
Company's formal code of ethics and business conduct that governs
the
behaviour of members, directors and officers and shall complete
and file
annually with the Company any and all documents required pursuant
to such
formal code of ethics and business conduct with respect to conflict
of
interests. This matter will also be reviewed annually by the Corporate
Governance Committee. The Board of Directors will monitor compliance
with
said code as well as with the Company's executive code of conduct
applicable to its principal executive officer, principal financial
officer, principal accounting officer or controller, or other persons
performing similar functions within the Company. The Board will
also be
responsible for the granting of any waivers from compliance with
the codes
for directors and officers. The Board of Directors will disclose
in due
time the adoption of such codes as well as all waivers and specify
the
circumstances and rationale for granting the
waiver.
|
|
3.3
|
The Board of Directors, following advice of its Corporate Governance Committee, is responsible for evaluating its size and composition and establishing a Board comprised of members who facilitate effective decision-making. The Board of Directors has the ability to increase or decrease its size. |
|
3.4
|
It
is a general requirement under the Company’s corporate governance
practices that all directors possess both financial and operational
literacy. In addition, the membership of the Board of Directors
will
include a sufficient number of individuals who are
who
|
19
have
Accounting or Related Financial Experience to ensure that at least one member
of
its Audit Committee has Accounting or Related Financial Experience within
the
meaning of the applicable corporate governance rules imposed by regulatory
bodies.
|
3.5
|
A
director who makes a major change in principal occupation will
forthwith
disclose this fact to the Board of Directors and will offer his
or her
resignation to the Board of Directors for consideration. It is
not
intended that directors who retire or whose professional positions
change
should necessarily leave the Board of Directors. However, there
should be
an opportunity for the Board of Directors to review the continued
appropriateness of the Board of Directors membership under such
circumstances.
|
|
3.6
|
The
Board of Directors is responsible for approving new nominees to
the Board.
New directors will be provided with an orientation and education
program
which will include written information about the duties and obligations
of
directors, the business and operations of the Company, documents
from
recent Board of Directors meetings and opportunities for meetings
and
discussion with senior management and other directors. The details
of the
orientation of each new director will be tailored to that director's
individual needs and areas of interest. The prospective candidates
should
fully understand the role of the Board of Directors and its committees
and
the contribution expected from individual directors and the Board
of
Directors will ensure that they are provided with the appropriate
information to that effect. In addition, the Board of Directors
will
ascertain and make available to its members, when required, continuing
education as per the business and operations of the
Company.
|
|
4.
|
RESOURCES
|
|
4.1
|
The
Board of Directors will implement structures and procedures to
ensure that
it functions independently of management.
|
|
4.2
|
The
Board of Directors appreciates the value of having certain members
of
senior management attend each Board of Directors meeting to provide
information and opinion to assist the directors in their deliberations.
The Executive Chairman of the Board will seek the Board of Directors'
concurrence in the event of any proposed change to the management
attendees at Board of Directors meetings. Management attendees
will be
excused for any agenda items which are reserved for discussion
among
directors only.
|
|
5.
|
RESPONSIBILITIES
AND DUTIES
|
The
principal responsibilities and duties of the Board of Directors include the
following, it being understood that in carrying out their responsibilities
and
duties, directors may consult with management and may retain external advisors
at the expense of the Company in appropriate
20
circumstances.
Any engagement of external advisors shall be subject to the approval of the
Chairof the Corporate Governance Committee.
|
5.1
|
General
Responsibilities
|
|
5.1.1
|
The
Board of Directors will oversee the management of the Company.
In doing
so, the Board of Directors will establish a productive working
relationship with the Executive Chairman of the Board and the Chief
Executive Officer and other members of senior management.
|
|
5.1.2
|
The
Board of Directors will oversee the formulation of long-term strategic,
financial and organizational goals for the Company. It shall approve
the
Company's strategic plan and review same on at least an annual
basis. This
plan will take into account the opportunity and risks of the Company's
business.
|
|
5.1.3
|
As
part of the responsibility of the Board of Directors to oversee
management
of the Company, the Board of Directors will engage in active monitoring
of
the Company and its affairs in its stewardship
capacity.
|
|
5.1.4
|
The
Board of Directors will engage in a review of short and long-term
performance of the Company in accordance with approved
plans.
|
|
5.1.5
|
The
officers of the Company, headed by the Executive Chairman of the
Board and
the Chief Executive Officer, shall be responsible for general day
to day
management of the Company and for making recommendations to the
Board of
Directors with respect to long term strategic, financial, organizational
and related objectives.
|
|
5.1.6
|
The
Board of Directors will periodically review the significant risks
and
opportunities affecting the Company and its business and oversee
the
actions, systems and controls in place to manage and monitor risks
and
opportunities. The Board of Directors may impose such limits as
may be in
the interests of the Company and its
shareholders.
|
|
5.1.7
|
The
Board of Directors will oversee how the Company communicates its
goals and
objectives to its shareholders and other relevant
constituencies.
|
|
5.1.8
|
The
Board of Directors will oversee the succession planning including
appointing, training and monitoring senior management and the Executive
Chairman of the Board in
particular.
|
|
5.1.9
|
The
Board of Directors is responsible for overseeing a Communication
Policy
for the Company. In doing so, the Board of Directors will ensure
that the
policy (i) addresses
|
21
how
the
Company interacts with analysts, investors, other key stakeholders and the
public, (ii) contains measures for the Company to comply with its continuous
and
timely disclosure obligations and to avoid selective disclosure, and (iii)
is
reviewed at least annually.
|
5.1.10
|
The
Board of Directors will oversee the integrity of the Company's
internal
control and management information systems.
|
|
5.1.11
|
The
Board of Directors will make sure that the Company adopt prudent
financial
standards with respect to the business of the Company and prudent
levels
of debt in relation to the Company's consolidated capitalization.
|
|
5.1.12
|
The
Board of Directors will also consider and
approve:
|
|
i)
|
transactions
out of the ordinary course of business including, without limitation,
proposals on mergers, acquisitions or other major investments or
divestitures;
|
|
ii)
|
all
matters that would be expected to have a major impact on
shareholders;
|
|
iii)
|
the
appointment of any person to any position that would qualify such
person
as an officer of the Company; and
|
|
iv)
|
any
proposed changes in compensation to be paid to members of the Board
of
Directors on the recommendation of the Human Resources Committee.
|
|
5.1.13
|
The
Board of Directors will also receive reports and
consider:
|
|
i)
|
The
quality of relationships between the Company and its key
customers;
|
|
ii)
|
Changes
in the shareholder base of the Company from time to time and relationships
between the Company and its significant
shareholders;
|
|
iii)
|
Periodic
reports from Board of Directors' committees with respect to matters
considered by such committees;
|
|
iv)
|
Health,
safety and environmental matters as they affect the Company and
its
business; and
|
|
v)
|
Such
other matters as the Board of Directors may, from time to time,
determine.
|
22
|
5.1.14
|
The
Board of Directors will oversee management through an ongoing review
process.
|
|
5.1.15
|
The
Board of Directors will, together with the Executive Chairman of
the Board
develop a position descriptions for the Executive Chairman of the
Board
and the Chief Executive Officer. The Board of Directors will also
approve
the corporate objectives that the Executive Chairman of the Board
is
responsible for meeting and assess management’s performance in relation to
such objectives. The Board of Directors will raise any concerns
related to
the performance of the Chief Executive Officer with the Executive
Chairman
of the Board as appropriate.
|
|
5.1.16
|
The
Board of Directors will receive a report from its Human Resources
Committee on succession planning as set forth in such committee's
mandate.
|
5.2 Annual
Assessment of the Board of Directors
The
Board
of Directors will annually review the assessment of the Board of Directors'
performance and recommendation provided by the Corporate Governance Committee.
The objective of this review is to increase the effectiveness of the Board
of
Directors and contribute to a process of continuous improvement in the Board
of
Directors' execution of its responsibilities. It is expected that the result
of
such reviews will be to identify any areas where the directors and/or management
believe that the Board of Directors and/or the directors individually could
make
a better contribution to the affairs of the Company. The Board of Directors
will
take appropriate action based upon the results of the review process.
5.3 Committees
|
5.3.1
|
The
Board of Directors shall appoint committees to assist it in performing
its
duties and processing the quantity of information it
receives.
|
|
5.3.2
|
Each
committee operates according to a Board of Directors approved written
mandate outlining its duties and responsibilities. This structure
may be
subject to change as the Board of Directors considers from time
to time
which of its responsibilities can best be fulfilled through more
detailed
review of matters in committee.
|
|
5.3.3
|
The
Board of Directors will review annually the work undertaken by
each
committee and the responsibilities
thereof.
|
|
5.3.4
|
The
Board of Directors will annually evaluate the performance and review
the
work of its committees,
|
23
including
their respective mandates and the sufficiency of such mandates.
|
5.3.5
|
The
Board of Directors will annually appoint a Lead Director as well
as a
member of each of its committees to act as Chair of the
committee.
|
|
5.3.6
|
Subject
to subsection 5.3.8, committees of the Board of Directors shall
be
composed of a majority of Independent
Directors.
|
|
5.3.7
|
The
Board of Directors shall appoint members of committees after considering
the recommendations of the Corporate Governance Committee and the
Executive Chairman of the Board as well as the skills and desires
of
individual Board members, all in accordance with the mandates of
such
committees approved by the Board.
|
|
5.3.8
|
The
Audit Committee shall be composed only of Independent Directors.
All
members of the Audit Committee shall be Financially Literate and
at least
one member shall have Accounting or Related Financial
Experience.
|
5.4 Lead
Director
|
5.4.1
|
The
Lead Director shall be an Independent Director. He will oversee
that the
Board of Directors discharges its responsibilities, ensure that
the Board
of Directors evaluates the performance of management objectively
and that
the Board of Directors understands the boundaries between the Board
of
Directors and management responsibilities.
|
|
5.4.2
|
The
Lead Director will chair periodic meetings of the Independent Directors
and assume other responsibilities which the Independent Directors
as a
whole might designate from time to
time.
|
|
5.4.3
|
The
Lead Director should be able to stand sufficiently back from the
day-to-day running of the business to ensure that the Board of
Directors
is in full control of the Company's affairs and alert to its obligations
to the shareholders.
|
|
5.4.4
|
The
Lead Director shall provide input to the Executive Chairman of
the Board
on preparation of agendas for Board and committee
meetings.
|
|
5.4.5
|
The
Lead Director shall chair the Corporate Governance Committee and
shall
chair Board meetings when the Executive Chairman of the Board is
not in
attendance, subject to the provisions of the by-laws of the
Company.
|
24
|
5.4.6
|
The
Lead Director shall provide leadership for the independent directors
and
ensure that the effectiveness of the Board is assessed on a regular
basis.
|
|
5.4.7
|
The
Lead Director shall set the agenda for the meetings of the Independent
Directors.
|
|
5.4.8
|
The
Lead Director shall report to the Board concerning the deliberations
of
the independent directors as
required.
|
|
5.4.9
|
The
Lead Director shall, in conjunction with the Executive Chairman
of the
Board, facilitate the effective and transparent interaction of
Board
members and management;
|
|
5.4.10
|
The
Lead Director shall provide feedback to the Executive Chairman
of the
Board and act as a sounding board with respect to strategies,
accountability, relationships and other
issues.
|
5.5 Review
of
the Board Mandate
In
order
to ensure that this mandate is kept current in the light of changes which
may
occur in corporate practice or the structure of the Company, the Board of
Directors will annually reconfirm this mandate or initiate a review to revise
it.
5.6 Board
of
Directors Compensation
The
Human
Resources Committee will review the adequacy and form of compensation of
the
senior management and directors each year. The Committee shall make
recommendations to the Board of Directors for consideration when it believes
changes in compensation are warranted. Furthermore, the Board of Directors
will
ensure the compensation realistically reflects the responsibility and risk
involved in being a director.
|
6.
|
COMMUNICATIONS
POLICY
|
|
6.1
|
The
Board of Directors will consider and review the means by which
shareholders can communicate with the Company including the opportunity
to
do so at the annual meeting, communications interfaces through
the
Company's website and the adequacy of resources available within
the
Company to respond to shareholders through the office of the
Corporate
Secretary and otherwise. However, the Board of Directors believes
that it
is the function of the management to speak for the Company in
its
communications with the investment community, the media, customers,
suppliers, employees, governments and the general public. It
is understood
that individual directors may from time to time be requested
by management
to assist with such communications. It is expected, if communications
from
stakeholders are made to individual directors,
|
25
|
management
will be informed and consulted to determine any appropriate
response.
|
||
|
6.2
|
The
Board of Directors has the responsibility for monitoring compliance
by the
Company with the corporate governance requirements and guidelines
of the
Toronto Stock Exchange and the New York Stock Exchange. The Board
of
Directors will approve the disclosure of the Company's system
of
governance and the operation of such system.
|
26
3.2
Charter of the Corporate Governance Committee
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Charter. This Charter should
therefore be read in conjunction with Chapter 1.
1. INTERPRETATION
"Committee"
means the Corporate Governance Committee of the Board of Directors of the
Company.
"Independent
Director" means a director who meets the independence criteria set out in
section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by
the
Canadian Securities Administrators and as amended and in effect as of June
30,
2005, which is reproduced in Appendix A.
|
2.
|
OBJECTIVES
|
The
Committee is responsible for: (a) developing the Company's approach to Board
governance issues and the Company's response to the corporate governance
guidelines; (b) reviewing the composition and contribution of the Board and
its
members and recommending Board nominees; (c) overseeing the orientation program
for new directors; and (d) helping to maintain an effective working relationship
between the Board of Directors of the Company and management.
|
3.
|
COMPOSITION
|
|
3.1
|
The
Committee shall be composed of a majority of Independent
Directors.
|
|
|
3.2
|
The
Board of Directors shall appoint the Lead Director as the Chair
of the
Committee. If the Chair is absent from a meeting, the members
shall select
a Chair from those in attendance to act as Chair of the
meeting.
|
|
4.
|
MEETINGS
|
|
4.1
|
Meetings
of the Committee shall be held at the call of the Chair, but
not less than
twice annually. Meetings of the Committee may be called by the
Chair of
the Committee, the Executive Chairman of the Board or the Chief
Executive
Officer.
|
27
|
4.2
|
The
powers of the Committee shall be exercisable by a meeting at
which a
quorum is present. A quorum shall be not less than two members
of the
Committee from time to time. Subject to the foregoing requirement,
unless
otherwise determined by the Board of Directors, the Committee
shall have
the power to fix its quorum and to regulate its procedure. Matters
decided
by the Committee shall be decided by majority vote.
|
|
|
4.3
|
Notice
of each meeting shall be given to each member, to the Executive
Chairman
of the Board, to the Chief Executive Officer and to the Corporate
Secretary of the Company.
|
|
|
4.4
|
The
Committee may invite from time to time such persons as it may
see fit to
attend its meetings and to take part in discussion and consideration
of
the affairs of the Committee, including in particular the Chief
Executive
Officer.
|
|
|
4.5
|
The
Committee shall appoint a secretary to be the secretary of all
meetings of
the Committee and to maintain minutes of all meetings and deliberations
of
the Committee.
|
|
5.
|
RESPONSIBILITIES
AND DUTIES
|
5.1 Role
and
responsibilities of the Committee Chair:
|
5.1.1
|
The
Chair of the Committee:
|
|
5.1.1.1
|
Provides
leadership for the committee by ensuring
that:
|
|
(i)
|
The
responsibilities of the committee are well understood by committee
members
and management.
|
|
(ii)
|
The
committee works as a cohesive team.
|
|
(iii)
|
Adequate
resources and timely and relevant information are available to
the
committee to support its work.
|
|
(iv)
|
The
effectiveness of the committee is assessed on a regular
basis.
|
|
(v)
|
The
committee's structure and mandate is appropriate and adequate to
support
the discharge of the committee's
responsibilities.
|
|
(vi)
|
The
scheduling, organization and procedures of committee meetings provide
adequate time for the consideration and discussion of relevant
issues.
|
28
|
5.1.1.2
|
Works
with the Executive Chairman of the Board and Corporate Secretary
to set
the calendar of the committee's regular
meetings.
|
|
5.1.1.3
|
Has
the authority to convene special meetings as
required.
|
|
5.1.1.4
|
Sets
the agenda in collaboration with the Executive Chairman of the
Board and
the Corporate Secretary.
|
|
5.1.1.5
|
Presides
at meetings.
|
|
5.1.1.6
|
Acts
as liaison with management with regard to the work of the
committee.
|
|
5.1.1.7
|
Reports
to the Board concerning the work of the
committee.
|
|
5.1.1.8
|
Exercises
the authority specifically delegated to the Chair by the Committee,
if
any.
|
5.2 General
Responsibilities
Board
Members
|
5.2.1
|
Review
criteria regarding the composition of the Board of Directors and
committees of the Board of Directors, such as size, proportion
of
Independent Directors and as to criteria to determine "relatedness"
as
well as profile of the Board of Directors (age, geographical
representation, disciplines, etc.) and establish a Board of Directors
comprised of members who facilitate effective
decision-making.
|
|
5.2.2
|
Review
criteria relating to tenure as a director, such as limitations
on the
number of times a director may stand for re-election, and the continuation
of directors in an honorary or similar capacity.
|
|
5.2.3
|
Review
criteria for retention of directors unrelated to age or tenure,
such as
attendance at Board of Directors and committee meetings, health
or the
assumption of responsibilities which are incompatible with effective
Board
of Directors membership; and assess the effectiveness of the Board
of
Directors as a whole, the committees of the Board of Directors,
the
contribution of individual directors on an ongoing basis and establish
in
light of the opportunities and risks facing the Company, what
competencies, skills and personal qualities it seeks in new Board
members
in order to add value to the
Company.
|
29
|
5.2.4
|
Recommend
to the Board of Directors the list of candidates for directors
to be
nominated for election by shareholders at annual meetings of shareholders.
|
|
5.2.5
|
Recommend
to the Board of Directors candidates to fill vacancies on the Board
of
Directors occurring between annual meetings of shareholders.
|
|
5.2.6
|
Recommend
to the Board of Directors the removal of a director in exceptional
circumstances, for example (a) such director is in a position of
conflict
of interest or (b) the criteria underlying the appointment of such
director change.
|
|
5.2.7
|
Ensure
that the Board of Directors can function independently of management.
To
this end, arrange for meetings on a regular basis of the Independent
Directors without management present. In such cases, meetings will
be
chaired by the Chair of the Committee.
|
Director
Orientation
|
5.2.8
|
As
an integral element of the process for appointing new directors,
put in
place an orientation and education program for new recruits to
the Board
of Directors and review from time to time the value and benefit
of such
program.
|
Compliance
|
5.2.9
|
Ensure
corporate compliance with applicable legislation including director
and
officer compliance.
|
|
5.2.10
|
Review
proposed amendments to the Company's by-laws before making recommendations
to the Board of Directors.
|
Codes
of Business Conduct
|
5.2.11
|
Periodically
review and make recommendations to the Board of Directors with
respect to
the Company's formal code of ethics and business conduct for its
members,
directors and officers and its executive code of conduct applicable
to the
Company's principal executive officer, principal financing officer,
principal accounting officer or controller, or other persons performing
similar functions within the Company; including the disclosure
of the
adoption of such codes.
|
|
5.2.12
|
Monitor
adherence to the codes and review potential situations related
thereto
brought to the attention of the Committee by the Corporate Secretary
of
the Company in order to recommend or not in certain circumstances
to the
Board of Directors to grant or not waivers from compliance
|
30
with
the
codes for directors and officers. The Committee shall also ensure that when
such
waivers are granted, the Board of Directors shall disclose same in due time
and
specify the circumstances and rationale for granting the waiver.
Corporate
Governance Principles
|
5.2.13
|
Make
recommendations to the Board of Directors as deemed appropriate
in the
context of adherence to corporate governance guidelines in effect
from
time to time.
|
|
5.2.14
|
In
conjunction with the Executive Chairman of the Board of Directors,
recommend to the Board of Directors the membership and chairs of
the
committees of the Board of Directors.
|
|
5.2.15
|
Review
annually the Board/management relationship.
|
|
5.2.16
|
Advise
the Board of Directors on the disclosure to be contained in the
Company's
public disclosure documents, such as the Company's annual management
proxy
circular or annual report, on matters of corporate governance as
required
by the Toronto Stock Exchange, the New York Stock Exchange or any
other
applicable exchange or regulator.
|
|
5.2.17
|
Generally
advise the Board of Directors on all other matters of corporate
governance.
|
External
and Internal Resources
|
5.2.18
|
Retain
such independent external advisors as it may deem necessary and
advisable
for its purposes.
|
|
5.2.19
|
Report
to the Board of Directors on its proceedings, reviews undertaken,
and any
associated recommendations.
|
|
5.2.20
|
Have adequate resources to discharge its responsibilities; |
|
5.2.21
|
Have the right, for the purposes of discharging the powers and responsibilities of the Committee, to inspect any relevant records of the Company and its subsidiaries. |
|
5.2.22
|
The Chair of the Committee shall review the opportunity for the Board of Directors of the Company or individual directors to retain external advisors at the expense of the Company in certain appropriate circumstances in carrying out their responsibilities. |
31
Shareholder
Proposals
|
5.2.23
|
Review and make recommendations on shareholder proposals to the Board of Directors or refer them to the Executive Chairman of the Board as appropriate. |
5.3 Other
Responsibilities
The
Committee shall carry out such other mandates as the Board of Directors may
request from time to time.
5.4 Review
of
Mandate of the Committee
The
Board
of Directors should review and reassess the adequacy of themandate on an
annual
basis.
5.5 Compensation
Members
of the Committee shall be entitled to receive such remuneration for acting
as
members of the Committee as the Board of Directors may determine from time
to
time.
32
3.3
Charter of the Human Resources Committee
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Charter. This Charter should
therefore be read in conjunction with Chapter 1.
|
1.
|
INTERPRETATION
|
"Committee"
means the Human Resources Committee of the Board of Directors of the
Company.
"Independent
Director" means a director who meets the independence criteria set out in
section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by
the
Canadian Securities Administrators and as amended and in effect as of June
30,
2005, which is reproduced in Appendix A.
|
2.
|
OBJECTIVES
|
The
Committee is responsible for reviewing and making recommendations to the
Board
of Directors of the Company for the appointment of Senior Executives of the
Company and for determining terms of employment of Senior Executives. It
shall
also perform functions such as reviewing succession planning and matters
of
compensation as well as such other matters the Committee may consider suitable
with respect to compensation or as may be specifically directed by the Board
of
Directors of the Company from time to time.
|
3.
|
COMPOSITION
|
3.1 The
Committee shall be composed of a majority of Independent Directors.
3.2 The
Board
of Directors shall appoint one of the Independent Directors as the Chair
of the
Committee. If the Chair is absent from a meeting, the members shall select
a
Chair from those in attendance to act as Chair of the meeting.
|
4.
|
MEETINGS
|
|
4.1
|
Meetings
of the Committee shall be held at the call of the Chair, but not
less than
three times annually. Meetings of the Committee may be called by
the Chair
of the Committee, the Executive Chairman of the Board or the Chief
Executive Officer.
|
|
4.2
|
The
powers of the Committee shall be exercisable by a meeting at which
a
quorum is present. A quorum shall be not less than two members
of the
Committee from time to time. Subject to
the
|
33
|
|
foregoing
requirement, unless otherwise determined by the Board of Directors,
the
Committee shall have the power to fix its quorum and to regulate
its
procedure. Matters decided by the Committee shall be decided
by majority
vote.
|
|
4.3
|
Notice
of each meeting shall be given to each
member, to the Executive Chairman of the Board, to the Chief Executive
Officer and to the Corporate Secretary of the
Company.
|
|
4.4
|
The Committee
may
invite from time to time such persons as it may see fit to attend
its
meetings and to take part in discussion and consideration of the
affairs
of the Committee, including in particular the Executive Chairman
of the
Board.
|
|
4.5
|
The Committee shall appoint a secretary to be the secretary of all meetings of the Committee and to maintain minutes of all meetings and deliberations of the Committee. |
|
5.
|
RESPONSIBILITIES
AND DUTIES
|
5.1 Role
and
responsibilities of the Committee Chair:
5.1.1 The
Chair
of the Committee:
|
5.1.1.1
|
Provides
leadership for the committee by ensuring
that:
|
|
(i)
|
The
responsibilities of the committee are well understood by committee
members
and management.
|
|
(ii)
|
The
committee works as a cohesive team.
|
|
(iii)
|
Adequate
resources and timely and relevant information are available to
the
committee to support its work.
|
|
(iv)
|
The
effectiveness of the committee is assessed on a regular
basis.
|
|
(v)
|
The
committee's structure and mandate is appropriate and adequate to
support
the discharge of the committee's
responsibilities.
|
|
(vi)
|
The
scheduling, organization and procedures of committee meetings provide
adequate time for the consideration and discussion of relevant
issues.
|
|
5.1.1.2
|
Works
with the Executive Chairman of the Board and Corporate Secretary
to set
the calendar of the committee's regular
meetings.
|
34
|
5.1.1.3
|
Has
the authority to convene special meetings as
required.
|
|
5.1.1.4
|
Sets
the agenda in collaboration with the Executive Chairman of the
Board and
the Corporate Secretary.
|
|
5.1.1.5
|
Presides
at meetings.
|
|
5.1.1.6
|
Acts
as liaison with management with regard to the work of the
committee.
|
|
5.1.1.7
|
Reports
to the Board concerning the work of the
committee.
|
|
5.1.1.8
|
Exercises
the authority specifically delegated to the Chair by the Committee,
if
any.
|
5.2 General
Responsibilities
|
5.2.1
|
The
Committee shall, among other things, have responsibility to advise
the
Board of Directors on human resources planning, compensation of
members of
the Board of Directors, Executive Officers and other employees,
short and
long-term incentive plans, benefit plans, and Executive Officer
appointments.
|
|
5.2.2
|
The
Committee shall review and report to the Board of Directors
on:
|
|
5.2.2.1
|
Management's
succession plans for Executive Officers, with special emphasis
on the
Executive Chairman of the Board and Chief Executive Officer
succession;
|
|
5.2.2.2
|
Compensation
philosophy of the organization, including a remuneration strategy
and
remuneration policies for the Executive Officer level, as proposed
by the
Executive Chairman of the Board and the Chief Executive
Officer;
|
|
5.2.2.3
|
Recommendations
to the Board of Directors for the appointment of the Executive
Chairman of
the Board, the Chief Executive Officer and other Executive Officers,
corporate objectives which the Executive Chairman of the Board
and such
other Executive Officers, as the case may be, are responsible for
meeting,
assessment of the Executive Chairman of the Board and of the Chief
Executive Officer against these objectives, monitoring of the Executive
Chairman of the
|
35
Board's
performance and providing advice and counsel in the execution of his
duties;
|
5.2.2.4
|
Total
remuneration plan including adequacy and form of compensation
realistically reflecting the responsibilities and risks of the
position
for the Executive Chairman of the Board and for the Chief Executive
Officer of the Company and, in connection therewith, consider appropriate
information, including information from the Board of Directors
with
respect to the overall performance of the Executive Chairman of
the Board
and of the Chief Executive Officer;
|
|
5.2.2.5
|
Remuneration
for Executive Officers, annual adjustment
to executive salaries, and the design and administration of short
and
long-term incentive plans, stock options, benefits and perquisites
as
proposed by the Executive Chairman of the Board and the Chief Executive
Officer;
|
|
5.2.2.6
|
Employment and termination arrangements for senior management; |
|
5.2.2.7
|
Adoption of new, or significant modifications to, pay and benefit plans; |
|
5.2.2.8
|
Appointment
of new officers as appropriate;
|
|
5.2.2.9
|
Significant
organizational changes;
|
|
5.2.2.10
|
The
Committee's proposed executive compensation report to be contained
in the
Company's annual proxy circular;
|
|
5.2.2.11
|
Management
development programs for the
Company;
|
|
5.2.2.12
|
Any
special employment contracts or arrangements with officers of the
Company
including any contracts relating to change of control;
and
|
|
5.2.2.13
|
Remuneration
for members of the Board of Directors and committees thereof, including
adequacy and form of compensation realistically reflecting the
responsibilities and risks of the positions and recommend changes
where
applicable
|
5.2.3
The
Committee shall perform such other duties as may from time to time be assigned
to it by the Board of Directors
36
including
those relating to compensation of officers and senior employees and the manpower
resources of the Company.
5.3
Other
Responsibilities
5.3.1
The
Committee shall have the right to retain such independent external advisors
as
it may deem necessary and advisable for its purposes.
5.3.2
The
Committee shall report to the Board of Directors on its proceedings, reviews
undertaken, and any associated recommendations.
5.3.3
The
Committee shall have adequate resources to discharge its
responsibilities.
5.3.4
The
Committee shall have the right, for the purposes of discharging the powers
and
responsibilities of the Committee, to inspect any relevant records of the
Company and its subsidiaries.
5.4
Review
of
Mandate of the Committee
The
Board
of Directors should review and reassess the adequacy of this mandate on an
annual basis.
5.5
Compensation
Members
of the Committee shall be entitled to receive such remuneration for acting
as
members of the Committee as the Board of Directors may determine from time
to
time.
37
3.4 Charter
of the Audit and Risk Management Committee
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Charter. This Charter should
therefore be read in conjunction with Chapter 1.
|
1.
|
INTERPRETATION
|
"Accounting
or Related Financial Experience" means the ability to analyze and interpret
a
full set of financial statements, including the notes attached thereto, in
accordance with Canadian generally accepted accounting principles.
"Committee"
means the Audit and Risk Management Committee of the Board of Directors of
the
Company.
"Financially
Literate" means the ability to read and understand a balance sheet, an income
statement, a cash-flow statement and the notes attached thereto.
"Independent
Director" means a director who meets the independence criteria set out in
section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by
the
Canadian Securities Administrators and as amended and in effect as of June
30,
2005, which is reproduced in Appendix A.
|
2.
|
OBJECTIVES
|
The
Committee will assist the Board of Directors in fulfilling its oversight
responsibilities. In performing its duties, the Committee will maintain
effective working relationships with the Board of Directors, management,
the
internal auditors and the external auditors.
|
3.
|
COMPOSITION
|
|
3.1
|
The
Committee shall consist solely of Independent Directors, all of
whom shall
be Financially Literate and at least one of whom shall have Accounting
or
Related Financial Experience.
|
38
|
3.2
|
Following
each annual meeting of shareholders, the Board of Directors shall
elect
three or more directors, who shall meet the independence and experience
requirements of the New York Stock Exchange and the Toronto Stock
Exchange
as well as the other similar requirements under applicable securities
regulations, to serve on the Committee until the close of the next
annual
meeting of shareholders of the Company or until the member ceases
to be a
director, resigns or is replaced, whichever first occurs. Any member
may
be removed from office or replaced at any time by the Board of
Directors.
|
|
3.3
|
The
Board of Directors shall appoint one of the members of the Committee
as
the Chair of the Committee. If the Chair is absent from a meeting,
the
members shall select a Chair from those in attendance to act as
Chair of
the meeting.
|
|
4.
|
MEETINGS
AND RESOURCES
|
|
4.1
|
Regular
meetings of the Committee shall be held quarterly. Special meetings
of the
Committee may be called by the Chair of the Committee, the external
auditors, the Executive Chairman of the Board, the Chief Executive
Officer
or the Chief Financial Officer of the Company.
|
|
4.2
|
The
powers of the Committee shall be exercisable by a meeting at which
a
quorum is present. A quorum shall be not less than two members
of the
Committee from time to time. Subject to the foregoing requirement,
unless
otherwise determined by the Board of Directors, the Committee shall
have
the power to fix its quorum and to regulate its procedure. Matters
decided
by the Committee shall be decided by majority
vote.
|
|
4.3
|
Notice of each meeting shall be given to each
member, the
external auditors, the Executive Chairman of the Board, the Chief
Executive Officer and the Chief Financial Officer of the Company,
any or
all of whom shall be entitled to attend. Notice of each meeting shall
also
be given, as the case may be, to the internal auditor who shall also
attend whenever requested to do so by the Chair of the Committee
or the
Corporate Secretary.
|
|
4.4
|
Notice
of meeting may be given orally or by letter, telephone facsimile
transmission, telephone or electronic device not less than 24 hours
before
the time fixed for the meeting. Members may waive notice of any
meeting.
The notice need not state the purpose or purposes for which the
meeting is
being held.
|
39
|
4.5
|
Opportunities
should be afforded periodically to the external auditors and, as
the case
may be, to the internal auditor and the senior management to meet
separately with the Committee. In addition, the Committee may meet
in
camera, with only members of the Committee present, whenever the
Committee
determines that it is appropriate to do
so.
|
|
4.6
|
The
Committee shall have the authority to retain special legal counselling,
accounting or other consultants as it may see fit to attend its
meetings
and to take part in discussion and consideration of the affairs
of the
Committee at the Company's expense.
|
|
4.7
|
The
Corporate Secretary of the Company or designate of the Corporate
Secretary
shall be the Secretary of all meetings of the Committee and shall
maintain
minutes of all meetings and deliberations of the
Committee.
|
|
5.
|
RESPONSIBILITIES
AND DUTIES
|
5.1 Role
and
responsibilities of the Committee Chair:
5.1.1 The
Chair
of the Committee:
|
5.1.1.1
|
Provides
leadership for the committee by ensuring
that:
|
|
(i)
|
The
responsibilities of the committee are well understood by committee
members
and management.
|
|
(ii)
|
The
committee works as a cohesive team.
|
|
(iii)
|
Adequate
resources and timely and relevant information are available to
the
committee to support its work.
|
|
(iv)
|
The
effectiveness of the committee is assessed on a regular
basis.
|
|
(v)
|
The
committee's structure and mandate is appropriate and adequate to
support
the discharge of the committee's
responsibilities.
|
|
(vi)
|
The
scheduling, organization and procedures of committee meetings provide
adequate time for the consideration and discussion of relevant
issues.
|
|
5.1.1.2
|
Works
with the Executive Chairman of the Board, the Chief Financial Officer
and
the Corporate
|
40
Secretary
to set the calendar of the committee's regular meetings.
|
5.1.1.3
|
Has
the authority to convene special meetings as
required.
|
|
5.1.1.4
|
Sets
the agenda in collaboration with the Executive Chairman of the
Board, the
Chief Financial Officer and the Corporate
Secretary.
|
|
5.1.1.5
|
Presides
at meetings.
|
|
5.1.1.6
|
Acts
as liaison with management with regard to the work of the
committee.
|
|
5.1.1.7
|
Reports
to the Board concerning the work of the
committee.
|
|
5.1.1.8
|
Exercises
the authority specifically delegated to the Chair by the Committee,
if
any.
|
5.2 General
Responsibilities
While
the
Committee has the responsibilities and powers set forth below, it is not
the
duty of the Committee to plan or conduct audits or to determine that the
Company's financial statements are complete and accurate. This is the
responsibility of management and the external auditors. Nor is it the duty
of
the Committee to conduct investigations, or to assure compliance with laws
and
regulations. The Committee shall review disagreements, if any, between
management and the external auditors and shall make recommendations to resolve
such disagreements. In the event that any such disagreement persists, the
matter
will be referred by the Committee to the Board of Directors for a final
determination.
5.3 Review
of
Mandate of the Committee
The
Board
of Directors and the Committee shall review and reassess the adequacy of
this
mandate on an annual basis.
5.4 Publicly
Disclosed Financial Information
|
5.4.1
|
The
Committee shall review and recommend for approval by the Board
of
Directors, before release to the
public:
|
|
5.4.1.1
|
interim
unaudited financial statements;
|
|
5.4.1.2
|
audited
annual financial statements, in conjunction with the report of
the
external auditors;
|
|
5.4.1.3
|
all
public disclosure documents containing audited or unaudited financial
information, including any prospectus, the annual information form
and
management's discussion and analysis of financial condition and
results of
operations, as well as related press releases, including earnings
guidance; and
|
41
|
5.4.1.4
|
the
compliance of management certification of financial reports with
applicable legislation and attestation of the Company's disclosure
controls and procedures.
|
|
5.4.2
|
The
Committee shall review any report which accompanies published financial
statements (to the extent such a report discusses financial condition
or
operating results) for consistency of disclosure with the financial
statements themselves.
|
|
5.4.3
|
In
its review of financial statements, the Committee should obtain
an
explanation from management of all significant variances between
comparative reporting periods and an explanation from management
for items
which vary from expected or budgeted amounts as well as from previous
reporting periods.
|
|
5.4.4
|
In
its review of financial statements, the Committee should review
unusual or
extraordinary items, transactions with related parties, and adequacy
of
disclosures, asset and liability carrying values, income tax status
and
related reserves, qualifications, if any, contained in letters
of
representation and business risks, uncertainties, commitments and
contingent liabilities.
|
|
5.4.5
|
In its review of financial statements, the Committee
shall review the appropriateness of the Company's significant accounting
principles and practices, including acceptable alternatives, and
the
appropriateness of any significant changes in accounting principles
and
practices.
|
5.5 Financial
Reporting and Accounting Trends
The
Committee shall:
|
5.5.1
|
Review and assess the effectiveness of accounting policies and practices concerning financial reporting; |
|
5.5.2
|
Review with management and with the external auditors any proposed changes in major accounting policies, the presentation and impact of significant risks and uncertainties, and key estimates and judgments of management that may be material to financial reporting; |
42
|
5.5.3
|
Question management and the external auditors regarding significant financial reporting issues discussed and the method of resolution; and |
|
5.5.4
|
Review general accounting trends and issues of accounting policy, standards and practices which affect or may affect the Company. |
5.6 Internal
Controls
|
5.6.1
|
The Committee shall review and monitor the Company's internal control procedures, programs and policies, and assess the adequacy and effectiveness of internal controls over the accounting and financial reporting systems, with particular emphasis on controls over computerized systems. |
|
5.6.2
|
The Committee shall review: |
|
5.6.2.1
|
The
evaluation of internal controls by the external auditors, together
with
management's response;
|
|
5.6.2.2
|
The
report issued by the internal auditor and management's response
and
subsequent follow-up to any identified
weakness;
|
|
5.6.2.3
|
The
working relationship between management and external
auditors;
|
|
5.6.2.4
|
The
appointments of the Chief Financial Officer and any key financial
executives involved in the financial reporting
process;
|
|
5.6.2.5
|
Any
decisions related to the need for internal auditing, including
whether
this function should be outsourced and, in such case, approving
the
supplier which shall not be the external auditors; and
|
|
5.6.2.6
|
Internal
control procedures to ensure compliance with the law and avoidance
of
conflicts of interest.
|
|
5.6.3
|
The Committee shall undertake private discussions with staff of the internal audit function to establish internal audit independence, the level of co-operation received from management, the degree of interaction with the external auditors, and any unresolved material differences of opinion or disputes. |
5.7 Internal
Auditor
The
Committee shall:
43
|
5.7.1
|
Review the mandate and annual objectives of the internal auditor, if the appointment of an internal auditor is deemed appropriate; |
|
5.7.2
|
Review the adequacy of the Company's internal audit resources; and |
|
5.7.3
|
Ensure the internal auditor has ongoing access to the Chair of the Committee as well as all officers of the Company, particularly the Executive Chairman of the Board and the Chief Executive Officer. |
5.8 External
Auditors
|
5.8.1
|
The Committee shall recommend to the Board of Directors the appointment of the external auditors, which firm is ultimately accountable to the Committee and the Board of Directors. |
|
5.8.2
|
The Committee shall receive periodic reports from the external auditors regarding the auditors independence, discuss such reports with the auditors, and if so determined by the Committee, recommend that the Board of Directors take appropriate action to satisfy itself as to the independence of the auditors. |
|
5.8.3
|
The Committee shall take appropriate steps to assure itself that the external auditors are satisfied with the quality of the Company's accounting principles and that the accounting estimates and judgments made by management reflect an appropriate application of generally accepted accounting principles. |
|
5.8.4
|
The Committee shall undertake private discussions on a regular basis with the external auditors to review, among other matters, the quality of financial personnel, the level of co-operation received from management, any unresolved material differences of opinion or disputes with management regarding financial reporting and the effectiveness of the work of the internal audit function. |
|
5.8.5
|
The Committee shall review the terms of the external auditors' engagement and the appropriateness and reasonableness of the proposed audit fees as well as the compensation of any advisors retained by the Committee. |
|
5.8.6
|
The Committee shall review any engagements for material non-audit services provided by the external auditors or their affiliates, together with the fees for such services, and consider the impact of this on the independence of the external auditors. The Committee shall determine which non- |
44
|
|
audit services the external auditors are prohibited from providing. |
|
5.8.7
|
When a change of auditors is proposed, the Committee shall review all issues related to the change, including the information required to be disclosed by regulations and the planned steps for an orderly transition. |
|
5.8.8
|
The Committee shall review all reportable events, including disagreements, unresolved issues and consultations on a routine basis whether or not there is to be a change of auditors. |
|
5.8.9
|
When discussing auditor independence, the Committee will consider both rotating the lead audit partner or audit partner responsible for reviewing the audit after a number of years and establishing hiring policies for employees or former employees of its external auditor. |
5.9 Audit
Procedures
|
5.9.1
|
The Committee shall review the audit plans of the internal and external audits, including the degree of co-ordination in those plans, and shall inquire as to the extent to which the planned audit scope can be relied upon to detect weaknesses in internal control or fraud or other illegal acts. The audit plans should be reviewed with the external auditors and with management, and the Committee should recommend to the Board of Directors the scope of the external audit as stated in the audit plan. |
|
5.9.2
|
The Committee shall review any problems experienced by the external auditors in performing the audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management. |
|
5.9.3
|
The Committee shall review the post-audit or management letter containing the recommendations of the external auditors, and management's response and subsequent follow-up to any identified weakness. |
5.10 Risk
Management and Other Responsibilities
|
5.10.1
|
The
Committee shall put in place procedures to receive and handle complaints
or concerns received by the Company about accounting or audit matters
including the anonymous submission by employees of concerns respecting
accounting or auditing matters.
|
|
5.10.2
|
The
Committee shall review such litigation, claims, transactions or
other
contingencies as the internal auditor,
|
45
|
|
external
auditors or any officer of the Company may bring to its attention,
and
shall periodically review the Company's risk management programs
and
comprehensive computer disaster recovery
plans.
|
|
5.10.3
|
The
Committee shall review the policy on use of derivatives and monitor
the
risk.
|
|
5.10.4
|
The
Committee shall review the related party transactions in line with
the New
York Stock Exchange rules and regulations and those of any other
applicable exchange or regulator.
|
|
5.10.5
|
The
Committee shall review assurances of compliance with covenants
in trust
deeds or loan agreements.
|
|
5.10.6
|
The
Committee shall review business risks that could affect the ability
of the
Company to achieve its business plan.
|
|
5.10.7
|
The
Committee shall review uncertainties, commitments, and contingent
liabilities material to financial
reporting.
|
|
5.10.8
|
The
Committee shall review the effectiveness of control and control
systems
utilized by the Company in connection with financial reporting
and other
identified business risks.
|
|
5.10.9
|
The
Committee shall review incidents of fraud, illegal acts, conflicts
of
interest and related-party transactions.
|
|
5.10.10
|
The
Committee shall review material valuation
issues.
|
|
5.10.11
|
The
Committee shall review the quality and accuracy of computerized
accounting
systems, the adequacy of the protections against damage and disruption,
and security of confidential information through information systems
reporting.
|
|
5.10.12
|
The
Committee shall review material matters relating to audits of
subsidiaries.
|
|
5.10.13
|
The
Committee shall review cases where management has sought accounting
advice
on a specific issue from an accounting firm other than the one
appointed
as auditor.
|
|
5.10.14
|
The
Committee shall review any legal matters that could have a significant
impact on the financial statements.
|
|
5.10.15
|
The
Committee shall consider other matters of a financial nature it
feels are
important to its mandate or as directed by the Board of
Directors.
|
|
5.10.16
|
The
Committee shall report regularly to the Board of Directors on its
proceedings, reviews undertaken and any associated
recommendations.
|
46
|
5.10.17
|
The
Committee shall have the right, for the purpose of discharging
the powers
and responsibilities of the Committee, to inspect any relevant
records of
the Company and its subsidiaries.
|
5.11 Compensation
Members
of the Committee shall be entitled to receive such remuneration for acting
as
members of the Committee as the Board of Directors may determine from time
to
time.
47
4.
Codes
of Ethics
48
Codes
of Ethics
4.1
Code of Ethics and Business Conduct
for
members, officers and directors of CGI
To
the CGI Team
This
Code
of Ethics and Business Conduct is based on the values and philosophy that
have
guided CGI successfully since the Company's inception in 1976. It constitutes
a
unique repository where the combination of CGI policies, guidelines, principles
of conduct and best practices have been regrouped under one umbrella document,
for the benefit of our members, officers and directors.
CGI's
operations have grown significantly and now extend worldwide, and our business
environment has become increasingly competitive and complex. The scope and
pace
of our business requires us to make quick and informed decisions, in a manner
consistent with our values.
This
Code
provides guidance - and a global view - for CGI members, officers and directors
to consistently achieve the professionalism that has earned our Company an
enviable reputation among our clients and within our industry. It also provides
guidance for CGI directors when acting for the Company.
This
Code
is not meant to be a complete list of ethics and business conduct covering
every
eventuality. It highlights situations that CGI's members, officers and directors
may face in their duties and provides the basic principles to guide their
actions. CGI recognizes the importance of supporting these individuals as
ethical issues arise, and has an open door policy for resolving such issues
with
integrity.
Upon
joining CGI, all members, as part of their employment contract, undertake
to
observe this Code in all aspects of their work. Furthermore, annually, all
members shall renew such undertaking.
We
must
always behave responsibly and in line with the Company's core values when
working on behalf of CGI for its clients and other stakeholders. By preserving
our personal integrity and the professional reputation of CGI, I am confident
that together we will succeed in achieving the Company's mission and vision.
Serge
Godin
Founder
and Executive Chairman of the Board
49
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Code of Ethics and Business
Conduct. This Code should therefore be read in conjunction with Chapter 1.
|
1.
|
VALUES,
PHILOSOPHY, MISSION AND
VISION
|
VALUES
CGI
has
always believed in investing in the future to ensure continued success. From
the
beginning, the Company has invested in developing a strong corporate culture,
based on six core values that reflect its approach to business. These values
are: quality and partnership, intrapreneurship and sharing, respect, objectivity
and integrity, financial strength and corporate social responsibility. These
values are at the heart of CGI's success. They ensure that CGI takes a long-term
view on business issues, and it builds long-lasting partnerships with its
clients.
PHILOSOPHY
The
success of CGI Group Inc. and its subsidiaries is based on the knowledge,
creativity and commitment of its members. CGI ensures this success by recruiting
the most qualified people available. CGI's members share in the risks and
rewards of CGI's business as partners of CGI and are committed to its
objectives. They take a disciplined approach to their work and constantly
strive
for excellence to achieve the best results for every client. In exchange,
CGI
strives to recognize the value of its members by offering them a stimulating
work environment that fosters their personal and professional development.
MISSION
The
mission of CGI is to help our clients with professional services of outstanding
quality, competence and objectivity, delivering the best solutions to fully
satisfy client objectives in information technology, business processes and
management.
In
all we
do, we foster a culture of partnership, intrapreneurship, teamwork and
integrity, building a world class IT and business process services company.
VISION
Our
vision is to be a world class IT and business process services leader helping
our clients win and grow.
50
2. PURPOSE
AND SCOPE OF THE CODE
This
Code
of Ethics and Business Conduct (the "Code") defines CGI's character and guides
the actions and decisions of the salaried employees ("members"), officers
and
directors of CGI. Compliance with the Code is essential for many reasons
and
notably to preserve and enhance CGI's reputation and maximize shareholder
value.
In keeping with CGI's values, the Code outlines the essential rules and
guidelines necessary to preserve CGI's enviable reputation among its clients
and
within its industry. The Code is not meant to be a complete list of ethics
and
business conduct covering every eventuality. It highlights situations that
CGI
members, officers and directors may face in their duties. The code is meant
to
give them a broad and clear understanding of the conduct expected of them,
wherever CGI does business. While the specific illustrations are primarily
addressed to members, they should be read as being equally applicable to
the
members of CGI’s Board of Directors to the extent that they may be applicable in
the circumstances.
Should
a
member be confronted with a situation where further guidance is required,
the
matter should be discussed with the member's manager. CGI recognizes its
obligation to support its members, officers and directors as ethical issues
arise.
3. MEMBERS'
CONDUCT AND BEHAVIOUR
GENERAL
CONDUCT
Upon
joining CGI, and annually thereafter, all members undertake, by signing the
"Member Commitment to the Code of Ethics and Business Conduct," to abide
by the
Company Code of Ethics and Business Conduct and related policies and guidelines.
If
a
member ceases to be employed by CGI for any reason, the Member Commitment
specifies which elements continue to apply, namely those related to the
confidentiality obligations.
RESPECT
AND INTEGRITY
All
members of CGI support the Company's philosophy and contribute to CGI's
development and good reputation by promoting synergy and teamwork, by expressing
their ideas and by adopting the highest standards of service quality and
integrity. The members of CGI are its ambassadors. They must always behave
responsibly and demonstrate courtesy, honesty, civility and respect for other
members of CGI, for its clients and for its suppliers.
LOYALTY
51
Members
are expected to act at all times with diligence and loyalty towards CGI and
in
such a way as to safeguard CGI's interests. Members should not act in a way
or
publicly hold a position that might harm the image or reputation of CGI.
RELATIONS
WITH CLIENTS
CGI's
services often involve visiting or working at a client's place of business.
A
member working at a client's site must comply with the client's practices
and
procedures and treat the client's facilities with respect. The member must
work
as efficiently and meticulously as possible and leave the client's premises
and
property as he or she found them. As well, members must use the client's
information and systems infrastructures for the sole purpose of the client's
contract and protect those infrastructures and information at all
times.
RELATIONS
WITH COMPETITORS
If
a
member is working with a competitor of CGI on a joint project for a client,
the
member must avoid any situations that could cause conflicts. The member must
respect the roles that the client has assigned to each party and work as
a team
in the client's best interests. CGI's members also have both an ethical and
a
legal responsibility to portray the Company's competitors fairly and accurately.
CGI does not tolerate its members using improper means for gathering information
about its competitors.
MAINTENANCE
OF ASSETS
All
members of CGI have a responsibility to protect CGI's assets against loss,
theft, abuse and unauthorized use or disposal. If, in the course of his or
her
work, a member of CGI is supplied with any property belonging to CGI or to
a
third party, the member must use said property solely for work-related purposes
as specified in the binding agreement he or she signed upon joining CGI.
More
specifically, the members must use CGI's systems infrastructures in a manner
consistent with legal requirements, professional ethics, the policies
established by the administrators of CGI's network and of any external networks
that the member uses, and must respect the copyrights protecting any software
that the member also uses. As well, members must never use the clients' systems
infrastructures, including the clients' software, for any purpose that is
not
work-related. CGI applies a zero-tolerance policy to any abuse of its systems
infrastructures or those of its clients.
At
the
end of employment, members are required to return all CGI property and assets
in
their possession to their manager or to a designated CGI
representative.
52
|
4.
|
INTEGRITY
OF BOOKS AND RECORDS AND COMPLIANCE WITH SOUND ACCOUNTING
PRACTICES
|
PREPARATION
OF BOOKS AND RECORDS
Accuracy
and reliability in the preparation of all business records is of critical
importance to the decision-making process and to the proper discharge of
financial, legal and reporting obligations. All business records, expense
accounts, invoices, bills, payroll and member records and other reports are
to
be prepared with care and honesty. False or misleading entries are not permitted
in CGI's books and records.
FINANCIAL
TRANSACTIONS
All
financial transactions are to be properly recorded in the books of account
and
accounting procedures are to be supported by the necessary internal controls.
In
turn, all books and records of CGI must be available for audit.
MEMBER
RESPONSIBILITIES
In
relation to CGI's books and records, members must:
|
i)
|
not
intentionally cause Company documents to be incorrect in any
way;
|
|
ii)
|
not
create or participate in the creation of any records that are intended
to
conceal anything that is improper;
|
|
iii)
|
properly
and promptly record all disbursements of
funds;
|
|
iv)
|
co-operate
with internal and external
auditors;
|
|
v)
|
report
any knowledge of any untruthful or inaccurate statements or records
or
transactions that do not seem to serve a legitimate commercial
purpose;
and
|
|
vi)
|
not
make unusual financial arrangements with a client or a supplier
(such as,
over-invoicing or under-invoicing) for payments on their behalf
to a party
not related to the transaction.
|
BREACHES
Suspected
breaches of the Code which directly or indirectly affect CGI's business must
be
reported to the Chief Financial Officer, the Chief Executive Officer or the
Chair of the Audit and Risk Management Committee and to CGI's Corporate
Secretary.
In
addition, CGI has established a policy for incident reporting (often referred
to
as a “whistleblower policy”) as well as a process under that
53
policy
which allows any person who has direct knowledge of specific facts to report
incidents where the Company is exposed to a serious risk in matters of
accounting, auditing, internal accounting controls, finance, banking or
financial corruption. The process in place protects the incident reporter
and
ensures the confidentiality of the report. See the heading “Compliance with the
Code” below.
5. CONFIDENTIAL
INFORMATION AND INTELLECTUAL PROPERTY
DEFINITION
Confidential
Information
"Confidential
Information" means information about the Company's business dealings,
development strategies and financial results; products or processes; client
lists; vendor lists or purchase prices; cost, pricing, marketing or service
strategies; results of research and development work, technical know-how,
manufacturing processes, computer software; reports and information related
to
mergers, acquisitions and divestitures. "Confidential Information" also includes
information that relates to intellectual property and may include, but is
not
limited to: business strategies, product marketing and costing information
and
information provided by suppliers and competitors. In addition, the way the
Company puts publicly-known information together, to achieve a particular
result, is often a valuable trade secret.
The
following information and documents constitute confidential information or
documents of CGI or its clients, as the case may be:
|
i)
|
methodologies;
|
|
ii)
|
all
information related to: processes, formulas, research and development,
products, financials, marketing; names and lists of customers,
employees
and suppliers as well as related data; computer programs, all software
developed or to be developed including flow charts, source and
object
codes;
|
iii)
all
information related to projects undertaken by the Company whether they are
merger and acquisition or divestiture projects or projects related to large
client contracts, including all information obtained in due diligence
initiatives, whether such information pertains to CGI or to any third party;
and
|
iv)
|
all
other information or documents that, if disclosed, could be prejudicial
to
CGI or its clients.
|
Intellectual
Property
54
"Intellectual
Property" (IP) means patents, copyrights, trademarks, trade secrets and
industrial designs of CGI.
NON-DISCLOSURE
UNDERTAKING
CGI
Confidential Information
During
the normal course of business, members will have access to confidential
information about CGI. In some cases, the information may affect the value
of
CGI shares. Each member must protect the confidentiality of all confidential
CGI
information and documents. Members cannot discuss them away from work, and
cannot divulge any confidential CGI information or any information that could
harm CGI. Confidential CGI information could include information from other
members or information acquired from outside sources, sometimes under
obligations of secrecy. Members are expected to use such information exclusively
for business purposes and this information must not be disclosed externally
without the approval of a member's manager.
Third
Party Agreements
In
cases
where information or records are obtained under an agreement with a third
party,
such as software licenses or technology purchases, members must ensure that
the
provisions of such agreements are strictly adhered to so that CGI will not
be
deemed to be in default. Unauthorized disclosure or use of information or
records associated with these agreements could expose the member involved
and/or
CGI to serious consequences.
DISCLOSURE
GUIDELINES
Insider
Information
Confidential
information about CGI or other public companies may not be used as a basis
for
trading in CGI securities, or the securities of any other company in respect
of
which CGI or its members, consultants or advisers are in possession of insider
information. For this purpose, CGI has an established policy regarding the
use
of insider information and trading in securities. This policy is entitled
"Guidelines on Timely Disclosure of Material Information and Transactions
in
Securities by Insiders" which extends to all directors, officers and, when
in
possession of Confidential Information, members, those authorized to speak
on
behalf of CGI and all other insiders. It is designed to protect the integrity
of
the Company and its directors, officers and members while ensuring compliance
with all applicable securities legislation in Canada, the United States and
other countries. The law stipulates that insiders may not take advantage
of
inside information to trade in the securities of a company. Likewise, employees
must not provide third parties with any information that would give them
an
unfair advantage when trading in securities of the company, including client
companies or any other company that is the subject of an acquisition,
divestiture or client related project.
55
Material
Information
CGI's
guidelines on disclosure also cover the disclosure of information with a
material impact, defined as any information that, if disclosed to a potential
investor, could affect his or her perception of the value of the Company
as an
investment. Because CGI is a publicly traded company, any information that
may
have a material impact on CGI's results or on the perception of the value
of the
stock must be communicated in accordance with CGI's "Guidelines on Timely
Disclosure of Material Information and Transactions in Securities of CGI
by
Insiders." If a member thinks that he or she is in possession of a piece
of
information that is not known to management and may have a material impact
on
the Company, the member must communicate it immediately to either the Executive
Chairman of the Board, the Chief Executive Officer, the Corporate Secretary,
or
the Chief Financial Officer, without divulging it to anyone else.
Client
Information
Just
as
CGI's members must protect confidential information about CGI, they must
also
show discretion at all times with regard to the client's business affairs.
Unless a member has the client's express authorization, he or she should
never
reveal any information that could harm the client's interests and should
never
use any information that he or she obtains in the course of a project or
assignment for any purpose other than that project or assignment. If the
client
restricts the distribution of certain information within its own organization,
the member must comply with those restrictions as well.
Member
Information
CGI
collects and maintains personal information relating to its members, including
medical and benefits information. Access to such information is restricted
to
CGI personnel on a need-to-know basis. They must ensure that this information
is
not disclosed in violation of CGI's policies and practices. Personal information
is released to outside parties only with the member's approval, except to
satisfy the requirements considered by CGI to be appropriate for legal
reasons.
Intellectual
Property
In
the
course of their duties, members may develop or create new designs, inventions,
systems or processes, products or documents. When these achievements have
been
made as a direct result of a member's employment with the Company and through
use of CGI's resources, they belong to CGI. Moreover, CGI is free to use
this
work as it so wishes and members cannot use nor divulge, publish or otherwise
disseminate it without prior written consent from CGI. Upon request, members
will execute documents made necessary to confirm or complete the assignment
of
rights to CGI. Upon joining CGI, and in Canada only, members agree, by signing
the Member Commitment to the Code of Ethics and Business Conduct, to waive
their
moral rights in favour of CGI.
Suppliers
and Partners Information
56
All
information on CGI suppliers and partners is also confidential and must not
be
disclosed without the express consent of the persons concerned.
6. CONFLICTS
OF INTEREST
DEFINITION
The
members of CGI must avoid any actual or apparent conflicts of interest and
should never engage in any conduct which is harmful to CGI or its reputation.
A
conflict of interest exists when a member favours his or her personal interests
over those of CGI or its clients or when an obligation or situation arising
from
a member's personal activities or financial affairs may adversely influence
the
member's judgement in the performance of his or her duties at CGI.
GUIDELINES
The
following guidelines provide guidance for members to avoid situations which
are
or may appear to be in conflict with their responsibility to act in the best
interest of the Company.
Financial
Interests
- A
conflict of interest exists when a member who is able to influence business
with
CGI owns, directly or indirectly, a beneficial interest in an organization
which
is a competitor of CGI, or which has current or prospective business as a
supplier, customer or contractor with CGI. This does not include the situation
where the financial interest in question consists of shares, bonds or other
securities of a company listed on a securities exchange and where the amount
of
this interest is less than one percent of the value of the class of security
involved.
Outside
Work
- When a
member, directly or indirectly, acts as a director, officer, employee,
consultant or agent of an organization that is a competitor of CGI, or which
has
current or prospective business as a supplier, customer or contractor with
CGI,
there is a conflict of interest. Similarly, a conflict of interest may exist
when a member undertakes to engage in an independent business venture or
to
perform work or services for another entity should that activity prevent
such
member from devoting the time and effort to the conduct of CGI's business,
which
his or her position requires.
Gifts
or Favours
- A
conflict of interest will arise when a member, either directly or indirectly,
solicits or accepts any gift or favour from any person or organization which
is
a competitor of CGI, or which has current or prospective business with CGI
as a
customer, supplier, partner or contractor.
For
this
purpose, a "gift" or "favour" includes any gratuitous service, loan, discount,
money or article of value. It does not include articles of nominal
57
value
normally used for sales promotion purposes, ordinary business meals or
reasonable entertainment consistent with local, social or business customs
if
received in a sporadic manner.
Commissions
- CGI or
its members will never accept any commissions from a third-party vendor when
recommending software, hardware or any equipment to a client as part of a
service agreement.
Trading
with CGI
- A
conflict of interest may exist when a member is directly or indirectly a
party
to a transaction with CGI.
Misappropriation
of Business Opportunities
- A
conflict of interest will exist when a member, without the knowledge and
consent
of CGI, appropriates for his or her own use, or that of another person or
organization, the benefit of any business venture, opportunity or potential
opportunity about which the member may have learned or that he or she may
have
developed during the course of his or her employment.
Bribes
-
Neither CGI nor its members will pay bribes to clients or client representatives
to obtain business from them.
REPORTING
If
a
member thinks that he or she has been placed in a conflict of interest, the
member must inform his or her manager and work with him or her to determine
how
the situation may be corrected.
7. LAWS,
STATUTES AND REGULATIONS
COMPLIANCE
WITH THE LAW
It
is
CGI's policy to comply, not merely with the letter, but also with the spirit
of
the law. CGI is required to maintain compliance with various acts, statutes
and
regulations governing activities in the jurisdictions in which it carries
on
business and expects members acting on its behalf to do likewise. Members
are
also expected to report any situation of concern to CGI's Corporate
Secretary.
GUIDELINES
FOR COMPLIANCE
This
Code
does not seek to provide legal guidance for all laws, statutes and regulations
that impact CGI's activities. Specialized resources - legal, tax, environmental,
government relations, personnel - are available within CGI for that purpose.
There are, however, several items of legislation that warrant specific mention.
These are listed below along with some general guidelines for
compliance.
HEALTH
AND SAFETY LAWS
58
CGI
is
committed to creating and maintaining healthy and safe workplaces for its
members. Members are expected to comply with all safety laws, regulations
and
directives from their managers (which may not necessarily be a law or
regulation).
ENVIRONMENTAL
LAWS
CGI
is
committed to preserving and enhancing the environment in the communities
where
its various businesses operate through responsible and environmentally-oriented
operating practices. Members are encouraged to participate in undertakings
geared to improving the environment in both their workplace and their
community.
HUMAN
RIGHTS LEGISLATION
Every
person has the right to equal treatment with respect to employment and the
right
to be free of discrimination because of race, ancestry, place of origin,
colour,
ethnic origin, citizenship, creed, sex, sexual orientation, age, pregnancy,
record of offences, marital status, social conditions, political beliefs,
language, veteran status (U.S. only), family status, disability or means
used to
overcome a disability. The following are CGI's policies on equal employment
opportunity, anti-discrimination and anti-harassment as well as the procedure
for reporting any breach or violation of these policies:
|
i)
|
Equal
Employment Opportunity
-
CGI is committed to treating all people fairly and equitably, without
discrimination. The company has established a program to ensure
that
groups which are often subject to discrimination are equitably
represented
within CGI and to eliminate any employment rules and practices
that could
be discriminatory. CGI regards diversity among its members as a
priceless
resource and one which enables the Company to work harmoniously
with
clients from around the world.
|
|
ii)
|
Anti-Harassment
and Anti-Discrimination Policies
-
CGI recognizes that everyone has the right to work in an environment
free
of sexual, psychological and racial harassment. CGI will do everything
in
its power to prevent its members from becoming victims of such
harassment.
CGI defines sexual, psychological or racial harassment as any behaviour,
in the form of words, gestures, or actions, generally repeated,
that has
undesired sexual, psychological or racial connotations, that has
a
negative impact on a person's dignity or physical or psychological
integrity, or that results in that person being subjected to unfavourable
working conditions or dismissal.
|
CGI
will
prevent any form of harassment or discrimination against job candidates and
members on any of the grounds mentioned above, whether during the hiring
process
or during employment. This commitment applies to such areas as training,
performance assessment, promotions, transfers, layoffs, remuneration and
all
other employment practices and working conditions.
59
All
CGI
managers are personally accountable for enforcing this policy and must make
every effort to prevent discriminatory or harassing behaviour and to intervene
immediately if they observe a problem or if a problem is reported to
them.
CGI
requires that all members refrain from any form of harassment or discrimination
against anyone else. CGI will not tolerate any violations of this policy
whatsoever.
|
iii)
|
Procedure
for Reporting Discrimination or Harassment
-
Any member of CGI who feels discriminated against or harassed can
and
should, in all confidence and without fear of reprisal, personally
report
the facts to the vice-president of his or her business unit and
to the
human resources leader either in that business unit, in the country
or at
the corporate head office. The facts will be examined carefully
by these
two individuals. Neither the name of the person reporting the facts
nor
the circumstances surrounding them will be disclosed to anyone
whatsoever,
unless such disclosure is necessary for an investigation or disciplinary
action. Any disciplinary action will be determined by these same
two
people and will be proportional to the seriousness of the behaviour
concerned. CGI will also provide appropriate assistance to any
member who
is a victim of discrimination or harassment. In addition, retaliation
against persons who make complaints of harassment, witness harassment,
offer testimony or are otherwise involved in the investigation
of
harassment complaints will not be
tolerated.
|
COMPETITION
ACT
CGI
is
required to make its own decisions on the basis of its best interest and
must do
so independent of agreements or understandings with competitors. The Competition
Act (Canada) or corresponding provisions of foreign legislation in matters
of
competition prohibit certain arrangements or agreements with others regarding
product prices, terms of sale, division of markets, allocation of customers
or
other practices that restrain competition. It is the responsibility of each
manager to comply with the letter and spirit of all competition laws as they
apply to CGI.
Should
a
question or doubt arise with respect to competition-sensitive issues, they
must
immediately be brought to the attention of CGI's Corporate
Secretary.
SECURITIES
LAWS AND INSIDER TRADING
Members
who possess material non-public information may not buy or sell CGI securities
while such information remains non-public and must refrain from passing such
information on to others, including family and friends. These trading
prohibitions apply to members at all levels - not just officers or managers.
The
prohibition on such trading is based on such information potentially providing
an unfair advantage to the member.
60
"Material
non-public information" is non-public information that is significant enough
that, if publicly known, is likely to affect the market price of any of CGI's
securities. CGI has adopted "Guidelines on Timely Disclosure of Material
Information and Transactions in Securities of CGI by Insiders". Each member,
officer and director must abide by the provisions of these guidelines, when
applicable.
8. MEMBER,
CLIENT, INVESTOR AND MEDIA RELATIONS
COMMUNICATIONS
IN GENERAL
Communications
Policy
|
i)
|
Within
CGI
-
CGI's management philosophy demonstrates the value it places on
its
members' participation in the Company's activities. Communication
is a key
responsibility of all members. CGI encourages open communication
and the
sharing of information because it believes its members are its
most
valuable ambassadors.
|
|
ii)
|
Outside
of CGI
-
CGI also believes in maintaining open communication with its clients,
shareholders, the investment community, industry analysts, regulators,
the
media and other interested parties. Clear and professional communication
enables CGI to promote its services and solutions to its various
audiences.
|
Communications
within CGI
|
i)
|
Member
Input
-
CGI encourages its members to share their opinions and ideas, both
at
scheduled meetings and in the member surveys circulated for this
purpose.
Regular team meetings are held in all of CGI's business units,
providing
opportunities for its members to get to know their colleagues better,
to
discuss topics of common interest and to receive information about
developments both in their business unit and in the company. During
the
annual tour of all business units, the senior managers of CGI provide
a
review for the members of the past year's performance and discuss
CGI's
strategies for the coming year.
|
|
ii)
|
Member
Satisfaction Assessment Process
-
Each year, all members of CGI are asked to participate in the Member
Satisfaction Assessment Process (MSAP) by filling out a survey
questionnaire. The answers provided in this questionnaire and the
comments
made in the "Message to the Senior Management" section enable CGI
corporate and operational management to improve policies and programs
and
develop action plans to achieve CGI's objective of becoming the
best
employer in the industry. Members of CGI can rest assured that
their
answers and comments on this questionnaire are kept entirely
confidential.
|
61
|
iii)
|
Newsletter,
Other Communications and the Intranet site
-
The purpose of internal communications is to fulfill CGI's promise
to
provide all members with complete, meaningful, up-to-date information
about CGI's activities on an ongoing basis. Examples of ongoing
communications initiatives include the member newsletter, Perspectives;
quarterly (audio) webcasts, Ontrack, and CGI's enterprise Intranet
site,
all of which keep the members informed about CGI's current projects
and
recent successes. CGI's Intranet site is intended to implement
an
infrastructure that allows CGI to share information and corporate
policies
with all of its members more
rapidly.
|
Corporate
Communications Department
The
Corporate Communications department of CGI is responsible for developing
and
managing the policies and programs for CGI's communications activities both
within and outside of the company. The Corporate Communications team's mandate
includes the establishment of a corporate identity that includes not only
the
visual branding, but also how to describe and talk about CGI. CGI's Corporate
Communications Program has been designed to focus on three key audiences:
members, clients and investors.
World
Wide Web site
As
a key
component of the corporate communications program, the CGI Web site is designed
to ensure a flow of information to current and future members, current and
prospective clients and investors. CGI's Web site is constantly changing
and
evolving to achieve CGI's worldwide communication strategy. CGI encourages
its
members and shareholders to keep up with the latest news on CGI and its
activities through CGI's Website at www.cgi.com.
COMMUNICATIONS
WITH CLIENTS
|
i)
|
Initiatives
with Clients
-
CGI is successful because it works hard at communicating effectively
with
its clients around the world. A Corporate Identity Manual is available
in
each of the business units. This manual provides guidelines which
must be
followed by all members for all external communications. A 'branding'
section is posted on the Intranet that supports the overall branding
effort, educating members on how best to manage the brand. It also
provides rules, as well as tools, for sales collaterals and presentations,
advertising, and trade show and conference
participation.
|
|
ii)
|
Marketing
Materials
-
A range of marketing materials has been developed in collaboration
with
leaders across CGI, representing its various business units, industry
sectors and areas of expertise. Included are computer-based presentations
and brochures about CGI. These materials are available to all members
who
work directly with the company's clients, and can be located on
the
company's Intranet site.
|
62
COMMUNICATIONS
WITH INVESTORS AND MEDIA
CGI
strives to maintain strong relations with its shareholders and has developed
an
integrated program to manage communications with its shareholders as well
as
with others in the investment community and with the media. As a publicly
traded
company, CGI must demonstrate discipline in dealing with external audiences.
CGI
has therefore adopted "Guidelines on Timely Disclosure of Material Information
and Transactions in Securities of CGI by Insiders." Such guidelines include
(i)
Timely Disclosure and Prohibition Against Selective Disclosure and (ii) CGI's
Corporate Disclosure Policy.
Release
of Information
CGI
regularly issues news releases in North America, Europe and around the world
when it concludes major agreements, signs important contracts or has any
other
news of general interest or material information. CGI also provides financial
information to institutional investors and financial analysts and other
interested parties by issuing quarterly financial news releases, quarterly
shareholders' reports, annual reports, annual notices and corporate and
financial profiles. These documents are distributed through newswires and/or
posted on SEDAR and EDGAR, as well as on the CGI Web site. CGI also holds
meetings with the investment community and hosts special events, such as
its
annual "Investor Day" and the annual general meeting of shareholders, where
CGI
communicates directly with the investment community and shareholders.
Internet
Broadcasts
CGI
strives to share information democratically by using Internet technology
to
broadcast its major communication events to all of its shareholders, other
investors, analysts and the media. CGI broadcasts live and also archives
its
annual shareholders' meeting for replay via its Web site. It also broadcasts
live and archives its regular and special telephone conferences with investors
and analysts to disclose its quarterly financial results and major news.
Where
possible, it also broadcasts presentations at brokerage-sponsored conferences.
CGI strives to give current and prospective shareholders and analysts a
transparent picture of CGI. This information helps investors better understand
CGI's strategy and strengths, so that its shares will trade on the market
at
their fair value.
63
Authorized
Spokespersons
Media
and
investor interaction is the responsibility of authorized CGI spokespersons,
who
ensure the timely and informed communication of relevant information. All
authorized spokespersons must demonstrate high standards of integrity and
transparency, while refraining from unauthorized disclosure of proprietary
or
non-public material information.
Initiatives
All
initiatives related to investor and media communications must be directed
through CGI's Chief Executive Officer. Furthermore, members should make sure
that CGI's authorized spokespersons know about any relevant issue of local
or
national interest that relates to CGI's business, of which they may not be
aware.
|
9.
|
COMMUNITY
ACTIVITIES AND POLITICAL AND PUBLIC
CONTRIBUTIONS
|
CGI
respects and supports the right of its members as individuals to participate
in
both community and political activities outside of work hours. No contributions
of any kind may be made by a member to any political party, candidate or
campaign on behalf of CGI without the approval of CGI's Chief Executive Officer.
However, CGI may itself make contributions to political parties as permitted
by
law.
|
10.
|
COMPLIANCE
WITH THE CODE
|
MANAGEMENT
RESPONSIBILITIES
CGI's
managers have a special duty to be role models of appropriate business conduct
and to see that the principles and policies of this Code and of other CGI
guidelines and policies referred to in this Code are upheld. This
means:
|
i)
|
Copy
of the Code
-
Ensuring that all members have a copy of the Code, and that they
understand and comply with its
provisions.
|
|
ii)
|
Assistance
-
Offering assistance and explanations to any member who has questions,
doubts or is in a difficult situation. Managers are also required
to
counsel members promptly when their conduct or behaviour is inconsistent
with the Code.
|
|
iii)
|
Enforcement
-
Taking prompt and decisive action when a violation of the Code
has
occurred, in consultation with CGI's Corporate Secretary . If a
manager
knows a member is contemplating a prohibited action and does nothing,
the
manager will be held responsible along with the
member.
|
MEMBER
RESPONSIBILITIES
64
Each
member is accountable for observing the rules of conduct that are normally
accepted as standard in a business enterprise. In addition they must abide
by
the following:
|
i)
|
Compliance
-
CGI's members are expected to comply with the Code and all policies
and
procedures of the company as well as to actively promote and support
CGI's
values.
|
|
ii)
|
Preventing
-
Members should take all necessary steps to prevent a Code
violation.
|
|
iii)
|
Reporting
-
Members must immediately report to their manager (i) situations
of
non-compliance with respect to this Code of which they become aware
and
(ii) suspected violations of the Code. All information will, to
the extent
possible, be received in confidence. It is corporate policy not
to take
action against a member who reports in good faith unless unusual
circumstances warrant such action.
|
In
addition, CGI has established a policy for incident reporting (often referred
to
as a “whistleblower policy”) as well as a process under that policy which allows
any person who has direct knowledge of specific facts to report incidents
in
which the Company is exposed to a serious risk in matters of accounting,
auditing, internal accounting controls, finance, banking or financial
corruption. The process in place protects the incident reporter and ensures
the
confidentiality of the report.
Incident
reports may be submitted either by telephone by dialing 1-800-422-3076 toll
free, by dialing (503) 352-7942 and reversing the long distance charges,
or by
submitting an incident report online. For telephone reports, all long distances
charges will be at the expense of CGI. For those who wish to submit incident
reports online, a link to the incident reporting web site is provided on
CGI’s
Enterprise Portal or members may access the incident reporting system directly
at www.ethicspoint.com.
CGI’s
incident reporting system is managed by EthicsPoint, Inc., a company unrelated
to CGI which has undertaken to ensure the confidentiality of all incident
reporters as well as the confidentiality of the reports they
submit.
CGI’s
policy on incident reporting is entitled the Serious
Ethical Incidents Reporting Policy
and is
available on the CGI Enterprise Portal on the policies page.
|
iv)
|
Consequences
-
Unethical behaviour, violations of this Code and of CGI's other
guidelines
and policies, as well as withholding information during the course
of an
investigation regarding a possible violation of the Code, may result
in
disciplinary action which will be
|
65
commensurate
with the seriousness of the behaviour. Such action could include termination
as
well as civil or criminal action.
|
11.
|
ADMINISTRATION
OF THE CODE
|
PERIODIC
REVIEW
Responsibility
for the periodic review and revision of the Code lies with CGI's Corporate
Governance Committee.
MONITORING
COMPLIANCE
The
Board
of Directors of CGI will monitor compliance with the Code and will be
responsible for the granting of any waivers from compliance with the Code
for
directors and officers of CGI. These waivers will be disclosed publicly in
due
course by the Board of Directors of CGI who shall also specify the circumstances
and rationale for granting the waivers, as the case may be. The Corporate
Secretary of CGI shall, when deemed appropriate, make reports to the Board
of
Directors of CGI with respect to compliance with this Code.
QUESTIONS
Questions
concerning this Code should be referred to a member's manager who, when
warranted, shall report to CGI's Corporate Secretary.
66
4.2
Executive Code of Conduct
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of this Executive Code of Conduct.
This
Code should therefore be read in conjunction with Chapter 1.
This
Executive Code of Conduct (the "Code") is part of the commitment of CGI Group
Inc. ("CGI") to ethical business conduct and practices. This Code reflects
CGI's
firm commitment, not only to adherence to the law, but also to the highest
standards of ethical conduct.
This
Code
specifically covers CGI's principal executive officer, principal financial
officer, principal accounting officer or controller, or other persons performing
similar functions (collectively, the "officers").
|
1.
|
HONEST
AND ETHICAL CONDUCT
|
RESPECT
AND INTEGRITY
The
officers of CGI are its ambassadors. They must always behave responsibly
and
demonstrate courtesy, honesty, civility and respect for all other employees
of
CGI, for its clients and for its suppliers.
ETHICS
Supporting
CGI's objectives, officers in performing their duties will carry out their
responsibilities at all times in a way that promotes ethics in their leadership.
The officers will:
|
(i)
|
Undertake
their responsibilities in a vigilant manner in the interests of
CGI and to
avoid any real or perceived impression of personal
advantage;
|
|
(ii)
|
Advance
CGI's legitimate interests when the opportunity arises at all times
ahead
of their own interests;
|
|
(iii)
|
Proactively
promote ethical behavior among subordinates and peers;
and
|
|
(iv)
|
Use
corporate assets and resources in a responsible and fair manner,
having
regard for the interests of CGI.
|
AVOIDANCE
OF CONFLICT OF INTEREST
Officers
must avoid any actual or apparent conflicts of interest and should never
engage
in any conduct that is harmful to CGI or its reputation. Such a conflict
would
exist when an officer favours his or her personal interests
67
over
those of CGI or its clients or when an obligation or situation arising from
an
officer's personal activities or financial affairs may adversely influence
the
officer's judgment in the performance of his or her duties to CGI.
Officers
will not knowingly do business with any parties related to CGI, any of CGI's
clients or any firms with which CGI does business if such business would
be
material or would be outside of normal client related activity.
Officers
shall not solicit or accept gifts or favours from related parties, clients
or
firms with which CGI does business beyond customary courtesies. For this
purpose, a "gift" or "favour" includes any gratuitous service, loan, discount,
money or article of value. It does not include articles of nominal value
normally used for sales promotion purposes, ordinary business meals or
reasonable entertainment consistent with local, social or business customs
if
received in a sporadic manner.
Officers
will not perform work or render services for, or knowingly make a material
investment in, organizations that compete with CGI or with which CGI does
business without appropriate approval from CGI's Corporate
Secretary.
If
an
officer thinks that he has been placed in a conflict of interest, the Officer
must inform CGI's Corporate Secretary.
|
2.
|
FULL,
FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE
DISCLOSURE
|
ANNUAL
AND QUARTERLY REPORTS
Each
officer shall read each annual or quarterly report filed or submitted under
the
applicable securities laws and satisfy himself or herself that the report
does
not contain any untrue statement of a material fact or omit to state a material
fact that is necessary in order for the statements made not to be misleading,
in
light of the circumstances in which such statements were made.
FINANCIAL
STATEMENTS
Each
officer shall satisfy himself or herself that the financial statements, and
other financial information included in the report, fairly present in all
material respects the financial condition and results of operations of CGI
as
of, and for, the periods presented in the report.
REPORTS
TO SECURITIES REGULATORS
68
Officers
shall perform their responsibilities with a view to causing periodic reports
filed with securities regulators to contain information which is accurate,
complete, fair and understandable and to be filed in a timely
fashion.
REPORTING
CONCERNS AND COMPLAINTS
An
officer who believes it is necessary or appropriate to do so can refer concerns
about the quality and scope of financial or related reporting requirements
to
the Chair of the Audit Committee. Any officer who receives a bona fide material
complaint about financial reporting from any employee shall report such
complaints to the Audit Committee. Any officer who has disclosed such concerns
in good faith shall not face any form of retribution.
|
3.
|
COMPLIANCE
WITH LAWS, RULES AND
REGULATIONS
|
The
officers are cognizant of their leadership roles within the organization
and the
importance of compliance with the letter and spirit of applicable laws, rules
and regulations relating to financial and related reporting.
|
4.
|
COMPLIANCE
WITH THE CODE
|
GENERAL
RESPONSIBILITIES
Officers
have a special duty to be role models of appropriate business conduct and
see
that the principles and policies of this Code and other CGI guidelines and
policies are upheld.
REPORTING
Any
violation or suspected violation of the Code should be personally reported
by an
officer to CGI's Corporate Secretary.
ACCOUNTABILITY
Non-compliance
with this Code in every respect by an officer will be a matter for consideration
and review by the Board of Directors of CGI.
|
4.3
|
Guidelines
on Timely Disclosure of Material Information and Transactions in
Securities of CGI by
Insiders
|
The
present document is divided into three sections. The first section is a summary
of the applicable legislation and policies regarding timely disclosure and
prohibitions against selective disclosure. The second section is CGI's corporate
disclosure policy which is destined to ensure compliance by CGI of the timely
disclosure requirements and avoid selective disclosure of material information.
Finally, the third section refers to restrictions applicable to transactions
in
securities of CGI by insiders.
IMPORTANT
NOTE
Chapter
1, Dream, Mission, Vision and Values of the CGI Group Inc. Fundamental Texts
constitutes the fundamental principles of these Guidelines on timely
69
disclosure
of material information and transactions in securities of CGI by insiders.
These
Guidelines should therefore be read in conjunction with Chapter 1.
|
I.
|
TIMELY
DISCLOSURE AND PROHIBITIONS AGAINST SELECTIVE
DISCLOSURE1
|
It
is
fundamental that all persons investing in securities have equal access to
information that may influence their investment decisions, therefore placing
all
participants in the market on an equal footing. The timely disclosure policies
of the Toronto Stock Exchange (the "TSX")2
and the
New York Stock Exchange (the "NYSE") (collectively, the "Exchanges") and
of the
Canadian Securities Administrators (the "CSA") (individually, a "Timely
Disclosure Policy" and collectively, the "Timely Disclosure Policies") elaborate
upon the provisions of the Securities Act (Québec), and the securities
legislation of all of the provinces of Canada (collectively, the "Legislation")
which require that when a material change occurs which is not generally known,
a
press release disclosing the substance of the change must be issued.
DEFINITION
OF MATERIAL INFORMATION
Material
information is any information relating to the business and affairs of CGI
that
results in or would reasonably be expected to result in a significant change
in
the market price or value of CGI securities (the "CGI Securities"). Material
information consists of both "material changes"3
and
"material facts"4
relating
to the business and affairs of CGI. A material change includes a decision
to
implement such a change made by the board of directors or by senior management
who believe that confirmation of the decision by the board of directors is
probable.
|
1
|
Definitions
provided in Sections I and II apply only to those
Sections.
|
|
2
|
Respectively,
the Toronto Stock Exchange Policy Statement on Timely Disclosure,
the
Listed Company Manual of the New York Stock Exchange (both available
on
the TSX website) and National Policy 51-201 on disclosure standards
and
which provide guidance on best disclosure practices.
|
|
3
|
A
material change is a change in the business, operations or capital
of the
issuer that would reasonably be expected to have a significant
effect on
the market price or value of any of the securities of the issuer
and
includes a decision to implement a change made by the board of
directors
of the issuer or by senior management of the issuer who believe
that
confirmation of the decision by the board of directors is
probable.
|
|
4
|
A
material fact is a fact that significantly affects, or would reasonably
be
expected to have a significant effect on, the market price or value
of a
security of the issuer. The Securities Act (Québec) refers to "privileged
information" which is defined as "any information that has not
been
disclosed to the public and that could affect the decision of a
reasonable
investor". (Refer to Section III of this
document).
|
70
It
is the
responsibility of CGI to determine the materiality of information, as it
relates
to CGI. When making materiality judgments, CGI should consider factors such
as
the nature of the information, the volatility of CGI Securities and prevailing
market conditions. Ongoing monitoring and assessment of market reaction by
CGI
to different disclosures will be helpful when making materiality judgments
in
the future. As a guiding principle, if there is any doubt about whether
particular information is material5,
the CSA
encourage companies to err on the side of caution and release information
publicly.
Pursuant
to the Timely Disclosure Policy of the TSX, the following examples of corporate
developments are likely to constitute material information requiring prompt
disclosure:
|
w
|
a
change in share ownership that may affect the control of the
company;
|
|
w
|
a
change in the corporate structure such as a merger, an amalgamation
or a
reorganization;
|
|
w
|
a
take-over bid or issuer bid;
|
|
w
|
a
major corporate acquisition, disposition or joint
venture;
|
|
w
|
a
stock split, consolidation, stock dividend or other change in capital
structure;
|
|
w
|
the
borrowing of a significant amount of
funds;
|
|
w
|
the
public or private sale of additional
securities;
|
|
w
|
the
development of a new product and/or a development affecting the
company's
resources, technology, products or
markets;
|
|
w
|
entering
into or loss of a significant
contract;
|
|
w
|
firm
evidence of a significant increase or decrease in near term earnings
prospects;
|
|
w
|
an
important change in capital investment plans or corporate
objectives;
|
|
w
|
a
significant change in management;
|
|
w
|
significant
litigation;
|
|
w
|
a
major labour dispute or a dispute with a major contractor or
supplier;
|
|
w
|
an
event of default under a financing or other agreement;
|
|
w
|
a
declaration or omission of
dividends;
|
|
w
|
a
call of securities for redemption;
and
|
|
5
|
U.S.
case law has interpreted information to be material if "there is
a
substantial likelihood that a reasonable shareholder would consider
it
important" in making an investment decision. Also, according to
the U.S.
case law, information will be considered material if there is a
substantial likelihood that a fact "would have been viewed by the
reasonable investor as having significantly altered the "total
mix" of
information available".
|
71
|
w
|
any
other development relating to the business and affairs of a company
that
would reasonably be expected to significantly affect the market
price or
value of any of the Company's securities or that would reasonably
be
expected to have a significant influence on an informed investor's
investment decisions.
|
TIMING
OF PUBLIC ANNOUNCEMENT
Pursuant
to Timely Disclosure Policies and Legislation, CGI is required to disclose
material information concerning its business and affairs immediately upon
the
information becoming known to management or a development being approved
by the
Board of Directors, or in the case of information previously known, immediately
upon it becoming apparent that the information is material6.
Immediate release of material information is necessary to ensure that it
is
promptly available to all investors and to reduce the risk that persons with
access to that information will act upon undisclosed information. The disclosure
of material change must be made by way of a broadly disseminated news release
that is followed by a material change report filed with the appropriate CSA
members.
The
announcement of an intention to proceed with a transaction or activity should
be
made when a decision has been taken to proceed with it by CGI's board of
directors or by senior management with the expectation in that case of such
decision being further agreed to by CGI's board of directors. However, as
discussed below, a corporate development in CGI's affairs in respect of which
no
firm decision has yet been made, may require immediate disclosure if leaks
or
rumours of such corporate development are reflected in the market
place.
Disclosure
of corporate developments must be managed with care and judgment by company
officials as to the timing of an announcement of material information whether
late or premature may affect the credibility and reputation of the company
and
of the securities market.
In
limited circumstances, disclosure of material information may be delayed
for
reasons of corporate confidentiality.
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Where
the material information constitutes a material change, such disclosure
must be followed by a material change report filed within ten days
of the
date on which the change occurred with the relevant securities
commissions.
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DEALING
WITH RUMOURS
Except
in
certain circumstances, CGI is not required to respond to market rumours.
It may
choose a "no comment" response to market rumours. An effective way of saying
"no
comment" is to say, "We do not respond to market rumours". To maintain a
consistent "no comment" policy, a company should not selectively comment,
even
if no significant corporate developments are taking place or the company
knows
of no reason for unusual market activity. For example, it is an inconsistent
(and likely ineffective) use of a "no comment" policy if a company were to
say,
"There are no significant corporate developments at this time," when such
is the
case, but respond, "no comment" when material developments or transactions
are
under consideration. Using a "no comment" policy in this fashion may act
as a
signal to the market and defeats the purpose of the policy.
If,
however, the rumour is about a material change in the company's business,
operations or capital or other material information that the company has
withheld from general disclosure under its confidentiality privilege, the
company's obligation to make immediate disclosure of that change or information
will be triggered. In the face of a rumour regarding undisclosed material
information, it is impossible for a company to continue a request for
confidentiality. In addition, CSA members or stock exchanges may request
that a
company respond to a rumour if it is the source of the rumour or if market
activity indicates that trading is being affected by the rumour.
Upon
such
a request, prompt clarification or denial of the rumour through a news release
will be necessary and, if the rumour is correct in whole or in part, immediate
disclosure of the relevant material information should be made. Pending
dissemination of a response to such a request, the relevant stock exchanges,
or
less frequently, the CSA member, may decide to halt trading in securities
of the
company.
Companies
are often asked to respond to rumours or inquiries regarding possible
differences in earnings from current Street estimates. When a company has
provided no guidance on analysts' earnings estimates, except in certain
circumstances, the company is under no obligation to respond to such rumours
or
inquiries. If it is a company's policy not to comment on analysts' earnings
estimates, the company should state this policy in response to any such
questions it receives.
If
earnings rumours are affecting the company's share price, the company may
wish
to consider issuing a full news release if it believes earnings will be
significantly different than Street expectations, or if it believes the rumours
to be false and wants to counter them.
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MAINTAINING
CONFIDENTIALITY
Pursuant
to Timely Disclosure Policies, the withholding of material information may
only
be justified where the potential harm to CGI or to its investors caused by
immediate disclosure may reasonably be considered to exceed the negative
consequences of delaying disclosure. Pursuant to the Legislation, CGI will
not
be required to prepare a press release if senior management has reasonable
ground to believe that disclosure would be seriously prejudicial to the
interests of CGI and that no transaction in CGI Securities has been or will
be
carried out on the basis of the information not generally known7.
In any
case, confidentiality may not be maintained beyond the short term. Furthermore,
in any situation where material information is being kept confidential because
disclosure would be unduly detrimental to CGI's best interests, CGI's management
is responsible for taking every possible precaution to ensure that no trading
whatsoever takes place by any insider or any employee of CGI in possession
of
such information before it is generally disclosed to the public.
If
the
information that CGI wants to keep confidential is a "material change" in
its
business, operations or capital, CGI must file a report of that change with
the
appropriate CSA members on a confidential basis, together with an explanation
of
the reasons for the non-disclosure. To maintain the confidentiality of the
filing, CGI must renew its confidential filing every 10 days in certain
jurisdictions.
The
Timely Disclosure Policy of the TSX enumerates as follows situations where
prompt disclosure might be unduly detrimental to CGI's interests:
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release
of the information would prejudice CGI's ability to pursue specific
and
limited objectives or complete a transaction or series of transactions
that are underway. For instance, premature disclosure of the fact
that CGI
intends to purchase a significant asset may increase the cost of
the
acquisition;
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disclosure
of the information would provide competitors with confidential
corporate
information that would significantly benefit them. Such information
may be
kept confidential if CGI is of the opinion that the detriment to
it
resulting from disclosure would exceed the detriment to the market
in not
having access to the information. A decision to release a new product,
or
details on the features of a new product, may be withheld for competitive
reasons, but such information should not be withheld if it is available
to
competitors from other sources;
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However,
in such circumstances CGI is nonetheless required to file a "confidential"
material change report indicating the reasons why disclosure is
being
delayed must be provided in writing. If CGI wishes to keep the
material
information confidential, it must renew the confidential filing
every 10
days following such filing.
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disclosure
of information concerning the status of ongoing negotiations would
prejudice the successful completion of these negotiations. It is
unnecessary to make a series of announcements concerning the status
of
negotiations with another party concerning a particular transaction.
If it
seems that the situation is going to stabilize within a short period,
public disclosure may be delayed until a definitive announcement
can be
made. Disclosure should be made once "concrete information" is
available,
such as a final decision to proceed with the transaction or, at
a later
point in time, finalization of the terms of the
transaction.
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Again,
when the disclosure of material information is to be delayed, complete
confidentiality must be maintained. In the event that such information has
leaked or appears to be impacting the market, CGI must then take immediate
steps
to ensure that full disclosure to the public is made and contact the Exchanges
immediately and ask that trading be halted pending the issuance of a news
release.
PROHIBITIONS
AGAINST SELECTIVE DISCLOSURE
The
Legislation prohibits CGI or any person or company in a special
relationship8
with CGI
from informing anyone, other than in the necessary course of business, of
a
material information before it has been generally disclosed. This prohibition
is
commonly known as "tipping". Tipping is prohibited in order to ensure equal
access to, and opportunity to act upon, material information.
The
tipping prohibition is very broad. It covers disclosure made by any person
in a
special relationship with CGI to anyone (other than in the "necessary course
of
business" as discussed below) and is not limited to communications made to
securities market professionals, analysts and institutional
investors9.
The
tipping provisions however permit an issuer to make a selective disclosure
in
the necessary course of business. This exception exists so as not to interfere
with a company's everyday business. However, whether a particular disclosure
has
been made in the necessary course of business is dependent on the facts of
each
case. The CSA set out a list of parties that the necessary course of business
exception would generally permit communication to, including:
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vendors,
suppliers, or strategic partners on issues such as research and
development, sales and marketing and supply
contracts;
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employees,
officers and board members;
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lenders,
legal counsel, auditors, financial advisors and
underwriters;
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Persons
in a special relationship with CGI, include, but are not limited
to: (a)
insiders of CGI; (b) directors, officers and employees of CGI;
(c) persons
engaging in professional or business activities for or on behalf
of CGI;
and (d) anyone who learns of material information from someone
that is
known or should be known to be in a special relationship with
CGI.
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The
CSA point out that although selective disclosure most often occurs
in
one-on-one discussions and private meetings, it can occur in a
variety of
situations including annual
meetings.
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parties
to negotiations;
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labour
unions and industry associations;
and
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government
agencies and non-governmental regulators;
and
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credit
rating agencies (provided that the information is disclosed for
the
purpose of assisting the agency to formulate a credit rating and
the
ratings are or will be publicly
available).
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The
CSA
advise however that the necessary course of business exception would not
generally allow selective disclosure to analysts, the media or institutional
investors.
In
relying on the necessary course of business exception when disclosing material
information, CGI must ensure that those receiving the information are aware
that
they cannot disclose the information to any other party, other than in the
necessary course of business, or trade on the information, until it has been
generally disclosed.
The
selective disclosure prohibition continues until material information has
been
"generally disclosed"10.
The
CSA
encourage issuers to satisfy the general disclosure requirement under the
tipping provisions by using one or a combination of news releases through
a
widely circulated service, press conferences and conference calls where the
public is given appropriate notice by news release and may attend or listen.
Although issuers are encouraged to file news releases on SEDAR and post
information on their website, the CSA point out that currently neither of
these
methods alone will constitute general disclosure.
If
CGI
makes an unintentional selective disclosure, it must take immediate steps
to
ensure that a full public announcement is made. The CSA suggest that, pending
issuance of a news release, a company which has made an unintentional selective
disclosure shall request a halt trading of its securities and advise anyone
with
knowledge of the information that it is material and has not been generally
disclosed.
Although
the Legislation does not provide for a safe harbour for unintentional selective
disclosure11,
the CSA
will look at all of the surrounding circumstances in a selective disclosure
enforcement proceeding. Factors that will be considered include:
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whether
and to what extent an issuer has implemented, maintained and
followed
reasonable selective disclosure policies and
procedures;
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10
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The
Legislation does not define the term "generally disclosed". Insider
trading jurisprudence however states that information has been
generally
disclosed when it has been disseminated in a manner calculated
to
effectively reach the market place and public investors have been
given a
reasonable amount of time to analyze the information. What constitutes
a
"reasonable amount of time" will depend on a number of factors
including
the circumstances in which the event arises, the particulars of
the
information, the nature of the market for the issuer's securities
and the
disclosure method used.
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11
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Unlike
Regulation FD which will be discussed
below.
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whether
any selective disclosure was intentional;
and
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what
steps were taken to disseminate information that had been unintentionally
disclosed, including how quickly the information was
disclosed.
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ANNOUNCEMENT
AND ISSUANCE OF A PRESS RELEASE
As
discussed above, the Timely Disclosure Policies, as well as the Legislation,
require that when a material change in CGI's affairs occurs that is likely
to
have a significant influence on the value or the market price of CGI Securities,
and is not generally known, CGI shall immediately prepare and distribute
a press
release disclosing the substance of the change. The press release should
be
factual and balanced and avoid unnecessary details, exaggerated reports or
promotional commentary. When a press release is to be issued during the trading
hours, it is essential that CGI officials notify the Market Surveillance
Division of the TSX (which will normally coordinate with the NYSE) prior
to the
issuance of such press release, in order to permit the Market Surveillance
Staff
to determine whether trading in any of CGI Securities should be temporarily
halted. Normally, a trading halt in a security will only be justified if
the
announcement of the material information is imminent.
The
NYSE
Company Manual requires that when an announcement of news of a material event
or
a statement dealing with a rumour which calls for immediate release is made
shortly before the opening or during the market hours, the company's NYSE
representative be notified by telephone at least ten minutes prior to the
release of the announcement to the news media. To ensure adequate coverage,
the
news release requiring immediate publicity should be given to Dow Jones &
Company, Inc., Reuters Economic Services and Bloomberg Business
News.
CGI
is
also required to release material information to the media by the quickest
possible method and by one which provides the widest possible dissemination.
Because dissemination of news is essential to ensure that all investors trade
on
equal information, the responsibility of ensuring appropriate dissemination
of
news releases belongs to CGI.
DISSEMINATION
OF MATERIAL INFORMATION THROUGH WEBSITES
The
dissemination of information through a website12
is also
subject to the Legislation and Timely Disclosure Policies and the information
to
be issued through electronic communications must be guided by the same rules
as
the information disseminated by traditional forms, such as a press release.
Consequently, electronic information cannot be misleading to investors (by
being
incomplete, out of date or by omitting facts) nor of a promotional nature
and
cannot be used to disseminate material information not yet disclosed to the
general public. CGI must regularly review, update or correct, if need be,
the
information posted on the website. CGI should date all material information
posted on its website and should disclaim any duty to update.
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The
dissemination of information through a website is governed by the
TSX
Electronic Communications Disclosure Guidelines (which may be found
on the
TSX website).
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In
addition, CGI should either delete outdated information or move it to an
archive. If CGI updates or corrects material information on its website,
it
should take steps to ensure that it properly disseminates that information
to
the public on a timely basis. No material information is to be disseminated
through electronic communications prior to being disseminated on a news wire
service.
REGULATION
FD
The
Securities and Exchange Commission's Regulation
FD (Fair
Disclosure)13
requires
that reporting companies disclose material information through broad public
means and not selectively to securities analysts and other market professionals.
However, it is to be noted that Regulation FD does not impose an obligation
to
disclose material non-public information but rather mandates that if such
information is disclosed voluntarily, it must be done on a broad non-exclusive
basis. Essentially, if an issuer, or any person acting on its behalf discloses
material non-public information to specified persons, Regulation FD requires
that the issuer must simultaneously (for intentional disclosures) or promptly
(for non-intentional disclosures) make public disclosure of that information.
Since
CGI
is considered under U.S. securities laws to be a foreign private issuer,
Regulation FD will not technically apply to it. It is however important to
note
that Regulation FD is, to some extent, simply a codification of the U.S.
Securities and Exchange Commission's (the "SEC") previous position and that
selective disclosure of material non-public information about CGI could,
in
certain circumstances, even if not technically in violation of Regulation
FD,
expose the person making the disclosure to liability under the SEC's anti-fraud
rules under the Exchange Act14.
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CGI
CORPORATE DISCLOSURE POLICY
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CGI's
management believes that the implementation and maintenance of a written
corporate disclosure policy will promote consistent, appropriate, timely
and
broadly disseminated disclosure of its material information and reinforce
compliance with the Legislation and the Timely Disclosure Policies.
This
disclosure policy confirms in writing our existing disclosure policies and
practices. Its goal is to raise awareness of the Company's approach to
disclosure among the board of directors, senior management and
employees.
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Which
became effective on October 23, 2000.
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14
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The
Securities Act of 1934, as amended.
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This
disclosure policy extends to all employees of the Company, its board of
directors, those authorized to speak on its behalf and all other insiders.
It
covers disclosures in documents filed with the securities regulators, financial
disclosure, including management's discussion and analysis (MD&A) and
written statements made in the Company's annual and quarterly reports, news
releases, letters to shareholders, presentations by senior management and
information contained on the Company's Web site and other electronic
communications. It extends to oral statements made in meetings and telephone
conversations with analysts and investors, interviews with the media as well
as
speeches, press conferences and conference calls.
DISCLOSURE
POLICY COMMITTEE
The
board
of directors has established a disclosure policy committee (the "Committee")
responsible for all regulatory disclosure requirements and overseeing the
Company's disclosure practices. The Committee consists of the Executive Chairman
of the Board, Chief Executive Officer, the Corporate Secretary, the Chief
Financial Officer and the Executive Vice-President and Chief Legal Officer.
It
is
essential that the Committee be kept fully apprised of all pending material
Company developments in order to evaluate and discuss those events and to
determine the appropriateness and timing for public release of information.
If
it is deemed that material information should remain confidential, the Committee
will determine how that inside information will be controlled.
The
Committee will identify appropriate industry and Company benchmarks for a
preliminary assessment of materiality. Guided by these benchmarks the Committee
will use experience and judgement to determine the appropriateness and timing
for public release of material information. The Committee will review all
core
disclosure documents prior to their release or filing, including the Company's
MD&A. The Committee will meet quarterly or as conditions dictate and the
Vice-President, Corporate Communications & Investor Relations will keep
records of these meetings.
The
Committee will review and update, if necessary, this disclosure policy annually
or as needed to ensure compliance with changing regulatory requirements.
The
Committee will report to the board of directors quarterly. The Committee
is also
responsible for ensuring that Company spokespersons receive adequate
training.
NEWS
RELEASES
Once
the
Committee determines that a development is material, it will authorize the
issuance of a news release unless the Committee determines that such
developments must remain confidential for the time being. If developments
are to
remain confidential, appropriate confidential filings must be made and control
of the inside information must be instituted. Should a material statement
inadvertently be made in a selective forum, the Company will immediately
issue a
news release to
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fully
disclose that information.
If
the
stock exchanges upon which shares of the Company are listed are open for
trading
at the time of a proposed announcement, prior notice of a news release
announcing material information must be provided to the exchanges' market
surveillance departments to enable a trading halt, if deemed necessary by
the
stock exchanges. If a news release announcing material information is issued
outside of trading hours, market surveillance must be notified before the
market
opens.
Annual
and interim financial results will be publicly released immediately following
audit committee or board approval of the MD&A, financial statements and
notes.
The
Vice-President, Corporate Communications & Investor Relations must ensure
that the material information disclosed in the press release is factual,
balanced and complete and avoid including unnecessary details, exaggerated
reports or promotional commentaries. The disclosure must allow a reasonable
and
objective valuation of the information (i.e. nature of the agreement, length,
costs and revenues involved, etc.) and comments on future events concerning
the
affairs of CGI should be limited to the strict minimum.
News
releases will be disseminated through an approved news wire service that
provides simultaneous national and/or international distribution. News releases
will be transmitted to all stock exchange members, relevant regulatory bodies,
major business wires, national financial media, and the local media in areas
where the Company has its headquarters and operations. As a general rule,
procedure for dissemination of material information shall be applied
consistently.
DISSEMINATION
OF THE MATERIAL INFORMATION
Once
the
information has been qualified as material, the responsibility of its immediate
disclosure by the issuance of a press release belongs to the Vice-President,
Corporate Communications & Investor Relations.
A
pre-notice of such press release must be sent to the TSX and NYSE before
its
issuance in order to allow the Market Surveillance Staff to determine whether
it
is necessary to temporarily halt trading in CGI Securities pending the
announcement.
The
press
release shall be distributed through a widely circulated news or wire service.
Refer to heading below "Investor Conference Calls", if an investor conference
call is scheduled in connection with the information announced in the press
release.
News
releases will be posted on the Company's Web site immediately after release
over
the news wire. The news release page of the Web site will include a notice
that
advises the reader that the information posted
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was
accurate at the time of posting, but may be superseded by subsequent news
releases.
PRINCIPLES
OF DISCLOSURE OF MATERIAL INFORMATION
Material
information is any information relating to the business and affairs of the
Company that results in, or would reasonably be expected to result in, a
significant change in the market price or value of the Company's securities
or
that would reasonably be expected to have a significant influence on a
reasonable investor's investment decisions. In complying with the requirement
to
immediately disclose all material information under applicable laws and stock
exchange rules, the Company will adhere to the following basic disclosure
principles:
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Material
information will be publicly disclosed immediately via news
release.
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In
certain circumstances, the Committee may determine that such disclosure
would be unduly detrimental to the Company (for example if release
of the
information would prejudice negotiations in a corporate transaction),
in
which case the information will be kept confidential until the
Committee
determines it is appropriate to publicly disclose. In these circumstances,
the Committee will cause a confidential material change report
to be filed
with the applicable securities regulators, and will periodically
(at least
every 10 days) review its decision to keep the information confidential
(also see 'Dealing with Rumours').
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Disclosure
must include any information the omission of which would make the
rest of
the disclosure misleading (half truths are
misleading).
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Unfavourable
material information must be disclosed as promptly and completely
as
favourable information.
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There
must be no selective disclosure. Previously undisclosed material
information must not be disclosed to selected individuals (for
example, in
an interview with an analyst or in a telephone conversation with
an
investor). If previously undisclosed material information has been
inadvertently disclosed to an analyst or any other person not bound
by an
express confidentiality obligation, this information must be broadly
disclosed immediately via news
release.
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Disclosure
on the Company's Web site alone does not constitute adequate disclosure
of
material information.
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Disclosure
must be corrected immediately if the Company subsequently learns
that
earlier disclosure contained a material error at the time it was
given.
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DESIGNATED
SPOKEPERSONS
The
Company designates a limited number of spokespersons with authority for
communication with the investment community, regulators or the media. The
Chief
Executive Officer, Chief Financial Officer and Vice-President, Corporate
Communications & Investor Relations shall be the official spokespersons for
the Company. Individuals holding these offices may, from time to time, designate
others within the Company with authority to speak on behalf of the Company
as
back-ups or to respond to specific inquiries.
Employees
who are not authorized spokespersons must not respond under any circumstances
to
inquiries from the investment community, the media or others, unless
specifically asked to do so by an authorized spokesperson. All such inquiries
are to be referred to the Vice-President, Corporate Communications &
Investor Relations.
All
external information requests from the investment community regarding CGI
will
be initially directed to the Vice-President, Corporate Communications &
Investor Relations, who is responsible for communications with the investment
community and securities analysts. However, in certain circumstances such
requests shall be directed to the Executive Chairman of the Board, the Corporate
Secretary, the Chief Financial Officer or the Senior Vice-President, Finance
and
Treasury (collectively, the "Authorized Spokespersons").
All
employees who are not Authorized Spokespersons must refer calls to the
Authorized Spokespersons or to the Vice-President, Corporate Communications
& Investor Relations or to the media relations managers, depending on the
particular call.
It
is
very important that any comment made by the Authorized Spokespersons reflects
only material information already generally disclosed. To that effect, all
relevant public information regarding CGI (news releases, financial analyst
reports, notes following communication with analysts, etc.) will be kept
in a
specific file in order to ensure complete compilation of the public information
and to assist the Vice-President, Corporate Communications & Investor
Relations in his or her functions.
Information
relating to CGI in the market place and reactions by the market place to
such
information shall be closely monitored by the Vice-President, Corporate
Communications & Investor Relations to ensure a prompt reaction to
non-intentional selective disclosures. All employees shall report any such
disclosure to the Vice-President, Corporate Communications & Investor
Relations.
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CONFIDENTIALITY
OF THE INFORMATION
The
Disclosure Policies and the Legislation allow material information to be
kept
confidential when immediate disclosure of such information would be unduly
detrimental to CGI (to that effect, refer to heading "Maintaining
Confidentiality" of Section I above).
In
order
to ensure the confidential nature of the information, CGI establishes the
following rules:
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a)
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the
number of CGI employees with access to confidential information
must be
limited, to the extent possible;
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b)
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appropriate
measures are to be taken in order to avoid unauthorized access
to the
confidential documents through technology or
otherwise;
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Moreover,
any CGI employee in possession of material information will not disclose
the
information to anyone (including financial analysts and institutional investors)
except in the necessary course of business (as discussed above) and when
disclosed in such manner, all parties involved will be reminded that such
information is to be kept confidential.
During
the period when the material information is being kept confidential, the
Vice-President, Corporate Communications & Investor Relations will carefully
monitor the market activity in CGI Securities. In some cases, he or she may
request the market surveillance department of one or both stock exchanges
where
it is listed to place the company's securities on 'stock watch' to monitor
trading activity.
If
the
confidential material information, or rumours about it, has leaked or appears
to
be impacting the market, the Vice-President, Corporate Communications &
Investor Relations, on the direction of the Disclosure Policy Committee will
have to take immediate steps to ensure that a full public announcement is
made.
This includes contacting the Exchanges and asking that trading be halted
pending
the issuance of a news release. Furthermore, pending the public release of
the
material information, those who have knowledge of the information shall be
told
that the information is material and that it has not been generally disclosed.
DEALING
WITH RUMOURS
The
Company does not comment, affirmatively or negatively, on rumours. This also
applies to rumours on the Internet. The Company's spokespersons will respond
consistently to any rumours, saying, "It is our policy not to comment on
market
rumours or speculation."
Should
the stock exchange request that the Company make a definitive statement in
response to a market rumour that is causing significant volatility in the
stock,
the Committee will consider the matter and decide whether to make a policy
exception. If the rumour is true in whole or in part,
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this
may
be evidence of a leak, and the Company then will immediately issue a news
release disclosing the relevant material information.
TRADING
RESTRICTIONS AND BLACKOUT PERIODS
It
is
illegal for anyone with knowledge of material information affecting a public
company that has not been publicly disclosed to purchase or sell securities
of
that company. It is also illegal for anyone to inform any other person of
material non-public information, except in the necessary course of business.
Therefore, insiders and employees with knowledge of confidential or material
information about the Company or information about counter-parties in
negotiations of transactions that are potentially material to the Company
or to
such counterparty, are prohibited from trading securities of the Company
or any
counter-party until the information has been fully disclosed and a reasonable
period has passed for the information to be widely disseminated.
Insiders
are personally responsible for filing accurate and timely insider trading
reports. Insiders are required to provide a copy of all insider reports to
the
Corporate Secretary or other designated person concurrent with their filing
to
regulatory authorities. For trading blackouts for designated employees in
possession of privileged information, please refer to Section III below
"Restrictions Applicable to Transactions in Securities by
Insiders".
Quarterly
trading blackout periods will apply to all insiders during periods when
financial statements are being prepared but results have not yet been publicly
disclosed. Employees may only trade in CGI Securities within the period
beginning on the third business day and ending on the fortieth calendar day
following the publication of quarterly financial statements and the fiscal
year
end results of CGI.
Blackout
periods may be prescribed from time to time by the Disclosure Policy Committee
as a result of special circumstances relating to the Company when insiders
would
be precluded from trading in its securities. All parties with knowledge of
such
special circumstances should be covered by the blackout. These parties may
include external advisors such as legal counsel, investment bankers, investor
relations consultants and other professional advisors, and counter-parties
in
negotiations of material potential transactions.
To
protect the reputation of the Company and avoid the appearance of impropriety,
all directors, officers, members who are part of due diligence teams or other
sensitive project related work, and other insiders are required to pre clear
with the Corporate Secretary or other designated officer of the Company all
proposed trades i) in the Company's securities (including the exercise of
stock
options), or ii) in the securities of any other public company that is the
subject of or is involved in an acquisition, divestiture or client related
project.
CONTACTS
WITH ANALYSTS, INVESTORS AND THE MEDIA
84
Disclosure
in individual or group meetings does not constitute adequate disclosure of
information that is considered material non-public information. If the Company
intends to announce material information at an analyst or shareholder meeting
or
a press conference or conference call, the announcement must be preceded
by a
news release.
The
Company recognizes that meetings with analysts and significant investors
are an
important element of its investor relations program. The Company will meet
with
analysts and investors individually or in small groups as needed and will
initiate contacts or respond to analyst and investor calls in a timely,
consistent and accurate fashion in accordance with this disclosure policy.
All
analysts will receive fair treatment regardless of whether they are recommending
buying or selling the Company's securities.
The
Company will provide only non-material information through individual and
group
meetings, in addition to publicly disclosed information, recognizing that
an
analyst or investor may construct this information into a mosaic that could
result in material information. The Company cannot alter the materiality
of
information by breaking down the information into smaller, non-material
components.
CGI
representatives meeting privately with financial analysts and investors will
carry out research on the people they are meeting in order to prepare for
their
expected line of questioning. Statements and responses to anticipated questions
will be discussed with the Vice-President, Corporate Communications &
Investor Relations prior to the meeting. The Vice-President, Corporate
Communications & Investor Relations will be present at each private meeting
to ensure consistency of corporate answers and to determine whether any
unintentional selective disclosure occurred during the meeting.
The
Company will provide the same sort of detailed, non-material information
to
individual investors or reporters that it has provided to analysts and
institutional investors and may post this information on its Web
site.
Spokespersons
will keep notes of telephone conversations with analysts and investors and
where
practicable more than one Company representative will be present at all
individual and group meetings. A debriefing will be held after these meetings
and if it determines that selective disclosure of previously undisclosed
material information has occurred, the Company will immediately disclose
the
information broadly via news release.
INVESTOR
CONFERENCE CALLS
The
following steps shall be followed when holding investor conference calls
to
disclose material information:
85
|
i)
|
a
press release containing the material information shall have been
previously released through a widely circulated news or wire service.
Such
press release shall contain the date and time of the call, the
subject
matter and the means for accessing
it;
|
|
ii)
|
CGI
representatives participating in the analyst conference call will
meet
before the call to prepare for anticipated questions. Statements
and
responses to anticipated questions will be discussed and scripted
in
advance and reviewed by the Company's executive
management.
|
|
iii)
|
the
conference call shall be held in an open manner, permitting investors
to
listen either by telephone or through Internet
Webcasting;
|
|
iv)
|
a
dial-in replay will be provided for a period of at least one week
after
the investor conference call and a web replay will be provided
for a
period of at least 90 days after the call.
|
|
v)
|
a
detailed transcript of the conference call will be kept and reviewed
to
determine whether any unintentional selective disclosure occurred
during
the conference call. If so, immediate steps to ensure full public
announcement shall be made including contacting the Exchanges and
asking
that trading be halted pending the issuance of a news
release.
|
REVIEWING
ANALYST REPORTS AND FINANCIAL MODELS
Upon
request, the Company may review analysts' draft research reports or financial
models for factual accuracy based on publicly disclosed information. The
Company
will not confirm, or attempt to influence, an analyst's opinions or conclusions
and will not express comfort with the analyst's financial model and earnings
estimates.
To
avoid
appearing to endorse an analyst's report or model, the Company will provide
its
comments orally or will attach a disclaimer to written comments to indicate
the
report was reviewed only for factual accuracy.
QUIET
PERIODS
To
avoid
the potential for selective disclosure or even the perception or appearance
of
selective disclosure, the Company will observe quiet periods prior to quarterly
earnings announcements or when material changes are pending. Regular quiet
periods will commence two days before the end of a quarter and end on the
date
of a news release disclosing results for the quarter just ended.
During
a
quiet period, the Company will not initiate any meetings or telephone contacts
with analysts and investors, but will respond to unsolicited inquiries
concerning factual matters. However, the Company may accept invitations to
participate in investment meetings and conferences organized by others, as
long
as material, non-public information is not selectively disclosed.
86
FORWARD-LOOKING
INFORMATION
When
CGI
elects to disclose forward-looking information in continuous disclosure
documents, speeches, conference calls, etc., the following guidelines will
be
observed.
|
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All
material forward-looking information will be broadly disseminated
via news
release and included in the Company's annual and quarterly MD&A. The
Committee will assess whether an update is required on a quarterly
basis
or as circumstances warrant.
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The
information will be clearly identified as forward
looking.
|
|
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The
Company will identify all material assumptions used in the preparation
of
the forward-looking information.
|
|
w
|
The
information will be accompanied by a statement that identifies,
in
specific terms, the risks and uncertainties that may cause the
actual
results to differ materially from those projected in the
statement.
|
|
w
|
The
information may be accompanied by supplementary information such
as a
range of reasonably possible outcomes or a sensitivity analysis
to
indicate the extent to which different business conditions may
affect the
actual outcome.
|
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w
|
The
information will be accompanied by a statement that the information
is as
of the current date and subject to change after that date and the
Company
disclaims any intention to update or revise the forward-looking
information, whether as a result of new information, future events
or
otherwise.
|
|
w
|
Once
forward looking information has been disclosed, CGI will regularly
assess
whether an update is required and ensure that past disclosure of
forward-looking information is accurately reflected in current
MD&A.
|
|
w
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Forward-looking
statements shall be updated, if necessary, by issuing a press release
and
filing a material change report.
|
DISCLOSURE
RECORD
The
Vice-President, Corporate Communications & Investor Relations will maintain
a five-year record of all public information about the Company, including
continuous disclosure documents, news releases, analysts' reports, transcripts
or tape recordings of conference calls, debriefing notes, notes from meetings
and telephone conversations with analysts and investors, and newspaper
articles.
ELECTRONIC
COMMUNICATIONS
Employees
must not use electronic communications to leak or discuss in any way undisclosed
material information regarding CGI's affairs and business.
87
|
a)
|
Officers
responsible for monitoring CGI's electronic communications:
|
|
i)
|
The
Vice-President, Corporate Communications & Investor Relations, under
the authority of the Disclosure Policy Committee,
and
|
|
ii)
|
Such
officers will be responsible for monitoring CGI's electronic
communications and enforcing compliance with CGI's guidelines.
Moreover,
in order to ensure the integrity and security of CGI's electronic
communications, regular review and update of its security systems
will be
executed. The Vice-President, Corporate Communications & Investor
Relations will maintain a log indicating the date that material
information is posted and/or removed from the IR section of the
Web site.
Documents filed with securities regulators will be maintained on
the web
site for a minimum of two years.
|
|
b)
|
CGI's
website:
|
|
i)
|
The
Vice-President, Corporate Communications & Investor Relations, under
the authority of the Disclosure Policy Committee shall be responsible
for
maintaining CGI's website up-to-date and accurate. All material
information shall be dated when posted or modified and outdated
information shall be archived, and
|
|
ii)
|
All
CGI corporate "timely disclosure" documents as well as any other
public
documents filed with the Exchanges and the Canadian securities
commissions
or required to be posted on the website shall be posted in their
entirety
on CGI's website. Such documents
include:
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|
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the
annual and interim financial statements and related auditors report
and
MD&A;
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|
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the
annual report;
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|
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|
interim
shareholder reports;
|
|
w
|
the
annual information form;
|
|
w
|
press
releases (whether or not
favourable);
|
|
w
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management
proxy circulars;
|
|
w
|
CEO
and CFO financial statements
certifications;
|
|
w
|
Corporate
governance Guidelines;
|
|
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Board
and Board Committee Charters;
|
|
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Code
of Business Conduct and Ethics;
|
|
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Insider
trading reports; and
|
|
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|
any
other communications transmitted to
shareholders.
|
No
material information shall be posted on CGI's website before it has been
widely
disseminated.
88
The
Vice-President, Corporate Communications & Investor Relations must approve
all links from the Company Web site to a third party web site. The Web site
will
include a notice that advises readers they are leaving the Company's Web
site
and that the Company is not responsible for the contents of the other site.
The
Vice-President, Corporate Communications & Investor Relations will be
responsible for the responses to electronic inquiries. Only public information
or information that could otherwise be disclosed in accordance with this
disclosure policy shall be used to respond to electronic inquiries.
|
c)
|
Rumours
on the Internet:
|
Rumours
about CGI on the Internet through chat-rooms, web logs, news groups or otherwise
shall be handled similarly to rumours spread in a traditional way (refer
to
heading "Dealing with Rumours" of Section I).
|
d)
|
Supplemental
information:
|
It
is
understood that any non material information disseminated to third parties
(including private investors, financial analysts, institutional investors)
should also be available to all investors. Consequently, such information
will
be posted on CGI's website unless the volume or format makes it unduly
complicated. In such case, CGI will provide a contact name on its website
so
that investors may have access to such information, if requested. The
supplemental information includes data books, fact sheets, slides of investor
presentations and other materials distributed at analyst or industry
presentations.
|
e)
|
Investor
Relations contact information:
|
CGI
will
maintain an e-mail link on its website allowing investors to communicate
directly with CGI's Investor Relations representatives. Such representatives
shall ensure that any risk of selective disclosure is avoided when responding
to
investor e-mails. When possible, they will respond to investor enquiries
by
telephone.
CGI
will
maintain a phone number for the media, to assist them in receiving responses
to
questions in a timely manner in order to meet their print deadlines.
|
f)
|
Utilization
and exclusion of certain
information:
|
|
i)
|
Employee
use of electronic information:
|
|
w
|
CGI
employees are hereby reminded that all correspondence received
and sent
via e-mail is to be considered corporate correspondence and therefore
must
not transmit confidential
|
89
information
externally unless protected by appropriate encryption technology;
|
w
|
CGI
employees are prohibited from participating in, hosting or linking
to any
Internet chat-rooms, bulletin boards, web logs or news groups in
communications involving CGI or its securities (even if the intention
of
CGI employees is to correct rumours or defend
CGI);
|
|
w
|
CGI
employees are encouraged to report to the Vice-President, Corporate
Communications & Investor Relations any discussion pertaining to CGI
which they find on the Internet.
|
|
ii)
|
Analyst
reports and third party
information:
|
Analyst
reports are proprietary products of the analyst's firm. Distributing analyst
reports or providing links to them may be viewed as an endorsement by the
Company of the reports. For these reasons, the Company will not provide analyst
reports through any means to persons outside of the Company or generally
to
employees of the Company, including posting such information on its Web site.
The Company will post on its Web site a complete list, regardless of the
recommendation, of all the investment firms and analysts who provide research
coverage on the Company. This list will not include links to the analysts'
or
any other third party Web sites or publications.
Notwithstanding
the foregoing, the Company will distribute analyst reports to its directors
and
senior officers to assist them in understanding how the marketplace values
the
company and what corporate developments analysts typically consider important.
This information is useful in monitoring the communications of the company,
and
in developing messages to better guide investor expectations.
|
g)
|
Legal
disclaimer:
|
A
legal
disclaimer regarding the accuracy, timeliness and completeness of the
information posted on the website must be included on CGI's website at all
times.
COMMUNICATION,
EDUCATION AND ENFORCEMENT
This
disclosure policy extends to all employees of the Company, its board
of
directors and authorized spokespersons. New directors, officers
and
90
employees
will be provided with a copy of this disclosure policy and educated
about its importance. This disclosure policy will be posted on the Company's
internal Web site and changes will be communicated to all employees.
Any
employee who violates this disclosure policy may face disciplinary action
up
to and including termination of employment with the Company without
notice. The violation of this disclosure policy may also violate certain
securities laws, which could expose directors, officers or employees to personal
liability. If it appears that an employee may have violated such securities
laws, the Company may refer the matter to the appropriate regulatory
authorities, which could lead to fines or other penalties.
III.
RESTRICTIONS APPLICABLE TO TRANSACTIONS IN SECURITIES BY
INSIDERS
The
acquisition or the sale of CGI securities (the "CGI Securities") by its
senior
executives (which means under Canadian securities legislation (the
"Legislation")), a person exercising the functions of a director or of a
president, vice-president, secretary, treasurer, controller or similar
functions) entails under the terms of the Legislation, civil, penal and criminal
liability if they carry out these operations while they have at their disposal
information which has not been disclosed to the public and which information
may
be susceptible of affecting the decision of a reasonable investor, as well
as
any information that may affect the value or market price of CGI Securities.
All
insiders of CGI are subject to the Legislation. These insiders include CGI,
its
senior executives and the senior executives of its subsidiaries as well as
any
person or company who exercises control over 10% or more of outstanding CGI
Securities.
The
Legislation also provides for civil, penal and criminal liability for any
person
who trades in the securities of any public company if they carry out these
operations while they have at their disposal information which they have
reason
to believe has not been disclosed to the public and that may be susceptible
of
affecting the decision of a reasonable investor, as well as any information
that
may affect the value or market price of such securities.
Any
such
information, whether it relates to CGI or to any other public company, is
hereafter referred to as "Privileged Information".
The
underlying principle of the Legislation in respect to insider restrictions
is
that all persons investing in securities should have access to information
that
may affect their investment decisions. Consequently, no insider having
Privileged Information relating to CGI Securities may trade in such securities,
except if such insider is justified in believing that the information is
generally known or known to the other party or, as the case may be, he avails
himself of an automatic subscription plan or any other automatic plan
established by CGI, according to conditions set down in writing, before he
learned of the information. Furthermore, no insider may disclose such Privileged
Information unless he is justified in believing that
91
the
information is generally known or known to the other party or such insider
must
disclose the information in the necessary course of business, having no ground
to believe it will be used or disclosed contrary to the guidelines set out
herein.
The
Legislation extends the prohibition in engaging in transactions with CGI
Securities at the time when a person possesses Privileged Information to:
|
(i)
|
any
person who possesses Privileged Information as a result of any
relationship he may have with CGI in the performance of his duties,
or
within the scope of commercial or professional
activities
|
|
(ii)
|
any
person who possesses Privileged Information coming from, to his
knowledge,
an insider or another person targeted by this prohibition
and
|
|
(iii)
|
any
person who possesses Privileged Information which he knows to be
such,
with respect to CGI.
|
TRANSACTIONS
BY SENIOR EXECUTIVES OF CGI
CGI
believes that it is important to establish rules of conduct in order to ensure
the respect of all Legislation pertaining to senior executives' transactions
in
CGI Securities as well as in the securities of other public companies. These
rules of conduct are the following, their application being cumulative and
not
exclusive:
|
a)
|
Directors,
senior executives, insiders and CGI employees who have access to
Privileged Information regarding CGI or any other public company
may not
carry out any transaction with CGI Securities when in possession
of
Privileged Information.
|
|
b)
|
Subject
to the restrictions provided for in the Legislation, these persons
may
only trade in CGI Securities within the period beginning on the
third
business day and ending on the 40th calendar day following the
publication
of quarterly financial statements and the fiscal year end results
of CGI
and the publication of any material information regarding
CGI.
|
|
c)
|
The
directors may not carry out any transaction with CGI Securities
from the
date of receipt of any notice concerning a meeting of the Board
of
Directors, or of any other notice, whether or not this notice discloses
any Privileged Information.
|
|
d)
|
To
protect the reputation of the company and avoid the appearance
of
impropriety, all directors, senior executives, insiders and CGI
employees
who have access to Privileged Information regarding CGI or any
other
public company are required to pre clear with the Corporate Secretary
or
other designated officer of the Company all proposed trades i)
in the
Company's securities (including the exercise
|
92
of
stock
options), or ii) in the securities of any other public company that is the
subject of or is involved in an acquisition, divestiture or client related
project.
|
e)
|
Directors
and senior executives shall avoid frequent transactions in the
market in
order to avoid the appearance of
speculation.
|
|
f)
|
Directors
and senior executives shall not engage in short selling in respect
of CGI
Securities and shall not sell a call or buy a put in respect of
CGI
Securities.
|
The
above
rules exist in order to help the directors and senior executives of CGI satisfy
themselves and all third parties, that they only carry out transactions in
CGI
Securities at times when it is reasonable for them to believe that all
Privileged Information regarding CGI has been publicly disclosed.
DISCLOSURE
OF PRIVILEGED INFORMATION
As
mentioned above, the Legislation prohibits the disclosure of Privileged
Information.
This prohibition extends to the same persons who are not
permitted
to carry out transactions when in possession of Privileged Information.
CGI
believes it is important to establish the following additional rules of
conduct
concerning the disclosure of Privileged Information:
|
g)
|
Material
information regarding the activities and affairs of CGI will be
disclosed
in a timely manner, in accordance with the requirements of the
timely
disclosure policies of the TSX and the NYSE and applicable securities
legislation (as discussed in Section
I).
|
|
h)
|
It
is forbidden for management, insiders and employees of CGI to onvey
to any
person whatsoever, any and all material information elated to the
activities and affairs of CGI before CGI's shareholders and the
general
public have been notified (by way of media or other means), except
in the
necessary course of business and subject to an obligation of
confidentiality.
|
INSIDER
REPORTS
Any
person who becomes an insider of CGI shall file an electronic profile in
the
System for Electronic Disclosure by Insiders ("SEDI")
(www.sedi.ca).
In
addition, CGI insiders are required to declare any modifications or changes
(whatever the percentage) to their holdings in CGI Securities within 10 days
of
such a change, except in certain limited exceptions. In this regard, an insider
report must be completed and filed in SEDI. The insider of CGI who registers
or
causes to be registered any CGI
93
Securities
in the name of a third person shall file an insider report, except in the
case
of a bona fide transfer in guarantee. In such case and where the insider
fails
to file the report provided for by the Legislation, the third person shall
file
the report himself on becoming aware of the failure.
The
obligation to complete insider reports shall continue for as long as the
person
qualifies as an insider.
An
insider is required to file an amended insider profile within ten days of
a
change
in the insider's name or relationship to CGI. If there is a change in any
other
information in the insider profile, an amended insider profile is only required
at the time of the insider's next SEDI filing.
As
a
matter of law, the responsibility for filing and updating an electronic profile
and for filing insider reports in SEDI lies solely with the insider. However,
CGI's secretariat staff will send three days prior to the end of each month
to
each insider of the Company a reminder to complete an insider report, if
necessary. It is recommended that each insider inform the Company's Corporate
Secretary prior to completion of any transaction on CGI
Securities.
94
Appendix
95
APPENDIX
A
Definition
of Independence in effect as of June 30, 2005 under CSA Multilateral Instrument
52-110
1.4 Meaning
of independence
|
(1)
|
An
audit committee member is independent if he or she has no direct
or
indirect material relationship with the
issuer.
|
|
(2)
|
For
the purposes of subsection (1), a "material relationship" is a
relationship which could, in the view of the issuer's board of
directors,
be reasonably expected to interfere with the exercise of a member's
independent judgement.
|
|
(3)
|
Despite
subsection (2), the following individuals are considered to have
a
material relationship withan
issuer:
|
|
(a)
|
an
individual who is, or has been within the last three years, an
employee or
executive officer of the issuer;
|
|
(b)
|
an
individual whose immediate family member is, or has been within
the last
three years, an executive officer of the
issuer;
|
|
(c)
|
an
individual who:
|
|
(i)
|
is
a partner of a firm that is the issuer's internal or external
auditor,
|
|
(ii)
|
is
an employee of that firm, or
|
|
(iii)
|
was
within the last three years a partner or employee of that firm
and
personally worked on the issuer's audit within that
time;
|
|
(d)
|
an
individual whose spouse, minor child or stepchild, or child or
stepchild
who shares a home with the
individual:
|
|
(i)
|
is
a partner of a firm that is the issuer's internal or external
auditor,
|
|
(ii)
|
is
an employee of that firm and participates in its audit, assurance
or tax
compliance (but not tax planning) practice,
or
|
|
(iii)
|
was
within the last three years a partner or employee of that firmand
personally worked on the issuer's audit within that
time;
|
96
|
(e)
|
an
individual who, or whose immediate family member, is or has been
within
the last three years, an executive officer of an entity if any
of the
issuer's current executive officers serves or served at that same
time on
the entity's compensation committee;
and
|
|
(f)
|
an
individual who received, or whose immediate family member who is
employed
as an executive officer of the issuer received, more than $75,000
in
direct compensation from the issuer during any 12 month period
within the
last three years.
|
|
(4)
|
Despite
subsection (3), an individual will not be considered to have a
material
relationship with the issuer solely
because
|
|
(a)
|
he
or she had a relationship identified in subsection (3) if that
relationship ended before March 30, 2004;
or
|
|
(b)
|
he
or she had a relationship identified in subsection (3) by virtue
of
subsection (8) if that relationship ended before June 30,
2005.
|
|
(5)
|
For
the purposes of clauses (3)(c) and (3)(d), a partner does not include
a
fixed income partner whose interest in the firm that is the internal
or
external auditor is limited to the receipt of fixed amounts of
compensation (including deferred compensation) for prior service
with that
firm if the compensation is not contingent in any way on continued
service.
|
|
(6)
|
For
the purposes of clause (3)(f), direct compensation does not
include:
|
|
(a)
|
remuneration
for acting as a member of the board of directors or of any board
committee
of the issuer, and
|
|
(b)
|
the
receipt of fixed amounts of compensation under a retirement plan
(including deferred compensation) for prior service with the issuer
if the
compensation is not contingent in any way on continued
service.
|
|
(7)
|
Despite
subsection (3), an individual will not be considered to have a
material
relationship with the issuer solely because the individual or his
or her
immediate family member
|
|
(a)
|
has
previously acted as an interim chief executive officer of the issuer,
or
|
|
(b)
|
acts,
or has previously acted, as a chair or vice-chair of the board
of
directors or of any board committee of the issuer on a part-time
basis.
|
97
|
(8)
|
For
the purpose of section 1.4, an issuer includes a subsidiary entity
of the
issuer and a parent of the issuer.
|
1.5 additional
independence requirements
|
(1)
|
Despite
any determination made under section 1.4, an individual
who
|
|
(a)
|
accepts,
directly or indirectly, any consulting, advisory or other compensatory
fee
from the issuer or any subsidiary entity of the issuer, other than
as
remuneration for acting in his or her capacity as a member of the
board of
directors or any board committee, or as a part time chair or vice-chair
of
the board or any board committee;
or
|
|
(b)
|
is
an affiliated entity of the issuer or any of its subsidiary entities,
is
considered to have a material relationship with the
issuer.
|
|
(2)
|
For
the purposes of subsection (1), the indirect acceptance by an individual
of any consulting, advisory or other compensatory fee includes
acceptance
of a fee by
|
|
(a)
|
an
individual's spouse, minor child or stepchild, or a child or stepchild
who
shares the individual's home; or
|
|
(b)
|
an
entity in which such individual is a partner, member, an officer
such as a
managing director occupying a comparable position or executive
officer, or
occupies a similar position (except limited partners, non-managing
members
and those occupying similar positions who, in each case, have no
active
role in providing services to the entity) and which provides accounting,
consulting, legal, investment banking or financial advisory services
to
the issuer or any subsidiary entity of the
issuer.
|
|
(3)
|
For
the purposes of subsection (1), compensatory fees do not include
the
receipt of fixed amounts of compensation under a retirement plan
(including deferred compensation) for prior service with the issuer
if the
compensation is not contingent in any way on continued
service.
|
98
Management’s
and Auditors’ reports
MANAGEMENT’S
STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING
The
management of CGI Group Inc. (“the Company”) is responsible for the preparation
and integrity of the consolidated financial statements and the Management’s
Discussion and Analysis (“MD&A”). The consolidated financial 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. Financial and operating data elsewhere in the
MD&A
are consistent with that contained in the accompanying consolidated
financial
statements.
To
fulfill its responsibility, management has developed, and continues
to maintain,
systems of internal controls reinforced by the Company’s standards of conduct
and ethics set out in written policies to ensure the reliability of
the
financial information and to safeguard its assets. The internal control
systems
and financial records are subject to audit by the independent auditors,
Deloitte
& Touche LLP, whose report follows. They were appointed as independent
auditors, by a vote of the Company’s shareholders, to audit the consolidated
financial statements. In addition, the Management Committee of the
Company
reviews the disclosure of corporate information and oversees the functioning
of
the Company’s disclosure controls and procedures.
Members
of the Audit and Risk Management Committee of the Board of Directors,
all of
whom are independent of the Company, meet regularly with the independent
auditors and with management to discuss internal controls in the financial
reporting process, auditing matters and financial reporting issues
and
formulates the appropriate recommendations to the Board of Directors.
The
independent auditors have unrestricted access to the Audit and Risk
Management
Committee. The financial statements and MD&A have been reviewed and approved
by the Board of Directors.
|
(signed)
|
(signed)
|
(signed)
|
|
| NOVEMBER 13, 2006 |
MICHAEL
E. ROACH
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
|
R.
DAVID ANDERSON
EXECUTIVE
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
|
ANDRÉ
IMBEAU
FOUNDER,
EXECUTIVE VICE-CHAIRMAN AND CORPORATE
SECRETARY
|
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation
of the Company’s consolidated financial statements for external reporting
purposes in accordance with accounting principles generally accepted
in the
Canada.
The
Company’s internal control over financial reporting includes policies and
procedures that:
|
-
|
pertain
to the maintenance of records that, in reasonable detail,
accurately and
fairly reflect transactions and dispositions of assets;
|
|
-
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of consolidated financial statements in accordance
with
accounting principles generally accepted in Canada, and that
receipts and
expenditures are being made only in accordance with authorizations
of
management and the directors of the Company; and,
|
|
-
|
provide
reasonable assurance regarding prevention or timely detection
of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the Company’s consolidated financial
statements.
|
All
internal controls have inherent limitations; therefore, even where
internal
control over financial reporting is determined to be effective, it
can provide
only reasonable assurance. Projections of any evaluation of effectiveness
to
future periods are subject to the risk that the controls may become
inadequate
because of changes in conditions, or that the degree of compliance
with the
policies or procedures may deteriorate.
There
was one exclusion from our assessment. Our interest in the joint ventures
were
excluded from our assessment as we do not have the ability to dictate
or modify
the entities’ internal control over financial reporting, and we do not have the
practical ability to assess those controls. Our interests in the joint
ventures
represent 1.6% of our consolidated total assets and 2.6% of our consolidated
revenue as at and for the year ended September 30, 2006. Despite this
exclusion,
we have assessed our internal control over financial reporting with
respect to
the inclusion of our share of the joint ventures and its results for
the year in
our consolidated financial statements. Further financial information
with
respect to the joint ventures is presented in Note 19 to the consolidated
financial statements.
As
of the end of the Company’s 2006 fiscal year, management conducted an assessment
of the effectiveness of the Company’s internal control over financial reporting
based on the framework established in Internal Control - Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on this assessment, management has determined the Company’s internal
control over financial reporting as of September 30, 2006 was
effective.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2006 has been audited by the Company’s independent
registered chartered accountants, as stated in their report appearing
on page 3.
|
(signed)
|
(signed)
|
(signed)
|
|
| NOVEMBER 13, 2006 |
MICHAEL
E. ROACH
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
|
R.
DAVID ANDERSON
EXECUTIVE
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
|
ANDRÉ
IMBEAU
FOUNDER,
EXECUTIVE VICE-CHAIRMAN AND CORPORATE SECRETARY
|
|
|
2006
Annual Report CGI Group Inc.
25
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To
the Board of Directors and Shareholders of CGI Group Inc.
We have audited management’s assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that CGI Group
Inc. and
subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of September 30, 2006, based on the criteria
established
in Internal Control - Integrated Framework issued by the Committee
of Sponsoring
Organizations of the Treadway Commission. As described in Management’s Report on
Internal Control over Financial Reporting, management excluded from
their
assessment the internal control over financial reporting on its joint
ventures
because the Company does not have the ability to dictate or modify
controls at
these entities and does not have the ability to assess, in practice,
the
controls at these entities. The interest in the joint ventures constitutes
total
assets and revenues of 1.6% and 2.6%, respectively, of the related
consolidated
financial statement amounts as at and for the year ended September
30, 2006.
Accordingly, our audit did not include the internal control over financial
reporting of the joint ventures. The Company’s management is responsible for
maintaining effective internal control over financial reporting and
for its
assessment of the effectiveness of internal control over financial
reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We
believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by,
or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company’s board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting
and the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1)
pertain to
the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and
directors of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override
of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of
the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our opinion, management’s assessment that the Company maintained effective
internal control over financial reporting as of September
30, 2006, is fairly stated, in all material respects, based on the
criteria
established in Internal Control - Integrated Framework issued by the
Committee
of Sponsoring Organizations of the Treadway Commission. Also, in our
opinion,
the Company maintained, in all material respects, effective internal
control
over financial reporting as of September 30, 2006, based on the criteria
established in Internal Control - Integrated Framework issued by the
Committee
of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of the Company as of and for the year ended September 30,
2006, and
our report dated November 13, 2006 expressed an unqualified opinion
on those
financial statements.
(signed)
Deloitte
& Touche LLP
INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTS
MONTRÉAL,
QUÉBEC
NOVEMBER
13, 2006
2006
Annual Report CGI Group Inc.
26
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To
the Board of Directors and Shareholders of CGI Group Inc.
We
have audited the consolidated balance sheets of CGI Group Inc. and
subsidiaries
(the “Company”) as at September 30, 2006 and 2005 and the related
consolidated statements of earnings, retained earnings and cash flows
for each
of the years in the three-year period ended September 30, 2006. 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.
With
respect to the consolidated financial statements for the year ended
September
30, 2006, we conducted our audits in accordance with the standards
of the Public
Company Accounting Oversight Board (United States). With respect to
the
consolidated financial statements for the year ended September 30,
2005 and
September 30, 2004, we conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards require that
we plan and
perform the audit to obtain reasonable assurance about 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. We believe that our audits provide
a
reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly,
in all
material respects, the financial position of the Company as at
September 30, 2006 and 2005 and the results of their operations and their
cash flows for each of the years in the three-year period ended
September 30, 2006, in accordance with Canadian generally accepted
accounting principles.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company’s
internal control over financial reporting as of September 30, 2006,
based on the
criteria established in Internal Control - Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission, and
our
report, dated November 13, 2006, expressed an unqualified opinion on
management’s assessment of the effectiveness of the Company’s internal control
over financial reporting and an unqualified opinion on the effectiveness
of the
Company’s internal control over financial reporting.
(signed)
Deloitte
& Touche LLP
INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTS
MONTRÉAL,
QUÉBEC
NOVEMBER
13, 2006
COMMENTS
BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS FOR U.S. READERS ON
CANADA-U.S.
REPORTING DIFFERENCES
In
the United States of America, reporting standards for auditors require
the
addition of an explanatory paragraph (following the opinion paragraph)
when
there are changes in accounting principles that have a material effect
on the
comparability of the Company’s financial statements, such as the changes
described in Note 2 to the financial statements. Our report to the
shareholders,
dated November 13, 2006, is expressed in accordance with Canadian reporting
standards, which do not require a reference to such changes in accounting
principles in the auditors’ report when the change is properly accounted for and
adequately disclosed in the financial statements.
(signed)
Deloitte
& Touche LLP
INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTS
MONTRÉAL,
QUÉBEC
NOVEMBER
13, 2006
2006
Annual Report CGI Group Inc.
27
Consolidated
Financial Statements
Consolidated
statements of earnings
|
YEARS
ENDED
SEPTEMBER
30
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands
of
Canadian
dollars,
except
share
data)
|
$
|
$
|
$
|
|||||||
|
REVENUE
|
3,477,623
|
3,685,986
|
3,150,070
|
|||||||
|
Operating
expenses
|
||||||||||
|
Costs
of services, selling and administrative (note 16)
|
2,996,521
|
3,151,558
|
2,677,396
|
|||||||
|
Amortization
(note 12)
|
170,766
|
199,283
|
162,591
|
|||||||
|
Restructuring
costs related
to specific items
(note 13)
|
67,266
|
-
|
-
|
|||||||
|
Interest
on long-term debt
|
43,291
|
24,014
|
20,672
|
|||||||
|
Other
income, net
|
(7,252
|
)
|
(7,156
|
)
|
(8,728
|
)
|
||||
|
Gain
on sale of assets (note 17)
|
(10,475
|
)
|
-
|
-
|
||||||
|
Gain
on sale and earnings from an investment in an entity
subject
to signiӿcant inӾuence (note
17)
|
-
|
(4,537
|
)
|
(488
|
)
|
|||||
|
Sale
of right (note 14)
|
-
|
(11,000
|
)
|
-
|
||||||
|
3,260,117
|
3,352,162
|
2,851,443
|
||||||||
|
Earnings
from continuing operations before income taxes
Income
taxes (note 15)
|
217,506
70,973
|
333,824
114,126
|
298,627
113,241
|
|||||||
|
Net
earnings from continuing operations
|
146,533
|
219,698
|
185,386
|
|||||||
|
Net
(loss) gain from discontinued operations (note 18)
|
-
|
(3,210
|
)
|
8,655
|
||||||
|
NET
EARNINGS
|
146,533
|
216,488
|
194,041
|
|||||||
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE (note 11)
|
||||||||||
|
Continuing
operations
|
0.40
|
0.50
|
0.44
|
|||||||
|
Discontinued
operations
|
-
|
(0.01
|
)
|
0.02
|
||||||
|
0.40
|
0.49
|
0.46
|
||||||||
|
See
Notes to the consolidated financial statements.
|
||||||||||
Consolidated
statements of retained earnings
|
YEARS
ENDED
SEPTEMBER
30
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands
of
Canadian
dollars)
|
$
|
$
|
$
|
|||||||
|
BALANCE,
BEGINNING OF YEAR
|
895,267
|
730,757
|
542,205
|
|||||||
|
Net
earnings
|
146,533
|
216,488
|
194,041
|
|||||||
|
Share
repurchase costs (note
9)
|
(6,760
|
)
|
-
|
-
|
||||||
|
Share
issue costs, net of income taxes (note
9)
|
-
|
-
|
(5,489
|
)
|
||||||
|
Excess
of purchase price over carrying value of Class A
subordinate
shares acquired (note
9)
|
(447,839
|
)
|
(51,978
|
)
|
-
|
|||||
|
BALANCE,
END OF YEAR
|
587,201
|
895,267
|
730,757
|
|||||||
See
Notes to the consolidated financial statements.
2006
Annual Report CGI Group Inc.
28
Consolidated
balance sheets
|
AS
AT
SEPTEMBER
30
|
2006
|
2005
|
|||||
|
(in
thousands
of
Canadian
dollars)
|
$
|
$
|
|||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
115,729
|
240,459
|
|||||
|
Accounts
receivable (note 3)
|
479,767
|
487,731
|
|||||
|
Work
in progress
|
197,381
|
214,470
|
|||||
|
Prepaid
expenses and other current assets
|
89,639
|
75,281
|
|||||
|
Future
income taxes (note 15)
|
33,728
|
22,118
|
|||||
|
916,244
|
1,040,059
|
||||||
|
Capital
assets (note 4)
|
120,032
|
116,388
|
|||||
|
Contract
costs (note 5)
|
212,115
|
223,122
|
|||||
|
Finite-life
intangibles and other long-term assets (note 6)
|
525,905
|
586,416
|
|||||
|
Future
income taxes (note 15)
|
25,127
|
46,601
|
|||||
|
Goodwill
(note 7)
|
1,737,886
|
1,773,370
|
|||||
|
Total
assets before funds held for clients
|
3,537,309
|
3,785,956
|
|||||
|
Funds
held for clients (note 2)
|
154,723
|
200,703
|
|||||
|
3,692,032
|
3,986,659
|
||||||
|
LIABILITIES
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable and accrued liabilities
|
367,127
|
378,691
|
|||||
|
Accrued
compensation
|
108,331
|
107,014
|
|||||
|
Deferred
revenue
|
111,759
|
127,950
|
|||||
|
Income
taxes
|
41,707
|
31,955
|
|||||
|
Future
income taxes (note 15)
|
30,384
|
47,163
|
|||||
|
Current
portion of long-term debt (note 8)
|
8,242
|
14,899
|
|||||
|
667,550
|
707,672
|
||||||
|
Future
income taxes (note
15)
|
213,512
|
238,983
|
|||||
|
Long-term
debt (note
8)
|
805,017
|
234,801
|
|||||
|
Accrued
integration charges (note
17)
and other long-term liabilities
|
103,210
|
109,810
|
|||||
|
Total
liabilities before clients’ funds obligations
|
1,789,289
|
1,291,266
|
|||||
|
Clients’
funds obligations (note
2)
|
154,723
|
200,703
|
|||||
|
1,944,012
|
1,491,969
|
||||||
|
Commitments,
contingencies and guarantees (note
24)
|
|||||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Capital
stock (note
9)
|
1,367,606
|
1,762,973
|
|||||
|
Contributed
surplus (note
10)
|
82,436
|
67,578
|
|||||
|
Warrants
(note
10)
|
-
|
19,655
|
|||||
|
Retained
earnings
|
587,201
|
895,267
|
|||||
|
Foreign
currency translation adjustment
|
(289,223
|
)
|
(250,783
|
)
|
|||
|
1,748,020
|
2,494,690
|
||||||
|
3,692,032
|
3,986,659
|
||||||
|
See
Notes to the consolidated financial statements.
|
|||||||
|
Approved
by the Board
|
(signed
|
)
|
(signed
|
)
|
|||
|
|
DIRECTOR
MICHAEL
E. ROACH |
DIRECTOR
ANDRÉ
IMBEAU
|
|||||
2006
Annual Report CGI Group Inc.
29
Consolidated
statements of cash flows
|
YEARS
ENDED
SEPTEMBER
30
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands
of
Canadian
dollars)
|
$
|
$
|
$
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||||
|
Net
earnings from continuing operations
|
146,533
|
219,698
|
185,386
|
|||||||
|
Adjustments
for:
|
||||||||||
|
Amortization
(note 12)
|
199,760
|
231,965
|
192,718
|
|||||||
|
Non-cash
portion of restructuring costs related to specific items
(note 13)
|
1,311
|
-
|
-
|
|||||||
|
Deferred
credits
|
(781
|
)
|
(3,038
|
)
|
(16,439
|
)
|
||||
|
Future
income taxes (note
15)
|
(34,225
|
)
|
35,650
|
55,626
|
||||||
|
Foreign
exchange loss (gain)
|
1,914
|
1,993
|
(789
|
)
|
||||||
|
Stock-based
compensation (note 10)
|
12,895
|
20,554
|
25,559
|
|||||||
|
Sale
of right (note
14)
|
-
|
(11,000
|
)
|
-
|
||||||
|
Gain
on sale of assets (note
17)
|
(10,475
|
)
|
-
|
-
|
||||||
|
Gain
on sale and earnings from an investment in an entity subject
to
significant
influence (note 17)
|
-
|
(4,537
|
)
|
(488
|
)
|
|||||
|
Net
change in non-cash working capital items (note
20)
|
(7,371
|
)
|
(10,576
|
)
|
(211,376
|
)
|
||||
|
Cash
provided by continuing operating activities
|
309,561
|
480,709
|
230,197
|
|||||||
|
INVESTING
ACTIVITIES
|
||||||||||
|
Business
acquisitions (net of cash acquired) (note
17)
|
(25,620
|
)
|
(66,229
|
)
|
(589,678
|
)
|
||||
|
Proceeds
from sale of assets and businesses (net of cash disposed)
(note
17)
|
30,114
|
29,521
|
87,503
|
|||||||
|
Proceeds
from sale of investment in an entity subject to significant
influence
(note
17)
|
-
|
20,849
|
-
|
|||||||
|
Proceeds
from sale of right (note
14)
|
-
|
11,000
|
-
|
|||||||
|
Purchase
of capital assets
|
(41,105
|
)
|
(25,314
|
)
|
(59,829
|
)
|
||||
|
Proceeds
from disposal of capital assets
|
562
|
6,663
|
4,738
|
|||||||
|
Payment
of contract costs
|
(31,417
|
)
|
(25,057
|
)
|
(75,142
|
)
|
||||
|
Reimbursement
of contract costs upon termination of a contract
|
-
|
15,300
|
-
|
|||||||
|
Additions
to ӿnite-life intangibles and other long-term assets
|
(74,568
|
)
|
(90,674
|
)
|
(85,814
|
)
|
||||
|
Proceeds
from disposal of ӿnite-life intangibles
|
-
|
5,251
|
-
|
|||||||
|
Decrease
in other long-term assets
|
2,677
|
12,413
|
17,202
|
|||||||
|
Cash
used in continuing investing activities
|
(139,357
|
)
|
(106,277
|
)
|
(701,020
|
)
|
||||
|
FINANCING
ACTIVITIES
|
||||||||||
|
Increase
in credit facilities (note
8)
|
746,170
|
190,000
|
240,534
|
|||||||
|
Repayment
of credit facilities
|
(158,944
|
)
|
(397,578
|
)
|
(219,000
|
)
|
||||
|
Increase
in long-term debt
|
-
|
-
|
257,604
|
|||||||
|
Repayment
of long-term debt
|
(13,124
|
)
|
(16,705
|
)
|
(26,451
|
)
|
||||
|
Repurchase
of Class A subordinate shares (net of share repurchase
costs)
(note
9)
|
(926,145
|
)
|
(109,456
|
)
|
-
|
|||||
|
Issuance
of shares (net of share issue costs) (note
9)
|
57,963
|
4,551
|
330,996
|
|||||||
|
Cash
(used in) provided by continuing financing activities
|
(294,080
|
)
|
(329,188
|
)
|
583,683
|
|||||
|
Effect
of foreign exchange rate changes on cash and cash equivalents
of
continuing operations
|
(854
|
)
|
(6,167
|
)
|
186
|
|||||
|
Net
(decrease) increase in cash and cash equivalents of continuing
operations
|
(124,730
|
)
|
39,077
|
113,046
|
||||||
|
Net
cash and cash equivalents provided by discontinued operations
(note
18)
|
-
|
759
|
4,068
|
|||||||
|
Cash
and cash equivalents, beginning of year
|
240,459
|
200,623
|
83,509
|
|||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
115,729
|
240,459
|
200,623
|
|||||||
Supplementary
cash flow information (note 20)
See
Notes to the consolidated financial statements.
2006
Annual Report CGI Group Inc.
30
Notes
to the Consolidated Financial Statements
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data)
1.
Description of business
CGI
Group Inc. (the “Company”), directly or through its subsidiaries, manages
information technology (“IT services”), including outsourcing, systems
integration and consulting, software licenses and maintenance, as well
as
business process services (“BPS”) to help clients cost effectively realize their
strategies and create added value.
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 from U.S. GAAP. A reconciliation between Canadian
and U.S.
GAAP can be found in Note 26.
Certain
comparative figures have been reclassified in order to conform to the
presentation adopted in 2006.
CHANGES
IN ACCOUNTING POLICIES
|
i)
|
The
Canadian Institute of Chartered Accountants (“CICA”)
amended Handbook Section 3831, “Non-Monetary Transactions”, effective
for fiscal years beginning on or after January 1, 2006. The
amendment of
the section requires that non-monetary transactions be recorded
at fair
value unless the transaction has no commercial substance,
it is an
exchange of inventory, it is a non-monetary, non-reciprocal
transfer to
owners or it’s not reliably measurable. The adoption of this section did
not have any impact on the consolidated financial statements.
|
|
ii)
|
The
CICA issued Emerging Issue Committee (“EIC”) Abstract 156, “Accounting by
a Vendor for Consideration Given to a Customer (Including
a Reseller of
the Vendor’s Products)”, which provides guidance to companies that give
incentives to customers or resellers in the form of cash,
equity, free
gifts, coupons and others. The adoption of EIC 156 did not
have any impact
on the consolidated financial statements since the Company
already adopted
the U.S. equivalent, Emerging Issues Task Force 01-9, “Accounting for
Consideration Given by a Vendor to a Customer”, issued in 2001.
|
|
iii)
|
The
CICA issued EIC 157, “Implicit variable interests under AcG 15’’, which
requires consideration of whether the reporting enterprise
holds an
implicit variable interest in a variable interest entity
or potential
variable interest entity when applying Accounting
Guideline 15 “Consolidation of Variable Interest Entities’’. The adoption
of this abstract did not have any impact on the consolidated
financial
statements.
|
|
iv)
|
The
CICA issued EIC 159, “Conditional Asset Retirement Obligations’’, which
provides guidance when a conditional asset retirement obligation
should be
recognized. The adoption of this abstract did not have any
impact on the
consolidated financial statements.
|
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. Significant estimates include, but
are not
limited to, the measurement of allowance for doubtful accounts, tax
credits,
long-term asset valuations and impairment assessments, income taxes,
provisions
and contingencies, as well as revenue recognition.
BASIS
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the Company
and its
subsidiaries. All intercompany transactions and balances have been
eliminated.
The Company accounts for its jointly-controlled investments using the
proportionate consolidation method. The Company accounts for investments
where
it has the ability to exercise significant influence under the equity
method. In
situations where the Company does not exercise significant influence,
the
investments are recorded at cost. The carrying amount of the investments
is
reviewed for decline, other than temporary fluctuations, whenever events
or
changes in circumstances indicate that the carrying amount of the investments
may not be recoverable.
2006
Annual Report CGI Group Inc.
31
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data)
2.
Summary of significant accounting policies (continued)
REVENUE
RECOGNITION, WORK IN PROGRESS AND DEFERRED REVENUE
The
Company generates revenue principally through the provision of IT services
and
BPS.
The
IT services include a full range of information technology services,
namely: i)
outsourcing ii) systems integration and consulting
iii)
software licenses and iv) maintenance. The BPS unit provides business
processing
for the financial services segments, as well as other services, such
as payroll
and document management services.
The
Company provides services under contracts that contain various pricing
mechanisms. The Company recognizes revenue when persuasive evidence
of an
arrangement exists, services or products have been provided to the
client, the
fee is fixed or determinable, and collectibility is reasonably assured.
If an
arrangement involves the provision of multiple elements, the total
arrangement
value is allocated to each element as a separate unit of accounting
if: 1) the
delivered item has value to the client on a stand-alone basis; 2) there
is
objective and reliable evidence of the fair value of the undelivered
item; and
3) the arrangement includes a general right of return relative to the
delivered
item and delivery or performance of the undelivered item is considered
probable
and substantially in the control of the vendor. If these criteria are
met, then
the total consideration of the arrangement is allocated among the separate
units
of accounting based on their fair values.
Provisions
for estimated contract losses, if any, are recognized in the period
in which the
loss is determined. Contract losses are measured at the amount by which
the
estimated total costs exceed the estimated total revenue from the contract.
OUTSOURCING
AND BPS ARRANGEMENTS
Revenue
from outsourcing and BPS arrangements under time and materials and
unit-priced
arrangements are recognized as the services are provided at the contractual
stated price. If the contractual per-unit prices within a unit-priced
contract
change during the term of the arrangement, the Company evaluates whether
it is
more appropriate to record revenue based on the average per-unit price
during
the term of the contract or based on the actual amounts billed.
Revenue
from outsourcing and BPS arrangements under fixed-fee arrangements
is recognized
on a straight-line basis over the term of the arrangement, regardless
of the
amounts billed, unless there is a better measure of performance or
delivery.
SYSTEMS
INTEGRATION AND CONSULTING SERVICES
Revenue
from systems integration and consulting services under time and material
arrangements is recognized as the services are rendered, and revenue
under
cost-based arrangements is recognized as reimbursable costs are incurred.
Revenue
from systems integration and consulting services under fixed-fee arrangements
is
recognized using the percentage-of-completion method over the implementation
period. The Company uses the labour costs or labour hours incurred
to date to
measure the progress towards completion. This method relies on estimates
of
total expected labour costs or total expected labour hours to complete
the
service, which are compared to labour costs or labour hours incurred
to date, to
arrive at an estimate of the percentage of revenue earned to date.
Management
regularly reviews underlying estimates of total expected labour costs
or hours.
Revisions to estimates are reflected in the statement of earnings in
the period
in which the facts that gave rise to the revision became known.
Revenue
from systems integration and consulting services under benefits-funded
arrangements is recognized only to the extent it can be predicted,
with
reasonable certainty, that the benefit stream will generate amounts
sufficient
to fund the value on which revenue recognition is based.
SOFTWARE
LICENSES AND MAINTENANCE ARRANGEMENTS
Revenue
from software license arrangements is recognized upon delivery of software
if
persuasive evidence of an arrangement exists, collection is probable,
the fee is
fixed or determinable and vendor-specific evidence of an arrangement
exists to
allocate the total fee to the different elements of an arrangement.
Vendor-specific objective evidence is typically based on the price
charged when
an element is sold separately.
In
circumstances where the implementation services are essential to the
functionality of the software or where the software requires significant
customization, the Company recognizes software license revenue using
the
percentage-of-completion method over the implementation period as previously
described.
Revenue
from maintenance services for licenses sold and implemented is recognized
ratably over the term of the contract.
WORK
IN PROGRESS AND DEFERRED REVENUE
Amounts
recognized as revenue in excess of billings are classified as work
in progress.
Amounts received in advance of the delivery of products or performances
of
services are classified as deferred revenue.
REIMBURSEMENTS
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.
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.
CAPITAL
ASSETS
Capital
assets are recorded at cost and are amortized over the following estimated
useful lives of the assets, using the straight-line method:
|
Buildings
|
10
to 40 years
|
|
Leasehold
improvements
|
Lesser
of the useful life or lease term plus ӿrst renewal option
|
|
Furniture
and fixtures
|
3
to 10 years
|
|
Computer
equipment
|
3
to 5 years
|
2006
Annual Report CGI Group Inc.
32
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data)
FUNDS
HELD FOR CLIENTS AND CLIENTS’ FUNDS OBLIGATIONS
In
connection with the Company’s payroll and tax filing services, the Company
collects funds for payment of payroll and taxes, temporarily holds
such funds
until payment is due, remits the funds to the clients’ employees and appropriate
tax authorities, files federal and local tax returns, and handles related
regulatory correspondence and amendments. The Company presents the
funds held
for clients and related obligations separately.
CONTRACT
COSTS
Contract
costs are mainly incurred when acquiring or implementing long-term
IT services
and BPS contracts. These assets are recorded at cost and amortized
using the
straight-line method over the term of the respective contracts. Contract
costs
are comprised primarily of incentives and transition costs.
Occasionally,
incentives are granted to clients upon signing of outsourcing contracts.
These
incentives can be granted either in the form of cash payments, issuance
of
equity instruments, or discounts awarded principally over a transition
period,
as negotiated in the contract. In the case of equity instruments, cost
is
measured at the estimated fair value at the time they are issued. For
discounts,
cost is measured at the value of the granted financial commitment and
a
corresponding amount is recorded in other long-term liabilities. As
services are
provided to the client, the amount is amortized and recorded as a reduction
of
revenue.
Capital
assets acquired from a client in connection with outsourcing contracts
are
capitalized as such and amortized consistent with the amortization
policies
described previously. The excess of the amount paid over the fair value
of
capital assets acquired in connection with outsourcing contracts is
considered
as an incentive granted to the client, and is recorded as described
in the
preceding paragraph.
Transition
costs consist of expenses associated with the installation of systems
and
processes incurred after the award of outsourcing contracts, relocation
of
transitioned employees and exit from client facilities. Under BPS contracts,
the
costs consist primarily of expenses related to activities such as the
conversion
of the customer’s applications to the Company’s platforms. These incremental
costs are comprised essentially of labour costs, including compensation
and
related fringe benefits, as well as subcontractor costs.
FINITE-LIFE
INTANGIBLE ASSETS
Finite-life
intangible assets consist mainly of internal software, business solutions,
software licenses and customer relationships.
Internal
software, business solutions and software licenses are recorded at
cost.
Business solutions developed internally and marketed for distribution
are
capitalized when they meet specific capitalization criteria related
to
technical, market and financial feasibility. Business solutions and
software
licenses acquired through a business combination are initially recorded
at fair
value based on the estimated net future income-producing capabilities
of the
software products. Customer relationships are acquired through business
combinations and are initially recorded at their fair value based on
the present
value of expected future cash flows.
The
Company amortizes its finite-life intangible assets using the straight-line
method over the following estimated useful lives:
|
Internal
software
|
2
to 7 years
|
|
Business
solutions
|
2
to 10 years
|
|
Software
licenses
|
3
to 8 years
|
|
Customer
relationships and other
|
2
to 15 years
|
IMPAIRMENT
OF LONG-LIVED ASSETS
When
events or changes in circumstances indicate that the carrying amount
of
long-lived assets may not be recoverable, undiscounted estimated cash
flows are
projected over their remaining term and compared to the carrying amount.
To the
extent such projections indicate that future undiscounted cash flows
are not
sufficient to recover the carrying amounts of related assets, a charge
is
recorded to reduce the carrying amount to equal projected future discounted
cash
flows.
BUSINESS
COMBINATIONS AND GOODWILL
The
Company accounts for its business combinations using the purchase method
of
accounting. Under this method, the Company allocates the purchase price
to
tangible and intangible assets acquired and liabilities assumed based
on
estimated fair values at the date of acquisition, with the excess of
the
purchase price amount being allocated to goodwill. Goodwill for each
reporting
unit is assessed for impairment at least annually, or when an event
or
circumstance occurs that more likely than not reduces the fair value
of a
reporting unit below its carrying amount. An impairment charge is recorded
when
the goodwill carrying amount of the reporting unit exceeds its fair
value.
ACCRUED
INTEGRATION CHARGES
Accrued
integration charges are comprised of liabilities for costs incurred
on business
combinations, such as severance payments related to the termination
of certain
employees of the acquired business performing functions already available
through the Company’s existing structure and provisions related to leases for
premises occupied by the acquired businesses that the Company plans
to vacate.
EARNINGS
PER SHARE
Basic
earnings per share are based on the weighted average number of shares
outstanding during the period. The dilutive effect of stock options
is
determined using the treasury stock method.
RESEARCH
AND SOFTWARE DEVELOPMENT COSTS
Research
costs are charged to earnings in the period in which they are incurred,
net of
related tax credits. Included in costs of services, selling and administrative
expenses are research expenses in the amount of $25,728,000 ($21,869,000
in 2005
and $26,710,000 in 2004). During the year, the Company incurred direct
research
and software development costs of $68,905,000 ($78,200,000 in 2005
and
$64,500,000 in 2004).
2006
Annual Report CGI Group Inc.
33
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data)
2.
Summary of significant accounting policies (continued)
Software
development costs are charged to earnings in the year they are incurred,
net of
related tax credits unless they meet specific capitalization criteria
related to
technical, market and financial feasibility. Deferred development costs
are
included as part of finite-life intangibles. Tax credits amounting
to $925,000
were recorded against these assets for the year ended September 30,
2006 (nil in
2005 and $1,408,000 in 2004).
INCOME
TAXES
Income
taxes are accounted for using the asset and liability method of accounting
for
income taxes. Future income tax assets and liabilities are determined
based on
deductible or taxable temporary differences between the amounts reported
for
financial statement purposes and tax values of assets and liabilities
using
enacted or substantively enacted income tax rates expected to be in
effect for
the year in which the differences are expected to reverse. A valuation
allowance
is recorded for the portion of the future income tax assets when its
realization
is not considered more likely than not.
TRANSLATION
OF FOREIGN CURRENCIES
Revenue
and expenses denominated in foreign currencies are recorded at the
rate of
exchange prevailing at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates
prevailing at
the balance sheet date. Unrealized translation gains and losses are
reflected in
net earnings.
Self-sustaining
subsidiaries, with economic activities 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 date. 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 adjustment
in
shareholders’ equity. As a result of differences in the translation of the
financial statements of foreign subsidiaries, the foreign currency
translation
adjustment varied by $38,440,000 and $92,124,000 in 2006 and 2005,
respectively.
These variations resulted principally from translating U.S. dollar
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 date, 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.
STOCK-BASED
COMPENSATION
Stock-based
compensation cost is recorded using the fair value based method. This
method
consists of recording compensation cost to earnings over the vesting
period of
options granted. When stock options are exercised, any consideration
paid by
employees is credited to capital stock and the recorded fair value
of the option
is removed from contributed surplus and credited to capital stock.
FINANCIAL
INSTRUMENTS
The
Company uses various financial instruments to manage its exposure to
fluctuations in foreign currency exchange rates. The Company does not
hold or
use any derivative instruments for trading purposes.
The
Company enters into financial instrument contracts to hedge its net
investment
in foreign subsidiaries. Foreign exchange translation gains or losses
on the net
investment are recorded under the foreign currency translation adjustment.
Any
realized or unrealized gains or losses on instruments covering the
net
investment are also recognized in the foreign currency translation
adjustment.
The
Company also enters, from time to time, into forward contracts to hedge
forecasted cash flows denominated in currencies other than the functional
currency of its subsidiaries. Gains and losses on foreign exchange
contracts
designated as hedges for firm commitments or forecasted transactions
are
recorded in costs of services, selling and administrative expenses
when the
related transaction is realized.
Periodic
assessments of each hedge’s effectiveness are performed during the year.
FUTURE
ACCOUNTING CHANGES
The
CICA has issued the following new Handbook Sections:
|
a)
|
Section
3855, “Financial Instruments - Recognition and Measurement”, effective for
interim periods beginning on or after October 1, 2006. This
section
describes the standards for recognizing and measuring financial
assets,
financial liabilities and non-financial derivatives. All
financial assets,
except for those classified as held-to-maturity, and derivative
financial
instruments must be measured at their fair value. All financial
liabilities must be measured at their fair value if they
are classified as
held for trading purposes, and if not, they are measured
at their carrying
value. The impact of the adoption of this new section on
the consolidated
financial statements is not expected to be material.
|
|
b)
|
Section
1530, “Comprehensive Income”, and Section 3251, “Equity”, effective for
interim periods beginning on or after October 1, 2006. Comprehensive
income is the change in equity of an enterprise during a
period arising
from transactions and other events and circumstances from
non-owner
sources. It includes items that would normally not be included
in net
income, such as changes in the foreign currency translation
adjustment
relating to self-sustaining foreign operations and unrealized
gains or
losses on available-for-sale financial
|
2006
Annual Report CGI Group Inc.
34
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data)
|
instruments.
These sections describe how to report and disclose comprehensive
income
and its components. Section 3251, “Equity”, replaces Section 3250,
“Surplus”, and describes the changes in how to report and disclose
equity
and changes in equity as a result of the new requirements
of Section 1530,
“Comprehensive Income”. Upon adoption of this section, the consolidated
financial statements will include a statement of comprehensive
income.
|
|
|
c)
|
Section
3865, “Hedges”, effective for interim periods beginning on or after
October 1, 2006. This section describes when hedge accounting
is
appropriate. Hedge accounting ensures that all gains, losses,
revenue and
expenses from the derivative, and the item it hedges, are
recorded in the
statement of earnings in the same period. The impact of the
adoption of
this new section on the consolidated financial statements
is not expected
to be material.
|
3.
Accounts receivable
|
2006
|
2005
|
||||||
| $ |
$
|
||||||
|
Trade
|
376,383
|
357,679
|
|||||
|
Other(1)
|
103,384
|
130,052
|
|||||
|
479,767
|
487,731
|
||||||
|
(1)
|
Other
accounts receivable include refundable tax credits on salaries
related to
the E-Commerce Place, Cité
du
multimEdia, New Economy Centre, SR&ED and other tax credit programs,
of approximately $80,943,000 and $93,287,000, in 2006 and
2005,
respectively.
|
|
The
Company is defined as an eligible company and operates “eligible
activities” under the terms of various Québec
government tax credit programs on salaries for eligible employees
located
mainly in designated locations in the province of Québec,
Canada.
The Company must obtain an eligibility certificate from the
Québec
government annually. These programs are designed to support
job creation
and revitalization efforts in certain urban areas.
|
|
|
In
order to be eligible for a majority of the tax credits, the
Company
relocated some of its employees to designated locations.
Real estate costs
for these designated locations are significantly higher than
they were at
the previous facilities. Initially, the Company’s ӿnancial commitments for
these real estate locations represented $618,800,000. As
at September 30,
2006, the balance outstanding for these commitments was $487,819,000,
ranging between two and 17 years.
|
|
|
The
refundable tax credits, under the various programs, are calculated
at
rates varying from 35% to 40% on salaries paid in Québec,
to a
maximum range of $12,500 to $15,000 per year per eligible
employee. For
the E-Commerce Place, the rate can vary depending on the
creation of a
sufficient number of jobs in the province of Québec.
The
rate is established using a predetermined formula and may
not exceed 35%
or $12,500. As at September 30, 2006, the Company is eligible
to be
refunded using the rate of 35%.
|
4.
Capital assets
|
2006
|
2005
|
||||||||||||||||||
|
ACCUMULATED
|
NET
BOOK
|
ACCUMULATED
|
NET
BOOK
|
||||||||||||||||
|
COST
|
AMORTIZATION
|
VALUE
|
COST
|
AMORTIZATION
|
VALUE
|
||||||||||||||
|
$
|
$
|
$
|
$
|
$ |
$
|
||||||||||||||
|
Land
and building
|
5,766
|
1,372
|
4,394
|
5,113
|
907
|
4,206
|
|||||||||||||
|
Leasehold
improvements
|
124,031
|
40,811
|
83,220
|
105,779
|
26,858
|
78,921
|
|||||||||||||
|
Furniture
and fixtures
|
28,596
|
16,315
|
12,281
|
24,979
|
13,286
|
11,693
|
|||||||||||||
|
Computer
equipment
|
69,253
|
49,116
|
20,137
|
60,330
|
38,762
|
21,568
|
|||||||||||||
|
227,646
|
107,614
|
120,032
|
196,201
|
79,813
|
116,388
|
||||||||||||||
Capital
assets include assets acquired under capital leases totaling $2,589,000
($3,461,000 in 2005), net of accumulated amortization of $3,520,000
($2,975,000
in 2005).
The
asset retirement obligations pertain to operating leases of office
buildings in
different locations where certain clauses require premises to be returned
to
their original state at the end of the lease term. The cost of the
asset
retirement obligations of $2,364,000 ($2,469,000 in 2005), which is
recorded in
accrued integration charges and other long-term liabilities, was based
on the
undiscounted expected cash flows of $3,400,000 ($3,600,000 in 2005)
using a
discount rate of 5.50% (5.78% in 2005). The timing of the settlement
of these
obligations varies between one and 17 years.
2006
Annual Report CGI Group Inc.
35
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
5.
Contract costs
|
2006
|
2005
|
||||||||||||||||||
|
ACCUMULATED
|
NET
BOOK
|
ACCUMULATED
|
NET
BOOK
|
||||||||||||||||
|
COST
|
AMORTIZATION
|
VALUE
|
COST
|
AMORTIZATION
|
VALUE
|
||||||||||||||
| $ |
$
|
$ |
$
|
$ |
$
|
||||||||||||||
|
Incentives
|
250,691
|
130,167
|
120,524
|
247,449
|
103,846
|
143,603
|
|||||||||||||
|
Transition
costs
|
124,784
|
33,193
|
91,591
|
107,218
|
27,699
|
79,519
|
|||||||||||||
|
375,475
|
163,360
|
212,115
|
354,667
|
131,545
|
223,122
|
||||||||||||||
6.
Finite-life intangibles and other long-term assets
|
2006
|
||||||||||
|
ACCUMULATED
|
NET
BOOK
|
|||||||||
|
COST
|
AMORTIZATION
|
VALUE
|
||||||||
| $ |
$
|
$
|
||||||||
|
Internal
software
|
77,874
|
34,724
|
43,150
|
|||||||
|
Business
solutions
|
258,566
|
80,103
|
178,463
|
|||||||
|
Software
licenses
|
120,557
|
78,373
|
42,184
|
|||||||
|
Customer
relationships and other
|
367,404
|
131,596
|
235,808
|
|||||||
|
Finite-life
intangibles
|
824,401
|
324,796
|
499,605
|
|||||||
|
Deferred
financing fees
Deferred
compensation plan (note 23)
Other
|
6,475
9,943
9,882
|
|||||||||
|
Other
long-term assets
|
26,300
|
|||||||||
|
Total
finite-life intangibles and other long-term assets
|
525,905
|
|||||||||
|
2005
|
||||||||||
|
|
COST
|
ACCUMULATED
AMORTIZATION
|
NET
BOOK
VALUE
|
|||||||
|
$
|
$
|
$
|
||||||||
|
Internal
software
|
75,088
|
31,056
|
44,032
|
|||||||
|
Business
solutions
|
230,854
|
51,160
|
179,694
|
|||||||
|
Software
licenses
|
135,991
|
69,644
|
66,347
|
|||||||
|
Customer
relationships and other
|
382,111
|
103,819
|
278,292
|
|||||||
|
Finite-life
intangibles
|
824,044
|
255,679
|
568,365
|
|||||||
|
Financing
lease (note
19)
Deferred
financing fees
Deferred
compensation plan (note 23)
Other
|
1,788
3,633
7,861
4,769
|
|||||||||
|
Other
long-term assets
|
18,051
|
|||||||||
|
Total
finite-life intangibles and other long-term assets
|
586,416
|
|||||||||
|
Amortization
expense of finite-life intangibles included in the consolidated
statements
of earnings is as follows:
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
$
|
|
$
|
|
$
|
||||||
|
Internal
software
|
10,839
|
16,731
|
15,003
|
|||||||
|
Business
solutions
|
35,298
|
29,175
|
23,054
|
|||||||
|
Software
licenses
|
29,983
|
31,653
|
33,905
|
|||||||
|
Customer
relationships and other
|
43,597
|
47,536
|
30,158
|
|||||||
|
119,717
|
125,095
|
102,120
|
||||||||
2006
Annual Report CGI Group Inc.
36
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
7.
Goodwill
The
Company has designated September 30 as the date for the annual impairment
test.
The Company completed its annual goodwill impairment test as of September
30,
2006. Based on the results of this test, no impairment loss was identified.
The
variations in goodwill are as follows:
|
2006
|
2005
|
||||||||||||||||||
|
IT
SERVICES
|
BPS
|
TOTAL
|
IT
SERVICES
|
BPS
|
TOTAL
|
||||||||||||||
| $ |
$
|
$ |
$
|
$ |
$
|
||||||||||||||
|
Balance,
beginning of year
|
1,494,133
|
279,237
|
1,773,370
|
1,532,413
|
295,191
|
1,827,604
|
|||||||||||||
|
Acquisitions
(note
17)
|
18,070
|
-
|
18,070
|
51,557
|
619
|
52,176
|
|||||||||||||
|
Purchase
price adjustments (note
17)
|
(6,611
|
)
|
119
|
(6,492
|
)
|
(13,775
|
)
|
12,269
|
(1,506
|
)
|
|||||||||
|
Disposal
of assets (subsidiaries in 2005) (note
17)
|
-
|
(13,172
|
)
|
(13,172
|
)
|
-
|
(16,152
|
)
|
(16,152
|
)
|
|||||||||
|
Foreign
currency translation adjustment
|
(28,533
|
)
|
(5,357
|
)
|
(33,890
|
)
|
(76,062
|
)
|
(12,690
|
)
|
(88,752
|
)
|
|||||||
|
Balance,
end of year
|
1,477,059
|
260,827
|
1,737,886
|
1,494,133
|
279,237
|
1,773,370
|
|||||||||||||
8.
Long-term debt
|
2006
|
2005
|
||||||
| $ |
$
|
||||||
|
Senior
U.S. unsecured notes, bearing a weighted average interest
rate of 5.14%
and repayable
|
|||||||
|
by
payments of $94,863,000 in 2009, of $97,004,300 in 2011 and
$22,270,300 in
2014(1)
|
214,138
|
222,931
|
|||||
|
Unsecured
committed revolving term facility bearing interest at LIBOR
rate plus
1.375%
or
bankers’ acceptance rate plus 1.375%, maturing in
2009(2)
|
587,226
|
-
|
|||||
|
Obligation
bearing interest at 1.60% and repayable in blended monthly
|
|||||||
|
instalments
maturing in 2008
|
5,777
|
9,214
|
|||||
|
Balances
of purchase price related to business acquisitions, non-interest
bearing,
|
|||||||
|
repayable
in various instalments through 2008. These balances were
recorded at
|
|||||||
|
their
discounted value using a 7% interest rate
|
4,399
|
7,241
|
|||||
|
Obligations
under capital leases, bearing a weighted average interest
rate of 8.28%
|
|||||||
|
and
repayable in blended monthly instalments maturing at various
dates until
2008
|
781
|
2,005
|
|||||
|
Share
of joint venture’s long-term debt
|
|||||||
|
Secured
term loan repayable in blended monthly payments of $540,249,
|
|||||||
|
bearing
interest of 5.71%, maturing in 2007
|
539
|
6,965
|
|||||
|
Other
loans bearing interest at a rate of prime plus 1.75%, repaid
during the
year
|
-
|
684
|
|||||
|
Other
|
399
|
660
|
|||||
|
Current
portion
|
813,259
8,242
|
249,700
14,899
|
|||||
|
805,017
|
234,801
|
||||||
|
(1)
|
The
US$192,000,000 private placement financings with U.S. institutional
investors is comprised of three tranches of senior unsecured
notes
maturing in January 2009, 2011 and 2014, and was issued on
January 29,
2004 with a weighted average maturity of 6.4 years. The Senior
U.S.
unsecured notes contain covenants that require the Company
to maintain
certain financial ratios. On June 9, 2006, the Company obtained
certain
amendments to the definition and calculations of the ratios
of
the
Senior U.S. unsecured notes.
The initial weighted average fixed coupon rate was 4.97%.
As a result of
the amendments, the rate increased to 5.14%. At September
30, 2006, the
Company is in compliance with these covenants.
|
|
(2)
|
The
Company has a five-year unsecured revolving credit facility
available for
an amount of $1,000,000,000 maturing in December 2009. This
agreement is
comprised of a Canadian tranche with a limit of $850,000,000
and a U.S.
tranche equivalent to $150,000,000. The interest rate charged
is
determined by the denomination of the amount drawn. As at
September 30,
2006, an amount of $590,000,000 has been drawn upon this
facility. Also,
an amount of $27,975,400 has been committed against this
facility to cover
various letters of credit issued for clients and other parties.
Financing
fees of $3,572,000 were incurred during the year and were
recorded in
finite-life intangibles and other long-term assets. In addition
to the
revolving credit facility, the Company has demand lines of
credit in the
amounts of $25,000,000 and £2,000,000 available. At September 30, 2006, no
amount had been drawn upon these facilities. The revolving credit
facility contains covenants that require the Company to maintain
certain
financial ratios. On April 21, 2006, the Company obtained
certain
amendments to the definition and calculations of the ratios
that take into
account the impact of the restructuring activities on the
unsecured
revolving credit facility. At September 30, 2006, the Company
is in
compliance with these covenants.
|
2006
Annual Report CGI Group Inc.
37
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
8.
Long-term debt (continued)
|
Principal
repayments on long-term debt over the forthcoming years are
as
follows:
|
$
|
|||
|
2007
2008
2009
2010
2011
Thereafter
|
7,626
3,488
94,863
587,226
97,005
22,270
|
|||
|
Total
principal payments on long-term debt
|
812,478
|
|||
|
Minimum
capital lease payments are as follows:
|
PRINCIPAL
|
INTEREST
|
PAYMENT
|
|||||||
|
2007
2008
|
$
|
616
165
|
$
|
29
5
|
$
|
645
170
|
||||
|
Total
minimum capital lease payments
|
781
|
34
|
815
|
|||||||
9.
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 ten 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.
2006
Annual Report CGI Group Inc.
38
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
For
2006,
2005 and 2004, the Class A subordinate and the Class B shares changed
as
follows:
|
CLASS
A
SUBORDINATE
SHARES
|
CLASS
B
SHARES
|
TOTAL
|
|||||||||||||||||
|
NUMBER
|
CARRYING
VALUE
|
NUMBER
|
CARRYING
VALUE
|
NUMBER
|
CARRYING
VALUE
|
||||||||||||||
| $ |
$
|
$
|
|||||||||||||||||
|
Balance,
September 30, 2003
|
368,236,503
|
1,435,763
|
33,772,168
|
44,868
|
402,008,671
|
1,480,631
|
|||||||||||||
|
Issued
for cash(1)
|
41,340,625
|
330,725
|
-
|
-
|
41,340,625
|
330,725
|
|||||||||||||
|
Issued
as consideration for business acquisitions
(note
17)
|
136,112
|
1,020
|
-
|
-
|
136,112
|
1,020
|
|||||||||||||
|
Issued
upon exercise of options
|
1,007,651
|
7,854
|
-
|
-
|
1,007,651
|
7,854
|
|||||||||||||
|
Balance,
September 30, 2004
|
410,720,891
|
1,775,362
|
33,772,168
|
44,868
|
444,493,059
|
1,820,230
|
|||||||||||||
|
Repurchased
and cancelled(2)
|
(14,078,360
|
)
|
(60,998
|
)
|
-
|
-
|
(14,078,360
|
)
|
(60,998
|
)
|
|||||||||
|
Repurchased
and not cancelled(2)
|
-
|
(3,665
|
)
|
-
|
-
|
-
|
(3,665
|
)
|
|||||||||||
|
Issued
upon exercise of options(3)
|
805,798
|
7,406
|
-
|
-
|
805,798
|
7,406
|
|||||||||||||
|
Balance,
September 30, 2005
|
397,448,329
|
1,718,105
|
33,772,168
|
44,868
|
431,220,497
|
1,762,973
|
|||||||||||||
|
Repurchased
and cancelled(2)
|
(108,315,500
|
)
|
(466,994
|
)
|
-
|
-
|
(108,315,500
|
)
|
(466,994
|
)
|
|||||||||
|
Repurchased
and not cancelled(2)
|
-
|
(4,028
|
)
|
-
|
-
|
-
|
(4,028
|
)
|
|||||||||||
|
Issued
upon exercise of options(3)
|
1,220,820
|
11,818
|
-
|
-
|
1,220,820
|
11,818
|
|||||||||||||
|
Issued
upon exercise of warrants(4)
|
7,021,096
|
60,260
|
546,131
|
3,577
|
7,567,227
|
63,837
|
|||||||||||||
|
Converted
upon exercise of warrants(4)
|
110,140
|
721
|
(110,140
|
)
|
(721
|
)
|
-
|
-
|
|||||||||||
|
Balance,
September
30,
2006
|
297,484,885
|
1,319,882
|
34,208,159
|
47,724
|
331,693,044
|
1,367,606
|
|||||||||||||
|
(1)
|
On
May 3, 2004, the Company issued 41,340,625 Class A subordinate
shares to
the public and to BCE Inc. (“BCE”) for cash proceeds of $330,725,000
before share issue costs of $5,489,000 (net of income tax
recoveries of
$2,466,000).
|
|
(2)
|
On
January 31, 2006, the Company’s Board of Directors authorized the renewal
of a Normal Course Issuer Bid and the purchase of up to 10%
of the public
float of the Company’s Class A subordinate shares during the next year.
The Toronto Stock Exchange subsequently approved the Company
request for
approval. The Issuer Bid enables the Company to purchase
up to 29,288,443
Class A subordinate shares for cancellation on the open market
through the
Toronto Stock Exchange. The Class A subordinate shares may
be purchased
under the Issuer Bid commencing February 3, 2006 and ending
no later than
February 2, 2007, or on such earlier date when the Company
completes its
purchases or elects to terminate the bid. Under a similar
program in 2005,
27,834,417 Class A subordinate shares could have been repurchased
between
February 3, 2005 and February 2, 2006. During 2006, the Company
repurchased 8,374,400 Class A subordinate shares (14,896,200
in 2005) for
cash consideration of $59,631,000 ($116,439,000 in 2005).
The excess of
the purchase price over the carrying value of Class A subordinate
shares
repurchased, in the amount of $22,364,000 ($51,978,000 in
2005), was
charged to retained earnings. As of September 30, 2006, 905,100
of the
repurchased Class A subordinate shares (846,200 in 2005)
with a carrying
value of $4,028,000 ($3,665,000 in 2005) and a purchase value
of
$6,661,000 ($7,185,000 in 2005) were held by the Company
and had been paid
and cancelled subsequent to the year-end.
|
|
On
January 12, 2006, the Company concluded a transaction whereby
the Company
repurchased from BCE for cancellation 100,000,000 of its
Class A
subordinate shares at a price of $8.5923 per share for consideration
of
$859,230,000. The excess of the purchase price over the carrying
value of
Class A subordinate shares repurchased, in the amount of
$425,475,000, as
well as share repurchase costs in the amount of $6,760,000,
were charged
to retained earnings.
|
|
|
During
2005, the Company received and cancelled 28,360 Class A subordinate
shares
for consideration of $202,000 as a settlement of an account
receivable
accounted for as part of a 2003 business acquisition.
|
|
|
(3)
|
The
carrying value of Class A subordinate shares includes $3,421,000
($2,855,000 in 2005), which corresponds to a reduction in
contributed
surplus representing the value of compensation cost associated
with the
options exercised since inception and the value of exercised
options
assumed in connection with acquisitions.
|
|
(4)
|
On
March 22, 2006, a warrant was exercised by one holder to
purchase
4,000,000 Class A subordinate shares of the Company at a
price of $6.55
each for an aggregate amount of $26,200,000. The carrying
value of these
Class A subordinate shares includes $14,271,000, which was
previously
recorded under the Warrants caption. On April 6, 2006, warrants were
exercised by another holder resulting in the issuance of
3,021,096 Class A
subordinate shares and 110,140 Class B shares of the Company
at a price of
$6.55 each for an aggregate amount of $20,510,000. At the
same time, this
holder converted the 110,140 Class B shares to 110,140 Class
A subordinate
shares at a price of $6.55 each for an aggregate amount of
$721,000. In
addition, on April 28, 2006, the Company’s Class B shareholders exercised
their warrants totalling 435,991 Class B shares at a price
of $6.55 each
for an aggregate amount of $2,856,000.
|
2006
Annual Report CGI Group Inc.
39
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
10.
Stock options, contributed surplus and warrants
A)
STOCK OPTIONS
Under
the
Company’s stock option plan, the Board of Directors may grant, at its
discretion, options to purchase Class A subordinate shares to certain
employees,
officers, directors and consultants of the Company and its subsidiaries.
The
exercise price is established by the Board of Directors and is equal
to the
closing price of the Class A subordinate shares on the Toronto Stock
Exchange
(“TSX”) on the day preceding the date of the grant. Options generally vest
one
year from the date of grant conditionally upon the achievement of objectives
and
must be exercised within a ten-year period, except in the event of
retirement,
termination of employment or death. As at September 30, 2006, 39,923,069
Class A
subordinate shares have been reserved for issuance under the Stock
option plan.
The
following table presents information concerning all outstanding stock
options
granted by the Company for the years ended September 30:
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
NUMBER
OF
OPTIONS
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER
SHARE
|
NUMBER
OF
OPTIONS
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER
SHARE
|
NUMBER
OF
OPTIONS
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER
SHARE
|
||||||||||||||
| $ |
$
|
$
|
|||||||||||||||||
|
Outstanding,
beginning of year
Granted
|
26,538,654
8,738,601
|
8.79
8.06
|
25,537,300
5,079,636
|
9.20
8.48
|
20,459,515
7,577,166
|
9.69
7.90
|
|||||||||||||
|
Exercised
Forfeited
and expired
|
(1,220,820)
(4,099,724
|
)
|
6.87
9.27
|
(805,798)
(3,272,484
|
)
|
5.61
11.60
|
(1,007,651)
(1,491,730
|
)
|
5.61
9.71
|
||||||||||
|
Outstanding,
end of year
|
29,956,711
|
8.57
|
26,538,654
|
8.79
|
25,537,300
|
9.20
|
|||||||||||||
|
Exercisable,
end of year
|
21,588,443
|
8.80
|
21,308,252
|
8.89
|
16,492,063
|
9.93
|
|||||||||||||
The
following table summarizes information about outstanding
stock options granted by the Company as at September 30, 2006:
|
OPTIONS
OUTSTANDING
|
OPTIONS
EXERCISABLE
|
|||||||||||||||
|
WEIGHTED
AVERAGE
REMAINING
|
WEIGHTED
AVERAGE
|
WEIGHTED
AVERAGE
|
||||||||||||||
|
RANGE
OF
EXERCISE
PRICE
|
NUMBER
OF OPTIONS
|
CONTRACTUAL
LIFE
(YEARS)
|
EXERCISE
PRICE
|
NUMBER
OF OPTIONS
|
EXERCISE
PRICE
|
|||||||||||
|
$
|
$
|
$
|
||||||||||||||
|
1.64
to 2.32
|
151,487
|
4
|
2.23
|
151,487
|
2.23
|
|||||||||||
|
4.19
to 6.98
|
5,537,899
|
7
|
6.40
|
3,003,220
|
6.20
|
|||||||||||
|
7.00
to 7.87
|
5,756,590
|
7
|
7.74
|
5,719,755
|
7.74
|
|||||||||||
|
8.00
to 8.99
|
14,537,769
|
7
|
8.62
|
8,831,015
|
8.67
|
|||||||||||
|
9.05
to 10.53
|
1,752,228
|
4
|
9.85
|
1,662,228
|
9.87
|
|||||||||||
|
11.34
to 14.85
|
910,163
|
2
|
13.45
|
910,163
|
13.45
|
|||||||||||
|
15.01
to 20.60
|
1,287,435
|
3
|
16.24
|
1,287,435
|
16.24
|
|||||||||||
|
24.51
to 26.03
|
23,140
|
3
|
25.99
|
23,140
|
25.99
|
|||||||||||
|
29,956,711
|
7
|
8.57
|
21,588,443
|
8.80
|
||||||||||||
2006
Annual Report CGI Group Inc.
40
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
The
following table presents the weighted average assumptions used to determine
the
stock-based compensation expense recorded in cost of services, selling
and
administrative expenses using the Black-Scholes option pricing model
for the
years ended September 30:
|
2006
|
2005
|
2004
|
||||||||
|
Compensation
expense ($)
|
12,895
|
20,554
|
25,559
|
|||||||
|
Dividend
yield (%)
|
0.00
|
0.00
|
0.00
|
|||||||
|
Expected
volatility (%)
|
36.13
|
45.80
|
47.40
|
|||||||
|
Risk-free
interest rate (%)
|
3.97
|
3.92
|
3.93
|
|||||||
|
Expected
life (years)
|
5
|
5
|
5
|
|||||||
|
Weighted
average grant date fair value ($)
|
3.13
|
3.85
|
3.68
|
|||||||
B)
CONTRIBUTED SURPLUS
The
following table summarizes the contributed surplus activity since September
30,
2003:
|
$
|
||||
|
Balance,
September 30, 2003
|
|
26,414
|
||
|
Compensation
cost of exercised options assumed in connection with
acquisitions
|
(2,094
|
)
|
||
|
Fair
value of options granted
|
25,559
|
|||
|
Balance,
September 30, 2004
|
49,879
|
|||
|
Compensation
cost of exercised options assumed in connection with acquisitions
|
(1,136
|
)
|
||
|
Compensation
cost associated with exercised options
|
(1,719
|
)
|
||
|
Fair
value of options granted
|
20,554
|
|||
|
Balance,
September 30, 2005
|
67,578
|
|||
|
Compensation
cost of exercised options assumed in connection with acquisitions
|
(152
|
)
|
||
|
Compensation
cost associated with exercised options
|
(3,269
|
)
|
||
|
Fair
value of options granted
|
12,895
|
|||
|
Carrying
value of warrants expired(1)
|
5,384
|
|||
|
Balance,
September 30, 2006
|
82,436
|
(1)
On June 13, 2006, 1,118,210 warrants of one of the holders expired,
resulting in a transfer of their carrying value of $5,384,000 from
the Warrants
to the Contributed surplus caption.
C)
WARRANTS
In
connection with the signing of a strategic outsourcing contract and
of a
business acquisition in 2001, 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.
In
addition to the warrants to purchase up to 5,118,210 Class A subordinate
shares
referred to above (the “Initial Warrants”), the Company issued to the majority
shareholders and BCE, 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 the
Company,
with substantially similar terms and conditions as those of the Initial
Warrants.
As
at September 30, 2006, all of these warrants expired or have been exercised.
2006
Annual Report CGI Group Inc.
41
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
11.
Earnings per share
The
following table sets forth the computation of basic and diluted earnings
per
share for the years ended September 30:
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
NET
EARNINGS
(NUMERATOR)
|
WEIGHTED
AVERAGE
NUMBER
OF
SHARES
OUTSTANDING(1)
(DENOMINATOR)
|
EARNINGS
PER
SHARE
|
NET
EARNINGS
(NUMERATOR)
|
WEIGHTED
AVERAGE
NUMBER
OF
SHARES
OUTSTANDING
(DENOMINATOR)
|
EARNINGS
PER
SHARE
|
NET
EARNINGS
(NUMERATOR)
|
WEIGHTED
AVERAGE
NUMBER
OF
SHARES
OUTSTANDING
(DENOMINATOR)
|
EARNINGS
PER
SHARE
|
||||||||||||||||||||
| $ | $ | $ | $ |
$
|
$
|
|||||||||||||||||||||||
|
146,533
|
362,783,618
|
0.40
|
216,488
|
439,349,210
|
0.49
|
194,041
|
419,510,503
|
0.46
|
||||||||||||||||||||
|
Dilutive
options2
|
-
|
1,224,463
|
-
|
-
|
1,077,743
|
-
|
-
|
1,994,835
|
-
|
|||||||||||||||||||
|
Dilutive
warrants2
|
-
|
698,575
|
-
|
-
|
1,146,559
|
-
|
-
|
1,595,014
|
-
|
|||||||||||||||||||
|
146,533
|
364,706,656
|
0.40
|
216,488
|
441,573,512
|
0.49
|
194,041
|
423,100,352
|
0.46
|
||||||||||||||||||||
|
(1)
|
The
108,374,400 Class A subordinate shares repurchased during
the year
(14,924,560 in 2005 and nil in 2004) were excluded from the
calculation of
earnings per share as of the date of repurchase.
|
|
(2)
|
The
calculation of the dilutive effects excludes all anti-dilutive
options and
warrants that would not be exercised because their exercise
price is
higher than the average market value of a Class A subordinate
share of the
Company for each of the periods shown in the table. The number
of excluded
options was 18,255,009, 22,140,883 and 13,194,520 for the
years ended
September 30, 2006, 2005 and 2004, respectively. The number
of excluded
warrants was nil for the year ended September 30, 2006 and
was 2,113,041
for both years ended September 30, 2005 and 2004.
|
12.
Amortization
|
2006
|
2005
|
2004
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Amortization
of capital assets
|
35,138
|
41,420
|
46,804
|
|||||||
|
Amortization
of contract costs related to transition costs
|
14,914
|
14,502
|
9,633
|
|||||||
|
Amortization
of ӿnite-life intangibles (note
6)
|
119,717
|
125,095
|
102,120
|
|||||||
|
Impairment
of contract costs and finite-life
intangibles(1)
|
997
|
18,266
|
4,034
|
|||||||
|
170,766
|
199,283
|
162,591
|
||||||||
|
Amortization
of contract costs related to incentives (presented as reduction
of
revenue)
|
24,294
|
28,314
|
29,734
|
|||||||
|
Impairment
of contract costs related to incentives (presented as reduction
of
revenue)1
|
2,308
|
3,336
|
-
|
|||||||
|
197,368
|
230,933
|
192,325
|
||||||||
|
Amortization
of other long-term assets (presented in costs of services,
selling and
administrative and interest on long-term debt)
|
2,392
|
1,032393
|
393
|
|||||||
|
199,760
|
231,965
|
192,718
|
||||||||
(1) The
impairment of contract costs and finite-life intangibles relate to
certain
non-performing assets that are no longer expected to provide future
value.
2006
Annual Report CGI Group Inc.
42
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
13.
Restructuring costs related to specific items
On
March 29, 2006, the
Company announced a restructuring plan impacting members located primarily
in
MontrÉal
and
Toronto, of which a significant portion was related to lower than expected
BCE
work volumes. Approximately 1,000 positions were eliminated as of
September
30, 2006. Under
the terms of the contract agreement signed on January 12, 2006 between
BCE and
the Company, BCE agreed to share in severance costs applicable to head
count
reductions in excess of 100 positions, up to a maximum of $10,000,000.
Total
restructuring costs related to specific items to be incurred will approximate
$90,000,000, of which $57,000,000 (net of the BCE contribution) will
be for
severance and $33,000,000 for the consolidation and closure of facilities.
The
amount of $90,000,000 will be split by segments as follows: $70,300,000
for IT
services, $8,000,000 for BPS and $11,700,000 for Corporate.
The
following table shows the details of the restructuring costs related
to specific
items recorded in the statement of earnings during the year ended September
30,
2006:
|
SEVERANCE
|
CONSOLIDATION
AND CLOSURE OF FACILITIES
|
TOTAL
|
||||||||
|
$
|
$
|
$
|
||||||||
|
IT
services
|
50,734
|
12,747
|
63,481
|
|||||||
|
BPS
|
2,343
|
315
|
2,658
|
|||||||
|
Corporate
|
7,894
|
2,754
|
10,648
|
|||||||
|
Restructuring
costs related to specific items
|
60,971
|
15,816
|
76,787
|
|||||||
|
BCE
contribution(1)
|
(9,521
|
)
|
-
|
(9,521
|
)
|
|||||
|
Total
restructuring costs related to specific items
|
51,450
|
15,816
|
67,266
|
|||||||
(1) The
amount receivable from BCE at September 30, 2006 amounts to
$2,177,000.
The
following table shows the components of the restructuring provision,
included in
accrued compensation, in accounts payable and accrued liabilities as
well as in
accrued integration charges and other long-term liabilities:
|
SEVERANCE
|
CONSOLIDATION
AND CLOSURE OF FACILITIES
|
TOTAL
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Balance,
October 1, 2005
|
-
|
-
|
-
|
|||||||
|
New
restructuring costs related to specific items
|
60,971
|
15,816
|
76,787
|
|||||||
|
Foreign
currency translation adjustment
|
60
|
(33
|
)
|
27
|
||||||
|
Payments
during 2006
|
(52,429
|
)
|
(9,027
|
)
|
(61,456
|
)
|
||||
|
Non-cash
portion of restructuring costs related to
specific
items
|
-
|
(1,311
|
)
|
(1,311
|
)
|
|||||
|
Balance,
September 30, 2006(1)
|
8,602
|
5,445
|
14,047
|
|||||||
|
(1)
|
Of
the total balance remaining, $8,602,000 is included in accrued
compensation, $3,855,000 is included in accounts payable
and accrued
liabilities and $1,590,000 is included in accrued integration
charges and
other long-term liabilities.
|
2006
Annual Report CGI Group Inc.
43
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
14.
Sale of right
On
June 15, 2005, the Company entered into an arrangement with a financial
institution. Under this arrangement, in exchange for cash consideration
of
$13,500,000, the Company sold a right to access the Company’s Canadian Credit
Union (“Credit Union”) clients allowing the financial institution to offer them
its business solutions. A portion of this consideration in the amount
of
$2,500,000 has been recorded as long-term deferred revenue, included
in accrued
integration charges and other long-term liabilities, and will be reversed
to
earnings upon certain conditions being met. Additional consideration,
up to a
maximum of $10,000,000, may be received by the Company based on the
number of
Credit Union clients transitioning to the financial institution’s business
solutions. The Company will continue to support or provide services
to the
Credit Unions with its current solutions and methodologies until this
transition
is completed. As a result of the above transaction, contract costs
and business
solutions relating to the Credit Unions in the amount of $5,106,000
and
$4,495,000, respectively, were impaired and included in amortization
expense.
15.
Income taxes
|
The
income tax provision is as follows:
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Current
|
105,198
|
78,476
|
57,615
|
|||||||
|
Future
|
(34,225
|
)
|
35,650
|
55,626
|
||||||
|
70,973
|
114,126
|
113,241
|
||||||||
The
Company’s effective income tax rate differs from the combined Federal and
Provincial Canadian statutory tax rate as follows:
|
2006
|
2005
|
2004
|
||||||||
| % | % | % | ||||||||
|
Canadian
statutory tax rate
|
31.7
|
31.0
|
31.5
|
|||||||
|
Effect
of provincial and foreign tax rate differences
|
2.5
|
3.7
|
2.1
|
|||||||
|
Benefit
arising from investment in subsidiaries
|
(4.0
|
)
|
(3.1
|
)
|
(1.9
|
)
|
||||
|
Non-deductible
stock options
|
1.9
|
1.9
|
2.9
|
|||||||
|
Other
non-deductible items
|
1.0
|
0.3
|
0.8
|
|||||||
|
Impact
on future tax assets and liabilities resulting from tax rate
changes
|
(0.9
|
)
|
-
|
-
|
||||||
|
Valuation
allowance relating to tax benefits on losses
|
-
|
0.1
|
0.9
|
|||||||
|
Other
|
0.4
|
0.3
|
1.6
|
|||||||
|
Effective
income tax rate
|
32.6
|
34.2
|
37.9
|
|||||||
2006
Annual Report CGI Group Inc.
44
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
|
Future
income tax assets and liabilities are as follows at September
30:
|
|||||||
|
2006
|
2005
|
||||||
| $ |
$
|
||||||
|
Future
income tax assets:
|
|||||||
|
Accrued
integration charges and accounts payable and accrued
liabilities
|
29,676
|
37,373
|
|||||
|
Tax
benefits on losses carried forward
|
78,901
|
82,132
|
|||||
|
Capital
assets, contract costs and finite-life intangibles and
other long-term
assets
|
2,194
|
946
|
|||||
|
Accrued
compensation
|
21,516
|
19,263
|
|||||
|
Allowance
for doubtful accounts
|
1,359
|
2,241
|
|||||
|
Share
issue costs
|
1,394
|
2,865
|
|||||
|
Other
|
5,766
|
4,628
|
|||||
|
140,806
|
149,448
|
||||||
|
Future
income tax liabilities:
|
|||||||
|
Capital
assets, contract costs and finite-life intangibles and
other long-term
assets
|
240,552
|
253,134
|
|||||
|
Work
in progress
|
14,536
|
28,092
|
|||||
|
Goodwill
|
15,577
|
10,699
|
|||||
|
Refundable
tax credits on salaries
|
26,545
|
32,400
|
|||||
|
Other
|
3,996
|
15,043
|
|||||
|
301,206
|
339,368
|
||||||
|
Valuation
allowance
|
24,641
|
27,507
|
|||||
|
Future
income taxes, net
|
(185,041
|
)
|
(217,427
|
)
|
|||
|
Future
income taxes are classfied as follows:
|
|||||||
|
$
|
|
$
|
|||||
|
Current
future income tax assets
|
33,728
|
22,118
|
|||||
|
Long-term
future income tax assets
|
25,127
|
46,601
|
|||||
|
Current
future income tax liabilities
|
(30,384
|
)
|
(47,163
|
)
|
|||
|
Long-term
future income tax liabilities
|
(213,512
|
)
|
(238,983
|
)
|
|||
|
Future
income tax liabilities, net
|
(185,041
|
)
|
(217,427
|
)
|
|||
At
September 30, 2006, the Company had $213,614,000 in non-capital losses
carried
forward, which expire at various dates to 2022. The Company recognized
a future
tax asset of $78,901,000 on the non-capital losses carried forward
and
recognized a valuation allowance of $24,641,000 in relation to these
losses
where their realization is unlikely. Should this valuation allowance
be
reversed, goodwill would be reduced by approximately $23,356,000 and
income tax
expense would be reduced by approximately $1,285,000.
Foreign
earnings of certain of the Company’s subsidiaries would be taxed only upon their
repatriation to Canada. The Company has not recognized a future income
tax
liability for these retained earnings as management does not expect
them to be
repatriated. A future income tax liability will be recognized when
the Company
expects that it will recover those undistributed earnings in a taxable
matter,
such as the sale of the investment or through the receipt of dividends.
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.
2006
Annual Report CGI Group Inc.
45
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
16.
Costs of services, selling and administrative
Tax
credits netted against costs of services, selling and administrative
are as
follows:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Costs
of services, selling and administrative
|
3,059,424
|
3,218,668
|
2,739,927
|
|||||||
|
Tax
credits (note
3)
|
(62,903
|
)
|
(67,110
|
)
|
(62,531
|
)
|
||||
|
2,996,521
|
3,151,558
|
2,677,396
|
||||||||
17.
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.
2006
TRANSACTIONS
A)
ACQUISITIONS
The
Company made the following acquisitions:
|
-
|
Plaut
Consulting SAS (“Plaut”) - On June 1, 2006, the Company acquired all of
the outstanding shares of a French management and technology
consulting
firm. Recognized for its expertise in implementing SAP solutions,
Plaut
guides its worldwide clients through organizational and information
systems transformation projects.
|
|
-
|
Pangaea
Systems Inc. (“Pangaea”) - On March 1, 2006, the Company acquired all of
the outstanding shares of an information technology services
company based
in Alberta, Canada. Pangaea specializes in development of
internet-based
solutions and related services mostly in the public sector,
as well as in
the energy and financial services sectors.
|
|
-
|
ERS
Informatique Inc. (“ERS”) - On April 7, 2006, one of the Company’s joint
ventures acquired all outstanding shares of an information
technology
services company based in Québec,
Canada.
ERS specializes in software development of applications mostly
in the
public sector.
|
The
acquisitions were accounted for using the purchase method. The purchase
price
allocations shown below are preliminary and based on the Company’s management’s
best estimates. The final purchase price allocations are expected to
be
completed as soon as the Company’s management has gathered all the significant
information believed to be available and considered necessary in order
to
finalize these allocations.
|
|
PLAUT
|
OTHER
|
TOTAL
|
|||||||
|
|
$ |
$
|
$
|
|||||||
|
Non-cash
working capital items
|
(580
|
)
|
(2,298
|
)
|
(2,878
|
)
|
||||
|
Capital
assets
|
28
|
656
|
684
|
|||||||
|
Customer
relationships and other
|
5,565
|
358
|
5,923
|
|||||||
|
Goodwill(1)
|
11,328
|
6,742
|
18,070
|
|||||||
|
Assumption
of long-term debt
|
-
|
(80
|
)
|
(80
|
)
|
|||||
|
Future
income taxes
|
1,698
|
738
|
2,436
|
|||||||
|
d
|
18,039
|
6,116
|
24,155
|
|||||||
|
Assumption
of bank indebtedness
|
(300
|
)
|
(49
|
)
|
(349
|
)
|
||||
|
Net
assets acquired
|
17,739
|
6,067
|
23,806
|
|||||||
|
Consideration
|
||||||||||
|
Cash
|
16,052
|
5,161
|
21,213
|
|||||||
|
Holdback
payable
|
1,242
|
516
|
1,758
|
|||||||
|
Acquisition
costs
|
445
|
390
|
835
|
|||||||
|
|
17,739
|
6,067
|
23,806
|
|||||||
(1)
Goodwill is not deductible for tax purposes.
In
connection with the acquisitions completed in 2006, the Company has
adopted
certain plans to restructure and integrate the acquired businesses.
Consequently, the Company established provisions related to leases
for premises
occupied by the acquired businesses, which the Company plans to vacate,
in the
amount of $936,000, as well as costs related to the planned termination
of
certain employees of the acquired businesses performing functions already
available through its existing structure, in the amount of $1,518,000.
B)
DISPOSALS
On
December 31, 2005, the Company disposed of its electronic switching
assets to
Everlink Payment Services Inc. for cash consideration of $27,559,000.
The net
assets disposed of included goodwill of $13,172,000 and the transaction
resulted
in a gain of $10,475,000.
2006
Annual Report CGI Group Inc.
46
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
C)
BALANCE OF INTEGRATION CHARGES
For
American Management Systems, Incorporated (“AMS”) and COGNICASE Inc.
(“Cognicase”), the components of the integration charges related to business
acquisitions included in accounts payable and accrued liabilities and
accrued
integration charges and other long-term liabilities are as follows:
|
CONSOLIDATION
AND
CLOSURE
OF
FACILITIES
|
SEVERANCE
|
TOTAL
|
||||||||
| $ |
$
|
$
|
||||||||
|
Balance,
October
1,
2005
|
57,118
|
5,194
|
62,312
|
|||||||
|
Adjustments
to initial provision(1)
|
(10,188
|
)
|
(1,688
|
)
|
(11,876
|
)
|
||||
|
Foreign
currency translation adjustment
|
(998
|
)
|
152
|
(846
|
)
|
|||||
|
Paid
during 2006
|
(10,922
|
)
|
(1,371
|
)
|
(12,293
|
)
|
||||
|
Balance,
September
30,
2006(2)
|
35,010
|
2,287
|
37,297
|
|||||||
(1)
Have been recorded as a decrease of goodwill.
(2)
Of the total balance remaining, $8,212,000 is included in accounts
payable and
accrued liabilities and $29,085,000 is included in accrued integration
charges
and other long-term liabilities.
D)
MODIFICATIONS TO PURCHASE PRICE ALLOCATIONS
The
Company modified the purchase price allocations and made adjustments
relating to
certain business acquisitions resulting in a net decrease of future
income tax
assets, integration charges and cash of $4,477,000, $8,661,000 and
$1,087,000,
respectively, and a net increase of customer relationships, long-term
debt and
non-cash working capital items of $325,000, $463,000 and $3,533,000,
respectively, whereas goodwill decreased by $6,492,000.
E)
CONSIDERATION OF PURCHASE PRICE
During
the year 2006, the Company paid balances of purchase price relating
to certain
business acquisitions resulting in a net decrease of long-term debt
by
$2,136,000.
2005
TRANSACTIONS
A)
ACQUISITIONS
The
Company increased its interest in one of its joint ventures and made
five
acquisitions of which the most significant were the following:
|
-
|
AGTI
Services Conseils Inc. (“AGTI”) - On December 1, 2004, the Company
purchased the remaining outstanding shares of a Montréal-based
information technology consulting enterprise specializing
in business and
IT consulting, project and change management and productivity
improvement.
The acquisition was accounted for as a step-by-step purchase.
The Company
previously held 49% of the outstanding shares of AGTI and
accounted for
its investment using proportionate consolidation.
|
|
-
|
MPI
Professionals (“MPI”) - On August 10, 2005, the Company acquired
substantially all of the assets of MPI. MPI provides management
solutions
for the financial services sector.
|
|
-
|
Silver
Oak Partners Inc. (“Silver Oak”) - On September 2, 2005, the Company
acquired all outstanding shares of Silver Oak. Silver Oak
is a leading
provider of spend management solutions to both the government
and
commercial sectors.
|
2006
Annual Report CGI Group Inc.
47
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
17.
Investments in subsidiaries and joint ventures (continued)
The
acquisitions were accounted for using the purchase method. The purchase
price
allocations shown below are preliminary and based on the Company’s management’s
best estimates. The Company has subsequently completed its purchase
price
allocations and these modifications are presented in Note d of the
year
subsequent to the acquisition.
|
AGTI
|
OTHER
|
TOTAL
|
||||||||
|
|
$ |
$
|
$
|
|||||||
|
Non-cash
working capital items
|
(1,302
|
)
|
(397
|
)
|
(1,699
|
)
|
||||
|
Capital
assets
|
368
|
521
|
889
|
|||||||
|
Internal
software
|
9
|
17
|
26
|
|||||||
|
Business
solutions
|
-
|
7,315
|
7,315
|
|||||||
|
Customer
relationships and other
|
17,493
|
7,918
|
25,411
|
|||||||
|
Goodwill(1)
|
32,471
|
19,705
|
52,176
|
|||||||
|
Future
income taxes
|
(4,561
|
)
|
(2,272
|
)
|
(6,833
|
)
|
||||
|
44,478
|
32,807
|
77,285
|
||||||||
|
Cash
acquired
|
2,702
|
2,569
|
5,271
|
|||||||
|
Net
assets acquired
|
47,180
|
35,376
|
82,556
|
|||||||
|
Consideration
|
||||||||||
|
Cash
|
47,067
|
26,707
|
73,774
|
|||||||
|
Holdback
payable
|
-
|
8,450
|
8,450
|
|||||||
|
Acquisition
costs
|
113
|
219
|
332
|
|||||||
|
47,180
|
35,376
|
82,556
|
||||||||
(1) Includes $5,649,000 of goodwill deductible for tax purposes.
In
connection with the acquisitions completed in 2005, the Company has
adopted
certain plans to restructure and integrate the acquired businesses.
Consequently, the Company established provisions related to leases
for premises
occupied by the acquired businesses, which the Company plans to vacate,
in the
amount of $2,736,000, as well as costs related to the planned termination
of
certain employees of the acquired businesses performing functions already
available through its existing structure, in the amount of $1,637,000.
B)
DISPOSALS
On
January 25, 2005, the Company disposed of its investment in Nexxlink
Technologies Inc. at a price of $6.05 per share for total proceeds
of
$20,849,000, resulting in a pre-tax gain of $4,216,000. This investment
had
previously been accounted for using the equity method resulting in
an investment
income of $321,000 and $488,000 in 2005 and 2004, respectively.
On
March 8, 2005, the Company disposed of the principal assets of Keyfacts
Entreprises Canada Inc. (“Keyfacts”), a wholly-owned subsidiary of the Company,
for proceeds of $3,524,000 of which an outstanding balance of sale
of $1,000,000
was received in 2006. The net assets disposed of included goodwill
of
$2,082,000. The transaction resulted in a net loss of $1,580,000.
On
March 10, 2005, the Company disposed of its U.S. Services to Credit
Unions
business and its CyberSuite product line for proceeds of $29,186,000
(US$24,000,000) for which there is a balance of sale of $2,189,000
(US$1,800,000). The net assets disposed of, including goodwill of $14,070,000,
resulted in a net loss of $1,419,000. During the year ended September
30, 2005,
a sale price adjustment was made that increased the net loss by $296,000
(US$239,000) after $174,000 (US$140,000) of tax effect, and reduced
the balance
of sale by $470,000 (US$379,000). The balance of sale was received
in
2006.
2006
Annual Report CGI Group Inc.
48
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
C)
BALANCE OF INTEGRATION CHARGES
For
AMS and Cognicase, the components of the integration charges related
to business
acquisitions included in accounts payable and accrued liabilities and
accrued
integration charges and other long-term liabilities are as follows:
|
CONSOLIDATION
AND
CLOSURE
OF
FACILITIES
|
SEVERANCE
|
TOTAL
|
||||||||
| $ |
$
|
$
|
||||||||
|
Balance,
October 1,
2004
|
68,977
|
20,250
|
89,227
|
|||||||
|
Adjustments
to initial provision(1)
|
7,091
|
3,230
|
10,321
|
|||||||
|
Foreign
currency translation adjustment
|
(4,458
|
)
|
(1,096
|
)
|
(5,554
|
)
|
||||
|
Paid
during 2005
|
(14,492
|
)
|
(17,190
|
)
|
(31,682
|
)
|
||||
|
Balance,
September
30,
2005(2)
|
57,118
|
5,194
|
62,312
|
|||||||
|
(1)
|
Have
been recorded as an increase of goodwill.
|
|
(2)
|
Of
the total balance remaining, $21,596,000 is included in accounts
payable
and accrued liabilities and $40,716,000 is included in accrued
integration
charges and other long-term liabilities.
|
D)
MODIFICATIONS TO PURCHASE PRICE ALLOCATIONS
The
Company modified the purchase price allocations and made adjustments
relating to
certain business acquisitions resulting in a net decrease of non-cash
working
capital items and capital assets of $23,080,000 and $1,895,000, respectively,
and a net increase of future income tax assets, finite-life intangibles
and
other long-term assets and cash of $6,227,000, $17,648,000 and $2,606,000,
respectively, whereas goodwill decreased by $1,506,000. Also, $12,500,000
of
goodwill, arising from the acquisition of AMS, was reallocated from
the IT
services line of business to the BPS line of business.
2004
TRANSACTIONS
A)
ACQUISITIONS
The
Company made the following acquisitions:
|
-
|
AMS
- On May 3, 2004, the Company acquired all outstanding shares
of AMS, a
business services and IT consulting firm to the government,
healthcare,
financial services and communications industries.
|
|
-
|
Other
- On October 28, 2003, the Company acquired all outstanding
shares of Apex
Consulting Group Inc, a business service, that provides systems
integration and consulting with a focus on business process
improvement
and new technologies. On January 14, 2004, it also acquired
certain assets
of GDS & Associates Systems Ltd., which provides systems integration
and consulting services to clients primarily within the government
sector.
|
2006
Annual Report CGI Group Inc.
49
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
17.
Investments in subsidiaries and joint ventures (continued)
The
acquisitions were accounted for using the purchase method. The purchase
price
allocations shown below are preliminary and based on the Company’s management’s
best estimates. The Company has subsequently completed its purchase
price
allocations and these modifications are presented in Note d of the
year
subsequent to the acquisition.
|
AMS
|
OTHER
|
TOTAL
|
||||||||
| $ |
$
|
$
|
||||||||
|
Non-cash
working capital items
|
(200,439
|
)
|
(936
|
)
|
(201,375
|
)
|
||||
|
Capital
assets
|
13,475
|
459
|
13,934
|
|||||||
|
Internal
software
|
7,129
|
-
|
7,129
|
|||||||
|
Business
solutions
|
83,814
|
-
|
83,814
|
|||||||
|
Software
licenses
|
7,916
|
-
|
7,916
|
|||||||
|
Customer
relationships and other
|
177,800
|
3,452
|
181,252
|
|||||||
|
Other
long-term assets
|
3,881
|
-
|
3,881
|
|||||||
|
Future
income taxes
|
13,659
|
12
|
13,671
|
|||||||
|
Goodwill(1)
|
549,519
|
6,940
|
556,459
|
|||||||
|
Assumption
of long-term debt
|
-
|
(70
|
)
|
(70
|
)
|
|||||
|
Accrued
integration charges and other long-term liabilities
|
(72,760
|
)
|
-
|
(72,760
|
)
|
|||||
|
583,994
|
9,857
|
593,851
|
||||||||
|
Cash
acquired
|
616,237
|
224
|
616,461
|
|||||||
|
Net
assets acquired
|
1,200,231
|
10,081
|
1,210,312
|
|||||||
|
Consideration
|
||||||||||
|
Cash
|
1,179,156
|
8,449
|
1,187,605
|
|||||||
|
Acquisition
costs
|
21,075
|
612
|
21,687
|
|||||||
|
Issuance
of 136,112 Class A subordinate shares(2)
|
-
|
1,020
|
1,020
|
|||||||
|
1,200,231
|
10,081
|
1,210,312
|
||||||||
|
(1)
|
Includes
$35,749,000 of goodwill deductible for tax purposes.
|
|
(2)
|
The
value of the shares issued as consideration for the business
acquisition
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
connection with the acquisitions completed in 2004, the Company has
adopted
certain plans to restructure and integrate the acquired businesses.
Consequently, the Company established provisions related to leases
for premises
occupied by the acquired businesses, which the Company plans to vacate,
in the
amount of $43,290,000, as well as costs related to the planned termination
of
certain employees of the acquired businesses performing functions already
available through its existing structure, in the amount of $96,981,000.
B)
DISPOSALS
The
Company sold the assets related to the information services of the
banking and
investment group, one of the divisions presented in the discontinued
operations,
for cash consideration of $47,000,000, which resulted in a gain on
sale of
$11,217,000 after tax and a goodwill reduction of $20,355,000.
The
Company sold three other divisions that were classified as discontinued
operations for a total consideration of $40,350,000, which is comprised
of cash
consideration of $17,560,000, a balance of sale of $6,000,000, an
interest-bearing note of $2,750,000, an assumption of liabilities of
$540,000
and $13,500,000 of shares of Nexxlink Technologies Inc. These transactions
resulted in a loss of approximately $1,400,000.
The
Company sold its interest in a joint venture and non-significant assets
for cash
consideration of $4,260,000, net of $4,235,000 of cash disposed. These
transactions resulted in a nominal gain.
2006
Annual Report CGI Group Inc.
50
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
C)
BALANCE OF INTEGRATION CHARGES
For
AMS and Cognicase, the components of the integration charges related
to business
acquisitions included in accounts payable and accrued liabilities and
accrued
integration charges and other long-term liabilities are as follows:
|
CONSOLIDATION
AND
CLOSURE
OF
FACILITIES
|
SEVERANCE
|
TOTAL
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Balance,
October
1,
2003
|
41,029
|
9,580
|
50,609
|
|||||||
|
New
integration charges
|
43,102
|
96,360
|
139,462
|
|||||||
|
Adjustments
to initial provision(1)
|
678
|
(5,963
|
)
|
(5,285
|
)
|
|||||
|
Foreign
currency translation adjustment
|
(3,028
|
)
|
(6,817
|
)
|
(9,845
|
)
|
||||
|
Paid
during 2004
|
(12,804
|
)
|
(72,910
|
)
|
(85,714
|
)
|
||||
|
Balance,
September
30,
2004(2)
|
68,977
|
20,250
|
89,227
|
|||||||
(1)
Have been recorded as a reduction of goodwill.
(2)
Of the total balance remaining, $37,631,000 is included in accounts
payable and
accrued liabilities and $51,596,000 is included in accrued integration
charges
and other long-term liabilities.
D)
MODIFICATIONS TO PURCHASE PRICE ALLOCATIONS
The
Company modified the purchase price allocations and made adjustments
relating to
certain business acquisitions resulting in a net decrease of goodwill
of
$11,326,000 and a net increase of non-cash working capital items, future
income
taxes and cash of $8,058,000, $115,000 and $3,153,000, respectively.
18.
Discontinued operations
There
were no operations discontinued in 2006.
On
March 8, 2005, the Company disposed of the principal assets of Keyfacts,
a
wholly-owned subsidiary of the Company. Keyfacts is a provider of information
search and retrieval services for investigative purposes.
Also,
on March 10, 2005, the Company disposed of its U.S. Services to Credit
Unions
business and its CyberSuite product line. U.S. Services to Credit Unions
was a
provider of back-office banking processing services for credit unions
in the
United States.
The
following table presents summarized financial information related to
discontinued operations:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Revenue
|
-
|
17,495
|
77,930
|
|||||||
|
Operating
expenses
|
-
|
12,585
|
56,955
|
|||||||
|
Amortization
|
-
|
610
|
3,708
|
|||||||
|
Earnings
before income taxes
|
-
|
4,300
|
17,267
|
|||||||
|
Income
taxes
|
-
|
7,510
|
8,612
|
|||||||
|
Net
(loss) gain from discontinued operations
|
-
|
(3,210
|
)
|
8,655
|
||||||
|
Net
cash provided by operating activities
|
-
|
759
|
2,924
|
|||||||
|
Net
cash provided by investing activities
|
-
|
-
|
1,174
|
|||||||
|
Net
cash used in financing activities
|
-
|
-
|
(30
|
)
|
||||||
|
Net
cash and cash equivalents provided by discontinued operations
|
-
|
759
|
4,068
|
|||||||
Discontinued
operations were included in the BPS segment in 2005 and in both BPS
and IT
segments in 2004. As at September 30, 2005, operating expenses from
discontinued
operations were reduced by pre-tax gains from disposal of $5,012,000
($17,267,000 in 2004). Also, the income tax expense does not bear a
normal
relation to earnings before income taxes since the sale included goodwill
of
$16,152,000, which had no tax basis ($23,658,000 in 2004).
2006
Annual Report CGI Group Inc.
51
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
19.
Joint ventures: supplementary information
The
Company’s proportionate share of its joint venture investees’ operations
included in the consolidated financial statements is as follows:
|
|
2006
|
2005
|
||||||||
| $ |
$
|
|||||||||
|
BALANCE
SHEETS
Current
assets
Non-current
assets
Current
liabilities
Non-current
liabilities
|
41,646
16,407
18,285
2,029
|
53,559
19,429
29,069
7,226
|
||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
$
|
|
$
|
|
$
|
||||||
|
STATEMENTS
OF EARNINGS
|
||||||||||
|
Revenue
|
90,122
|
86,916
|
138,570
|
|||||||
|
Expenses
|
82,191
|
78,011
|
129,923
|
|||||||
|
Net
earnings
|
7,931
|
8,905
|
8,647
|
|||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||||
|
Cash
provided by (used in):
|
||||||||||
|
Operating
activities
|
1,578
|
28,634
|
5,247
|
|||||||
|
Investing
activities
|
(13,955
|
)
|
(23,205
|
)
|
(17,008
|
)
|
||||
|
Financing
activities
|
1,430
|
8,147
|
599
|
|||||||
FINANCING
LEASE
On
November 1, 2002, one of the Company’s joint ventures, acting as the lessor,
entered into a 50-month lease agreement for information, system and
technology
assets, as part of an existing outsourcing contract with one of its
major
clients. This agreement was accounted for as a direct financing lease.
As at
September 30, 2006, the remaining balance of $1,796,000 is included
in prepaid
expenses and other current assets. As at September 30, 2005, $12,434,000
was
included in prepaid expenses and other current assets and $1,788,000
was
included in finite-life intangibles and other long-term assets. The
effective
interest rate of the lease agreement is 5.02%.
20.
Supplementary cash flow information
a)
Net change in non-cash working capital items is as follows for the
years ended
September 30:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Accounts
receivable
|
6,771
|
62,687
|
41,151
|
|||||||
|
Work
in progress
|
14,659
|
(1,150
|
)
|
(25,211
|
)
|
|||||
|
Prepaid
expenses and other current assets
|
(12,010
|
)
|
13,921
|
1,238
|
||||||
|
Accounts
payable and accrued liabilities
|
(16,956
|
)
|
(89,503
|
)
|
(96,537
|
)
|
||||
|
Accrued
compensation
|
3,699
|
(3,601
|
)
|
(39,143
|
)
|
|||||
|
Deferred
revenue
|
(14,848
|
)
|
13,519
|
16,892
|
||||||
|
Income
taxes
|
11,314
|
(6,449
|
)
|
(109,766
|
)
|
|||||
|
(7,371
|
)
|
(10,576
|
)
|
(211,376
|
)
|
|||||
2006
Annual Report CGI Group Inc.
52
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
b)
Non-cash operating, investing and financing activities related to continuing
operations are as follows for the years ended September 30:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Operating
activities
|
||||||||||
|
Prepaid
expenses and other current assets
|
(3,006
|
)
|
-
|
-
|
||||||
|
Accounts
payable and accrued liabilities
|
(524
|
)
|
7,185
|
-
|
||||||
|
Accrued
integration charges and other long-term liabilities
|
-
|
-
|
7,583
|
|||||||
|
(3,530
|
)
|
7,185
|
7,583
|
|||||||
|
Investing
activities
|
||||||||||
|
Business
acquisitions
|
-
|
-
|
(1,020
|
)
|
||||||
|
Proceeds
from sale of assets and businesses
|
-
|
-
|
13,500
|
|||||||
|
Purchase
of capital assets
|
-
|
-
|
(1,393
|
)
|
||||||
|
Payment
of contract costs
|
-
|
-
|
(7,583
|
)
|
||||||
|
Proceeds
from disposal of finite-life intangibles
|
3,006
|
(11,050
|
)
|
(13,500
|
)
|
|||||
|
3,006
|
(11,050
|
)
|
(9,996
|
)
|
||||||
|
Financing
activities
|
||||||||||
|
Increase
in obligations under capital leases
|
-
|
11,050
|
1,393
|
|||||||
|
Issuance
of shares
|
-
|
-
|
1,020
|
|||||||
|
Repurchase
of Class A subordinate shares
|
524
|
(7,185
|
)
|
-
|
||||||
|
524
|
3,865
|
2,413
|
||||||||
c) Interest paid and income taxes paid are as follows for the years ended September 30:
|
2006
|
2005
|
2004
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Interest
paid
|
40,255
|
17,965
|
21,477
|
|||||||
|
Income
taxes paid
|
61,365
|
66,534
|
143,405
|
|||||||
21.
Segmented information
The
Company has two lines of business (“LOB”), IT services and BPS’, in addition to
Corporate services. The focus of these LOBs is as follows:
|
-
|
The
IT services LOB provides a full-range of IT services, including
systems
integration, consulting and outsourcing to clients located
in North
America, Europe and Asia Pacific. The Company professionals
and centers of
excellence facilities in North America, Europe and India
also provide IT
and BPS services to clients as an integral part of our homeshore,
nearshore and offshore delivery model..
|
|
-
|
Services
provided by the BPS LOB include business processing for the
financial
services sector, as well as other services such as payroll
and document
management services.
|
2006
Annual Report CGI Group Inc.
53
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
21.
Segmented information (continued)
The
following presents information on the Company’s operations based on its
management structure:
|
2006
|
|||||||||||||
|
IT
SERVICES
|
BPS
|
CORPORATE
|
TOTAL
|
||||||||||
| $ |
$
|
$ |
$
|
||||||||||
|
Revenue
|
3,061,513
|
416,110
|
-
|
3,477,623
|
|||||||||
|
Earnings
(loss) before interest on long-term debt, other income,
gain on sale of
assets, restructuring costs related to specific items and
income
taxes(1)
|
334,044
|
55,207
|
(78,915
|
)
|
310,336
|
||||||||
|
Total
assets
|
2,861,325
|
599,021
|
231,686
|
3,692,032
|
|||||||||
(1)
Amortization included in IT services, BPS and Corporate is $165,522,000,
$22,556,000 and $11,682,000, respectively, as at September 30, 2006.
|
2005
|
|||||||||||||
|
IT
SERVICES
|
BPS
|
CORPORATE
|
TOTAL
|
||||||||||
|
Revenue
|
$
|
3,239,656
|
$
|
446,330
|
$
|
-
|
$
|
3,685,986
|
|||||
|
Earnings
(loss) before interest on long-term debt, other income, gain
on sale and
earnings from an investment in an entity subject to significant
influence,
income taxes and discontinued operations(1)
|
360,379
|
70,401
|
(84,635
|
)
|
346,145
|
||||||||
|
Total
assets
|
2,938,386
|
676,626
|
371,647
|
3,986,659
|
|||||||||
(1)
Amortization included in IT services, BPS and Corporate is $191,002,000,
$30,921,000 and $10,042,000, respectively, as at September 30, 2005.
|
2004
|
|||||||||||||
|
IT
SERVICES
|
BPS
|
CORPORATE
|
TOTAL
|
||||||||||
|
$$
|
$$
|
||||||||||||
|
Revenue
|
2,721,306
|
428,764
|
-
|
3,150,070
|
|||||||||
|
Earnings
(loss) before interest on long-term debt, other income, gain
on sale and
earnings from an investment in an entity subject to significant
influence,
income taxes and discontinued operations(1)
|
326,043
|
72,394
|
(88,354
|
)
|
310,083
|
||||||||
|
Total
assets
|
3,283,949
|
708,649
|
323,917
|
4,316,515
|
|||||||||
(1)
Amortization included in IT services, BPS and Corporate is $168,931,000,
$15,904,000 and $7,883,000, respectively, as at September 30, 2004.
The
following table provides information for capital assets based on the
LOBs:
|
2006
|
2005
|
||||||
| $ |
$
|
||||||
|
Capital
assets
|
|||||||
|
IT
services
|
77,155
|
70,693
|
|||||
|
BPS
|
12,584
|
15,595
|
|||||
|
Corporate
|
30,293
|
30,100
|
|||||
|
120,032
|
116,388
|
||||||
The
accounting policies of each segment are the same as those described
in the
summary of significant accounting policies (see Note 2). The figures
are
presented net of intersegment sales and transfers, which are priced
as if the
sales or transfers were to third parties.
2006
Annual Report CGI Group Inc.
54
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
GEOGRAPHIC
INFORMATION
The
following table sets out certain geographic market information based
on the
client’s location:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Revenue
|
||||||||||
|
Canada
|
2,092,026
|
2,211,191
|
2,161,818
|
|||||||
|
United
States
|
1,151,260
|
1,195,346
|
797,411
|
|||||||
|
Europe
and Asia Pacific
|
234,337
|
279,449
|
190,841
|
|||||||
|
3,477,623
|
3,685,986
|
3,150,070
|
||||||||
Capital
assets and goodwill are not disclosed by geographic areas as this financial
information is not used to produce the general purpose financial statements.
All
the Company’s business units share the capital asset infrastructure; therefore,
providing geographic information for capital assets and goodwill is
impracticable.
22.
Related party transactions
At
September 30, 2005, BCE exercised significant influence over the Company’s
operating, financing and investing activities through its 29.75% ownership
interest and through the business volume originating from BCE, together
with its
subsidiaries and affiliates. On December 16, 2005, the Company reached
an
agreement with BCE, which was finalized on January 12, 2006, to purchase
100,000,000 of Class A subordinate shares of the Company. As a consequence,
BCE
lost its significant influence over the Company’s operating, financing and
investing activities. During the period from October 1, 2005 to January
12,
2006, the Company generated revenue of $126,108,000 and purchased BCE’s services
for $26,471,000. During 2006, the volume
of business with that party, its subsidiaries and affiliates represented
11.9% of total Company revenue.
Transactions
and resulting balances for the previous years, which were measured
at commercial
rate (exchange amount), are presented below:
|
2005
|
2004
|
||||||
| $ |
$
|
||||||
|
Revenue
|
526,935
|
516,968
|
|||||
|
Purchase
of services
|
121,184
|
99,881
|
|||||
|
Accounts
receivable
|
21,632
|
16,730
|
|||||
|
Work
in progress
|
14,209
|
5,894
|
|||||
|
Contract
costs
|
14,103
|
17,916
|
|||||
|
Accounts
payable and accrued liabilities
|
1,018
|
8,343
|
|||||
|
Deferred
revenue
|
1,978
|
1,249
|
|||||
In
the normal course of business, the Company is party to contracts with
Innovapost, a joint venture, pursuant to which the Company is its preferred
IT
supplier. The Company exercises significant influence over Innovapost’s
operating, financing and investing activities through its 49% ownership
interest.
Transactions
and resulting balances, which were measured at commercial rate (exchange
amount), are presented below:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Revenue
|
100,994
|
102,699
|
94,607
|
|||||||
|
Accounts
receivable
|
9,490
|
4,112
|
3,622
|
|||||||
|
Work
in progress
|
1,528
|
1,290
|
1,988
|
|||||||
|
Prepaid
expenses and other current assets
|
-
|
2,019
|
1,815
|
|||||||
|
Contract
costs
|
16,239
|
17,301
|
19,696
|
|||||||
|
Accounts
payable and accrued liabilities
|
147
|
1,254
|
1,113
|
|||||||
|
Deferred
revenue
|
509
|
-
|
946
|
|||||||
2006
Annual Report CGI Group Inc.
55
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
22.
Related party transactions (continued)
On
December 5, 2005, the Company leased a private aircraft for business
purposes
from a leasing company that had acquired it from a limited partnership
of which
a director of the Company is the sole limited partner. The transaction
was
measured at the exchange amount, which was supported by independent
evidence at
the date of the transaction.
23.
Employee future benefits
Generally,
the Company does not offer pension plan or post-retirement benefits
to its
employees with the exception of the following:
Underwriters
Adjustment Bureau Ltd. (“UAB”) maintained a post-employment benefits plan to
cover the former UAB retired employees. The post-employment benefits
liability
totaled $6,117,000 and $6,584,000, as at September 30, 2006 and 2005.
There was
no related expense for the years ended September 30, 2006, 2005 and
2004.
With
the acquisition of AMS, the Company assumed defined contribution pension
plans.
For the years ended September 30, 2006, 2005 and 2004, the plan expense
was
$4,076,000, $5,373,000 and $2,059,000, respectively.
The
Company maintains a 401(k) defined contribution plan covering substantially
all
U.S. employees. The Company matches employees’ contributions to a
maximum
of $1,000 per year. For the years ended September 30, 2006, 2005 and
2004, the
amounts of the
Company’s contributions were $4,697,000, $5,634,000 and $2,784,000,
respectively.
The
Company maintains a non-qualified deferred compensation plan covering
some of
its U.S. management. A trust was established so that the plan assets
could be
segregated; however, the assets are subject to the Company's general
creditors
in the case of bankruptcy. The assets, composed of investments, vary
with
employees’ contributions and changes in the value of the investments. The change
in liability associated with the plan is equal to the change of the
assets.
24.
Commitments, contingencies and guarantees
A)
COMMITMENTS
At
September 30, 2006, the Company is committed under the terms of operating
leases
with various expiration dates, primarily for the rental of premises
and computer
equipment used in outsourcing contracts, in the aggregate amount of
approximately $1,134,709,000. Minimum lease payments due in the next
five years
are as follows:
|
$
|
||||
|
2007
|
205,174
|
|||
|
2008
|
155,286
|
|||
|
2009
|
117,886
|
|||
|
2010
|
94,953
|
|||
|
2011
|
73,025
|
|||
The
Company entered into long-term service agreements representing a total
commitment of $202,939,000. Minimum payments under these agreements
due in each
of the next five years are as follows:
|
$
|
||||
|
2007
|
66,714
|
|||
|
2008
|
35,749
|
|||
|
2009
|
44,519
|
|||
|
2010
|
31,716
|
|||
|
2011
|
14,795
|
|||
2006
Annual Report CGI Group Inc.
56
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
B)
CONTINGENCIES
From
time to time, the Company is involved in various litigation matters
arising in
the ordinary course of its business. The Company has no reason to believe
that
the disposition of any such current matter could reasonably be expected
to have
a materially adverse impact on the Company’s financial position, results of
operations or the ability to carry on any of its business activities.
C)
GUARANTEES
SALE
OF ASSETS AND BUSINESS DIVESTITURES
In
connection with the sale of assets and business divestitures, the Company
may be
required to pay counterparties for costs and losses incurred as the
result of
breaches in representations and warranties, intellectual property right
infringement and litigation against counterparties. While some of the
agreements
specify a maximum potential exposure of approximately $108,500,000
in total,
others do not specify a maximum amount or limited period. It is impossible
to
reasonably estimate the maximum amount that may have to be paid under
such
guarantees. The amounts are dependent upon the outcome of future contingent
events, the nature and likelihood of which cannot be determined at
this time. No
amount has been accrued in the consolidated balance sheets relating
to this type
of indemnification as at September 30, 2006. The Company does not expect
to
incur any potential payment in connection with these guarantees that
could have
a materially adverse effect on its consolidated financial statements.
U.S.
GOVERNMENT CONTRACTS
The
Company is engaged to provide services under contracts with the U.S.
Government.
The contracts are subject to extensive legal and regulatory requirements
and,
from time to time, agencies of the U.S. Government investigate whether
the
Company’s operations are being conducted in accordance with these requirements.
Generally, the Government has the right to change the scope of, or
terminate,
these projects at its convenience. The termination, or reduction in
the scope,
of a major government project could have a materially adverse effect
on the
results of operations and financial condition of the Company.
OTHER
TRANSACTIONS
In
the normal course of business, the Company may provide certain clients,
principally governmental entities, with bid and performance bonds.
In general,
the Company would only be liable for the amount of the bid bonds if
the Company
refuses to perform the project once the bid is awarded. The Company
would also
be liable for the performance bonds in the event of default in the
performance
of its obligations. As at September 30, 2006, the Company provided
for a total
of $72,923,000 of these bonds. The Company believes it is in compliance
with its
performance obligations under all service contracts for which there
is a
performance or bid bond, and the ultimate liability, if any, incurred
in
connection with these guarantees would not have a materially adverse
effect on
the Company’s consolidated results of operations or financial
condition.
In
addition, the Company provides a guarantee of $5,900,000 of the residual
value
of a leased property, accounted for as an operating lease, at the expiration
of
the lease term.
25.
Financial instruments
The
Company periodically uses various financial instruments to manage its
exposure
to foreign currency risk, but does not hold or issue such financial
instruments
for trading purposes.
FAIR
VALUE
At
September 30, 2006 and 2005, 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 value of long-term debt, with the exception of Senior
U.S.
unsecured notes, is not significantly different from its respective
carrying
value at September 30, 2006 and 2005.
The
fair value of Senior U.S. unsecured notes, estimated by discounting
expected
cash flows at rates currently offered to the Company for debts of the
same
remaining maturities and conditions, is $204,593,000.
INTEREST
RATE RISK
The
Company is exposed to interest rate risk on a portion of its long-term
debt and
does not currently hold any financial instruments that mitigate this
risk.
Management does not believe that the impact of interest rate fluctuations
will
be significant.
CREDIT
RISK
Financial
instruments that potentially subject the Company to concentrations
of credit
risk consist of cash equivalents and accounts receivable. The cash
equivalents
consist mainly of short-term investments, such as money market deposits.
The
Company has deposited the cash equivalents with reputable financial
institutions, from which management believes the risk of loss to be
remote. The
Company has accounts receivable from clients engaged in various industries
including governmental agencies, finance, telecommunications, manufacturing
and
utilities, that are not concentrated in any specific geographic area.
These
specific industries may be affected by economic factors that may impact
accounts
receivable. Management does not believe that any single industry or
geographic
region represents significant credit risk. Credit risk concentration
with
respect to trade receivables is limited due to the Company’s large client base.
CURRENCY
RISK
The
Company operates internationally and is exposed to risk from changes
in foreign
currency rates. The Company mitigates this risk principally through
foreign debt
and forward contracts. During 2004, the Company designated its US$192,000,000
Senior U.S. unsecured notes as the hedging instrument for a part of
the
Company’s net investment in self-sustaining foreign subsidiaries, for which
foreign currency translation gains or losses have been recorded under
the
foreign currency
2006
Annual Report CGI Group Inc.
57
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
25.
Financial instruments (continued)
translation
adjustment. Realized or unrealized gains or losses on financial instruments
have
also been recorded under the same caption, as they qualify for hedge
accounting.
There
were no outstanding forward contracts as at September 30, 2006, 2005
and 2004.
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,
2006, were not significant.
The
consolidated balance sheets include significant foreign financial assets,
such
as cash and cash equivalents and accounts receivable, as well as significant
foreign financial liabilities, such as accounts payable and accrued
liabilities
of $114,449,000, $180,646,000 and $174,138,000, respectively, as of
September
30, 2006 ($116,238,000, $173,686,000 and $162,167,000, respectively,
as of
September 30, 2005). As at
September
30, 2006, the cash and cash equivalents, accounts receivable and accounts
payable and accrued liabilities denominated in U.S. dollars amount
to
US$27,179,000, US$122,566,000 and US$114,812,500, respectively. For
the same
date, the cash and cash equivalents, accounts receivable and accounts
payable
and accrued liabilities denominated in euros amount to €25,990,000, €19,330,000
and €19,685,500, respectively.
26.
Reconciliation of results reported in accordance with Canadian GAAP
to U.S.
GAAP
The
material differences between Canadian and U.S. GAAP affecting the Company’s
consolidated financial statements are detailed as follows:
|
2006
|
2005
|
2004
|
||||||||
| $ |
$
|
$
|
||||||||
|
Reconciliation
of net earnings:
|
||||||||||
|
Net
earnings - Canadian GAAP
|
146,533
|
216,488
|
194,041
|
|||||||
|
Adjustments
for:
|
||||||||||
|
Stock-based compensation (i)
|
-
|
20,554
|
25,559
|
|||||||
|
Warrants (ii)
|
1,405
|
1,405
|
1,405
|
|||||||
|
Unearned compensation (iii)
|
-
|
-
|
(794
|
)
|
||||||
|
Other
|
1,238
|
(665
|
)
|
(1,999
|
)
|
|||||
|
Net
earnings - U.S. GAAP
|
149,176
|
237,782
|
218,212
|
|||||||
|
Basic
and diluted EPS - U.S. GAAP
|
0.41
|
0.54
|
0.52
|
|||||||
|
Reconciliation
of shareholders’ equity:
|
||||||||||
|
Shareholders’
equity - Canadian GAAP
|
1,748,020
|
2,494,690
|
2,461,862
|
|||||||
|
Adjustments
for:
|
||||||||||
|
Stock-based compensation (i)
|
58,411
|
58,411
|
37,857
|
|||||||
|
Warrants (ii )
|
(5,075
|
)
|
(6,480
|
)
|
(7,885
|
)
|
||||
|
Unearned compensation (iii)
|
(3,694
|
)
|
(3,694
|
)
|
(3,694
|
)
|
||||
|
Integration costs (iv)
|
(6,606
|
)
|
(6,606
|
)
|
(6,606
|
)
|
||||
|
Goodwill (v)
|
28,078
|
28,078
|
28,078
|
|||||||
|
Income taxes and adjustment for change in accounting policy
(vi)
|
9,715
|
9,715
|
9,715
|
|||||||
|
Other
|
(8,225
|
)
|
(9,463
|
)
|
(8,798
|
)
|
||||
|
Shareholders’
equity - U.S. GAAP
|
1,820,624
|
2,564,651
|
2,510,529
|
|||||||
(i)
Stock-based compensation
Under
Canadian GAAP, stock-based compensation cost was accounted for using
the fair
value based method beginning October 1, 2004. Under U.S. GAAP, the
Statement of
Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based
Payment”, did not require adoption of this standard until fiscal years beginning
on or after June 15, 2005. The 2005 and 2004 adjustments represent
the charge to
consolidated net earnings recorded for Canadian GAAP purposes as no
such expense was recorded or required under U.S. GAAP. Beginning
October 1, 2005, there is no difference between Canadian and U.S. GAAP
in
connection to stock-based compensation cost.
(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 U.S. GAAP,
the fair
value of equity instruments issued was subtracted from the initial
proceeds
received in determining revenue. The 2006, 2005 and 2004 adjustments
reflect the
reversal of contract cost amortization, net of income taxes, which
is included
as a reduction to Canadian GAAP consolidated net earnings.
2006
Annual Report CGI Group Inc.
58
YEARS
ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(tabular
amounts only are in thousands of Canadian dollars, except share
data
(iii)
Unearned compensation
Under
Canadian GAAP, prior to July 1, 2001, unvested stock options granted
as a result
of a business combination were 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 U.S. GAAP purposes.
This unearned compensation was 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 U.S.
GAAP, only
costs relating directly to the acquired business may be considered
in the
purchase price allocation. This adjustment represents the charge to
consolidated
net earnings, net of goodwill amortization in 2001, recorded for Canadian
GAAP
purposes and net of income taxes.
(v)
Goodwill
The
goodwill adjustment to shareholders’ equity results principally from the
difference in the value assigned to stock options issued to IMRglobal
Corp.
employees. Under Canadian GAAP, the fair value of the outstanding vested
stock
options is recorded as part of the purchase price allocation whereas
under U.S.
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.
(vi)
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”. 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 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 U.S. GAAP, this amount would have been
reflected as
additional goodwill.
(vii)
Comprehensive income
Cumulative
other comprehensive income is comprised solely of foreign currency
translation
adjustments resulting from translating the financial statements of
foreign
subsidiaries.
The
following table represents comprehensive income in accordance with
SFAS No. 130,
“Reporting Comprehensive Income”:
|
2006
|
2005
|
2004
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Net
earnings - U.S. GAAP
|
149,176
|
237,782
|
218,212
|
|||||||
|
Other
comprehensive income
|
||||||||||
|
Foreign
currency translation adjustment
|
(38,440
|
)
|
(92,124
|
)
|
(69,157
|
)
|
||||
|
Comprehensive
income
|
110,736
|
145,658
|
149,055
|
|||||||
(viii)
Proportionate consolidation
The
proportionate consolidation method is used to account for interests
in joint
ventures. Under U.S. 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, 2006 and 2005, and for each of the years in the
three-year
period ended September 30, 2006. However, the differences in the case
of
majority-owned joint ventures were not considered material and have
consequently
not been presented (see Note 19). In accordance with practices prescribed
by the
U.S. Securities and Exchange Commission (“SEC”), the Company has elected, for
the purpose of this reconciliation, to account for interests in joint
ventures
using the proportionate consolidation method.
(ix)
Share issue costs
As
permitted under Canadian GAAP, the Company’s share issue costs are charged to
retained earnings. For U.S. GAAP purposes, share issue costs are recorded
as a
reduction of the proceeds raised from the issuance of capital stock.
(x)
Recent and future accounting changes
In
March 2005, the FASB issued FASB Interpretation No. 47, (“FIN 47”), “Accounting
for Conditional Asset Retirement Obligations, an Interpretation of
SFAS No.
143”. FIN 47 requires an entity to recognize a liability for the fair value
of a
conditional asset retirement obligation in the period in which it is
incurred if
the liability’s fair value can be reasonably estimated. The adoption of FIN
47 did not have any impact on the consolidated financial
statements.
In
July 2006, the FASB issued FASB
Interpretation No. 48, (“FIN 48”), “Accounting for Uncertainty in Income Taxes”,
effective for fiscal years beginning after December 15, 2006. FIN
48 describes the accounting for income taxes by prescribing the minimum
recognition threshold a tax position must meet before being recognized
in the
financial statements. The Interpretation also provides guidance on
derecognition, measurement, classification, interest and penalties,
accounting
in interim periods, disclosure and transition. The Company is currently
evaluating the impact of the adoption of this new section on the consolidated
financial statements, but does not expect the impact to be material.
2006
Annual Report CGI Group Inc.
59
Management’s
Discussion and Analysis of
Financial
Position and Results of Operations
FOR
THE
YEAR ENDED SEPTEMBER 30, 2006
November
14, 2006
BASIS
OF PRESENTATION
Throughout
this document, CGI Group Inc. is referred to as “CGI”, “we”, “our” or “Company”.
This management’s discussion and analysis of financial position and results of
operations (“MD&A”) should be read in conjunction with the audited
consolidated financial statements for the years ended September 30, 2006,
2005
and 2004 and the notes to the financial statements of this annual report.
CGI’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”). All dollar amounts are in Canadian dollars unless otherwise
indicated.
FORWARD-LOOKING
STATEMENTS
All
statements in this MD&A that do not directly and exclusively relate to
historical facts constitute “forward-looking statements” within the meaning of
that term in Section 27A of the United States Securities Act of 1933, as
amended, and Section 21E of the United States Securities Exchange Act of
1934,
as amended, and are “forward-looking information” within the meaning of
sections 138.3 and following of the Ontario Securities Act. These
statements and this information represent CGI’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 or
forward-looking information. These factors include and are not restricted
to the
timing and size of new contracts, acquisitions and other corporate developments;
the ability to attract and retain qualified members; market competition in
the
rapidly-evolving information technology industry; general economic and business
conditions, foreign exchange and other risks identified in the MD&A, in
CGI’s Annual Report or Form 40-F filed with the U.S. Securities and
Exchange Commission (filed on EDGAR at www.sec.gov), the Company’s Annual
Information Form filed with the Canadian securities authorities (filed on
SEDAR
at www.sedar.com), as well as assumptions regarding the foregoing. The words
“believe,” “estimate,” “expect,” “intend,” “anticipate,” “foresee,” “plan,” and
similar expressions and variations thereof, identify certain of such
forward-looking statements or forward-looking information, which speak only
as
of the date on which they are made. In particular, statements relating to
future
performance are forward-looking statements and forward-looking information.
CGI
disclaims any intention or obligation to publicly update or revise any
forward-looking statements or forward-looking information, whether as a result
of new information, future events or otherwise. Readers are cautioned not
to
place undue reliance on these forward-looking statements or on this
forward-looking information. You will find more information about the risks
that
could cause our actual results to significantly differ from our current
expectations in the Risks and Uncertainties section.
NON-GAAP
MEASURES
The
Company reports its financial results in accordance with GAAP. However, in
this
MD&A certain non-GAAP financial measures are used, which
include:
|
1.
|
Earnings
before restructuring costs related to specific items, interest
on
long-term debt, other income-net, gain on sale and earnings from
an
investment in an entity subject to significant influence, gain
on sale of
assets, income taxes and net gain or (loss) from discontinued operations
(“adjusted EBIT”) and
|
|
2.
|
Net
earnings from continuing operations prior to restructuring costs
related
to specific items.
|
Adjusted
EBIT is used by our management as a measure of our operating performance
as it
provides information that can be used to evaluate the effectiveness of our
business from an operational perspective. A reconciliation of this item to
its
closest GAAP measure can be found on page 8.
Net
earnings from continuing operations prior to restructuring costs related
to
specific items is used by our management as a measure of our operating
performance excluding restructuring activities. A reconciliation of this
item to
its closest GAAP measure can be found on page 10.
Management
believes that these non-GAAP measures provide useful information to investors
regarding the Company’s financial condition and results of operations as they
provide additional measures of its performance. They also provide investors
with
measures of performance to compare our results between periods without regards
to specified items. These non-GAAP measures do not have any standardized
meaning
prescribed by GAAP and are therefore unlikely to be comparable to similar
measures presented by other issuers. They should be considered as supplemental
in nature and not a substitute for the related financial information prepared
in
accordance with GAAP.
CORPORATE
OVERVIEW
Headquartered
in Montréal, Canada, CGI provides end-to-end information technology services
(commonly referred to as IT services) and business process services (“BPS”) to
clients worldwide, utilizing a highly
2006
Annual Report CGI Group Inc.
4
customized,
cost efficient delivery model. The Company’s delivery model provides for work to
be carried out onsite at client premises, or through one of its centers of
excellence located in North America, Europe and India. We also have a number
of
leading business solutions that support long-term client relationships. Our
services are generally broken down as:
|
-
|
Consulting
- CGI provides a full range of IT and management consulting services,
including business transformation, IT strategic planning, business
process
engineering and systems architecture.
|
|
-
|
Systems
integration - CGI integrates and customizes leading technologies
and
software applications to create IT systems that respond to clients’
strategic needs.
|
|
-
|
Management
of IT and business functions (outsourcing) - Clients delegate entire
or
partial responsibility for their IT or business functions to CGI
to
achieve significant savings and access the best information technology,
while retaining control over strategic IT and business functions.
As part
of such agreements, we implement our quality processes and best-of-breed
practices to improve the efficiency of the clients’ operations. We also
integrate clients’ operations into our technology network. Finally, we may
hire clients’ IT and specialized professionals, enabling them to focus on
mission critical operations. Services provided as part of an outsourcing
contract may include development and integration of new projects
and
applications; applications maintenance and support; technology
management
(enterprise and end-user computing and network services); transaction
and
business processing for the financial services sector, as well
as other
services such as payroll and document management services. Outsourcing
contracts typically have terms from five to ten years and are
renewable.
|
Our
operations are managed through two lines of business (“LOB”), in addition to
Corporate services, namely: IT services and BPS. The focus of these LOB’s is as
follows:
|
-
|
The
IT services LOB provides a full range of services, including systems
integration, consulting and outsourcing, to clients located in
North
America, Europe and Asia Pacific. Our professionals and centers
of
excellence facilities in North America, Europe and India also provide
IT
and BPS services to clients as an integral part of our homeshore,
nearshore and offshore delivery model.
|
|
-
|
Services
provided by the BPS LOB include business processing for the financial
services sector, as well as other services such as payroll and
document
management services.
|
COMPETITIVE
ENVIRONMENT
CGI
operates as a global end-to-end provider of information technology and business
process services in a competitive and rapidly evolving global industry. As
such,
its competition is global in nature and comprise a variety of players, from
the
niche markets of specific industry work to other global players, mainly in
the
US, Europe and India, competing for some or all of the services we provide.
Because of the rapid growth experienced by the Company over the last several
years, particularly the successful acquisition and integration of American
Management Systems (“AMS”), CGI is now invited to participate in larger,
more complex deals than it had in the past.
CGI
combines a decentralized, metro markets business structure with a global
delivery model, resulting in IT and business process services that are both
highly responsive to client needs and highly cost competitive. As per CGI’s
delivery model, work may be carried out onsite at client premises, or through
one of CGI’s centers of excellence located in North America, Europe and India.
CGI also has a number of leading business solutions that support long-term
client relationships. However, all operations are carried out according to
the
same Management Foundation, thus ensuring consistency and cohesion.
There
are
many factors in winning and retaining IT and business process services
contracts. These include a service provider’s total cost of services, its
ability to deliver, track record, vertical sector expertise, investment in
business solutions, local presence, global delivery capability, and the strength
of the client-provider relationship. We believe that we compare favorably
based
on these factors. Our value proposition includes our end-to-end IT and business
process services capability, our expertise and proprietary business solutions
in
five industry sectors, our global delivery model which includes the industry’s
leading nearshore services delivery capability, our disciplined management
foundation, and our client focus which is supported by our metropolitan markets
business model. We have built critical mass in our three main markets - Canada,
the U.S. and Europe - which positions us to win large contracts.
Our
focus
is on higher-end systems integration, consulting and outsourcing business
where
vertical industry knowledge and expertise is required. We are cost competitive
in part through our global delivery model which provides clients with a blend
of
homeshore, nearshore and offshore delivery which meets their strategic and
cost
requirements.
VISION,
MISSION, AND STRATEGY
CGI’s
vision is to be a world-class IT and BPS leader helping its clients win and
grow.
Our
mission is to help our clients with professional services of outstanding
quality, competence and objectivity, delivering the best solutions to fully
satisfy client objectives in information technology, business processes and
management. In all we do, we foster a culture of partnership, intrapreneurship,
teamwork and integrity, building a world-class IT and BPS company.
CGI
is a
domain consolidator through its four-pillar growth strategy that combines
organic growth and acquisitions. The first driver, focused on organic growth,
is
comprised of both outsourcing, systems integration and consulting (“SI&C”)
contract wins, renewals and extensions, at the regional level of our operations.
We are growing our sales funnel of contract proposals across all of our
geographic markets.
The
second element of our growth strategy is the pursuit of new large outsourcing
contracts. These contracts can use a blend of onshore, nearshore or offshore
expertise to leverage our full, end-to-end global delivery capabilities.
Given
the Company’s growth rate over the last several years, we have the greater
critical mass required to bid on large, complex opportunities in North
America
and in Europe.
The
third
driver of our growth strategy focuses on acquisitions of smaller firms
or niche
players. We identify niche acquisitions through our strategic mapping program
that systematically searches for targets that could
2006
Annual Report CGI Group Inc.
5
strengthen
our vertical market knowledge or increase the richness of our service offering.
Currently, we are focused on acquisitions in our targeted verticals, metro
markets and expanding our BPS capabilities.
The
fourth pillar focuses on larger acquisitions to build geographic presence
and
critical mass in order to further qualify us for larger outsourcing deals.
CGI
has a disciplined approach to its growth strategy, focused on increasing
shareholder value and earnings accretion. Currently, we are focusing on the
U.S.
and Western Europe.
DEVELOPMENTS
IN 2006
Since
the
end of fiscal 2005, CGI has invested $926.1 million in repurchasing its own
stock, and signed approximately $4.0 billion in new contracts, extensions
and renewals. These ranged up to $1.1 billion in value and ten years in
duration and span across our targeted verticals. So fiscal 2006 was not without
its successes for our Company but it was, nonetheless, a year marked by two
over-arching challenges. First, lower than expected revenue and work volumes
from our largest client, BCE Inc. (“BCE”), which impacted our revenue by
$114.7 million in fiscal 2006. Second, the strengthening Canadian dollar
had a negative impact of $106.4 million on our fiscal 2006 revenue compared
with fiscal 2005. Despite the combined year-over-year variance of
$221.1 million on the top line of these two elements, we were able to
offset the profitability impact and guard our bottom line with the acceleration
of our global delivery model, cost reductions, and productivity improvements,
as
part of the plan announced in the second quarter of 2006. This program will
be
completed at the end of first quarter of 2007, when the Company expects to
reach
the annualized run rate of approximately $90 million in savings related to
our plan.
ADJUSTMENTS
TO SENIOR MANAGEMENT
Serge
Godin, previously Chairman of the Board and Chief Executive Officer (“CEO”) took
the position of Executive Chairman of CGI in January 2006, and the Board
appointed Michael E. Roach, previously President and Chief Operating Officer,
as
President and Chief Executive Officer of CGI, reporting to the Executive
Chairman.
In
July
of 2006, André Imbeau, previously Executive Vice-President and Chief Financial
Officer (“CFO”), was appointed Executive Vice-Chairman and Corporate Secretary
of CGI. In his new role, André works closely with Serge Godin and focus on
strategic initiatives leading to value creation, such as major transactions
and
financing as well as key client relationships. Concurrently, David Anderson,
previously CGI’s Senior Vice-President and Corporate Controller, was appointed
to the role of Executive Vice-President and Chief Financial Officer. In this
capacity, David also joined the CGI Executive Committee, which consists of
Serge
Godin, André Imbeau and Michael E. Roach.
NEW
CONTRACTS, EXTENSIONS AND RENEWALS
During
fiscal 2006, CGI announced new contracts, extensions and renewals totalling
$4.0 billion including, but not limited to, the following:
|
-
|
October
26, 2005: Two-year project valued at $20 million with the ministère
du Revenu du Québec (Québec Revenue Ministry) to adapt and integrate
information technology and accounting systems related to the Québec Goods
and Services Tax.
|
|
-
|
October
27, 2005: Four-year contract renewal valued at $60 million with
Alberta Health and Wellness Ministry. This contract extended and
expanded
upon an agreement announced on January 11, 2001.
|
|
-
|
November
22, 2005: Up to five-year business process services contract valued
at
US$44 million with the Housing Trust Fund Corporation of New York, a
division of Housing and Community Renewal, to serve the United
States
Department of Housing and Urban Development (“HUD”). CGI is the largest
HUD processor of its kind in the U.S.
|
|
-
|
December
30, 2005: Seven-year contract expected to be up to US$300 million,
with two optional three-year renewal periods, with the Commonwealth
of
Virginia as its private sector partner for a sweeping initiative
to
transform the state’s business and information technology
program.
|
|
-
|
January
5, 2006: Multi-year business process services contract valued at
US$30 million to $40 million with Medco Health
Solutions, Inc. to provide payment, reconciliation and enrollment
form processing services.
|
|
-
|
January
12, 2006: Extended outsourcing agreement with BCE through June
2016.
Adding $1.1 billion to the backlog, this extension provides CGI with
an important source of recurring revenues.
|
|
-
|
January
31, 2006: Seven-year contract valued at $90 million with Royal &
Sun Alliance Insurance Company of Canada for infrastructure management
services including mainframe and mid-range equipment, as well as
data
storage and recovery.
|
|
-
|
February
1, 2006: Six-year outsourcing agreement with Boston-based OneBeacon
Insurance Group. This multi-million dollar business process services
insurance contract will include policy administration and
CollaborativeEdge¨,
a
front-end solution for Massachusetts personal lines agents to streamline
data-capture activities.
|
| - | April 5, 2006: Seven-year contract signings totaling US$100 million by leading local governments for its AMS Advantage¨ ERP Suite. The City of New York has committed to implement the latest version of AMS Advantage to serve as the foundation for its enterprise-wide financial management and budgetary control systems. In addition, Wake County, North Carolina, has chosen the AMS Advantage ERP Suite to support the county’s human resources, finance and budget systems. |
| - | April 6, 2006: Ten-year IT outsourcing contract valued at $130 million with Cirque du Soleil to operate and support the evolution of Cirque du Soleil’s global technology infrastructure and applications. |
| - | April 11, 2006: Seven-year agreement valued at between US$45 million to US$75 million to provide Universal Insurance of North America with policy and accounting business process services. |
| - | April 24, 2006: Two-year IT contract renewal valued at $50 million with the Caisse de dépôt et placement du Québec. The services covered by this agreement include infrastructure management, production services, a “one-stop service” call center, office technology support, maintenance of a large number of business applications, and the development and integration of solutions. |
| - | June 7, 2006: Two and a half year contract worth US$10 million with the City and County of Honolulu to integrate its web-based AMS Advantage¨ ERP Suite to centralize and support core financial and human resources processes and systems such as general ledger, accounts payable, purchasing, fixed assets, payroll and other related services. |
2006
Annual Report CGI Group Inc.
6
|
-
|
September
28, 2006: Three contract signings in Western Canada totaling more
than
$20 million including a three-year contract with an option for two
additional two year agreements with the City of Calgary, a five-year
contract to provide application and server management services
with the
British Columbia Ministry of Health and a four-year contract to
provide
Business Intelligence Environment services with the Alberta Ministry
of
Health and Wellness.
|
ACQUISITIONS
On
March
1, 2006, we completed the acquisition of Pangaea Systems Inc. (“Pangaea”)
for an aggregate consideration of $4.6 million. Pangaea was a privately
held corporation located in Western Canada, serving mostly public sector
clients
as well as clients in the utilities and the financial services
verticals.
On
June
1, 2006, CGI acquired Paris-based Plaut Consulting SAS (“Plaut”), a management
and technology-consulting firm with approximately 120 professionals known
for its SAP expertise serving clients in Europe, for an aggregate consideration
of $17.7 million.
DIVESTITURE
On
December 31, 2005, we completed the transaction with Everlink Payment Services
Inc. (“Everlink”), previously announced on October 26, 2005, under which
the Company divested its electronic switching assets for $27.6 million. As
a result, a pre-tax gain of $10.5 million was booked in 2006.
As
announced on March 29, 2006, the Company has taken measures to reduce the
overall cost structure and accelerate the expansion of its Global Delivery
Model
partially due to lower than expected revenue from BCE. In line with this
plan,
approximately 1,000 positions were eliminated this year, primarily located
in Montreal and Toronto, of which half were related to BCE. The remaining
headcount reduction stems from other adjustments to CGI’s cost base and includes
reductions in global and corporate functions.
The
expansion of the Global Delivery Model created new positions in our centres
of
excellence in Atlantic Canada, southwest Virginia and India, which will
partially offset the headcount reductions. This exercise allowed the Company
to
further reduce its overhead and increase the overall utilization rate of
its
workforce.
A
pre-tax
provision of $67.3 million was taken in fiscal 2006, comprised of
$51.5 million for severance and $15.8 million for consolidation and
closure of facilities. The remaining estimated provision of $22.7 million
will be taken over the remainder of calendar 2006. The Company continues
to
expect a one-year payback.
BCE
SHARE BUYBACK AND REPURCHASE PROGRAM
On
December 16, 2005, the Company reached an agreement with BCE to purchase
for
cancellation 100 million of its Class A subordinate shares held by BCE at a
price of $8.59 per share. The transaction was completed on January 12, 2006
and the shares were cancelled. The purchase price was equal to the
volume-weighted average price of the Class A subordinate shares on the
Toronto Stock Exchange for the 20 trading days preceding December 16,
2005. CGI financed the acquisition price of $859.2 million plus associated
costs of $6.8 million through cash on hand and utilization of its credit
facilities. Following this transaction, through an agreement with a bank
syndicate, our current bank facilities have been increased by
$200.0 million to stand at $1.0 billion.
Subsequent
to the 100 million share repurchase, the Shareholders Agreement with BCE
was terminated, and its representation on the CGI Board was relinquished.
As at
September 30, 2006, BCE’s share ownership represented approximately 2% of CGI’s
issued and outstanding Class A subordinate voting shares and Class B shares,
compared to 30% at the end of fiscal 2005.
Also,
on
January 31, 2006, the Company’s Board of Directors authorized the renewal of a
Normal Course Issuer Bid and the purchase of up to 10% of the public float
of
the Company’s Class A subordinate shares during the next year and the Toronto
Stock Exchange subsequently approved the company request for approval. The
Issuer Bid enables CGI to purchase on the open market through the Toronto
Stock
Exchange up to 29,288,443 Class A subordinate shares for cancellation. The
Class A subordinate shares may be purchased under the Issuer Bid commencing
February 3, 2006 and ending no later than February 2, 2007, or on such earlier
date when the Company completes its purchases or elects to terminate the
bid.
Under the terms of the normal course issuer bid, the Company repurchased
8,374,400 of its Class A subordinates shares for $59,631,507 during
fiscal 2006 at an average price plus commissions of $7.12. The total Class
A
subordinate shares repurchased included 905,100 shares bought for
cancellation at the end of the year, all of which were cancelled on October
5,
2006.
WARRANTS
On
March
22, 2006, La Fédération des caisses Desjardins du Québec (“Desjardins”)
exercised a warrant for 4,000,000 Class A subordinate voting shares at a
price of $6.55 each. This warrant was originally issued by CGI in
connection with a 10-year outsourcing agreement signed with Desjardins
in 2001.
The carrying value of these Class A subordinate shares includes
$14.3 million which was previously recorded in the Warrants
caption.
On
April
6, 2006, BCE exercised its warrant for 3,021,096 Class A subordinate
voting shares and 110,140 Class B shares at a price of $6.55 each. BCE
received its warrant in accordance with its pre-emptive rights under the
former
CGI Shareholders’ Agreement, which was terminated on January 12, 2006. On April
28, 2006, the Class B shareholders of CGI exercised their warrants for
435,991 Class B shares at a price of $6.55 each. These warrants were
related to the same Desjardins warrants exercised during 2006.
On
June
13, 2006, 1,118,210 warrants held by one party with a carrying value of
$5,384,000 expired. At September 30, 2006, the Company had no further
warrants outstanding.
2006
Annual Report CGI Group Inc.
7
OVERVIEW
OF THE YEAR
SELECTED
ANNUAL INFORMATION
|
CHANGE
|
CHANGE
|
|||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006/2005
|
2005/2004
|
|||||||||||
|
Backlog
(1) (in
millions of dollars)
|
12,722
|
12,863
|
12,965
|
-1.1
|
%
|
-0.8
|
%
|
|||||||||
|
Bookings
(in
millions of dollars)
|
3,997
|
3,573
|
3,041
|
11.9
|
%
|
17.5
|
%
|
|||||||||
|
Revenue
|
||||||||||||||||
|
Revenue
(in
’000 of dollars)
|
3,477,623
|
3,685,986
|
3,150,070
|
-5.7
|
%
|
17.0
|
%
|
|||||||||
|
Year-over-year
revenue growth prior to foreign currency impact
|
-2.8
|
%
|
20.5
|
%
|
23.7
|
%
|
||||||||||
|
Profitability
|
||||||||||||||||
|
Adjusted
EBIT
(2)
margin
|
8.9
|
%
|
9.4
|
%
|
9.8
|
%
|
||||||||||
|
Net
earnings margin prior to restructuring costs
related
to specific items
|
5.5
|
%
|
5.9
|
%
|
6.2
|
%
|
||||||||||
|
Net
earnings margin
|
4.2
|
%
|
5.9
|
%
|
6.2
|
%
|
||||||||||
|
Basic
and diluted EPS from continuing operations (in
dollars)
|
0.40
|
0.50
|
0.44
|
(0.10
|
)
|
0.06
|
||||||||||
|
Basic
and diluted EPS from continuing operations prior to
restructuring
costs related to specific items (in
dollars)
|
0.53
|
0.50
|
0.44
|
0.03
|
0.06
|
|||||||||||
|
Balance
sheet (in
’000 of dollars)
|
||||||||||||||||
|
Total
assets
|
3,692,032
|
3,986,659
|
4,316,515
|
-7.4
|
%
|
-7.6
|
%
|
|||||||||
|
Total
long-term liabilities
|
1,276,462
|
784,297
|
1,078,604
|
62.8
|
%
|
-27.3
|
%
|
|||||||||
|
Cash
generation / Financial
structure
|
||||||||||||||||
|
Cash
provided by continuing operating activities (in
’000 of dollars)
|
309,561
|
480,709
|
230,197
|
-35.6
|
%
|
108.8
|
%
|
|||||||||
|
Days
sales outstanding
(3)
|
52
|
48
|
54
|
4
|
(6
|
)
|
||||||||||
|
Net
debt to capitalization ratio
(4)
|
27.2
|
%
|
0.3
|
%
|
9.8
|
%
|
||||||||||
|
(1)
|
Backlog
includes new contract wins, extensions and renewals, partially
offset by
the backlog consumed during the year as a result of client work
performed
and adjustments related to the volume, cancellation and/or the
impact of
foreign currencies to our existing contracts. Backlog incorporates
estimates from management that are subject to change from time
to
time.
|
|
(2)
|
Adjusted
EBIT is a non-GAAP measure for which we provide a reconciliation
to its
closest GAAP measure on page 8.
|
|
(3)
|
Days
sales outstanding (“DSO”) is obtained by subtracting deferred revenue and
tax credits receivable from accounts receivable and work in progress;
the
result is divided by the fourth quarter revenue over
90 days.
|
|
(4)
|
The
net debt to capitalization ratio represents the proportion of long-term
debt net of cash and cash equivalents over the sum of shareholders’ equity
and long-term debt.
|
FINANCIAL
REVIEW OF 2006, 2005, AND 2004
REVENUE
Revenue
Variation
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
|||||||
|
Revenue
(in
’000 of dollars)
|
3,477,623
|
3,685,986
|
3,150,070
|
|||||||
|
Variation
prior to foreign currency impact
|
-2.8
|
%
|
20.5
|
%
|
23.7
|
%
|
||||
|
Foreign
currency impact
|
-2.9
|
%
|
-3.5
|
%
|
-2.1
|
%
|
||||
|
Variation
over previous year
|
-5.7
|
%
|
17.0
|
%
|
21.6
|
%
|
||||
For
fiscal 2006, revenue was $3,477.6 million. On a constant currency basis,
revenue declined by 2.8% ($102.0 million) compared with fiscal 2005. The
variation resulted primarily from a decrease in revenue from BCE, as well
as the
ramping down and termination of isolated contracts not meeting our profitability
standards. These were partially offset by business won from new and existing
clients, and by the two acquisitions made during fiscal 2006. Revenue in
the
year was further impacted by -2.9% due to currency fluctuation with the
resulting total revenue change for fiscal 2006 being -5.7%.
For
fiscal 2005, revenue was $3,686.0 million. On a constant currency basis,
the growth between 2004 and 2005 was 20.5% ($645.1 million), mainly
attributable to the full year impact of AMS acquired in May 2004. The
growth was partially offset by the negative foreign currencies fluctuations
of
3.5%, resulting in net revenue growth of 17.0%
($535.9 million).
2006
Annual Report CGI Group Inc.
8
Revenue
by LOB
|
CHANGE
|
CHANGE
|
|||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006/2005
|
2005/2004
|
|||||||||||
|
(in
’000 of dollars except for percentage)
|
||||||||||||||||
|
IT
services prior to foreign currency impact
|
3,156,994
|
3,336,398
|
2,721,306
|
|||||||||||||
|
Foreign
currency impact
|
(95,481
|
)
|
(96,742
|
)
|
-
|
|||||||||||
|
IT
services
|
3,061,513
|
3,239,656
|
2,721,306
|
-5.5
|
%
|
19.0
|
%
|
|||||||||
|
BPS
prior to foreign currency impact
|
427,032
|
458,793
|
428,764
|
|||||||||||||
|
Foreign
currency impact
|
(10,922
|
)
|
(12,463
|
)
|
-
|
|||||||||||
|
BPS
|
416,110
|
446,330
|
428,764
|
-6.8
|
%
|
4.1
|
%
|
|||||||||
|
Revenue
|
3,477,623
|
3,685,986
|
3,150,070
|
-5.7
|
%
|
17.0
|
%
|
|||||||||
In
fiscal
2006, on a constant currency basis, the change in revenue from our IT services
LOB reflected mainly lower work volumes from BCE and the ramping down and
termination of isolated contracts not meeting our profitability standards.
This
change was partly offset by business won from new and existing clients as
well
as from the two niche acquisitions made during the year.
In
2005,
on a constant currency basis, revenue from IT services increased resulting
from
the acquisitions of AMS and AGTI Consulting Services Inc. (“AGTI”) and new
contracts.
In
fiscal
2006, on a constant currency basis, the change in BPS revenue was primarily
due
to the sale of our electronic switching assets in December 2005 and the
termination of a contract not meeting our profitability standards. These
were
partly offset by the ramping up of work in the insurance, government and
healthcare sectors of the U.S. market.
In
2005,
on a constant currency basis, revenue from BPS increased reflecting the
acquisition of AMS and new business won in the government, healthcare and
financial services verticals.
Revenue
Distribution
The
following tables provide additional information regarding our revenue
mix:
 |
 |
 |
|
CONTRACT
TYPES
52% Management
of IT and business functions (outsourcing)
-
IT services 41%
-
Business process services 11%
48% Systems
integration and consulting
|
GEOGRAPHIC
MARKETS
60% Canada
33% United
States
7% Europe
and Asia Pacific
|
TARGETED
VERTICALS
35% Financial
services
32% Government
and healthcare
20% Telecommunications
and utilities
7% Manufacturing
6% Retail
and distribution
|
BCE
Revenue
In
fiscal
2006, BCE, our largest client, represented 11.9% of our revenue, compared
to
14.3% in fiscal 2005 and 16.4% in fiscal 2004.
2006
Annual Report CGI Group Inc.
9
OPERATING
EXPENSES
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
|||||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
|||||||||||||
|
(in
’000 of dollars except for percentage)
|
|||||||||||||||||||
|
Costs
of services, selling and administrative expenses
|
2,996,521
|
3,151,558
|
2,677,396
|
86.2
|
%
|
85.5
|
%
|
85.0
|
%
|
||||||||||
|
Sale
of right
|
-
|
(11,000
|
)
|
-
|
0.0
|
%
|
-0.3
|
%
|
0.0
|
%
|
|||||||||
|
Amortization
expenses
|
|||||||||||||||||||
|
Capital
assets
|
35,138
|
41,420
|
46,804
|
1.0
|
%
|
1.1
|
%
|
1.5
|
%
|
||||||||||
|
Contract
costs related to transition costs
|
14,914
|
14,502
|
9,633
|
0.4
|
%
|
0.4
|
%
|
0.3
|
%
|
||||||||||
|
Finite-life
intangibles
|
119,717
|
125,095
|
102,120
|
3.4
|
%
|
3.4
|
%
|
3.2
|
%
|
||||||||||
|
Impairment
of contract costs and
finite-life
intangibles
|
997
|
18,266
|
4,034
|
0.0
|
%
|
0.5
|
%
|
0.1
|
%
|
||||||||||
|
Total
amortization
|
170,766
|
199,283
|
162,591
|
4.9
|
%
|
5.4
|
%
|
5.2
|
%
|
||||||||||
During
2006, the rapid reduction of the BCE work program adversely impacted our
cost
structure. As previously noted, we implemented an action plan to improve
utilization rates and reduce overhead. For the year, the 86.2% of revenue
represented by costs of services, selling and administrative expenses do
not
fully include the benefit of this action plan. Based on the fourth quarter
run
rate, these expenses were 84.4% of revenue, slightly below historical
averages.
The
decrease in amortization expenses was mainly related to a $9.6 million
impairment charge taken against contract costs and business solutions related
to
our Canadian credit unions business and to an impairment charge of
$8.7 million taken on contract costs and finite-life intangibles in 2005.
The decline in amortization of finite-life intangibles is due to certain
software having been fully amortized, the favorable translation impact of
currency fluctuations, partially offset by amortization of $6.5 million
related to our new business solution for the brokerage industry. Additionally,
the amortization of capital assets decreased, due to certain computer equipment
having been fully amortized, and the non-recurring cost of disposed assets
during 2005. These were partially offset by additional amortization related
to
contract costs associated with the transition of new clients and contracts
started in 2006.
The
change in costs of services, selling and administrative expenses in fiscal
2005,
when compared with fiscal 2004, was mainly due to the acquisition of AMS
operations and new outsourcing contracts.
The
increase in amortization expenses in 2005 versus the prior year reflected
mainly
the addition of finite-life intangible assets from acquisitions, impairment
charges to contract costs and finite-life intangibles as noted above, and
transition costs related to new outsourcing contracts. This was partially
offset
by a reduction of amortization related to certain computer equipment and the
disposal of certain assets.
ADJUSTED
EBIT BY LOB
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
|||||||
|
(in
’000 of dollars except for percentage)
|
||||||||||
|
IT
services
|
334,044
|
360,379
|
326,043
|
|||||||
|
As
a percentage of IT services revenue
|
10.9
|
%
|
11.1
|
%
|
12.0
|
%
|
||||
|
BPS
|
55,207
|
70,401
|
72,394
|
|||||||
|
As
a percentage of BPS services revenue
|
13.3
|
%
|
15.8
|
%
|
16.9
|
%
|
||||
|
Corporate
|
(78,915
|
)
|
(84,635
|
)
|
(88,354
|
)
|
||||
|
As
a percentage of total revenues
|
-2.3
|
%
|
-2.3
|
%
|
-2.8
|
%
|
||||
|
Adjusted
EBIT
|
310,336
|
346,145
|
310,083
|
|||||||
|
Adjusted
EBIT margin
|
8.9
|
%
|
9.4
|
%
|
9.8
|
%
|
||||
For
fiscal 2006, the variance in the adjusted EBIT of IT services resulted
mainly
from less than expected BCE work volumes over the last year, partly offset
by
additional work from the new and existing clients, savings yielded from
the
competitive position strengthening program initiated in March 2006, and
improved
profitability within our U.S. operations.
For
fiscal 2005, the drivers of adjusted EBIT growth were new contracts and
acquisitions. The change in the adjusted EBIT margin was mainly a result
of a
nonrecurring license sale which was completed in fiscal 2004, an impairment
charge related to an unprofitable contract and a higher cost structure
inherited
from the AMS acquisition.
For
fiscal 2006, the change in adjusted EBIT and
adjusted EBIT margin of BPS reflected the decrease of $6.1 million of EBIT
as a result of the sale of our electronic switching assets in December
2005, and
$11.6 million of amortization and the maintenance costs related to a
2006
Annual Report CGI Group Inc.
10
business
solution developed for the brokerage industry which became commercially
available at the beginning of the year.
The
change in adjusted EBIT and adjusted EBIT margin observed in 2005 resulted
mainly from a decline in the volume of transactions processed in the insurance
sector and the impairment charge related to contracts and business solutions,
partially offset by new projects initiated in the government and healthcare
and
financial services verticals.
For
fiscal 2006, the decrease in corporate expenses is mainly due to the savings
achieved as part of the Company’s on-going program to strengthen its competitive
position. The savings in fiscal 2005 relates to synergies stemming from the
AMS
acquisition.
The
following table provides, for the periods indicated, a reconciliation between
our adjusted EBIT and earnings from continuing operations before income taxes
which is reported in accordance with Canadian GAAP:
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
AS
A
PERCENTAGE
OF
TOTAL REVENUE
|
|||||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
|||||||||||||
|
(in
’000 of dollars except for percentage)
|
|||||||||||||||||||
|
Adjusted
EBIT
|
310,336
|
346,145
|
310,083
|
8.9
|
%
|
9.4
|
%
|
9.8
|
%
|
||||||||||
|
Restructuring
costs related to specific items
|
(67,266
|
)
|
-
|
-
|
-1.9
|
%
|
0.0
|
%
|
0.0
|
%
|
|||||||||
|
Interest
expense
|
|||||||||||||||||||
|
Interest
on long-term debt
|
(43,291
|
)
|
(24,014
|
)
|
(20,672
|
)
|
-1.2
|
%
|
-0.7
|
%
|
-0.7
|
%
|
|||||||
|
Other
income, net
|
7,252
|
7,156
|
8,728
|
0.2
|
%
|
0.2
|
%
|
0.3
|
%
|
||||||||||
|
Gain
on sale and earnings from an investment
in
an entity subject to significant influence
|
-
|
4,537
|
488
|
0.0
|
%
|
0.1
|
%
|
0.0
|
%
|
||||||||||
|
Gain
on sale of assets
|
10,475
|
-
|
-
|
0.3
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||||
|
Earnings
from continuing operations before income taxes
|
217,506
|
333,824
|
298,627
|
6.3
|
%
|
9.1
|
%
|
9.5
|
%
|
||||||||||
RESTRUCTURING
COSTS RELATED TO SPECIFIC ITEMS
The
company recorded a charge of $67.3 million in relation to the competitive
position strengthening program. Further details of the program are discussed
on
page 4.
The
following table details the restructuring costs related to specific items
recorded in the statement of earnings during the fiscal year ended September
30,
2006:
|
SEVERANCE
|
CONSOLIDATION
AND CLOSURE OF FACILITIES
|
TOTAL
|
||||||||
|
(in
’000 of dollars)
|
$ |
$
|
$
|
|||||||
|
IT
Services
|
50,734
|
12,747
|
63,481
|
|||||||
|
BPS
|
2,343
|
315
|
2,658
|
|||||||
|
Corporate
|
7,894
|
2,754
|
10,648
|
|||||||
|
BCE
contribution
|
(9,521
|
)
|
-
|
(9,521
|
)
|
|||||
|
Restructuring
costs related to specific items
|
51,450
|
15,816
|
67,266
|
|||||||
INTEREST
EXPENSE
The
increase in interest expense during fiscal 2006 reflected the associated
increase in long-term debt. This debt was drawn from the Company’s credit
facility to finance the purchase of 100,000,000 Class A subordinate
voting shares from BCE during the first quarter of 2006.
In
fiscal
2005, the variance resulted mainly from the additional debt issued to partially
finance the AMS acquisition, which has since been repaid.
GAIN
ON SALE OF ASSETS AND GAIN ON SALE AND EARNINGS FROM INVESTMENTS IN AN ENTITY
SUBJECT TO SIGNIFICANT INFLUENCE
In
fiscal
2006, we recorded a gain on the sale of our electronic switching assets of
$10.5 million.
The
sale
of our interest in Nexxlink Technologies Inc. (“Nexxlink”) had yielded a pre-tax
gain in fiscal 2005 of $4.2 million.
2006
Annual Report CGI Group Inc.
11
INCOME
TAXES
The
reduction in year-over-year income tax expense in fiscal 2006 resulted mainly
from the restructuring charges related to specific items, part of the program
announced in the second quarter.
The
income tax rate was 32.6% in fiscal 2006, compared to 34.2% in fiscal 2005.
The
newly enacted tax legislation in Canada that sets out lower tax rates beginning
in 2008, was the primary driver for this change. In addition, the earnings
from
our non-Canadian operations improved allowing for the recovery of unbooked
prior
years’ losses. As well, the effect of the benefits arising from investments in
subsidiaries contributed to the year-over-year improvement in the income
tax
rate.
The
decrease in fiscal 2005 in our tax rate compared with fiscal 2004 reflected
the
reduction in the Canadian combined federal and provincial statutory tax rates
and a more balanced distribution of our earnings across our major geographic
markets.
The
following table includes a reconciliation between net earnings from continuing
operations prior to restructuring costs related to specific items and net
earnings from continuing operations which is reported in accordance with
Canadian GAAP:
|
CHANGE
|
CHANGE
|
|||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006/2005
|
2005/2004
|
|||||||||||
|
(in
’000 of dollars unless otherwise indicated)
|
||||||||||||||||
|
Net
earnings from continuing operations prior to restructuring costs
related
to specific items
|
191,267
|
219,698
|
185,386
|
-12.9
|
%
|
18.5
|
%
|
|||||||||
|
Net
earnings margin from continuing operations prior to
restructuring
costs related to specific items
|
5.5
|
%
|
6.0
|
%
|
5.9
|
%
|
||||||||||
|
Restructuring
costs related to specific items
|
67,266
|
-
|
-
|
|||||||||||||
|
Tax
impact of restructuring costs related to specific items
|
(22,532
|
)
|
-
|
-
|
||||||||||||
|
Net
earnings from continuing operations
|
146,533
|
219,698
|
185,386
|
-33.3
|
%
|
18.5
|
%
|
|||||||||
|
Net
earnings margin from continuing operations
|
4.2
|
%
|
6.0
|
%
|
5.9
|
%
|
||||||||||
|
Net
(loss) gain from discontinued operations
|
-
|
(3,210
|
)
|
8,655
|
||||||||||||
|
Net
earnings
|
146,533
|
216,488
|
194,041
|
-32.3
|
%
|
11.6
|
%
|
|||||||||
|
Net
earnings margin
|
4.2
|
%
|
5.9
|
%
|
6.2
|
%
|
||||||||||
|
Weighted
average number of Class A subordinate shares
and
Class B shares (basic)
|
362,783,618
|
439,349,210
|
419,510,503
|
-17.4
|
%
|
4.7
|
%
|
|||||||||
|
Basic
and diluted earnings per share from continuing operations
prior
to restructuring costs related to specific items (in
dollars)
|
0.53
|
0.50
|
0.44
|
0.03
|
0.06
|
|||||||||||
|
Basic
and diluted earnings per share from
continuing
operations (in dollars)
|
0.40
|
0.50
|
0.44
|
(0.10
|
)
|
0.06
|
||||||||||
|
Basic
and diluted earnings per share (in
dollars)
|
0.40
|
0.49
|
0.46
|
(0.09
|
)
|
0.03
|
||||||||||
For
fiscal 2006, the decrease in net earnings from continuing operations, when
compared to fiscal 2005, is primarily due to the additional charges related
to
the restructuring program, the interest on the long-term debt and the change
in
adjusted EBIT.
The
increase in fiscal 2005 net earnings from continuing operations, compared
with
fiscal 2004, resulted primarily from the full year impact of the acquisition
of
AMS in May 2004, the ramping up of new contracts and, to a lesser extent,
from a
reduction of our income tax rate.
CGI’s
basic weighted average number of shares outstanding at the end of fiscal
2006
was down 17.4% compared with fiscal 2005, due to the repurchase of shares
from
BCE and on the open market as part of the Normal Course Issuer Bid. The
total
number of shares outstanding at the end of fiscal 2006 is 331,693,044 which
includes 905,100 shares repurchased at the end of the fourth quarter but
not yet paid for nor cancelled at year end.
There
were no discontinued operations in fiscal 2006. The net loss
from discontinued operations of $3.2 million in fiscal 2005 resulted
from the sale of the U.S. Services to Credit Unions business and the sale
of the
principal assets of Keyfacts. In 2004, net earnings from discontinued operations
of $8.7 million resulted from assets sold to Nexxlink and the sale of our
Starquote market data services business.
LIQUIDITY
CGI’s
growth is financed through our cash flow from operations, combined with
the
issuance of debt, borrowing under our existing credit facilities or the
issuance
of equity. One of our primary financial goals is to maintain an optimal
level of
liquidity through the active management of our assets and liabilities as
well as
our cash flows.
2006
Annual Report CGI Group Inc.
12
As
at
September 30, 2006, cash and cash equivalents were $115.7 million. The
following table illustrates the main activities over the last three fiscal
years:
|
VARIANCE
|
VARIANCE
|
|||||||||||||||
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
2006/2005
|
2005/2004
|
|||||||||||
|
(in
’000 of dollars)
|
||||||||||||||||
|
Cash
provided by continuing operating activities
|
309,561
|
480,709
|
230,197
|
(171,148
|
)
|
250,513
|
||||||||||
|
Cash
used in continuing investing activities
|
(139,357
|
)
|
(106,277
|
)
|
(701,020
|
)
|
(33,080
|
)
|
594,743
|
|||||||
|
Cash
used in/provided by continuing financing activities
|
(294,080
|
)
|
(329,188
|
)
|
583,683
|
35,108
|
(912,871
|
)
|
||||||||
|
Effect
of foreign exchange rate changes on cash and cash equivalents of
continuing operations
|
(854
|
)
|
(6,167
|
)
|
186
|
5,313
|
(6,353
|
)
|
||||||||
|
Net
(decrease) increase in cash and cash equivalents
of
continuing operations
|
(124,730
|
)
|
39,077
|
113,046
|
(163,807
|
)
|
(73,969
|
)
|
||||||||
|
Net
cash and cash equivalents from discontinued operations
|
-
|
759
|
4,068
|
(759
|
)
|
(3,309
|
)
|
|||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(124,730
|
)
|
39,836
|
117,114
|
(164,566
|
)
|
(77,278
|
)
|
||||||||
OPERATING
ACTIVITIES
The
decline of $171.1 million in cash provided by continuing operating
activities versus last year resulted mainly from this year’s lower earnings from
operations as discussed above and the timing of large client payments which
were
partially offset by the decrease in integration payments related to
acquisitions.
INVESTING
ACTIVITIES
Cash
used
in investing activities was $139.4 million, an increase of
$33.1 million compared with $106.3 million in 2005. The change was
mainly driven by the one-time events of 2005 which include the sale of
the
investment in Nexxlink, the proceeds from the sale of a right to access
clients,
and the reimbursement following the early termination of a contract. In
2006,
the company increased its investment in capital assets. These items were
partially offset by a reduction in business acquisition activities.
The
investment in capital assets was mainly comprised of leasehold improvements
of
$20 million, up $7.5 million over last year. These improvements are
the result of the consolidation and optimization of office space in the
Greater
Toronto Area and Fairfax, following an initiative to consolidate and optimize
our real estate space. In addition, we made computer equipment and office
equipment purchases of $14.5 million and $5.4 million respectively to
support new outsourcing contracts, an increase of $7.0 million over prior
year.
In
fiscal
2006, we spent $25.6 million in business acquisitions mainly related to
Plaut and Pangaea. During fiscal 2005, we completed the acquisition of
AGTI for
a consideration of $47.2 million. We also acquired MPI Professionals
(“MPI”) and Silver Oak Partners Inc. (“Silver Oak”) for $13.0 million and
$21.8 million, respectively. In fiscal 2004, we made one major acquisition,
AMS, purchased for a net cash consideration of $584.0 million, along with
two niche acquisitions.
Investments
in finite-life intangibles and other long-term assets were $74.6 million in
2006 compared to $90.7 in 2005. These investments were primarily comprised
of business solutions of $40.1 million and software licenses and prepaid
maintenance of $14.4 million which were purchased as part of the
outsourcing services provided to our clients.
We
also
incurred research expenses of $27.6 million within our costs of services,
selling and administrative expenses, while seeking applications for new
technology, or conceptually formulating and designing possible prototypes
or
process alternatives that could potentially lead to new solutions for either
existing or new clients. The combined gross research and development spending
incurred in 2006 was $68.6 million compared with $78.2 million last
year.
The
investment of $31.4 million in contract costs was mainly related to
transition costs for new outsourcing contracts and was consistent with
last
year’s investment.
FINANCING
ACTIVITIES
Cash
used
by continuing financing activities was $294.1 million in 2006, a decrease
of $35.1 million compared to $329.2 million in fiscal 2005. The
primary financing transaction in 2006 related to the repurchase of
100 million Class A shares from BCE for a consideration and related costs
of $866.0 million which was partially financed through $738.6 million
of debt, resulting in a net use of cash of $120.6 million. Financing
activities also included the issuance of shares for $58.0 million mainly
from the exercise of warrants by Desjardins, BCE and the majority shareholders,
and the partial repayment of our credit facilities for $172.0 million, a
decrease of $52.3 million versus 2005. Finally, the repurchase of shares
under the Normal Course Issuer Bid program for $60.1 million represented a
reduction of $49.3 million when compared to 2005.
2006
Annual Report CGI Group Inc.
13
CONTRACTUAL
OBLIGATIONS
|
PAYMENTS
DUE BY PERIOD
|
|||||||||||||||||||
|
COMMITMENT
TYPE
|
TOTAL
|
LESS
THAN
1 YEAR
|
2ND
AND 3RD YEARS
|
4TH
AND 5TH YEARS
|
YEARS
6
TO 10
|
AFTER
10 YEARS
|
|||||||||||||
|
(in
’000 of dollars)
|
|||||||||||||||||||
|
Long-term
debt
|
812,478
|
7,626
|
98,351
|
684,231
|
22,270
|
-
|
|||||||||||||
|
Capital
lease obligations
|
781
|
616
|
165
|
-
|
-
|
-
|
|||||||||||||
|
Operating
leases
|
|||||||||||||||||||
|
Rental
of office space
(1)
|
1,017,528
|
130,790
|
219,356
|
178,746
|
284,905
|
203,731
|
|||||||||||||
|
Computer
equipment and other
|
172,305
|
84,516
|
77,488
|
7,996
|
2,305
|
-
|
|||||||||||||
|
Automobiles
|
4,969
|
2,338
|
2,402
|
229
|
-
|
-
|
|||||||||||||
|
Long-term
service agreements
(1)
|
209,652
|
72,213
|
81,482
|
46,511
|
9,446
|
-
|
|||||||||||||
|
Total
contractual obligations
|
2,217,713
|
298,099
|
479,244
|
917,713
|
318,926
|
203,731
|
|||||||||||||
(1) Included
in these obligations are $60.1 million of office space leases from past
acquisitions and $6.7 million of long-term service agreements which are
accounted for under accounts payable and accrued liabilities, accrued
integration charges and other long-term liabilities and long-term
debt.
We
are
committed under the terms of contractual obligations with various expiration
dates, primarily for the rental of premises, long-term debt, computer equipment
and long-term service agreements in the aggregate amount of
$2,217.7 million. In 2006, total contractual obligations increased by
$575.1 million, mainly due to an increase in long-term debt to finance the
repurchase of shares from BCE.
CAPITAL
RESOURCES
|
TOTAL
COMMITMENT
|
AVAILABLE
AT SEPTEMBER 30, 2006
|
OUTSTANDING
AT SEPTEMBER 30, 2006
|
||||||||
|
(in
’000 of dollars)
|
$ |
$
|
$
|
|||||||
|
Cash
and cash equivalents
|
-
|
115,729
|
-
|
|||||||
|
Unsecured
committed revolving facilities
(1)
|
1,000,000
|
382,025
|
617,975(2
|
)
|
||||||
|
Lines
of credit and other facilities
(1)
|
29,175
|
29,175
|
-
|
|||||||
|
Total
|
1,029,175
|
526,929
|
617,975(2
|
)
|
||||||
(1) Excluding
any existing credit facility under non-majority owned entities.
(2) Consists
of drawn portion of $590.0 million and Letters of Credit for
$28.0 million.
Our
cash
position and bank lines are sufficient to support our growth strategy.
At
September 30, 2006, cash and cash equivalents were $115.7 million and the
total credit facilities available amounted to $411.2 million. Cash
equivalents typically include commercial paper, money market funds and
term
deposits as well as bankers’ acceptances and bearer deposit notes issued by
major Canadian banks, all with an initial maturity of less than
3 months.
Total
long-term debt increased by $563.6 million to $813.3 million at
September 30, 2006, compared with $249.7 million at September 30,
2005. The variation resulted primarily from a net increase of
$587.2 million in our credit facilities and the impact from the
fluctuations of foreign currencies against the Canadian dollar.
On
January 12, 2006, the Company amended its existing five-year unsecured
credit
facility to increase it to $1.0 billion. The $1.0 billion committed
banking facilities are notably for our operating activity needs, working
capital
purposes and for the financing of acquisitions and outsourcing contracts.
The
agreement is currently comprised of a Canadian tranche with a limit of
$850.0 million and a U.S. tranche equivalent to $150.0 million. As at
September 30, 2006, an amount of $382.0 million was available under this
agreement. The agreement has a five-year term, expiring in December 2009.
We
also have access to a $25.0 million demand line of credit for cash
management purposes and $4.2 million of other facilities to cover other
requirements. The long-term debt agreements contain covenants, which require
us
to maintain certain financial ratios. During the year, we have obtained
certain
amendments to the definition and calculations of the ratios which consider
the
impact of the competitive position strengthening program as well as share
repurchases on our unsecured committed revolving facilities and notes.
At
September 30, 2006, CGI was in compliance with these covenants and maintains
its
financial flexibility.
Considering
the needs for reinvestment in our operations and the size of the investment
projects, we did not pay a dividend. Annually our Board of Directors evaluates
whether or not to pay a dividend as well as to continue with the share
repurchase program.
2006
Annual Report CGI Group Inc.
14
SELECTED
MEASURES OF LIQUIDITY AND CAPITAL RESOURCES
|
AS
AT SEPTEMBER 30, 2006
|
AS
AT SEPTEMBER 30, 2005
|
AS
AT SEPTEMBER 30, 2004
|
||||||||
|
Net
debt to capitalization ratio
|
27.2
|
%
|
0.3
|
%
|
9.8
|
%
|
||||
|
Days
sales outstanding (in days)
|
52
|
48
|
54
|
|||||||
|
Return
on invested capital
(1)
|
8.5
|
%
|
8.7
|
%
|
7.8
|
%
|
||||
(1) The
return
on invested capital ratio represents the proportion of the last four quarters’
after-tax adjusted EBIT net of restructuring costs related to specific items
over the last four quarters’ average invested capital (sum of equity and debt
less cash and cash equivalents).
The
net
debt to capitalization ratio increased by 26.9% compared to last year
mainly due to the additional debt issued in fiscal 2006 to purchase the
100 million shares from BCE.
Days
sales outstanding increased by four days to 52 days when -compared
with
last
year, mainly due to the timing of payments from large customers.
In
fiscal 2005, DSO was 48 days, down six days from 2004. In calculating DSOs,
we subtract the deferred revenue balance and the tax credits receivable from
the
accounts receivable and work in progress. Payments from clients in advance
of
work being performed may fluctuate from year to year depending on the timing
of
payments received from outsourcing clients.
Return
on
invested capital in fiscal 2006 was 8.5%, a decline of 0.2% from fiscal 2005.
This is mainly due to restructuring charges and the reduction in work levels
from BCE.
OFF-BALANCE
SHEET FINANCING AND GUARANTEES
We
do not
engage in the practice of off-balance sheet financing, except for the use
of
operating leases for office space, computer equipment and vehicles. In
accordance with GAAP, neither the lease liability nor the underlying asset
is
carried on the balance sheet as the terms of the leases do not meet the
threshold for capitalization. We enter into agreements to provide financial
or
performance assurances to third parties on the sale of assets, business
divestitures guarantees and U.S. Government contracts.
In
connection with sales of assets and business divestitures, we may be required
to
pay counterparties for costs and losses incurred as the result of breaches
in
representations and warranties, intellectual property right infringement
and
litigation against counterparties. While many of
the
agreements specify a maximum potential exposure of approximately
$108.5 million in total, many do not specify a maximum amount or limited
period. It is impossible to reasonably estimate the maximum amount that may
have
to be paid under such guarantees. The amounts are dependent upon the outcome
of
future contingent events, the nature and likelihood of which cannot be
determined at this time. No amount has been accrued in the consolidated balance
sheets relating to this type of indemnification as at September 30, 2006.
The
Company does not expect to incur any potential payment in connection with
these
guarantees which will have a materially adverse effect on its consolidated
financial statements.
We
are
also engaged to provide services under contracts with the U.S. Government.
The
contracts are subject to extensive legal and regulatory requirements and,
from
time to time, agencies of the U.S. Government investigate whether our operations
are being conducted in accordance with these requirements. Generally, the
Government has the right to change the scope of, or terminate, these projects
at
its convenience. The termination or a reduction in the scope of a major
government project could have a material adverse effect on our results
of
operations and financial condition.
In
the
normal course of business, we may provide certain clients, principally
governmental entities, with bid and performance bonds. In general, we would
only
be liable for the amount of the bid bonds if we refuse to perform the project
once the bid is awarded. We would also be liable for the performance bonds
in
the event of default in the performance of our obligations. As at
September 30, 2006, we provided for a total of $72.9 million of these
bonds. We believe we are in compliance with our performance obligations
under
all service contracts for which there is a performance or bid bond, and
the
ultimate liability, if any, incurred in connection with these guarantees
would
not have a material adverse effect on our consolidated results of operations
or
financial condition.
In
addition, we provided a guarantee of $5.9 million of the residual value of
leased equipment, accounted for as an operating lease, at the expiration
of the
lease term.
CAPABILITY
TO DELIVER RESULTS
We
believe that we have the capital resources and liquidity necessary to meet
our
commitments and existing obligations as well as to support our operations
and to
finance our growth strategies. We also believe that we have the required
non-capital resources necessary to achieve our goals for continued growth.
These
non-capital resources include a strong management team with a very low
historical turnover rate, sophisticated management frameworks for a consistent
high standard of client service and ongoing managerial training, as well
as
quality processes that help us integrate and retain new members as part
of
outsourcing contract wins or acquisitions.
RELATED
PARTY TRANSACTIONS
As
a
result of the Company’s repurchase of its shares in fiscal 2006, BCE no longer
held its significant influence over CGI’s operating, financing and investing
activities. Please refer to Note 22 to the financial statements for details
of 2005 and 2004 transaction history with BCE.
In
the
normal course of business, CGI is party to contracts with Innovapost, a
joint
venture, pursuant to which CGI is its preferred IT supplier. The Company
exercises significant influence over Innovapost’s operating, financing and
investing activities through its 49% ownership interest.
2006
Annual Report CGI Group Inc.
15
The
Company’s share of the transactions and resulting balances, which were measured
at commercial rates, are presented below:
INNOVAPOST
|
YEARS
ENDED SEPTEMBER 30
|
2006
|
2005
|
2004
|
|||||||
|
(in
’000 of Canadian dollars)
|
$
|
$
|
$
|
|||||||
|
Revenue
|
100,994
|
102,699
|
94,607
|
|||||||
|
Accounts
receivable
|
9,490
|
4,112
|
3,622
|
|||||||
|
Work
in progress
|
1,528
|
1,290
|
1,988
|
|||||||
|
Prepaid
expenses
|
-
|
2,019
|
1,815
|
|||||||
|
Contract
costs
|
16,239
|
17,301
|
19,696
|
|||||||
|
Accounts
payable and accrued liabilities
|
147
|
1,254
|
1,113
|
|||||||
|
Deferred
revenue
|
509
|
-
|
946
|
|||||||
FOURTH
QUARTER RESULTS
The
fourth quarter of CGI’s fiscal 2006 was focused on improving profitability as
outlined in the action plan announced on March 29, 2006. Accordingly, a
pre-tax charge for severance and other related benefits and costs related
to the
consolidation and closure of facilities, totaling $20.9 million, was taken
in the fourth quarter bringing the total charge of the program thus far to
$67.3 million. The Company expects to incur the remaining charge of
approximately $22.7 million over the course of this calendar year and
continues to anticipate the full payback of its investment on an annualized
basis at that time.
REVENUE
BY LOB
|
FOR
THE 3 MONTHS ENDED SEPTEMBER 30
|
2006
|
2005
|
CHANGE
|
|||||||
|
(in
’000 of dollars except for percentage)
|
$
|
$
|
%
|
|||||||
|
IT
services prior to foreign currency impact
|
766,839
|
792,149
|
-3.2
|
%
|
||||||
|
Foreign
currency impact
|
(20,134
|
)
|
-
|
-2.5
|
%
|
|||||
|
IT
services
|
746,705
|
792,149
|
-5.7
|
%
|
||||||
|
BPS
prior to foreign currency impact
|
101,835
|
112,691
|
-9.6
|
%
|
||||||
|
Foreign
currency impact
|
(2,720
|
)
|
-
|
-2.4
|
%
|
|||||
|
BPS
|
99,115
|
112,691
|
-12.0
|
%
|
||||||
|
Revenue
|
845,820
|
904,840
|
-6.5
|
%
|
||||||
In
the
fourth quarter of 2006, on a constant currency basis, the revenue decrease
versus prior year in our IT services segment was due to lower work volumes
from
BCE for $40.9 million, the ramping down of isolated contracts not meeting
our profitability standards, offset by business won from new and existing
clients and niche acquisitions made during the year, all for a net impact
of
$7.7 million.
BPS
revenue decreased in the quarter mainly due to the sale of our electronic
switching assets in December 2005 which drove $6.1 million of the change
and lower claims and inspections in our insurance business.
2006
Annual Report CGI Group Inc.
16
ADJUSTED
EBIT BY LOB
|
FOR
THE 3 MONTHS ENDED SEPTEMBER 30
|
2006
|
2005
|
CHANGE
|
|||||||
|
(in
’000 of dollars except for percentage)
|
$
|
$
|
%
|
|||||||
|
IT
services
|
93,004
|
93,789
|
-0.8
|
%
|
||||||
|
As
a percentage of IT services revenue
|
12.5
|
%
|
11.8
|
%
|
||||||
|
BPS
|
16,609
|
16,249
|
2.2
|
%
|
||||||
|
As
a percentage of BPS services revenue
|
16.8
|
%
|
14.4
|
%
|
||||||
|
Corporate
|
(18,492
|
)
|
(20,611
|
)
|
10.3
|
%
|
||||
|
As
a percentage of total revenues
|
-2.2
|
%
|
-2.3
|
%
|
||||||
|
Adjusted
EBIT
|
91,121
|
89,427
|
1.9
|
%
|
||||||
|
Adjusted
EBIT margin
|
10.8
|
%
|
9.9
|
%
|
||||||
The
variance in the adjusted EBIT of IT services for the quarter resulted mainly
from less than anticipated BCE work volumes, partly offset by the gain from
the
sale of a license in our financial sector, the fiscal 2005 impairment charge
related to a contract not meeting the Company’s profitability standards, and
savings achieved from the program initiated in March 2006.
For
BPS,
the improvement in adjusted EBIT is the result of winding down an unprofitable
contract, business won from new and existing clients in the U.S., partially
offset by the sale of our electronic switching assets and lower claims in
the
insurance business.
For
the
quarter ended September 30, 2006, the decrease in corporate expenses is tied
to
the on-going action plan to strengthen the Company’s competitive
position.
NET
EARNINGS FROM CONTINUING OPERATIONS
|
FOR
THE 3 MONTHS ENDED SEPTEMBER 30
|
2006
|
2005
|
CHANGE
|
|||||||
|
(in
’000 of dollars except for percentage)
|
$ |
$
|
% | |||||||
|
Adjusted
EBIT
|
91,121
|
89,427
|
1.9
|
%
|
||||||
|
Adjusted
EBIT margin
|
10.8
|
%
|
9.9
|
%
|
||||||
|
Restructuring
costs related to specific items
|
20,931
|
-
|
||||||||
|
Interest
on long-term debt
|
13,439
|
4,807
|
179.6
|
%
|
||||||
|
Other
income, net
|
(1,448
|
)
|
(1,510
|
)
|
-4.1
|
%
|
||||
|
Earnings
from continuing operations before income taxes
|
58,199
|
86,130
|
-32.4
|
%
|
||||||
|
Income
tax
|
18,667
|
29,715
|
-37.2
|
%
|
||||||
|
Net
earnings from continuing operations
|
39,532
|
56,415
|
-29.9
|
%
|
||||||
|
Basic
and diluted EPS from continuing operations (in
dollars)
|
0.12
|
0.13
|
-9.7
|
%
|
||||||
|
Weighted
average number of outstanding Class A subordinate shares and Class
B
shares
|
336,941,173
|
433,788,490
|
-22.3
|
%
|
||||||
The
decline in net earnings from continuing operations is mainly the result
of an
improvement in adjusted EBIT driven by savings from our competitive
strengthening program, which is offset by the associated restructuring
costs for
severance and facilities rationalization. Additionally, interest expense
increased stemming from the additional long-term debt to finance the share
repurchases made during the year. On a per share basis, the decline is
minimized, demonstrating the benefit of the share repurchase program undertaken
by the Company.
2006
Annual Report CGI Group Inc.
17
SUMMARY
OF QUARTERLY RESULTS
|
2006
|
2005
|
||||||||||||||||||||||||
|
QUARTERLY
RESULTS
|
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|||||||||||||||||
|
Backlog
(in
millions of dollars)
|
12,722
|
13,303
|
13,686
|
12,901
|
12,863
|
12,934
|
12,929
|
13,071
|
|||||||||||||||||
|
Bookings
(in
millions of dollars)
|
462
|
787
|
1,746
|
1,002
|
666
|
1,025
|
844
|
1,038
|
|||||||||||||||||
|
Revenue
|
|||||||||||||||||||||||||
|
Revenue
(in
’000 of dollars)
|
845,820
|
866,504
|
866,836
|
898,463
|
904,840
|
936,394
|
915,662
|
929,090
|
|||||||||||||||||
|
Year-over-year
revenue growth
prior to foreign currency impact
|
-4.0
|
%
|
-3.4
|
%
|
-2.4
|
%
|
-1.3
|
%
|
0.0
|
%
|
14.8
|
%
|
33.9
|
%
|
42.3
|
%
|
|||||||||
|
Cost
of services, selling and administrative expenses
|
713,573
|
746,395
|
759,706
|
776,847
|
761,919
|
802,312
|
789,330
|
797,997
|
|||||||||||||||||
|
Margin
|
84.4
|
%
|
86.1
|
%
|
87.6
|
%
|
86.5
|
%
|
84.2
|
%
|
85.7
|
%
|
86.2
|
%
|
85.9
|
%
|
|||||||||
|
Profitability
|
|||||||||||||||||||||||||
|
Net
earnings from continuing operations
(in
’000 of dollars)
|
39,532
|
35,944
|
14,149
|
56,908
|
56,415
|
56,621
|
53,591
|
53,072
|
|||||||||||||||||
|
Margin
|
4.7
|
%
|
4.1
|
%
|
1.6
|
%
|
6.3
|
%
|
6.2
|
%
|
6.0
|
%
|
5.9
|
%
|
5.7
|
%
|
|||||||||
|
Basic
and diluted earnings per
share from continuing operations
(in dollars)
|
0.12
|
0.11
|
0.04
|
0.13
|
0.13
|
0.13
|
0.12
|
0.12
|
|||||||||||||||||
|
Net
earnings from continuing operations
prior to restructuring
costs related to specific
items (in
’000 of dollars)
|
53,145
|
46,392
|
34,822
|
56,908
|
56,415
|
56,621
|
53,591
|
53,072
|
|||||||||||||||||
|
Margin
|
6.3
|
%
|
5.4
|
%
|
4.0
|
%
|
6.3
|
%
|
6.2
|
%
|
6.0
|
%
|
5.9
|
%
|
5.7
|
%
|
|||||||||
|
Basic
and diluted earnings per
share from continuing operations
prior to restructuring
costs related to specific
items (in dollars)
|
0.16
|
0.14
|
0.10
|
0.13
|
0.13
|
0.13
|
0.12
|
0.12
|
|||||||||||||||||
|
Net
earnings
|
39,532
|
35,944
|
14,149
|
56,908
|
55,792
|
57,759
|
49,594
|
53,343
|
|||||||||||||||||
|
Net earnings margin
|
4.7
|
%
|
4.1
|
%
|
1.6
|
%
|
6.3
|
%
|
6.2
|
%
|
6.2
|
%
|
5.4
|
%
|
5.7
|
%
|
|||||||||
|
Basic
and diluted earnings per
share (in dollars)
|
0.12
|
0.11
|
0.04
|
0.13
|
0.13
|
0.13
|
0.11
|
0.12
|
|||||||||||||||||
|
Weighted
average number of Class A subordinate shares and Class B shares
- basic (in
’000)
|
336,941
|
338,714
|
344,825
|
430,487
|
433,788
|
436,592
|
442,493
|
444,562
|
|||||||||||||||||
During
the period, our revenues reached their peak in third quarter 2005 at
$936.4 million, declining by $31.6 million during the fourth quarter,
driven primarily by lower seasonal volumes as well as unfavourable foreign
currency fluctuation against the Canadian dollar. Revenues for fourth quarter
2006 were $845.8 million and show a further decline versus the same period
last year as a result of lower BCE work volumes and continued unfavourable
currency fluctuations.
The
decrease of work from BCE led the Company to undertake the competitive
strengthening program, announced during the second quarter of 2006, to reduce
its cost structure and gradually improve its profit margins.
The
cost
savings generated by the program are the main driver of the reduction in
the
cost of services, selling and administrative expenses margin through the second
half of 2006 when it reached 84.4% of revenues in the fourth quarter, compared
to the peak of 87.6% during the second quarter of the year when the program
was
initiated.
As
a
result of the efficiencies delivered by the program, net earnings from
continuing operations prior to restructuring costs related to specific items
margin improved from 4.0% in the second quarter, to 5.4% in the third, and
6.3%
in the fourth quarter. In 2005, there was a net loss from discontinued
operations of $3.2 million, resulting from the sale of the U.S. Services to
Credit unions business unit and the sale of the principal assets of
Keyfacts.
The
share
repurchase in January 2006 was financed with our credit facilities, which
led to
an increase of the net debt to capitalization ratio in the second quarter
of
2006.
QUARTERLY
VARIANCES
There
are
factors causing quarterly variances which may not be reflective of the
Company’s
future performance. First, there is seasonality in SI&C work, and the
quarterly performance of these operations is impacted by occurences such
as
vacations and the number of statutory holidays in
2006
Annual Report CGI Group Inc.
18
any
given
quarter. Outsourcing contracts including BPS are affected to a lesser extent
by
seasonality. Second, the workflow from some clients may fluctuate from quarter
to quarter based on their business cycle and the seasonality of their own
operations. Third, the savings that we generate for a client on a given
outsourcing contract may temporarily reduce our revenue stream from this
client,
as these savings may not be immediately offset by additional work performed
for
this client.
In
general, cash flow from continuing operating activities could vary significantly
from quarter to quarter depending on the timing of monthly payments received
from large clients, cash requirements associated with large acquisitions
and
outsourcing contracts, the timing of the reimbursements for various tax credits
as well as profit sharing payments to members and the timing of restructuring
cost payments.
Foreign
exchange fluctuations also contribute to quarterly variances, and these
variances are likely to increase as the percentage of revenue in foreign
currencies increases. From a margin perspective, CGI benefits from a natural
hedge against currency fluctuations driven by US dollar expenses incurred
in
Canada, such as licenses, maintenance, insurance, and interest
expenses.
In
2006,
we have purchased from BCE, 100 million Class A subordinate shares, as well
as an additional 8,374,400 shares from the market. As a result, our number
of outstanding shares have decreased sequentially since the second quarter
and
our debt has increased to fund part of the transaction, which has driven
the
increase in our debt to capitalization ratio.
While
cash flow provided by continuing operating activities has remained strong
over
the period, the main fluctuations resulted from our profitability and the
timing
of payments received from large customers and payments made to our vendors
on
multi-year license and maintenance agreements. The timing impact from payments
received from our clients also explains the fluctuation of our DSO in the
period.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
annual audited financial statements of the Company for the years ended September
30, 2006, 2005 and 2004 include all adjustments that the management of CGI
considers necessary for a fair presentation of the financial position, results
of operations and cash flows.
Certain
comparative figures have been reclassified in order to conform to the current
period presentation.
CRITICAL
ACCOUNTING ESTIMATES
The
Company’s significant accounting policies are described in Note 2 of the
September 30, 2006 audited consolidated financial statements. 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.
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|||||||||||||||||||
|
AREAS
IMPACTED BY ESTIMATES
|
CONSOLIDATED
BALANCE SHEETS
|
REVENUE
|
COSTS
OF SERVICES, SELLING AND ADMINISTRATIVE
|
AMORTIZATION/
IMPAIRMENT
|
RESTRUCTURING
COSTS
RELATED
TO SPECIFIC ITEMS
|
INCOME
TAXES
|
|||||||||||||
|
Allowance
for doubtful accounts
|
n
|
n
|
|||||||||||||||||
|
Goodwill
|
n
|
n
|
|||||||||||||||||
|
Income
taxes
|
n
|
n
|
|||||||||||||||||
|
Accounts
payable and accrued liabilities
|
n
|
n
|
|||||||||||||||||
|
Revenue
recognition
|
n
|
(1)
|
n
|
||||||||||||||||
|
Contract
costs
|
n
|
n
|
n
|
||||||||||||||||
|
Investment
tax credits
|
n
|
n
|
|||||||||||||||||
|
Impairment
of long-lived assets
|
n
|
n
|
|||||||||||||||||
|
Restructuring
costs related to specific items
|
n
|
n
|
|||||||||||||||||
(1) Accounts
receivable and work in progress
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
The
allowance for doubtful trade receivables is established when collection of
amounts due from clients is deemed improbable. The allowance is reviewed
periodically and is based on an analysis of specific outstanding accounts,
aging
of trade receivables, historical collection experience and client
creditworthiness. Indicators of improbable collection include client bankruptcy,
client litigation, industry downturns, client cash flow difficulties or ongoing
service or billing disputes.
GOODWILL
Goodwill
is assessed for potential impairment, at the reporting unit level, at least
annually or when events or changes in circumstances exist such that the
carrying
amount may not be recoverable. Such assessment requires a comparison of
the fair
value of the reporting unit to its carrying value. The estimate of fair
value of
a reporting unit is based on a discounted cash flow analysis using management
approved key assumptions such as future cash flows, growth projections,
terminal
2006
Annual Report CGI Group Inc.
19
values
and discount rates. Significant changes in the estimates and assumptions
used in
goodwill impairment testing will not impact cash flows generated from our
operations.
INCOME
TAXES
The
Company measures income tax assets and liabilities, both current and future,
according to enacted or substantively enacted income tax legislation that
is
expected to apply when the asset is realized or the liability settled. The
applicable income tax legislation and regulations are subject to the Company’s
interpretation. An assessment of the ultimate realization of the future income
taxes generated from temporary differences between the book and the tax value
of
assets and liabilities as well as tax losses carried forward is performed
regularly. The conclusion of whether it is more likely than not that future
assets will be realized includes making assessments of expectations of future
taxable income. The ultimate amount of future income taxes and income tax
provisions could be materially different from those recorded, as it is
influenced by future operating results of the Company and its tax
interpretations.
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
The
Company accrued for costs incurred to restructure and integrate the acquired
businesses and for other liabilities requiring significant judgment.
Contingencies for pending or threatened litigation, guarantees and other
possible liabilities involve uncertainty as to possible gain or loss to the
Company that will ultimately be resolved when one or more future events occur
or
fail to occur. Resolution of the uncertainty may confirm the reduction of
a
liability or the occurrence of a liability. The accrued liabilities are based
on
historical experience, current trends and other assumptions that are believed
to
be reasonable under the circumstances.
Accrued
integration charges are comprised mostly of provisions related to leases
for
premises occupied by the acquired businesses which the Company plans to vacate.
The costs of closure of facilities are estimated at the business acquisition
date and the adjustments to initial provision are made as soon as the Company’s
management has gathered all the significant information. Key assumptions
include
discount rate and the possibility to sublease vacated premises. The discount
rate assumption used to calculate the present value of the Company’s projected
payments was determined using the interest rate on the unsecured notes of
the
Company. The possibility to sublease vacated premises was determined using
the
experience of the Company’s management and the knowledge of the Company’s
advisers regarding specific regions and characteristics of
premises.
Furthermore,
there are various claims and pending actions against the Company arising
in the
ordinary course of its business as well as inherited from business acquisitions.
Certain of these actions seek damages in significant amounts. Among other
things, the Company considers the period in which the underlying cause of
the
claim occurred, the degree of probability of an unfavorable outcome and the
ability to make a reasonable estimate of the loss to determine whether a
loss
accrual or disclosure in the consolidated financial statements is
required.
REVENUE
RECOGNITION
The
determination of revenues and costs on arrangements that use the
percentage-of-completion method requires judgment and estimation. The method
requires estimates of costs and profits over the entire term of the arrangement,
including estimates of resources and costs necessary to complete performance.
Moreover, if total costs from a contract are estimated to exceed the estimated
total revenue from the contract, then a provision for the estimated loss
is made
in the period in which the loss first becomes apparent. Another assessment,
related to a contract which involves the provision of multiple service elements,
is to determine whether the total estimated contract revenue that is allocated
to each element is based on the relative fair value of each element. Revenue
is
then recognized for each element as for single-element contracts. Management
regularly reviews arrangement profitability and the underlying
estimates.
CONTRACT
COSTS
Certain
costs incurred upon initiation of an outsourcing contract are deferred and
amortized over the contract life. These costs consist primarily of incentives
and transition costs. Estimates and assumptions that the Company makes include
projecting future cash flows in order to assess the recoverability of these
contract costs when events or changes in circumstances exist such that the
carrying amount may not be recoverable. To assess recoverability, undiscounted
estimated cash flows of the contract are projected over its remaining life
and
compared to the contract costs carrying amount. Changes in the estimates
and
assumptions on one or more contracts will not impact the cash flows generated
by
the Company’s operations.
INVESTMENT
TAX CREDITS
The
Company receives refundable tax credits on salaries and tax credits on research
and software development costs, which meet the criteria of investment tax
credits. The Company is subject to annual audits to verify the amount for
which
it is entitled and whether it operates eligible activities under the terms
of
various government tax credit programs. An assessment of the proportion of
eligible expenses and of the acceptability rate by these different governments
are performed periodically.
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company tests the recoverability of long-lived assets, such as finite-life
intangibles and capital assets, when events or changes in circumstances
exist
that the carrying amount may not be recoverable. For finite-life intangibles,
such as business solutions, software licenses and customer relationships,
estimates and assumptions include determining the appropriate period over
which
to amortize the capitalized costs based on the estimated useful lives and
estimating the related future cash flows, and assessing these against the
unamortized balances. For internal-use software included in finite-life
intangibles and for capital assets, the appropriate amortization period
is based
on estimates of the Company’s ability to utilize these assets on an ongoing
basis. To assess the recoverability of capitalized software costs, the
Company
must estimate future revenue, costs and future cash inflows and outflows.
Changes in the estimates and assumptions used in long-lived assets impairment
testing will not impact the cash flows generated by the Company’s
operations.
RESTRUCTURING
COSTS RELATED TO SPECIFIC ITEMS
The
Company announced a plan to reduce its workforce and to close and consolidate
certain facilities. The plan was initiated because of lower than expected
BCE
work volumes and in an effort to reduce costs and improve its profitability.
The
charge taken during the year is
2006
Annual Report CGI Group Inc.
20
comprised
of severance costs and costs related to the consolidation and closure of
facilities. The recognition of these charges requires management to make
certain
judgments and estimates regarding the nature, timing and amount associated
with
these plans. For leased facilities that have been abandoned or subleased,
the
estimated lease cost represents future lease payments subsequent to abandonment
less estimated sublease income. At each reporting date, we will evaluate
the
accruals for closed facilities and employee severances to ensure that the
accruals are still appropriate.
CHANGE
IN ACCOUNTING POLICIES
The
CICA
has issued the following new Handbook Sections which were effective for interim
periods beginning on or after January 1, 2006:
|
a)
|
Handbook
Section 3831, “Non-Monetary Transactions”, requires that non-monetary
transactions be recorded at fair value unless the transaction has
no
commercial substance, it is an exchange of inventory, it is non-monetary,
non-reciprocal transfer to owners or it is not reliably measurable.
The
adoption of this section did not have any impact on the consolidated
financials statements.
|
|
b)
|
EIC
156, “Accounting by a Vendor for Consideration Given to a Customer
(Including a Reseller of the Vendor’s Products)”, provides guidance to
companies that give incentives to customers or resellers in the
form of
cash, equity, free gifts, coupons and other. The adoption of EIC 156
did not have any impact on the consolidated financial statements
since the
Company already adopted the U.S. equivalent, Emerging Issues Task
Force
(“EITF”) 01-9 “Accounting for Consideration Given by a Vendor to a
Customer” issued in 2001.
|
|
c)
|
EIC
157, “Implicit variable interests under AcG 15”, requires to consider
whether the reporting enterprise holds an implicit variable interest
in a
variable interest entity or potential variable interest entity
in applying
Accounting Guideline 15, “Consolidation of Variable Interest Entities”.
The adoption of this abstract did not have any impact on the consolidated
financials statements.
|
|
d)
|
EIC
159, “Conditional Asset Retirement Obligations”, provides guidance when a
conditional asset retirement obligation should be recognized. The
adoption
of this abstract did not have any impact on the consolidated financials
statements.
|
CHANGE
IN FUTURE ACCOUNTING POLICIES
The
CICA
has issued the following new Handbook Sections:
|
a)
|
Handbook
Section 3855, “Financial Instruments - Recognition and Measurement”,
effective for interim periods beginning on or after October 1, 2006.
The section describes the standards for recognizing and measuring
financial assets, financial liabilities and non-financial derivatives.
All
financial assets, except for those classified as held-to-maturity,
and
derivative financial instruments must be measured at their fair
value. All
financial liabilities must be measured at their fair value if they
are
classified as held for trading purposes, if not, they are measured
at
their carrying value. The impact of the adoption of this new section
on
the consolidated financial statements is not expected to be
material.
|
|
b)
|
Handbook
Section 1530, “Comprehensive Income”, and Section 3251, “Equity”,
effective for interim periods beginning on or after October 1, 2006.
Comprehensive income is the change in equity of an enterprise during
a
period arising from transactions and other events and circumstances
from
non-owner sources. It includes items that would normally not be
included
in net income such as changes in the foreign currency translation
adjustment relating to self-sustaining foreign operations and unrealized
gains or losses on available for sale financial instruments. This
section
describes how to report and disclose comprehensive income and its
components. Section 3251, “Equity”, replaces Section 3250, “Surplus”, and
describes the changes in how to report and disclose equity and
changes in
equity as a result of the new requirements of Section 1530, “Comprehensive
Income”. Upon adoption of this section, the consolidated financial
statements will include a statement of comprehensive
income.
|
|
c)
|
Handbook
Section 3865, “Hedges”, effective for interim periods beginning on or
after October 1, 2006. This section describes when hedge accounting
is appropriate. Hedge accounting ensures that all gains, losses,
revenues
and expenses from the derivative and the item it hedges are recorded
in
the statement of earnings in the same period. The impact of the
adoption
of this new section on the consolidated financial statements is
not
expected to be material.
|
FINANCIAL
INSTRUMENTS
From
time
to time, the Company uses various financial instruments to manage its exposure
to fluctuations of foreign currency exchange rates. The Company does not
hold or
use any derivative instruments for speculative trading purposes. The Company
enters into financial instrument contracts to hedge its net investment
in
foreign subsidiaries. Foreign exchange translation gain or loss on the
net
investment is recorded under foreign currency translation adjustment. Any
realized or unrealized gain or loss on instruments covering the net investment
is also recognized in foreign currency translation adjustment.
RISKS
AND UNCERTAINTIES
While
we
are confident about our long-term prospects, the following risks and
uncertainties could affect our ability to achieve our strategic vision
and
objectives for growth and should be considered when evaluating our potential
as
an investment.
RISKS
RELATED TO OUR INDUSTRY
The
competition for contracts -
We have
a disciplined approach to the management of all aspects of our business,
with an
increasing proportion of our operations certified under ISO 9001. Our
management processes were developed to help us ensure that our members
consistently deliver services according to our high standards and they
are based
on strong values underlying our client-focused culture. These processes
have
contributed to our high contract win and renewal rates to date. Additionally,
we
have developed a deep strategic understanding of the five economic sectors
we
target, and this helps enhance our competitive position. CGI is a leading
provider of IT and business process services in Canada, and through a
combination of organic growth and acquisitions, we continue to strengthen
our
position in the U.S. market. We have made good progress in growing our
revenue
from
2006
Annual Report CGI Group Inc.
21
the
U.S.
and internationally over the past three years and expect this trend to continue.
However, the market for new IT and BPS outsourcing contracts remains very
competitive and there can be no assurances that we will continue to compete
successfully.
The
long sales cycle for major outsourcing contracts -
As
outsourcing deals become larger and more complex, the Company is experiencing
longer selling cycles. In the past, we experienced cycles lasting between
six
and 18 months, which now are between 12 and 24 months. The lengthening
sales cycle could affect our ability to meet annual
growth targets.
The
availability and cost of qualified IT professionals -
There
is strong demand for qualified individuals in the IT industry. Over the years,
we have been able to successfully attract and retain qualified staff, thanks
to
our solid culture, strong values and emphasis on career development, as well
as
performance-driven remuneration. In addition, we have implemented a
comprehensive program aimed at attracting and retaining qualified and dedicated
professionals. We believe that we are a preferred employer in the IT services
industry. We also secure access to additional qualified professionals through
outsourcing contract wins and business acquisitions.
The
ability to continue developing and expanding service offerings to address
emerging business demands and technology trends -
We
strive to remain at the forefront of developments in the IT services industry,
thus ensuring that we can meet the evolving needs of our clients. We achieved
this expertise as a result of our specialization in five targeted economic
sectors; our non-exclusive commercial alliances with hardware and software
vendors and strategic alliances with major partners; our development of
proprietary IT solutions to meet the needs of our clients; regular training
and
sharing of professional expertise across our network of offices and
professionals; and business acquisitions that provide specific knowledge
or
added geographic coverage.
Infringing
on the intellectual property rights of others -
We
cannot be sure that our services and offerings do not infringe on the
intellectual property rights of third parties, and we may have infringement
claims asserted against us. These claims may be costly, harm our reputation,
and
prevent us from providing some services and offerings. We enter into licensing
agreements with our clients for the right to use intellectual property that
includes a commitment to indemnify the licensee against liability and damages
arising from any third-party claims of patent, copyright, trademark or trade
secret infringement. In some instances, the amount of these indemnity claims
could be greater than the revenue we receive from the client. Any claims
or
litigation in this area, whether we ultimately win or lose, could be
time-consuming and costly, injure our reputation, or require us to enter
into
royalty or licensing arrangements. Any limitation on our ability to sell
or use
products or services that incorporate challenged software or technologies
could
cause us to lose revenue-generating opportunities or require us to incur
additional expenses to modify solutions for future projects.
Limited
ability to protect our intellectual property rights -
Our
success depends, in part, on our ability to protect our proprietary
methodologies and other intellectual property that we use to provide our
services. Our general practice is to pursue patent or other appropriate
intellectual property protection that is reasonable and necessary to protect
and
leverage our intellectual assets. We assert trademark rights in and to our
name,
product names, logos and other markings used to identify our goods and services
in the marketplace. We routinely file for and have been granted trademark
registrations from the U.S. Patent and Trademark Office and other trademark
offices worldwide. However, the laws of some countries in which we conduct
business may offer only limited protection of our intellectual property rights;
and despite our efforts, the steps taken to protect our intellectual property
may not be adequate to prevent or deter infringement or other misappropriation
of intellectual property, and we may not be able to detect unauthorized use
of
our intellectual property, or take appropriate steps to enforce our intellectual
property rights.
RISKS
RELATED TO OUR BUSINESS
Business
mix variations -
The
proportion of revenue that we generate from shorter-term SI&C projects,
versus revenue from long-term outsourcing contracts, will fluctuate at
times,
affected by acquisitions or other transactions. An increased exposure to
revenue
from SI&C projects may result in greater quarterly revenue
variations.
The
financial and operational risks inherent in worldwide
operations -
We manage operations in 16 countries worldwide, with less than 10% of
revenue coming from outside North America. We believe that our Management
Foundation, which includes management frameworks and processes that guide
business unit leaders in managing our members and clients, helps ensure
worldwide operational efficiency and consistency. However, the scope of
our
worldwide operations makes us subject to currency fluctuations; price controls
or restrictions on the exchange of foreign currency; the burden of complying
with a wide variety of national and local laws; differences in, and
uncertainties arising from local business culture and practices; multiple
and
sometimes conflicting laws and regulations, including tax laws; operating
losses
incurred in certain countries as we develop our international service delivery
capabilities and the non-deductibility of these losses for tax purposes;
the
absence in some jurisdictions of effective laws to protect our intellectual
property rights; restrictions on the movement of cash and other assets;
restrictions on the import and export of certain technologies; restrictions
on
the repatriation of earnings; and political, social and economic instability
including the threats of terrorism and pandemic illnesses. We have a hedging
strategy in place to protect ourselves, to the extent possible, against
foreign
currency exposure; but, other than the use of financial products to deliver
on
our hedging strategy, we do not trade derivative financial instruments.
While we
believe we have effective management processes in place in each office
worldwide, any or all of these risks could impact our global business operations
and cause our profitability to decline.
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 us
as we
have acquired a large number of companies since our inception. Our disciplined
approach to management, largely based on our management frameworks, has
been an
important factor in the successful integration of human resources of
2006
Annual Report CGI Group Inc.
22
acquired
companies and the IT operations of outsourcing clients. As at September 30,
2006, the majority of our operations had received
ISO 9001 certification.
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 our total
revenue.
Early
termination risk -
If we
should fail to deliver our services -according to contractual agreements,
some
of our clients could elect to terminate contracts before their agreed expiry
date, which would result in a reduction of our earnings and cash flow and
may
impact the value or our backlog. We have a strong record of successfully
meeting
or exceeding our clients’ needs. We take a professional approach to business,
and our contracts are written to clearly identify the scope of our
responsibilities and minimize risks. In addition, a number of our outsourcing
contractual agreements have termination for convenience and change of control
clauses according to which a change in the client’s intentions or a change in
control of CGI could lead to a termination of the said agreements.
Credit
risk concentration with respect to trade receivables -
We
generate a significant portion of our revenue (11.9% in the fiscal year 2006)
from the subsidiaries and affiliates, namely BCE Inc. However, it is our
belief
that we are not subject to any significant credit risk, especially in view
of
our large and diversified client base.
Short-term,
project-related contract risks -
With
the acquisition of AMS, the percentage of revenue that CGI derives from
shorter-term, project-oriented contracts increased substantially. We manage
all
client contracts utilizing the Client Partnership Management Framework (“CPMF”),
a process framework which helps ensure that client projects are all managed
according to the same high standards throughout the organization. As a result
of
the CPMF, there is a high degree of rigour and discipline used to accurately
estimate the cost of client engagements. However, a significant portion of
engagements acquired with AMS are performed on a fixed-price basis. Billing
for
fixed-price engagements is made in accordance with the contract terms agreed
upon with our client, and revenue is recognized based on the percentage of
effort incurred to date in relation to the total estimated costs to be incurred
over the duration of the respective contract. When making proposals for these
types of engagements, we rely on our estimates of costs and timing for
completing the projects. These estimates reflect our best judgment regarding
the
efficiencies of our methodologies and professionals as we plan to apply them
to
the projects. Any increased or unexpected costs or unanticipated delays in
connection with the performance of fixed-price contracts, including delays
caused by factors outside our control, could make these contracts less
profitable or unprofitable.
Guarantees
risk -
In the
normal course of business, we enter into agreements that may provide for
indemnification and guarantees to counterparties in transactions such as
consulting and outsourcing services, business divestitures, lease agreements
and
financial obligations. These indemnification undertakings and guarantees
may
require us to compensate counterparties for costs and losses incurred as
a
result of various events, including breaches of representations and warranties,
intellectual property right infringement, claims that may arise while providing
services or as a result of litigation that may be suffered by
counterparties.
Government
tax credits risk -
An
acquisition of control of CGI could translate into a loss of provincial tax
credits related to E-Commerce Place and the Cité Multimédia in Montréal, the
Carrefour de la nouvelle économie in Saguenay and the Carrefour national des
nouvelles techno-logies de Québec.
Government
business risk -
Changes
in federal, provincial or state government spending policies or budget
priorities could directly affect our financial performance. Among the factors
that could harm our government contracting business are the curtailment
of the
government’s use of consulting and technology services firms; a significant
decline in spending by the governments, in general, or by specific departments
or agencies in particular; the adoption of new laws or regulations that
affect
companies that provide services to governments; delays in the payment of
our
invoices by government payment offices; and general economic and political
conditions. These or other factors could cause government agencies and
departments to reduce their purchases under contracts, to exercise their
right
to terminate contracts, to issue temporary stop work orders, or not to
exercise
options to renew contracts, any of which would cause us to lose future
revenue.
Our client base in the government economic sector is very diversified with
contracts from many different departments and agencies in the U.S. and
Canada;
however, government spending reductions or budget cutbacks at these departments
or agencies could materially harm our continued performance under these
contracts, or limit the awarding of additional contracts from these
agencies.
Legal
claims made against our work -
We
create, implement and maintain IT solutions that are often critical to
the
operations of our clients’ business. Our ability to complete large projects as
expected could be adversely affected by unanticipated delays, renegotiations,
and changing client requirements or project delays. Such problems could
subject
us to legal liability, which could adversely impact our business, operating
results and financial condition, and may negatively affect our professional
reputation. We typically include provisions in our contracts which are
designed
to limit our exposure to legal claims relating to our services and the
applications we develop. These provisions may not protect us or may not
be
enforceable under some circumstances or under the laws of some
jurisdictions.
RISKS
RELATED TO BUSINESS ACQUISITIONS
Difficulties
in executing our acquisition strategy -
A
significant part of our growth strategy is dependent on our ability to
continue
making niche acquisitions to increase the breadth and depth of our service
offerings as well as large acquisitions to specifically increase our critical
mass in the U.S. and Europe. We cannot, however, make any assurances that
we
will be able to identify any potential acquisition candidates, consummate
any
additional acquisitions or that any future acquisitions will be successfully
integrated into our operations and provide the tangible value that had
been
expected. Without additional acquisitions, we are unlikely to maintain
our
historic or expected growth rates.
2006
Annual Report CGI Group Inc.
23
Our
management faces a complex and potentially time-consuming task in implementing
uniform standards, controls, procedures and policies across our business
units.
Integrating businesses can result in unanticipated operational problems,
expenses and liabilities. In addition, to the extent that management is required
to devote significant time, attention and resources to the integration of
operations, personnel and technology, our ability to service current clients
may
be reduced, which may adversely affect our revenue and
profitability.
RISKS
RELATED TO THE MARKET
Economic
risk -
An
economic downturn may cause our revenue to decline. The level of business
activity of our clients, which is affected by economic conditions, has a
bearing
upon the results of our operations. We can neither predict the impact that
current economic conditions will have on our future revenue, nor predict
when
economic conditions will show meaningful improvement. During an economic
downturn, our clients and potential clients often cancel, reduce or defer
existing contracts and delay entering into new engagements. In general,
companies also decide to undertake fewer IT systems projects during difficult
economic times, resulting in limited implementation of new technology and
smaller engagements. Because there are fewer engagements in a downturn,
competition usually increases and pricing for services may decline as
competitors, particularly companies with significant financial resources,
decrease rates to maintain or increase their market share in our industry.
Our
pricing, revenue and profitability could be negatively impacted as a result
of
these factors.
INTEGRITY
OF DISCLOSURE
Our
management assumes the responsibility for the existence of appropriate
information systems, procedures and controls to ensure that information used
internally and disclosed externally is complete and reliable. The Board of
Directors’ duties include the assessment of the integrity of the Company’s
internal control and information system.
CGI
has a
formal Corporate Disclosure Policy whose goal is to raise awareness of the
Company’s approach to disclosure among the Board of Directors, senior
management, and employees. The Board of Directors has established a Disclosure
Policy Committee responsible for all regulatory disclosure requirements and
overseeing the Company’s disclosure practices.
The
Audit
and Risk Management Committee of CGI is composed entirely of unrelated directors
who meet the independence and experience requirements of the New York Stock
Exchange and the Toronto Stock Exchange. The responsibilities of our Audit
and
Risk Management Committee include: a) the review of all our public disclosure
documents containing audited or unaudited financial information, b) the review
and assessment of the effectiveness of our accounting policies and practices
concerning financial reporting, c) the review and monitoring of our internal
control procedures, programs and policies and assessment of the adequacy
and
effectiveness thereof, d) recommendation to the Board of Directors of CGI
on the
appointment of external auditors, assertion of the independence thereof,
review
of the terms of engagement thereof and ongoing discussions therewith, e)
the
review of the audit procedures, and f) such other responsibilities usually
attributed to audit and risk committees or as directed by our Board of
Directors.
The
Company evaluated the effectiveness of its disclosure controls, supervised
by
and with the participation of the Chief Executive Officer and the Chief
Financial Officer as of September 30, 2006. The CEO and CFO concluded that,
based on this evaluation, the Company’s disclosure controls and procedures were
adequate and effective, at a reasonable level of assurance, to ensure that
material information related to the Company and its consolidated subsidiaries
would be made known to them by others within those entities.
LEGAL
PROCEEDINGS
From
time
to time, the Company is involved in various litigation matters arising
in the
ordinary course of its business. As at September 30, 2006, the Company
has no
reason to believe that the disposition of any such current matters could
reasonably be expected to have a material adverse impact on CGI’s financial
position, results of operations, or the ability to carry on any of its
business
activities.
2006
Annual Report CGI Group Inc.
24
SIGNATURES
Pursuant
to the requirements of the Exchange Act, the registrant certifies that it meets
all of the requirements for filing on Form 40-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereto duly
authorized.
|
Groupe
CGI Inc./CGI Group Inc.
|
|
|
By:
/s/
André Imbeau
|
|
|
Date:
December 20, 2006
|
Name:
André Imbeau
|
|
Title:
Founder, Executive Vice-Chairman and Corporate
Secretary
|
EXHIBIT
INDEX
|
23.1
|
Consent
of Deloitte & Touche LLP
|
|
99.1
|
Certification
of the Registrant’s Chief Executive Officer required pursuant to Rule
13a-14(a).
|
|
99.2
|
Certification
of the Registrant’s Chief Financial Officer required pursuant to Rule
13a-14(a).
|
|
99.3
|
Certification
of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
99.4
|
Certification
of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|